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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 September 30, 2022

 

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 November 11, 2022, there were 27,413,654 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 24
       
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 32
       
Item 4.   Controls and Procedures 32
       
Part II   OTHER INFORMATION 33
     
Item 1.   Legal Proceedings 33
       
Item 1A.   Risk Factors 33
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 33
       
Item 3.   Defaults Upon Senior Securities 34
       
Item 4.   Mine Safety Disclosures 34
       
Item 5.   Other Information 34
       
Item 6.   Exhibits 34
       
    Signatures 35

 

2
 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HARROW HEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2022   2021 
   (unaudited)     
ASSETS          
Current assets          
Cash and cash equivalents  $44,959,000   $42,167,000 
Investment in Eton Pharmaceuticals   4,162,000    8,503,000 
Accounts receivable, net   6,743,000    4,470,000 
Inventories   5,283,000    4,217,000 
Prepaid expenses and other current assets   2,927,000    1,305,000 
Total current assets   64,074,000    60,662,000 
Property, plant and equipment, net   3,291,000    3,141,000 
Capitalized software costs, net   1,878,000    1,313,000 
Operating lease right-of-use assets   7,688,000    5,935,000 
Intangible assets, net   19,632,000    15,813,000 
Investment in Melt Pharmaceuticals   2,097,000    11,133,000 
Goodwill   332,000    332,000 
TOTAL ASSETS  $98,992,000   $98,329,000 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $14,112,000   $6,337,000 
Accrued payroll and related liabilities   3,441,000    3,089,000 
Deferred revenue and customer deposits   115,000    16,000 
Current portion of operating lease obligations   703,000    272,000 
Current portion of finance lease obligations   -    8,000 
Total current liabilities   18,371,000    9,722,000 
Operating lease obligations, net of current portion   7,520,000    6,012,000 
Finance lease obligations, net of current portion   -    10,000 
Loans payable, net of current portion and unamortized debt discount   72,239,000    71,654,000 
TOTAL LIABILITIES   98,130,000    87,398,000 
Commitments and contingencies   -      
STOCKHOLDERS’ EQUITY          
Common stock, $0.001 par value, 50,000,000 shares authorized, 27,074,307 and 26,902,763 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively   27,000    27,000 
Additional paid-in capital   111,738,000    106,666,000 
Accumulated deficit   (110,548,000)   (95,407,000)
TOTAL HARROW HEALTH STOCKHOLDERS’ EQUITY   1,217,000    11,286,000 
Noncontrolling interests   (355,000)   (355,000)
TOTAL STOCKHOLDERS’ EQUITY   862,000    10,931,000 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $98,992,000   $98,329,000 

 

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

 

3
 

 

HARROW HEALTH, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   2022   2021   2022   2021 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Revenues:                    
Product sales, net  $21,575,000   $17,811,000   $63,433,000   $50,056,000 
Other revenues   1,248,000    900,000    4,833,000    2,232,000 
Total revenues   22,823,000    18,711,000    68,266,000    52,288,000 
Cost of sales   (6,721,000)   (4,947,000)   (19,218,000)   (13,134,000)
Gross profit   16,102,000    13,764,000    49,048,000    39,154,000 
Operating expenses:                    
Selling, general and administrative   15,421,000    11,356,000    43,004,000    28,643,000 
Research and development   775,000    6,125,000    2,347,000    7,142,000 
Total operating expenses   16,196,000    17,481,000    45,351,000    35,785,000 
(Loss) income from operations   (94,000)   (3,717,000)   3,697,000    3,369,000 
Other (expense) income:                    
Interest expense, net   (1,800,000)   (1,685,000)   (5,386,000)   (3,512,000)
Equity in losses of unconsolidated entities   (3,504,000)   (706,000)   (9,036,000)   (2,967,000)
Investment loss from Eton Pharmaceuticals   (1,031,000)   (2,220,000)   (4,341,000)   (8,639,000)
Loss on early extinguishment of debt   -    -    -    (756,000)
Gain on forgiveness of PPP loan   -    -    -    1,967,000 
Other expense, net   -    -    -    (51,000)
Total other expense, net   (6,335,000)   (4,611,000)   (18,763,000)   (13,958,000)
Loss before income taxes   (6,429,000)   (8,328,000)   (15,066,000)   (10,589,000)
Income taxes   (35,000)   -    (75,000)   - 
Net loss   (6,464,000)   (8,328,000)   (15,141,000)   (10,589,000)
Preferred dividends and accretion of preferred stock issuance costs   -    -    -    (472,000)
Net loss attributable to common stockholders  $(6,464,000)  $(8,328,000)  $(15,141,000)  $(11,061,000)
Basic and diluted net loss per share of common stock  $(0.24)  $(0.31)  $(0.55)  $(0.42)
Weighted average number of shares of common stock outstanding, basic and diluted   27,349,642    27,112,531    27,293,756    26,626,722 

 

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

 

4
 

 

HARROW HEALTH, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three and Nine Months Ended September 30, 2022 and 2021

 

                                     
                           Total        
   Preferred Stock   Common Stock   Additional       Harrow
Health, Inc.
   Total
Noncontrolling
   Total 
       Par       Par   Paid-in   Accumulated   Stockholders’   Interest   Stockholders’ 
   Shares   Value   Shares   Value   Capital   Deficit   Equity   Equity   Equity 
Balance at December 31, 2020   -   $-    25,749,875   $26,000   $104,557,000   $(77,400,000)  $27,183,000    (355,000)  $26,828,000 
                                              
