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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to _____________

 

Commission File Number: 001-35814

 

Harrow Health, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   45-0567010

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

102 Woodmont Blvd., Suite 610

Nashville, Tennessee

  37205
(Address of principal executive offices)   (Zip code)

 

(615) 733-4730

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name on exchange on which registered
Common Stock, $0.001 par value per share   HROW   The NASDAQ Global Market
8.625% Senior Notes due 2026   HROWL   The NASDAQ Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer Accelerated filer
  Non-accelerated filer Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of August 9, 2021, there were 26,893,896 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

 

 

 
 

 

HARROW HEALTH, INC.

 

Table of Contents

 

        Page
Part I   FINANCIAL INFORMATION   3
         
Item 1.   Financial Statements (unaudited)   3
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   38
         
Item 4.   Controls and Procedures   38
         
Part II   OTHER INFORMATION   39
         
Item 1.   Legal Proceedings   39
         
Item 1A.   Risk Factors   39
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   42
         
Item 3.   Defaults Upon Senior Securities   42
         
Item 4.   Mine Safety Disclosures   42
         
Item 5.   Other Information   42
         
Item 6.   Exhibits   42
         
    Signatures   43

 

2
 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HARROW HEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

   June 30,   December 31, 
   2021   2020 
   (unaudited)     
ASSETS          
Current assets          
Cash and cash equivalents, including restricted cash of $200  $72,851   $4,301 
Investment in Eton Pharmaceuticals   12,209    28,455 
Accounts receivable, net   3,710    2,662 
Inventories   3,903    3,962 
Prepaid expenses and other current assets   801    751 
Total current assets   93,474    40,131 
Property, plant and equipment, net   4,937    4,453 
Operating lease right-of-use assets   4,747    6,799 
Intangible assets, net   1,882    1,939 
Investment in Surface Ophthalmics   -    1,314 
Investment in Melt Pharmaceuticals   1,594    2,506 
Goodwill   332    332 
TOTAL ASSETS  $106,966   $57,474 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $5,207   $3,932 
Accrued payroll and related liabilities   2,388    2,315 
Deferred revenue and customer deposits   56    66 
Current portion of paycheck protection program loan payable   -    1,259 
Current portion of loan payable, net of unamortized debt discount   -    2,639 
Current portion of operating lease liabilities   485    580 
Current portion of finance lease obligations   8    8 
Total current liabilities   8,144    10,799 
Operating lease liabilities, net of current portion   4,695    6,652 
Finance lease obligations   14    17 
Accrued expenses, net of current portion   -    800 
Paycheck protection program loan payable, net of current portion   -    708 
Loan payable, net of current portion and unamortized debt discount   71,265    11,670 
TOTAL LIABILITIES   84,118    30,646 
COMMITMENTS AND CONTINGENCIES          
STOCKHOLDERS’ EQUITY          
Common stock, $0.001 par value, 50,000,000 shares authorized, 26,893,896 and 25,749,875 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively   27    26 
Additional paid-in capital   102,837    104,557 
Accumulated deficit   (79,661)   (77,400)
TOTAL HARROW HEALTH STOCKHOLDERS’ EQUITY   23,203    27,183 
Noncontrolling interests   (355)   (355)
TOTAL EQUITY   22,848    26,828 
TOTAL LIABILITIES AND EQUITY  $106,966   $57,474 

 

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

 

3
 

 

HARROW HEALTH, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for share and per share data)

 

                     
   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2021   2020   2021   2020 
Revenues:                    
Sales, net  $17,297   $8,049   $32,245   $19,859 
Other revenues   837    11    1,332    18 
Total revenues   18,134    8,060    33,577    19,877 
Cost of sales   (4,417)   (3,204)   (8,187)   (6,830)
Gross profit   13,717    4,856    25,390    13,047 
Operating expenses:                    
Selling, general and administrative   9,123    6,954    17,287    15,370 
Research and development   425    749    1,017    1,152 
Impairment of intangible assets   -    363    -    363 
Total operating expenses   9,548    8,066    18,304    16,885 
Income (loss) from operations   4,169    (3,210)   7,086    (3,838)
Other (expense) income:                    
Interest expense, net   (1,314)   (505)   (1,827)   (1,065)
Investment loss from Melt Pharmaceuticals, net   (477)   (690)   (947)   (1,236)
Investment loss from Surface Pharmaceuticals, net   (465)   (599)   (1,314)   (938)
Investment (loss) gain from Eton Pharmaceuticals, net   (3,584)   4,725    (6,419)   (6,125)
Loss from early extinguishment of loan   (756)   -    (756)   - 
Gain on forgiveness of PPP loan   -    -    1,967    - 
Other (expense) income, net   (51)   19    (51)   19 
Total other (expense) income, net   (6,647)   2,950    (9,347)   (9,345)
Total net loss including noncontrolling interests   (2,478)   (260)   (2,261)   (13,183)
Net loss attributable to noncontrolling interests   -    23    -    39 
Net loss attributable to Harrow Health, Inc.   (2,478)   (237)   (2,261)   (13,144)
Preferred dividends and accretion of preferred stock discount   (472)   -    (472)   - 
Net loss attributable to common stockholders  $(2,950)  $(237)  $(2,733)  $(13,144)
Basic and diluted net loss per share of common stock  $(0.11)  $(0.01)  $(0.10)  $(0.51)
Weighted average number of shares of common stock outstanding, basic and diluted   26,736,970    25,893,629    26,379,943    25,867,478 

 

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

 

4
 

 

