NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three Months Ended March 31, 2023 and 2022
NOTE
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Company
and Background
Harrow
Health, Inc. (together with its subsidiaries, partially owned companies and royalty arrangements unless the context indicates or otherwise
requires, the “Company” or “Harrow”) is an eyecare pharmaceutical company exclusively focused on the discovery,
development, and commercialization of innovative ophthalmic therapies that are accessible and affordable.
The
Company owns non-controlling equity positions in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”),
both companies that began as subsidiaries of Harrow. Harrow also owns royalty rights in various drug candidates being developed by Surface
and Melt.
Basis
of Presentation
The
Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the
rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes
required by GAAP for audited financial statements. In the opinion of management, all adjustments (consisting of only normal recurring
adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31,
2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or for any other period.
For further information, refer to the Company’s audited consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
The
accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned
subsidiaries.
Harrow
consolidates entities in which it has a controlling financial interest. The Company assesses control under the variable interest entity
(“VIE”) model to determine whether the Company is the primary beneficiary of that entity’s operations. The Company
consolidates (i) entities in which it holds and/or controls, directly or indirectly, more than 50% of the voting rights, and (ii) entities
that the Company deems to be a VIE. All intercompany accounts and transactions have been eliminated in consolidation.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
following represents an update for the three months ended March 31, 2023 to the significant accounting policies described in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2022.
Risks,
Uncertainties and Liquidity
The
Company is subject to certain regulatory standards, approvals, guidelines and inspections which could impact the Company’s ability
to make, dispense, and sell certain products. If the Company was required to cease compounding and selling certain products as a result
of regulatory guidelines or inspections, this may have a material impact on the Company’s financial condition, liquidity and results
of operations.
Credit
Losses
The
Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables.
The Company considers historical collection rates, the current financial status of its customers, macroeconomic factors, and other industry-specific
factors when evaluating for current expected credit losses. Forward-looking information is also considered in the evaluation of current
expected credit losses. However, because of the short time to the expected receipt of accounts receivable, the Company believes that
the carrying value, net of expected losses, approximates fair value and therefore, relies more on historical and current analysis of
such financial instruments, including its trade receivables.
To
determine the provision for credit losses for accounts receivable, the Company has disaggregated its accounts receivable by class of
customer at the business component level, as the Company determined that the risk profile of its customers is consistent based on
the type and industry in which they operate, mainly in the life sciences industry. Each business component is analyzed for estimated
credit losses individually. In doing so, the Company establishes a historical loss matrix, based on the previous collections of
accounts receivable by the age of such receivables, and evaluates the current and forecasted financial position of its customers, as
available. Further, the Company considers macroeconomic factors and the status of the life sciences industry to estimate if there
are current expected credit losses within its trade receivables based on the trends of the Company’s expectation of the future
status of such economic and industry-specific factors. Also, specific allowance amounts are established based on review of
outstanding invoices to record the appropriate provision for customers that have a higher probability of default.
The
accounts receivable balance on the Company’s condensed consolidated balance sheet as of March 31, 2023 was $12,111,000, net of
$82,000 of allowances. The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized
cost basis of accounts receivable to present the net amount expected to be collected at March 31, 2023:
SCHEDULE
OF ACCOUNTS RECEIVABLE ALLOWANCE OF CREDIT LOSS
Balance at January 1, 2023 | |
$ | 73,000 | |
Change in expected credit losses | |
| 20,000 | |
Write-offs, net of recoveries | |
| (11,000 | ) |
Balance at March 31, 2023 | |
$ | 82,000 | |
Business
Combinations and Asset Acquisitions
The
Company evaluates acquisitions of assets and other similar transactions to assess whether the transaction should be accounted for as
a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the
gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met,
the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether
the Company has acquired inputs, process, and output, which would meet the requirements of a business. If determined to be a
business combination, the Company accounts for the transaction under the acquisition method of accounting as indicated in Financial
Account Standards Board (“FASB”). Accounting Standards Codification (“ASC”) 805, Business Combinations, requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities
assumed, and any non-controlling interest in the acquiree and establishes the acquisition date as the fair value measurement point.
Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including any contingent
assets and liabilities, and any non-controlling interest in the acquiree based on the fair value estimates as of the date of
acquisition. In accordance with ASC 805 – Business Combinations, the
Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over
the fair value of the identified net assets acquired.
The
consideration for the Company’s business acquisitions may include future payments that are contingent upon the occurrence of a
particular event or events. The obligation for such contingent consideration payments are recorded at fair value on the acquisition
date. The contingent consideration obligations are then evaluated each reporting period. Changes in the fair value of contingent
consideration, other than changes due to payments, would be recognized as a gain or loss and recorded in the condensed consolidated
statement of operations.
If
determined to be an asset acquisition, the Company accounts for the transaction under ASC 805-50 Business Combinations – Related
Issues, which requires the acquiring entity in an asset acquisition to recognize assets acquired and liabilities assumed based on
the cost of the acquired assets on a relative fair value basis, which includes transaction costs in addition to consideration given.
No gain or loss is recognized as of the date of acquisition unless the fair value of non-cash assets given as consideration differs from
the assets’ carrying amounts on the acquiring entity’s financial statements. Consideration transferred that is non-cash will
be measured based on either the cost (which shall be measured based on the fair value of the consideration given) or the fair value of
the assets acquired, and liabilities assumed, whichever is more reliably measurable. Goodwill is not recognized in an asset acquisition
and any excess consideration transferred over the fair value of the net assets acquired is allocated to the identifiable assets based
on relative fair values.
Fair
Value Measurements
Fair
value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. GAAP
establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when available. The established fair value hierarchy prioritizes
the use of inputs used in valuation methodologies into the following three levels:
● |
Level 1: Applies to assets
or liabilities for which there are quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price
in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available. |
● |
Level 2: Applies to assets
or liabilities for which there are significant other observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data. |
● |
Level 3: Applies to assets
or liabilities for which there are significant unobservable inputs that reflect a reporting entity’s own assumptions about
the assumptions that market participants would use in pricing an asset or liability. For example, Level 3 inputs would relate to
forecasts of future earnings and cash flows used in a discounted future cash flows method. |
At
March 31, 2023 and December 31, 2022, the Company measured its investment in Eton on a recurring basis. The Company’s
investment in Eton is classified as Level 1 as the fair value is determined using quoted market prices in active markets for the
same securities. As of March 31, 2023 and December 31, 2022, the fair market value of the Company’s investment in Eton was
$7,631,000 and
$5,589,000,
respectively.
The Company carries the 2026 Notes at face value,
including the unamortized premium, less unamortized debt issuance costs, the 2027 Notes are carried at face value less unamortized debt
issuance costs, and the Oaktree Loan is carried at face value less the original issue discount and unamortized debt issuance costs on
the condensed consolidated balance sheets and presents fair value for disclosure purposes only. The 2026 Notes and 2027 Notes are classified
as Level 1 instruments as the fair value is determined using quoted market prices in active markets for the same securities.
The
following table presents the estimated fair values and the carrying values:
SCHEDULE OF ESTIMATED FAIR VALUE
| | |
March
31, 2023 | | |
December
31, 2022 | |
| | |
Carrying Value | | |
Fair Value | | |
Carrying Value | | |
Fair Value | |
2026 Notes | | |
$ | 72,628,000 | | |
$ | 73,590,000 | | |
$ | 72,436,000 | | |
$ | 71,550,000 | |
2027 Notes | | |
$ | 36,900,000 | | |
$ | 40,250,000 | | |
$ | 31,738,000 | | |
$ | 35,112,000 | |
Oaktree Loan | | |
$ | 59,322,000 | | |
$ | 65,000,000 | | |
$ | - | | |
$ | - | |
The
Company’s other financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses,
accrued payroll and related liabilities, deferred revenue and customer deposits and operating and finance lease liabilities. The carrying
amount of these financial instruments, except for operating and finance lease liabilities, approximates fair value due to the short-term
maturities of these instruments. Based on borrowing rates currently available to the Company, the carrying values of the operating and
finance lease liabilities approximate their respective fair values.
Basic
and Diluted Net Loss per Common Share
Basic
net loss per common share is computed by dividing net loss attributable to common stockholders for the period by the weighted
average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net
loss attributable to common stockholders for the period by the weighted average number of common and common equivalent shares, such
as stock options, restricted stock units (“RSUs”) and warrants, outstanding during the period. Common equivalent shares
(using the treasury stock method) from stock options, unvested RSUs and warrants was 4,750,340
and 5,546,200
at March 31, 2023 and 2022, respectively, and are excluded in the calculation of diluted net loss per common share for the periods
presented, because the effect is anti-dilutive. Included in the basic and diluted net loss per share calculation were RSUs awarded
to directors that had vested, but the issuance and delivery of the shares are deferred until the director resigns. The number of
unissued shares underlying vested RSUs at March 31, 2023 and 2022 was 336,264
and 277,405,
respectively.
The
following table shows the computation of basic and diluted net loss per share of common stock for the three months ended March 31,
2023 and 2022:
SCHEDULE OF BASIC AND DILUTED EARNINGS PER COMMON SHARE
| |
2023 | | |
2022 | |
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Numerator – net loss | |
$ | (6,643,000 | ) | |
$ | (2,438,000 | ) |
Denominator – weighted average | |
| | | |
| | |
number of shares outstanding, basic and diluted | |
| 30,289,730 | | |
| 27,226,819 | |
Net loss per share, basic and diluted | |
$ | (0.22 | ) | |
$ | (0.09 | ) |
Income
Taxes
The Company calculates its quarterly tax provision
pursuant to the guidelines in ASC 740-270, Income Taxes. Generally, ASC 740-270 requires companies to estimate the annual effective
tax rate for current year ordinary income. The estimated annual effective tax rate represents the best estimate of the tax provision
in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date
ordinary income or loss to calculate the year-to-date interim tax provision and is adjusted for discrete items that occur within the
period.
