10-Q 1 form10-q.htm
false Q1 --12-31 0001360214 P1Y 0001360214 2024-01-01 2024-03-31 0001360214 HROW:CommonStock0.001ParValuePerShareMember 2024-01-01 2024-03-31 0001360214 HROW:Sec8.625SeniorNotesDue2026Member 2024-01-01 2024-03-31 0001360214 HROW:Sec11.875SeniorNotesDue2027Member 2024-01-01 2024-03-31 0001360214 2024-05-10 0001360214 2024-03-31 0001360214 2023-12-31 0001360214 2023-01-01 2023-03-31 0001360214 HROW:ProductSalesNetMember 2024-01-01 2024-03-31 0001360214 HROW:ProductSalesNetMember 2023-01-01 2023-03-31 0001360214 HROW:OtherRevenuesMember 2024-01-01 2024-03-31 0001360214 HROW:OtherRevenuesMember 2023-01-01 2023-03-31 0001360214 us-gaap:CommonStockMember 2022-12-31 0001360214 us-gaap:AdditionalPaidInCapitalMember 2022-12-31 0001360214 us-gaap:RetainedEarningsMember 2022-12-31 0001360214 us-gaap:ParentMember 2022-12-31 0001360214 us-gaap:NoncontrollingInterestMember 2022-12-31 0001360214 2022-12-31 0001360214 us-gaap:CommonStockMember 2023-12-31 0001360214 us-gaap:AdditionalPaidInCapitalMember 2023-12-31 0001360214 us-gaap:RetainedEarningsMember 2023-12-31 0001360214 us-gaap:ParentMember 2023-12-31 0001360214 us-gaap:NoncontrollingInterestMember 2023-12-31 0001360214 us-gaap:CommonStockMember 2023-01-01 2023-03-31 0001360214 us-gaap:AdditionalPaidInCapitalMember 2023-01-01 2023-03-31 0001360214 us-gaap:RetainedEarningsMember 2023-01-01 2023-03-31 0001360214 us-gaap:ParentMember 2023-01-01 2023-03-31 0001360214 us-gaap:NoncontrollingInterestMember 2023-01-01 2023-03-31 0001360214 us-gaap:CommonStockMember 2024-01-01 2024-03-31 0001360214 us-gaap:AdditionalPaidInCapitalMember 2024-01-01 2024-03-31 0001360214 us-gaap:RetainedEarningsMember 2024-01-01 2024-03-31 0001360214 us-gaap:ParentMember 2024-01-01 2024-03-31 0001360214 us-gaap:NoncontrollingInterestMember 2024-01-01 2024-03-31 0001360214 us-gaap:CommonStockMember 2023-03-31 0001360214 us-gaap:AdditionalPaidInCapitalMember 2023-03-31 0001360214 us-gaap:RetainedEarningsMember 2023-03-31 0001360214 us-gaap:ParentMember 2023-03-31 0001360214 us-gaap:NoncontrollingInterestMember 2023-03-31 0001360214 2023-03-31 0001360214 us-gaap:CommonStockMember 2024-03-31 0001360214 us-gaap:AdditionalPaidInCapitalMember 2024-03-31 0001360214 us-gaap:RetainedEarningsMember 2024-03-31 0001360214 us-gaap:ParentMember 2024-03-31 0001360214 us-gaap:NoncontrollingInterestMember 2024-03-31 0001360214 HROW:EtonPharmaceuticalsIncMember 2024-03-31 0001360214 HROW:EtonPharmaceuticalsIncMember 2023-12-31 0001360214 HROW:StockOptionsUnvestedRSUsAndUnvestedPSUsMember 2024-01-01 2024-03-31 0001360214 HROW:StockOptionsUnvestedRSUsAndUnvestedPSUsMember 2023-01-01 2023-03-31 0001360214 us-gaap:RestrictedStockUnitsRSUMember 2024-01-01 2024-03-31 0001360214 us-gaap:RestrictedStockUnitsRSUMember 2023-01-01 2023-03-31 0001360214 HROW:MeltPharmaceuticalsIncMember 2024-03-31 0001360214 HROW:MeltPharmaceuticalsIncMember us-gaap:PreferredStockMember 2024-03-31 0001360214 HROW:MeltPharmaceuticalsIncMember 2024-01-01 2024-03-31 0001360214 us-gaap:FairValueInputsLevel1Member HROW:TwoThousandAndTwentySixNotesMember 2024-03-31 0001360214 us-gaap:FairValueInputsLevel1Member HROW:TwoThousandAndTwentySixNotesMember 2023-12-31 0001360214 us-gaap:FairValueInputsLevel1Member HROW:TwoThousandAndTwentySevenNotesMember 2024-03-31 0001360214 us-gaap:FairValueInputsLevel1Member HROW:TwoThousandAndTwentySevenNotesMember 2023-12-31 0001360214 us-gaap:FairValueInputsLevel1Member HROW:OaktreeLoanMember 2024-03-31 0001360214 us-gaap:FairValueInputsLevel1Member HROW:OaktreeLoanMember 2023-12-31 0001360214 us-gaap:CommonStockMember HROW:MeltPharmaceuticalsIncMember 2024-03-31 0001360214 us-gaap:PreferredStockMember HROW:MeltPharmaceuticalsIncMember 2024-03-31 0001360214 HROW:MeltPharmaceuticalsIncMember 2024-03-31 0001360214 HROW:MeltPharmaceuticalsIncMember HROW:ManagementServicesAgreementMember 2019-02-01 2019-02-28 0001360214 HROW:MeltPharmaceuticalsIncMember 2023-01-01 2023-03-31 0001360214 HROW:MeltPharmaceuticalsIncMember 2023-01-01 2023-12-31 0001360214 HROW:MeltPharmaceuticalsIncMember us-gaap:SeriesBPreferredStockMember 2024-01-01 2024-03-31 0001360214 HROW:MeltPharmaceuticalsIncMember 2023-12-31 0001360214 HROW:CapitalizedInternalUseSoftwareMember 2024-03-31 0001360214 HROW:CapitalizedInternalUseSoftwareMember 2023-12-31 0001360214 HROW:ThirdPartySoftwareLicenseMember 2024-03-31 0001360214 HROW:ThirdPartySoftwareLicenseMember 2023-12-31 0001360214 HROW:CapitalizedSoftwareDevelopmentCostsMember 2024-01-01 2024-03-31 0001360214 HROW:CapitalizedSoftwareDevelopmentCostsMember 2023-01-01 2023-03-31 0001360214 srt:MinimumMember us-gaap:PatentsMember 2024-03-31 0001360214 srt:MaximumMember us-gaap:PatentsMember 2024-03-31 0001360214 us-gaap:PatentsMember 2024-03-31 0001360214 HROW:LicensesMember srt:MinimumMember 2024-03-31 0001360214 HROW:LicensesMember srt:MaximumMember 2024-03-31 0001360214 HROW:LicensesMember 2024-03-31 0001360214 us-gaap:TrademarksMember 2024-01-01 2024-03-31 0001360214 us-gaap:TrademarksMember 2024-03-31 0001360214 HROW:NewDrugApplicationsMember srt:MinimumMember 2024-03-31 0001360214 HROW:NewDrugApplicationsMember srt:MaximumMember 2024-03-31 0001360214 HROW:NewDrugApplicationsMember 2024-03-31 0001360214 srt:MinimumMember us-gaap:CustomerRelationshipsMember 2024-03-31 0001360214 srt:MaximumMember us-gaap:CustomerRelationshipsMember 2024-03-31 0001360214 us-gaap:CustomerRelationshipsMember 2024-03-31 0001360214 us-gaap:TradeNamesMember 2024-03-31 0001360214 srt:MinimumMember HROW:NonCompetitionClauseMember 2024-03-31 0001360214 srt:MaximumMember HROW:NonCompetitionClauseMember 2024-03-31 0001360214 HROW:NonCompetitionClauseMember 2024-03-31 0001360214 HROW:StatePharmacyLicensesMember 2024-03-31 0001360214 us-gaap:PatentsMember 2024-01-01 2024-03-31 0001360214 us-gaap:PatentsMember 2023-01-01 2023-03-31 0001360214 HROW:LicensesMember 2024-01-01 2024-03-31 0001360214 HROW:LicensesMember 2023-01-01 2023-03-31 0001360214 HROW:AcquiredNewDrugApplicationsMember 2024-01-01 2024-03-31 0001360214 HROW:AcquiredNewDrugApplicationsMember 2023-01-01 2023-03-31 0001360214 us-gaap:CustomerRelationshipsMember 2024-01-01 2024-03-31 0001360214 us-gaap:CustomerRelationshipsMember 2023-01-01 2023-03-31 0001360214 HROW:FinancingAgreementMember 2024-01-01 2024-03-31 0001360214 HROW:OaktreeLoanMember HROW:OaktreeFundAdministrationLLCMember HROW:SeniorSecuredTermLoanMember srt:MaximumMember 2023-03-31 0001360214 HROW:OaktreeLoanMember HROW:OaktreeFundAdministrationLLCMember 2023-03-31 0001360214 HROW:OaktreeCreditAgreementAmendmentMember 2023-07-31 0001360214 HROW:OaktreeCreditAgreementAmendmentMember srt:MinimumMember 2023-07-01 2023-07-31 0001360214 HROW:OaktreeCreditAgreementAmendmentMember srt:MaximumMember 2023-07-01 2023-07-31 0001360214 HROW:OaktreeLoanMember HROW:OaktreeFundAdministrationLLCMember srt:MaximumMember 2023-07-01 2023-07-31 0001360214 HROW:OaktreeLoanMember HROW:OaktreeFundAdministrationLLCMember 2023-03-01 2023-03-31 0001360214 HROW:OaktreeLoanMember 2024-01-01 2024-03-31 0001360214 HROW:OaktreeLoanMember 2023-01-01 2023-03-31 0001360214 HROW:SeniorNotesDueTwoThousandTwentySevenMember 2022-12-31 0001360214 HROW:SeniorNotesDueTwoThousandTwentySevenMember 2023-01-31 0001360214 HROW:SeniorNotesDueTwoThousandTwentySevenMember 2024-01-01 2024-03-31 0001360214 HROW:SeniorNotesDueTwoThousandTwentySevenMember 2023-01-01 2023-03-31 0001360214 HROW:SeniorNotesDueTwoThousandTwentySixMember 2021-04-30 0001360214 HROW:SeniorNotesDueTwoThousandTwentySixMember 2021-09-30 0001360214 HROW:SeniorNotesDueTwoThousandTwentySixMember 