Issuance of common stock in connection with:                                             
Exercise of warrants   -    -    311,369    -    -    -    -    -    - 
Exercise of employee stock-based options             25,480    -    65,000    -    65,000    -    65,000 
Vesting of RSUs   -    -    1,207,500    1,000    (1,000)   -    -    -    - 
Shares withheld related to net share settlement of equity awards   -    -    (391,461)   -    (3,228,000)   -    (3,228,000)   -    (3,228,000)
Issuance of preferred shares, net of discount and issuance costs   440,000         -    -    10,655,000    -    10,655,000    -    10,655,000 
Redemption of preferred shares   (440,000)   -    -    -    (11,000,000)   -    (11,000,000)   -    (11,000,000)
Payment of preferred dividends   -    -    -    -    (127,000)   -    (127,000)   -    (127,000)
Stock-based compensation expense   -    -    -    -    3,630,000    -    3,630,000    -    3,630,000 
Net loss   -    -    -    -    -    (10,589,000)   (10,589,000)   -    (10,589,000)
Balance at September 30, 2021   -   $-    26,902,763   $27,000   $104,551,000   $(87,989,000)  $16,589,000   $(355,000)  $16,234,000 
                                              
Balance at December 31, 2021   -   $-    26,902,763   $27,000   $106,666,000   $(95,407,000)  $11,286,000   $(355,000)  $10,931,000 
Issuance of common stock in connection with:                                             
Exercise of consultant stock-based options   -    -    4,054    -    -    -    -    -    - 
Exercise of employee stock-based options   -    -    92,261    -    7,000    -    7,000    -    7,000 
Vesting of RSUs   -    -    185,000    1,000    (1,000)   -    -    -    - 
Shares withheld related to net share settlement of equity awards   -    -    (109,771)   (1,000)   (875,000)   -    (876,000)   -    (876,000)
Stock-based compensation expense   -    -    -    -    5,941,000    -    5,941,000    -    5,941,000 
Net loss   -    -    -    -    -    (15,141,000)   (15,141,000)   -    (15,141,000)
Balance at September 30, 2022   -   $-      27,074,307   $  27,000   $  111,738,000   $  (110,548,000)  $1,217,000   $(355,000)  $862,000 

 

 

                           Total        
   Preferred Stock   Common Stock   Additional       Harrow Health, Inc.   Total
Noncontrolling
   Total 
       Par       Par   Paid-in   Accumulated   Stockholders’   Interest   Stockholders’ 
   Shares   Value   Shares   Value   Capital   Deficit   Equity   Equity   Equity 
Balance at June 30, 2021   -   $-    26,893,896   $27,000   $102,837,000   $(79,661,000)  $23,203,000   $(355,000)  $22,848,000 
                                              
Issuance of common stock in connection with:                                             
Exercise of employee stock-based options             8,867    -    17,000    -    17,000    -    17,000 
Stock-based compensation expense   -    -    -    -    1,697,000    -    1,697,000    -    1,697,000 
Net loss   -   -    -    -    -    (8,328,000)   (8,328,000)   -    (8,328,000)
Balance at September 30, 2021   -   $-    26,902,763   $27,000   $104,551,000   $(87,989,000)  $16,589,000   $(355,000)  $16,234,000 
                                              
Balance at June 30, 2022   -   $-    27,069,978   $27,000   $109,806,000   $(104,084,000)  $5,749,000   $(355,000)  $5,394,000 
Issuance of common stock in connection with:                                             
Exercise of consultant stock-based options   -    -    4,054    -    -    -    -    -    - 
Exercise of employee stock-based options   -    -    275    -    -    -    -    -    - 
Stock-based compensation expense   -    -    -    -    1,932,000    -    1,932,000    -    1,932,000 
Net loss   -    -    -    -    -    (6,464,000)   (6,464,000)   -    (6,464,000)
Balance at September 30, 2022   -   $-      27,074,307   $  27,000   $  111,738,000   $  (110,548,000)  $1,217,000   $(355,000)  $862,000 

 

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

 

         
   For the Nine Months Ended 
   September 30, 
   2022   2021 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(15,141,000)  $(10,589,000)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation and amortization of property, plant and equipment   1,090,000    1,275,000 
Amortization of intangible assets   1,200,000    122,000 
Amortization of operating lease right-of-use assets   435,000    422,000 
Provision for bad debt expense   36,000    36,000 
Amortization of debt issuance costs and discount   585,000    480,000 
Gain on forgiveness of PPP loan   -    (1,967,000)
Investment loss from investment in Eton   4,341,000    8,639,000 
Equity in losses of unconsolidated entities   9,036,000    2,967,000 
Interest paid-in-kind from note receivable   -    (136,000)
Loss on early extinguishment of loan   -    706,000 
Stock-based compensation   5,941,000    3,630,000 
Changes in assets and liabilities:          
Accounts receivable   (2,309,000)   (1,532,000)
Inventories   (1,066,000)   37,000 
Prepaid expenses and other current assets   (716,000)   (866,000)
Accounts payable and accrued expenses   1,534,000    2,983,000 
Accrued payroll and related liabilities   352,000    428,000 
Deferred revenue and customer deposits   99,000    (63,000)
NET CASH PROVIDED BY OPERATING ACTIVITIES   5,417,000    6,572,000 
CASH FLOWS FROM INVESTING ACTIVITIES          
Net proceeds on sale of investments   -    9,827,000 
Investment in patent and trademark assets   (19,000)   (75,000)
Issuance of note receivable, Melt Pharmaceuticals   -    (12,592,000)
Purchases of property, plant and equipment   (1,719,000)   (1,649,000)
NET CASH USED IN INVESTING ACTIVITIES   (1,738,000)   (4,489,000)
CASH FLOWS FROM FINANCING ACTIVITIES          
Payments on finance lease obligations   (18,000)   (5,000)
Net proceeds from 8.625% notes payable, net of costs   -    71,073,000 
Principal and exit fee payments on SWK loan   -    (15,961,000)
Payment of taxes upon vesting of RSUs   (876,000)   (3,228,000)
Proceeds from exercise of stock options   7,000    65,000 
Sale of preferred stock, net of discount and issuance costs   -    10,655,000 
Redemption of preferred stock   -    (11,000,000)
Payment of preferred stock dividends   -    (127,000)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES   (887,000)   51,472,000 
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH   2,792,000    53,555,000 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period   42,167,000    4,301,000 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period  $44,959,000   $57,856,000 
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH          
Cash and cash equivalents  $44,959,000   $57,656,000 
Restricted cash   -    200,000 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD  $44,959,000   $57,856,000 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for income taxes  $75,000   $- 
Cash paid for interest  $4,851,000   $2,603,000 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Issuance of common stock upon vesting of RSUs  $-   $1,000 
Purchase of intangible asset included in accounts payable and accrued expenses  $5,000,000   $- 
Purchase of property, plant and equipment included in accounts payable and accrued expenses  $86,000   $- 
Insurance premium financed  $906,000   $- 
Right-of-use assets obtained in exchange for new operating lease obligations  $2,188,000   $1,753,000 
Melt accounts receivable to note receivable  $-   $908,000 