The
Company’s effective tax rate was 4.16% and 0% for the three months ended March 31, 2023 and 2022, respectively. The Company’s
effective tax rate for the three months ended March 31, 2023 and 2022 differed from the U.S. federal statutory tax rate of 21% due to
state taxes, permanent book-tax differences related to Internal Revenue Code Section 162(m) excess officer compensation limitation and share-based compensation
and the change in valuation allowance.
As
of March 31, 2023 and December 31, 2022, there were no
unrecognized tax benefits included in the condensed consolidated balance sheets that would, if recognized, affect the effective tax
rate.
Investment
in Eton Pharmaceuticals, Inc.
As
of March 31, 2023, the Company owned 1,982,000
shares of Eton common stock, which represented less than 10%
of the equity and voting interests of Eton. At March 31, 2023, the fair market value of Eton’s common stock was $3.85
per share. In accordance with the ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities, the Company recorded an unrealized investment gain from its Eton common stock
position of $2,042,000
and $139,000
during the three months ended March 31, 2023 and 2022, respectively, related to the change in fair market value of its investment in
Eton during the measurement period. As of March 31, 2023 and December 31, 2022, the fair market value of the Company’s
investment in Eton was $7,631,000
and $5,589,000,
respectively.
Investment
in Melt Pharmaceuticals, Inc. – Related Party
The
Company owns 3,500,000
shares of common stock of Melt which represented approximately 46%
of the equity and voting interests of Melt as of March 31, 2023. The Company analyzes its investment in Melt and related
agreements on a regular basis to evaluate its position of variable interests in Melt. The Company has determined that it does not
have the ability to control Melt, however it has the ability to exercise significant influence over the operating and financial
decisions of Melt and uses the equity method of accounting for this investment. Under this method, the Company recognizes earnings
and losses in Melt in its condensed consolidated financial statements and adjusts the carrying amount of its investment in Melt
accordingly. Any intra-entity profits and losses are eliminated. During the year ended December 31, 2021, the Company reduced the
carrying value of its common stock investment in Melt to $0
as a result of the Company recording its share of equity losses in Melt since its deconsolidation in 2019. As of March 31, 2023, and
at the time of entering into the Melt Loan Agreement (see Note 5), the Company owned 100%
of Melt’s indebtedness. Following the reduction of the carrying value of the Company’s common stock investment in Melt
to $0,
the Company began recording 100%
of the equity method losses of Melt, based on its ownership of Melt’s total indebtedness. In addition, the Company treats
interest paid in kind on the Melt Loan Agreement as an in-substance capital contribution and reduces its investment in Melt
accordingly, rather than recording interest income. The Company has no other requirements to advance funds to Melt.
The
following table summarizes the Company’s investments in Melt as of March 31, 2023:
SCHEDULE OF INVESTMENT
| |
Cost | | |
Share of Equity | | |
Paid-in-Kind | | |
In-substance | | |
Net | |
| |
Basis | | |
Method Losses | | |
Interest | | |
Capital Contributions | | |
Carrying value | |
Common stock | |
$ | 5,810,000 | | |
$ | (5,810,000 | ) | |
$ | - | | |
$ | | | |
$ | - | |
Loan | |
| 13,500,000 | | |
| (13,500,000 | ) | |
| 3,001,000 | | |
| (3,001,000 | ) | |
| - | |
| |
$ | 19,310,000 | | |
$ | (19,310,000 | ) | |
$ | 3,001,000 | | |
$ | (3,001,000 | ) | |
$ | - | |
See
Note 5 for more information and related party disclosure regarding Melt.
Investment
in Surface Ophthalmics, Inc. – Related Party
The
Company owns 3,500,000
common shares of Surface, which represented approximately 20%
of Surface’s equity and voting interests as of March 31, 2023, and uses the equity method of accounting for this investment, as management has determined that the Company has the ability
to exercise significant influence over the operating and financial decisions of Surface. Under this method, the Company recognizes
earnings and losses in Surface in its consolidated financial statements and adjusts the carrying amount of its investment in Surface
accordingly. The Company’s share of earnings and losses are based on the Company’s ownership interest of Surface. Any
intra-entity profits and losses are eliminated. During the year ended December 31, 2021, the Company reduced its common stock
investment in Surface to $0
as a result of the Company recording its share of equity losses of Surface. The Company has no other investments in
Surface.
The
following table summarizes the Company’s investment in Surface as of March 31, 2023:
SCHEDULE OF INVESTMENT
| |
Cost | | |
Share of Equity | | |
Net | |
| |
Basis | | |
Method Losses | | |
Carrying value | |
Common stock | |
$ | 5,320,000 | | |
$ | (5,320,000 | ) | |
$ | - | |
See
Note 6 for more information and related party disclosure regarding Surface.
Recently
Adopted Accounting Pronouncements
In
June 2016, FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU replaces the incurred
loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a
broader range of reasonable and supportable information for credit loss estimates on certain types of financial instruments,
including trade receivables. In addition, new disclosures are required. The ASU, as subsequently amended, is effective for the
Company for the fiscal years beginning after December 15, 2022. The Company adopted ASU 2016-13 on January 1, 2023. Based on the
composition of the Company’s accounts receivable, and other financial assets, including current market conditions and
historical credit loss activity, the adoption of this standard did not have a material impact on the Company’s condensed
consolidated financial statements or disclosures. Specifically, the Company’s estimate of expected credit losses as of March
31, 2023, using its expected credit loss evaluation process described above, resulted in no adjustments to the provision for credit
losses and no cumulative-effect adjustment to accumulated deficit on the adoption date of the standard.
NOTE
3. REVENUES
The
Company accounts for contracts with customers in accordance with ASC 606, Revenues from Contracts with Customers. The Company
has three primary streams of revenue: (1) revenue recognized from sales of products through its pharmacy and outsourcing facility and
sales of branded products to wholesalers through a third-party logistics (“3PL”) partner, (2) revenue recognized from a commission
agreement with a third party, and (3) revenue recognized from intellectual property licenses and asset purchase agreements.
Product
Revenues
The
Company sells prescription medications directly through its pharmacy, outsourcing facility and 3PL partner. Revenue from the Company’s
pharmacy services includes: (i) the portion of the price the client pays directly to the Company, net of any volume-related or other
discounts paid back to the client, (ii) the price paid to the Company by individuals, and (iii) customer copayments made directly to
the pharmacy network. Sales taxes are not included in revenue. Following the core principles of ASC 606, the Company has identified the
following:
1. |
Identify
the contract(s) with a customer: A contract is deemed to exist when the customer places an order through receipt of a prescription,
via an online order or via receipt of a purchase order from a customer. For branded products, orders are received through the Company’s
3PL partner, and the customer takes title of the products via formal purchase orders placed and fulfilled. |
|
|
2. |
Identify
the performance obligations in the contract: Obligations for fulfillment of the Company’s contracts consist of delivering the
product to customers at their specified destination. ASU 2016-10 was issued in April 2016 and amended ASC 606 for shipping and handling
activities as follows: If the customer takes control of the goods after shipment, shipping and handling activities would always be considered
a fulfillment activity and not treated as a separate performance obligation. If the customer takes control of the goods before shipment,
entities must make an accounting policy election to treat shipping and handling activities as either a fulfillment cost or as a separate
performance obligation. The Company has elected to treat its shipping and handling activities as a fulfillment cost.. |
|
|
3. |
Determine
the transaction price: The transaction price is based on an amount that reflects the consideration to which the Company expects
to be entitled, net of accruals for estimated rebates, wholesaler chargebacks, discounts and other deductions (collectively, sales
deductions) and an estimate for returns and replacements established at the time of sale. The Company utilizes the services of a
third-party professional services firm to estimate rebates and chargebacks associated with sales of its branded products. The transfer
of promised goods is satisfied within a year, and therefore there are no significant financing components. There is no non-cash consideration
related to product sales. |
|
|
4. |
Allocate
the transaction price to the performance obligations in the contract: Because there is only one performance obligation for product
sales, no allocation is necessary. |
|
|
5. |
Recognize
revenue when (or as) the entity satisfies a performance obligation: Revenue from products is recognized upon transfer of control
of a product to a customer. This generally occurs upon shipment unless contractual terms with a customer state that transfer of control
occurs at delivery. |
Commission
Revenues
The
Company had entered into an agreement whereby it was paid a fee calculated based on sales the Company generates from a pharmaceutical
product that is owned by a third party. The revenue earned from this arrangement was recognized, at which point there was no future performance
obligation required by the Company and no consequential continuing involvement on the Company’s part to recognize the associated
revenue.
Revenues
From Transfer of Acquired Product Profit
The
Company entered into agreements whereby it purchased the exclusive commercial rights to assets
associated with certain ophthalmic products from another pharmaceutical company (the “Seller”). During a temporary, transition
period, the Seller continues to manufacture and market these products and transfer the net profit from the sale of the products
to the Company. The revenue recognized by the Company from the transfer of net profit was recognized at the time profit from the product
sales were calculated by the Seller and confirmed by the Company, typically on a monthly basis, at which point there is no future performance
obligation required by the Company and no consequential continuing involvement on the Company’s part to recognize the associated
revenue. On a quarterly basis, the Seller invoices the Company for all credits and reimbursements (“Chargebacks”) made to
customers related to the products. The Company uses historical actual experience to estimate Chargebacks associated with the net profit
transferred. The estimate is recorded as a reduction in revenues in the Company’s condensed consolidated statements of operations
and accounts receivable in the condensed consolidated balance sheets, at the time the revenue is recognized.
Intellectual
Property License Revenues
The
Company currently holds five intellectual property licenses and related agreements pursuant to which the Company has agreed to license
or sell to a customer with the right to access the Company’s intellectual property. License arrangements may consist of non-refundable
upfront license fees, data transfer fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds,
technology access fees, and various performance or sales milestones. These arrangements can be multiple-element arrangements, the revenue
of which is recognized at the point in time that the performance obligation is met.