2024-01-01 2024-03-31 0001360214 HROW:SeniorNotesDueTwoThousandTwentySixMember 2023-01-01 2023-03-31 0001360214 HROW:SeniorNotesDueTwoThousandTwentySixMember 2024-03-31 0001360214 HROW:SeniorNotesDueTwoThousandTwentySixMember 2023-12-31 0001360214 HROW:SeniorNotesDueTwoThousandTwentySevenMember 2024-03-31 0001360214 HROW:SeniorNotesDueTwoThousandTwentySevenMember 2023-12-31 0001360214 HROW:OaktreeLoanMember 2024-03-31 0001360214 HROW:OaktreeLoanMember 2023-12-31 0001360214 srt:MinimumMember HROW:OfficeAndLaboratorySpaceMember 2024-03-31 0001360214 srt:MaximumMember HROW:OfficeAndLaboratorySpaceMember 2024-03-31 0001360214 HROW:CarlsbadMember 2024-03-31 0001360214 HROW:CarlsbadMember 2024-01-01 2024-03-31 0001360214 HROW:LedgewoodMember 2024-03-31 0001360214 HROW:LedgewoodMember 2024-01-01 2024-03-31 0001360214 HROW:LedgewoodMember HROW:LeaseAmendmentMember 2024-01-01 2024-03-31 0001360214 HROW:LedgewoodMember HROW:LeaseAmendmentMember 2024-03-31 0001360214 HROW:NashvilleMember 2024-03-31 0001360214 HROW:NashvilleMember 2024-01-01 2024-03-31 0001360214 HROW:Nashville1Member 2024-03-31 0001360214 HROW:Nashville1Member 2024-01-01 2024-03-31 0001360214 HROW:Nashville2Member 2024-03-31 0001360214 HROW:Nashville2Member 2024-01-01 2024-03-31 0001360214 us-gaap:CommonStockMember us-gaap:EmployeeStockOptionMember 2024-01-01 2024-03-31 0001360214 HROW:AndrewRBollMember us-gaap:CommonStockMember us-gaap:RestrictedStockUnitsRSUMember 2024-01-01 2024-03-31 0001360214 HROW:MarkLBaumMember us-gaap:CommonStockMember us-gaap:RestrictedStockUnitsRSUMember 2024-01-01 2024-03-31 0001360214 HROW:JohnSaharekMember us-gaap:CommonStockMember us-gaap:RestrictedStockUnitsRSUMember 2024-01-01 2024-03-31 0001360214 HROW:EmployeesMember us-gaap:CommonStockMember us-gaap:RestrictedStockUnitsRSUMember 2024-01-01 2024-03-31 0001360214 srt:DirectorMember us-gaap:CommonStockMember us-gaap:RestrictedStockUnitsRSUMember 2024-01-01 2024-03-31 0001360214 HROW:TwoThousandAndSeventeenIncentiveStockandAwardsPlanMember srt:MaximumMember 2023-12-31 0001360214 HROW:TwoThousandAndSeventeenIncentiveStockandAwardsPlanMember 2024-03-31 0001360214 HROW:StockOptionPlanMember 2024-03-31 0001360214 us-gaap:EmployeeStockOptionMember HROW:EmployeesAndConsultantMember 2024-01-01 2024-03-31 0001360214 HROW:EmployeesAndDirectorsMember 2024-01-01 2024-03-31 0001360214 us-gaap:EmployeeStockOptionMember 2024-03-31 0001360214 us-gaap:EmployeeStockOptionMember 2024-01-01 2024-03-31 0001360214 us-gaap:EmployeeStockOptionMember 2023-01-01 2023-03-31 0001360214 HROW:UnvestedRSUMember 2024-03-31 0001360214 HROW:UnvestedRSUMember 2024-01-01 2024-03-31 0001360214 HROW:UnvestedRSUMember 2023-01-01 2023-03-31 0001360214 HROW:UnvestedPSUMember 2024-03-31 0001360214 HROW:UnvestedPSUMember 2024-01-01 2024-03-31 0001360214 HROW:UnvestedPSUMember 2023-01-01 2023-03-31 0001360214 HROW:StockOptionPlanOneMember 2023-12-31 0001360214 HROW:StockOptionPlanOneMember 2024-01-01 2024-03-31 0001360214 HROW:StockOptionPlanOneMember 2024-03-31 0001360214 HROW:RangeOneMember 2024-01-01 2024-03-31 0001360214 HROW:RangeOneMember 2024-03-31 0001360214 HROW:RangeTwoMember 2024-01-01 2024-03-31 0001360214 HROW:RangeTwoMember 2024-03-31 0001360214 HROW:RangeThreeMember 2024-01-01 2024-03-31 0001360214 HROW:RangeThreeMember 2024-03-31 0001360214 HROW:RangeFourMember 2024-01-01 2024-03-31 0001360214 HROW:RangeFourMember 2024-03-31 0001360214 HROW:RangeFiveMember 2024-01-01 2024-03-31 0001360214 HROW:RangeFiveMember 2024-03-31 0001360214 HROW:RangeSixMember 2024-01-01 2024-03-31 0001360214 HROW:RangeSixMember 2024-03-31 0001360214 HROW:RangeSevenMember 2024-01-01 2024-03-31 0001360214 HROW:RangeSevenMember 2024-03-31 0001360214 HROW:RangeEightMember 2024-01-01 2024-03-31 0001360214 HROW:RangeEightMember 2024-03-31 0001360214 HROW:RangeNineMember 2024-01-01 2024-03-31 0001360214 HROW:RangeNineMember 2024-03-31 0001360214 HROW:RangeTenMember 2024-01-01 2024-03-31 0001360214 HROW:RangeTenMember 2024-03-31 0001360214 us-gaap:RestrictedStockUnitsRSUMember 2023-12-31 0001360214 us-gaap:RestrictedStockUnitsRSUMember 2024-03-31 0001360214 HROW:PerformanceStockUnitsPSUMember 2023-12-31 0001360214 HROW:PerformanceStockUnitsPSUMember 2024-01-01 2024-03-31 0001360214 HROW:PerformanceStockUnitsPSUMember 2024-03-31 0001360214 HROW:EmployeesMember us-gaap:SellingGeneralAndAdministrativeExpensesMember 2024-01-01 2024-03-31 0001360214 HROW:EmployeesMember us-gaap:SellingGeneralAndAdministrativeExpensesMember 2023-01-01 2023-03-31 0001360214 HROW:EmployeesMember us-gaap:ResearchAndDevelopmentExpenseMember 2024-01-01 2024-03-31 0001360214 HROW:EmployeesMember us-gaap:ResearchAndDevelopmentExpenseMember 2023-01-01 2023-03-31 0001360214 srt:DirectorMember us-gaap:SellingGeneralAndAdministrativeExpensesMember 2024-01-01 2024-03-31 0001360214 srt:DirectorMember us-gaap:SellingGeneralAndAdministrativeExpensesMember 2023-01-01 2023-03-31 0001360214 HROW:ConsultantMember us-gaap:SellingGeneralAndAdministrativeExpensesMember 2024-01-01 2024-03-31 0001360214 HROW:ConsultantMember us-gaap:SellingGeneralAndAdministrativeExpensesMember 2023-01-01 2023-03-31 0001360214 HROW:AssetPurchaseLicenseandRelatedAgreementsMember 2024-01-01 2024-03-31 0001360214 HROW:AssetPurchaseLicenseandRelatedAgreementsMember 2023-01-01 2023-03-31 0001360214 HROW:SalesAndMarketingAgreementsMember 2024-01-01 2024-03-31 0001360214 HROW:SalesAndMarketingAgreementsMember srt:MinimumMember 2024-01-01 2024-03-31 0001360214 srt:MaximumMember HROW:SalesAndMarketingAgreementsMember 2024-01-01 2024-03-31 0001360214 HROW:SalesAndMarketingAgreementsMember 2023-01-01 2023-03-31 0001360214 us-gaap:SubsequentEventMember 2024-12-31 0001360214 HROW:OneProductConcentrationRiskMember us-gaap:SalesRevenueNetMember us-gaap:ProductConcentrationRiskMember 2024-01-01 2024-03-31 0001360214 HROW:OneProductConcentrationRiskMember us-gaap:SalesRevenueNetMember us-gaap:ProductConcentrationRiskMember 2023-01-01 2023-03-31 0001360214 HROW:TwoProductConcentrationRiskMember us-gaap:SalesRevenueNetMember us-gaap:ProductConcentrationRiskMember 2024-01-01 2024-03-31 0001360214 HROW:TwoProductConcentrationRiskMember us-gaap:SalesRevenueNetMember us-gaap:ProductConcentrationRiskMember 2023-01-01 2023-03-31 0001360214 HROW:SingleCustomerMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2024-01-01 2024-03-31 0001360214 HROW:SingleCustomerMember us-gaap:AccountsReceivableMember us-gaap:CustomerConcentrationRiskMember 2023-01-01 2023-12-31 0001360214 HROW:SingleCustomerMember us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2024-01-01 2024-03-31 0001360214 HROW:ThreeSuppliersMember us-gaap:SalesRevenueNetMember us-gaap:SupplierConcentrationRiskMember 2024-01-01 2024-03-31 0001360214 HROW:ThreeSuppliersMember us-gaap:SalesRevenueNetMember us-gaap:SupplierConcentrationRiskMember 2023-01-01 2023-03-31 0001360214 us-gaap:SubsequentEventMember us-gaap:CommonStockMember 2024-04-01 2024-04-30 0001360214 us-gaap:CommonStockMember us-gaap:SubsequentEventMember srt:MinimumMember 2024-04-30 0001360214 us-gaap:CommonStockMember us-gaap:SubsequentEventMember srt:MaximumMember 2024-04-30 0001360214 us-gaap:SubsequentEventMember HROW:EtonPharmaceuticalsIncMember us-gaap:CommonStockMember 2024-04-01 2024-04-30 0001360214 us-gaap:SubsequentEventMember HROW:EtonPharmaceuticalsIncMember us-gaap:CommonStockMember 2024-04-30 0001360214 us-gaap:SubsequentEventMember HROW:EtonPharmaceuticalsIncMember 2024-04-01 2024-04-30 iso4217:USD xbrli:shares iso4217:USD xbrli:shares HROW:Segment utr:sqft xbrli:pure

