The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Nine months ended September, 2022 and 2021
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 and nine months ended September
30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 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, 2021.
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 and nine months ended September 30, 2022 to the significant accounting policies described
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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.
Segments
As
a result of shifts in the Company’s strategic plans to further focus on growing the Company’s ImprimisRx business and
suspension of activities related to starting up development-stage pharmaceutical companies, along with changes to the
Company’s organizational and internal reporting structure, beginning in January 2022, management no longer evaluates the
Company’s business in two segments and instead focuses on the performance of the business as a single operating
business.
Basic
and Diluted Net Loss per Common Share
Basic
net loss per common share is computed by dividing net loss attributable to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to
common stockholders for the period by the weighted average number of common and common equivalent shares, such as stock options, restricted
stock units (“RSUs”) and warrants, outstanding during the period. Common equivalent shares (using the treasury stock method)
from stock options, unvested RSUs and warrants were 5,622,997 and 5,657,046 at September 30, 2022 and 2021, respectively. Included in
the basic and diluted net loss per share calculation were RSUs awarded to directors that had vested, but the issuance and delivery of
the shares are deferred until the director resigns. The number of shares underlying vested RSUs at September 30, 2022 and 2021 was 303,454
and 258,117, respectively.
The
following table shows the computation of basic net loss per share of common stock for the three and nine months ended September 30, 2022
and 2021:
SCHEDULE OF BASIC AND DILUTED EARNINGS PER COMMON SHARE
| |
| | | |
| | | |
| | | |
| | |
| |
For the Three Months Ended | | |
For the Nine Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Numerator – net loss attributable to common stockholders | |
$ | (6,464,000 | ) | |
$ | (8,328,000 | ) | |
$ | (15,141,000 | ) | |
$ | (10,589,000 | ) |
Denominator – weighted average number of shares outstanding, basic and
diluted | |
| 27,349,642 | | |
| 27,112,531 | | |
| 27,293,756 | | |
| 26,626,722 | |
Net loss per share, basic and diluted | |
$ | (0.24 | ) | |
$ | (0.31 | ) | |
$ | (0.55 | ) | |
$ | (0.42 | ) |
Investment
in Eton Pharmaceuticals, Inc.
As
of September 30, 2022, the Company owned 1,982,000 shares of Eton common stock, which represents less than 10% of the equity interests
of Eton. At September 30, 2022, the fair market value of Eton’s common stock was $2.10 per share. In accordance with the Accounting
Standards Update (“ASU”) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities, the Company recorded an unrealized investment loss from its Eton common stock position of $1,031,000
and $4,341,000, and $2,220,000 and $8,639,000 during the three and nine months ended September 30, 2022 and 2021, respectively, related
to the change in fair market value of its investment in Eton during the measurement period. As of September 30, 2022, the fair market
value of the Company’s investment in Eton was $4,162,000.
Investment
in Melt Pharmaceuticals, Inc. – Related Party
The
Company owns 3,500,000 shares of common stock of Melt (representing approximately 46% of the equity interests as of September 30, 2022). The Company analyzes its investment in Melt and related agreements on a regular basis to evaluate its position of variable interests
in Melt. The Company has determined that it does not have the ability to control Melt, however it has the ability to exercise significant
influence over the operating and financial decisions of Melt and uses the equity method of accounting for this investment. Under this
method, the Company recognizes earnings and losses in Melt in its condensed consolidated financial statements and adjusts the carrying
amount of its investment in Melt accordingly. Any intra-entity profits and losses are eliminated. During the year ended December 31,
2021, the Company reduced the carrying value of its common stock investment in Melt to $0 as a result of the Company recording its share
of equity losses in Melt since its deconsolidation in 2019. As of September 30, 2022 and at the time of entering into the Melt Loan Agreement
(see Note 4), the Company owned 100% of Melt’s indebtedness. Following the reduction of the carrying value of the Company’s
common stock investment in Melt to $0, the Company began recording 100% of the equity method losses of Melt, based on its ownership of
Melt’s total indebtedness. In addition, the Company treats interest paid in kind on the Melt Loan Agreement as an in-substance
capital contribution and reduces its investment in Melt accordingly, rather than recording interest income. The Company has no other
requirements to advance funds to Melt.