Non-refundable
fees that are not contingent on any future performance by the Company and require no consequential continuing involvement on the part
of the Company are recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation
and/or other deliverable is delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the
compounded drug preparations and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the
patents or patent applications for such compounded drug preparations. The Company defers recognition of non-refundable fees if it has
continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable
fee has no utility to the licensee and that are separate and independent of the Company’s performance under the other elements
of the arrangement. In addition, if the Company’s continued involvement is required, through research and development services
that are related to its proprietary know-how and expertise of the delivered technology or can only be performed by the Company, then
such non-refundable fees are deferred and recognized over the period of continuing involvement. Guaranteed minimum annual royalties are
recognized on a straight-line basis over the applicable term.
Revenue
disaggregated by revenue source for the three months ended March 31, 2023 and 2022 consists of the following:
SCHEDULE OF DISAGGREGATED REVENUE
| |
2023 | | |
2022 | |
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Product sales, net | |
$ | 20,453,000 | | |
$ | 20,340,000 | |
Commission revenues | |
| - | | |
| 1,320,000 | |
Transfer of profits | |
| 5,650,000 | | |
| 460,000 | |
Total revenues | |
$ | 26,103,000 | | |
$ | 22,120,000 | |
Deferred
revenue and customer deposits at March 31, 2023 and December 31, 2022 were $67,000 and $113,000, respectively. All deferred revenue and
customer deposit amounts at December 31, 2022 were recognized as revenue during the three months ended March 31, 2023.
NOTE
4. RECENT PRODUCT ACQUISITIONS, LICENSES AND DIVESTITURES
Acquisition
of ILEVRO, NEVANAC, VIGAMOX, MAXIDEX, and TRIESENCE
In
December 2022, the Company entered into an Asset Purchase Agreement (the “Fab 5 APA”) with Novartis Technology, LLC and Novartis
Innovative Therapies AG (together, “Novartis”), pursuant to which the Company agreed to purchase from Novartis the exclusive
commercial rights to assets associated with the following ophthalmic products (collectively the “Fab 5 Products”) in the
U.S. (the “Fab 5 Acquisition”): ILEVRO, NEVANAC, VIGAMOX, MAXIDEX, and TRIESENCE.
Under
the terms of the Fab 5 APA, the Company made a one-time payment of $130,000,000 at closing in January 2023, with up to another $45,000,000
due in a milestone payment related to the timing of the commercial availability of TRIESENCE. Pursuant to the Fab 5 APA and various ancillary
agreements, immediately following the closing and subject to certain conditions and prior to the transfer of the Fab 5 Products new drug
applications (the “NDAs”) to the Company, Novartis will continue to sell the Fab 5 Products on the Company’s behalf
and transfer the net profit from the sale of the Fab 5 Products to the Company. Novartis has agreed to supply certain Fab 5 Products
to the Company for a period of time after the NDAs are transferred and to assist with technology transfer of the Fab 5 Products manufacturing
to other third-party manufacturers, if needed.
The
assets acquired in the Fab 5 Acquisition are identifiable intangible asset groups in similar asset classes and all directly related to
the five product NDAs acquired. The developed technology is within one major intangible asset class. No workforce/employees were included
in the Fab 5 Acquisition and the Company is required to utilize its own business inputs/processes to transfer and commercialize the Fab
5 Products and NDAs. As a result, the Company recognized this transaction as an asset acquisition.
The
Company incurred $558,000 in costs associated with the Fab 5 Acquisition, including the acquisition costs and the payment of $130,000,000
at closing, the total purchase price of the Fab 5 Acquisition was $130,558,000. At the time of the Fab 5 Acquisition and as of March
31, 2023, the contingent consideration due related to the commercial availability of TRIESENCE was not considered probable and reasonably
estimable, therefore no amount was included in the purchase price of the Fab 5 Acquisition. At the time the contingent consideration
due related to the commercial availability of TRIESENCE becomes probable and reasonably estimable, the additional consideration, if any,
paid will be allocated to all of the assets on a pro rata basis based on their initial estimated fair values as a percent of the total
purchase price. The Company does not consider any amounts related to TRIESENCE to be in-process research and development (IPR&D)
as considered within the scope of ASC 730, Research and Development.
Divestiture
of Non-Ophthalmic Assets
In
October 2022, wholly owned subsidiaries of the Company (“Imprimis”) entered into an Asset Purchase Agreement (the “RPC
Agreement”) with Innovation Compounding Pharmacy, LLC (the “Buyer”). Under the terms of the RPC Agreement, Imprimis
agreed to sell substantially all of its assets associated with its non-ophthalmology related compounding product line, including but
not limited to, certain intellectual property rights, customer lists, databases, and formulations (the “RPC Assets”). The
Buyer agreed to make offers of employment to six of the Company’s employees that were responsible for the sales activities associated
with the RPC Assets. Under the terms of the RPC Agreement, the Buyer paid Imprimis an aggregate cash amount of $6,000,000 in October
2022. In addition, the Buyer is obligated to pay up to $4,500,000 to Imprimis based on mutually agreed upon revenue milestones during
the calendar year 2023 (the “Contingent Amount”). During the year ended December 31, 2022, no amount related to the Contingent
Amount was recognized by the Company. The Company will recognize a gain related to the Contingent Amount if/when the contingency (in
this case, revenue thresholds for 2023) become likely and reasonably estimated.
In
connection with the RPC Agreement, Imprimis entered into a separate transition services agreement with the Buyer related to
providing on going services associated with the RPC Assets, such as procuring and dispensing prescription orders, providing
accounting and billing services and collecting accounts receivable. The Company expects Imprimis to provide transition services to
the Buyer for up to six to nine months following the effective date of the RPC Agreement. The Company collected and will continue to
collect cash on behalf of the Buyer for revenue generated by sales of RPC Assets from October 2022 through the transition period and
the Company is obligated to transfer cash generated by such sales to the Buyer. The Company’s condensed consolidated balance
sheets as of March 31, 2023 and December 31, 2022 reflected $226,000
and $579,000, respectively, of cash collected on behalf of the Buyer and a receivable within accounts receivable of $116,000
and $128,000, respectively, for cash to be collected on behalf of the Buyer for sales of RPC Assets sold through March 31,
2023 and December 31, 2022, respectively.
The amounts due from the Buyer for
reimbursement of services performed under the transition services agreement was $162,000
and $254,000
as of March 31, 2023 and December 31, 2022, respectively. Such amounts were netted against the amounts collected on behalf of the
Buyer and was unpaid within accrued expenses on the condensed consolidated balance sheets as of March 31, 2023 and December 31,
2022. The combined total of $307,000
and $453,000
was recorded within accrued expenses on the condensed consolidated balances sheets as of March 31, 2023 and December 31, 2022,
respectively, and represents a payable to the Buyer. The Company recorded income from the transition services agreement of $124,000
which is presented in other income on the consolidated statement of operations for the three months ended March 31, 2023. During the
three months ended March 31, 2023, the Company recorded a loss on the sale of assets of $94,800
related to remaining unusable inventory.
NOTE
5. INVESTMENT IN, AND NOTE RECEIVABLE FROM MELT PHARMACEUTICALS, INC. - RELATED PARTY TRANSACTIONS
In
December 2018, the Company entered into an asset purchase agreement with Melt (the “Melt Asset Purchase Agreement”). Pursuant
to the terms of the Melt Asset Purchase Agreement, Melt was assigned certain intellectual property and related rights from the Company
to develop, formulate, make, sell, and sub-license certain Company conscious sedation and analgesia related formulations (collectively,
the “Melt Products”). Under the terms of the Melt Asset Purchase Agreement, Melt is required to make mid-single digit royalty
payments to the Company on net sales of the Melt Products while any patent rights remain outstanding, as well as other conditions.
In
February 2019, the Company and Melt entered into a Management Service Agreement between the Company and Melt (the “Melt MSA”),
whereby the Company provides to Melt certain administrative services and support, including bookkeeping, web services and human resources
related activities, and Melt is required to pay the Company a monthly amount of $10,000. During
the three months ended March 31, 2023, the Company recorded $59,000 due from Melt for reimbursable expenses and amounts payable pursuant
to the Melt MSA, which are included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets.
As of March 31, 2023, and December 31, 2022, the Company was due $198,000 and $139,000, respectively,
from Melt for reimbursable expenses and amounts due under the Melt MSA. Melt did not make any payments to the Company during the three
months ended March 31, 2023.
The
Company’s Chief Executive Officer, Mark L. Baum, was previously a member of the Melt board of directors until his resignation during
the year ended December 31, 2021. Mr. Baum re-joined the Melt board of directors in January 2023. At the time Mr. Baum re-joined, the
Melt board of directors consists of five total board members, including Mr. Baum, who is the only representative of the Company on Melt’s
board of directors.
The
unaudited condensed results of operations information of Melt is summarized below:
SCHEDULE
OF CONDENSED INCOME STATEMENT
| |
2023 | | |
2022 | |
| |
For the Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Revenues, net | |
$ | - | | |
$ | - | |
Loss from operations | |
$ | (1,858,000 | ) | |
$ | (3,337,000 | ) |
Net loss | |
$ | (1,858,000 | ) | |
$ | (3,337,000 | ) |
The
unaudited condensed balance sheet information of Melt is summarized below:
SCHEDULE
OF CONDENSED BALANCE SHEET
| |
At March 31, | | |
At December 31, | |
| |
2023 | | |
2022 | |
Current assets | |
$ | 133,000 | | |
$ | 655,000 | |
Non-current assets | |
| 133,000 | | |
| 107,000 | |
Total assets | |
$ | 266,000 | | |
$ | 762,000 | |
| |
| | | |
| | |
Total liabilities | |
$ | 20,273,000 | | |
$ | 19,056,000 | |
Total preferred stock and stockholders’ deficit | |
| (20,007,000 | ) | |
| (18,294,000 | ) |
Total liabilities and stockholders’ equity | |
$ | 266,000 | | |
$ | 762,000 | |
Melt
Note Receivable
On
September 1, 2021, the Company entered into a loan and security agreement in the principal amount of $13,500,000 (the “Melt Loan
Agreement”), as lender, with Melt, as borrower. Amounts borrowed under the Melt Loan Agreement bear interest at 12.50% per annum,
which interest can be paid in-kind at the option of Melt until the maturity date. The Melt Loan Agreement permits Melt to pay interest
only on the principal amount loaned thereunder through the term and all amounts owed were previously due and payable on September 1,
2022. In April 2022, the Company entered into a First Amendment and in September 2022, a Second Amendment (together, the “Amendments”)
to the Melt Loan Agreement. The Amendments (i) extended the maturity date of the Melt Loan Agreement to June 1, 2023, which can be extended
further to September 1, 2026 upon Melt completing a qualifying financing of a minimum amount of $10,000,000 from third-party investors,
(ii) added conditions related to minimum cash amounts following a qualifying financing, and (iii) clarified the definition of material
adverse effects. Melt may elect to prepay all, but not less than all, of the amounts owed prior to the maturity date at any time without
penalty.