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2024

 

or

 

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

 

For the transition period from ___________ to _____________

 

Commission File Number: 001-35814

 

Harrow, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   45-0567010
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

102 Woodmont Blvd., Suite 610

Nashville, Tennessee

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

 

(615) 733-4730

(Registrant’s telephone number, including area code)

 

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

 

Title of each class   Trading Symbol(s)   Name on exchange on which registered
Common Stock, $0.001 par value per share   HROW   The Nasdaq Stock Market LLC
8.625% Senior Notes due 2026   HROWL   The Nasdaq Stock Market LLC
11.875% Senior Notes due 2027   HROWM   The Nasdaq Stock Market LLC

 

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

 

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

 

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

 

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

 

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

 

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

 

As of May 10, 2024, there were 35,381.935 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

 

 

 

 

 

HARROW, INC.

 

Table of Contents

 

        Page
Part I   FINANCIAL INFORMATION   3
         
Item 1.   Financial Statements (unaudited)   3
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   23
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   28
         
Item 4.   Controls and Procedures   28
         
Part II   OTHER INFORMATION   29
         
Item 1.   Legal Proceedings   29
         
Item 1A.   Risk Factors   29
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   29
         
Item 3.   Defaults Upon Senior Securities   29
         
Item 4.   Mine Safety Disclosures   29
         
Item 5.   Other Information   29
         
Item 6.   Exhibits   29
         
    Signatures   30

 

2
 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

HARROW, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31,   December 31, 
   2024   2023 
    (Unaudited)      
ASSETS          
Current assets          
Cash and cash equivalents  $68,538,000   $74,085,000 
Investment in Eton Pharmaceuticals   7,433,000    8,681,000 
Accounts receivable, net   28,960,000    37,271,000 
Inventories   10,810,000    10,867,000 
Prepaid expenses and other current assets   9,717,000    9,588,000 
Total current assets   125,458,000    140,492,000 
Property, plant and equipment, net   3,389,000    3,521,000 
Capitalized software costs, net   2,019,000    2,138,000 
Operating lease right-of-use assets, net   6,968,000    6,785,000 
Intangible assets, net   157,370,000    159,906,000 
Goodwill   332,000    332,000 
TOTAL ASSETS  $295,536,000   $313,174,000 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $15,129,000   $24,581,000 
Accrued rebates and copay assistance   20,690,000    19,442,000 
Accrued payroll and related liabilities   5,027,000    5,450,000 
Deferred revenue and customer deposits   112,000    75,000 
Current portion of operating lease obligations   795,000    806,000 
Total current liabilities   41,753,000    50,354,000 
Operating lease obligations, net of current portion   6,716,000    6,524,000 
Accrued expenses, net of current portion   2,713,000    2,713,000 
Notes payable, net of unamortized debt discount   184,148,000    183,172,000 
TOTAL LIABILITIES   235,330,000    242,763,000 
Commitments and contingencies   -     -  
STOCKHOLDERS’ EQUITY          
Common stock, $0.001 par value, 50,000,000 shares authorized, 35,380,955 and 35,168,260 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively   35,000    35,000 
Additional paid-in capital   207,995,000    204,635,000 
Accumulated deficit   (147,469,000)   (133,904,000)
TOTAL HARROW, INC. STOCKHOLDERS’ EQUITY   60,561,000    70,766,000 
Noncontrolling interests   (355,000)   (355,000)
TOTAL STOCKHOLDERS’ EQUITY   60,206,000    70,411,000 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $295,536,000   $313,174,000 

 

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

 

3
 

 

HARROW, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   2024   2023 
   For the Three Months Ended 
   March 31, 
   2024   2023 
Revenues:        
Product sales, net  $34,508,000   $20,453,000 
Other revenues   79,000    5,650,000 
Total revenues   34,587,000    26,103,000 
Cost of sales   (10,553,000)   (8,271,000)
Gross profit   24,034,000    17,832,000 
Operating expenses:          
Selling, general and administrative   28,813,000    15,888,000 
Research and development   2,149,000    734,000 
Total operating expenses   30,962,000    16,622,000 
(Loss)income from operations   (6,928,000)   1,210,000 
Other (expense) income:          
Interest expense, net   (5,415,000)   (4,747,000)
Investment (loss) gain from Eton Pharmaceuticals   (1,248,000)   2,042,000 
Loss on extinguishment of debt   -    (5,465,000)
Other income, net   26,000    29,000 
Total other expense, net   (6,637,000)   (8,141,000)
Loss before income tax expense   (13,565,000)   (6,931,000)
Income tax benefit   -    288,000 
Net loss   (13,565,000)   (6,643,000)
Basic and diluted net loss per share of common stock  $(0.38)  $(0.22)
Weighted average number of shares of common stock outstanding, basic and diluted   35,469,638    30,289,730 

 

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

 

4
 

 

HARROW, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2024 and 2023

 

                   Total   Total     
   Common Stock   Additional       Harrow, Inc.   Noncontrolling   Total 
       Par   Paid-in   Accumulated   Stockholders’   Interest   Stockholders’ 
   Shares   Value   Capital   Deficit   Equity   Equity   Equity 
Balance at December 31, 2022   29,901,530   $30,000   $137,058,000   $(109,493,000)  $27,595,000   $(355,000)  $27,240,000 
                                    
Issuance of common stock in connection with:                                   
Exercise of employee stock-based options   97,542    -    148,000    -    148,000    -    148,000 
Vesting of RSUs   111,000    -    -    -    -    -    - 
Shares withheld related to net share settlement of equity awards   (53,702)   -    (850,000)   -    (850,000)   -    (850,000)
Stock-based compensation expense   -    -    1,633,000    -    1,633,000    -    1,633,000 
Net loss   -    -    -    (6,643,000)   (6,643,000)   -    (6,643,000)
Balance at March 31, 2023   30,056,370   $30,000   $137,989,000   $(116,136,000)  $21,883,000   $(355,000)  $21,528,000 

 

                   Total   Total     
   Common Stock   Additional       Harrow, Inc.   Noncontrolling   Total 
       Par   Paid-in   Accumulated   Stockholders’   Interest   Stockholders’ 
   Shares   Value   Capital   Deficit   Equity   Equity   Equity 
Balance at December 31, 2023   35,168,260   $35,000   $204,635,000   $(133,904,000)  $   70,766,000   $(355,000)  $   70,411,000 
                                    
Issuance of common stock in connection with:                                   
Exercise of employee stock-based options   46,175    -    348,000    -    348,000    -    348,000 
Vesting of RSUs   275,000    -    -    -    -    -    - 
Shares withheld related to net share settlement of equity awards   (108,480)   -    (1,157,000)   -    (1,157,000)   -    (1,157,000)
Stock-based compensation expense   -    -    4,169,000    -    4,169,000    -    4,169,000 
Net loss   -    -    -    (13,565,000)   (13,565,000)   -    (13,565,000)
Balance at March 31, 2024   35,380,955   $35,000   $207,995,000   $(147,469,000)  $60,561,000   $(355,000)  $60,206,000 

 

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

 

5
 

 

HARROW, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

         
   For the Three Months Ended 
   March 31, 
   2024   2023 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(13,565,000)  $(6,643,000)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization of property, plant and equipment and software development costs   432,000    292,000 
Amortization of intangible assets   2,554,000    2,207,000 
Amortization of operating lease right-of-use assets   194,000    177,000 
(Recovery of) provision for credit losses   (85,000)   20,000 
Amortization of debt issuance costs and debt discount   976,000    761,000 
Investment loss (gain) from investment in Eton   1,248,000    (2,042,000)
Loss on extinguishment of debt   -    5,465,000 
Stock-based compensation   4,169,000    1,633,000 
Deferred income tax   -    (288,000)
Changes in assets and liabilities:          
Accounts receivable   8,396,000    (5,882,000)
Inventories   57,000    (2,552,000)
Prepaid expenses and other current assets   321,000    7,000 
Accounts payable, accrued expenses, accrued rebates and copay assistance   (8,939,000)   (212,000)
Accrued payroll and related liabilities   (423,000)   (1,111,000)
Deferred revenue and customer deposits   37,000    (46,000)
NET CASH USED IN OPERATING ACTIVITIES   (4,628,000)   (8,214,000)
CASH FLOWS FROM INVESTING ACTIVITIES          
Investment in patent and trademark assets   (18,000)   - 
Purchase of product NDAs and related patents   -    (130,474,000)
Purchases of property, plant and equipment   (92,000)   (496,000)
NET CASH USED IN INVESTING ACTIVITIES   (110,000)   (130,970,000)
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from 11.875% notes payable, net of costs   -    4,961,000 
Proceeds from Oaktree Loan, net of costs   -    61,585,000 
Payment of payroll taxes upon vesting of PSUs, RSUs and exercise of stock options   (1,157,000)   (661,000)
Proceeds from exercise of stock options   348,000    148,000 
Proceeds from B. Riley senior secured note, net of costs   -    55,879,000 
Repayment of B. Riley senior secured note   -    (59,750,000)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES   (809,000)   62,162,000 
NET CHANGE IN CASH AND CASH EQUIVALENTS   (5,547,000)   (77,022,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   74,085,000    96,270,000 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $68,538,000   $19,248,000 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for income taxes  $-   $- 
Cash paid for interest  $5,340,000   $3,371,000 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Reclassification of deferred financing costs  $-   $1,950,000 
Accrual of exit fee related to Oaktree Loan  $-   $2,275,000 
Purchase of property, plant and equipment included in accounts payable and accrued expenses  $89,000   $61,000 
Right-of-use assets obtained in exchange for new operating lease obligations  $377,000   $- 
Income taxes owed for exercise of options  $-   $189,000 
Insurance premium financed  $450,000   $- 

