UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from ___________ to _____________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name on exchange on which registered | ||
The Global Market | ||||
The
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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
☒ | Smaller reporting company | |||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
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As of August 9, 2021, there were 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 $ | $ | $ | ||||||
Investment in Eton Pharmaceuticals | ||||||||
Accounts receivable, net | ||||||||
Inventories | ||||||||
Prepaid expenses and other current assets | ||||||||
Total current assets | ||||||||
Property, plant and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Intangible assets, net | ||||||||
Investment in Surface Ophthalmics | - | |||||||
Investment in Melt Pharmaceuticals | ||||||||
Goodwill | ||||||||
TOTAL ASSETS | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued expenses | $ | $ | ||||||
Accrued payroll and related liabilities | ||||||||
Deferred revenue and customer deposits | ||||||||
Current portion of paycheck protection program loan payable | - | |||||||
Current portion of loan payable, net of unamortized debt discount | - | |||||||
Current portion of operating lease liabilities | ||||||||
Current portion of finance lease obligations | ||||||||
Total current liabilities | ||||||||
Operating lease liabilities, net of current portion | ||||||||
Finance lease obligations | ||||||||
Accrued expenses, net of current portion | - | |||||||
Paycheck protection program loan payable, net of current portion | - | |||||||
Loan payable, net of current portion and unamortized debt discount | ||||||||
TOTAL LIABILITIES | ||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, $ | par value, shares authorized, and shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
TOTAL HARROW HEALTH STOCKHOLDERS’ EQUITY | ||||||||
Noncontrolling interests | ( | ) | ( | ) | ||||
TOTAL EQUITY | ||||||||
TOTAL LIABILITIES AND EQUITY | $ | $ |
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 | $ | $ | $ | $ | ||||||||||||
Other revenues | ||||||||||||||||
Total revenues | ||||||||||||||||
Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Gross profit | ||||||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | ||||||||||||||||
Research and development | ||||||||||||||||
Impairment of intangible assets | ||||||||||||||||
Total operating expenses | ||||||||||||||||
Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
Other (expense) income: | ||||||||||||||||
Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Investment loss from Melt Pharmaceuticals, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Investment loss from Surface Pharmaceuticals, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Investment (loss) gain from Eton Pharmaceuticals, net | ( | ) | ( | ) | ( | ) | ||||||||||
Loss from early extinguishment of loan | ( | ) | ( | ) | ||||||||||||
Gain on forgiveness of PPP loan | ||||||||||||||||
Other (expense) income, net | ( | ) | ( | ) | ||||||||||||
Total other (expense) income, net | ( | ) | ( | ) | ( | ) | ||||||||||
Total net loss including noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net loss attributable to noncontrolling interests | ||||||||||||||||
Net loss attributable to Harrow Health, Inc. | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Preferred dividends and accretion of preferred stock discount | ( | ) | ( | ) | ||||||||||||
Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Basic and diluted net loss per share of common stock | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Weighted average number of shares of common stock outstanding, basic and diluted |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4 |
HARROW 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 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
Issuance of common stock in connection with: | ||||||||||||||||||||||||||||||||||||
Exercise of employee stock options | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Stock-based payment for services provided | - | - | - | - | - | |||||||||||||||||||||||||||||||
Stock-based compensation expense | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ |
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 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
Issuance of common stock in connection with: | ||||||||||||||||||||||||||||||||||||
Exercise of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||
Exercise of warrants | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Vesting of RSUs | - | - | ( | ) | - | - | - | - | ||||||||||||||||||||||||||||
Shares withheld related to net share settlement of equity awards | - | - | ( | ) | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||||||
Issuance of preferred shares, net of discount and issuance costs | - | - | - | - | - | |||||||||||||||||||||||||||||||
Redemption of preferred shares | ( | ) | - | - | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||||||
Payment of preferred dividends | - | - | - | - | ( | ) | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||
Stock-based compensation expense | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | ( | ) | ( | ) | - | ( | ) | ||||||||||||||||||||||||
Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ |
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 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
Issuance of common stock in connection with: | ||||||||||||||||||||||||||||||||||||
Exercise of employee stock options | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Vesting of RSUs | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Stock-based payment for services provided | - | - | - | - | - | |||||||||||||||||||||||||||||||
Stock-based compensation expense | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ |
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 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
Issuance of common stock in connection with: | ||||||||||||||||||||||||||||||||||||
Exercise of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||
Exercise of warrants | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Vesting of RSUs | - | - | ( | ) | - | - | - | - | ||||||||||||||||||||||||||||
Shares withheld related to net share settlement of equity awards | - | - | ( | ) | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||||||
Issuance of preferred shares, net of discount and issuance costs | - | - | - | - | - | |||||||||||||||||||||||||||||||
Redemption of preferred shares | ( | ) | - | - | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||||||
Payment of preferred dividends | - | - | - | - | ( | ) | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||
Stock-based compensation expense | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | ( | ) | ( | ) | - | ( | ) | ||||||||||||||||||||||||
Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ |
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) | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization of property, plant and equipment | ||||||||
Amortization of intangible assets | ||||||||
Amortization of operating lease right-of-use assets | ||||||||
Provision for bad debt expense | ||||||||
Amortization of debt issuance costs and discount | ||||||||
Gain on forgiveness of PPP loan | ( | ) | - | |||||
Investment loss from Eton Pharmaceuticals, net | ||||||||
Investment loss from Surface Opthalmics, net | ||||||||
Investment loss from Melt Pharmaceuticals, net | ||||||||
Loss on sale and disposal of assets | - | |||||||
Interest paid-in-kind on loan payable | - | |||||||
Impairment of long-lived assets | - | |||||||
Loss on early extinguishment of loan | - | |||||||
Stock-based payment of consulting services | - | |||||||
Stock-based compensation | ||||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | ( | ) | ( | ) | ||||
Inventories | ( | ) | ||||||
Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
Accounts payable and accrued expenses | ( | ) | ||||||
Accrued payroll and related liabilities | ||||||||
Deferred revenue and customer deposits | ( | ) | ( | ) | ||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | ( | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Net proceeds on sale investments | - | |||||||
Investment in patent and trademark assets | ( | ) | ( | ) | ||||
Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | ( | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payments on finance lease obligations | ( | ) | ( | ) | ||||
Net proceeds from 8.625% notes payable, net of costs | - | |||||||
Principal and exit fee payments on SWK loan | ( | ) | - | |||||
Net proceeds from PPP loan | - | |||||||
Proceeds from SWK debt, net of costs | - | |||||||
Payment of taxes for vesting of RSUs | ( | ) | - | |||||
Proceeds from exercise of stock options | - | |||||||
Sale of preferred stock, net of discount and issuance costs | - | |||||||
Redemption of preferred stock | ( | ) | - | |||||
Payment of preferred stock dividends | ( | ) | - | |||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | ||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $ | $ | ||||||
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Restricted cash | ||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | $ | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for income taxes | $ | $ | ||||||
Cash paid for interest | $ | $ | ||||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Right-of-use asset obtained in exchange for lease obligation | $ | $ | ||||||
Net reduction in right-of-use assets and lease liabilities in connection with lease modifications | $ | $ |
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 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.
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
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
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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Denominator - weighted average number of shares outstanding, basic and diluted | ||||||||||||||||
Net loss per share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) |
Investment in Eton Pharmaceuticals, Inc.
During
the three and six months ended June 30, 2021, the Company sold underwritten public offering at a public offering price of $
8 |
Following
the Eton Stock Sale and as of June 30, 2021, the Company owns
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
See Note 4 for more information and related party disclosure regarding Melt.
