UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the quarterly period ended
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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Indicate
by check mark whether the registrant (1) 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 small reporting company, or an emerging growth company.
| 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. ☐
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name on exchange on which registered | ||
| The
|
As of August 7, 2020, 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 | |||
| Item 1. | Financial Statements (unaudited) | 3 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 41 | ||
| Item 4. | Controls and Procedures | 41 | ||
| Part II | OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 42 | ||
| Item 1A. | Risk Factors | 42 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 45 | ||
| Item 3. | Defaults Upon Senior Securities | 45 | ||
| Item 4. | Mine Safety Disclosures | 45 | ||
| Item 5. | Other Information | 45 | ||
| Item 6. | Exhibits | 45 | ||
| Signatures | 46 |
| 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, | |||||||
| 2020 | 2019 | |||||||
| (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 Pharmaceuticals | ||||||||
| 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, net of current portion | ||||||||
| 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, 2020 and December 31, 2019, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL HARROW HEALTH STOCKHOLDERS’ EQUITY | ||||||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ 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 | For the | For the | For the | |||||||||||||
| Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| License | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Impairment of intangible assets | - | - | ||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Investment (loss) gain from Melt Pharmaceuticals, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Investment loss from Surface Pharmaceuticals, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Investment gain (loss) from Eton Pharmaceuticals, net | ( | ) | ( | ) | ||||||||||||
| Other income, net | - | |||||||||||||||
| Total other (expense) income, net | ( | ) | ( | ) | ||||||||||||
| (Loss) income before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax benefit, net | - | - | - | - | ||||||||||||
| Total net (loss) income including noncontrolling interests | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss attributable to noncontrolling interest | ||||||||||||||||
| Net (loss) income attributable to Harrow Health, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Basic net (loss) income per share of common stock | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Diluted net (loss) income per share of common stock | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Weighted average number of shares of common stock outstanding, basic | ||||||||||||||||
| Weighted average number of shares of common stock outstanding, 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, 2020 and 2019
(In thousands, except for share data)
| Total | ||||||||||||||||||||||||||||
| Common Stock | Additional | Harrow Health, Inc. | Total | Total | ||||||||||||||||||||||||
| Par | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Stockholders’ | |||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||
| Balance at March 31, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of warrants | - | - | - | |||||||||||||||||||||||||
| Exercise of employee stock-based options | - | - | - | - | - | - | ||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Total | ||||||||||||||||||||||||||||
| Common Stock | Additional | Harrow Health, Inc. | Total | Total | ||||||||||||||||||||||||
| Par | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Stockholders’ | |||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of employee stock-based options | - | - | - | - | - | - | ||||||||||||||||||||||
| Stock-based payment for services provided | - | - | - | |||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 5 |
| Total | ||||||||||||||||||||||||||||
| Common Stock | Additional | Harrow Health, Inc. | Total | Total | ||||||||||||||||||||||||
| Par | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Stockholders’ | |||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | ( | ) | $ | $ | - | $ | |||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of warrants | - | - | ||||||||||||||||||||||||||
| Exercise of employee stock-based options | - | - | - | - | - | - | ||||||||||||||||||||||
| Stock-based payment for services provided | - | - | - | |||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | ||||||||||||||||||||||||
| Net income (loss) | - | - | - | ( | ) | |||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Total | ||||||||||||||||||||||||||||
| Common Stock | Additional | Harrow Health, Inc. | Total | Total | ||||||||||||||||||||||||
| Par | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Stockholders’ | |||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of employee stock-based options | - | - | - | - | - | - | ||||||||||||||||||||||
| Vesting of RSUs | - | - | - | - | - | - | ||||||||||||||||||||||
| Stock-based payment for services provided | - | - | - | |||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 6 |
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, | |||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income (including noncontrolling interests) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Depreciation and amortization of property, plant and equipment | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Amortization of debt issuance costs and discount | ||||||||
| Provision for bad debt expense | - | |||||||
| Investment loss (gain) from Eton, net | ( | |||||||
| Investment loss from Surface, net | ||||||||
| Investment loss (gain) from Melt, net | ( | |||||||
| Loss on sale and disposal of assets | ||||||||
| Interest paid-in-kind on loan payable | - | |||||||
| Impairment of intangible assets | - | |||||||
| 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 USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Investment in patent and trademark assets | ( | ) | ( | ) | ||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payments on finance lease obligations | ( | ) | ( | ) | ||||
| Proceeds from SWK debt | - | |||||||
| Principal payments on loan payable | - | ( | ) | |||||
| Payments of costs related to amendment of loan payable | - | ( | ) | |||||
| Net proceeds from Payroll Protection Program loan payable | - | |||||||
| Net proceeds from exercise of warrants | - | |||||||
| NET CASH PROVIDED BY (USED IN) 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 | $ | $ | ||||||
| Acquisition of property, plant and equipment with finance lease obligations | $ | $ | ||||||
| Purchase of property, plant and equipment included in accounts payable and accrued expenses | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 7 |
HARROW HEALTH, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2020 and 2019
(Dollar amounts 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 equity positions in Eton Pharmaceuticals, Inc. (“Eton”), Surface Pharmaceuticals, Inc. (“Surface”), and Melt Pharmaceuticals, Inc. (“Melt”), all companies that began as subsidiaries of Harrow. More recently, the Company founded drug development subsidiaries Mayfield Pharmaceuticals, Inc. (“Mayfield”) and Stowe Pharmaceuticals, Inc. (“Stowe”), among others. In 2020, Harrow created Visionology, Inc., which intends to launch an online eye health platform business. Harrow also owns royalty rights in various drug candidates being developed by Surface, Melt and Mayfield. The Company intends to continue to create, and hold equity and royalty rights in, new businesses that commercialize drug candidates that are internally developed or otherwise acquired or licensed from third parties.
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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 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, 2019.
The
accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries,
as well as Mayfield (79%
majority controlled) and Stowe (70%
majority controlled) each subsidiaries of Harrow as of June 30, 2020. The remaining
Harrow
consolidates entities in which it has a controlling financial interest.
The condensed consolidated balance sheets at June 30, 2020 and December 31, 2019 and the condensed consolidated statements of operations, stockholders’ equity and cash flows for the periods ended June 30, 2020 and 2019 include our accounts and those of our wholly owned subsidiaries as well as Mayfield and Stowe.
| 8 |
Risks, Uncertainties and Liquidity
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. On March 18, 2020, the Centers for Medicare & Medicaid Services (“CMS”) released guidance for U.S. healthcare providers to limit all elective medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the pendency of the pandemic. In addition to limiting elective medical procedures, many hospitals and other healthcare providers have strictly limited access to their facilities during the pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and healthcare delivery, led to social distancing recommendations, stay-at-home orders and other restrictive measures, and created significant volatility in financial markets.
Many of the Company’s customers use its drugs in procedures impacted by the CMS guidance to limit elective procedures. In addition, the Company and our business partners need access to healthcare providers and facilities to conduct clinical trials and other activities required to achieve regulatory clearance of products under development.
The Company believes reductions in elective procedures in response to CMS guidance have had, and will continue to have, an adverse impact, which may be material, on the Company’s financial condition, liquidity and results of operations. The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on its customers, all of which are uncertain and cannot be predicted. As of the date of issuance of this Quarterly Report, the extent to which the COVID-19 pandemic may materially impact the Company’s financial condition, liquidity or results of operations is uncertain. For further information, refer to “Risk Factors” in Part II, Item 1A of this Quarterly Report and information in the Company’s other filings with the Securities and Exchange Commission.
The
Company has incurred significant operating losses and negative cash flows from operations since its inception. The Company incurred
operating losses of $
While
there is no assurance, management of the Company believes existing cash resources and restricted cash of $
The Company may seek to increase liquidity and capital resources through a variety of means which may include, but are not limited to: the sale of assets, investments and/or businesses, obtaining financing through the issuance of equity, debt, or convertible securities; and working to increase revenue growth through sales. There is no guarantee that the Company will be able to obtain capital when needed on terms management deems acceptable, or at all.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following represents an update for the three and six months ended June 30, 2020 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
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 presented as operating segments. The Company has identified two operating segments as reportable segments. See Note 15 for more information regarding the Company’s reportable segments.
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.
| 9 |
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 interests 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 income (loss) per common share is computed by dividing income (loss) attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed by dividing the income (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 income (loss) per share is computed using the weighted average number of shares of common stock outstanding
during the period. Common stock equivalents (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, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Numerator – net (loss) income attributable to Harrow Health, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Denominator – weighted average number of shares outstanding, basic | ||||||||||||||||
| Net (loss) income per share, basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
For the Six Months Ended | ||||
| June 30, 2019 | ||||
| Diluted shares related to: | ||||
| Warrants | ||||
| Stock options | ||||
| Dilutive common equivalent shares | ||||
| 10 |
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Numerator – net (loss) income attributable to Harrow Health, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Denominator – weighted average number of shares outstanding, basic | ||||||||||||||||
| Dilutive common equivalents | - | - | - | |||||||||||||
| Number of shares used for diluted income (loss) per share computation | ||||||||||||||||
| Net (loss) income per share, basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
Investment in Eton Pharmaceuticals, Inc. – Related Party
The
Company owns shares
of Eton common stock, which represents approximately
Mark Baum, the Company’s Chief Executive Officer, is a member of the board of directors of Eton.
Investment in Melt Pharmaceuticals, Inc. – Related Party
In
April 2018, the Company formed Melt as a wholly owned subsidiary. In January and March of 2019, Melt entered into definitive stock
purchase agreements (collectively, the “Melt Series A Preferred Stock Agreement”) with certain investors and closed
on the sale of Melt’s Series A Preferred Stock (the “Melt Series A Stock”), totaling approximately $
In
January 2019, the Company deconsolidated Melt and recorded a gain of $
The
Company owns common shares of Melt (which is approximately
See Note 4 for more information and related party disclosure regarding Melt.
| 11 |
Investment in Surface Pharmaceuticals, Inc. – Related Party
The
Company owns common shares (which is approximately
See Note 5 for more information and related party disclosure regarding Surface.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. The Company adopted ASU 2016-13 on January 1, 2020, and adoption of the standard did not have a material effect on the Company’s consolidated financial position, results of operations and cash flows.