The
following table summarizes the Company’s investments in Melt as of September 30, 2022:
SCHEDULE OF INVESTMENT
| |
| | |
| | |
| | |
In-substance | | |
Net | |
| |
Cost
Basis | | |
Share of Equity
Method Losses | | |
Paid-in-Kind
Interest | | |
Capital
Contributions | | |
Carrying
value | |
Common stock | |
$ | 5,810,000 | | |
$ | (5,810,000 | ) | |
$ | - | | |
$ | | | |
$ | - | |
Loan | |
| 13,500,000 | | |
| (11,403,000 | ) | |
| 1,995,000 | | |
| (1,995,000 | ) | |
| 2,097,000 | |
| |
$ | 19,310,000 | | |
$ | (17,213,000 | ) | |
$ | 1,995,000 | | |
$ | (1,995,000 | ) | |
$ | 2,097,000 | |
See
Note 4 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 (representing approximately 20% of Surface’s equity interests following the closing
of a round of financing completed by Surface in July 2021) 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 September 30, 2022:
SCHEDULE OF INVESTMENT
| |
Cost | | |
Share of Equity | | |
Net | |
| |
Basis | | |
Method Losses | | |
Carrying value | |
Common stock | |
$ | 5,320,000 | | |
$ | (5,320,000 | ) | |
$ | - | |
See
Note 5 for more information and related party disclosure regarding Surface.
Impairment
of Equity Method Investments and Note Receivable
On
a quarterly basis, management assesses whether there are any indicators that the carrying value of the Company’s equity method
investments and note receivable may be other than temporarily impaired. Indicators include financial condition, operating performance,
and near-term prospects of the investee. To the extent indicators suggest that a loss in value may have occurred, the Company will evaluate
both quantitative and qualitative factors to determine if the loss in value is other than temporary. If a potential loss in value is
determined to be other than temporary, the Company will recognize an impairment loss based on the estimated fair value of the equity
method investments and note receivable. At September 30, 2022 and December 31, 2021, no indicators of impairment existed.
NOTE
3. REVENUES
The
Company accounts for contracts with customers in accordance with Accounting Standards Codification (“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: Given that 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 has entered into an agreement whereby it is 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 is recognized, 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.
Revenues
From Transfer of Acquired Product Profit
The
Company entered into an agreement whereby it purchased the exclusive commercial rights to assets
associated with certain ophthalmic products from another pharmaceutical company (the “Seller”). During a temporary, six month
transition period, the Seller continued 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 invoiced the Company for all credits and reimbursements (“Chargebacks”)
made to customers related to the products. The Company used 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 and nine months ended September 30, 2022 and 2021 consists of the following:
SCHEDULE OF DISAGGREGATED REVENUE
| |
| | | |
| | | |
| | | |
| | |
| |
For the Three Months Ended | | |
For the Nine Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Product sales, net | |
$ | 21,575,000 | | |
$ | 17,811,000 | | |
$ | 63,433,000 | | |
$ | 50,056,000 | |
Commission revenues | |
| 1,044,000 | | |
| 900,000 | | |
| 3,576,000 | | |
| 2,212,000 | |
Transfer of profits | |
| 204,000 | | |
| - | | |
| 1,257,000 | | |
| - | |
License revenues | |
| - | | |
| 10,000 | | |
| - | | |
| 20,000 | |
Total revenues | |
$ | 22,823,000 | | |
$ | 18,711,000 | | |
$ | 68,266,000 | | |
$ | 52,288,000 | |
Deferred
revenue and customer deposits at September 30, 2022 and December 31, 2021 were $115,000 and $16,000, respectively. All deferred revenue
and customer deposit amounts at December 31, 2021 were recognized as revenue during the nine months ended September 30, 2022.
NOTE
4. 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 and nine months ended September 30, 2022, the Company recorded $30,000 and $100,000, respectively, due from Melt for reimbursable
expenses and amounts payable pursuant to the Melt MSA, which are included in prepaid expenses and other current assets in the accompanying
condensed consolidated balance sheets. As of September 30, 2022 and December 31, 2021, the Company
was due $139,000 and $48,000, 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 and nine months ended September 30, 2022.
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. Following Mr. Baum’s departure, the Company no longer has any representation on Melt’s
board of directors.
The
unaudited condensed results of operations information of Melt is summarized below:
SCHEDULE OF CONDENSED INCOME STATEMENT
| |
| | | |
| | |
| |
For the Nine Months Ended
September 30, | |
| |
2022 | | |
2021 | |
Revenues, net | |
$ | - | | |
$ | - | |
Loss from operations | |
| (9,064,000 | ) | |
| (3,765,000 | ) |
Net loss | |
$ | (10,562,000 | ) | |
$ | (3,907,000 | ) |
The
unaudited condensed balance sheet information of Melt is summarized below:
SUMMARY OF CONDENSED BALANCE SHEET
| |
| | | |
| | |
| |
At | | |
At | |
| |
September 30,
2022 | | |
December 31,
2021 | |
Current assets | |
$ | 3,638,000 | | |
$ | 11,278,000 | |
Non-current assets | |
| 994,000 | | |
| - | |
Total assets | |
$ | 4,632,000 | | |
$ | 11,278,000 | |
| |
| | | |
| | |
Total liabilities | |
$ | 19,207,000 | | |
$ | 15,732,000 | |
Total preferred stock and stockholders’ deficit | |
| (14,575,000 | ) | |
| (4,454,000 | ) |
Total liabilities and stockholders’ equity | |
$ | 4,632,000 | | |
$ | 11,278,000 | |
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 September 30, 2022 and December 31, 2021, $15,495,000 and $14,076,000,
respectively, in principal balance of the Melt Loan Agreement is payable to the Company.