 

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

 

6
 

 

HARROW HEALTH, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine months ended September, 2022 and 2021

 

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Company and Background

 

Harrow Health, Inc. (together with its subsidiaries, partially owned companies and royalty arrangements unless the context indicates or otherwise requires, the “Company” or “Harrow”) is an eyecare pharmaceutical company exclusively focused on the discovery, development, and commercialization of innovative ophthalmic therapies that are accessible and affordable.

 

The Company owns non-controlling equity positions in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”), both companies that began as subsidiaries of Harrow. Harrow also owns royalty rights in various drug candidates being developed by Surface and Melt.

 

Basis of Presentation

 

The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or for any other period. For further information, refer to the Company’s audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries.

 

Harrow consolidates entities in which it has a controlling financial interest. The Company assesses control under the variable interest entity (“VIE”) model to determine whether the Company is the primary beneficiary of that entity’s operations. The Company consolidates (i) entities in which it holds and/or controls, directly or indirectly, more than 50% of the voting rights, and (ii) entities that the Company deems to be a VIE. All intercompany accounts and transactions have been eliminated in consolidation.

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following represents an update for the three and nine months ended September 30, 2022 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

 

Risks, Uncertainties and Liquidity

 

The Company is subject to certain regulatory standards, approvals, guidelines and inspections which could impact the Company’s ability to make, dispense, and sell certain products. If the Company was required to cease compounding and selling certain products as a result of regulatory guidelines or inspections, this may have a material impact on the Company’s financial condition, liquidity and results of operations.

 

Segments

 

As a result of shifts in the Company’s strategic plans to further focus on growing the Company’s ImprimisRx business and suspension of activities related to starting up development-stage pharmaceutical companies, along with changes to the Company’s organizational and internal reporting structure, beginning in January 2022, management no longer evaluates the Company’s business in two segments and instead focuses on the performance of the business as a single operating business.

 

7
 

 

Basic and Diluted Net Loss per Common Share

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common and common equivalent shares, such as stock options, restricted stock units (“RSUs”) and warrants, outstanding during the period. Common equivalent shares (using the treasury stock method) from stock options, unvested RSUs and warrants were 5,622,997 and 5,657,046 at September 30, 2022 and 2021, respectively. Included in the basic and diluted net loss per share calculation were RSUs awarded to directors that had vested, but the issuance and delivery of the shares are deferred until the director resigns. The number of shares underlying vested RSUs at September 30, 2022 and 2021 was 303,454 and 258,117, respectively.

 

The following table shows the computation of basic net loss per share of common stock for the three and nine months ended September 30, 2022 and 2021:

 

                     
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
                 
Numerator – net loss attributable to common stockholders  $(6,464,000)  $(8,328,000)  $(15,141,000)  $(10,589,000)
Denominator – weighted average number of shares outstanding, basic and diluted   27,349,642    27,112,531    27,293,756    26,626,722 
Net loss per share, basic and diluted  $(0.24)  $(0.31)  $(0.55)  $(0.42)

 

Investment in Eton Pharmaceuticals, Inc.

 

As of September 30, 2022, the Company owned 1,982,000 shares of Eton common stock, which represents less than 10% of the equity interests of Eton. At September 30, 2022, the fair market value of Eton’s common stock was $2.10 per share. In accordance with the Accounting Standards Update (“ASU”) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the Company recorded an unrealized investment loss from its Eton common stock position of $1,031,000 and $4,341,000, and $2,220,000 and $8,639,000 during the three and nine months ended September 30, 2022 and 2021, respectively, related to the change in fair market value of its investment in Eton during the measurement period. As of September 30, 2022, the fair market value of the Company’s investment in Eton was $4,162,000.

 

Investment in Melt Pharmaceuticals, Inc. – Related Party

 

The Company owns 3,500,000 shares of common stock of Melt (representing approximately 46% of the equity interests as of September 30, 2022). The Company analyzes its investment in Melt and related agreements on a regular basis to evaluate its position of variable interests in Melt. The Company has determined that it does not have the ability to control Melt, however it has the ability to exercise significant influence over the operating and financial decisions of Melt and uses the equity method of accounting for this investment. Under this method, the Company recognizes earnings and losses in Melt in its condensed consolidated financial statements and adjusts the carrying amount of its investment in Melt accordingly. Any intra-entity profits and losses are eliminated. During the year ended December 31, 2021, the Company reduced the carrying value of its common stock investment in Melt to $0 as a result of the Company recording its share of equity losses in Melt since its deconsolidation in 2019. As of September 30, 2022 and at the time of entering into the Melt Loan Agreement (see Note 4), the Company owned 100% of Melt’s indebtedness. Following the reduction of the carrying value of the Company’s common stock investment in Melt to $0, the Company began recording 100% of the equity method losses of Melt, based on its ownership of Melt’s total indebtedness. In addition, the Company treats interest paid in kind on the Melt Loan Agreement as an in-substance capital contribution and reduces its investment in Melt accordingly, rather than recording interest income. The Company has no other requirements to advance funds to Melt.

 

8
 

 

The following table summarizes the Company’s investments in Melt as of September 30, 2022:

 

            In-substance   Net 
   Cost
Basis
   Share of Equity
Method Losses
   Paid-in-Kind
Interest
   Capital
Contributions
   Carrying
value
 
Common stock  $5,810,000   $(5,810,000)  $-   $   $- 
Loan   13,500,000    (11,403,000)   1,995,000    (1,995,000)   2,097,000 
   $19,310,000   $(17,213,000)  $1,995,000   $(1,995,000)  $2,097,000 

 

See Note 4 for more information and related party disclosure regarding Melt.