In August 2018, the FASB issued ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements, which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements. The Company adopted ASU 2018-13 on January 1, 2020, and adoption of the standard did not have a material effect on the Company’s consolidated financial position, results of operations and cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other. This guidance simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the current two-step impairment test under ASC 350. The updated standard eliminates the requirement to calculate a goodwill impairment charge using Step 2. If a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for reporting periods beginning after December 31, 2019 on a prospective basis, and early adoption is permitted. The Company adopted ASU 2017-04 on January 1, 2020, and adoption of the standard did not have a material effect on the Company’s consolidated financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted. The Company does not expect ASU 2019-12 to have a material impact on its consolidated financial position, results of operations and cash flows.
NOTE 3. REVENUES
The Company accounts for contracts with customers in accordance with ASC 606, Revenues from Contracts with Customers. The Company has two primary streams of revenues: (1) revenues recognized from our sale of products within our pharmacy services and (2) revenues recognized from intellectual property license and asset purchase agreements.
| 12 |
Product Revenues from Pharmacy Services
The Company sells prescription drugs directly through our pharmacy and outsourcing facility network. Revenues 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 principle 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 be 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.
Intellectual Property License Revenues
The Company currently holds five intellectual property license and related agreements in which the Company has sold or granted a license which provides a customer with the right to access the Company’s intellectual property. License arrangements may include or require 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 of time 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.
| 13 |
Revenue disaggregated by revenue source for the three and six months ended June 30, 2020 and 2019, consists of the following:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| License | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
Deferred
revenue and customer deposits at June 30, 2020 and December 31, 2019, was $
NOTE 4. INVESTMENT IN MELT PHARMACEUTICALS, INC. AND AGREEMENTS - 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
royalty payments to the Company up to
In
February 2019, the Company and Melt entered into a Management Services Agreement (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 pays the Company a monthly amount of $
As
of June 30, 2020, the Company was due $
The Company’s Chief Executive Officer, Mark L. Baum, and Chief Medical Officer, Larry Dillaha, are members of the Melt board of directors.
The unaudited condensed results of operations information of Melt is summarized below:
| For the | ||||
| Six Months Ended | ||||
| June 30, 2020 | ||||
| Revenues, net | $ | |||
| Loss from operations | ||||
| Net loss | $ | ( | ) | |
The unaudited condensed balance sheet information of Melt is summarized below:
| 14 |
| June 30, | ||||
| 2020 | ||||
| Current assets | $ | |||
| Non-current assets | ||||
| Total assets | $ | |||
| Total liabilities | $ | |||
| Total preferred stock and stockholders’ equity | ||||
| Total liabilities and stockholders’ equity | $ | |||
NOTE 5. INVESTMENT IN SURFACE PHARMACEUTICALS, INC. AND AGREEMENTS - 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 to develop, formulate, make, sell, and sub-license ophthalmic formulations
(collectively, the “Surface Products”). Surface is required to make royalty payments to the Company of
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
The unaudited condensed results of operations information of Surface is summarized below:
| For the | ||||
| Six Months Ended | ||||
| June 30, 2020 | ||||
| Revenues, net | $ | |||
| Loss from operations | ||||
| Net loss | $ | ( | ) | |
The unaudited condensed balance sheet information of Surface is summarized below:
| June 30, | ||||
| 2020 | ||||
| Current assets | $ | |||
| Non-current assets | ||||
| Total assets | $ | |||
| Total liabilities | $ | |||
| Total stockholders’ equity | ||||
| Total liabilities and stockholders’ equity | $ | |||
NOTE 6. 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, 2020 and December 31, 2019 was as follows:
| 15 |
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
NOTE 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Other prepaid expenses | ||||||||
| Receivable due from Melt | ||||||||
| Deposits and other current assets | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Property, plant and equipment, net: | ||||||||
| Computer software and hardware | $ | $ | ||||||
| Furniture and equipment | ||||||||
| Lab and pharmacy equipment | ||||||||
| Leasehold improvements | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
For
the three and six months ended June 30, 2020, depreciation and amortization related to the property, plant and equipment was $
| 16 |
NOTE 9. INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets at June 30, 2020 consisted of the following:
| Amortization | ||||||||||||||||||
| periods | Accumulated | Net | ||||||||||||||||
| (in years) | Cost | amortization | Impairment | Carrying value | ||||||||||||||
| Patents | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||
| Licenses | ( | ) | ||||||||||||||||
| Trademarks | ||||||||||||||||||
| Customer relationships | ( | ) | ||||||||||||||||
| Trade name | ( | ) | ||||||||||||||||
| Non-competition clause | ( | ) | ||||||||||||||||
| State pharmacy licenses | ( | ) | ||||||||||||||||
| $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
During
the three and six months ended June 30, 2020, the Company recorded impairment charges of $
Amortization expense for intangible assets for the three and six months ended June 30, 2020 and 2019 was as follows:
| For the | For the | For the | For the | |||||||||||||
| Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Patents | $ | $ | $ | $ | ||||||||||||
| Licenses | ||||||||||||||||
| Customer relationships | ||||||||||||||||
| Trade name | ||||||||||||||||
| State pharmacy licenses | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Estimated future amortization expense for the Company’s intangible assets at June 30, 2020 is as follows:
| Remainder of 2020 | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| $ |
There
have been
| 17 |
NOTE 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Accounts payable | $ | $ | ||||||
| Other accrued expenses | - | |||||||
| Accrued interest | ||||||||
| Accrued exit fee for note payable | ||||||||
| Total accounts payable and accrued expenses | ||||||||
| Less: Current portion | ( | ) | ( | ) | ||||
| Non-current total accrued expenses | $ | $ | ||||||
NOTE 11. DEBT
In
July 2017, the Company entered into a term loan and security agreement in the principal amount of $
Second Amendment to SWK Loan
On April 1, 2020, the Company and several of its wholly owned subsidiaries entered into a second amendment (the “SWK Amendment”) to the SWK Loan, with SWK. A summary of the material changes contained in the SWK Amendment are 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 Amendment; and | |
| ● | The interest payment due May 14, 2020 will be paid in kind by increasing the principal amount of the term loans by an amount equal to the interest accrued as of such date. |
Paycheck Protection Program Loan
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 $
Under
the terms of the PPP Loan, interest accrues on the outstanding principal at the rate of
| 18 |
The
CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply
for and be granted forgiveness for all or part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based
on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the
eight-week period after the loan origination for certain purposes including payroll costs, interest on certain mortgage obligations,
rent payments on certain leases, and certain qualified utility payments (
At June 30, 2020, future minimum payments under the Company’s debt agreements were as follows:
| Amount | ||||
| Remainder of 2020 | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| Total minimum payments | ||||
| Less: amount representing estimated interest | ( | ) | ||
| Loans payable, gross | ||||
| Less: unamortized discount | ( | ) | ||
| Notes payable | ||||
| Less: current portion, net of unamortized discount | ( | ) | ||
| Loans payable, net of current portion and unamortized debt discount | $ | |||
For
the three and six months ended June 30, 2020, debt discount amortization related to the SWK Loan was $
NOTE 12. LEASES
The Company leases office and laboratory space under the non-cancelable operating leases listed below. These lease agreements have remaining lease terms between one to four years and contain various clauses for renewal at our option.
| ● | An
operating lease for | |
| ● | An
operating lease for | |
| ● | An
operating lease for | |
| ● | An
operating lease for |
| 19 |
In
March 2020, the Company amended its New Jersey lease for the expansion of an additional
At
June 30, 2020, 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, 2020, cash paid for amounts included for the operating lease liabilities was $
Future lease payments under operating leases as of June 30, 2020 were as follows:
| Operating Leases | ||||
| Remainder of 2020 | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 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 lease that is included in its lease accounting but is not considered significant.
Future lease payments under finance leases as of June 30, 2020 were as follows:
| Finance Leases | ||||
| Remainder of 2020 | $ | |||
| 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, 2020, the incremental borrowing rate and the remaining lease term for the finance lease
held by the Company were
For
the three and six months ended June 30, 2020, depreciation expense related to the equipment held under the finance lease obligation
was $
For
each of the three and six months ended June 30, 2020, cash paid and expense recognized for interest expense related to
the finance lease obligation was $
| 20 |
Common Stock
In
May 2020, the Company issued shares of its restricted common stock, with a fair value of $
During
the six months ended June 30, 2020, the Company issued
During
the six months ended June 30, 2020, the Company issued shares of its common stock underlying RSUs issued to a director
that resigned. The RSUs had previously vested, including
During the six months ended June 30, 2020, 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 (the “2017 Plan” together with the 2007 Plan, the “Plans”). As of June 30, 2020, 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, 2020.
Stock Options
| Number of shares | Weighted Avg. Exercise Price | Weighted Avg. Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| Options outstanding - January 1, 2020 | $ | |||||||||||||||
| Options granted | $ | |||||||||||||||
| Options exercised | ( | ) | $ | |||||||||||||
| Options cancelled/forfeited | ( | ) | $ | |||||||||||||
| Options outstanding - June 30, 2020 | $ | $ | ||||||||||||||
| Options exercisable – June 30, 2020 | $ | $ | ||||||||||||||
| Options vested and expected to vest – June 30, 2020 | $ | $ | ||||||||||||||
| 21 |
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, 2020, based on the closing price of the Company’s common stock of $ on that date.
During the six months ended June 30, 2020, 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.
On
July 31, 2015, the Company granted to its Chief Executive Officer, Mark Baum, an option (the “Baum Performance Option”)
to purchase shares of the Company’s common stock
at an exercise price of $per share under the 2007 Plan subject
to the satisfaction of certain market-based vesting criteria. The market-based vesting criteria are separated into five tranches
and require that the Company achieve and maintain certain average stock price targets ranging from $
With
the exception of the Baum Performance Option, 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 rate of
| 2020 | ||||
| Weighted-average fair value of options granted | $ | |||
| Expected terms (in years) | – | |||
| Expected volatility | % - % | |||
| Risk-free interest rate | % - % | |||
| Dividend yield | ||||
| 22 |
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted | ||||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Range of | Number | Contractual | Exercise | Number | Exercise | |||||||||||||||
| Exercise Prices | Outstanding | Life in Years | Price | Exercisable | Price | |||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
As of June 30, 2020, 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 expense for all stock options was $and $during the three and six months ended June 30, 2020, 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 three and six months ended June 30, 2020, the Company’s board of directors were granted RSUs with a fair market
value $
During
the three and six months ended June 30, 2020, RSUs with a fair market value of $
During the six months ended June 30, 2020, the Company granted RSUs to a new member of its board of directors,
with a fair market value of $
| Number of RSUs | Weighted Average Grant Date Fair Value | |||||||
| RSUs unvested - January 1, 2020 | $ | |||||||
| RSUs granted | $ | |||||||
| RSUs vested | ( | ) | $ | |||||
| RSUs cancelled/forfeited | ||||||||
| RSUs unvested at June 30, 2020 | $ | |||||||
As of June 30, 2020, 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, 2020 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.
| 23 |
A summary of warrant activity for the six months ended June 30, 2020 is as follows:
| Number of Shares Subject to Warrants Outstanding | Weighted Avg. Exercise Price | |||||||
| Warrants outstanding - January 1, 2020 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ||||||||
| Warrants outstanding and exercisable - June 30, 2020 | $ | |||||||
| Weighted average remaining contractual life of the outstanding warrants in years - June 30, 2020 | ||||||||
Warrants outstanding and exercisable as of June 30, 2020 are as follows:
| Warrants | Exercise | Expiration | ||||||||||||
| Warrant Series | Issue Date | Outstanding | Price | Date | ||||||||||
| Lender warrants | $ | |||||||||||||
| Settlement warrants | $ | |||||||||||||
| Lender warrants | $ | |||||||||||||
| $ | ||||||||||||||
Subsidiary Stock-Based Transactions
Mayfield Pharmaceuticals, Inc.