NOTE
5. 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 September 30, 2022, the Company owned 3,500,000 shares of Surface common stock. Company directors Richard L. Lindstrom, Perry J. Sternberg
and Mark L. Baum, who is also the Company’s Chief Executive Officer, 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.
The
unaudited condensed results of operations information of Surface is summarized below:
SUMMARY OF CONDENSED INCOME STATEMENT
| |
| | | |
| | |
| |
For the Nine
Months Ended September 30, | |
| |
2022 | | |
2021 | |
Revenues, net | |
$ | - | | |
$ | - | |
Loss from operations | |
| (5,338,000 | ) | |
| (6,859,000 | ) |
Net loss | |
$ | (5,338,000 | ) | |
$ | (6,859,000 | ) |
The
unaudited condensed balance sheet information of Surface is summarized below:
SUMMARY OF CONDENSED BALANCE SHEET
| |
| | | |
| | |
| |
At | | |
At | |
| |
September 30,
2022 | | |
December 31,
2021 | |
Current assets | |
$ | 16,625,000 | | |
$ | 21,731,000 | |
Non-current assets | |
| 661,000 | | |
| 412,000 | |
Total assets | |
$ | 17,286,000 | | |
$ | 22,143,000 | |
| |
| | | |
| | |
Total liabilities | |
$ | 1,745,000 | | |
$ | 1,514,000 | |
Total preferred stock and stockholders’ deficit | |
| 15,541,000 | | |
| 20,629,000 | |
Total liabilities and stockholders’ equity | |
$ | 17,286,000 | | |
$ | 22,143,000 | |
NOTE
6. INVENTORIES
Inventories
are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, branded commercial
pharmaceutical products, including those held at the Company’s 3PL partner, related laboratory supplies and active
pharmaceutical ingredients. The composition of inventories as of September 30, 2022 and December 31, 2021 was as follows:
SCHEDULE OF INVENTORIES
| |
| | | |
| | |
| |
September 30,
2022 | | |
December 31,
2021 | |
Raw materials | |
$ | 3,507,000 | | |
$ | 2,441,000 | |
Work in progress | |
| 26,000 | | |
| - | |
Finished goods | |
| 1,750,000 | | |
| 1,776,000 | |
Total inventories | |
$ | 5,283,000 | | |
$ | 4,217,000 | |
NOTE
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets at September 30, 2022 and December 31, 2021 consisted of the following:
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
| | | |
| | |
| |
September 30,
2022 | | |
December 31,
2021 | |
Prepaid insurance | |
$ | 1,165,000 | | |
$ | 728,000 | |
Prepaid computer software licenses and related expenses | |
| 781,000 | | |
| 248,000 | |
Due from Melt Pharmaceuticals | |
| 139,000 | | |
| 48,000 | |
Other prepaid expenses | |
| 769,000 | | |
| 189,000 | |
Deposits and other current assets | |
| 73,000 | | |
| 92,000 | |
Total prepaid expenses and other current assets | |
$ | 2,927,000 | | |
$ | 1,305,000 | |
NOTE
8. PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment at September 30, 2022 and December 31, 2021 consisted of the following:
SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT
| |
September 30,
2022 | | |
December 31,
2021 | |
Property, plant and equipment, net: | |
| | | |
| | |
Computer hardware | |
$ | 875,000 | | |
$ | 772,000 | |
Furniture and equipment | |
| 843,000 | | |
| 443,000 | |
Lab and pharmacy equipment | |
| 4,160,000 | | |
| 4,056,000 | |
Leasehold improvements | |
| 6,276,000 | | |
| 5,703,000 | |
Property, plant and equipment, gross | |
| 12,154,000 | | |
| 10,974,000 | |
Accumulated depreciation | |
| (8,863,000 | ) | |
| (7,833,000 | ) |
Property,
plant and equipment, net | |
$ | 3,291,000 | | |
$ | 3,141,000 | |
For
the three and nine months ended September 30, 2022, depreciation related to the property, plant and equipment was $171,000 and $928,000,
respectively, compared to $410,000 and $1,202,000 during the same periods in 2021, respectively.
NOTE
9. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized
software development costs at September 30, 2022 and December 31, 2021 consisted of the following:
SCHEDULE OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS
| |
September
30,
2022 | | |
December
31,
2021 | |
Capitalized internal-use software development
costs | |
$ | 1,533,000 | | |
$ | 417,000 | |
Acquired third-party software
license for internal-use | |
| 159,000 | | |
| 684,000 | |
Total gross capitalized software
for internal-use | |
| 1,692,000 | | |
| 1,101,000 | |
Accumulated amortization | |
| (731,000 | ) | |
| (569,000 | ) |
Capitalized internal-use software
in process | |
| 917,000 | | |
| 781,000 | |
Total
Capitalized software costs, net | |
$ | 1,878,000 | | |
$ | 1,313,000 | |
The
Company recorded amortization expense of $76,000 and $162,000 related to capitalized software development costs during the three and
nine months ended September 30, 2022, respectively, and $22,000 and $73,000 during the same periods in 2021, respectively.
