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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by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
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 November 6, 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)
| September 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 Ophthalmics | ||||||||
| Investment in Melt Pharmaceuticals | ||||||||
| Goodwill | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued payroll and related liabilities | ||||||||
| Deferred revenue and customer deposits | ||||||||
| Current portion of paycheck protection program loan payable | - | |||||||
| Current portion of loan payable, net of unamortized debt discount | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Current portion of finance lease obligations | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Finance lease obligations, 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 September 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 | Nine Months Ended | Nine Months Ended | |||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| Other revenues | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Impairment of long-lived assets | - | |||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Investment (loss) gain from Melt Pharmaceuticals, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Investment loss from Surface Ophthalmics, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Investment gain (loss) from Eton Pharmaceuticals, net | ( | ) | ||||||||||||||
| Other income, net | - | |||||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax benefit, net | - | - | - | - | ||||||||||||
| Total net income (loss) including noncontrolling interests | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss attributable to noncontrolling interests | ||||||||||||||||
| Net income (loss) attributable to Harrow Health, Inc. | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Basic net income (loss) per share of common stock | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted net income (loss) 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.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended September 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 June 30, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of warrants | - | - | - | - | - | - | ||||||||||||||||||||||
| Exercise of employee stock-based options, net of tax withholding | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||
| Stock-based payment for services provided | - | - | - | |||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at September 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 June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of employee stock-based options, net of tax withholding | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | ||||||||||||||||||||||||
| Net income (loss) | - | - | - | ( | ) | |||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| 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, net of tax withholding | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||
| Stock-based payment for services provided | - | - | - | |||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at September 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, net of tax withholding | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||
| Vesting of RSUs | - | - | - | - | - | - | ||||||||||||||||||||||
| Stock-based payment for services provided | - | - | - | |||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 5 |
HARROW HEALTH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the | ||||||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss (including noncontrolling interests) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss 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 gain from Eton, net | ( | ) | ( | ) | ||||
| Investment loss from Surface, net | ||||||||
| Investment loss (gain) from Melt, net | ( | ) | ||||||
| Loss on sale and disposal of equipment | - | |||||||
| Interest paid-in-kind on loan payable | - | |||||||
| Impairment of long-lived assets | ||||||||
| Stock-based payment of consulting services | ||||||||
| Stock-based compensation | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable, net of provision for bad debt expense | ( | ) | ( | ) | ||||
| 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 | ||||||||
| Proceeds on sale and disposal of assets | - | |||||||
| 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 note payable | - | ( | ) | |||||
| Net proceeds from Payroll Protection Program loan payable | - | |||||||
| Net proceeds from exercise of warrants and stock options, net of taxes remitted for RSU and options | ( | ) | ||||||
| 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: | ||||||||
| New and revaluation of right-of-use asset obtained in exchange for lease obligation | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 6 |
HARROW HEALTH, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 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 Ophthalmics, 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 nine months ended September 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 (
Harrow
consolidates entities in which it has a controlling financial interest.
The condensed consolidated balance sheets at September 30, 2020 and December 31, 2019 and the condensed consolidated statements of operations, stockholders’ equity and cash flows for the periods ended September 30, 2020 and 2019 include our accounts and those of our wholly owned subsidiaries as well as Mayfield and Stowe.
| 7 |
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 may in the future have, an adverse impact, which may be material, to 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 filing 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.
During
certain periods, including those impacted by the COVID-19 pandemic, the Company has incurred operating losses and negative cash
flows from operations. 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 nine months ended September 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.
| 8 |
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, restricted stock units (“RSUs”) 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
RSUs and warrants were
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Numerator – net income (loss) attributable to Harrow Health, Inc. | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Denominator – weighted average number of shares outstanding, basic | ||||||||||||||||
| Net income (loss) per share, basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| For the Three months Ended | ||||
| September 30, 2020 | ||||
| Diluted shares related to: | ||||
| Warrants | ||||
| Stock options | ||||
| Dilutive common equivalent shares | ||||
| 9 |
| For the Three Months Ended | For the Nine months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Numerator – net income (loss) attributable to Harrow Health, Inc. | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Denominator – weighted average number of shares outstanding, basic | ||||||||||||||||
| Dilutive common equivalent shares | - | - | - | |||||||||||||
| Number of shares used for diluted earnings per share computation | ||||||||||||||||
| Net income (loss) per share, diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
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
| 10 |
See Note 4 for more information and related party disclosure regarding Melt.