During
the six months ended June 30, 2020, Mayfield repurchased shares of its common stock from Elle,
for an aggregate purchase price of $
During
the six months ended June 30, 2020, Mayfield issued shares of its restricted common stock,
with a fair value of $
During the six months ended June 30, 2020, shares of Mayfield’s restricted common stock were forfeited by a consultant.
Stock-Based Compensation Summary
| For the | For the | |||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||
| Employees - selling, general and administrative | $ | $ | $ | $ | ||||||||||||
| Directors - selling, general and administrative | ||||||||||||||||
| Consultants - selling, general and administrative | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 24 |
NOTE 14. COMMITMENTS AND CONTINGENCIES
Novel Drug Solutions et al.
In April 2018, Novel Drug Solutions, LLC and Eyecare Northwest, PA (collectively “NDS”) filed a lawsuit against the Company in the U.S. District Court of Delaware asserting claims for breach of contract. The claims stem from an asset purchase agreement between the Company and NDS entered into in 2013. In July 2019, NDS filed a second amended complaint which added a claim related to its purported termination of the APA. In October 2019, NDS voluntarily dismissed all claims related to breach of contract, leaving only claims related to the scope of the post-termination obligations to be litigated. NDS is seeking unspecified damages, interest, attorney’s fees and other costs. The Company believes the claims are meritless and has previously and will continue to dispute all claims asserted against it and intends to vigorously defend against these allegations. Nonetheless, the Company cannot predict the eventual outcome of this litigation and it could result in substantial costs, losses and a diversion of management’s resources and attention, which could harm the Company’s business and the value of its common stock.
Product and Professional Liability
Product and professional liability litigation represents an inherent risk to all firms in the pharmaceutical and pharmacy industry. We utilize traditional third-party insurance policies with regard to our product and professional liability claims. Such insurance coverage at any given time reflects current market conditions, including cost and availability, when the policy is written.
John Erick et al.
In January 2018, John Erick and Deborah Ferrell, successors-in-interest and heirs of Jade Erick, (collectively “Erick”) filed a lawsuit in the San Diego County Superior against Kim Kelly, ND, MPH asserting claims related to the death of Jade Erick. In April 2018, Erick filed an amendment to the lawsuit, naming us as a co-defendant. In September 2018, co-defendant Dr. Kelly filed a cross-complaint against the Company and various entities affiliated with Spectrum Laboratory Products, Inc., Spectrum Chemical Manufacturing Corp. and Spectrum Pharmacy Products, Inc. (collectively “Spectrum”). The cross-complaint seeks indemnity and contribution from the Company and Spectrum. The Company answered the claims filed by Dr. Kelly in October 2018. The case is currently in the discovery phase. Erick is seeking unspecified damages, interest, attorney’s fees and other costs. The Company believes the claims are meritless and has previously and will continue to dispute all claims asserted against it and intends to vigorously defend against these allegations. Nonetheless, the Company cannot predict the eventual outcome of this litigation, it could result in substantial costs, losses and a diversion of management’s resources and attention, which could harm the Company’s business and the value of its common stock.
General and Other
In the ordinary course of business, the Company may face various claims brought by third parties and it may, from time to time, make claims or take legal actions to assert its rights, including intellectual property disputes, contractual disputes and other commercial disputes. Any of these claims could subject the Company to litigation.
Indemnities
In addition to the indemnification provisions contained in the Company’s governing documents, the Company generally enters into separate indemnification agreements with each of the Company’s directors and officers. These agreements require the Company, among other things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys’ fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or proceeding arising out of the individual’s status or service as the Company’s director or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to indemnification by the Company. The Company also indemnifies its lessors in connection with its facility leases for certain claims arising from the use of the facilities. These indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities in the accompanying condensed consolidated balance sheets.
| 25 |
Klarity License Agreement – Related Party
The Company entered into a license agreement in April 2017 and as amended in April 2018, (the “Klarity License Agreement”) with Richard L. Lindstrom, M.D., a member of its Board of Directors. Pursuant to the terms of the Klarity License Agreement, the Company licensed certain intellectual property and related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license the topical ophthalmic solution Klarity used to protect and rehabilitate the ocular surface (the “Klarity Product”).
Injectable Asset Purchase Agreement – Related Party
In December 2019, the Company entered into an asset purchase agreement (the “Lindstrom APA”) with Dr. Lindstrom, a member of its Board of Directors. Pursuant to the terms of the Lindstrom APA, the Company acquired certain intellectual property and related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license an ophthalmic injectable product (the “Lindstrom Product”).
Under
the terms of the Lindstrom APA,
Sales and Marketing Agreements
The Company has entered various sales and marketing agreements with certain organizations, to provide exclusive sales and marketing representation services to Harrow in select geographies in the U.S., in connection with our ophthalmic compounded formulations.
Under
the terms of the sales and marketing agreements,
Asset Purchase, License and Related Agreements
The Company has acquired and sourced intellectual property rights related to certain proprietary innovations from certain inventors and related parties (the “Inventors”) through multiple asset purchase agreements, license agreements, strategic agreements and commission agreements. In general, these agreements provide that the Inventors will cooperate with the Company in obtaining patent protection for the acquired intellectual property and that the Company will use commercially reasonable efforts to research, develop and commercialize a product based on the acquired intellectual property. In addition, the Company has acquired a right of first refusal on additional intellectual property and drug development opportunities presented by these Inventors.
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In consideration for the acquisition of the
intellectual property rights, the Company is obligated to make payments to the Inventors based on the completion of certain milestones,
generally consisting of: (1) a payment payable within 30 days after the issuance of the first patent in the United States arising
from the acquired intellectual property (if any); (2) a payment payable within 30 days after the Company files the first investigational
new drug application (“IND”) with the U.S. Food and Drug Administration (“FDA”) for the first product
arising from the acquired intellectual property (if any); (3) for certain of the Inventors, a payment payable within 30 days after
the Company files the first new drug application with the FDA for the first product arising from the acquired intellectual property
(if any); and (4) certain royalty payments based on the net receipts received by the Company in connection with the sale or licensing
of any product based on the acquired intellectual property (if any), after deducting (among other things) the Company’s
development costs associated with such product. If, following five years after the date of the applicable asset purchase agreement,
the Company either (a) for certain of the Inventors, has not filed an IND or, for the remaining Inventors, has not initiated a
study where data is derived, or (b) has failed to generate royalty payments to the Inventors for any product based on the acquired
intellectual property, the Inventors may terminate the applicable asset purchase agreement and request that the Company re-assign
the acquired technology to the Inventors. Royalty expenses of $
NOTE 15. SEGMENT INFORMATION AND CONCENTRATIONS
Management
evaluates performance of the Company based on operating segments. Segment performance for its
| ● | Selling, general and administrative expenses that result from shared infrastructure, including certain expenses associated with legal matters, public company costs (e.g. investor relations), board of directors and principal executive officers and other like shared expenses. | |
| ● | Operating expenses within selling, general and administrative expenses that result from the impact of corporate initiatives. Corporate initiatives primarily include integration, restructuring, acquisition and other shared costs. | |
| ● | Other select revenues and operating expenses including research and development expenses, amortization, and asset sales and impairments, net as not all such information has been accounted for at the segment level, or such information has not been used by all segments. | |
| ● | Total assets including capital expenditures. |
The Company defines segment net revenues as pharmaceutical compounded drug sales, licenses and other revenue derived from related agreements.
Cost of sales within segment contribution includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements depreciation, the write-off of obsolete inventory and other related expenses.
Selling, general and administrative expenses consist mainly of personnel-related costs, marketing and promotion costs, distribution costs, professional service costs, insurance, depreciation, facilities costs, transaction costs, and professional services costs which are general in nature and attributable to the segment.
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Segment net revenues, segment operating expenses and segment contribution information consisted of the following for the three and six months ended June 30, 2020:
| For the Three Months Ended June 30, 2020 | ||||||||||||
| Pharmaceutical | Pharmaceutical Drug | |||||||||||
| Compounding | Development | Total | ||||||||||
| Net revenues | $ | $ | - | $ | ||||||||
| Cost of sales | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative | ||||||||||||
| Research and development | ||||||||||||
| Segment contribution | ( | ) | ( | ) | ( | ) | ||||||
| Corporate | ||||||||||||
| Research and development | ||||||||||||
| Amortization | ||||||||||||
| Asset sales and impairments, net | ||||||||||||
| Operating loss | $ | ( | ) | |||||||||
| For the Six Months Ended June 30, 2020 | ||||||||||||
| Pharmaceutical | Pharmaceutical Drug | |||||||||||
| Compounding | Development | Total | ||||||||||
| Net revenues | $ | $ | - | $ | ||||||||
| Cost of sales | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative | ||||||||||||
| Research and development | ||||||||||||
| Segment contribution | ( | ) | ||||||||||
| Corporate | ||||||||||||
| Research and development | ||||||||||||
| Amortization | ||||||||||||
| Asset sales and impairments, net | ||||||||||||
| Operating loss | $ | ( | ) | |||||||||
| For the Three Months Ended June 30, 2019 | ||||||||||||
| Pharmaceutical | Pharmaceutical | |||||||||||
| Compounding | Drug Development | Total | ||||||||||
| Net revenues | $ | $ | - | $ | ||||||||
| Cost of sales | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative | ||||||||||||
| Research and development | ||||||||||||
| Segment contribution | ( | ) | ||||||||||
| Corporate | ||||||||||||
| Research and development | ||||||||||||
| Amortization | ||||||||||||
| Operating loss | $ | ( | ) | |||||||||
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| For the Six Months Ended June 30, 2019 | ||||||||||||
| Pharmaceutical | Pharmaceutical Drug | |||||||||||
| Compounding | Development | Total | ||||||||||
| Net revenues | $ | $ | - | $ | ||||||||
| Cost of sales | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative | ||||||||||||
| Research and development | ||||||||||||
| Segment contribution | ( | ) | ||||||||||
| Corporate | ||||||||||||
| Research and development | ||||||||||||
| Amortization | ||||||||||||
| Operating loss | $ | ( | ) | |||||||||
The Company categorizes revenues by geographic area based on selling location. All operations are currently located in the U.S.; therefore, total revenues are attributed to the U.S. All long-lived assets at June 30, 2020 and December 31, 2019 are located in the U.S.