NOTE
10. INTANGIBLE ASSETS AND GOODWILL
The
Company’s intangible assets at September 30, 2022 consisted of the following:
SCHEDULE OF INTANGIBLE ASSETS
| |
Amortization
Periods (in
years) | | |
Cost | | |
Accumulated Amortization | | |
Impairment | | |
Net
Carrying
Value | |
Patents | |
| 17-19
| | |
$ | 981,000 | | |
$ | (140,000 | ) | |
$ | - | | |
$ | 841,000 | |
Licenses | |
| 20 | | |
| 100,000 | | |
| (20,000 | ) | |
| - | | |
| 80,000 | |
Trademarks | |
| Indefinite | | |
| 264,000 | | |
| - | | |
| - | | |
| 264,000 | |
Acquired NDAs | |
| 10 | | |
| 18,635,000 | | |
| (1,023,000 | ) | |
| - | | |
| 17,612,000 | |
Customer relationships | |
| 3-15 | | |
| 1,519,000 | | |
| (685,000 | ) | |
| - | | |
| 834,000 | |
Trade name | |
| 5 | | |
| 5,000 | | |
| (5,000 | ) | |
| - | | |
| - | |
Non-competition clause | |
| 3-4 | | |
| 50,000 | | |
| (50,000 | ) | |
| - | | |
| - | |
State pharmacy licenses | |
| 25 | | |
| 8,000 | | |
| (7,000 | ) | |
| - | | |
| 1,000 | |
| |
| | | |
$ | 21,562,000 | | |
$ | (1,930,000 | ) | |
$ | - | | |
$ | 19,632,000 | |
Amortization
expense for intangible assets for the three and nine months ended September 30, 2022 and 2021 was as follows:
SCHEDULE OF AMORTIZATION EXPENSES FOR INTANGIBLE ASSETS
| |
| | | |
| | | |
| | | |
| | |
| |
For the Three Months Ended | | |
For the Nine Months Ended | |
| |
September
30, | | |
September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Patents | |
$ | 22,000 | | |
$ | 8,000 | | |
$ | 65,000 | | |
$ | 20,000 | |
Licenses | |
| 2,000 | | |
| 1,000 | | |
| 13,000 | | |
| 2,000 | |
Acquired NDAs | |
| 341,000 | | |
| - | | |
| 1,023,000 | | |
| - | |
Customer relationships | |
| 33,000 | | |
| 34,000 | | |
| 99,000 | | |
| 100,000 | |
Amortization of intangible
assets | |
$ | 398,000 | | |
$ | 43,000 | | |
$ | 1,200,000 | | |
$ | 122,000 | |
Estimated
future amortization expense for the Company’s intangible assets at September 30, 2022 is as follows:
SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE
| |
| | |
Remainder of 2022 | |
$ | 523,000 | |
2023 | |
| 2,092,000 | |
2024 | |
| 2,092,000 | |
2025 | |
| 2,092,000 | |
2026 | |
| 2,096,000 | |
Thereafter | |
| 10,473,000 | |
Intangible assets | |
$ | 19,368,000 | |
NOTE
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses at September 30, 2022 and December 31, 2021 consisted of the following:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
| | | |
| | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accounts payable | |
$ | 7,043,000 | | |
$ | 5,174,000 | |
Accrued insurance premium | |
| 906,000 | | |
| - | |
Accrued IHEEZO milestone payment | |
| 5,000,000 | | |
| - | |
Other accrued expenses | |
| 49,000 | | |
| 49,000 | |
Accrued interest | |
| 1,114,000 | | |
| 1,114,000 | |
Total accounts payable and accrued expenses | |
$ | 14,112,000 | | |
$ | 6,337,000 | |
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
12. DEBT
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 “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 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 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
Notes bear interest at a rate of 8.625% per annum. Interest on the 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 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 Notes using the effective interest rate method.
Prior
to February 1, 2026, the Company may, at its option, redeem the 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 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 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.
Interest
expense related to the Notes totaled $1,814,000 and $5,436,000 for the three and nine months ended September 30, 2022, respectively,
and $1,464,000 and $2,930,000 during the three and nine months ended September 30, 2021, respectively, and included amortization of debt
issuance costs and discount of $197,000 and $585,000 for three and nine months ended September 30, 2022, respectively, and $197,000 and
$389,000 during the three and nine months ended September 30, 2021, respectively.