Melt
has granted the Company a security interest in substantially all of its personal property, rights and assets, including intellectual
property rights, to secure the payment of all amounts owed under the Melt Loan Agreement. The Melt Loan Agreement contains customary
representations, warranties and covenants, including covenants by Melt limiting additional indebtedness, liens, mergers and acquisitions,
dispositions, investments, distributions, subordinated debt, and transactions with affiliates. The Melt Loan Agreement includes customary
events of default, and upon the occurrence of an event of default (subject to cure periods for certain events of default), all amounts
owed by Melt thereunder may be declared immediately due and payable by the Company, and the interest rate on the loan may be increased
by 3% per annum.
In
connection with the Melt Loan Agreement, the Company and Melt entered into a Right of First Refusal Agreement providing the Company with
the right, but not the obligation, to match any offer received by Melt associated with the commercial rights to any of Melt’s drug
candidates for a period of five years following the effective date of the Melt Loan Agreement.
The
net funds received by Melt excluded $908,000 owed to the Company for reimbursable expenses and amounts due under the Melt MSA prior to
the effective date of the note receivable. As of March 31, 2023 and December 31, 2022, aggregate principal and accrued interest payable
to the Company pursuant to the Melt Loan Agreement amounted to $16,501,000 and $15,984,000, respectively. In accordance with ASC 328,
Investments – Equity Method and Joint Ventures, the carrying amount of the notes receivable has been reduced by the Company’s
allocated share of Melt’s losses based on its ownership of total debt owed by Melt (see Note 2).
NOTE
6. INVESTMENT IN SURFACE OPHTHALMICS, INC. - RELATED PARTY TRANSACTIONS
The
Company entered into an asset purchase and license agreement with Surface in 2017 and amended it in April 2018 (the “Surface License
Agreements”). Pursuant to the terms of the Surface License Agreements, the Company assigned and licensed to Surface certain intellectual
property and related rights associated with Surface’s drug candidates (collectively, the “Surface Products”). Surface
is required to make mid-single digit royalty payments to the Company on net sales of the Surface Products while any patent rights remain
outstanding.
As
of March 31, 2023, the Company owned 3,500,000
shares of Surface common stock. Certain Company directors, Richard L. Lindstrom and Perry J. Sternberg are directors of Surface. Dr. Lindstrom is a principal of Flying L Partners, an
affiliate of an investor who purchased Surface Series A Preferred Stock. Mark L. Baum, who is the Company’s Chief Executive Officer, was previously a member of the Surface board of
directors and resigned from his position as a director of Surface during the three months ended March 31, 2023
The
unaudited condensed results of operations information of Surface is summarized below:
SUMMARY
OF CONDENSED INCOME STATEMENT
| |
2023 | | |
2022 | |
| |
For the Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Revenues, net | |
$ | - | | |
$ | - | |
Loss from operations | |
$ | (1,587,000 | ) | |
$ | (1,996,000 | ) |
Net loss | |
$ | (1,524,000 | ) | |
$ | 1,996,000 | |
The
unaudited condensed balance sheet information of Surface is summarized below:
SUMMARY
OF CONDENSED BALANCE SHEET
| |
At March 31, | | |
At December 31, | |
| |
2023 | | |
2022 | |
Current assets | |
$ | 13,350,000 | | |
$ | 15,350,000 | |
Non-current assets | |
| 902,000 | | |
| 652,000 | |
Total assets | |
$ | 14,252,000 | | |
$ | 16,002,000 | |
| |
| | | |
| | |
Total liabilities | |
$ | 995,000 | | |
$ | 1,586,000 | |
Total preferred stock and stockholders’ deficit | |
| 13,257,000 | | |
| 14,416,000 | |
Total liabilities and stockholders’ equity | |
$ | 14,252,000 | | |
$ | 16,002,000 | |
NOTE
7. INVENTORIES
Inventories
are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, branded commercial pharmaceutical
products, including those held at a 3PL, related laboratory supplies and active pharmaceutical ingredients. The composition of inventories
as of March 31, 2023 and December 31, 2022 was as follows:
SCHEDULE
OF INVENTORIES
| |
March 31, 2023 | | |
December 31, 2022 | |
Raw materials | |
$ | 5,023,000 | | |
$ | 3,707,000 | |
Work in progress | |
| 36,000 | | |
| 38,000 | |
Finished goods | |
| 4,034,000 | | |
| 2,796,000 | |
Total inventories | |
$ | 9,093,000 | | |
$ | 6,541,000 | |
NOTE
8. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets at March 31, 2023 and December 31, 2022 consisted of the following:
SCHEDULE
OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
March 31, 2023 | | |
December 31, 2022 | |
Prepaid insurance | |
$ | 527,000 | | |
$ | 858,000 | |
Prepaid computer software licenses and related expenses | |
| 1,072,000 | | |
| 1,165,000 | |
Due from Melt Pharmaceuticals | |
| 198,000 | | |
| 139,000 | |
Other prepaid expenses | |
| 1,689,000 | | |
| 1,331,000 | |
Deposits and other current assets | |
| 118,000 | | |
| 118,000 | |
Total prepaid expenses and other current assets | |
$ | 3,604,000 | | |
$ | 3,611,000 | |
NOTE
9. PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment at March 31, 2023 and December 31, 2022 consisted of the following:
SCHEDULE
OF PROPERTY, PLANT AND EQUIPMENT
| |
March 31, 2023 | | |
December 31, 2021 | |
Property, plant and equipment, net: | |
| | | |
| | |
Computer hardware | |
$ | 1,060,000 | | |
$ | 979,000 | |
Furniture and equipment | |
| 922,000 | | |
| 860,000 | |
Lab and pharmacy equipment | |
| 4,335,000 | | |
| 4,259,000 | |
Leasehold improvements | |
| 6,555,000 | | |
| 6,449,000 | |
Property, plant and equipment,
gross | |
| 12,872,000 | | |
| 12,547,000 | |
Accumulated depreciation | |
| (9,286,000 | ) | |
| (9,061,000 | ) |
Property,
plant and equipment, net | |
$ | 3,586,000 | | |
$ | 3,486,000 | |
For
the three months ended March 31, 2023 and 2022, depreciation expense related to the property, plant and equipment was $225,000 and
$376,000, respectively.
NOTE
10. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized
software development costs at March 31, 2023 and December 31, 2022 consisted of the following:
SCHEDULE
OF FINITE LIVED INTANGIBLE ASSETS
| |
March 31, 2023 | | |
December 31, 2022 | |
Capitalized internal-use software development costs | |
$ | 1,415,000 | | |
$ | 1,413,000 | |
Acquired third-party software license for internal-use | |
| 159,000 | | |
| 159,000 | |
Total gross capitalized software for internal-use | |
| 1,574,000 | | |
| 1,572,000 | |
Accumulated amortization | |
| (860,000 | ) | |
| (793,000 | ) |
Capitalized internal-use software in process | |
| 1,563,000 | | |
| 1,333,000 | |
Total finite lived intangible
assets net | |
$ | 2,277,000 | | |
$ | 2,112,000 | |
The
Company recorded amortization expense of $67,000 and $43,000 related to capitalized software development costs during the three months
ended March 31, 2023 and 2022, respectively.