The
Company sells its compounded formulations to a large number of customers. No customer accounted for more than
The Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted
for
NOTE 16. SUBSEQUENT EVENTS
The Company has performed an evaluation of events occurring subsequent to June 30, 2020 through the filing date of this Quarterly Report. Based on its evaluation, no events other than those described below need to be disclosed.
In
July 2020, the Company issued shares of its common stock upon the exercise
of options to purchase shares of common stock, with an exercise price of $per share, and received net proceeds of
$
Eyepoint Commercial Alliance Agreement
On August 1, 2020, the Company, through its wholly-owned subsidiary ImprimisRx, LLC, entered into a Commercial Alliance Agreement (the “Dexycu Agreement”) with Eyepoint Pharmaceuticals, Inc. (“Eyepoint”), pursuant to which Eyepoint granted the Company the non-exclusive right to co-promote DEXYCU® (dexamethasone intraocular suspension) 9% for the treatment of post-operative inflammation following ocular surgery in the United States. Pursuant to the Dexycu Agreement, Eyepoint will pay the Company a fee calculated based on the quarterly sales of DEXCYU in excess of predefined volumes to specific customers of the Company in the U.S. Under the terms of the Dexycu Agreement, the Company shall use commercially reasonable efforts to promote and market DEXCYU in the U.S.
Subject
to early termination, the Dexycu Agreement expires on
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”). Our condensed consolidated financial statements have been prepared and, unless otherwise stated, the information derived therefrom as presented in this discussion and analysis is presented, in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The information contained in this Quarterly Report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and subsequent reports, which discuss our business in greater detail. As used in this discussion and analysis, unless the context indicates otherwise, the terms the “Company”, “Harrow” “we”, “us” and “our” refer to Harrow Health, Inc. and its consolidated subsidiaries, consisting of Park Compounding, Inc., ImprimisRx, LLC, ImprimisRx NJ, LLC dba ImprimisRx, Imprimis NJOF, LLC, Radley Pharmaceuticals, Inc., Mayfield Pharmaceuticals, Inc., and Stowe Pharmaceuticals, Inc. In this discussion and analysis, we refer to our consolidated subsidiaries ImprimisRx, LLC, ImprimisRx NJ, LLC and Imprimis NJOF, LLC collectively as “ImprimisRx.”
In addition to historical information, the following discussion contains forward-looking statements regarding future events and our future performance. In some cases, you can identify forward-looking statements by terminology such as “will”, “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “forecasts”, “potential” or “continue” or the negative of these terms or other comparable terminology. All statements made in this Quarterly Report other than statements of historical fact are forward-looking statements. These forward-looking statements involve risks and uncertainties and reflect only our current views, expectations and assumptions with respect to future events and our future performance. If risks or uncertainties materialize or assumptions prove incorrect, actual results or events could differ materially from those expressed or implied by such forward-looking statements. Risks that could cause actual results to differ from those expressed or implied by the forward-looking statements we make include, among others, risks related to: the impact of the COVID-19 pandemic on our financial condition, liquidity or results of operations; our ability to successfully implement our business plan, develop and commercialize our proprietary formulations in a timely manner or at all, identify and acquire additional proprietary formulations, manage our pharmacy operations, service our debt, obtain financing necessary to operate our business, recruit and retain qualified personnel, manage any growth we may experience and successfully realize the benefits of our previous acquisitions and any other acquisitions and collaborative arrangements we may pursue; competition from pharmaceutical companies, outsourcing facilities and pharmacies; general economic and business conditions; regulatory and legal risks and uncertainties related to our pharmacy operations and the pharmacy and pharmaceutical business in general; physician interest in and market acceptance of our current and any future formulations and compounding pharmacies generally; our limited operating history; and the other risks and uncertainties described under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report and in our other filings with the Securities and Exchange Commission. You should not place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date they are made and, except as required by law, we undertake no obligation to revise or publicly update any forward-looking statement for any reason.
Overview
Our business specializes in the development, production and sale of innovative medications that offer unique competitive advantages and serve unmet needs in the marketplace through our subsidiaries and deconsolidated companies. We own and operate one of the nation’s leading ophthalmology pharmaceutical businesses, ImprimisRx. In addition to wholly owning ImprimisRx, we also have non-controlling equity positions in Eton Pharmaceuticals, Inc. (“Eton”), Surface Pharmaceuticals, Inc. (“Surface”), and Melt Pharmaceuticals, Inc. (“Melt”), all companies that began as subsidiaries of Harrow. More recently, we founded drug development subsidiaries Mayfield Pharmaceuticals, Inc. (“Mayfield”) and Stowe Pharmaceuticals, Inc. (“Stowe”), among others. During the second half of 2020, we intend to launch a new business called Visionology. We also own royalty rights in various drug candidates being developed by Surface, Melt and Mayfield. We intend to continue to create and hold equity and royalty rights in new businesses that commercialize drug candidates that are internally developed or otherwise acquired or licensed from third parties.
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ImprimisRx
ImprimisRx is our ophthalmology focused prescription pharmaceutical business. We offer to over 9,000 physician customers and their patients critical medicines to meet their needs that are unmet by commercially available drugs. We make our formulations available at prices that are, in most cases, lower than non-customized commercial drugs. Our current ophthalmology formulary includes over twenty compounded formulations, many of which are patented or patent-pending, and are customizable for the specific needs of a patient. Some examples of our compounded medications are various combinations of drugs formulated into one bottle and numerous preservative free formulations. Depending on the formulation, the regulations of a specific state and ultimately the needs of the patient, ImprimisRx products may be dispensed as patient-specific medications from our 503A pharmacy, or for in-office use, made according to current good manufacturing practices (or cGMPs) or other FDA guidance documents, in our FDA-registered New Jersey Outsourcing Facility (“NJOF”).
Visionology
Visionology is expected to be an online eye health platform. Visionology will leverage our experience in the ophthalmic pharmaceutical business as well as our relationships with eyecare professionals across the United States. We expect to launch a proof-of-concept model for Visionology during the second half of 2020 within a certain region of the U.S., and if successful, expand the launch on a nationwide basis later in 2020 and/or 2021.
Pharmaceutical Compounding Businesses
Pharmaceutical Compounding
Pharmaceutical compounding is the science of combining different active pharmaceutical ingredients (APIs), all of which are approved by the FDA (either as a finished form product or as a bulk drug ingredient) and excipients, to create specialized pharmaceutical preparations. Physicians and healthcare institutions use compounded drugs when commercially available drugs do not optimally treat a patient’s needs. In many cases, compounded drugs, such as ours, have wide market utility and may be clinically appropriate for large patient populations. Examples of compounded formulations include medications with alternative dosage strengths or unique dosage forms, such as topical creams or gels, suspensions, or solutions with more tolerable drug delivery vehicles.
Almost all of our sales revenue is derived from making, selling and dispensing our compounded prescription drug formulations as cash pay transactions between us and our end-user customer. As such, the majority of our commercial transactions do not involve distributors, wholesalers, insurance companies, pharmacy benefit managers or other middle parties. By not being reliant on insurance company formulary inclusion and pharmacy benefit manager payment clawbacks, we are able to simplify the prescription transaction process. We believe the outcome of our business model is a simple transaction, involving a patient-in-need, a physician’s diagnosis, a fair price and great service for a quality pharmaceutical product. We sell our products through a network of employees and independent contractors and we dispense our formulations in all 50 states, Puerto Rico and in selected markets outside the United States.
Our Compounding Facilities
Pharmaceutical compounding businesses are governed by Sections 503A and 503B of the Federal Food Drug and Cosmetic Act (the “FDCA”). Section 503A of the FDCA provides that a pharmacy is only permitted to compound a drug for an individually identified patient based on a prescription for a patient, and is only permitted to distribute the drug interstate if the pharmacy is licensed to do so in the states where it is compounded and where the medication is received.
Section 503B of the FDCA provides that a pharmacy engaged in preparing sterile compounded drug formulations may voluntarily elect to register as an “outsourcing facility.” Outsourcing facilities are permitted to compound large quantities of drugs without a prescription and distribute them out of state with certain limitations such as the formulation appearing on the FDA’s drug shortage list or the bulk drug substances contained in the formulations appearing on the FDA’s “clinical need” list. Entities voluntarily registering with FDA as outsourcing facilities are subject to additional requirements that do not apply to compounding pharmacies (operating under Section 503A of the FDCA), including adhering to standards such as current good manufacturing practices (cGMP) or other FDA guidance documents and being subject to regular FDA inspection.
We operate two compounding facilities located in Ledgewood, New Jersey. Our New Jersey operations are comprised of two separate entities and facilities, one of which is registered with the FDA as an outsourcing facility under Section 503B of the FDCA. The other New Jersey facility (“RxNJ”), is a licensed pharmacy operating under Section 503A of the FDCA. All products that we sell, produce and dispense are made in the United States.
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We believe that, with our current compounding pharmacy facilities and licenses and FDA registration of NJOF, we have the infrastructure to scale our business appropriately under the current regulatory landscape and meet the potential growth in demand we are targeting. We plan to invest in one or both of our facilities to further their capacity and efficiencies. Also, we may seek to access greater pharmacy and production related redundancy and markets through acquisitions, partnerships or other strategic transactions.