 

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

 

6
 

 

HARROW, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2024 and 2023

 

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Company and Background

 

Harrow, Inc. (together with its consolidated subsidiaries, unless the context indicates or otherwise requires, the “Company” or “Harrow”) is a leading eyecare pharmaceutical company engaged in the discovery, development, and commercialization of innovative ophthalmic pharmaceutical products for the U.S. market. Harrow helps U.S. eyecare professionals preserve the gift of sight by making its comprehensive portfolio of prescription and non-prescription pharmaceutical products accessible and affordable to millions of Americans each year. The Company owns commercial rights to one of the largest portfolios of branded ophthalmic pharmaceutical products in the U.S. that are marketed under its Harrow name. The Company also owns and operates ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding businesses.

 

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

 

Basis of Presentation

 

The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024 or for any other period. For further information, refer to the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

 

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

 

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

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following represents an update for the three months ended March 31, 2024 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

 

Risks, Uncertainties and Liquidity

 

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

 

7
 

 

Fair Value Measurements

 

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The established fair value hierarchy prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

Level 1: Applies to assets or liabilities for which there are quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available.
Level 2: Applies to assets or liabilities for which there are significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Applies to assets or liabilities for which there are significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, Level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method.

 

At March 31, 2024 and December 31, 2023, the Company measured its investment in Eton Pharmaceuticals, Inc. (“Eton”) on a recurring basis. The Company’s investment in Eton is classified as Level 1 as the fair value is determined using quoted market prices in active markets for the same securities. As of March 31, 2024 and December 31, 2023, the fair market value of the Company’s investment in Eton was $7,433,000 and $8,681,000, respectively. The Company sold its remaining interest in April 2024 (see Note 16).

 

The Company’s 2026 Notes (as defined in Note 11) are carried at face value, including the unamortized premium, less unamortized debt issuance costs, the 2027 Notes (as described in Note 11) are carried at face value less unamortized debt issuance costs, and the Oaktree Loan (as defined in Note 11) is carried at face value less the original issue discount and unamortized debt issuance costs on the condensed consolidated balance sheets and the Company presents fair value for disclosure purposes only. The 2026 Notes and 2027 Notes are classified as Level 1 instruments as the fair value is determined using quoted market prices in active markets for the same securities. The Oaktree Loan is classified as a Level 2 instrument and its fair value is determined through an income approach that considers collateral coverage, yield calibration, yield analysis and any adjustments to implied yield associated with the Company’s fundamental measures.

 

The following table presents the estimated fair values and the carrying values:

 

   March 31, 2024   December 31, 2023 
   Carrying Value   Fair Value   Carrying Value   Fair Value 
2026 Notes  $73,413,000   $73,560,000   $73,218,000   $70,260,000 
2027 Notes  $37,591,000   $41,860,000   $37,413,000   $40,363,000 
Oaktree Loan  $73,144,000   $76,725,000   $72,541,000   $76,627,000 

 

The Company’s other financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, accrued payroll and related liabilities, deferred revenue and customer deposits and operating lease liabilities. The carrying amount of these financial instruments, except for operating lease liabilities, approximates fair value due to the short-term maturities of these instruments. Based on borrowing rates currently available to the Company, the carrying value of the operating lease liabilities approximate their respective fair values.

 

Basic and Diluted Net Loss per Common Share

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common and common equivalent shares, such as stock options, restricted stock units (“RSUs”), performance stock units (“PSUs”), and warrants, outstanding during the period. Common equivalent shares (using the treasury stock method) from stock options, unvested RSUs, unvested PSUs and warrants were 4,318,057 and 4,750,340 at March 31, 2024 and 2023, respectively, and are excluded in the calculation of diluted net loss per common share for the periods presented, because the effect is anti-dilutive. Included in the basic and diluted net loss per share calculation were RSUs awarded to directors that had vested, but the issuance and delivery of the shares are deferred until the director resigns. The number of shares underlying vested RSUs at March 31, 2024 and 2023 was 223,928 and 336,264, respectively.

 

8
 

 

The following table shows the computation of basic net loss per share of common stock for the three months ended March 31, 2024 and 2023:

 

   2024   2023 
  

For the Three Months Ended

March 31,

 
   2024   2023 
         
Numerator – net loss  $(13,565,000)  $(6,643,000)
Denominator – weighted average number of shares outstanding, basic and diluted   35,469,638    30,289,730 
Net loss per share, basic and diluted  $(0.38)  $(0.22)

 

Income Taxes

 

The Company’s effective tax rate was (0.11)% and 4.16% for the three months ended March 31, 2024 and 2023, respectively. The Company’s effective tax rate for the three months ended March 31, 2024 and 2023 differs from the U.S. federal statutory tax rate of 21% due to state taxes, permanent book-tax differences related to Internal Revenue Code of 1986, as amended (“IRC”), Section 162(m) excess officer compensation limitation and share-based compensation and the change in valuation allowance.

 

As of March 31, 2024 and December 31, 2023, there were no unrecognized tax benefits included in the condensed consolidated balance sheets that would, if recognized, affect the effective tax rate.

 

Investment in Melt Pharmaceuticals, Inc. – Related Party

 

The Company owns 3,500,000 shares of common stock and 2,334,256 shares of preferred stock of Melt (representing in aggregate approximately 46% of Melt’s equity interests as of March 31, 2024). The Company analyzes its investment in Melt and related agreements on a regular basis to evaluate its position of variable interests in Melt. The Company has determined that it does not have the ability to control Melt, however it has the ability to exercise significant influence over the operating and financial decisions of Melt and uses the equity method of accounting for this investment. Under this method, the Company recognizes its portion of earnings and losses in Melt in its consolidated financial statements and adjusts the carrying amount of its investment in Melt accordingly. Any intra-entity profits and losses are eliminated.

 

On a quarterly basis, management assesses whether there are any indicators that the carrying value of the Company’s equity method investments may be other than temporarily impaired. Indicators include financial condition, operating performance, and near-term prospects of the investee. To the extent indicators suggest that a loss in value may have occurred, the Company will evaluate both quantitative and qualitative factors to determine if the loss in value is other than temporary. If a potential loss in value is determined to be other than temporary, the Company will recognize an impairment loss based on the estimated fair value of the equity method investments. The Company has no other investments other than its common stock and preferred stock positions in Melt and no other requirements to advance funds to Melt.

 

The following table summarizes the Company’s investments in Melt as of March 31, 2024:

 

   Cost   Share of Equity Method   Net
Carrying
 
   Basis   Losses   Value 
Common stock  $5,810,000   $(5,810,000)  $- 
Preferred stock   18,397,000    (18,397,000)                - 
   $24,207,000   $(24,207,000)  $- 

 

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

 

9
 

 

Accounting Guidance Issued but Not Adopted at March 31, 2024

 

In August 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement, which applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) and requires joint ventures to initially measure all contributions received upon formation at fair value. The new guidance does not impact accounting by the venturers. The new guidance is applicable to joint venture entities with a formation date on or after January 1, 2025 on a prospective basis. Joint ventures formed prior to the effective date may elect to apply the new guidance retrospectively back to their original formation date. The Company will apply the guidance in ASU 2023-05 prospectively to any future arrangements meeting the definition of a joint venture.

 

In October 2023, FASB issued ASU 2023-06, Disclosure Improvements—Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU modifies the disclosure or presentation requirements of a variety of topics in the codification by aligning them with the SEC’s regulations. The amendments to the various topics should be applied prospectively, and the effective date for the Company for each amendment will be determined based on the effective date of the SEC’s removal of the related disclosure from Regulation S-X or Regulation S-K. If the SEC has not removed the applicable requirement by June 30, 2027, then the related amendment in ASU 2023-06 will be removed from the codification and will not become effective. Early adoption of this ASU is prohibited. The Company does not expect the amendments in this ASU to have a material impact on the disclosures or presentation in its consolidated financial statements.

 

In November 2023, FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures, which enhances the disclosures required for operating segments in the Company’s annual and interim consolidated financial statements. ASU 2023-07 is effective for the Company in our annual reporting for fiscal 2024 and for interim period reporting beginning in fiscal 2025 on a retrospective basis, with all required disclosures to be made for all prior periods presented in the consolidated financial statements. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2023-07 on its consolidated financial statements.

 

In December 2023, FASB issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures, which enhances the disclosures required for income taxes in the Company’s annual consolidated financial statements. Notably, this ASU requires entities to disclose specific categories in the effective tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 is effective for the Company in its annual reporting for fiscal year 2025 on a prospective basis. Early adoption and retrospective reporting are permitted. The Company is currently evaluating the impact of ASU 2023-09 on its consolidated financial statements.

 

Reclassifications

 

Certain prior period items and amounts have been reclassified to conform to the classifications used to prepare the condensed consolidated financial statements for the current period. These reclassifications had no material impact on the Company’s condensed consolidated financial position, results of operations, or cash flows as previously reported.

 

NOTE 3. REVENUES

 

The Company accounts for contracts with customers in accordance with ASC 606, Revenues from Contracts with Customers. The Company has three primary streams of revenue: (1) product revenues, including revenue recognized from sales of products through its pharmacy and outsourcing facility and sales of branded products to wholesalers through a third-party logistics (“3PL”) partner, (2) revenue recognized from transfer of acquired product sales and profits in 2023, and (3) revenue recognized from intellectual property licenses and related arrangements.