 

Investment in Surface Ophthalmics, Inc. – Related Party

 

The Company owns 3,500,000 common shares of Surface (representing approximately 20% of Surface’s equity interests following the closing of a round of financing completed by Surface in July 2021) and uses the equity method of accounting for this investment, as management has determined that the Company has the ability to exercise significant influence over the operating and financial decisions of Surface. Under this method, the Company recognizes earnings and losses in Surface in its consolidated financial statements and adjusts the carrying amount of its investment in Surface accordingly. The Company’s share of earnings and losses are based on the Company’s ownership interest of Surface. Any intra-entity profits and losses are eliminated. During the year ended December 31, 2021, the Company reduced its common stock investment in Surface to $0 as a result of the Company recording its share of equity losses of Surface. The Company has no other investments in Surface.

 

The following table summarizes the Company’s investment in Surface as of September 30, 2022:

 

   Cost   Share of Equity   Net 
   Basis   Method Losses   Carrying value 
Common stock  $5,320,000   $(5,320,000)  $- 

 

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

 

Impairment of Equity Method Investments and Note Receivable

 

On a quarterly basis, management assesses whether there are any indicators that the carrying value of the Company’s equity method investments and note receivable may be other than temporarily impaired. Indicators include financial condition, operating performance, and near-term prospects of the investee. To the extent indicators suggest that a loss in value may have occurred, the Company will evaluate both quantitative and qualitative factors to determine if the loss in value is other than temporary. If a potential loss in value is determined to be other than temporary, the Company will recognize an impairment loss based on the estimated fair value of the equity method investments and note receivable. At September 30, 2022 and December 31, 2021, no indicators of impairment existed.

 

NOTE 3. REVENUES

 

The Company accounts for contracts with customers in accordance with Accounting Standards Codification (“ASC”) 606, Revenues from Contracts with Customers. The Company has three primary streams of revenue: (1) revenue recognized from sales of products through its pharmacy and outsourcing facility and sales of branded products to wholesalers through a third-party logistics (“3PL”) partner, (2) revenue recognized from a commission agreement with a third party, and (3) revenue recognized from intellectual property licenses and asset purchase agreements.

 

Product Revenues

 

The Company sells prescription medications directly through its pharmacy, outsourcing facility and 3PL partner. Revenue from the Company’s pharmacy services includes: (i) the portion of the price the client pays directly to the Company, net of any volume-related or other discounts paid back to the client, (ii) the price paid to the Company by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are not included in revenue. Following the core principles of ASC 606, the Company has identified the following:

 

1. Identify the contract(s) with a customer: A contract is deemed to exist when the customer places an order through receipt of a prescription, via an online order or via receipt of a purchase order from a customer. For branded products, orders are received through the Company’s 3PL partner, and the customer takes title of the products via formal purchase orders placed and fulfilled.

 

9
 

 

2.

Identify the performance obligations in the contract: Obligations for fulfillment of the Company’s contracts consist of delivering the product to customers at their specified destination. ASU 2016-10 was issued in April 2016 and amended ASC 606 for shipping and handling activities as follows: If the customer takes control of the goods after shipment, shipping and handling activities would always be considered a fulfillment activity and not treated as a separate performance obligation. If the customer takes control of the goods before shipment, entities must make an accounting policy election to treat shipping and handling activities as either a fulfillment cost or as a separate performance obligation. The Company has elected to treat its shipping and handling activities as a fulfillment cost.

 

3.

Determine the transaction price: The transaction price is based on an amount that reflects the consideration to which the Company expects to be entitled, net of accruals for estimated rebates, wholesaler chargebacks, discounts and other deductions (collectively, sales deductions) and an estimate for returns and replacements established at the time of sale. The Company utilizes the services of a third-party professional services firm to estimate rebates and chargebacks associated with sales of its branded products. The transfer of promised goods is satisfied within a year, and therefore there are no significant financing components. There is no non-cash consideration related to product sales.

 

4.

Allocate the transaction price to the performance obligations in the contract: Given that there is only one performance obligation for product sales, no allocation is necessary.

 

5. Recognize revenue when (or as) the entity satisfies a performance obligation: Revenue from products is recognized upon transfer of control of a product to a customer. This generally occurs upon shipment unless contractual terms with a customer state that transfer of control occurs at delivery.

 

Commission Revenues

 

The Company has entered into an agreement whereby it is paid a fee calculated based on sales the Company generates from a pharmaceutical product that is owned by a third party. The revenue earned from this arrangement is recognized, at which point there is no future performance obligation required by the Company and no consequential continuing involvement on the Company’s part to recognize the associated revenue.

 

Revenues From Transfer of Acquired Product Profit

 

The Company entered into an agreement whereby it purchased the exclusive commercial rights to assets associated with certain ophthalmic products from another pharmaceutical company (the “Seller”). During a temporary, six month transition period, the Seller continued to manufacture and market these products and transfer the net profit from the sale of the products to the Company. The revenue recognized by the Company from the transfer of net profit was recognized at the time profit from the product sales were calculated by the Seller and confirmed by the Company, typically on a monthly basis, at which point there is no future performance obligation required by the Company and no consequential continuing involvement on the Company’s part to recognize the associated revenue. On a quarterly basis, the Seller invoiced the Company for all credits and reimbursements (“Chargebacks”) made to customers related to the products. The Company used historical actual experience to estimate Chargebacks associated with the net profit transferred. The estimate is recorded as a reduction in revenues in the Company’s condensed consolidated statements of operations and accounts receivable in the condensed consolidated balance sheets at the time the revenue is recognized.

 

Intellectual Property License Revenues

 

The Company currently holds five intellectual property licenses and related agreements pursuant to which the Company has agreed to license or sell to a customer with the right to access the Company’s intellectual property. License arrangements may consist of non-refundable upfront license fees, data transfer fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and various performance or sales milestones. These arrangements can be multiple-element arrangements, the revenue of which is recognized at the point in time that the performance obligation is met.