HARROW HEALTH, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three and six months ended June 30, 2021 and 2020

(In thousands, except for share data)

 

                           Total         
   Preferred Stock   Common Stock   Additional       Harrow Health, Inc.   Total
Noncontrolling
   Total 
       Par       Par   Paid-in   Accumulated   Stockholders’   Interests   Stockholders’ 
   Shares   Value   Shares   Value   Capital   Deficit   Equity   Equity   Equity 
Balance at March 31, 2020   -   $-    25,618,918   $26   $102,261   $(86,950)  $15,337   $(309)  $15,028 
                                              
Issuance of common stock in connection with:                                             
Exercise of employee stock options   -    -    253    -    -    -    -    -    - 
Stock-based payment for services provided   -    -    30,000    -    83    -    83    -    83 
Stock-based compensation expense   -    -    -    -    545    -    545    -    545 
Net loss   -    -    -    -    -    (237)   (237)   (23)   (260)
Balance at June 30, 2020   -   $-    25,649,171   $26   $102,889   $(87,187)  $15,728   $(332)  $15,396 

 

                                     
                           Total         
   Preferred Stock   Common Stock   Additional       Harrow Health, Inc.   Total
Noncontrolling
   Total 
       Par       Par   Paid-in   Accumulated   Stockholders’   Interests   Stockholders’ 
   Shares   Value   Shares   Value   Capital   Deficit   Equity   Equity   Equity 
Balance at March 31, 2021   -   $-    25,983,676   $26   $105,382   $(77,183)  $28,225   $(355)  $27,870 
                                              
Issuance of common stock in connection with:                                             
Exercise of employee stock options   -    -    5,312    -    21    -    21    -    21 
Exercise of warrants   -    -    311,369    -    -    -    -    -    - 
Vesting of RSUs   -    -    977,500    1    (1)   -    -    -    - 
Shares withheld related to net share settlement of equity awards   -    -    (383,961)   -    (3,171)   -    (3,171)   -    (3,171)
Issuance of preferred shares, net of discount and issuance costs   440,000    -    -    -    10,655    -    10,655    -    10,655 
Redemption of preferred shares   (440,000)   -    -    -    (11,000)   -    (11,000)   -    (11,000)
Payment of preferred dividends   -    -    -    -    (127)   -    (127)   -    (127)
Stock-based compensation expense   -    -    -    -    1,078    -    1,078    -    1,078 
Net loss   -    -    -    -    -    (2,478)   (2,478)   -    (2,478)
Balance at June 30, 2021   -   $-    26,893,896   $27   $102,837   $(79,661)  $23,203   $(355)  $22,848 

 

                           Total         
   Preferred Stock   Common Stock   Additional       Harrow Health, Inc.   Total
Noncontrolling
   Total 
       Par       Par   Paid-in   Accumulated   Stockholders’   Interests   Stockholders’ 
   Shares   Value   Shares   Value   Capital   Deficit   Equity   Equity   Equity 
Balance at December 31, 2019   -   $-    25,526,931   $26   $101,728   $(74,043)  $27,711   $(293)  $27,418 
                                              
Issuance of common stock in connection with:                                             
Exercise of employee stock options   -    -    253    -    -    -    -    -    - 
Vesting of RSUs             91,987    -    -    -    -    -    - 
Stock-based payment for services provided   -    -    30,000    -    83    -    83    -    83 
Stock-based compensation expense   -    -    -    -    1,078    -    1,078    -    1,078 
Net loss   -    -    -    -    -    (13,144)   (13,144)   (39)   (13,183)
Balance at June 30, 2020   -   $-    25,649,171   $26   $102,889   $(87,187)  $15,728   $(332)  $15,396 

 

                           Total         
   Preferred Stock   Common Stock   Additional       Harrow Health, Inc.   Total Noncontrolling   Total 
       Par       Par   Paid-in   Accumulated   Stockholders’   Interests   Stockholders’ 
   Shares   Value   Shares   Value   Capital   Deficit   Equity   Equity   Equity 
Balance at December 31, 2020   -   $-    25,749,875   $26   $104,557   $(77,400)  $27,183   $(355)  $26,828 
                                              
Issuance of common stock in connection with:                                             
Exercise of employee stock options   -    -    16,613    -    48    -    48    -    48 
Exercise of warrants   -    -    311,369    -    -    -    -    -    - 
Vesting of RSUs   -    -    1,207,500    1    (1)   -    -    -    - 
Shares withheld related to net share settlement of equity awards   -    -    (391,461)   -    (3,228)   -    (3,228)   -    (3,228)
Issuance of preferred shares, net of discount and issuance costs   440,000    -    -    -    10,655    -    10,655    -    10,655 
Redemption of preferred shares   (440,000)   -    -    -    (11,000)   -    (11,000)   -    (11,000)
Payment of preferred dividends   -    -    -    -    (127)   -    (127)   -    (127)
Stock-based compensation expense   -    -    -    -    1,933    -    1,933    -    1,933 
Net loss   -    -    -    -    -    (2,261)   (2,261)   -    (2,261)
Balance at June 30, 2021   -   $-    26,893,896   $27   $102,837   $(79,661)  $23,203   $(355)  $22,848 

 

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

 

5
 

 

HARROW HEALTH, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   For the   For the 
  

Six Months

Ended

  

