UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from ___________ to _____________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip code) |
(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 | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
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 August 7, 2024, there were shares of the registrant’s common stock, $ par value, outstanding.
HARROW, INC.
Table of Contents
| Page | ||||
| Part I | FINANCIAL INFORMATION | 3 | ||
| Item 1. | Financial Statements | 3 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 30 | ||
| Item 4. | Controls and Procedures | 30 | ||
| Part II | OTHER INFORMATION | 31 | ||
| Item 1. | Legal Proceedings | 31 | ||
| Item 1A. | Risk Factors | 31 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 31 | ||
| Item 3. | Defaults Upon Senior Securities | 31 | ||
| Item 4. | Mine Safety Disclosures | 31 | ||
| Item 5. | Other Information | 31 | ||
| Item 6. | Exhibits | 31 | ||
| Signatures | 32 |
| 2 |
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
HARROW, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investment in Eton Pharmaceuticals | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Capitalized software costs, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued rebates and copay assistance | ||||||||
| Accrued payroll and related liabilities | ||||||||
| Deferred revenue and customer deposits | ||||||||
| Current portion of operating lease obligations | ||||||||
| Total current liabilities | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Accrued expenses, net of current portion | ||||||||
| Deferred tax liability | ||||||||
| Notes payable, net of unamortized debt discount | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL HARROW, INC. STOCKHOLDERS’ EQUITY | ||||||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 3 |
HARROW, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| Other revenues | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ||||||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Investment (loss) gain from Eton Pharmaceuticals | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss on extinguishment of debt | ( | ) | ||||||||||||||
| Other income (expenses), net | ( | ) | ( | ) | ||||||||||||
| Total other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax (expense) benefit | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted net loss per share of common stock | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average number of shares of common stock outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 4 |
HARROW, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the periods ended June 30, 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 | $ | $ | $ | ( | ) | $ | | $ | ( | ) | $ | | ||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of consultant stock-based options | ||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||
| Vesting of RSUs and PSUs | ||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||
| Vesting of RSUs | ||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| 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 March 31, 2023 | $ | $ | $ | ( | ) | $ | | $ | ( | ) | $ | | ||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of consultant stock-based options | ||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||
| Vesting of RSUs | ||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of equity awards | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of common stock in connection with: | ||||||||||||||||||||||||||||
| Exercise of employee stock-based options | ||||||||||||||||||||||||||||
| Vesting of RSUs | ||||||||||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
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 Six Months Ended | ||||||||
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization of property, plant and equipment and software development costs | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| (Recovery of) provision for credit losses | ( | ) | ||||||
| Amortization of debt issuance costs and debt discount | ||||||||
| Investment loss (gain) from investment in Eton | ( | ) | ||||||
| Loss on extinguishment of debt | ||||||||
| Stock-based compensation | ||||||||
| Deferred income tax | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable, accrued expenses, accrued rebates and copay assistance | ||||||||
| Accrued payroll and related liabilities | ( | ) | ||||||
| Deferred revenue and customer deposits | ||||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Net proceeds on sale of Eton Pharmaceuticals | ||||||||
| Investment in patent and trademark assets | ( | ) | ||||||
| Purchase of product NDAs and related patents | ( | ) | ||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from 11.875% notes payable, net of costs | ||||||||
| Proceeds from Oaktree Loan, net of costs | ||||||||
| Payment of debt issuance costs | ( | ) | ||||||
| Payment of payroll taxes upon vesting of PSUs, RSUs and exercise of stock options | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from B. Riley senior secured note, net of costs | ||||||||
| Repayment of B. Riley senior secured note | ( | ) | ||||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | ( | ) | ||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | ( | ) | ( | ) | ||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Reclassification of deferred financing costs | $ | $ | ||||||
| Accrual of exit fee related to Oaktree Loan | $ | $ | ||||||
| Purchase of property, plant and equipment included in | ||||||||
| accounts payable and accrued expenses | $ | $ | ||||||
| Right-of-use assets obtained in exchange for new operating lease obligations | $ | $ | ||||||
| Income taxes owed for exercise of options | $ | $ | ||||||
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 and Six Months Ended June 30, 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, all of which are marketed under its Harrow name. The Company also owns and operates ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding businesses.
Basis of Presentation
The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 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
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following represents an update for the three and six months ended June 30, 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.