Investment in Surface Ophthalmics, Inc. – Related Party
The
Company owns common shares (which is approximately
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
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 | $ | $ | $ | $ | ||||||||||||
Commission revenues | ||||||||||||||||
License revenues | ||||||||||||||||
Total revenues | $ | $ | $ | $ |
Deferred
revenue and customer deposits at June 30, 2021 and December 31, 2020, were $
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 $
As
of June 30, 2021 and December 31, 2020, the Company was due $
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 | ||||||||
Net loss | $ | ( | ) | $ | ( | ) |
The unaudited condensed balance sheet information of Melt is summarized below:
At June 30, | At December 31, | |||||||
2021 | 2020 | |||||||
Current assets | $ | $ | ||||||
Non current assets | ||||||||
Total assets | ||||||||
Total liabilities | ||||||||
Total stockholders’ (deficit) equity | ( | ) | ||||||
Total liabilities and stockholders’ equity | $ | $ |
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 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 | ||||||||
Net loss | $ | ( | ) | $ | ( | ) |
The unaudited condensed balance sheet information of Surface is summarized below:
At June 30, | At December 31, | |||||||
2021 | 2020 | |||||||
Current assets | $ | $ | ||||||
Non current assets | ||||||||
Total assets | ||||||||
Total liabilities | ||||||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ |
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 $
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 | $ | $ | ||||||
Work in progress | ||||||||
Finished goods | ||||||||
Total inventories | $ | $ |
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 | $ | $ | ||||||
Other prepaid expenses | ||||||||
Deposits and other current assets | ||||||||
Total prepaid expenses and other current assets | $ | $ |
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 | $ | $ | ||||||
Internal use software costs in development | ||||||||
Furniture and equipment | ||||||||
Lab and pharmacy equipment | ||||||||
Leasehold improvements | ||||||||
Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
$ | $ |
For
the three and six months ended June 30, 2021, depreciation and amortization related to the property, plant and equipment was $
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 | $ | $ | ( | ) | $ | $ | ||||||||||||||
Licenses | ( | ) | ||||||||||||||||||
Trademarks | ||||||||||||||||||||
Customer relationships | ( | ) | ||||||||||||||||||
Trade name | ( | ) | ||||||||||||||||||
Non-competition clause | ( | ) | ||||||||||||||||||
State pharmacy licenses | ( | ) | ||||||||||||||||||
$ | $ | ( | ) | $ | $ |
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 | $ | $ | $ | $ | ||||||||||||
Licenses | ||||||||||||||||
Customer relationships | ||||||||||||||||
$ | $ | $ | $ |
Estimated future amortization expense for the Company’s intangible assets at June 30, 2021 is as follows:
Remainder of 2021 | $ | |||
2022 | ||||
2023 | ||||
2024 | ||||
2025 | ||||
Thereafter | ||||
$ |
NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
June 30, 2021 | December 31, 2020 | |||||||
Accounts payable | $ | $ | ||||||
Other accrued expenses | ||||||||
Accrued interest | ||||||||
Accrued exit fee for loan payable | - | |||||||
Total accounts payable and accrued expenses | ||||||||
Less: Current portion | ( | ) | ( | ) | ||||
Non-current total accrued expenses | $ | $ |
14 |
NOTE 12. DEBT
8.625% Senior Notes Due 2026
In
April 2021, the Company closed an offering of $
Prior
to February 1, 2026, the Company may, at its option, redeem the Notes, in whole at any time or in part from time to time, at a
Interest
expense related to the Notes totaled $
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 $
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 $ | |
● | 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 $ |
15 |
Interest
expense related to the SWK Loan Agreement, as amended, amounted to $
In
April 2021, the Company paid $
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 $
At June 30, 2021, future minimum payments under the Company’s debt were as follows:
Amount | ||||
Remainder of 2021 | $ | |||
2022 | ||||
2023 | ||||
2024 | ||||
2025 | ||||
2026 | ||||
Total minimum payments | ||||
Less: amount representing interest payments | ( | ) | ||
Notes payable, gross | ||||
Less: unamortized discount, net of premium | ( | ) | ||
Notes payable, net of unamortized discount | $ |
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 | |
● | An
operating lease for | |
● | An
operating lease for |
In
May 2021, the Company amended its New Jersey lease to include the addition of
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
During
the three and six months ended June 30, 2021, cash paid for amounts included for the operating lease liabilities was $
Future lease payments under operating leases as of June 30, 2021 were as follows:
Operating Leases | ||||
Remainder of 2021 | $ | |||
2022 | ||||
2023 | ||||
2024 | ||||
2025 | ||||
Thereafter | ||||
Total minimum lease payments | ||||
Less: amount representing interest payments | ( | ) | ||
Total operating lease liabilities | ||||
Less: current portion, operating lease liabilities | ( | ) | ||
Operating lease liabilities, net of current portion | $ |
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 | $ | |||
2022 | ||||
2023 | ||||
2024 | ||||
Total minimum lease payments | ||||
Less: amount representing interest payments | ( | ) | ||
Present value of future minimum lease payments | ||||
Less: current portion, finance lease obligation | ( | ) | ||
Finance lease obligation, net of current portion | $ |
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
For
the three and six months ended June 30, 2021, depreciation expense related to the equipment held under the finance lease obligation was
$
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 $
Preferred Stock
At June 30, 2021 and 2020, the Company had shares of preferred stock, $ par value, authorized and shares of preferred stock issued and outstanding.