Six Months

Ended

 
   June 30,   June 30, 
   2021   2020 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss (including noncontrolling interests)  $(2,261)  $(13,183)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation and amortization of property, plant and equipment   876    913 
Amortization of intangible assets   79    88 
Amortization of operating lease right-of-use assets   299    341 
Provision for bad debt expense   36    302 
Amortization of debt issuance costs and discount   288    243 
Gain on forgiveness of PPP loan   (1,967)   - 
Investment loss from Eton Pharmaceuticals, net   6,419    6,125 
Investment loss from Surface Opthalmics, net   1,314    938 
Investment loss from Melt Pharmaceuticals, net   947    1,236 
Loss on sale and disposal of assets   -    5 
Interest paid-in-kind on loan payable   -    348 
Impairment of long-lived assets   -    363 
Loss on early extinguishment of loan   706    - 
Stock-based payment of consulting services   -    83 
Stock-based compensation   1,933    1,078 
Changes in assets and liabilities:          
Accounts receivable   (1,084)   (311)
Inventories   59    (540)
Prepaid expenses and other current assets   (85)   (25)
Accounts payable and accrued expenses   1,026    (2,253)
Accrued payroll and related liabilities   73    1,052 
Deferred revenue and customer deposits   (10)   (4)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   8,648    (3,201)
CASH FLOWS FROM INVESTING ACTIVITIES          
Net proceeds on sale investments   9,827    - 
Investment in patent and trademark assets   (22)   (74)
Purchases of property, plant and equipment   (1,360)   (536)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES   8,445    (610)
CASH FLOWS FROM FINANCING ACTIVITIES          
Payments on finance lease obligations   (3)   (3)
Net proceeds from 8.625% notes payable, net of costs   71,073    - 
Principal and exit fee payments on SWK loan   (15,961)   - 
Net proceeds from PPP loan   -    1,967 
Proceeds from SWK debt, net of costs   -    1,000 
Payment of taxes for vesting of RSUs   (3,228)   - 
Proceeds from exercise of stock options   48    - 
Sale of preferred stock, net of discount and issuance costs   10,655    - 
Redemption of preferred stock   (11,000)   - 
Payment of preferred stock dividends   (127)   - 
NET CASH PROVIDED BY FINANCING ACTIVITIES   51,457    2,964 
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH   68,550    (847)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period  4,301   4,949 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period  $72,851   $4,102 
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH          
Cash and cash equivalents  $72,651   $3,902 
Restricted cash   200    200 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD  $72,851   $4,102 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for income taxes  $-   $- 
Cash paid for interest  $788   $408 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Right-of-use asset obtained in exchange for lease obligation  $-   $41 
Net reduction in right-of-use assets and lease liabilities in connection with lease modifications  $1,753   $- 

 

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

 

6
 

 


HARROW HEALTH, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2021 and 2020

(All dollar amounts are expressed in thousands, except share and per share data)

 

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”) specializes in the development, production and sale of innovative medications that offer unique competitive advantages and serve unmet needs in the marketplace through its subsidiaries and deconsolidated companies. The Company owns one of the nation’s leading ophthalmology-focused pharmaceutical businesses, ImprimisRx. In addition to wholly owning ImprimisRx, the Company also has non-controlling equity positions in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”), both companies that began as subsidiaries of Harrow. In 2020, Harrow created Visionology, Inc. (“Visionology”), which recently launched an online eye health platform business. 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 six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 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, 2020.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

Harrow consolidates entities in which it has a controlling financial interest. The Company consolidates subsidiaries in which it holds and/or controls, directly or indirectly, more than 50% of the voting rights. All intercompany accounts and transactions have been eliminated in consolidation.

 

The condensed consolidated balance sheets at June 30, 2021 and December 31, 2020 and the condensed consolidated statements of operations, stockholders’ equity and cash flows for the periods ended June 30, 2021 and 2020 include our accounts and those of our wholly owned subsidiaries, as well as our majority owned subsidiaries Mayfield Pharmaceuticals, Inc. and Stowe Pharmaceuticals, Inc.

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following represents an update for the six months ended June 30, 2021 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

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

 

The Company’s chief operating decision-maker is its Chief Executive Officer who makes resource allocation decisions and assesses performance based on financial information of our operating segments. The Company has identified two operating segments as reportable segments. See Note 16 for more information regarding the Company’s reportable segments.

 

7
 

 

Noncontrolling Interests

 

The Company recognizes any noncontrolling interest as a separate line item in equity in the condensed consolidated financial statements. A noncontrolling interest represents the portion of equity ownership in a less-than-wholly-owned subsidiary not attributable to the Company. Generally, any interest that holds less than 50% of the outstanding voting shares is deemed to be a noncontrolling interest; however, there are other factors, such as decision-making rights, that are considered as well. The Company includes the amount of net loss attributable to noncontrolling interests in consolidated net loss on the face of the condensed consolidated statements of operations.

 

The Company provides in the condensed consolidated statements of stockholders’ equity a reconciliation at the beginning and the end of the period of the carrying amount of total equity, equity attributable to the parent, and equity attributable to the noncontrolling interest that separately discloses:

 

  (1) Net income or loss;
  (2) transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and
  (3) each component of other income or loss.

 

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 and warrants, outstanding during the period. Basic and diluted net loss per share is computed using the weighted average number of shares of common stock outstanding during the period. Common equivalent shares (using the treasury stock or “if converted” method) from stock options, unvested restricted stock units (“RSUs”) and warrants were 4,121,398 and 5,414,504 at June 30, 2021 and 2020, respectively. For the three and six months ended June 30, 2021 and 2020, the common equivalent shares are excluded in the calculation of diluted net loss per share because the effect is anti-dilutive. Included in the basic and diluted net loss per share calculation were RSUs awarded to directors that had vested, but the issuance and delivery of the shares are deferred until the director resigns. The number of shares underlying vested RSUs at June 30, 2021 and 2020 was 235,973 and 251,746, respectively.