 

Non-refundable fees that are not contingent on any future performance by the Company and require no consequential continuing involvement on the part of the Company are recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverable is delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications for such compounded drug preparations. The Company defers recognition of non-refundable fees if it has continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and that are separate and independent of the Company’s performance under the other elements of the arrangement. In addition, if the Company’s continued involvement is required, through research and development services that are related to its proprietary know-how and expertise of the delivered technology or can only be performed by the Company, then such non-refundable fees are deferred and recognized over the period of continuing involvement. Guaranteed minimum annual royalties are recognized on a straight-line basis over the applicable term.

 

10
 

 

Revenue disaggregated by revenue source for the three and nine months ended September 30, 2022 and 2021 consists of the following:

 SCHEDULE OF DISAGGREGATED REVENUE

                     
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Product sales, net  $21,575,000   $17,811,000   $63,433,000   $50,056,000 
Commission revenues   1,044,000    900,000    3,576,000    2,212,000 
Transfer of profits   204,000    -    1,257,000    - 
License revenues   -    10,000    -    20,000 
Total revenues  $22,823,000   $18,711,000   $68,266,000   $52,288,000 

 

Deferred revenue and customer deposits at September 30, 2022 and December 31, 2021 were $115,000 and $16,000, respectively. All deferred revenue and customer deposit amounts at December 31, 2021 were recognized as revenue during the nine months ended September 30, 2022.

 

NOTE 4. INVESTMENT IN, AND NOTE RECEIVABLE FROM MELT PHARMACEUTICALS, INC. - RELATED PARTY TRANSACTIONS

 

In December 2018, the Company entered into an asset purchase agreement with Melt (the “Melt Asset Purchase Agreement”). Pursuant to the terms of the Melt Asset Purchase Agreement, Melt was assigned certain intellectual property and related rights from the Company to develop, formulate, make, sell, and sub-license certain Company conscious sedation and analgesia related formulations (collectively, the “Melt Products”). Under the terms of the Melt Asset Purchase Agreement, Melt is required to make mid-single digit royalty payments to the Company on net sales of the Melt Products while any patent rights remain outstanding, as well as other conditions.

 

In February 2019, the Company and Melt entered into a Management Service Agreement between the Company and Melt (the “Melt MSA”), whereby the Company provides to Melt certain administrative services and support, including bookkeeping, web services and human resources related activities, and Melt is required to pay the Company a monthly amount of $10,000. During the three and nine months ended September 30, 2022, the Company recorded $30,000 and $100,000, respectively, due from Melt for reimbursable expenses and amounts payable pursuant to the Melt MSA, which are included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. As of September 30, 2022 and December 31, 2021, the Company was due $139,000 and $48,000, respectively, from Melt for reimbursable expenses and amounts due under the Melt MSA. Melt did not make any payments to the Company during the three and nine months ended September 30, 2022.

 

The Company’s Chief Executive Officer, Mark L. Baum, was previously a member of the Melt board of directors until his resignation during the year ended December 31, 2021. Following Mr. Baum’s departure, the Company no longer has any representation on Melt’s board of directors.

 

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

 

           
   For the Nine Months Ended
September 30,
 
   2022   2021 
Revenues, net  $-   $- 
Loss from operations   (9,064,000)   (3,765,000)
Net loss  $(10,562,000)  $(3,907,000)

 

11
 

 

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

 

           
   At    At  
   September 30,
2022
   December 31,
2021
 
Current assets  $3,638,000   $11,278,000 
Non-current assets   994,000    - 
Total assets  $4,632,000   $11,278,000 
           
Total liabilities  $19,207,000   $15,732,000 
Total preferred stock and stockholders’ deficit   (14,575,000)   (4,454,000)
Total liabilities and stockholders’ equity  $4,632,000   $11,278,000 

 

Melt Note Receivable

 

On September 1, 2021, the Company entered into a loan and security agreement in the principal amount of $13,500,000 (the “Melt Loan Agreement”), as lender, with Melt, as borrower. Amounts borrowed under the Melt Loan Agreement bear interest at 12.50% per annum, which interest can be paid in-kind at the option of Melt until the maturity date. The Melt Loan Agreement permits Melt to pay interest only on the principal amount loaned thereunder through the term and all amounts owed were previously due and payable on September 1, 2022. In April 2022, the Company entered into a First Amendment and in September 2022, a Second Amendment (together, the “Amendments”) to the Melt Loan Agreement. The Amendments (i) extended the maturity date of the Melt Loan Agreement to June 1, 2023, which can be extended further to September 1, 2026 upon Melt completing a qualifying financing of a minimum amount of $10,000,000 from third-party investors, (ii) added conditions related to minimum cash amounts following a qualifying financing, and (iii) clarified the definition of material adverse effects. Melt may elect to prepay all, but not less than all, of the amounts owed prior to the maturity date at any time without penalty.

 

Melt has granted the Company a security interest in substantially all of its personal property, rights and assets, including intellectual property rights, to secure the payment of all amounts owed under the Melt Loan Agreement. The Melt Loan Agreement contains customary representations, warranties and covenants, including covenants by Melt limiting additional indebtedness, liens, mergers and acquisitions, dispositions, investments, distributions, subordinated debt, and transactions with affiliates. The Melt Loan Agreement includes customary events of default, and upon the occurrence of an event of default (subject to cure periods for certain events of default), all amounts owed by Melt thereunder may be declared immediately due and payable by the Company, and the interest rate on the loan may be increased by 3% per annum.

 

In connection with the Melt Loan Agreement, the Company and Melt entered into a Right of First Refusal Agreement providing the Company with the right, but not the obligation, to match any offer received by Melt associated with the commercial rights to any of Melt’s drug candidates for a period of five years following the effective date of the Melt Loan Agreement.