At
September 30, 2022, future minimum payments under the Company’s debt were as follows:
SCHEDULE
OF FUTURE MINIMUM PAYMENT UNDER NOTES PAYABLES
| |
Amount | |
Remainder of 2022 | |
$ | 1,617,000 | |
2023 | |
| 6,469,000 | |
2024 | |
| 6,469,000 | |
2025 | |
| 6,469,000 | |
2026 | |
| 77,158,000 | |
Total minimum payments | |
| 98,182,000 | |
Less: amount representing interest payments | |
| (23,182,000 | ) |
Notes payable, gross | |
| 75,000,000 | |
Less: unamortized discount, net of premium | |
| (2,761,000 | ) |
Notes payable, net of unamortized discount | |
$ | 72,239,000 | |
NOTE
13. LEASES
The
Company leases office and laboratory space under the 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 July 2027. |
| ● | 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 lease was amended, effective July 2020, to
extend the term of the original lease and add 1,400
of additional square footage to the lease, and amended again in May 2021 to extend the term of the lease to July
2027 and add 8,900
square feet of space. |
| ● | An
operating lease for 5,500 square feet of office space in Nashville, Tennessee that expires
in December 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 expires in June 2027. |
At
September 30, 2022, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases
held by the Company were 6.62% and 10.99 years, respectively.
During
the three and nine months ended September 30, 2022, cash paid for amounts included for the operating lease liabilities was $249,000 and
$622,000, respectively, and $250,000 and $752,000 during the same periods in 2021, respectively. During the three and nine months ended
September 30, 2022, the Company recorded operating lease expense of $309,000 and $809,000, respectively, which is included in selling,
general and administrative expenses.
Future
lease payments under operating leases as of September 30, 2022 were as follows:
SCHEDULE OF FUTURE LEASE PAYMENT UNDER OPERATING LEASES
| |
Operating
Leases | |
Remainder of 2022 | |
$ | 303,000 | |
2023 | |
| 1,231,000 | |
2024 | |
| 1,262,000 | |
2025 | |
| 1,093,000 | |
2026 | |
| 1,114,000 | |
Thereafter | |
| 6,801,000 | |
Total minimum lease payments | |
| 11,804,000 | |
Less: amount representing interest payments | |
| (3,581,000 | ) |
Total operating lease liabilities | |
| 8,223,000 | |
Less: current portion, operating lease liabilities | |
| (703,000 | ) |
Operating lease liabilities, net of current portion | |
$ | 7,520,000 | |
During
the nine months ended September 30, 2022, the Company repaid all remaining amounts owed under its finance lease and no future payments
are due related to finance leases.
NOTE
14. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Preferred
Stock
At
September 30, 2022 and December 31, 2021, the Company had 5,000,000 shares of preferred stock, $0.001 par value, authorized and no shares
of preferred stock issued and outstanding.
Common
Stock
During
the nine months ended September 30, 2022, the Company issued 53,594 shares of common stock to Mark L. Baum, the Company’s Chief
Executive Officer, upon the cashless exercise of options to purchase 125,000 shares at an exercise price of $2.40 per share. The Company
withheld from Mr. Baum 36,014 shares as consideration for the cashless exercise and an additional 35,392 shares for payroll tax obligations
totaling $295,000.
During
the nine months ended September 30, 2022, the Company issued 4,054 shares of common stock to consultants upon the cashless exercise
of options to purchase 15,995 shares at an exercise price of $7.07 per share. The Company withheld 11,941 shares as consideration for
the cashless exercise.
During
the nine months ended September 30, 2022, the Company issued 3,275 shares of common stock and received net proceeds of $7,000 upon the
exercise of options to purchase 3,275 shares of common stock with exercise prices between $1.70 to $3.95 per share.
During
the nine months ended September 30, 2022, 50,000 RSUs granted in February 2019 to Andrew R. Boll, the Company’s Chief Financial
Officer, vested, and in February 2022, the Company issued 29,395 shares of common stock to Mr. Boll, net of 20,605 shares of common stock
withheld for payroll tax withholdings totaling $162,000.
During
the nine months ended September 30, 2022, 50,000 RSUs granted in February 2019 to John P. Saharek, the President of ImprimisRx, vested,
and in February 2022, the Company issued 24,077 shares of common stock to Mr. Saharek, net of 25,923 shares of common stock withheld
for payroll tax withholdings totaling $204,000.
During
the nine months ended September 30, 2022, 35,000 RSUs granted in February 2019 vested, and in February 2022, the Company issued 20,298
shares of common stock, net of 14,702 shares of common stock withheld for payroll tax withholdings totaling $116,000.
During
the nine months ended September 30, 2022, 50,000 RSUs granted in May 2019 vested, and in May 2022, the Company issued 36,851 shares of
common stock, net of 13,149 shares of common stock withheld for payroll tax withholdings totaling $99,000.
During
the nine months ended September 30, 2022, 35,693 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 September 30, 2022, 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 2,058,280 shares available for future issuances under the 2017 Plan at September 30, 2022.