 

The following table shows the computation of basic and diluted net loss per share of common stock for the three and six months ended June 30, 2021 and 2020:

 

                     
   For the Three Months Ended   For the Six Months Ended 
   June 30,    June 30, 
   2021   2020   2021   2020 
                 
Numerator – net loss attributable to Harrow Health, Inc. common stockholders  $(2,950)  $(237)  $(2,733)  $(13,144)
Denominator - weighted average number of shares outstanding, basic and diluted   26,736,970    25,893,629    26,379,943    25,867,478 
Net loss per share, basic and diluted  $(0.11)  $(0.01)  $(0.10)  $(0.51)

 

Investment in Eton Pharmaceuticals, Inc.

 

During the three and six months ended June 30, 2021, the Company sold 1,518,000 shares of its Eton Pharmaceuticals, Inc. (“Eton”) common stock through an underwritten public offering at a public offering price of $7.00 per share (the “Eton Stock Sale”). The gross proceeds to the Company from the Eton Stock Sale were $10,626, before deducting underwriting discounts and commissions and other offering expenses payable by the Company of $799. During the three and six months ended June 30, 2021, the Company recorded a realized loss of $1,406 related to the sale of 1,518,000 shares of its Eton common stock.

 

8
 

 

Following the Eton Stock Sale and as of June 30, 2021, the Company owns 1,982,000 shares of Eton common stock, which represents less than 10% of the equity interests of Eton. At June 30, 2021, the fair market value of Eton’s common stock was $6.16 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 gain (loss) from its Eton common stock position of $(2,178) and $(5,013) and $4,725 and $(6,125) during the three and six months ended June 30, 2021 and 2020, respectively, related to the change in fair market value of its investment in Eton during the measurement period. As of June 30, 2021, the fair market value of the Company’s investment in Eton was $12,209.

 

As part of the Eton Stock Sale, the Company also agreed, for a period of 180 days, not to conduct any further sales of shares of its common stock of Eton or otherwise dispose of, directly or indirectly, any common stock of Eton (or any securities convertible into, or exercisable or exchangeable for, the common stock of Eton).

 

Investment in Melt Pharmaceuticals, Inc. – Related Party

 

The Company owns 3,500,000 common shares (which is approximately 44% of the equity interests as of June 30, 2021) of Melt 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 Melt. 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. The Company’s share of earnings and losses are based on the Company’s ownership interest of Melt. Any intra-entity profits and losses are eliminated. During the three months ended June 30, 2021 and 2020, the Company recorded equity in the net losses of Melt of $477 and $690, and $947 and $1,236 during the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the Company’s investment in Melt was $1,594 and $2,506, respectively, which includes $885 and $851, respectively, due from Melt for reimbursable expenses and amounts due under a Management Services Agreement between the Company and Melt (the “Melt MSA”).

 

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 (which is approximately 20% of the equity interests following the close of a round of financing completed by Surface at various dates from May 2021 to July 2021) of Surface and uses the equity method of accounting for this investment, as management has determined that the Company has the ability to exercise significant influence over the operating and financial decisions of Surface. Under this method, the Company recognizes earnings and losses in Surface in its condensed consolidated financial statements and adjusts the carrying amount of its investment in Surface accordingly. The Company’s share of earnings and losses are based on the Company’s ownership interest of Surface. Any intra-entity profits and losses are eliminated. The Company recorded equity in the net losses of Surface of $465 and $599 during the three months and $1,314 and $938 during the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, the Company’s investment in Surface was $0 and $1,314, respectively.

 

See Notes 5 for more information and related party disclosure regarding Surface.

 

Property, Plant and Equipment

 

Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful life of the asset. Leasehold improvements and capital lease equipment are amortized over the estimated useful life or remaining lease term, whichever is shorter.  Software costs during the application development stage used to meet the Company’s internal needs are generally capitalized. Computer software and hardware and furniture and equipment are depreciated over three to five years.

 

Recently Adopted Accounting Pronouncements

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This guidance became effective for the Company on January 1, 2021 on a prospective basis. Adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

 

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 our sale of products within our pharmacy services, (2) revenue recognized from a commission agreement with a third party and (3) revenue recognized from intellectual property license and asset purchase agreements.

 

9
 

 

Product Revenues from Pharmacy Services

 

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

 

  1. Identify the contract(s) with a customer: A contract exists with a customer at the time the prescription or order is received by the Company.
     
  2. Identify the performance obligations in the contract: The order received contains the performance obligations to be met, in almost all cases the product the customer is wishing to receive. If we are unable to meet the performance obligation, the customer is notified.
     
  3. Determine the transaction price: the transaction price is based on the product being sold to the customer and any related customer discounts. These amounts are pre-determined and built into our order management software.
     
  4. Allocate the transaction price to the performance obligations in the contract: The transaction price associated with the product(s) being ordered is allocated according to the pre-determined amounts.
     
  5. Recognize revenue when (or as) the entity satisfies a performance obligation: At the time of shipment from the pharmacy or outsourcing facility, the performance obligation has been met.