 

The net funds received by Melt excluded $908,000 owed to the Company for reimbursable expenses and amounts due under the Melt MSA prior to the effective date of the note receivable. As of September 30, 2022 and December 31, 2021, $15,495,000 and $14,076,000, respectively, in principal balance of the Melt Loan Agreement is payable to the Company.

 

NOTE 5. INVESTMENT IN SURFACE OPHTHALMICS, INC. - RELATED PARTY TRANSACTIONS

 

The Company entered into an asset purchase and license agreement with Surface in 2017 and amended it in April 2018 (the “Surface License Agreements”). Pursuant to the terms of the Surface License Agreements, the Company assigned and licensed to Surface certain intellectual property and related rights associated with Surface’s drug candidates (collectively, the “Surface Products”). Surface is required to make mid-single digit royalty payments to the Company on net sales of the Surface Products while any patent rights remain outstanding.

 

As of September 30, 2022, the Company owned 3,500,000 shares of Surface common stock. Company directors Richard L. Lindstrom, Perry J. Sternberg and Mark L. Baum, who is also the Company’s Chief Executive Officer, are directors of Surface. Dr. Lindstrom is a principal of Flying L Partners, an affiliate of an investor who purchased Surface Series A Preferred Stock.

 

12
 

 

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

 

           
   For the Nine Months Ended
September 30,
 
   2022   2021 
Revenues, net  $-   $- 
Loss from operations   (5,338,000)   (6,859,000)
Net loss  $(5,338,000)  $(6,859,000)

 

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

 

           
   At    At  
   September 30,
2022
   December 31,
2021
 
Current assets  $16,625,000   $21,731,000 
Non-current assets   661,000    412,000 
Total assets  $17,286,000   $22,143,000 
           
Total liabilities  $1,745,000   $1,514,000 
Total preferred stock and stockholders’ deficit   15,541,000    20,629,000 
Total liabilities and stockholders’ equity  $17,286,000   $22,143,000 

 

NOTE 6. INVENTORIES

 

Inventories are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, branded commercial pharmaceutical products, including those held at the Company’s 3PL partner, related laboratory supplies and active pharmaceutical ingredients. The composition of inventories as of September 30, 2022 and December 31, 2021 was as follows:

 

           
   September 30,
2022
   December 31,
2021
 
Raw materials  $3,507,000   $2,441,000 
Work in progress   26,000    - 
Finished goods   1,750,000    1,776,000 
Total inventories  $5,283,000   $4,217,000 

 

NOTE 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets at September 30, 2022 and December 31, 2021 consisted of the following:

 

           
   September 30,
2022
   December 31,
2021
 
Prepaid insurance  $1,165,000   $728,000 
Prepaid computer software licenses and related expenses   781,000    248,000 
Due from Melt Pharmaceuticals   139,000    48,000 
Other prepaid expenses   769,000    189,000 
Deposits and other current assets   73,000    92,000 
Total prepaid expenses and other current assets  $2,927,000   $1,305,000 

 

NOTE 8. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment at September 30, 2022 and December 31, 2021 consisted of the following:

 

   September 30,
2022
   December 31,
2021
 
Property, plant and equipment, net:          
Computer hardware  $875,000   $772,000 
Furniture and equipment   843,000    443,000 
Lab and pharmacy equipment   4,160,000    4,056,000 
Leasehold improvements   6,276,000    5,703,000 
Property, plant and equipment, gross   12,154,000    10,974,000 
Accumulated depreciation   (8,863,000)   (7,833,000)
Property, plant and equipment, net  $3,291,000   $3,141,000 

 

13
 

 

For the three and nine months ended September 30, 2022, depreciation related to the property, plant and equipment was $171,000 and $928,000, respectively, compared to $410,000 and $1,202,000 during the same periods in 2021, respectively.

 

NOTE 9. CAPITALIZED SOFTWARE DEVELOPMENT COSTS

 

Capitalized software development costs at September 30, 2022 and December 31, 2021 consisted of the following:

 

   September 30,
2022
   December 31,
2021
 
Capitalized internal-use software development costs  $1,533,000   $417,000 
Acquired third-party software license for internal-use   159,000    684,000 
Total gross capitalized software for internal-use   1,692,000    1,101,000 
Accumulated amortization   (731,000)   (569,000)
Capitalized internal-use software in process   917,000    781,000 
Total Capitalized software costs, net   $1,878,000   $1,313,000 

 

The Company recorded amortization expense of $76,000 and $162,000 related to capitalized software development costs during the three and nine months ended September 30, 2022, respectively, and $22,000 and $73,000 during the same periods in 2021, respectively.

 

NOTE 10. INTANGIBLE ASSETS AND GOODWILL

 

The Company’s intangible assets at September 30, 2022 consisted of the following:

 

  

Amortization

Periods

(in years)

   Cost  

Accumulated

Amortization

   Impairment  

Net

Carrying Value

 
Patents   17-19    $981,000   $(140,000)  $-   $841,000 
Licenses   20    100,000    (20,000)   -    80,000 
Trademarks   Indefinite    264,000    -    -    264,000 
Acquired NDAs   10    18,635,000    (1,023,000)   -    17,612,000 
Customer relationships   3-15    1,519,000    (685,000)   -    834,000 
Trade name   5    5,000    (5,000)   -    - 
Non-competition clause   3-4    50,000    (50,000)   -    - 
State pharmacy licenses   25    8,000    (7,000)   -    1,000 
        $21,562,000   $(1,930,000)  $-   $19,632,000 

 

Amortization expense for intangible assets for the three and nine months ended September 30, 2022 and 2021 was as follows:

 

                     
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Patents  $22,000   $8,000   $65,000   $20,000 
Licenses   2,000    1,000    13,000    2,000 
Acquired NDAs   341,000    -    1,023,000    - 
Customer relationships   33,000    34,000    99,000    100,000 
Amortization of intangible assets  $398,000   $43,000   $1,200,000   $122,000 

 

Estimated future amortization expense for the Company’s intangible assets at September 30, 2022 is as follows:

 

      
Remainder of 2022  $523,000 
2023   2,092,000 
2024   2,092,000 
2025   2,092,000 
2026   2,096,000 
Thereafter   10,473,000 
Intangible assets  $19,368,000 

 

14
 

 

NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses at September 30, 2022 and December 31, 2021 consisted of the following:

 

           
   September 30,   December 31, 
   2022   2021 
Accounts payable  $7,043,000   $5,174,000 
Accrued insurance premium   906,000    - 
Accrued IHEEZO milestone payment   5,000,000    - 
Other accrued expenses   49,000    49,000 
Accrued interest   1,114,000    1,114,000 
Total accounts payable and accrued expenses  $14,112,000   $6,337,000 

 

The Company financed all insurance policies for the policy term of August 17, 2022 through August 16, 2023. The financing agreement has an interest rate of 4.13% per annum and requires eight monthly payments of $114,000.