NOTE
11. INTANGIBLE ASSETS AND GOODWILL
The
Company’s intangible assets at March 31, 2023 consisted of the following:
SCHEDULE
OF INTANGIBLE ASSETS
| |
Amortization
Periods (in
years) | | |
Cost | | |
Accumulated
Amortization | | |
Impairment | | |
Net
Carrying Value | |
Patents | |
| 7-19
| | |
$ | 981,000 | | |
$ | (183,000 | ) | |
$ | - | | |
$ | 798,000 | |
Licenses | |
| 20 | | |
| 100,000 | | |
| (25,000 | ) | |
| - | | |
| 75,000 | |
Trademarks | |
| Indefinite | | |
| 267,000 | | |
| - | | |
| - | | |
| 267,000 | |
Acquired
NDAs | |
| 10-15 | | |
| 154,193,000 | | |
| (3,533,000 | ) | |
| - | | |
| 150,660,000 | |
Customer
relationships | |
| 3-15 | | |
| 596,000 | | |
| (475,000 | ) | |
| - | | |
| 121,000 | |
Trade
name | |
| 5 | | |
| 75,000 | | |
| (5,000 | ) | |
| - | | |
| 70,000 | |
Non-competition
clause | |
| 3-4 | | |
| 50,000 | | |
| (50,000 | ) | |
| - | | |
| - | |
State
pharmacy licenses | |
| 25 | | |
| 8,000 | | |
| (7,000 | ) | |
| - | | |
| 1,000 | |
| |
| | | |
$ | 156,270,000 | | |
$ | (4,278,000 | ) | |
$ | - | | |
$ | 151,992,000 | |
Amortization
expense for intangible assets for the three months ended March 31, 2023 and 2022 was as follows:
SCHEDULE
OF AMORTIZATION EXPENSES FOR INTANGIBLE ASSETS
| |
2023 | | |
2022 | |
| |
For the | |
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Patents | |
$ | 22,000 | | |
$ | 22,000 | |
Licenses | |
| 2,000 | | |
| 8,000 | |
Acquired NDAs | |
| 2,170,000 | | |
| 341,000 | |
Customer relationships | |
| 13,000 | | |
| 33,000 | |
Amortization of intangible
assets | |
$ | 2,207,000 | | |
$ | 404,000 | |
Estimated
future amortization expense for the Company’s intangible assets at March 31, 2023 is as follows:
SCHEDULE
OF ESTIMATED FUTURE AMORTIZATION EXPENSE
| |
| | |
Remainder of 2023 | |
$ | 8,777,000 | |
2024 | |
| 11,673,000 | |
2025 | |
| 11,652,000 | |
2026 | |
| 11,652,000 | |
2027 | |
| 11,652,000 | |
Thereafter | |
| 96,319,000 | |
Intangible assets | |
$ | 151,725,000 | |
NOTE
12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses at March 31, 2023 and December 31, 2022 consisted of the following:
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
2023 | | |
2022 | |
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Accounts payable | |
$ | 6,237,000 | | |
$ | 6,440,000 | |
Accrued insurance premium | |
| 237,000 | | |
| 575,000 | |
Accrued IHEEZO milestone payment (see Note 16) | |
| 5,000,000 | | |
| 5,000,000 | |
Accrued RPC transition payments (see Note 4) | |
| 307,000 | | |
| 453,000 | |
Accrued litigation settlements | |
| 49,000 | | |
| 49,000 | |
Accrued exit fee for note payable (see Note 13) | |
| 2,275,000 | | |
| - | |
Accrued interest | |
| 1,964,000 | | |
| 1,254,000 | |
Total accounts payable and accrued expenses | |
$ | 16,069,000 | | |
$ | 13,771,000 | |
Less: Current portion | |
| (13,794,000 | ) | |
| (13,771,000 | ) |
Non-current total accrued expenses | |
$ | 2,275,000 | | |
$ | - | |
The
Company financed all insurance policies for the policy term of August 17, 2022 through August 16, 2023. The financing agreement has an
interest rate of 4.13% per annum and requires eight monthly payments of $114,000.
NOTE
13. DEBT
Oaktree
Loan
In
March 2023, the Company entered into a Credit and Guaranty Agreement (the “Oaktree Loan”) with Oaktree Fund
Administration, LLC, as administrative agent for the lenders (together, “Oaktree”), providing for a senior secured term
loan facility to the Company with a principal amount of up to $100,000,000.
Upon entering into the Oaktree Loan, the Company drew a principal amount of $65,000,000
(“Tranche A”) from the Oaktree Loan and used the net proceeds to repay all amounts owed by the Company pursuant to the
Loan and Security Agreement the Company previously entered into with B. Riley Commercial Capital, LLC on December 14, 2022 (the
“B. Riley Loan”) – see subheading B. Riley Loan and Security Agreement – Paid in Full within this
footnote. The additional principal loan amount of up to $35,000,000
available under the Oaktree Loan (“Tranche B”) will be made available to the Company upon the commercialization of
TRIESENCE (see Note 4). If Tranche B is not drawn by the Company on or before March 27, 2024, the additional principal loan amount available
under the Oaktree Loan is reduced to $30,000,000.
The
Oaktree Loan is secured by nearly all of the assets, including intellectual property, of the Company and its material subsidiaries.
The Oaktree Loan which has a maturity date of January
19, 2026, and bears interest at a rate equal to the Secured Overnight Financing Rate (SOFR) plus 6.5%
per annum (totaling 11.398% at March 31, 2023). Interest is payable quarterly in arrears on March 31, June 30, September 30, and
December 31, of each year. From the proceeds, the Company paid fees and offering expenses of $915,000,
and the Oaktree Loan was issued at an original issue discount of $2,500,000.
The Oaktree Loan also requires the Company to pay an exit fee equal to 3.50%
of the aggregate principal amount owed upon any payment or prepayment in full or in part, on or after the maturity date, and
accordingly, the Company accrued $2,275,000 related
to the exit fee. The original issue discount, fees and expenses (including the exit fee) totaling $5,690,000
have been recorded as a debt discount, which is being amortized over the term of the Oaktree Loan using the effective interest rate
method. The Oaktree Loan requires interest-only payments through the maturity date.
The
Oaktree Loan contains customary guarantees and covenants, including financial covenants related to minimum liquidity and minimum net
revenues. As of the end of the fiscal quarter ending December 31, 2024, if the Company’s Total Leverage Ratio (as defined in the
Oaktree Loan) is greater than or equal to five times, but less than seven times, the Company will be required to issue to Oaktree warrants
to purchase 375,000 shares of the Company’s common stock, and if the Total Leverage Ratio is greater than or equal to seven times,
the Company will be required to issue to Oaktree warrants to purchase an additional 375,000 shares of the Company’s common stock
(equaling 750,000 shares in aggregate). If the Total Leverage Ratio as of the end of the fiscal quarter ending December 31, 2024 is less
than five times, no warrants will be issued to Oaktree. Based on current projections, the Company does not expect to issue any warrants
related to the Oaktree Loan.
Interest
expense related to the Oaktree Loan totaled $95,000
for the three months ended March 31, 2023, and included the amortization of debt issuance costs and discount of $12,000.
HROWM
- 11.875% Senior Notes Due 2027
In
December 2022 and in January 2023, the Company closed an offering of $35,000,000 and $5,250,000, respectively, aggregate principal amount
of 11.875% senior notes due in December 2027 (the “2027 Notes”). The 2027 Notes were sold to investors at a par value of
$25.00 per 2027 Note, and the offering resulted in net proceeds to the Company of approximately $36,699,000 after deducting underwriting
discounts and commissions and expenses of $3,551,000.
The
2027 Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other
existing and future senior unsecured and unsubordinated indebtedness. The 2027 Notes are effectively subordinated in right of payment
to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness
of the Company’s subsidiaries, including trade payables. The 2027 Notes bear interest at the rate of 11.875% per annum. Interest
on the 2027 Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on January
31, 2023. The 2027 Notes will mature on December 31, 2027.
At
any time prior to December 31, 2024, the Company may, at its option, redeem the 2027 Notes, in whole at any time or in part from time
to time, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed, plus a make-whole amount, if any,
plus accrued and unpaid interest to, but excluding, the date of redemption. The Company may redeem the 2027 Notes for cash in whole or
in part at any time at its option (i) on or after December 31, 2024 and prior to December 31, 2025, at a price equal to $25.50 per note,
plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after December 31, 2025 and prior to December
31, 2026, at a price equal to $25.25 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iii)
on or after December 31, 2026 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest
to, but excluding, the date of redemption. In addition, the Company is required to redeem the 2027 Notes, for cash, in whole but not
in part, at the price of $25.50 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, upon occurrence
of certain events including (i) the occurrence of a Material Change, as defined in the Second Supplemental Indenture. The 2027 Notes
trade on the Nasdaq Stock Market LLC under the symbol “HROWM”.
Interest
expense related to the 2027 Notes totaled $1,395,000 for the three months ended March 31, 2023, and included amortization of debt issuance
costs and debt discount of $200,000.
Our
Chief Executive Officer, Mark L. Baum, Chief Financial Officer, Andrew R. Boll along with directors Dr. Richard Lindstrom and R. Lawrence
Van Horn, in aggregate, own $950,000 in principal amount of the 2027 Notes.
HROWL
- 8.625% Senior Notes Due 2026
In
April 2021, the Company closed an offering of $50,000,000 aggregate principal amount of 8.625% senior notes due April 2026, and in May
2021 issued an additional $5,000,000 of such notes pursuant to the full exercise of the underwriters’ option to purchase additional
notes (collectively, the “April Notes”). The April Notes were sold to investors at a par value of $25.00 per April Note and
the offering resulted in net proceeds to the Company of approximately $51,909,000 after deducting underwriting discounts and commissions
and expenses of $3,091,000. In June 2021, in a further issuance of the April Notes, the Company sold an additional $20,000,000 aggregate
principal amount of such notes (the “June Notes,” and together with the April Notes, the “2026 Notes”), at a
price of $25.75 per June Note, with interest of $278,000 on the June Notes being accrued from April 20, 2021 as of the date of issuance.
The June offering resulted in net proceeds to the Company of approximately $19,164,000 after deducting underwriting discounts and commissions
and expenses of $1,158,000 and a premium on note issuance of $322,000. The June Notes are treated as a single series with the April Notes
under the indenture governing the April Notes, dated as of April 20, 2021, and have the same terms as the April Notes (other than the
initial offering price and issue date). The 2026 Notes are senior unsecured obligations
of the Company and rank equally in right of payment with all of our other existing and future senior unsecured and unsubordinated indebtedness.
The 2026 Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness
and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables.
The 2026 Notes bear interest at a rate of 8.625% per annum. Interest on the 2026 Notes is payable quarterly in arrears on January 31,
April 30, July 31 and October 31 of each year, commencing on July 31, 2021. The 2026 Notes will mature on April 30, 2026. The issuance
costs were recorded as a debt discount and are being amortized as interest expense, net of the amortization of the premium on note issuance,
over the term of the 2026 Notes using the effective interest rate method.
Prior
to February 1, 2026, the Company may, at its option, redeem the 2026 Notes, in whole at any time or in part from time to time, at a redemption
price equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus a make-whole amount, if any, plus accrued and unpaid
interest to, but excluding, the date of redemption. The Company may redeem the 2026 Notes for cash in whole or in part at any time at
our option on or after February 1, 2026 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid
interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes.
The 2026 Notes trade on the Nasdaq Stock Market LLC under the symbol “HROWL”.