 

Product Revenues

 

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

 

1. Identify the contract(s) with a customer: A contract is deemed to exist when the customer places an order through receipt of a prescription, via an online order or via receipt of a purchase order from a customer. For branded products, orders are received through the Company’s 3PL partner, and the customer takes title of the products via formal purchase orders placed and fulfilled.
   
10
 

 

2. Identify the performance obligations in the contract: Obligations for fulfillment of the Company’s contracts consist of delivering the product to customers at their specified destination. For shipping and handling activities under ASC 606, if the customer takes control of the goods after shipment, shipping and handling activities would always be considered a fulfillment activity and not treated as a separate performance obligation. If the customer takes control of the goods before shipment, entities must make an accounting policy election to treat shipping and handling activities as either a fulfillment cost or as a separate performance obligation. The Company has elected to treat its shipping and handling activities as a fulfillment cost.
   
3. Determine the transaction price: The transaction price is based on an amount that reflects the consideration to which the Company expects to be entitled, net of accruals for estimated rebates, wholesaler chargebacks, discounts, copay assistance and other deductions (collectively, sales deductions) and an estimate for returns and replacements established at the time of sale. The Company utilizes the services of a third-party professional services firm to estimate rebates and chargebacks associated with sales of its branded products. The transfer of promised goods is satisfied within a year, and therefore there are no significant financing components. There is no non-cash consideration related to product sales.
   
4. Allocate the transaction price to the performance obligations in the contract: Because there is only one performance obligation for product sales, no allocation is necessary.
   
5. Recognize revenue when (or as) the entity satisfies a performance obligation: Revenue from products is recognized upon transfer of control of a product to a customer. This generally occurs upon shipment unless contractual terms with a customer state that transfer of control occurs at delivery.

 

Revenues From Transfer of Acquired Product Sales and Profits

 

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

 

Intellectual Property License and Related Arrangements Revenues

 

As of March 31, 2024, the Company holds five intellectual property licenses and related arrangements pursuant to which the Company has agreed to license or sell to a customer the right to access the Company’s intellectual property. License arrangements may consist of non-refundable upfront license fees, data transfer fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and various performance or sales milestones. These arrangements can be multiple-element arrangements, the revenue of which is recognized at the point in time that the performance obligation is met.

 

Non-refundable fees that are not contingent on any future performance by the Company and require no consequential continuing involvement on the part of the Company are recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverables are 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.

 

11
 

 

Revenue disaggregated by revenue source for the three months ended March 31, 2024 and 2023 consisted of the following:

 

   2024   2023 
   For the Three Months Ended 
   March 31, 
   2024   2023 
Product sales, net  $34,508,000   $20,453,000 
Other revenues (including transfer of acquired product sales/profit)   79,000    5,650,000 
Total revenues  $34,587,000   $26,103,000 

 

Deferred revenue and customer deposits at March 31, 2024 and December 31, 2023 were $112,000 and $75,000, respectively. All deferred revenue and customer deposit amounts at December 31, 2023 were recognized as revenue during the three months ended March 31, 2024.

 

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

 

In December 2018, the Company entered into an Asset Purchase Agreement with Melt (the “Melt APA”). Pursuant to the terms of the Melt APA, 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 APA, Melt is required to make mid-single digit royalty payments to the Company on net sales of the Melt Products while any patent rights remain outstanding, as well as other conditions.

 

In February 2019, the Company entered into a Management Services Agreement (the “Melt MSA”), whereby the Company provided to Melt certain administrative services and support, including bookkeeping, web services and human resources related activities, and Melt was required to pay the Company a monthly amount of $10,000. The Melt MSA was terminated effective July 1, 2023. During the three months ended March 31, 2024 and 2023, the Company recorded $0 and $59,000, respectively, due from Melt for reimbursable expenses and amounts payable pursuant to the Melt MSA, which are included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. As of March 31, 2024 and December 31, 2023, the Company was due $228,000, from Melt for reimbursable expenses and amounts due under the Melt MSA

 

In March 2024, Melt completed its Series B Preferred Stock financing which raised gross proceeds of approximately $23,900,000.

 

The Company’s Chief Executive Officer, Mark L. Baum, was previously a member of the Melt board of directors until his resignation during the year ended December 31, 2021. Mr. Baum re-joined the Melt board of directors in January 2023. At the time Mr. Baum re-joined, the Melt board of directors consisted of five members, including Mr. Baum, who is the only representative of the Company on Melt’s board of directors.

 

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

 

    2024     2023  
   

For the Three Months Ended

March 31,

 
    2024     2023  
Revenues, net   $ -     $ -  
Loss from operations   $ (2,036,000 )   $ (1,352,000 )
Net loss   $ (1,893,000 )   $ (1,858,000 )

 

12
 

 

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

 

   2024   2023 
   At March 31,   At December 31, 
   2024   2023 
Current assets  $14,277,000   $13,404,000 
Non-current assets   -    - 
Total assets  $14,277,000   $13,404,000 
           
Total liabilities  $3,524,000   $3,922,000 
Total preferred stock and stockholders’ equity   10,753,000    9,482,000 
Total liabilities and stockholders’ equity  $14,277,000   $13,404,000 

 

NOTE 5. INVENTORIES

 

Inventories are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, branded pharmaceutical products, including those held at the Company’s 3PL partner, related laboratory supplies and active pharmaceutical ingredients. The composition of inventories as of March 31, 2024 and December 31, 2023 was as follows:

 

   March 31, 2024   December 31, 2023 
Raw materials  $5,470,000   $   5,477,000 
Work in progress   140,000    54,000 
Finished goods   5,200,000    5,336,000 
Total inventories  $10,810,000   $10,867,000 

 

NOTE 6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets at March 31, 2024 and December 31, 2023 consisted of the following:

 

   March 31, 2024   December 31, 2023 
Prepaid insurance  $766,000   $                  1,241,000 
Prepaid computer software licenses and related expenses   1,462,000    1,613,000 
Other prepaid expenses   2,350,000    906,000 
Receivable due from Melt   228,000    228,000 
Prepaid FY 2024 Prescription Drug User (“PDUFA”) fees   2,292,000    3,438,000 
Deferred Oaktree Loan commitment fee   468,000    409,000 
Deposits and other current assets   2,151,000    1,753,000 
Total prepaid expenses and other current assets  $9,717,000   $9,588,000 

 

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment at March 31, 2024 and December 31, 2023 consisted of the following:

 

    March 31, 2024     December 31, 2023  
Property, plant and equipment, net:                
Computer hardware   $ 1,323,000     $ 1,322,000  
Furniture and equipment     942,000       936,000  
Lab and pharmacy equipment     4,690,000       4,564,000  
Leasehold improvements     6,802,000       6,771,000  
Property, plant and equipment, gross     13,757,000       13,593,000  
Accumulated depreciation     (10,368,000 )     (10,072,000)  
Property, plant and equipment, net   $ 3,389,000     $ 3,521,000  

 

For the three months ended March 31, 2024 and 2023, depreciation related to the property, plant and equipment was $296,000 and $225,000, respectively.

 

13
 

 

NOTE 8. CAPITALIZED SOFTWARE COSTS

 

Capitalized software costs at March 31, 2024 and December 31, 2023 consisted of the following:

 

   March 31, 2024   December 31, 2023 
Capitalized software costs          
Capitalized internal-use software development costs  $2,780,000   $2,780,000 
Acquired third-party software license for internal-use   159,000    159,000 
Total gross capitalized software for internal-use   2,939,000    2,939,000 
Accumulated amortization   (1,404,000)   (1,268,000)
Capitalized internal-use software in process   484,000    467,000 
Total capitalized software costs net  $2,019,000   $2,138,000 

 

For the three months ended March 31, 2024 and 2023, the Company recorded amortization expense related to capitalized software costs of $136,000 and $67,000, respectively.

 

NOTE 9. INTANGIBLE ASSETS AND GOODWILL

 

The Company’s intangible assets at March 31, 2024 consisted of the following:

 

  

Amortization

Periods

(in years)

  Cost  

Accumulated

Amortization

   Disposal  

Net

Carrying Value

 
Patents  7-19  $610,000   $(169,000)  $-   $441,000 
Licenses  7-20   50,000    (2,000)   -    48,000 
Trademarks  Indefinite   217,000    -              -    217,000 
Acquired new drug applications (“NDAs”)  4-15   170,353,000    (13,830,000)   -    156,523,000 
Customer relationships  3-15   596,000    (526,000)   -    70,000 
Trade name  5   75,000    (5,000)   -    70,000 
Non-competition clause  3-4   50,000    (50,000)   -    - 
State pharmacy licenses  25   8,000    (7,000)   -    1,000 
      $171,959,000   $(14,589,000)  $-   $157,370,000 

 

Amortization expense for intangible assets for the three months ended March 31, 2024 and 2023 was as follows:

 

   2024   2023 
   For the Three Months Ended 
   March 31, 
   2024   2023 
Patents  $14,000   $22,000 
Licenses   -    2,000 
Acquired NDAs   2,530,000    2,170,000 
Customer relationships   10,000    13,000 
Amortization of intangible assets  $2,554,000   $2,207,000 

 

Estimated future amortization expense for the Company’s intangible assets at March 31, 2024 was as follows:

 

         
Remainder of 2024   $ 10,240,000  
2025     13,658,000  
2026     13,658,000  
2027     13,309,000  
2028     12,961,000  
Thereafter     93,327,000  
Intangible assets    $ 157,153,000  

 

There were no changes to the carrying value of the Company’s goodwill during the three months ended March 31, 2024 and 2023.