 

NOTE 12. DEBT

 

8.625% Senior Notes Due 2026

 

In April 2021, the Company closed an offering of $50,000,000 aggregate principal amount of 8.625% senior notes due April 2026, and in May 2021 issued an additional $5,000,000 of such notes pursuant to the full exercise of the underwriters’ option to purchase additional notes (collectively, the “April Notes”). The April Notes were sold to investors at a par value of $25.00 per April Note and the offering resulted in net proceeds to the Company of approximately $51,909,000 after deducting underwriting discounts and commissions and expenses of $3,091,000. In June 2021, in a further issuance of the April Notes, the Company sold an additional $20,000,000 aggregate principal amount of such notes (the “June Notes,” and together with the April Notes, the “Notes”), at a price of $25.75 per June Note, with interest of $278,000 on the June Notes being accrued from April 20, 2021 as of the date of issuance. The June offering resulted in net proceeds to the Company of approximately $19,164,000 after deducting underwriting discounts and commissions and expenses of $1,158,000 and a premium on note issuance of $322,000. The June Notes are treated as a single series with the April Notes under the indenture governing the April Notes, dated as of April 20, 2021, and have the same terms as the April Notes (other than the initial offering price and issue date). The Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of our other existing and future senior unsecured and unsubordinated indebtedness. The Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The Notes bear interest at a rate of 8.625% per annum. Interest on the Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on July 31, 2021. The Notes will mature on April 30, 2026. The issuance costs were recorded as a debt discount and are being amortized as interest expense, net of the amortization of the premium on note issuance, over the term of the Notes using the effective interest rate method.

 

Prior to February 1, 2026, the Company may, at its option, redeem the Notes, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus a make-whole amount, if any, plus accrued and unpaid interest to, but excluding, the date of redemption. The Company may redeem the Notes for cash in whole or in part at any time at our option on or after February 1, 2026 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes.

 

Interest expense related to the Notes totaled $1,814,000 and $5,436,000 for the three and nine months ended September 30, 2022, respectively, and $1,464,000 and $2,930,000 during the three and nine months ended September 30, 2021, respectively, and included amortization of debt issuance costs and discount of $197,000 and $585,000 for three and nine months ended September 30, 2022, respectively, and $197,000 and $389,000 during the three and nine months ended September 30, 2021, respectively.

 

15
 

 

At September 30, 2022, future minimum payments under the Company’s debt were as follows:

 

   Amount 
Remainder of 2022  $1,617,000 
2023   6,469,000 
2024   6,469,000 
2025   6,469,000 
2026   77,158,000 
Total minimum payments   98,182,000 
Less: amount representing interest payments   (23,182,000)
Notes payable, gross   75,000,000 
Less: unamortized discount, net of premium   (2,761,000)
Notes payable, net of unamortized discount  $72,239,000 

 

NOTE 13. LEASES

 

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

 

An operating lease for 5,789 square feet of office space in Carlsbad, California, which commenced in January 2022 and will expire in July 2027.

 

An operating lease for 35,326 square feet of lab, warehouse and office space in Ledgewood, New Jersey that expires in July 2026, with an option to extend the term for two additional five-year periods. This lease was amended, effective July 2020, to extend the term of the original lease and add 1,400 of additional square footage to the lease, and amended again in May 2021 to extend the term of the lease to July 2027 and add 8,900 square feet of space.

 

An operating lease for 5,500 square feet of office space in Nashville, Tennessee that expires in December 2024, with an option to extend the term for two additional five-year periods.

 

An operating lease for 11,552 square feet of lab and office space in Nashville, Tennessee which commenced in June 2022 and expires in June 2027.

 

At September 30, 2022, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases held by the Company were 6.62% and 10.99 years, respectively.

 

During the three and nine months ended September 30, 2022, cash paid for amounts included for the operating lease liabilities was $249,000 and $622,000, respectively, and $250,000 and $752,000 during the same periods in 2021, respectively. During the three and nine months ended September 30, 2022, the Company recorded operating lease expense of $309,000 and $809,000, respectively, which is included in selling, general and administrative expenses.

 

Future lease payments under operating leases as of September 30, 2022 were as follows:

 

   Operating Leases 
Remainder of 2022  $303,000 
2023   1,231,000 
2024   1,262,000 
2025   1,093,000 
2026   1,114,000 
Thereafter   6,801,000 
Total minimum lease payments   11,804,000 
Less: amount representing interest payments   (3,581,000)
Total operating lease liabilities   8,223,000 
Less: current portion, operating lease liabilities   (703,000)
Operating lease liabilities, net of current portion  $7,520,000 

 

During the nine months ended September 30, 2022, the Company repaid all remaining amounts owed under its finance lease and no future payments are due related to finance leases.

 

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NOTE 14. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

 

Preferred Stock

 

At September 30, 2022 and December 31, 2021, the Company had 5,000,000 shares of preferred stock, $0.001 par value, authorized and no shares of preferred stock issued and outstanding.

 

Common Stock

 

During the nine months ended September 30, 2022, the Company issued 53,594 shares of common stock to Mark L. Baum, the Company’s Chief Executive Officer, upon the cashless exercise of options to purchase 125,000 shares at an exercise price of $2.40 per share. The Company withheld from Mr. Baum 36,014 shares as consideration for the cashless exercise and an additional 35,392 shares for payroll tax obligations totaling $295,000.