Pharmaceutical Development Businesses
We have ownership interests in Eton, Surface, Melt, Mayfield, and Stowe and hold royalty interests in certain of their drug candidates. These companies are pursuing market approval for their drug candidates under the FDCA, including in some instances under the abbreviated pathway described in Section 505(b)(2) which permits the submission of a new drug application (“NDA”) where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. We intend to create additional subsidiaries that will be focused on the development and FDA approval of certain proprietary drug formulations that we currently own, will in-license/acquire and/or otherwise develop.
Consolidated Businesses (Controlling Equity Interests)
Stowe Pharmaceuticals, Inc.
Stowe is a consolidated subsidiary of Harrow that was formed in 2019, focused on the development of its proprietary ophthalmic drug candidate STE-006. STE-006 is a patented, new chemical entity, small molecule topical drug candidate intended to treat various bacterial, fungal, and viral infections in the eye and ear. In initial preclinical models, STE-006 was shown to be significantly more effective compared to current conventional therapies against numerous bacterial and viral pathogens, including strains of methicillin-resistant staphylococcus aureus, or MRSA, and herpes simplex virus. STE-006 has several patents covering matter of composition, methods of production, methods of use and molecule, which are valid until 2038.
We own 2,500,000 shares of Stowe common stock, and control 70% of the equity and voting interests issued and outstanding of Stowe, at June 30, 2020.
Mayfield Pharmaceuticals, Inc.
Mayfield, a consolidated subsidiary of Harrow, is a development-stage pharmaceutical company focused on consequential products that address the conspicuous unmet needs of patients. Its development programs focus on using known molecules in dosage forms for new indications, and by developing new chemical entities with known mechanisms of action. Mayfield recently licensed worldwide rights to a first-in-class antimicrobial drug candidate, called MAY-66, which is being studied to treat recurrent bacterial vaginosis. In February 2019, Mayfield acquired drug formulation assets and intellectual property, including three recently issued patents, for MAY-44, a drug candidate for the treatment of dyspareunia, or pain experienced by women during sexual intercourse. In addition to MAY-44, Mayfield is also developing MAY-88 for patients suffering from interstitial cystitis, which it will acquire from Harrow at the closing of a deconsolidating transaction.
We own 2,500,000 shares of Mayfield common stock, and control 79% of the equity and voting interests issued and outstanding of Mayfield, at June 30, 2020. We are currently pursuing a deconsolidating transaction for Mayfield. We have contracted with an experienced life science executive that we expect to lead Mayfield once deconsolidated.
Radley Pharmaceuticals, Inc.
Radley Pharmaceuticals, Inc. (“Radley”), a consolidated subsidiary of Harrow, is a development-stage pharmaceutical company that has been focused on the development of proprietary drug candidates focused on rare diseases. Radley currently has three drug programs in its pipeline. During the second quarter of 2020, we suspended all activities related to Radley to focus attention and capital on other projects. We intend to resume these activities at the appropriate time, however, no assurance can be provided that activities related to Radley will resume.
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De-Consolidated Businesses (Noncontrolling Equity Interests)
Eton Pharmaceuticals, Inc.
Eton is a pharmaceutical company focused on developing and commercializing innovative products utilizing the FDA’s 505(b)(2) regulatory pathway. Its pipeline includes several products and drug candidates in various stages of development across a variety of dosage forms. Eton’s pipeline is focused on innovative 505(b)(2) products and obtaining FDA marketing approval for currently marketed but unapproved drugs.
In May 2017, Eton closed an offering of its Series A Preferred Stock and we lost our controlling interest in it. In November 2018, Eton completed an initial public offering of its common stock. We own 3,500,000 shares of Eton common stock, which is less than 20% of the equity and voting interests issued and outstanding of Eton as of June 30, 2020.
Surface Pharmaceuticals, Inc.
Surface is a development-stage pharmaceutical company focused on development and commercialization of innovative therapeutics for ocular surface diseases and is seeking FDA approval for the commercialization of its drug candidates through the Section 505(b)(2) regulatory pathway under the FDCA. In 2017 and amended in April 2018, Harrow entered into asset purchase and license agreements (the “Surface License Agreements”) and transferred to Surface its current drug pipeline, which consists of three proprietary drug candidates. Surface’s patent-pending topical eye drop drug candidates, SURF-100 and SURF-200, utilize a patented delivery vehicle known as Klarity Drops (“Klarity”), that was invented by Harrow board member and Surface’s chairman of the board, renowned ophthalmologist Dr. Richard Lindstrom.
During the fourth quarter of 2019, Surface filed an investigational new drug application (“IND”) for its drug program SURF-201. SURF-201 is a novel steroid topical eye drop drug candidate for treating pain and inflammation post-ocular surgery. Surface submitted an IND for its lead drug candidate, SURF-100, in May 2020, for treating signs and symptoms associated with chronic dry eye disease. Surface also filed a third IND during the first half of 2020. We expect Surface may release certain clinical data related to these programs near the end of 2020 and beginning of 2021, however such clinical programs were delayed as a result of the ongoing COVID-19 pandemic and as a result, data from these clinical programs will likely be delayed as well.
In May and July 2018, Surface closed on an offering of its Series A Preferred Stock. At that time, we lost our controlling interest and deconsolidated Surface from our consolidated financial statements. We own 3,500,000 shares of Surface which is approximately 30% of the equity and voting interests as of June 30, 2020. We expect Surface to complete another round of financing within the next twelve months.
Melt Pharmaceuticals, Inc.
Melt is a development-stage pharmaceutical company focused on the development and commercialization of proprietary non-intravenous, sedation and anesthesia therapeutics for human medical procedures in hospital, outpatient, and in-office settings. Melt intends to seek regulatory approval for its proprietary technologies, where possible. In December 2018, we entered into an Asset Purchase Agreement with Melt (the “Melt Asset Purchase Agreement”), and Harrow assigned to Melt the underlying intellectual property for Melt’s current pipeline, including its lead drug candidate MELT-100. The core intellectual property Melt owns is a patented series of combination non-opioid sedation drug formulations that we estimate to have multitudinous applications. Pursuant to the terms of the Melt Asset Purchase Agreement, Melt is required to make royalty payments to the Company equal to 5% of net sales of MELT-100, while any patent rights remain outstanding, subject to other conditions.
MELT-100 is a novel, sublingually delivered, non-IV, opioid-free drug candidate being developed for procedural sedation. Melt filed an IND in June 2020 and has begun its clinical program for MELT-100. We expect Melt will announce topline data from its Phase 1 study during the fourth quarter of 2020.
In January 2019, Melt closed an offering of its Series A Preferred Stock and we lost our controlling interest in it. We own 3,500,000 shares of Melt common stock, which is approximately 44% of the equity and voting interests issued and outstanding of Melt, as of June 30, 2020. We expect Melt to complete another round of financing within the next twelve months.
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Factors Affecting Our Performance
We believe the primary factors affecting our performance are our ability to increase revenues of our proprietary compounded formulations and certain non-proprietary products, grow and gain operating efficiencies in our pharmacy operations, optimize pricing and obtain reimbursement options for our proprietary compounded formulations, and continue to pursue development and commercialization opportunities for certain of our ophthalmology and other assets that we have not yet made commercially available as compounded formulations. We believe we have built a tangible and intangible infrastructure that will allow us to scale revenues efficiently in the long-term. All of these activities will require significant costs and other resources, which we may not have or be able to obtain from operations or other sources. See “Liquidity and Capital Resources” below.
Reimbursement Options
Our proprietary ophthalmic compounded formulations are currently primarily available on a cash-pay basis. However, we work with third-party insurers, pharmacy benefit managers and buying groups to offer patient-specific customizable compounded formulations at accessible prices. We may devote time and other resources to seek reimbursement and patient pay opportunities for these and other compounded formulations and we have hired pharmacy billers to process certain existing reimbursement opportunities for certain formulations. However, we may be unsuccessful in achieving these goals, as many third-party payors have imposed significant restrictions on reimbursement for compounded formulations in recent years. Moreover, third-party payors, including Medicare, are increasingly attempting to contain health care costs by limiting coverage and the level of reimbursement for new drugs and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval. Further, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (collectively, the “Health Care Reform Law”), may have a considerable impact on the existing U.S. system for the delivery and financing of health care and could conceivable have a material effect on our business. As a result, reimbursement from Medicare, Medicaid and other third-party payors may never be available for any of our products or, if available, may not be sufficient to allow us to sell the products on a competitive basis and at desirable price points. We are communicating with government and third-party payors in order to make our formulations available to more patients and at optimized pricing levels. However, if government and other third-party payors do not provide adequate coverage and reimbursement levels for our formulations, the market acceptance and opportunity for our formulations may be limited.
Additionally, we are making efforts to receive reimbursement and/or optimize the pricing for some of our currently available pharmaceutical compounded formulations, including applying for transitional pass-through reimbursement status for one of our formulations. Pass-through status allows for separate payment (i.e., outside the bundled payment) under Medicare Part B for new drugs and other medical technologies that meet well-established criteria specified by federal regulations governing CMS spending. We had previously expected that CMS would communicate a decision to us prior to July 1, 2020, however, that timeline was delayed which we believe was due to COVID-19 related priorities at CMS (i.e. new policymaking). As of the date of this Report, we expect to hear from CMS before October 1, 2020 regarding whether we will be granted pass-through status for one of these formulations, although we may continue to experience further delays in a decision for our formulation beyond that date. Any efforts to attain optimized pricing or reimbursement for these or any of our other proprietary formulations could fail, which could make our products less attractive or unavailable to some patients or could reduce our margins.
Recent Developments
The following describes certain developments in 2020 to date that are important to understand our financial condition and results of operations as well as operating trends and prospects. See the notes to our condensed consolidated financial statements included in this report for additional information about each of these developments.
COVID-19 Pandemic
A novel strain of coronavirus was first identified in Wuhan, China in December 2019. The disease caused by it, COVID-19, was declared a global pandemic by the World Health Organization in March 2020. On March 18, 2020, CMS released guidance for U.S. healthcare providers to limit all elective medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the pendency of the pandemic. In addition to limiting elective medical procedures, many hospitals and other healthcare providers have strictly limited access to their facilities during the pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and healthcare delivery, led to social distancing recommendation, and created significant volatility in financial markets.
In response to the pandemic and business disruptions, first and foremost, we have prioritized the health and safety of our employees, customers, suppliers and others with whom we partner in our business activities. We have instructed employees to work from home when possible and to maintain recommended physical distancing when working in our facilities. We also have eliminated non-essential in-person contact with customers, suppliers and other third parties.