 

14
 

 

NOTE 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses at March 31, 2024 and December 31, 2023 consisted of the following:

 

    March 31,     December 31,  
    2024     2023  
Accounts payable   $ 12,567,000     $ 21,424,000  
Accrued insurance premium     450,000       873,000  
Other accrued payments     106,000       306,000  
Accrued interest (see Note 11)     2,006,000       1,978,000  
Accrued exit fee for Oaktree Loan (see Note 11)     2,713,000       2,713,000  
Total accounts payable and accrued expenses   $ 17,842,000     $ 27,294,000  
Less: current portion     (15,129,000 )     (24,581,000)  
Non-current total accrued expenses   $ 2,713,000     $ 2,713,000  

 

The Company financed all insurance policies for the policy term of August 2023 through August 2024. The financing agreement has an interest rate of 7.48% per annum and requires nine monthly payments of $150,000, of which we have three payments remaining as of March 31, 2024.

 

NOTE 11. DEBT

 

Oaktree Loan Due 2026

 

In March 2023, the Company entered into a Credit Agreement and Guaranty, (the “Oaktree Loan”) with Oaktree Fund Administration, LLC, as administrative agent for the lenders (together, “Oaktree”), providing for a senior secured term loan facility to the Company with a principal amount of up to $100,000,000. Upon entering into the Oaktree Loan, the Company drew a principal amount of $65,000,000. In July 2023, the Company drew an additional principal amount of $12,500,000 and entered into the First Amendment to the Oaktree Loan (the “Oaktree Amendment”). Under the Oaktree Amendment, the overall credit facility size was increased from $100,000,000 to $112,500,000. The additional principal loan amount of up to $35,000,000 available under the Oaktree Loan (“Tranche B”) is made available to the Company upon the commercialization of TRIESENCE. Since Tranche B was not drawn by the Company on or before March 27, 2024, the amount available under Tranche B decreased to $30,000,000. While undrawn, the Company is required to pay a commitment fee related to the Tranche B amount equal to 2% per annum, payable quarterly. This fee is recorded within prepaid expenses and other current assets and is being amortized on a straight-line basis over the access period.

 

Interest expense related to the Oaktree Loan totaled $2,953,000 and $95,000 for the three months ended March 31, 2024 and 2023, respectively, and included the amortization of debt issuance costs and discount of $603,000 and $12,000, respectively.

 

HROWM – 11.875% Senior Notes Due 2027

 

In December 2022 and in January 2023, the Company closed offerings of $40,250,000 aggregate principal amount of 11.875% senior notes due December 2027 (the “2027 Notes”). Interest expense related to the 2027 Notes totaled $1,373,000 and $1,395,000 for the three months ended March 31, 2024 and 2023, respectively, and included the amortization of debt issuance costs and discount of $178,000 and $200,000, respectively.

 

HROWL – 8.625% Senior Notes Due 2026

 

In April and September 2021, the Company closed offerings (including an over-allotment exercise in May 2021) of $75,000,000 aggregate principal amount of 8.625% senior notes due April 2026 (the “2026 Notes”). Interest expense related to the 2026 Notes totaled $1,812,000 and $1,810,000 for the three months ended March 31, 2024 and 2023, respectively, and included amortization of debt issuance costs and debt discount of $195,000 and $193,000, respectively.

 

15
 

 

A summary of the Company’s debt at March 31, 2024 and December 31, 2023 is described as follows:

 

    March 31,     December 31,  
    2024     2023  
8.625% Senior Notes, due April 2026   $ 75,000,000     $ 75,000,000  
11.875% Senior Notes, due December 2027     40,250,000       40,250,000  
Oaktree Loan, due January 2026     77,500,000       77,500,000  
Notes payable gross      192,750,000       192,750,000  
Less: Unamortized debt issuance costs     (8,602,000 )     (9,578,000 )
Notes payable net    $ 184,148,000     $ 183,172,000  

 

For the three months ended March 31, 2024 and 2023, the total effective interest rate of the Company’s debt was 10.78%.

 

At March 31, 2024, future minimum payments under the Company’s debt were as follows:

 

   Amount 
Remainder of 2024  $15,902,000 
2025   20,614,000 
2026   159,897,000 
2027   45,030,000 
Total minimum payments   243,443,000 
Less: amount representing interest payments   (48,693,000)
Notes payable, gross principal amount due   192,750,000 
Less: unamortized debt issuance costs, net of premium   (8,602,000)
Notes payable, net of unamortized debt issuance costs  $184,148,000 

 

NOTE 12. LEASES

 

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

 

  An operating lease for 5,789 square feet of office space in Carlsbad, California, which commenced in January 2022 and will expire in March 2025.
     
  An operating lease for 38,153 square feet of lab, warehouse and office space in Ledgewood, New Jersey that expires in July 2027, with an option to extend the term for two additional five-year periods. This includes an amendment, which was made effective July 2020, that extended the term of the original lease and added 1,400 of additional square footage to the lease, another amendment entered into in May 2021 that extended the term of the lease to July 2027 and added 8,900 square feet of space, and another amendment entered into in January 2024 that added 2,861 square feet of space.
     
  An operating lease for 5,500 square feet of office space in Nashville, Tennessee, which commenced in January 2020 and will expire in December 2024, with an option to extend the term for two additional five-year periods. The Company does not intend to exercise its option to extend the term of this lease.
     
  An operating lease for 11,552 square feet of lab and office space in Nashville, Tennessee, which commenced in September 2022 and will expire in September 2027.
     
  In March 2024, we entered in a new operating lease for 17,625 square feet of office space in Nashville, Tennessee which is expected to commence in July 2024 and has a seven year term (target expiration date of June 30, 2032) with an option to extend the term for two additional five-year terms. Once occupied, the Company expects this office space to serve as the Company’s new corporate headquarters. Any operating lease right-of-use assets and liabilities related to this lease will be recognized at its commencement date.

 

At March 31, 2024, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases held by the Company were 6.61% and 11.26 years, respectively.

 

During the three months ended March 31, 2024 and 2023, cash paid for amounts included for the operating lease liabilities was $327,000 and $306,000, respectively. During the three months ended March 31, 2024 and 2023, the Company recorded operating lease expense of $319,000 and $309,000, respectively, which is included in selling, general and administrative expenses.

 

16
 

 

Future lease payments under operating leases as of March 31, 2024 were as follows:

 

   Operating Leases 
Remainder of 2024  $978,000 
2025   1,133,000 
2026   1,155,000 
2027   1,014,000 
2028   699,000 
Thereafter   5,533,000 
Total minimum lease payments   10,512,000 
Less: amount representing interest payments   (3,001,000)
Total operating lease obligations   7,511,000 
Less: current portion, operating lease obligations   (795,000)
Operating lease obligations, net of current portion  $6,716,000 

 

NOTE 13. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

 

Common Stock

 

During the three months ended March 31, 2024, the Company issued 46,175 shares of common stock and received proceeds of $348,000 upon the exercise of options to purchase 46,175 shares of common stock with exercise prices ranging from $6.75 to $8.75 per share.

 

During the three months ended March 31, 2024, 45,000 RSUs granted in February 2021 to Andrew R. Boll, the Company’s Chief Financial Officer, vested, and 26,520 shares the Company’s common stock were issued to Mr. Boll, net of 18,480 shares of common stock withheld for payroll tax withholdings totaling $197,000.

 

During the three months ended March 31, 2024, 150,000 RSUs granted in February 2021 to Mark L. Baum, the Company’s Chief Executive Officer, vested, and 90,164 shares the Company’s common stock were issued to Mr. Baum, net of 59,836 shares of common stock withheld for payroll tax withholdings totaling $638,000.

 

During the three months ended March 31, 2024, 30,000 RSUs granted in February 2021 to John Saharek, the Company’s Chief Commercial Officer, vested, and 17,384 shares the Company’s common stock were issued to Mr. Saharek, net of 12,616 shares of common stock withheld for payroll tax withholdings totaling $135,000.

 

During the three months ended March 31, 2024, 50,000 RSUs granted in February 2021 to employees, vested, and 32,452 shares the Company’s common stock were issued, net of 17,548 shares of common stock withheld for payroll tax withholdings totaling $187,000.

 

During the three months ended March 31, 2024, 8,389 shares of the Company’s common stock underlying RSUs issued to directors vested, but the issuance and delivery of these shares are deferred until the applicable director ceases providing services to the Company.

 

Stock Option Plan

 

On September 17, 2007, the Company’s Board of Directors and stockholders adopted the Company’s 2007 Incentive Stock and Awards Plan, which was subsequently amended on November 5, 2008, February 26, 2012, July 18, 2012, May 2, 2013 and September 27, 2013 (as amended, the “2007 Plan”). The 2007 Plan reached its term in September 2017, and we can no longer issue additional awards under this plan, however, options previously issued under the 2007 Plan will remain outstanding until they are exercised, reach their maturity or are otherwise cancelled/forfeited. On June 13, 2017, the Company’s Board of Directors and stockholders adopted the Company’s 2017 Incentive Stock and Awards Plan which was subsequently amended on June 3, 2021 (as amended, the “2017 Plan” together with the 2007 Plan, the “Plans”). As of December 31, 2023, the 2017 Plan provides for the issuance of a maximum of 6,000,000 shares of the Company’s common stock. The purpose of the Plans are to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in the Company’s development and financial success. Under the Plans, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, restricted stock units and restricted stock. The Plans are administered by the Compensation Committee of the Company’s Board of Directors. The Company had 400,250 shares available for future issuances under the 2017 Plan at March 31, 2024.

 

17
 

 

Stock Options

 

A summary of stock option activity under the Plans for the three months ended March 31, 2024 is as follows:

 

   Number of Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life   Aggregate Intrinsic Value 
Options outstanding – January 1, 2024   2,711,317   $6.25           
Options granted   51,500   $9.81           
Options exercised   (46,175)  $7.54           
Options cancelled/forfeited   (48,626)  $12.22           
Options outstanding – March 31, 2024   2,668,016   $6.19    3.82   $19,285,000 
Options exercisable   2,404,897   $5.55    3.27   $18,508,000 
Options vested and expected to vest   2,631,881   $6.10    3.75   $19,191,000 

 

The aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would have been received by option holders if all option holders had exercised and immediately sold all shares underlying options with an exercise price lower than the market price on March 31, 2024, based on the closing price of the Company’s common stock of $13.23 on that date.