Interest
expense related to the 2026 Notes totaled $1,810,000 and $1,810,000 for the three months ended March 31, 2023 and 2022, respectively,
and included amortization of debt issuance costs and debt discount of $193,000 and $193,000, respectively.
B. Riley Loan and Security Agreement – Paid in Full
On
December 14, 2022 (the “Effective Date”), the Company entered into a Loan and Security Agreement (the “BR Loan”)
with B. Riley Commercial Capital, LLC, as Administrative Agent for the Lenders. The BR Loan provided for a loan facility of up to $100,000,000
to the Company with a maturity date of December 14, 2025, at an interest rate of 10.875% per annum.
The
BR Loan was secured by an intellectual property security agreement entered into in connection with the BR Loan, and by all assets of
the Company and its material subsidiaries. The outstanding balance of the BR Loan was due in full on the maturity date. The BR Loan provided
for voluntary prepayment subject to no prepayment fee if no loan had been funded or the prepayment or repayment occured (other than as
a result of acceleration of the BR Loan) on or prior to the date that was 90 days following the Effective Date and up to 3.00% of the
amount of the loan based on other payment dates.
In
January 2023, $59,750,000 of principal amount was funded pursuant to the BR Loan simultaneously with the consummation of the Fab 5 Acquisition.
In March 2023, the Company repaid all amounts owed under the BR Loan, including accrued interest of $1,200,000, from proceeds received in connection with the Oaktree Loan, and no exit or prepayment
fees were paid as a result of the payoff of the BR Loan.
Interest
expense related to the BR Loan totaled $1,565,000
for the three months ended March 31, 2023, and included amortization of debt issuance costs and debt discount of $356,000.
The Company recorded $5,465,000
related to the write off of the remaining unamortized debt issuance costs and debt discount in connection with the early
extinguishment of debt associated with the BR Loan.
At
March 31, 2023, future minimum payments under the Company’s debt are as follows:
SCHEDULE
OF FUTURE MINIMUM PAYMENT UNDER NOTES PAYABLES
| |
Amount | |
Remainder of 2023 | |
$ | 14,145,000 | |
2024 | |
| 18,695,000 | |
2025 | |
| 18,695,000 | |
2026 | |
| 147,325,000 | |
2027 | |
| 45,030,000 | |
Total minimum payments | |
| 243,890,000 | |
Less: amount representing interest payments | |
| (63,640,000 | ) |
Notes payable, gross | |
| 180,250,000 | |
Less: unamortized discount, net of premium | |
| (11,400,000 | ) |
Notes payable, net of unamortized discount | |
$ | 168,850,000 | |
NOTE
14. LEASES
The
Company leases office and laboratory space under non-cancelable operating leases listed below. These lease agreements have remaining
terms between one to five years and contain various clauses for renewal at the Company’s option.
|
● |
An
operating lease for 5,789 square feet of office space in Carlsbad, California, which commenced in January 2022 and will expire in
March 2025. |
|
|
|
|
● |
An
operating lease for 35,326 square feet of lab, warehouse and office space in Ledgewood, New Jersey that expires in July 2026, with
an option to extend the term for two additional five-year periods. This includes an amendment, which was made effective July 2020,
that extended the term of the original lease and added 1,400 of additional square footage to the lease, and another amendment entered
into in May 2021 that extended the term of the lease to July 2027 and added 8,900 square feet of space. |
|
|
|
|
● |
An
operating lease for
5,500 square feet of office space in Nashville, Tennessee that expires November
30, 2024, with an option to extend the term for two additional five-year periods. |
|
|
|
|
● |
An
operating lease for 11,552 square feet of lab and office space in Nashville, Tennessee which commenced in June 2022 and will expire
in June 2027. |
At
March 31, 2023, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases
held by the Company were 6.61% and 10.72 years, respectively.
During
the three months ended March 31, 2023 and 2022, cash paid for amounts included for the operating lease liabilities was $306,000 and $166,000,
respectively. During the three months ended March 31, 2023 and 2022, the Company recorded operating lease expense of $309,000 and $238,000,
respectively, which is included in selling, general and administrative expenses.
Future
lease payments under operating leases as of March 31, 2023 were as follows:
SCHEDULE
OF FUTURE LEASE PAYMENT UNDER OPERATING LEASES
| |
Operating Leases | |
Remainder of 2023 | |
$ | 925,000 | |
2024 | |
| 1,262,000 | |
2025 | |
| 1,093,000 | |
2026 | |
| 1,114,000 | |
2027 | |
| 972,000 | |
Thereafter | |
| 5,829,000 | |
Total minimum lease payments | |
| 11,195,000 | |
Less: amount representing interest payments | |
| (3,314,000 | ) |
Total operating lease liabilities | |
| 7,881,000 | |
Less: current portion, operating lease liabilities | |
| (744,000 | ) |
Operating lease liabilities, net of current portion | |
$ | 7,137,000 | |
NOTE
15. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Common
Stock
During
the three months ended March 31, 2023, the Company issued 33,063 shares of common stock and received proceeds of $148,000 upon the exercise
of options to purchase 33,063 shares of common stock with exercise prices ranging from $3.50 to $7.60 per share.
During
the three months ended March 31, 2023, 23,000 RSUs granted in January 2020 to Andrew R. Boll, the Company’s Chief Financial Officer,
vested, and in January 2023, the Company issued 13,398 shares of common stock to Mr. Boll, net of 9,602 shares of common stock withheld
for payroll tax withholdings totaling $142,000.
During
the three months ended March 31, 2023, 88,000 RSUs granted in January 2020 to Mark L. Baum, the Company’s Chief Executive Officer,
vested, and in January 2023, the Company issued 52,821 shares of common stock to Mr. Baum, net of 35,179 shares of common stock withheld
for payroll tax withholdings totaling $519,000.
During
the three months ended March 31, 2023, the Company issued 55,558 shares of common stock to Mr. Boll, upon the cashless exercise of options to purchase 90,000 shares at an exercise price of $6.00 per share. The Company
withheld from Mr. Boll 25,521 shares as consideration for the cashless exercise and an additional 8,921 shares for payroll tax obligations
totaling $189,000.
During
the three months ended March 31, 2023, 16,405 shares of the Company’s common stock underlying RSUs issued to directors vested,
but the issuance and delivery of these shares are deferred until the applicable director resigns.
Stock
Option Plan
On
September 17, 2007, the Company’s Board of Directors and stockholders adopted the Company’s 2007 Incentive Stock and Awards
Plan, which was subsequently amended on November 5, 2008, February 26, 2012, July 18, 2012, May 2, 2013 and September 27, 2013 (as amended,
the “2007 Plan”). The 2007 Plan reached its term in September 2017, and we can no longer issue additional awards under this
plan; however, options previously issued under the 2007 Plan will remain outstanding until they are exercised, reach their maturity or
are otherwise cancelled/forfeited. On June 13, 2017, the Company’s Board of Directors and stockholders adopted the Company’s
2017 Incentive Stock and Awards Plan which was subsequently amended on June 3, 2021 (as amended, the “2017 Plan” together
with the 2007 Plan, the “Plans”). As of March 31, 2023, the 2017 Plan provides for the issuance of a maximum of 6,000,000
shares of the Company’s
common stock. The purposes of the Plans are to attract and retain directors, officers, consultants, advisors and employees whose services
are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in the Company’s
development and financial success. Under the Plans, the Company is authorized to issue incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, restricted stock units and restricted stock.
The Plans are administered by the Compensation Committee of the Company’s Board of Directors. The Company had 2,145,767
shares available for future issuances under the 2017 Plan at March 31, 2023.
Stock
Options
A
summary of stock option activity under the Plans for the three months ended March 31, 2023 is as follows:
SCHEDULE
OF STOCK OPTION PLAN ACTIVITY
| |
Number of Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life | | |
Aggregate Intrinsic Value | |
Options outstanding – January 1, 2022 | |
| 3,027,701 | | |
$ | 5.90 | | |
| | | |
| | |
Options granted | |
| 28,500 | | |
$ | 17.40 | | |
| | | |
| | |
Options exercised | |
| (123,063 | ) | |
$ | 5.54 | | |
| | | |
| | |
Options cancelled/forfeited | |
| (42,112 | ) | |
$ | 5.61 | | |
| | | |
| | |
Options outstanding – March 31, 2023 | |
| 2,891,026 | | |
$ | 6.03 | | |
| 4.30 | | |
$ | 43,730,000 | |
Options exercisable | |
| 2,589,182 | | |
$ | 5.73 | | |
| 3.77 | | |
$ | 39,941,000 | |
Options vested and expected to vest | |
| 2,848,713 | | |
$ | 5.99 | | |
| 4.23 | | |
$ | 43,219,000 | |
The
aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would
have been received by option holders if all option holders had exercised and immediately sold all shares underlying options with an exercise
price lower than the market price on March 31, 2023, based on the closing price of the Company’s common stock of $21.16 on that
date.
During
the three months ended March 31, 2023, the Company granted stock options to certain employees. The stock options were granted with an
exercise price equal to the current market price of the Company’s common stock, as reported by the securities exchange on which
the common stock was then listed, at the grant date and have contractual terms of ten years. Vesting terms for options granted to employees
during the three months ended March 31, 2023 included the following vesting schedule: 25% of the shares subject to the option vest and
become exercisable on the first anniversary of the grant date and the remaining 75% of the shares subject to the option vest and become
exercisable quarterly in equal installments thereafter over three years. Certain option awards provide for accelerated vesting if there
is a change in control (as defined in the Plans) and in the event of certain modifications to the option award agreement.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The expected term
of options granted to employees and directors was determined in accordance with the “simplified approach,” as the Company
has limited, relevant, historical data on employee exercises and post-vesting employment termination behavior. The expected risk-free
interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time
of the grant. The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual
effect differs from those estimates. For option grants to employees and directors, the Company assigns a forfeiture factor of 10%. These
factors could change in the future, which would affect the determination of stock-based compensation expense in future periods. Utilizing
these assumptions, the fair value is determined at the date of grant.