 

The following revenue recognition policy has been established for the pharmacy services division:

 

Revenues generated from prescription or office use drugs sold by our pharmacies and outsourcing facility are recognized when the prescription is shipped. At the time of shipment, the pharmacy services division has performed substantially all of its obligations under its client contracts and does not experience a significant level of returns or reshipments. Determination of criteria (3) and (4) is based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. The Company records reductions to revenue for discounts at the time of the initial sale. Estimated returns and allowances and other adjustments are provided for in the same period during which the related sales are recorded and are based on actual returns history. The rate of returns is analyzed annually to determine historical returns experience. If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. The Company will defer any revenues received for a product that has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered and no refund will be required.

 

Commission Revenues

 

During the year ended December 31, 2020, the Company entered into an agreement whereby it is paid a fee calculated based on sales it generates from a pharmaceutical product that is owned by a third party. The revenue earned from this arrangement is recognized at the time a customer has ordered the pharmaceutical product and it has shipped from the third party (or one of its distributors or affiliates), at which point there is no future performance obligation required by the Company and no consequential continuing involvement on the part of the Company to recognize the associated revenue.

 

Intellectual Property License Revenues

 

As of June 30, 2021, we are party to four intellectual property licenses and asset purchase agreements in which we have agreed to grant a license and which provide 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 at which 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.

 

10
 

 

Revenue disaggregated by revenue source for the three and six months ended June 30, 2021 and 2020, consists of the following:

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2021   2020   2021   2020 
Product sales, net  $17,297   $8,049   $32,245   $19,859 
Commission revenues   827    -    1,312    - 
License revenues   10    11    20    18 
Total revenues  $18,134   $8,060   $33,577   $19,877 

 

Deferred revenue and customer deposits at June 30, 2021 and December 31, 2020, were $56 and $66, respectively. All deferred revenue and customer deposit amounts at December 31, 2020 were recognized as revenue during the six months ended June 30, 2021.

 

NOTE 4. INVESTMENT IN 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 January and March 2019, the Company entered into the Melt Series A Preferred Stock Agreement. See also Note 2, under the subheading

 

Investment in Melt Pharmaceuticals, Inc.

 

In February 2019, the Company and Melt entered into 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.

 

As of June 30, 2021 and December 31, 2020, the Company was due $885 and $851, 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 six months ended June 30, 2021.

 

The Company’s Chief Executive Officer, Mark L. Baum is a member of the Melt board of directors, and several employees of the Company (including Mr. Baum and the Company’s Chief Financial Officer, Andrew R. Boll) entered into consulting agreements and provide consulting services to Melt.

 

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

 

   For the Six Months Ended 
   June 30, 
   2021   2020 
Revenues, net  $-   $- 
Loss from operations   2,177    2,574 
Net loss  $(2,177)  $(2,574)

 

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

 

   At June 30,   At December 31, 
   2021   2020 
Current assets  $927   $2,947 
Non current assets   98    11 
Total assets   1,025    2,958 
           
Total liabilities   1,784    1,778 
Total stockholders’ (deficit) equity   (759)   1,180 
Total liabilities and stockholders’ equity  $1,025   $2,958 

 

11
 

 

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 June 30, 2021, the Company owned 3,500,000 shares of Surface common stock. A Company director, Richard L. Lindstrom, and the Company’s Chief Executive Officer, Mark L. Baum, are directors of Surface. Surface is required to make royalty payments to Dr. Lindstrom of net sales of certain Surface products while certain patent rights remain outstanding. Dr. Lindstrom is also a minority owner of Flying L Partners, an affiliate of the funding investor who purchased the Surface Series A Preferred Stock. Several employees and a director of the Company (including Mr. Baum and Dr. Lindstrom) entered into consulting agreements and provide consulting services to Surface.

 

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

 

   For the Six Months Ended 
   June 30, 
   2021   2020 
Revenues, net  $-   $- 
Loss from operations   4,712    3,127 
Net loss  $(4,712)  $(3,127)

 

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

 

   At June 30,   At December 31, 
   2021   2020 
Current assets  $25,786   $9,074 
Non current assets   43    45 
Total assets   25,829    9,119 
           
Total liabilities   1,771    1,666 
Total stockholders’ equity   24,058    7,453 
Total liabilities and stockholders’ equity  $25,829   $9,119 

 

NOTE 6. RESTRICTED CASH

 

The restricted cash at June 30, 2021 and December 31, 2020 consisted of funds held in a money market account. At June 30, 2021 and December 31, 2020, the restricted cash was recorded at amortized cost, which approximates fair value.

 

At June 30, 2021 and December 31, 2020, the funds held in a money market account of $200 were classified as a current asset. The money market account funds are required as collateral as additional security for the Company’s New Jersey facility lease.

 

12
 

 

NOTE 7. INVENTORIES

 

Inventories are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, commercial pharmaceutical products, related laboratory supplies and active pharmaceutical ingredients. The composition of inventories as of June 30, 2021 and December 31, 2020 was as follows:

 

  

June 30,

2021

  

December 31,

2020

 
Raw materials  $1,990   $2,501 
Work in progress   17    17 
Finished goods   1,896    1,444 
Total inventories  $3,903   $3,962 

 

NOTE 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets at June 30, 2021 and December 31, 2020, consisted of the following:

 

  

June 30,

2021

  

December 31,

2020

 
Prepaid insurance  $120   $160 
Other prepaid expenses   607    401 
Deposits and other current assets   74    190 
Total prepaid expenses and other current assets  $801   $751 

 

NOTE 9. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment at June 30, 2021 and December 31, 2020, consisted of the following:

 

  

June 30,

2021

  

December 31,

2020

 
Property, plant and equipment, net:          
Computer software and hardware  $1,427   $1,370 
Internal use software costs in development   

803

    

337

 
Furniture and equipment   441    418 
Lab and pharmacy equipment   4,225    3,426 
Leasehold improvements   5,735    5,720 
Property, plant and equipment, gross   12,631    11,271 
Accumulated depreciation and amortization   (7,694)   (6,818)
Property, plant and equipment, net  $4,937   $4,453 

 

For the three and six months ended June 30, 2021, depreciation and amortization related to the property, plant and equipment was $412 and $876, respectively. For the three and six months ended June 30, 2020, depreciation and amortization related to the property, plant and equipment was $465 and $913, respectively.