Investment in Surface Ophthalmics, Inc. – Related Party
The
Company owns common shares (which is approximately
See 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. 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 is currently assessing the impact of this standard and 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.
| 11 |
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.
Commission Revenues
During the third quarter of 2020, the Company entered into an agreement whereby it is paid a fee calculated based on sales it generates from a pharmaceutical product that is owned by a third party. The revenue earned from this arrangement is recognized at the time a customer has ordered the pharmaceutical product and it has shipped from the third party (or one of its distributors or affiliates), at which point there is no future performance obligation required by the Company and no consequential continuing involvement on the part of the Company to recognize the associated revenue.
Intellectual Property License Revenues
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.
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Non-refundable fees that are not contingent on any future performance by the Company and require no consequential continuing involvement on the part of the Company are recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverable is delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications for such compounded drug preparations. The Company defers recognition of non-refundable fees if it has continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and that are separate and independent of the Company’s performance under the other elements of the arrangement. In addition, if the Company’s continued involvement is required, through research and development services that are related to its proprietary know-how and expertise of the delivered technology or can only be performed by the Company, then such non-refundable fees are deferred and recognized over the period of continuing involvement. Guaranteed minimum annual royalties are recognized on a straight-line basis over the applicable term.
Revenue disaggregated by revenue source for the three and nine months ended September 30, 2020 and 2019, consists of the following:
| For the Three Months Ended | For the Nine months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| Commissions | ||||||||||||||||
| License | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
Deferred
revenue and customer deposits at September 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 September 30, 2020, the Company was due $
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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 | ||||
| Nine Months Ended | ||||
| September 30, 2020 | ||||
| Revenues, net | $ | |||
| Loss from operations | ||||
| Net loss | $ | ( | ) | |
The unaudited condensed balance sheet information of Melt is summarized below:
| September 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 OPHTHALMICS, 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 | ||||
| Nine Months Ended | ||||
| September 30, 2020 | ||||
| Revenues, net | $ | |||
| Loss from operations | ||||
| Net loss | $ | ( | ) | |
The unaudited condensed balance sheet information of Surface is summarized below:
| September 30, | ||||
| 2020 | ||||
| Current assets | $ | |||
| Non current assets | ||||
| Total assets | $ | |||
| Total liabilities | $ | |||
| Total stockholders’ equity | ||||
| Total liabilities and stockholders’ equity | $ | |||
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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 September 30, 2020 and December 31, 2019 was as follows:
| September 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:
| September 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:
| September 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 nine months ended September 30, 2020, depreciation and amortization related to the property, plant and equipment
was $
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NOTE 9. INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets at September 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 nine months ended September 30, 2020, the Company recorded impairment charges of $
Amortization expense for intangible assets for the three and nine months ended September 30, 2020 and 2019 was as follows:
| For the | For the | |||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 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 September 30, 2020 is as follows:
| Remainder of 2020 | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| $ |
There
have been
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NOTE 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
| September 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 $
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Under
the terms of the PPP Loan, interest accrues on the outstanding principal at the rate of
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 September 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 | ( | ) | ||
| Less: current portion, net of unamortized discount | ( | ) | ||
| Loans payable, net of current portion and unamortized debt discount | $ | |||
For
the three and nine months ended September 30, 2020, debt discount amortization related to the SWK loan payable was $
NOTE 12. LEASES
The Company’s leases of 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 |
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