Credit Losses
The Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables. Management considers historical collection rates, the current financial status of the Company’s customers, macroeconomic factors, and other industry-specific factors when evaluating for current expected credit losses. Forward-looking information is also considered in the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable, management believes that the carrying value, net of expected losses, approximates fair value and therefore, relies more on historical and current analysis of such financial instruments, including its trade receivables.
| 7 |
To determine the provision for credit losses for accounts receivable, the Company has disaggregated its accounts receivable by class of customer at the business component level, as management determined that risk profile of the Company’s customers is consistent based on the type and industry in which they operate, mainly in the pharmaceuticals industry. Each business component is analyzed for estimated credit losses individually. In doing so, the Company establishes a historical loss matrix, based on the previous collections of accounts receivable by the age of such receivables, and evaluates the current and forecasted financial position of its customers, as available. Further, the Company considers macroeconomic factors and the status of the pharmaceuticals industry to estimate if there are current expected credit losses within its trade receivables based on the trends of the Company’s expectation of the future status of such economic and industry-specific factors. Also, specific allowance amounts are established based on review of outstanding invoices to record the appropriate provision for customers that have a higher probability of default.
The
accounts receivable balance on the Company’s condensed consolidated balance sheet as of June 30, 2024 was $
| Balance at January 1, 2024 | $ | |||
| Change in expected credit losses | ( | ) | ||
| Write-offs, net of recoveries | ( | ) | ||
| Balance at June 30, 2024 | $ |
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
December 31, 2023, the Company measured its investment in Eton Pharmaceuticals, Inc. (“Eton”) on a recurring basis. The Company’s
investment in Eton was classified as a Level 1 as the fair value was determined using quoted market prices in active markets for the
same securities. As of December 31, 2023, the fair market value of the Company’s investment in Eton was $
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.
| 8 |
The following table presents the estimated fair values and the carrying values:
| June 30, 2024 | December 31, 2023 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
| 2026 Notes | $ | $ | $ | $ | ||||||||||||
| 2027 Notes | $ | $ | $ | $ | ||||||||||||
| Oaktree Loan | $ | $ | $ | $ | ||||||||||||
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
net loss per common share is computed by dividing net loss attributable to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to
common stockholders for the period by the weighted average number of common and common equivalent shares, such as stock options, restricted
stock units (“RSUs”), and market-based vesting performance stock units (“PSUs”) outstanding during the period.
Common equivalent shares (using the treasury stock method) from stock options, unvested RSUs, and unvested PSUs were and
at June 30, 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 ceases providing services. The number of
shares underlying vested RSUs at June 30, 2024 and 2023 was
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Numerator – net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator – weighted average number of shares outstanding, basic and diluted | ||||||||||||||||
| Net loss per share, basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
Income Taxes
The
Company’s effective tax rate was
As
of June 30, 2024 and December 31, 2023, there were
Investment in Melt Pharmaceuticals, Inc. – Related Party
The
Company owns shares of common stock and shares of preferred stock of Melt (representing in aggregate approximately
| 9 |
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 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 June 30, 2024:
| Cost | Share of Equity Method | Net Carrying | ||||||||||
| Basis | Losses | Value | ||||||||||
| Common stock | $ | $ | ( | ) | $ | |||||||
| Preferred stock | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
See Note 4 for more information and related party disclosure regarding Melt.
Accounting Guidance Issued but Not Adopted at June 30, 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.
| 10 |
NOTE 3. REVENUES
The Company accounts for contracts with customers in accordance with ASC 606, Revenue 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, 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. |
| 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. |
| 11 |
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 June 30, 2024, the Company held 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.