 

13
 

 

NOTE 10. INTANGIBLE ASSETS AND GOODWILL

 

The Company’s intangible assets at June 30, 2021 consisted of the following:

 

  

Amortization

periods

(in years)

   Cost  

Accumulated

amortization

   Impairment  

Net

carrying value

 
Patents   17-19    $540   $(60)  $-   $480 
Licenses   20    50    (6)   -    44 
Trademarks   Indefinite    358    -    -    358 
Customer relationships   3-15    1,519    (520)   -    999 
Trade name   5    5    (5)   -    - 
Non-competition clause   3-4    50    (50)   -    - 
State pharmacy licenses   25    8    (7)   -    1 
        $2,530   $(648)  $-   $1,882 

 

Amortization expense for intangible assets for the three and six months ended June 30, 2021 and 2020 was as follows:

  

For the

Three Months Ended

  

For the

Six Months Ended

 
   June 30,   June 30, 
   2021   2020   2021   2020 
Patents  $6   $8   $12   $19 
Licenses   -    -    1    1 
Customer relationships   33    35    66    68 
   $39   $43   $79   $88 

 

Estimated future amortization expense for the Company’s intangible assets at June 30, 2021 is as follows:

 

      
Remainder of 2021  $110 
2022   188 
2023   188 
2024   161 
2025   148 
Thereafter   729 
Intangible assets  $1,524 

 

NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

  

June 30,

2021

  

December 31,

2020

 
Accounts payable  $3,882   $3,645 
Other accrued expenses   49    49 
Accrued interest   1,276    238 
Accrued exit fee for loan payable   -    800 
Total accounts payable and accrued expenses   5,207    4,732 
Less: Current portion   (5,207)   (3,932)
Non-current total accrued expenses  $-   $800 

 

14
 

 

NOTE 12. DEBT

 

8.625% Senior Notes Due 2026

 

In April 2021, the Company closed an offering of $50,000 aggregate principal amount of 8.625% senior notes due in April 2026 and in May 2021 issued an additional $5,000 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 after deducting underwriting discounts and commissions and expenses of $3,091. In June 2021, in a further issuance of the April Notes, the Company sold an additional $20,000 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 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 after deducting underwriting discounts and commissions and expenses of $1,158 and a premium on note issuance of $322. 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 $1,466 for the three and six months ended June 30, 2021, and included amortization of debt issuance costs and discount of $192 for the three and six months ended June 30, 2021.

 

SWK Senior Note – Paid in April 2021

 

In July 2017, the Company and several of its wholly owned subsidiaries entered into a term loan and security agreement in the principal amount of $16,000 (the “SWK Loan Agreement” or “SWK Loan”) with SWK Funding LLC and its partners (collectively, “SWK”), as lender and collateral agent. The SWK Loan Agreement was fully funded at closing with a five-year term; however, such term could be reduced to four years if certain revenue requirements were not achieved. The SWK Loan was secured by substantially all of the Company’s assets, including its intellectual property rights. The SWK Loan was subsequently amended in May 2019 and again in April 2020. The SWK Loan bore an interest rate equal to the three-month London Inter-Bank Offered Rate (subject to a minimum of 2.00%), plus an applicable margin of 10.00% (the “Margin Rate”); provided that, if, two days prior to a payment date, the Company provided SWK evidence that the Company has achieved a leverage ratio as of such date of less than 4.00:1:00, the Margin Rate shall equal 9.00%; and if the Company had achieved a leverage ratio as of such date of less than 3.00:1:00, the Margin Rate shall equal 7.00%. The leverage ratio means, as of any date of determination, the ratio of: (a) indebtedness as of such date to (b) EBITDA (as defined in the SWK Loan), of the Company for the immediately preceding 12 month period, adding-back (i) actual litigation expenses for the immediately preceding 12 month period, minus (ii) actual litigation expenses for the immediately preceding 3 month period multiplied by 4.

 

A summary of the material changes contained in the amendment entered into with SWK in April 2020 was as follows:

 

  SWK agreed to make available to the Company, and the Company drew down on, an additional principal amount of $1,000;
  The definition of the first amortization date was changed to August 14, 2020, permitting the Company to pay interest only on the principal amount loaned for the next payment (payments are due on a quarterly basis) following the SWK Second Amendment; and
  The interest payment of $358 due May 14, 2020 was paid in-kind by increasing the principal amount of the term loans by an amount equal to the interest accrued as of such date.

 

15
 

 

Interest expense related to the SWK Loan Agreement, as amended, amounted to $138 and $647 for the three and six months ended June 30, 2021, respectively, and $505 and $1,065 for the three and six months ended June 30, 2020, respectively, and included amortization of debt issuance costs and discount of $0 and $96 for the three and six months ended June 30, 2021, respectively, and $83 and $243 for the three and six months ended June 30, 2020, respectively.