 

During the three months ended March 31, 2024, the Company granted stock options to certain employees. The stock options were granted with an exercise price equal to the current market price of the Company’s common stock, as reported by the securities exchange on which the common stock was then listed, at the grant date and have contractual terms of ten years. Vesting terms for options granted to employees during the three months ended March 31, 2024 included the following vesting schedule: 25% of the shares subject to the option vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the shares subject to the option vest and become exercisable quarterly in equal installments thereafter over three years. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans) and in the event of certain modifications to the option award agreement.

 

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

 

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

 

   2024 
Weighted-average fair value of options granted  $6.34 
Expected terms (in years)   6.11 
Expected volatility   68%
Risk-free interest rate   4.06-4.21%
Dividend yield   - 

 

18
 

 

The following table summarizes information about stock options outstanding and exercisable at March 31, 2024:

 

   Options Outstanding   Options Exercisable 
Range of Exercise Prices  Number Outstanding   Weighted Average Remaining Contractual Life in Years  

Weighted

Average

Exercise

Price

  

Number

Exercisable

  

Weighted

Average

Exercise

Price

 
$1.47 - $1.73   295,852    3.71   $1.72    295,852   $1.72 
$2.23   285,000    2.84   $2.23    285,000   $2.23 
$2.40 - $2.60   24,068    2.77   $2.58    24,068   $2.58 
$3.95   310,000    2.00   $3.95    310,000   $3.95 
$4.49 - $5.72   100,225    5.22   $5.54    96,350   $5.53 
$6.30   285,000    4.89   $6.30    285,000   $6.30 
$6.75 - $7.26   62,500    8.24   $6.91    24,979   $6.92 
$7.30   274,500    5.76   $7.30    274,500   $7.30 
$7.37 - $7.79   204,261    4.14   $7.50    155,136   $7.47 
$7.87 - $25.86   826,610    3.30   $9.38    654,012   $8.01 
$1.47 - $25.86   2,668,016    3.82   $6.19    2,404,897   $5.55 

 

As of March 31, 2024, there was approximately $1,815,000 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 2.81 years. The stock-based compensation for all stock options was $126,000 and $341,000 during the three months ended March 31, 2024 and 2023, respectively.

 

The intrinsic value of options exercised during the three months ended March 31, 2024 was $139,000.

 

Restricted Stock Units

 

RSU awards are granted subject to certain vesting requirements and other restrictions, including time-based 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.

 

A summary of the Company’s RSU activity and related information for the three months ended March 31, 2024 is as follows:

 

   Number of Shares   Weighted Average Grant Date Fair Value 
RSUs unvested - January 1, 2024   363,029   $9.23 
RSUs granted   6,238    9.66 
RSUs vested   (283,389)   9.21 
RSUs cancelled/forfeited   (3,750)   8.10 
RSUs unvested - March 31, 2024   82,128   $9.37 

 

As of March 31, 2024, the total unrecognized compensation expense related to unvested RSUs was approximately $859,000, which is expected to be recognized over a weighted-average period of 2.2 years, based on estimated and actual vesting schedules of the applicable RSUs. The stock-based compensation for RSUs during the three months ended March 31, 2024 and 2023 was $405,000 and $29,000, respectively.

 

19
 

 

Performance Stock Units

 

A summary of the Company’s PSU activity and related information for the three months ended March 31, 2024 is as follows:

 

   Number of Shares   Weighted Average Grant Date Fair Value 
PSUs unvested – January 1, 2024   1,567,913   $18.56 
PSUs granted   -      
PSUs vested   -      
PSUs cancelled/forfeited   -      
PSUs unvested – March 31, 2024   1,567,913   $18.56 

 

As of March 31, 2024, the total unrecognized compensation expense related to unvested PSUs was approximately $14,553,000, which is expected to be recognized over a weighted-average period of 1.01 years, based on estimated and actual vesting schedules of the applicable PSUs. The stock-based compensation for PSUs during the three months ended March 31, 2024 and 2023 was $3,638,000 and $1,263,000, respectively.

 

Stock-Based Compensation Summary

 

The Company recorded stock-based compensation related to equity instruments granted to employees, directors and consultants as follows:

 

   2024   2023 
   For the Three Months Ended March 31, 
   2024   2023 
Employees - selling, general and administrative  $3,525,000   $1,328,000 
Employees – research and development   439,000    163,000 
Directors - selling, general and administrative   188,000    125,000 
Consultants - selling, general and administrative   17,000    17,000 
Total  $4,169,000   $1,633,000 

 

NOTE 14. COMMITMENTS AND CONTINGENCIES

 

Legal

 

General and Other

 

In the ordinary course of business, the Company is involved in various legal proceedings, government investigations and other matters that are complex in nature and have outcomes that are difficult to predict. The Company describes legal proceedings and other matters that are/were significant or that it believes could become significant in this footnote.

 

The Company records accruals for loss contingencies to the extent that it concludes it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of a liability that has been accrued previously.

 

The Company’s legal proceedings involve various aspects of its business and a variety of claims, some of which present novel factual allegations and/or unique legal theories. Typically, a number of the matters pending against the Company are at early stages of the legal process, which in complex proceedings of the sort the Company faces often extend for several years. While it is not possible to accurately predict or determine the eventual outcomes of matters that have not concluded, an adverse determination in one or more of the matters (whether discussed in this footnote or not) currently pending may have a material adverse effect on the Company’s condensed consolidated results of operations, financial position or cash flows.

 

Ocular Science, Inc. et. al

 

In July 2021, ImprimisRx, LLC, a subsidiary of the Company, filed a lawsuit against Ocular Science, Inc. and OSRX, Inc. (together, “OSRX”) in the U.S. District Court for the Southern District of California, asserting claims for copyright infringement, trademark infringement, unfair competition and false advertising (Lanham Act). ImprimisRx is seeking damages from OSRX. Since July 2021, the complaint has been amended and OSRX added counterclaims alleging ImprimisRx, LLC is violating the Lanham Act with false advertising. Both parties are seeking damages from the other. The Company expects the trial to take place in August 2024.

 

20
 

 

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.

 

Indemnities

 

In addition to the indemnification provisions contained in the Company’s charter 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. Several of the Company’s asset purchase and license agreements contain customary representations, warranties, covenants and confidentiality provisions, and also contain mutual indemnification obligations related primarily to performance under the respective agreements. 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.

 

Asset Purchase, License and Related Agreements

 

FDA Approved Product Acquisitions 

 

In recent years, the Company has acquired commercial and product rights to various FDA approved ophthalmic medications and products through asset purchase, licenses, supply and/or other related agreements. In general, in exchange for product and commercial rights these agreements provide the counterparties with certain upfront and contingent milestone payments typically related to certain annual sales amounts and manufacturing events, and in certain cases, per unit transfer prices and royalties on sales of some of the products. During the three months ended March 31, 2024 and 2023, $274,000 and $0 were incurred under these agreements as royalty expenses, respectively. The Company incurred $0 and $5,000,000 related to upfront and milestone payments under these agreements during the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, the remaining contingent consideration payable pursuant to these agreements were not considered probable and reasonably estimable and therefore, no amount was accrued related to these contingent obligations during the three months ended March 31, 2024. At the time contingent consideration payable becomes probable and reasonably estimable the additional consideration, if any, paid will be allocated to the assets based on their initial estimated fair values as a percent of the total purchase price.

 

Formulation Acquisitions 

 

The Company has acquired and sourced intellectual property rights related to certain proprietary innovations from certain inventors, innovator companies and related parties (the “Inventors”) through multiple asset purchase agreements and license 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.

 

In consideration for the acquisition of these 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 to 45 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. During the three months ended March 31, 2024 and 2023, $180,000 and $376,000 were incurred under these agreements as royalty expenses, respectively.

 

21
 

 

Sales and Marketing Agreements

 

The Company had entered various sales and marketing agreements with certain organizations to provide exclusive and non-exclusive sales and marketing representation services to Harrow in select geographies in the U.S. in connection with the Company’s ophthalmic pharmaceutical compounded formulations or related products.

 

Under the terms of the sales and marketing agreements, the Company was generally required to make commission payments equal to 10% to 14% of net sales for products above and beyond the initial existing sales amounts. In addition, the Company was required to make periodic milestone payments to certain organizations in shares of the Company’s restricted common stock if net sales in the assigned territory reach certain future levels by the end of their terms. Commission expenses of $0 and $130,000 were incurred under these agreements for commission expenses during the three months ended March 31, 2024 and 2023, respectively.

 

Contract Manufacturing

 

The Company had entered into manufacturing agreements with respect to third-party contract manufacturers for its FDA approved pharmaceutical products. Some of these contract manufacturing agreements require minimum annual order amounts. The Company has committed to pay approximately $2,728,000  related to contract manufacturing agreements for the year ending December 31, 2024.

 

NOTE 15. SEGMENTS AND CONCENTRATIONS

 

The Company operates its business on the basis of a single reportable segment, which is the business of discovery, development, and commercialization of innovative ophthalmic therapies. The Company’s chief operating decision-maker is the Chief Executive Officer, who evaluates the Company as a single operating segment.

 

The Company had one and two products that accounted for more than 10% of total revenues during the three months ended March 31, 2024 and 2023, respectively. These products accounted for 11% and 36% of revenues during the three months ended March 31, 2024 and 2023, respectively.

 

As of March 31, 2024 and December 31, 2023, accounts receivable from a single customer accounted for 68% and 80% of total accounts receivable, respectively. For the three months ended March 31, 2024, revenues from a single customer accounted for 27% of total revenues. For the three months ended March 31, 2023, no customer exceeded 10% of total revenues.