The
table below illustrates the fair value per share determined using the Black-Scholes-Merton option pricing model with the following assumptions
used for valuing options granted to employees:
SCHEDULE
OF FAIR VALUE ASSUMPTIONS
| |
2023 | |
Weighted-average fair value of options granted | |
$ | 10.58 | |
Expected terms (in years) | |
| 5.50-6.11 | |
Expected volatility | |
| 69-70 | % |
Risk-free interest rate | |
| 3.64-3.76 | % |
Dividend yield | |
| - | |
The
following table summarizes information about stock options outstanding and exercisable at March 31, 2023:
SCHEDULE OF STOCK
OPTION OUTSTANDING AND EXERCISABLE
| |
Options
Outstanding | | |
Options
Exercisable | |
Range
of Exercise Prices | |
Number
Outstanding | | |
Weighted
Average Remaining
Contractual
Life
in Years | | |
Weighted
Average Exercise Price | | |
Number
Exercisable | | |
Weighted
Average Exercise Price | |
$1.47
- $1.73 | |
| 298,112 | | |
| 4.71 | | |
$ | 1.72 | | |
| 298,112 | | |
$ | 1.72 | |
$2.23
- $2.60 | |
| 309,068 | | |
| 3.61 | | |
$ | 2.26 | | |
| 309,068 | | |
$ | 2.26 | |
$3.95 | |
| 310,000 | | |
| 2.93 | | |
$ | 3.95 | | |
| 310,000 | | |
$ | 3.95 | |
$4.08
- $6.30 | |
| 409,850 | | |
| 5.66 | | |
$ | 5.99 | | |
| 398,194 | | |
$ | 6.00 | |
$6.75
- $7.30 | |
| 402,000 | | |
| 7.43 | | |
$ | 7.18 | | |
| 279,500 | | |
$ | 7.29 | |
$7.37
- $7.79 | |
| 260,323 | | |
| 5.13 | | |
$ | 7.53 | | |
| 166,760 | | |
$ | 7.50 | |
$7.87 | |
| 600,000 | | |
| 2.33 | | |
$ | 7.87 | | |
| 600,000 | | |
$ | 7.87 | |
$7.89
- $12.38 | |
| 274,173 | | |
| 2.57 | | |
$ | 9.12 | | |
| 227,548 | | |
$ | 8.84 | |
$15.17 | |
| 7,500 | | |
| 9.84 | | |
$ | 15.17 | | |
| - | | |
$ | - | |
$18.35 | |
| 20,000 | | |
| 9.82 | | |
$ | 18.35 | | |
| - | | |
$ | - | |
$1.47
- $18.35 | |
| 2,891,026 | | |
| 4.30 | | |
$ | 6.03 | | |
| 2,589,182 | | |
$ | 5.73 | |
As
of March 31, 2023, there was approximately $1,441,000 of total unrecognized compensation expense related to unvested stock options granted
under the Plans. That expense is expected to be recognized over the weighted-average remaining vesting period of 3.0 years. The stock-based
compensation for all stock options was $341,000 and $272,000 during the three months ended March 31, 2023 and 2022, respectively.
The
intrinsic value of options exercised during the three months ended March 31, 2023 was $1,819,000.
Restricted
Stock Units/Performance Stock Units
RSU
awards are granted subject to certain vesting requirements and other restrictions, including performance and market-based vesting criteria.
The grant date fair value of the RSUs, which has been determined based upon the market value of the Company’s common stock on the
grant date, is expensed over the vesting period of the RSUs.
A
summary of the Company’s RSU activity (including performance stock units) and related information for the three months ended March
31, 2023 is as follows:
SCHEDULE
OF RESTRICTED STOCK UNITS ACTIVITY
| |
Number of RSUs | | |
Weighted Average Grant Date Fair Value | |
RSUs unvested - January 1, 2023 | |
| 2,061,719 | | |
$ | 6.88 | |
RSUs granted | |
| - | | |
$ | - | |
RSUs vested | |
| (127,405 | ) | |
$ | 7.34 | |
RSUs cancelled/forfeited | |
| (75,000 | ) | |
$ | 5.83 | |
RSUs unvested - March 31, 2023 | |
| 1,859,314 | | |
$ | 6.82 | |
As
of March 31, 2023, the total unrecognized compensation expense related to unvested RSUs was approximately $2,476,000, which is expected
to be recognized over a weighted-average period of 0.4 years, based on estimated and actual vesting schedules of the applicable RSUs.
The stock-based compensation for RSUs during the three months ended March 31, 2023 and 2022 was $1,292,000 and $1,744,000, respectively.
Stock-Based
Compensation Summary
The
Company recorded stock-based compensation related to equity instruments granted to employees, directors and consultants as follows:
SCHEDULE
OF STOCK BASED COMPENSATION GRANTED TO EMPLOYEES DIRECTORS CONSULTANTS
| |
2023 | | |
2022 | |
| |
For the | |
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Employees - selling, general and administrative | |
$ | 1,328,000 | | |
$ | 1,676,000 | |
Employees - R&D | |
| 163,000 | | |
| 186,000 | |
Directors - selling, general and administrative | |
| 125,000 | | |
| 100,000 | |
Consultants - R&D | |
| 17,000 | | |
| 54,000 | |
Total | |
$ | 1,633,000 | | |
$ | 2,016,000 | |
NOTE
16. COMMITMENTS AND CONTINGENCIES
Legal
General
and Other
In
the ordinary course of business, the Company is involved in various legal proceedings, government investigations and other matters that
are complex in nature and have outcomes that are difficult to predict. The Company describes legal proceedings and other matters that
are/were significant or that it believes could become significant in this footnote.
The
Company records accruals for loss contingencies to the extent that it concludes it is probable that a liability has been incurred and
the amount of the related loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings
and other matters that could cause an increase or decrease in the amount of a liability that has been accrued previously.
The
Company’s legal proceedings involve various aspects of its business and a variety of claims, some of which present novel factual
allegations and/or unique legal theories. Typically, a number of the matters pending against the Company are at early stages of the legal
process, which in complex proceedings of the sort the Company face often extend for several years. While it is not possible to accurately
predict or determine the eventual outcomes of matters that have not concluded, an adverse determination in one or more of matter (whether
discussed in this footnote or not) currently pending may have a material adverse effect on the Company’s condensed consolidated
results of operations, financial position or cash flows.
Ocular
Science, Inc. et. al
In
July 2021, ImprimisRx, LLC, a subsidiary of the Company, filed a lawsuit against Ocular Science, Inc. and OSRX, Inc. (together, “OSRX”)
in the U.S. District Court for the Southern District of California, asserting claims for copyright infringement, trademark infringement, unfair competition and
false advertising (Lanham Act). ImprimisRx is seeking damages from OSRX. Since July 2021, the complaint has been amended and OSRX added
counterclaims alleging ImprimisRx, LLC is violating the Lanham Act with false advertising. Both parties are seeking damages from the
other. Discovery is currently ongoing and trial is set to take place in the fourth quarter of 2023.
Product
and Professional Liability
Product
and professional liability litigation represents an inherent risk to all firms in the pharmaceutical and pharmacy industry. We utilize
traditional third-party insurance policies with regard to our product and professional liability claims. Such insurance coverage at any
given time reflects current market conditions, including cost and availability, when the policy is written.
Indemnities
In
addition to the indemnification provisions contained in the Company’s governing documents, the Company generally enters into separate
indemnification agreements with each of the Company’s directors and officers. These agreements require the Company, among other
things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys’ fees, judgments, fines
and settlements, paid by the individual in connection with any action, suit or proceeding arising out of the individual’s status
or service as the Company’s director or officer, other than liabilities arising from willful misconduct or conduct that is knowingly
fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the
individual with respect to which the individual may be entitled to indemnification by the Company. The Company indemnifies Oaktree for
certain claims and losses associated with the Oaktree Loan. The Company also indemnifies its lessors in connection with its facility
leases for certain claims arising from the use of the facilities. These indemnities do not provide for any limitation of the maximum
potential future payments the Company could be obligated to make. Historically, the Company has not incurred any payments for these obligations
and, therefore, no liabilities have been recorded for these indemnities in the accompanying condensed consolidated balance sheets.
Klarity
License Agreement – Related Party
The
Company entered into a license agreement in April 2017, as amended in April 2018 (the “Klarity License Agreement”), with
Richard L. Lindstrom, M.D., a member of its Board of Directors. Pursuant to the terms of the Klarity License Agreement, the Company licensed
certain intellectual property and related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license the topical ophthalmic
solution Klarity designed to protect and rehabilitate the ocular surface (the “Klarity Product”).
Under
the terms of the Klarity License Agreement, the Company is required to make royalty payments to Dr. Lindstrom ranging from 3% to 6% of
net sales, dependent upon the final formulation of the Klarity Product sold. In addition, the Company is required to make certain milestone
payments to Dr. Lindstrom including: (i) an initial payment of $50,000 upon execution of the Klarity License Agreement, (ii) a second
payment of $50,000 following the first $50,000 in net sales of the Klarity Product; and (iii) a final payment of $50,000 following the
first $100,000 in net sales of the Klarity Product. All of the above referenced milestone payments were payable at the Company’s
election in cash or shares of the Company’s restricted common stock. Payments totaling $71,000 and $30,000 were made during the
three months ended March 31, 2023 and 2022, respectively. Royalty expenses were $75,000 and $71,000 during the three months ended March
31, 2023 and 2022, respectively, and were included in accounts payable to Dr. Lindstrom.
Injectable
Asset Purchase Agreement – Related Party
In
December 2019, the Company entered into an asset purchase agreement (the “Lindstrom APA”) with Dr. Lindstrom, a member of
its Board of Directors. Pursuant to the terms of the Lindstrom APA, the Company acquired certain intellectual property and related rights
from Dr. Lindstrom to develop, formulate, make, sell, and sub-license an ophthalmic injectable product (the “Lindstrom Product”).