Stock
Options
A
summary of stock option activity under the Plans for the nine months ended September 30, 2022 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 | |
| 3,039,546 | | |
$ | 5.52 | | |
| | | |
| | |
Options granted | |
| 323,250 | | |
$ | 7.30 | | |
| | | |
| | |
Options exercised | |
| (144,270 | ) | |
$ | 2.92 | | |
| | | |
| | |
Options cancelled/forfeited | |
| (47,500 | ) | |
$ | 7.41 | | |
| | | |
| | |
Options outstanding – September 30, 2022 | |
| 3,171,026 | | |
$ | 5.79 | | |
| 4.59 | | |
$ | 19,919,000 | |
Options exercisable | |
| 2,462,904 | | |
$ | 5.33 | | |
| 4.19 | | |
$ | 16,609,000 | |
Options vested and expected to vest | |
| 3,037,832 | | |
$ | 5.72 | | |
| 4.57 | | |
$ | 19,314,000 | |
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 September 30, 2022, based on the closing price of the Company’s common stock of $12.07 on
that date.
During
the nine months ended September 30, 2022, 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 and nine months ended September 30, 2022 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
| |
2022 | |
Weighted-average fair value of options granted | |
$ | 4.49 | |
Expected terms (in years) | |
| 6.11 | |
Expected volatility | |
| 68-70 | % |
Risk-free interest rate | |
| 1.54-3.19 | % |
Dividend yield | |
| - | |
The
following table summarizes information about stock options outstanding and exercisable at September 30, 2022:
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
- $2.23 | | |
| 595,612 | | |
| 4.74 | | |
$ | 1.97 | | |
| 595,612 | | |
$ | 1.97 | |
| $2.40 - $3.50 | | |
| 53,568 | | |
| 5.80 | | |
$ | 3.00 | | |
| 44,162 | | |
$ | 2.90 | |
| $3.95 | | |
| 370,000 | | |
| 3.50 | | |
$ | 3.95 | | |
| 370,000 | | |
$ | 3.95 | |
| $4.08 - $6.30 | | |
| 578,850 | | |
| 4.61 | | |
$ | 5.76 | | |
| 540,006 | | |
$ | 5.82 | |
| $6.75 - $7.30 | | |
| 413,000 | | |
| 7.91 | | |
$ | 7.18 | | |
| 237,250 | | |
$ | 7.29 | |
| $7.37 - $7.79 | | |
| 287,323 | | |
| 5.97 | | |
$ | 7.54 | | |
| 140,073 | | |
$ | 7.47 | |
| $7.87 | | |
| 600,000 | | |
| 2.83 | | |
$ | 7.87 | | |
| 300,000 | | |
$ | 7.87 | |
| $7.89 - $8.75 | | |
| 82,673 | | |
| 3.06 | | |
$ | 8.06 | | |
| 52,051 | | |
$ | 8.15 | |
| $8.98 | | |
| 10,000 | | |
| 8.34 | | |
$ | 8.98 | | |
| 3,750 | | |
$ | 8.98 | |
| $8.99 | | |
| 180,000 | | |
| 0.59 | | |
$ | 8.99 | | |
| 180,000 | | |
$ | 8.99 | |
| $1.47
- $8.99 | | |
| 3,171,026 | | |
| 4.59 | | |
$ | 5.79 | | |
| 2,462,904 | | |
$ | 5.33 | |
As
of September 30, 2022, there was approximately $1,830,000 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 4.34 years.
The stock-based compensation for all stock options was $241,000 and $771,000 during the three and nine months ended September 30, 2022,
respectively, and $355,000 and $1,376,000 during the same periods in 2021, respectively.
The
intrinsic value of options exercised during the nine months ended September 30, 2022 was $794,000.
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 nine months ended September
30, 2022 is as follows:
SCHEDULE
OF RESTRICTED STOCK UNITS ACTIVITY
| |
Number
of RSUs | | |
Weighted
Average Grant
Date Fair Value | |
RSUs unvested – January 1, 2022 | |
| 2,233,202 | | |
$ | 6.78 | |
RSUs granted | |
| 65,615 | | |
$ | 7.62 | |
RSUs vested | |
| (220,693 | ) | |
$ | 6.60 | |
RSUs cancelled/forfeited | |
| - | | |
| - | |
RSUs unvested – September 30, 2022 | |
| 2,078,124 | | |
$ | 6.82 | |
As
of September 30, 2022, the total unrecognized compensation expense related to unvested RSUs was approximately $5,755,000, which is expected
to be recognized over a weighted-average period of 0.85 years, based on estimated and actual vesting schedules of the applicable RSUs.
The stock-based compensation for RSUs during the three and nine months ended September 30, 2022 was $1,691,000 and $5,170,000, respectively,
and $1,340,000 and $2,167,000 during the same periods in 2021, respectively.