 

In April 2021, the Company paid $15,540 related to all outstanding obligations to SWK under the SWK Loan, including outstanding principal, accrued interest, accrued exit fee and related expenses and recorded a loss from early extinguishment of $756 related to the SWK Loan during the three and six months ended June 30, 2021.

 

Paycheck Protection Program Loan – Forgiven in March 2021

 

In April 2020, the Company entered into an unsecured promissory note and related Business Loan Agreement with Renasant Bank, as lender, for a loan (the “PPP Loan”) in the principal amount of $1,967 and received cash proceeds of the same amount, pursuant to the Paycheck Protection Program (the “PPP”) under the Federal Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted March 27, 2020. The PPP is administered by the U.S. Small Business Administration (the “SBA”). On March 30, 2021, the Company received a notice of forgiveness of the full balance of the PPP Loan, including all accrued interest, in accordance with the terms and conditions of the CARES Act. Related to the forgiveness, the Company recorded a gain on the forgiveness of the PPP Loan for the loan balance of $1,967 in the accompanying condensed consolidated statement of operations for the six months ended June 30, 2021.

 

At June 30, 2021, future minimum payments under the Company’s debt were as follows:

 

   Amount 
Remainder of 2021  $3,308 
2022   6,562 
2023   6,562 
2024   6,580 
2025   6,562 
2026   77,158 
Total minimum payments   106,732 
Less: amount representing interest payments   (31,732)
Notes payable, gross   75,000 
Less: unamortized discount, net of premium   (3,735)
Notes payable, net of unamortized discount  $71,265 

 

NOTE 13. LEASES

 

The Company leases office and laboratory space under non-cancelable operating leases listed below. These lease agreements have remaining terms between one to four years and contain various clauses for renewal at the Company’s option.

 

  An operating lease for 10,200 square feet of office space in San Diego, California that expires in December 2021;
     
  An operating lease for 26,400 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 that 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
     
  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.

 

In May 2021, the Company amended its New Jersey lease to include the addition of 8,926 square feet of space (the “May Lease Amendment”), which will expire in July 2027. The Company expects to take possession of this additional space in September 2021, which will trigger the commencement of the May Lease Amendment. Since the commencement date of the May Lease Amendment is expected to occur after June 30, 2021, right-of-use assets and operating lease liabilities associated with the May Lease Amendment are not included in the Company’s condensed consolidated balance sheets as of June 30, 2021.

 

16
 

 

At June 30, 2021, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases held by the Company were 6.32% and 14.08 years, respectively.

 

During the three and six months ended June 30, 2021, cash paid for amounts included for the operating lease liabilities was $251 and $502, respectively, and the Company recorded operating lease expense of $241 and $502 included in selling, general and administrative expenses, respectively.

 

Future lease payments under operating leases as of June 30, 2021 were as follows:

 

  

Operating

Leases

 
Remainder of 2021  $502 
2022   585 
2023   600 
2024   617 
2025   433 
Thereafter   5,146 
Total minimum lease payments   7,883 
Less: amount representing interest payments   (2,703)
 Total operating lease liabilities   5,180 
Less: current portion, operating lease liabilities   (485)
Operating lease liabilities, net of current portion  $4,695 

 

The Company also has a finance lease that is included in its lease accounting but is not considered significant.

Future lease payments under the non-cancelable finance lease as of June 30, 2021 were as follows:

 

  

Finance

Leases

 
Remainder of 2021  $5 
2022   9 
2023   9 
2024   1 
Total minimum lease payments   24 
Less: amount representing interest payments   (2)
Present value of future minimum lease payments   22 
Less: current portion, finance lease obligation   (8)
Finance lease obligation, net of current portion  $14 

 

At June 30, 2021, the weighted average incremental borrowing rate and the weighted average remaining lease term for the finance lease held by the Company were 6.36% and 2.58 years, respectively.

 

For the three and six months ended June 30, 2021, depreciation expense related to the equipment held under the finance lease obligation was $2 and $4, respectively.

 

For the three and six months ended June 30, 2021, cash paid and expense recognized for interest expense related to the finance lease obligation was $0 and $1, respectively.

 

NOTE 14. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

 

Preferred Stock

 

At June 30, 2021 and 2020, the Company had 5,000,000 shares of preferred stock, $0.001 par value, authorized and no shares of preferred stock issued and outstanding.

 

17
 

 

Series B Cumulative Preferred Stock – Redeemed

 

In May 2021, the Company sold 440,000 shares of the Company’s Series B Cumulative Preferred Stock, par value $0.001 per share and liquidation preference of $25.00 per share (the “Series B Preferred Stock”), for a net purchase price of approximately $10,655. The Series B Preferred Stock was not convertible into our common stock, had no voting rights, except as required by Delaware law, and was redeemable by the Company at any time. Holders of Series B Preferred Stock were entitled to cumulative cash dividends at the rate of 9.50% of the $25.00 liquidation preference per year; provided, however, that for each thirty (30) day period following May 5, 2021, the dividend rate increased at various rates, except as otherwise limited by applicable law. Dividends were payable quarterly in arrears, on or about the 15th of January, April, July and October, beginning on or about July 15, 2021.

 

In June 2021, the Company redeemed all of the outstanding shares of the Company’s Series B Preferred Stock, par value $0.001 per share. The redemption price for the 440,000 shares of Series B Preferred Stock outstanding was equal to $25.00 per share, plus accrued and unpaid dividends, which in aggregate totaled $11,127. During the three and six months ended June 30, 2021, the Company recorded preferred stock cash dividends and deemed dividends equal to $472.