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Many of the Company’s customers use its drugs in procedures that were impacted by the CMS guidance to limit elective procedures. In addition, the Company and our business partners need access to healthcare providers and facilities to conduct clinical trials and other activities required to achieve regulatory clearance of products under development. We are carefully monitoring rapidly evolving changes in healthcare delivery systems and may adjust our operating and product development plans accordingly.
Given the unprecedented and dynamic nature of the COVID-19 pandemic, we cannot reasonably estimate the impacts it may have on our financial condition, results of operations or cash flows in the future. However, the reduction in elective procedures in response to CMS guidance has had a material adverse impact, on our revenues, profitability and cash flows, in particular during the second quarter of 2020. The extent and duration of that impact will depend upon the extent of procedure postponements, the duration of the pandemic and any resurgences of it, especially within certain geographies and states that have retained restrictive measures and social distancing policies. In May 2020, some U.S. states and geographies began easing restrictions associated with the COVID-19 pandemic including those restrictions related to elective procedures, as restrictions were lifted in those areas there was a correlation with an increase in our revenues. Despite the recent resurgence of the COVID-19 pandemic in certain parts of the U.S., we are hopeful that the general trend of easing of restrictions will continue, and sales of our products will return to historical norms and historical growth trends, as other states and governmental authorities continue to ease restrictions associated with elective procedures and the COVID-19 pandemic. Assuming the strictest of lockdown scenarios are avoided, we believe we have sufficient liquidity resources to sustain our planned level of operations.
SWK Amendment
In April 2020, the Company and several of its wholly owned subsidiaries entered into a second amendment (the “SWK Amendment”) to the term loan and security agreement dated as of July 19, 2017, as amended (the “SWK Loan”), with SWK Funding LLC, as lender and collateral agent, and certain other lenders (collectively, “SWK”). A summary of the material changes contained in the SWK Amendment are as follows:
| ● | SWK agreed to make available to the Company, and the Company drew down on, an additional principal amount of $1,000,000; | |
| ● | The definition of the first amortization date was changed to August 14, 2020, permitting the Company to pay interest only on the principal amount loaned for the next payment (payments are due on a quarterly basis) following the SWK Amendment; and | |
| ● | The interest payment due May 14, 2020 will be paid in-kind by increasing the principal amount of the term loans by an amount equal to the interest that has accrued. |
PPP Loan
In April 2020, we entered into the PPP Loan with Renasant Bank in the principal amount of $1,967,100 and received cash proceeds of the same amount, pursuant to the PPP under the CARES Act, which was enacted March 27, 2020. The PPP is administered by the U.S. Small Business Administration (the “SBA”).
Under the terms of the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the PPP Loan is two years, unless sooner required in connection with an event of default under the PPP Loan. To the extent the PPP Loan amount is not forgiven under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the PPP Loan, until the maturity date.
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply for and be granted forgiveness for all or part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the eight-week period after the loan origination for certain purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments (it being anticipated that at least 75% of the loan amount will be required to be used for eligible payroll costs); the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible expenses during the covered eight-week period will qualify for forgiveness. While we used proceeds from the PPP Loan for such qualifying expenses, in particular maintaining continuity of our payroll and workforce (including staff critical to the timely production and dispensing of medicines we make), no assurance can be provided that we will apply for or obtain forgiveness of the PPP Loan in whole or in part.
Eyepoint Commercial Alliance Agreement
On August 1, 2020, our wholly-owned subsidiary ImprimisRx entered into a Commercial Alliance Agreement (the “Dexycu Agreement”) with Eyepoint Pharmaceuticals, Inc. (“Eyepoint”), pursuant to which Eyepoint granted ImprimisRx the non-exclusive right to co-promote DEXYCU® (dexamethasone intraocular suspension) 9% for the treatment of post-operative inflammation following ocular surgery in the United States. Pursuant to the Dexycu Agreement, Eyepoint will pay ImprimisRx a fee calculated based on the quarterly sales of DEXCYU in excess of predefined volumes to specific customers of ImprimisRx in the U.S. Under the terms of the Dexycu Agreement, ImprimisRx shall use commercially reasonable efforts to promote and market DEXCYU in the U.S.
Subject to early termination, the Dexycu Agreement expires on August 1, 2025, subject to specified notice periods and specified limitations, either party may terminate the Dexycu Agreement in the event of (i) uncured material breach by the other party or (ii) if DEXCYU ceases to have “pass-through” payment status. In addition, subject to certain limitations, ImprimisRx may terminate the Dexycu Agreement (i) for convenience subject to an extended specified notice period or (ii) in the event Eyepoint undergoes a change of control. Eyepoint may terminate the Dexycu Agreement, subject to specified notice periods and specified limitations, if ImprimisRx fails to achieve certain minimum sales levels during specified periods.
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Results of Operations
The following period-to-period comparisons of our financial results for the three and six months ended June 30, 2020 and 2019, are not necessarily indicative of results for the current period or any future period.
Revenues
Our revenues include amounts recorded from sales of proprietary compounded formulations and revenues received from royalty payments owed to us pursuant to out-license arrangements.
The following presents our revenues for the three and six months ended June 30, 2020 and 2019:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||
| June 30, | June 30, | $ | ||||||||||||||||||||||
| 2020 | 2019 | Variance | 2020 | 2019 | Variance | |||||||||||||||||||
| Product sales, net | $ | 8,049,000 | $ | 13,509,000 | $ | (5,460,000 | ) | $ | 19,859,000 | $ | 25,792,000 | $ | (5,933,000 | ) | ||||||||||
| License revenues | 11,000 | 7,000 | 4,000 | 18,000 | 14,000 | 4,000 | ||||||||||||||||||
| Total revenues | $ | 8,060,000 | $ | 13,516,000 | $ | (5,456,000 | ) | $ | 19,877,000 | $ | 25,806,000 | $ | (5,929,000 | ) | ||||||||||
The decrease in revenues between periods was largely attributable to the COVID-19 pandemic and CMS guidance to limit elective procedures. Net revenues generated from NJOF totaled $4,870,000 and $12,805,000 during the three and six months ended June 30, 2020, and $8,285,000 and $15,683,000 during the three and six months ended June 30, 2019, respectively.
Cost of Sales
Our cost of sales includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements depreciation, the write-off of obsolete inventory and other related expenses.
The following presents our cost of sales for the three and six months ended June 30, 2020 and 2019:
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||||
| June 30, | $ | June 30, | $ | ||||||||||||||||||||||
| 2020 | 2019 | Variance | 2020 | 2019 | Variance | ||||||||||||||||||||
| Cost of sales | $ | 3,204,000 | $ | 5,225,000 | $ | (2,021,000 | ) | $ | 6,830,000 | $ | 9,123,000 | $ | (2,293,000 | ) | |||||||||||
The decrease in our cost of sales between periods was largely attributable to a decrease in unit volumes sold and partially offset by continued improved utilization of capacity at our compounding facilities.
Gross Profit and Margin
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||
| June 30, | $ | June 30, | $ | |||||||||||||||||||||
| 2020 | 2019 | Variance | 2020 | 2019 | Variance | |||||||||||||||||||
| Gross Profit | $ | 4,856,000 | $ | 8,291,000 | $ | (3,435,000 | ) | $ | 13,047,000 | $ | 16,683,000 | $ | (3,636,000 | ) | ||||||||||
| Gross Margin | 60 | % | 61 | % | (1 | %) | 66 | % | 65 | % | 1 | % | ||||||||||||
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Despite a decrease in unit volumes sold, there was little variability between gross margin between periods. This is largely attributable to increased efficiencies in our production process, extension of beyond using dating, or BUD, of some of our products, and an increase in sales prices.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses include personnel costs, including wages and stock-based compensation, corporate facility expenses, and investor relations, consulting, insurance, filing, legal and accounting fees and expenses as well as costs associated with our marketing activities and sales of our proprietary compounded formulations and other non-proprietary pharmacy products and formulations.
The following presents our selling, general and administrative expenses for the three and six months ended June 30, 2020 and 2019:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||
| June 30, | $ | June 30, | $ | |||||||||||||||||||||
| 2020 | 2019 | Variance | 2020 | 2019 | Variance | |||||||||||||||||||
| Selling, general and administrative | $ | 6,954,000 | $ | 8,248,000 | $ | (1,294,000 | ) | $ | 15,370,000 | $ | 16,791,000 | $ | (1,421,000 | ) | ||||||||||
The decrease in selling, general and administrative expenses between periods was largely attributable to decreased legal expenses incurred associated with ongoing litigation, and sales related expenses.
Research and Development Expenses
Our research and development expenses primarily include expenses related to the development of acquired intellectual property, investigator-initiated research and evaluations and other costs related to the clinical development of our assets.
The following presents our research and development expenses for the three and six months ended June 30, 2020 and 2019:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||
| June 30, | $ | June 30, | $ | |||||||||||||||||||||
| 2020 | 2019 | Variance | 2020 | 2019 | Variance | |||||||||||||||||||
| Research and development | $ | 749,000 | $ | 810,000 | $ | (61,000 | ) | $ | 1,152,000 | $ | 1,215,000 | $ | (63,000 | ) | ||||||||||
Research and development expenses between periods was primarily attributable to formulation development studies for new ophthalmic formulations and clinical programs related to our drug development segment during the three and six months ended June 30, 2020.
Impairment of Intangible Assets
During the three and six months ended June 30, 2020, we recorded a loss of $363,000 related to the impairment of intangible assets related to patent filings associated with the products that we were no longer actively selling.
Interest Expense, net
Interest expense, net was $505,000 and $1,065,000 for the three and six months ended June 30, 2020, compared to $716,000 and $1,319,000 for the same period last year. The decrease during the period ended June 30, 2020 compared to the same period in 2019 was primarily due to interest expense recognition related to a decrease in the amortization of our finance lease obligations.
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Investment Gain (Loss) from Melt, net
During the three and six months ended June 30, 2020, we recorded a loss of $690,000 and $1,236,000, respectively, for our share of losses based on our ownership of Melt. During the six months ended June 30, 2019, we recorded a net gain of $5,199,000 related to our investment in Melt. We recorded a gain of $5,810,000 for the deconsolidation of Melt, and a loss of $611,000 for our share of losses based on our ownership of Melt. We began using equity method accounting for our investment in Melt beginning on January 30, 2019, the date we no longer had a controlling interest. Prior to that date, Melt’s losses were consolidated within our statements of operations.