 

The Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted for 85% of active pharmaceutical ingredient purchases during the three months ended March 31, 2024, and 90% during the same period in 2023.

 

NOTE 16. SUBSEQUENT EVENTS

 

The Company has performed an evaluation of events occurring subsequent to March 31, 2024 through the filing date of this Quarterly Report on Form 10-Q. Based on its evaluation, no events other than those described below need to be disclosed.

 

In April 2024, the Company issued 1,481 shares of common stock and received proceeds of $11,000 upon the exercise of options to purchase 1,481 shares of common stock with exercise prices between $10.62 and $12.72 per share.

 

In April 2024, the Company sold all 1,982,000 shares of common stock it held of Eton in a block trade at a gross price of $3.00 per share. After deducting trading expenses and commissions of approximately $436,000, the Company received net proceeds of $5,510,000 related to the trade.

 

22
 

 

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, 2023 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, Inc. and its consolidated subsidiaries, including ImprimisRx, LLC, ImprimisRx NJ, LLC dba ImprimisRx, Imprimis NJOF, LLC, Harrow IP, LLC and Harrow Eye, LLC. 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: liquidity or results of operations; our ability to successfully implement our business plan, develop and commercialize our products, product candidates and proprietary formulations in a timely manner or at all, identify and acquire additional products, 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, including inflation and supply chain challenges; 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; 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 SEC. 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

 

We are a leading eyecare pharmaceutical company engaged in the discovery, development, and commercialization of innovative ophthalmic pharmaceutical products for the U.S. market. Harrow helps U.S. eyecare professionals preserve the gift of sight by making its comprehensive portfolio of prescription and non-prescription pharmaceutical products accessible and affordable to millions of Americans each year. We own commercial rights to one of the largest portfolios of branded ophthalmic pharmaceutical products in North America, all of which are marketed under the Harrow name. We also own and operate ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding businesses. In addition, we have a non-controlling equity interest in Melt Pharmaceuticals, Inc. (“Melt”), and two other companies that began as subsidiaries of Harrow and were subsequently carved-out of our corporate structure and deconsolidated from our financial statements.

 

23
 

 

Factors Affecting Our Performance

 

We believe the primary factors affecting our performance are our ability to increase revenues of our branded pharmaceutical products, proprietary compounded formulations and certain non-proprietary products, grow and gain operating efficiencies in our operations, potential regulatory-related restrictions, optimize pricing and obtain reimbursement options for our drug products, and continue to pursue development and commercialization opportunities for certain of our ophthalmology and other assets that we have not yet made commercially available. We believe we have built a tangible and intangible infrastructure that will allow us to scale revenues efficiently in the near and 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.

 

Recent Developments

 

The following describes certain developments in 2024 to date that are important to understand our financial condition and results of operations. See the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report for additional information about each of these developments.


Apotex - Canadian Out-License

 

In February 2024, we entered into a license and supply agreement with Apotex Inc. (“Apotex”). Under the terms of the agreement, Apotex licensed exclusive rights and marketing authorizations of the following products in the Canadian market from Harrow: VERKAZIA (cyclosporine ophthalmic emulsion) 0.1% and Cationorm PLUS. Apotex was also granted a license for products Apotex will pursue approval for in Canada: VEVYE (cyclosporine ophthalmic solution) 0.1%, IHEEZO (chloroprocaine hydrochloride ophthalmic gel) 3%, and ZERVIATE (cetirizine ophthalmic solution) 0.24% (with VERKAZIA and Cationorm Plus, collectively, the “Apotex Products”). In exchange, Apotex will make payments to Harrow for milestones related to manufacturing arrangements, regulatory and commercial achievements, in addition to royalties on net sales of the Apotex Products.


IHEEZO Reimbursement

 

In January 2024, we met with the Centers for Medicare & Medicaid Services (“CMS”)to request clarification related to its anesthesia billing policy which has historically not allowed for the separate billing of anesthesia services in the physician’s office. During the meeting we requested that CMS clarify that J-Code 2403, IHEEZO’s permanent J-Code, is appropriate to be billed for the anesthesia product itself (i.e., IHEEZO in our case) in the physician office setting. In March 2024, we received communication from a representative at CMS that the inclusion of J-Code 2403 in CMS’s April 2024 quarterly drug pricing file of the average sales prices (ASP) of some Medicare Part B-covered drugs and biologicals confirms that IHEEZO is separately payable in the physician office setting.

 

In February 2024, we made a request to CMS to consider increasing the Medically Unlikely Edits (“MUE”) for IHEEZO’s J-Code from 1 to 2. This request was made because the limitation of one MUE only allowed a single IHEEZO administration (equal to one single-use vial) to be used and billed, while many ophthalmologists perform bilateral ocular procedures, which would require two vials of IHEEZO to be used. On March 20, 2024, the Company received communication from the National Correct Coding Initiative (NCCI) program of CMS stating that CMS decided to increase the MUE for IHEEZO’s J-Code (J2403) from 1 to 2. While not final until published, CMS stated in its communication to the Company that the MUE edit will be (1) effective in July 2024, and (2) made retroactive for procedures dating to January 1, 2024.

 

VEVYE U.S. Launch

 

In January 2024, we launched VEVYE (cyclosporine ophthalmic solution) 0.1%, the first and only water-free cyclosporine dissolved in a semifluorinated alkane approved to treat both the signs and symptoms of dry eye disease in the U.S. We partnered with various entities including PhilRx, Apollo Care and PARx Solutions to enhance our market and patient access program for VEVYE.

 

24
 

 

Results of Operations

 

The following period-to-period comparisons of our financial results for the three months ended March 31, 2024 and 2023 are not necessarily indicative of results for any future period.

 

Revenues

 

Our revenues include amounts recorded from sales of proprietary compounded formulations, sales of branded products to wholesalers through a third-party logistics facility, commissions from third parties and revenues received from royalty payments owed to us pursuant to out-license arrangements.

 

The following presents our revenues for the three months ended March 31, 2024 and 2023:

 

   For the Three Months Ended     
   March 31,     
   2024   2023   Variance 
Product sales, net  $34,508,000   $20,453,000   $14,055,000 
Other revenues   79,000    5,650,000    (5,571,000)
Total revenues  $34,587,000   $26,103,000   $8,484,000 

 

The increase in revenues between periods was related to an increase in sales of our branded ophthalmology products. During 2023, the Company recorded $5,650,000 in revenues associated with the transfer of profits of recently acquired products where the product new drug applications (“NDAs”) had not yet transferred to Harrow. During the three months ended March 31, 2024, revenues from branded products totaled $13,868,000, compared to $6,272,000 (which included revenues from the transfer of profits) during the same period in the prior year.

 

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, amortization of acquired product NDAs, and other related expenses.

 

The following presents our cost of sales for the three months ended March 31, 2024 and 2023:

 

   For the Three Months Ended     
   March 31,     
   2024   2023   Variance 
Cost of sales  $10,553,000   $8,271,000   $2,282,000 

 

The increase in our cost of sales was largely attributable to expenses associated with unit volumes sold and increased direct and indirect costs associated with production of our products.

 

Gross Profit and Margin

 

   For the Three Months Ended     
   March 31,     
   2024    2023   Variance 
Gross profit  $24,034,000    $17,832,000   $6,202,000 
Gross margin   69.49%  68.31%   1.17%

 

The increase in gross margin between the three months ended March 31, 2024 and 2023 was primarily attributable to an increase in sales associated with our branded ophthalmology products, which generally have a higher gross margin profile than our compounded products.

 

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.

 

25
 

 

The following presents our selling, general and administrative expenses for the three months ended March 31, 2024 and 2023:

 

    For the Three Months Ended        
    March 31,     $  
    2024     2023     Variance  
Selling, general and administrative   $ 28,813,000     $ 15,888,000     $ 12,925,000  

 

The increase in selling, general and administrative expenses between periods was primarily attributable to an increase in expenses included regulatory enhancements, costs to support the transition of recent product acquisitions, and an increase in expenses related to the addition of new employees in sales, marketing and other departments to support current and expected growth, including the commercial launch of VEVYE in December 2023. In addition, stock-based compensation expense increased by $2,260,000 for the three months ended March 31, 2024, compared to the prior year period represented another notable increase.

 

Research and Development Expenses

 

Our research and development (“R&D”) expenses primarily include personnel costs, including wages and stock-based compensation, expenses related to the development of intellectual property, investigator-initiated research and evaluations, formulation development, acquired in-process R&D and other costs related to the clinical development of our assets.

 

The following presents our research and development expenses for the three months ended March 31, 2024 and 2023:

 

    For the Three Months Ended        
    March 31,     $  
    2024     2023     Variance  
Research and development   $ 2,149,000     $ 734,000     $ 1,415,000  

 

The increase in R&D expenses between periods was primarily attributable to increased activity related to our expanded branded product portfolio, product acquisitions, product development efforts, product launches, clinical and medical support.

 

Interest Expense, Net

 

Interest expense, net was $5,415,000 for the three months ended March 31, 2024, compared to $4,747,000 for the same period in 2023. The increase during the period ended March 31, 2024 compared to the same period in 2023 was primarily to the result of an increase in the outstanding principal amount of our debt obligations.

 

Investment (Loss) Gain from Eton

 

During the three months ended March 31, 2024, we recorded a loss of $(1,248,000), related to the change in fair market value of Eton’s common stock compared to a gain of $2,042,000 for the same period in 2023.

 

Loss on Extinguishment of Debt

 

During the three months ended March 31, 2023, we recorded a loss on extinguishment of debt of $5,465,000, related to the payoff of a loan.

 

Other Income, Net

 

During the three months ended March 31, 2024, we recorded other income of $26,000, related to our sublease at our lab and office space in Nashville.

 

26
 

 

Liquidity and Capital Resources

 

Liquidity

 

Our cash on hand at March 31, 2024 was $68,538,000, compared to $74,085,000 at December 31, 2023.

&#