 

Common Stock

 

During the six months ended June 30, 2021, the Company issued 311,369 shares of its common stock upon the cashless exercise of warrants to purchase 406,539 shares of common stock with exercise prices between $1.79 and $3.75 per share.

 

During the six months ended June 30, 2021, the Company issued 16,613 shares of its common stock upon the exercise of options to purchase 16,613 shares of common stock with exercise prices between $1.70 and $4.29 per share and received net proceeds of $48.

 

During the six months ended June 30, 2021, the Company issued 715,871 shares of its common stock to Mark L. Baum, its CEO, related to the vesting of 1,050,000 performance-based restricted stock units. The Company withheld issuance of 334,129 shares of common stock valued at $2,760 for payroll tax purposes.

 

During the six months ended June 30, 2021, the Company issued 100,168 shares of common stock to Andrew R. Boll, its CFO, related to the vesting of 157,500 performance-based restricted stock units. The Company withheld issuance of 57,332 shares of common stock to Mr. Boll for payroll tax purposes valued at $468.

 

During the six months ended June 30, 2021, 35,510 shares of the Company’s common stock underlying RSUs issued to directors vested, but the issuance and delivery of these shares are deferred until the director resigns.

 

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 June 30, 2021, the 2017 Plan provides for the issuance of a maximum of 6,000,000 shares of the Company’s common stock. The purpose 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, 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 3,967,251 shares available for future issuances under the 2017 Plan at June 30, 2021.

 

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Stock Options

 

A summary of stock option activity under the Plans for the six months ended June 30, 2021 is as follows:

 

   Number of Shares  

Weighted

Avg.

Exercise

Price

   Weighted Avg. Remaining Contractual Life  

Aggregate Intrinsic

Value

 
Options outstanding - January 1, 2021   3,030,033   $5.43           
Options granted   67,000   $8.07           
Options exercised   (16,613)  $2.99           
Options cancelled/forfeited   (29,945)  $5.32           
Options outstanding - June 30, 2021   3,050,475   $5.50    5.28   $11,555 
Options exercisable   2,333,132   $5.01    4.85   $9,985 
Options vested and expected to vest   2,978,866   $5.46    5.25   $11,399 

 

The aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would have been received by option holders if all option holders had exercised and immediately sold all options with an exercise price lower than the market price on June 30, 2021, based on the closing price of the Company’s common stock of $9.29 on that date.

 

During the six months ended June 30, 2021, the Company granted stock options to certain employees and a consultant. 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 10 years. Vesting terms for options granted to employees and consultants during the six months ended June 30, 2021 included the following vesting schedules: 25% of the shares subject to the option vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the shares subject to the option vest and become exercisable quarterly in equal installments thereafter over three years. 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:

 

   2021 
Weighted-average fair value of options granted  $4.96 
Expected terms (in years)   6.11 
Expected volatility   69%
Risk-free interest rate   0.39-0.45%
Dividend yield   - 

 

The following table summarizes information about stock options outstanding and exercisable at June 30, 2021:

   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 - $2.60   760,318    5.13   $2.06    755,208   $2.06 
$2.76 - $4.66   506,566    5.22   $3.98    449,872   $3.98 
$5.49 - $6.36   470,350    6.59   $6.12    348,128   $6.14 
$6.64 - $8.99  1,313,241    4.93   $7.86   779,924   $7.96 
$1.47 - $8.99   3,050,475    5.28   $5.50    2,333,132   $5.01 

 

As of June 30, 2021, there was approximately $2,012 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 5.17 years. The stock-based compensation for all stock options was $569 and $1,021 during the three and six months ended June 30, 2021, respectively.

 

19
 

 

The intrinsic value of options exercised during the three and six months ended June 30, 2021 was $14 and $77, respectively.

 

Restricted Stock Units

 

RSU awards are granted subject to certain vesting requirements and other restrictions, including performance and market-based vesting criteria. The grant date fair value of the RSUs, which has been determined based upon the market value of the Company’s common stock on the grant date, is expensed over the vesting period of the RSUs.

 

During the six months ended June 30, 2021, 300,000 RSUs with a fair market value of $2,670 were issued to certain employees; the RSUs vest in full on the third anniversary of the grant date.

 

During the six months ended June 30, 2021, the Company’s board of directors were granted 38,576 RSUs with a fair market value of $400 which vest in equal quarterly installments over one year.

 

A summary of the Company’s RSU activity and related information for the six months ended June 30, 2021 is as follows:

 

   Number of RSUs   Weighted Average Grant Date Fair Value 
RSUs unvested - January 1, 2021   1,601,509   $3.14 
RSUs granted   338,576   $9.07 
RSUs vested   (1,243,009)  $2.24 
RSUs cancelled/forfeited   -    - 
RSUs unvested at June 30, 2021   697,076   $7.61 

 

As of June 30, 2021, the total unrecognized compensation expense related to unvested RSUs was approximately $3,606, which is expected to be recognized over a weighted-average period of 1.74 years, based on estimated and actual vesting schedules of the applicable RSUs. The stock-based compensation for RSUs during the three and six months ended June 30, 2021 was $481 and $827, respectively.

 

Warrants

 

From time to time, the Company issues 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 six months ended June 30, 2021 is as follows:

 

   Number of Shares Subject to Warrants Outstanding   Weighted Avg. Exercise Price 
Warrants outstanding - January 1, 2021   780,386   $2.12 
Granted   -      
Exercised   (406,539)   2.16 
Expired   -