Investment Loss from Surface, net
During the three and six months ended June 30, 2020, we recorded a loss of $599,000 and $938,000, respectively, for our share of losses based on our ownership of Surface. During the three and six months ended June 30, 2019, we recorded a loss of $261,000 and $504,000, respectively, for our share of losses based on our ownership of Surface. We began using equity method accounting for our investment in Surface beginning on June 11, 2018, the date we no longer had a controlling interest. Prior to that date, Surface’s losses were consolidated within our statements of operations.
Investment Gain (Loss) from Eton, net
We recorded a gain of $4,725,000 and loss of $(6,125,000) related to the change in fair market value of Eton’s common stock for the three and six months ended June 30, 2020, respectively. During the three and six months ended June 30, 2019, we recorded a loss of $(350,000) and gain of $6,230,000, respectively, for our share of losses based on our ownership of Eton. We began recording our investment in Eton at fair market value, and ceased equity method accounting for our investment in Eton in November 2018 following Eton’s initial public offering and our ownership falling below 20%.
Other Income (Expense), net
During the six months ended June 30, 2019, we recorded other income, net of $630,000. This was the result of income of $630,000 related to expenses that were paid by us and will be reimbursed by Melt following its deconsolidation. During the six months ended June 30, 2020, we recorded other income, net of $19,000. This was the result of income of $19,000 related to equipment from our Park facility that was sold during the six months ended June 30, 2020.
Net Loss
The following table presents our net loss for the three and six months ended June 30, 2020 and 2019:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Numerator – net loss | $ | (237 | ) | $ | (2,378 | ) | $ | (13,144 | ) | $ | 8,980 | |||||
| Net income (loss) per share, basic | $ | (0.01 | ) | $ | (0.09 | ) | $ | (0.51 | ) | $ | 0.36 | |||||
| Net income (loss) per share, diluted | $ | (0.01 | ) | $ | (0.09 | ) | $ | (0.51 | ) | $ | 0.34 | |||||
Financial Information About Segments and Geographic Areas
Management evaluates performance of the Company based on operating segments. Segment performance for our two operating segments are based on segment contribution. Our reportable segments consist of (i) our commercial stage pharmaceutical compounding business (Pharmaceutical Compounding), generally including the operations of our ImprimisRx and Park businesses; and (ii) the start-up operations associated with our pharmaceutical drug development business (Pharmaceutical Drug Development). Segment contribution for the segments represents net revenues less cost of sales, research and development, selling and marketing expenses, and select general and administrative expenses. We do not evaluate the following items at the segment level:
| ● | Selling, general and administrative expenses that result from shared infrastructure, including certain expenses associated with litigation and other legal matters, public company costs (e.g. investor relations), board of directors and principal executive officers, and other like shared expenses. |
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| ● | Operating expenses within selling, general and administrative expenses that result from the impact of corporate initiatives. Corporate initiatives primarily include integration, restructuring, acquisition and other shared costs. |
| ● | Other select revenues and operating expenses including research and development expenses, amortization, and asset sales and impairments, net as not all such information has been accounted for at the segment level, or such information has not been used by all segments. |
| ● | Total assets including capital expenditures. |
The Company defines segment net revenues as pharmaceutical compounded drug sales, licenses and other revenue derived from related agreements.
Cost of sales within segment contribution includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements depreciation, the write-off of obsolete inventory and other related expenses.
Selling, general and administrative expenses consist mainly of personnel-related costs, marketing and promotion costs, distribution costs, professional service costs, insurance, depreciation, facilities costs, transaction costs, and professional services costs which are general in nature and attributable to the segment.
See Note 15 to our condensed consolidated financial statements included in this Quarterly Report for more information about our reportable segments.
Liquidity and Capital Resources
Liquidity
Our cash on hand (including restricted cash) at June 30, 2020 was $4,102,000, compared to $4,949,000 at December 31, 2019. Since inception, July 24, 1998, through June 30, 2020, we have incurred aggregate losses of $87,187,000. These losses are primarily due to selling, general and administrative, and research and development expenses incurred in connection with developing and seeking regulatory approval for a former drug candidate, which activities we discontinued in 2013, the development and commercialization of novel compounded formulations and the development of our pharmacy operations.
As of the date of this Quarterly Report, we believe that cash and cash equivalents of $3,902,000 and restricted investments of $200,000, totaling approximately $4,102,000 at June 30, 2020 together with cash generated from revenues, will be sufficient to sustain our planned level of operations and capital expenditures for at least the next 12 months. We also may consider the sale of certain assets including, but not limited to, part of, or all of, our ownership interest in Eton, Surface, Melt, and/or any of our consolidated subsidiaries. However, our plans for this period may change, our estimates of our operating expenses, capital expenditures and working capital requirements could be inaccurate, we may pursue acquisitions of pharmacies or other strategic transactions that involve large expenditures or we may experience growth more quickly or on a larger scale than we expect, any of which could result in the depletion of capital resources more rapidly than anticipated and could require us to seek additional financing earlier than we expect to support our operations.
We expect to use our current cash position and funds generated from our operations and any financing to pursue our business plan, which includes developing and commercializing compounded formulations and technologies, integrating and developing our compounding operations, pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of additional pharmacy, outsourcing facilities, drug company and manufacturers, and/or assets or technologies, and otherwise fund our operations. We may also use our resources to conduct clinical trials or other studies in support of our formulations or any drug candidate for which we pursue FDA approval, to pursue additional development programs or to explore other development opportunities.
Net Cash Flow
The following provides detailed information about our net cash flows:
| For the Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net cash (used in) provided by: | ||||||||
| Operating activities | $ | (3,201,000 | ) | $ | (632,000 | ) | ||
| Investing activities | (610,000 | ) | (785,000 | ) | ||||
| Financing activities | 2,964,000 | (1,228,000 | ) | |||||
| Net change in cash and cash equivalents | (847,000 | ) | (2,645,000 | ) | ||||
| Cash and cash equivalents at beginning of the period | 4,949,000 | 6,838,000 | ||||||
| Cash and cash equivalents at end of the period | $ | 4,102,000 | $ | 4,193,000 | ||||
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Operating Activities
Net cash used in operating activities was $(3,201,000), compared to $(632,000) in operating activities during the same period in the prior year. The increase in net cash used in operating activities during the periods was mainly attributed to the decrease in revenue during the quarter ended June 30, 2020 due to the COVID-19 pandemic and decrease in elective surgical procedures during that period.
Investing Activities
Net cash used in investing activities during the six months ended June 30, 2020 and 2019 was $(610,000) and $(785,000), respectively. Cash used in investing activities in 2020 and 2019 was primarily associated with equipment purchases and upgrades and investments in our intellectual property portfolio.
Financing Activities
Net cash provided by (used in) financing activities during the six months ended June 30, 2020 and 2019 was $2,964,000 and $(1,228,000), respectively. Cash provided by financing activities during the six months ended June 30, 2020 was related to proceeds received from the amendment to our loan and security agreement with SWK as well as proceeds received from the PPP Loan.
Sources of Capital
Our principal sources of cash consist of cash provided by operating activities from our pharmaceutical compounding business. We may also sell some or all of our ownership interests in Eton, Surface, Melt or our other subsidiaries. We produced cash from operations during 2018 and 2019; however, we currently are experiencing a downturn in revenues mostly as a result of the COVID-19 pandemic which will have an impact on our ability to produce cash in the current year. In addition, prior to 2017, we had not generated sufficient revenues to support our operations and may not be able to do so in the future.
The changing trends and overall economic outlook in light of the COVID-19 pandemic, including the related interim stay-at-home orders and bans on elective surgeries, have created uncertainty surrounding our operating outlook and may impact our future operating results. As a result, we may need significant additional capital to support our business plan and fund our proposed business operations. We may receive additional proceeds from the exercise of stock purchase warrants that are currently outstanding. We may also seek additional financing from a variety of sources, including other equity or debt financings, funding from corporate partnerships or licensing arrangements, sales of assets or any other financing transaction. If we issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms or rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration or licensing arrangements or sales of assets, we may be required to relinquish potentially valuable rights to our product candidates or proprietary technologies or formulations, or grant licenses on terms that are not favorable to us. If we raise funds by incurring additional debt, we may be required to pay significant interest expenses and our leverage relative to our earnings or to our equity capitalization may increase. Obtaining commercial loans, assuming they would be available, would increase our liabilities and future cash commitments and may impose restrictions on our activities, such as the financial and operating covenants included in the agreements governing the SWK Loan. Further, we may incur substantial costs in pursuing future capital and/or financing transactions, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which would adversely impact our financial results.
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We may be unable to obtain financing when necessary as a result of, among other things, our performance, general economic conditions, conditions in the pharmaceuticals and pharmacy industries, or our operating history, including our past bankruptcy proceedings. In addition, the fact that we have a limited history of profitability could further impact the availability or cost to us of future financings. As a result, sufficient funds may not be available when needed from any source or, if available, such funds may not be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital needs when needed, then we may need to forego pursuit of potentially valuable development or acquisition opportunities, we may not be able to continue to operate our business pursuant to our business plan, which would require us to modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing and other activities, or we may be forced to discontinue our operations entirely.
Recently Issued and Adopted Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements included in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as they existed on June 30, 2020. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective to achieve their stated purpose as of June 30, 2020, the end of the period covered by this report.
Changes in Internal Controls over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal control over financial reporting due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Novel Drug Solutions et al.
In April 2018, Novel Drug Solutions, LLC and Eyecare Northwest, PA, (collectively “NDS”) filed a lawsuit against us in the U.S. District Court of Delaware asserting claims for breach of contract. The claims stem from an asset purchase agreement between us and NDS entered into in 2013. In July 2019, NDS filed a second amended complaint which added a claim related to its purported termination of the APA. In October 2019, NDS voluntarily dismissed all claims related to breach of contract, leaving only claims related to the scope of the post termination obligations to be litigated. NDS is seeking unspecified damages, interest, attorney’s fees and other costs. We believe the claims are meritless and have previously and will continue to dispute all claims asserted against us and intend to vigorously defend against these allegations. Nonetheless, we cannot predict the eventual outcome of this litigation and it could result in substantial costs, losses and a diversion of management’s resources and attention, which could harm the Company’s business and the value of its common stock.
Product and Professional Liability
Product and professional liability litigation represents an inherent risk to all firms in the pharmaceutical and pharmacy industry. We utilize traditional third-party insurance policies with regard to our product and professional liability claims. Such insurance coverage at any given time reflects current market conditions, including cost and availability, when the policy is written.