Warrants
From
time to time, the Company has issued warrants to purchase shares of the Company’s common stock to investors, lenders, underwriters
and other non-employees for services rendered or to be rendered in the future, or pursuant to settlement agreements.
A
summary of warrant activity for the nine months ended September 30, 2022 is as follows:
SCHEDULE
OF WARRANTS ACTIVITY
| |
Number
of Shares
Subject to Warrants
Outstanding | | |
Weighted
Average
Exercise Price | |
Warrants outstanding – January 1, 2022 | |
| 373,847 | | |
$ | 2.08 | |
Granted | |
| - | | |
| | |
Exercised | |
| - | | |
| | |
Expired | |
| - | | |
| | |
Warrants outstanding and exercisable – September
30, 2022 | |
| 373,847 | | |
$ | 2.08 | |
Weighted average remaining contractual life of
the outstanding warrants in years – September 30, 2022 | |
| 1.8 | | |
| | |
Warrants
outstanding and exercisable as of September 30, 2022 are as follows:
SCHEDULE
OF WARRANTS OUTSTANDING AND WARRANTS EXERCISABLE
Warrant Series | |
Issue Date | |
Warrants Outstanding | | |
Exercise Price | | |
Expiration Date |
Lender warrants | |
7/19/2017 | |
| 373,847 | | |
$ | 2.08 | | |
7/19/2024 |
Subsidiary
Stock-Based Transactions
The
Company recognized $0 in stock-based compensation expense related to subsidiary stock options during the three and nine months ended
September 30, 2022, and $2,000 and $87,000 during the same periods in 2021, 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
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
For the
Three Months Ended
September 30, | | |
For the
Nine Months Ended
September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Employees – selling, general and administrative | |
$ | 1,611,000 | | |
$ | 1,435,000 | | |
$ | 4,942,000 | | |
$ | 2,984,000 | |
Employees – R&D | |
| 163,000 | | |
| 144,000 | | |
| 525,000 | | |
| 328,000 | |
Directors – selling, general and administrative | |
| 125,000 | | |
| 118,000 | | |
| 337,000 | | |
| 318,000 | |
Consultants – R&D | |
| 33,000 | | |
| - | | |
| 137,000 | | |
| - | |
Total | |
$ | 1,932,000 | | |
$ | 1,697,000 | | |
$ | 5,941,000 | | |
$ | 3,630,000 | |
NOTE
15. COMMITMENTS AND CONTINGENCIES
Legal
General
and Other
In
the ordinary course of business, the Company may face various claims brought by third parties and it may, from time to time, make claims
or take legal actions to assert its rights, including intellectual property disputes, contractual disputes and other commercial disputes.
Any of these claims could subject the Company to litigation.
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 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 was required to make certain milestone
payments to Dr. Lindstrom. 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 $77,000 and $199,000 were made during the three and nine months ended
September 30, 2022, respectively, compared to $44,000 and $114,000 during the same periods in 2021, respectively. Royalty expenses were
$67,000 and $244,000 during the three and nine months ended September 30, 2022, respectively, compared to $51,000 and $130,000 during
the same periods in 2021, 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 $8,000 and $23,000 in cash during the three and nine months ended September 30, 2022, respectively, and $7,000 and $21,000 during
the same periods in 2021, respectively. The Company incurred $9,000 and $24,000 for royalty expenses related to the Lindstrom APA during
the three and nine months ended September 30, 2022, respectively, and $7,000 and $21,000 during the same periods in 2021, respectively.
Presbyopia
Asset Purchase Agreement – Related Party
In
December 2019, the Company entered into an asset purchase agreement (the “Presbyopia APA”) with Richard L. Lindstrom, M.D.,
a member of its Board of Directors. Pursuant to the terms of the Presbyopia APA, the Company acquired certain intellectual property and
related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license an ophthalmic topical product to treat presbyopia
(the “Presbyopia Product”).
Under
the terms of the Presbyopia APA, the Company is required to make royalty payments to Dr. Lindstrom ranging from 2% to 4% of net sales,
dependent upon the final formulation and patent protection of the Presbyopia Product sold. Dr. Lindstrom was paid $0 in cash during the
three and nine month periods ended September 30, 2022 and 2021, and was due $0 at September 30, 2022 and 2021. The Company incurred $0
for royalty expenses related to the Presbyopia APA during the three and nine month periods ended September 30, 2022 and 2021.
Asset
Purchase, License and Related Agreements
The
Company has acquired and sourced intellectual property rights related to certain proprietary innovations from certain inventors and related
parties (the “Inventors”) through multiple asset purchase agreements, license agreements, strategic agreements and commission
agreements. In general, these agreements provide that the Inventors will cooperate with the Company in obtaining patent protection for
the acquired intellectual property and that the Company will use commercially reasonable efforts to research, develop and commercialize
a product based on the acquired intellectual property. In addition, the Company has acquired a right of first refusal on additional intellectual
property and drug development opportunities presented by these Inventors.