17 |
Series B Cumulative Preferred Stock – Redeemed
In
May 2021, the Company sold shares of the Company’s Series B Cumulative
Preferred Stock, par value $per share and liquidation preference of $
In
June 2021, the Company redeemed all of the outstanding shares of the Company’s Series B Preferred Stock, par value $
Common Stock
During
the six months ended June 30, 2021, the Company issued
During
the six months ended June 30, 2021, the Company issued
During
the six months ended June 30, 2021, the Company issued
During
the six months ended June 30, 2021, the Company issued
During the six months ended June 30, 2021, 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 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 shares available for future issuances under the 2017 Plan at June 30, 2021.
18 |
Stock Options
Number of Shares | Weighted Avg. Exercise Price | Weighted Avg. Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
Options outstanding - January 1, 2021 | $ | |||||||||||||||
Options granted | $ | |||||||||||||||
Options exercised | ( | ) | $ | |||||||||||||
Options cancelled/forfeited | ( | ) | $ | |||||||||||||
Options outstanding - June 30, 2021 | $ | $ | ||||||||||||||
Options exercisable | $ | $ | ||||||||||||||
Options vested and expected to vest | $ | $ |
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 $ 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 years.
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.
2021 | ||||
Weighted-average fair value of options granted | $ | |||
Expected terms (in years) | ||||
Expected volatility | % | |||
Risk-free interest rate | - | % | ||
Dividend yield |
Options Outstanding | Options Exercisable | |||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life in Years | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||
$ | - $$ | $ | ||||||||||||||||||
$ | - $$ | $ | ||||||||||||||||||
$ | - $$ | $ | ||||||||||||||||||
$ | - $$ | $ | ||||||||||||||||||
$ | - $$ | $ |
As of June 30, 2021, there was approximately $ of total unrecognized compensation expense related to unvested stock options granted under the Plans. That expense is expected to be recognized over the weighted-average remaining vesting period of years. The stock-based compensation for all stock options was $ and $ during the three and 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 $ and $ , 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,
During
the six months ended June 30, 2021, the Company’s board of directors were granted
Number of RSUs | Weighted Average Grant Date Fair Value | |||||||
RSUs unvested - January 1, 2021 | $ | |||||||
RSUs granted | $ | |||||||
RSUs vested | ( | ) | $ | |||||
RSUs cancelled/forfeited | ||||||||
RSUs unvested at June 30, 2021 | $ |
As of June 30, 2021, the total unrecognized compensation expense related to unvested RSUs was approximately $ , which is expected to be recognized over a weighted-average period of years, based on estimated and actual vesting schedules of the applicable RSUs. The stock-based compensation for RSUs during the three and six months ended June 30, 2021 was $ and $ , 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 | $ | |||||||
Granted | ||||||||
Exercised | ( | ) | ||||||
Expired |