John Erick et al.
In January 2018, John Erick and Deborah Ferrell, successors-in-interest and heirs of Jade Erick, (collectively “Erick”) filed a lawsuit in the San Diego County Superior against Kim Kelly, ND, MPH asserting claims related to death of Jade Erick. In April 2018, Erick filed an amendment to the lawsuit, naming us as a co-defendant. In September 2018, co-defendant Dr. Kelly filed a cross-complaint against us and various Spectrum entities. The cross-complaint seeks indemnity and contribution from us and Spectrum. We answered the claims filed by Dr. Kelly in October 2018. The case is currently in the discovery phase. Erick is seeking unspecified damages, interest, attorney’s fees and other costs. We believe the claims are meritless and have previously and will continue to dispute all claims asserted against us and intend to vigorously defend against these allegations. Nonetheless, we cannot predict the eventual outcome of this litigation and it could result in substantial costs, losses and a diversion of management’s resources and attention, which could harm the Company’s business and the value of its common stock.
General and Other
In the ordinary course of business, we may face various claims brought by third parties and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property disputes, contractual disputes and other commercial disputes. Any of these claims could subject us to litigation.
Item 1A. Risk Factors
You should carefully consider the following risk factors in addition to the other information contained in this Quarterly Report. Our business, financial condition, results of operations and stock price could be materially adversely affected by any of these risks. You should consider all of the factors described in this section as well as the risk factors and the other information in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 and our Annual Report on Form 10-K including our audited financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” when evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline and you may lose all or part of your investments. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
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The COVID-19 pandemic has had an adverse effect on our business and results of operations and is expected to continue to have further adverse effects, which could be material, on our business, results of operations, financial condition, liquidity, and capital investments.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted supply chains and created significant volatility in financial markets. We have implemented business policies intended to protect our employees from the spread of COVID-19. Those policies include employees working from home when possible and employees in our facilities increasing physical distancing.
On March 18, 2020, the Centers for Medicare & Medicaid Services (“CMS”) released guidance for U.S. healthcare providers to limit all elective medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the pendency of the pandemic. Many of our customers use our products in procedures impacted by the guidance. In addition to limiting medical procedures, many hospitals and other healthcare providers have strictly limited access to their facilities during the pandemic. We cannot predict the duration or scope of the pandemic, actions that may be taken by governments and businesses in response to the pandemic, or the impacts of the pandemic on healthcare systems. The impacts of the pandemic may include, but are not limited to:
| ● | Reduced revenues from our customers, including our major customers, whose products are impacted by CMS guidance to limit elective medical procedures; |
| ● | Diminished ability or willingness of third parties to market, distribute and sell our products, due to reduced demand from, or lack of access to, healthcare facilities and providers; |
| ● | Diminished ability, or inability, to complete clinical trials and other activities required to achieve regulatory clearance of our products under development due to lack of access to healthcare facilities, healthcare providers and patients; |
| ● | Diminished or lost access to third party service providers that we use in our research and development or marketing efforts; |
| ● | Reduced cash flow from our operations due to reductions in revenues or collections from our customers and increases in operating costs related to actions we have taken in response to the pandemic; |
| ● | Reduced business productivity due to inefficiencies in employees working from home or increasing physical distancing and other pandemic response protocols in our production facilities; |
| ● | Increased susceptibility to the risk of information technology security breaches and other disruptions due to increased volumes of remote access to our information systems from our employees working at home; |
| ● | Inability to source sufficient components used in our products due to disruptions in supply chains; |
| ● | Diminished ability to identify, evaluate and acquire, or effectively integrate, complementary businesses, products, materials or technologies due to travel restrictions, physical distancing protocols, and lack of access to third party service providers related to our development activities; |
| ● | Loss of manufacturing capacity, which could lead to failures to meet product delivery commitments, or increased operating costs if one of our facilities were to experience a COVID-19 outbreak; |
| ● | Difficulties in assessing and securing intellectual property rights due to lack of access to, or delayed responsiveness of, third party service providers or governmental agencies; |
| ● | Diminished ability to retain personnel over concerns about workplace exposure to COVID-19, or to hire and effectively train new personnel, due to physical distancing protocols; and |
| ● | Impairment of goodwill or other assets due to reductions in the fair value of our reporting units. |
These and other factors relating to, or arising from, the pandemic could have material adverse effects on our business, results of operations, cash flows, financial condition, and capital investments. Actual or anticipated adverse effects on our cash flows or financial condition may lead us to seek additional funding. Any future debt financing into which we enter may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. We cannot be certain that additional funding will be available on acceptable terms, if at all. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or otherwise curtail our operations. Any of these events could materially harm our business and operating results.
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Our business is significantly impacted by state and federal statutes and regulations.
Our proprietary formulations are comprised of active pharmaceutical ingredients that are components of drugs that have received marketing approval from the FDA, although our proprietary compounded formulations have not themselves received FDA approval. FDA approval is not required in order to market and sell our compounded formulations. In the future we may choose to pursue FDA approval to market and sell certain potential drug candidates. The marketing and sale of compounded formulations is subject to and must comply with extensive state and federal statutes and regulations governing compounding pharmacies. These statutes and regulations include, among other things, restrictions on compounding for office use or in advance of receiving a patient-specific prescription or, for outsourcing facilities, requirements regarding preparation, such as regular FDA inspections and cGMP requirements, prohibitions on compounding drugs that are essentially copies of FDA-approved drugs, limitations on the volume of compounded formulations that may be sold across state lines, and prohibitions on wholesaling or reselling. These and other restrictions on the activities of compounding pharmacies and outsourcing facilities may significantly limit the market available for compounded formulations, compared to the market available for FDA-approved drugs.
Our pharmacy business is impacted by federal and state laws and regulations governing the following: the purchase, distribution, management, compounding, dispensing, reimbursement, marketing and labeling of prescription drugs and related services including; FDA and/or state regulation affecting the pharmacy and pharmaceutical industries, including state pharmacy licensure and registration or permit standards; rules and regulations issued pursuant to HIPAA and other state and federal laws related to the use, disclosure and transmission of health information; and state and federal controlled substance laws. Our failure to comply with any of these laws and regulations could severely limit or curtail our pharmacy operations, which would materially harm our business and prospects. Further, our business could be adversely affected by changes in these or any newly enacted laws and regulations, and federal and state agency interpretations of the statutes and regulations. Statutory or regulatory changes could require us to make changes to our business model and operations and/or could require us to incur significantly increased costs to comply with such regulations.
On July 30, 2020, FDA issued a notice for comments related to certain bulk drug substances to be removed from the 503B Bulk’s List (or Category 1 List). Included in this notice for comment were certain bulk drug substances which we currently use in some of our compounded products. In the event one or more of these bulk substances are ultimately removed from the Category 1 List, we intend to utilize commercially available versions of these substances or similar active pharmaceutical ingredients as replacements of the bulk powders contained in our sterile products. In addition, nothing in the FDA’s notice affects the dispensing of bulk powder-containing products from our 503A pharmacy. Nonetheless, if all or some of the bulk drug substances we use are removed from the 503B Bulk’s List, this may result in a disruption in our operations, revenues and cash flows.
Our loan under the Paycheck Protection Program may not be forgiven or may subject us to challenges and investigations regarding qualification for the loan.
In April 2020, we received the PPP Loan, which was established under the CARES Act in the principal amount of $1,967,000. Pursuant to Section 1106 of the CARES Act we may apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of the loan proceeds for qualifying expenses, which include payroll costs, rent, and utility costs over the allowable measurement period following receipt of the loan proceeds.
The SBA continues to develop and issue new and updated guidance regarding the PPP Loan application and forgiveness process, including guidance regarding required borrower certifications and requirements for forgiveness of loans made under the program. Given the evolving nature of the guidance and depending upon our ability to use the loan proceeds for qualifying expenses, we cannot give any assurance that our PPP Loan will be forgiven in whole or in part.
Additionally, the PPP Loan application required us to certify that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. While we made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan and that our receipt of the PPP Loan is consistent with the broad objectives of the Paycheck Protection Program of the CARES Act, the certification described above does not contain any objective criteria and is subject to interpretation. In addition, the SBA has stated that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good faith belief that we satisfied all eligibility requirements for the PPP Loan, we are found to have been ineligible to receive the PPP Loan or in violation of any of the laws or regulations that apply to us in connection with the PPP Loan, including the False Claims Act, we may be subject to penalties, including significant civil, criminal and administrative penalties and would be required to repay the PPP Loan. In the event that we seek forgiveness of all or a portion of the PPP Loan, we will also be required to make certain certifications which will be subject to audit and review by governmental entities and could subject us to significant penalties and liabilities if found to be inaccurate, including being required to repay the PPP Loan. In addition, our receipt of the PPP Loan may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources. Any of these events could materially harm our business, results of operations and financial condition.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our operations, and those of contract research organizations (or CROs), contractors and consultants, could be subject to power shortages, telecommunications failures, wildfires, water shortages, floods, earthquakes, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics, such as the COVID-19 pandemic, and other natural or man-made disasters or business interruptions for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of our contract manufacturers or cell line storage facilities are affected by a man-made or natural disaster or other business interruption.
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Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.
From time to time, including recently as a result of the COVID-19 pandemic, global credit and financial markets have experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment and continued unpredictable and unstable market conditions. If the equity and credit markets deteriorate it may make any debt or equity financing more difficult to complete, more costly, and more dilutive. In the event the Company or one of its subsidiaries needed to access additional capital, failure to secure financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive an economic downturn, which could directly affect our ability to attain our operating goals on schedule and on budget.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In May 2020, the Company issued 30,000 shares of its restricted common stock, with a fair value of $167, as consideration for commission expenses incurred during the year ended December 31, 2019 and the six months ended June 30, 2020. These securities have not been registered under the Securities Act and have been issued in reliance on an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) thereof. These securities may not be offered or sold in the United States in the absence of an effective registration statement or exemption from applicable registration requirements. In determining that each of the issuances qualified for an exemption under Section 4(a)(2) of the Securities Act, we relied on the fact that the securities were offered to a single individual or entity in consideration for amounts payable by the Company and certain representations and warranties of each investor.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Harrow Health, Inc. | ||
| Dated: August 10, 2020 | By: | /s/ Mark L. Baum |
| Mark L. Baum | ||
| Chief Executive Officer and Director | ||
| (Principal Executive Officer) | ||
| By: | /s/ Andrew R. Boll | |
| Andrew R. Boll | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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