Under
the terms of the Lindstrom APA, the Company is required to make royalty payments to Dr. Lindstrom ranging from 2% to 3% of net sales,
dependent upon the final formulation and patent protection of the Lindstrom Product sold. In addition, the Company is required to make
certain milestone payments to Dr. Lindstrom including an initial payment of $33,000 upon execution of the Lindstrom APA. Dr. Lindstrom
was paid $9,000 and $8,000 in cash during the three months ended March 31, 2023 and 2022, respectively. The Company incurred $8,000 and
$7,000 for royalty expenses related to the Lindstrom APA during the three months ended March 31, 2023 and 2022, respectively.
Other
Asset Purchase, License and Related Agreements
The
Company has acquired and sourced intellectual property rights related to certain proprietary innovations from certain inventors and related
parties (the “Inventors”) through multiple asset purchase agreements, license agreements, strategic agreements and commission
agreements. In general, these agreements provide that the Inventors will cooperate with the Company in obtaining patent protection for
the acquired intellectual property and that the Company will use commercially reasonable efforts to research, develop and commercialize
a product based on the acquired intellectual property. In addition, the Company has acquired a right of first refusal on additional intellectual
property and drug development opportunities presented by these Inventors.
In
consideration for the acquisition of the intellectual property rights, the Company is obligated to make payments to the Inventors based
on the completion of certain milestones, generally consisting of: (i) a payment payable within 30 days after the issuance of the first
patent in the United States arising from the acquired intellectual property (if any); (ii) a payment payable within 30 days after the
Company files the first investigational new drug application (“IND”) with the U.S. Food and Drug Administration (“FDA”)
for the first product arising from the acquired intellectual property (if any); (iii) for certain of the Inventors, a payment payable within
30 days after the Company files the first new drug application with the FDA for the first product arising from the acquired intellectual
property (if any); and (4) certain royalty payments based on the net receipts received by the Company in connection with the sale or
licensing of any product based on the acquired intellectual property (if any), after deducting (among other things) the Company’s
development costs associated with such product. If, following five years after the date of the applicable asset purchase agreement, the
Company either (a) for certain of the Inventors, has not filed an IND or, for the remaining Inventors, has not initiated a study where
data is derived, or (b) has failed to generate royalty payments to the Inventors for any product based on the acquired intellectual property,
the Inventors may terminate the applicable asset purchase agreement and request that the Company re-assign the acquired technology to
the Inventors. During the three months ended March 31, 2023 and 2022, $293,000 and $213,000 were
incurred under these agreements as royalty expenses, respectively.
Sintetica
Agreement
In
July 2021, the Company entered into a License and Supply Agreement (the “Sintetica Agreement”) with Sintetica S.A. (“Sintetica”),
pursuant to which Sintetica granted the Company the exclusive license and marketing rights to its patented ophthalmic drug candidate
(“IHEEZO”) in the U.S. and Canada.
Pursuant
to the Sintetica Agreement, the Company agreed to pay Sintetica a per unit transfer price to supply IHEEZO, along with a per unit royalty
for units sold. The Company is required to pay Sintetica up to $18,000,000 in one-time milestone payments including a $5,000,000 payment
(the “Upfront Payment”) due within 30 days of signing the Sintetica Agreement and the balance of payments due upon achievement
of certain regulatory and commercial milestones. Under the terms of the Sintetica Agreement, Sintetica was responsible for regulatory
filings for IHEEZO in the U.S. As of March 31, 2023 and December 31, 2022, the Company had accrued $5,000,000 under the Sintetica Agreement
related to a milestone payment, which was capitalized as an intangible asset.
Subject
to certain limitations, the Sintetica Agreement has a ten-year term, and allows for a ten-year extension if certain sales thresholds
are met.
Wakamoto
Agreement
In
August 2021, the Company entered into a License Agreement and a Basic Sale and Purchase Agreement (together, the “Wakamoto Agreements”)
with Wakamoto Pharmaceutical Co., Ltd. (“Wakamoto”), pursuant to which Wakamoto granted the Company the exclusive license
and marketing rights to its ophthalmic drug candidate (“MAQ-100”) in the U.S. and Canada.
Pursuant
to the Wakamoto Agreements, Wakamoto will supply MAQ-100 to the Company, and the Company
will pay Wakamoto a per unit transfer price to supply MAQ-100. In addition, the Company is required to pay Wakamoto various one-time
milestone payments totaling up to $2,000,000 upon the achievement of certain regulatory milestones and up to $6,200,000 upon the achievement
of certain commercial milestones. Under the terms of the Agreements, the Company will be responsible for regulatory filings and fees
for MAQ-100 in the U.S. and Canada. Through March 31, 2023, no amounts have been paid or accrued under the Wakamoto agreement.
Subject
to certain limitations, the term of the Agreements is for five years from the date of the FDA’s market approval of MAQ-100 and
allows for a five-year extension if certain unit sales thresholds are met.
Eyepoint
Commercial Alliance Agreement - Terminated
In
August 2020, the Company, through its wholly owned subsidiary ImprimisRx, LLC, entered into a Commercial Alliance Agreement (the “Dexycu
Agreement”) with Eyepoint Pharmaceuticals, Inc. (“Eyepoint”), pursuant to which Eyepoint granted the Company the non-exclusive
right to co-promote DEXYCU® (dexamethasone intraocular suspension) 9% for the treatment of post-operative inflammation
following ocular surgery in the United States. Pursuant
to the Dexycu Agreement, Eyepoint pays the Company a fee calculated based on the quarterly
sales of DEXYCU in excess of predefined volumes to specific customers of the Company in the U.S. Under the terms of the Dexycu
Agreement, the Company agreed to use commercially reasonable efforts to promote and market DEXYCU in the U.S.
Following
the preliminary Hospital Outpatient Prospective Payment System (HOPPS) rule proposed by the Centers for Medicare & Medicaid Services
(CMS) in July of 2022, which did not contain an extension of the pass-through payment period for Dexycu beyond December 31, 2022, the
Company entered into a Mutual Termination Agreement (the “Termination Agreement”) with Eyepoint on October 7, 2022, pursuant
to which Eyepoint and the Company agreed (a) that the Company will continue to support the sale of Dexycu through the fourth quarter
of 2022, consistent with the Company’s level of effort during the January through June 2022 period, (b) to decrease the required
minimum quarterly sales levels based on Dexycu unit demand for the fourth quarter of 2022, and (c) to terminate the Dexycu Agreement,
along with ancillary letter agreements, effective January 1, 2023.
During
the three months ended March 31, 2022, the Company recorded $1,320,000 in commission revenues related to the Dexycu Agreement.
Sales
and Marketing Agreements
The
Company has entered various sales and marketing agreements with certain organizations to provide exclusive and non-exclusive sales and
marketing representation services to Harrow in select geographies in the U.S. in connection with the Company’s ophthalmic pharmaceutical
compounded formulations or related products.
Under
the terms of the sales and marketing agreements, the Company is generally required to make commission payments equal to 10% to 14% of
net sales for products above and beyond the initial existing sales amounts. In addition, the Company is required to make periodic milestone
payments to certain organizations in shares of the Company’s restricted common stock if net sales in the assigned territory reach
certain future levels by the end of their terms. Commission expenses of $130,000 and $1,047,000
were incurred under these agreements during the three months ended March 31, 2023 and 2022, respectively.
NOTE
17. SEGMENTS AND CONCENTRATIONS
The
Company operates its business on the basis of a single reportable segment, which is the business of discovery,
development, and commercialization of innovative ophthalmic therapies. The Company’s chief operating decision-maker is the
Chief Executive Officer, who evaluates the Company as a single operating segment.
The
Company has two products that each comprised more than 10% of total revenues during the three months ended March 31, 2023 and 2022. These
products collectively accounted for 36% and 32% of revenues during the three months ended March 31, 2023 and 2022, respectively.
The
Company sells its products and compounded formulations to a large number of customers. There were no customers who comprised more than
10% of the Company’s total product sales during the three months ended March 31, 2023 and 2022.
The
Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted for 90% and
74% of active pharmaceutical ingredient purchases during the three months ended March 31, 2023 and 2022, respectively.
NOTE
18. SUBSEQUENT EVENTS
The
Company has performed an evaluation of events occurring subsequent to March 31, 2023 through the filing date of this Quarterly
Report on Form 10-Q. Based on its evaluation, no events other than those described below need to be disclosed.
In
April 2023, the Company issued 62,367 shares of common stock to Mark L. Baum, the Company’s Chief Executive Officer, upon the cashless
exercise of options to purchase 180,000 shares at an exercise price of $8.99 per share. The Company withheld from Mr. Baum 77,167 shares
as consideration for the cashless exercise and an additional 40,466 shares for payroll tax obligations totaling $849,000.
In
April 2023, the Company issued 3,260 shares of common stock upon the exercise of options to purchase 3,260 shares of common stock at
exercise prices ranging from $1.70 to $7.52 per share.
In
April 2023, the Company granted 1,567,913 performance stock units to members
of its senior management including Mark L. Baum, Chief Executive Officer, Andrew R. Boll, Chief Financial Officer, and John P. Saharek,
Chief Commercial Officer, which are subject to the satisfaction of certain market-based and continued service conditions (the “2023
PSUs”). The vesting of the 2023 PSUs require (i) a minimum of a two-year service period, and (ii) during a five-year term, the
achievement and maintenance of Company common stock price targets ranging between $25 to $50, broken out into four separate tranches
as described further in the table below.
SCHEDULE
OF SHARE BASED COMPENSATION
Tranche |
|
Number
of Shares |
|
Target
Share Price |
Tranche
1 |
|
223,988 |
|
$25 |
Tranche
2 |
|
335,981 |
|
$35 |
Tranche
3 |
|
447,975 |
|
$45 |
Tranche
4 |
|
559,969 |
|
$50 |