In
consideration for the acquisition of the intellectual property rights, the Company is obligated to make payments to the Inventors based
on the completion of certain milestones, generally consisting of: (1) a payment payable within 30 days after the issuance of the first
patent in the United States arising from the acquired intellectual property (if any); (2) a payment payable within 30 days after the
Company files the first investigational new drug application (“IND”) with the U.S. Food and Drug Administration (“FDA”)
for the first product arising from the acquired intellectual property (if any); (3) for certain of the Inventors, a payment payable within
30 days after the Company files the first new drug application with the FDA for the first product arising from the acquired intellectual
property (if any); and (4) certain royalty payments based on the net receipts received by the Company in connection with the sale or
licensing of any product based on the acquired intellectual property (if any), after deducting (among other things) the Company’s
development costs associated with such product. If, following five years after the date of the applicable asset purchase agreement, the
Company either (a) for certain of the Inventors, has not filed an IND or, for the remaining Inventors, has not initiated a study where
data is derived, or (b) has failed to generate royalty payments to the Inventors for any product based on the acquired intellectual property,
the Inventors may terminate the applicable asset purchase agreement and request that the Company re-assign the acquired technology to
the Inventors. During the three and nine months ended September 30, 2022, $185,000 and $695,000 were incurred under these agreements
as royalty expenses, respectively, and $285,000 and $778,000 during the same periods in 2021, 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 is
responsible for regulatory filings for IHEEZO in the U.S. The Upfront Payment along with an additional milestone payment of $3,117,000
was paid and recorded as R&D expenses during the year ended December 31, 2021. During the three and nine months ended September
30, 2022, $5,000,000
was accrued under the Sintetica Agreement related to the FDA approval of the United States NDA for IHEEZO.
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 agreed to supply MAQ-100 to the Company, and the
Company agreed to 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 Wakamoto Agreements, the Company is responsible
for regulatory filings and fees for MAQ-100 in the U.S. and Canada. Through September 30, 2022, no amounts have been paid or accrued
under the Wakamoto Agreements.
Subject
to certain limitations, the term of the Wakamoto Agreements is five years from the date of the FDA’s market approval of
MAQ-100 with a five-year extension if certain unit sales thresholds are met.
Eyepoint
Commercial Alliance Agreement
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.
Pursuant
to a mutual termination agreement entered into on October 7, 2022 the Dexycu Agreement
will terminate on January 1, 2023 (see Note 17 for more information). During the three and nine months ended September 30, 2022, the
Company recorded $1,044,000
and $3,576,000,
respectively, and $900,000
and $2,212,000
during the same periods in 2021, respectively, 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 $1,041,000 and $3,188,000 were incurred under these agreements
for commission expenses during the three and nine months ended September 30, 2022, respectively, and $953,000 and $2,766,000 during the
same periods in 2021, respectively.
NOTE
16. CONCENTRATIONS
The
Company has two products that each comprised more than 10% of total revenues during the three and nine month periods ended September
30 2022 and 2021, respectively. These products collectively accounted for 34%
and 33%
of revenues during the three and nine months ended September 30, 2022, respectively, and 35%
and 36%
during the same periods in 2021, respectively.
The
Company sells its compounded formulations to a large number of customers. There were no customers who comprised more than 10% of the
Company’s total pharmacy sales during the three and nine months ended September 30, 2022 and 2021.
The
Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted for 52% and
66% of active pharmaceutical ingredient purchases during the three and nine months ended September 30, 2022, respectively, and 59% and
71% during the same periods in 2021, respectively.
NOTE
17. SUBSEQUENT EVENTS
The
Company has performed an evaluation of events occurring subsequent to September 30, 2022 through the filing date of this Quarterly Report.
Based on its evaluation, no events other than those described below need to be disclosed.
In
October 2022, the Company issued 306,347 shares of its common stock upon the cashless exercise
of warrants to purchase 373,847 shares of common stock, with an exercise price $2.08 per share.
In
October 2022, the Company issued 31,000 shares of common stock upon the exercise of options to purchase 31,000 shares of common stock
at exercise prices of $1.70 - $8.40 per share.
Eyepoint
Termination
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.
Divestment
of Non-Ophthalmology Revenues
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”). The closing of the RPC Agreement
was made effective on September 30, 2022; however, control of the assets transferred to the Buyer, and a closing payment was made,
in October 2022. 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. In connection with the RPC
Agreement, Imprimis entered into a separate transition services agreement with the Buyer related to providing on going services,
such as procuring and dispensing prescription orders associated with RPC Assets. The Company expects Imprimis to provide transition
services to the Buyer for up to six months following the effective date of the RPC Agreement. 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 Company determined that the
disposal of the related net assets does not qualify for reporting as a discontinued operation because it does not represent a
strategic shift that has or will have a major effect on the Company’s operations and financial results.