 

During the nine months ended September 30, 2022, the Company issued 4,054 shares of common stock to consultants upon the cashless exercise of options to purchase 15,995 shares at an exercise price of $7.07 per share. The Company withheld 11,941 shares as consideration for the cashless exercise.

 

During the nine months ended September 30, 2022, the Company issued 3,275 shares of common stock and received net proceeds of $7,000 upon the exercise of options to purchase 3,275 shares of common stock with exercise prices between $1.70 to $3.95 per share.

 

During the nine months ended September 30, 2022, 50,000 RSUs granted in February 2019 to Andrew R. Boll, the Company’s Chief Financial Officer, vested, and in February 2022, the Company issued 29,395 shares of common stock to Mr. Boll, net of 20,605 shares of common stock withheld for payroll tax withholdings totaling $162,000.

 

During the nine months ended September 30, 2022, 50,000 RSUs granted in February 2019 to John P. Saharek, the President of ImprimisRx, vested, and in February 2022, the Company issued 24,077 shares of common stock to Mr. Saharek, net of 25,923 shares of common stock withheld for payroll tax withholdings totaling $204,000.

 

During the nine months ended September 30, 2022, 35,000 RSUs granted in February 2019 vested, and in February 2022, the Company issued 20,298 shares of common stock, net of 14,702 shares of common stock withheld for payroll tax withholdings totaling $116,000.

 

During the nine months ended September 30, 2022, 50,000 RSUs granted in May 2019 vested, and in May 2022, the Company issued 36,851 shares of common stock, net of 13,149 shares of common stock withheld for payroll tax withholdings totaling $99,000.

 

During the nine months ended September 30, 2022, 35,693 shares of the Company’s common stock underlying RSUs issued to directors vested, but the issuance and delivery of these shares are deferred until the applicable director resigns.

 

Stock Option Plan

 

On September 17, 2007, the Company’s Board of Directors and stockholders adopted the Company’s 2007 Incentive Stock and Awards Plan, which was subsequently amended on November 5, 2008, February 26, 2012, July 18, 2012, May 2, 2013 and September 27, 2013 (as amended, the “2007 Plan”). The 2007 Plan reached its term in September 2017, and we can no longer issue additional awards under this plan; however, options previously issued under the 2007 Plan will remain outstanding until they are exercised, reach their maturity or are otherwise cancelled/forfeited. On June 13, 2017, the Company’s Board of Directors and stockholders adopted the Company’s 2017 Incentive Stock and Awards Plan which was subsequently amended on June 3, 2021 (as amended, the “2017 Plan” together with the 2007 Plan, the “Plans”). As of September 30, 2022, the 2017 Plan provides for the issuance of a maximum of 6,000,000 shares of the Company’s common stock. The purposes of the Plans are to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in the Company’s development and financial success. Under the Plans, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, restricted stock units and restricted stock. The Plans are administered by the Compensation Committee of the Company’s Board of Directors. The Company had 2,058,280 shares available for future issuances under the 2017 Plan at September 30, 2022.

 

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Stock Options

 

A summary of stock option activity under the Plans for the nine months ended September 30, 2022 is as follows:

 

   Number of
Shares
   Weighted Average
Exercise Price
   Weighted Average
Remaining
Contractual Life
   Aggregate
Intrinsic Value
 
Options outstanding – January 1, 2022   3,039,546   $5.52           
Options granted   323,250   $7.30           
Options exercised   (144,270)  $2.92           
Options cancelled/forfeited   (47,500)  $7.41           
Options outstanding – September 30, 2022   3,171,026   $5.79    4.59   $19,919,000 
Options exercisable   2,462,904   $5.33    4.19   $16,609,000 
Options vested and expected to vest   3,037,832   $5.72    4.57   $19,314,000 

 

The aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would have been received by option holders if all option holders had exercised and immediately sold all shares underlying options with an exercise price lower than the market price on September 30, 2022, based on the closing price of the Company’s common stock of $12.07 on that date.

 

During the nine months ended September 30, 2022, the Company granted stock options to certain employees. The stock options were granted with an exercise price equal to the current market price of the Company’s common stock, as reported by the securities exchange on which the common stock was then listed, at the grant date and have contractual terms of ten years. Vesting terms for options granted to employees during the three and nine months ended September 30, 2022 included the following vesting schedule: 25% of the shares subject to the option vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the shares subject to the option vest and become exercisable quarterly in equal installments thereafter over three years. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans) and in the event of certain modifications to the option award agreement.

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The expected term of options granted to employees and directors was determined in accordance with the “simplified approach,” as the Company has limited, relevant, historical data on employee exercises and post-vesting employment termination behavior. The expected risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual effect differs from those estimates. For option grants to employees and directors, the Company assigns a forfeiture factor of 10%. These factors could change in the future, which would affect the determination of stock-based compensation expense in future periods. Utilizing these assumptions, the fair value is determined at the date of grant.

 

The table below illustrates the fair value per share determined using the Black-Scholes-Merton option pricing model with the following assumptions used for valuing options granted to employees:

 

   2022 
Weighted-average fair value of options granted  $4.49 
Expected terms (in years)   6.11 
Expected volatility   68-70%
Risk-free interest rate   1.54-3.19%
Dividend yield   - 

 

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The following table summarizes information about stock options outstanding and exercisable at September 30, 2022:

 

    Options Outstanding   Options Exercisable 

Range of

Exercise Prices

  

Number

Outstanding

  

Weighted

Average

Remaining

Contractual

Life in Years

  

Weighted

Average

Exercise

Price

  

Number

Exercisable

  

Weighted

Average

Exercise

Price

 
 $1.47 - $2.23    595,612    4.74   $1.97    595,612   $1.97 
 $2.40 - $3.50    53,568    5.80   $3.00    44,162   $2.90 
 $3.95    370,000    3.50   $3.95    370,000   $3.95 
 $4.08 - $6.30    578,850