Revenue disaggregated by revenue source consisted of the following:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Product sales, net | $ | $ | $ | $ | ||||||||||||
| Other revenues | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
Deferred
revenue and customer deposits at June 30, 2024 and December 31, 2023 were $
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 $
| 12 |
In
March 2024, Melt completed its Series B Preferred Stock financing which raised gross proceeds of approximately $
The Company’s Chief Executive Officer, Mark L. Baum, is a member of the Melt board of directors. The Melt board of directors consists of five members, including Mr. Baum. Mr. Baum 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:
For the Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Revenues, net | $ | $ | ||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | ||
| Net loss | $ | ( | ) | $ | ( | ) | ||
The unaudited condensed balance sheet information of Melt is summarized below:
| At June 30, | At December 31, | |||||||
| 2024 | 2023 | |||||||
| Current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Total liabilities | $ | $ | ||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
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 was as follows:
At June 30, 2024 | At December 31, 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
NOTE 6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
At June 30, 2024 | At December 31, 2023 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Prepaid computer software licenses and related expenses | ||||||||
| Other prepaid expenses | ||||||||
| Receivable due from Melt | ||||||||
| Prepaid FY 2024 Prescription Drug User (“PDUFA”) fees | ||||||||
| Deferred Oaktree Loan commitment fee | ||||||||
| Deposits and other current assets | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
| 13 |
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
At June 30, 2024 | At December 31, 2023 | |||||||
| Property, plant and equipment, net: | ||||||||
| Computer hardware | $ | $ | ||||||
| Furniture and equipment | ||||||||
| Lab and pharmacy equipment | ||||||||
| Leasehold improvements | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
For
the three and six months ended June 30, 2024, depreciation related to property, plant and equipment was $
NOTE 8. CAPITALIZED SOFTWARE COSTS
Capitalized software costs consisted of the following:
At June 30, 2024 | At December 31, 2023 | |||||||
| Capitalized software costs | ||||||||
| Capitalized internal-use software development costs | $ | $ | ||||||
| Acquired third-party software license for internal-use | ||||||||
| Total gross capitalized software for internal-use | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Capitalized internal-use software in process | ||||||||
| $ | $ | |||||||
The
Company recorded amortization expense of $
NOTE 9. INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets at June 30, 2024 consisted of the following:
Amortization Periods (in years) | Cost | Accumulated Amortization | Disposal | Net Carrying Value | ||||||||||||||
| Patents | $ | $ | ( | ) | $ | $ | ||||||||||||
| Licenses | ( | ) | ||||||||||||||||
| Trademarks | ||||||||||||||||||
| Acquired NDAs | ( | ) | ||||||||||||||||
| Customer relationships | ( | ) | ||||||||||||||||
| Trade name | ( | ) | ||||||||||||||||
| Non-competition clause | ( | ) | ||||||||||||||||
| State pharmacy licenses | ( | ) | ||||||||||||||||
| $ | $ | ( | ) | $ | $ | |||||||||||||
| 14 |
Amortization expense for intangible assets was as follows:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Patents | $ | $ | $ | $ | ||||||||||||
| Licenses | ||||||||||||||||
| Acquired NDAs | ||||||||||||||||
| Customer relationships | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Estimated future amortization expenses for the Company’s intangible assets at June 30, 2024 was as follows:
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| $ |
There
were
NOTE 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
| At June 30, | At December 31, | |||||||
| 2024 | 2023 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued insurance premium | ||||||||
| Other accrued payments | ||||||||
| Accrued interest (see Note 11) | ||||||||
| Accrued exit fee for Oaktree Loan (see Note 11) | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Non-current total accrued expenses | $ | $ | ||||||
The
Company financed insurance policies for the policy terms of August 2023 through August 2024. The financing agreement had an interest
rate of
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 $
| 15 |
Interest
expense related to the Oaktree Loan totaled $
The
Oaktree Loan carries an exit fee equal to
HROWM – 11.875% Senior Notes Due 2027
In
December 2022 and January 2023, the Company closed offerings of $
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 $
A summary of the Company’s debt is described as follows:
| At June 30, | At December 31, | |||||||
| 2024 | 2023 | |||||||
| $ | $ | |||||||
| Oaktree Loan due | ||||||||
| Less: Unamortized debt issuance costs, net of premium | ( | ) | ( | ) | ||||
| $ | $ | |||||||
For
the three and six months ended June 30, 2024, the total effective interest rate of the Company’s debt was
At June 30, 2024, future minimum payments under the Company’s debt were as follows:
| Amount | ||||
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total minimum payments | ||||
| Less: amount representing interest payments | ( | ) | ||
| Notes payable, gross principal amount due | ||||
| Less: unamortized debt issuance costs, net of premium | ( | ) | ||
| Notes payable, net of unamortized debt issuance costs | $ | |||
| 16 |
NOTE 12. LEASES
The
Company leases office and laboratory space under non-cancelable operating leases listed below. These lease agreements have remaining
terms between to
| ● | An
operating lease for |
| ● | An
operating lease for |
| ● | An
operating lease for |
| ● | An
operating lease for |
| ● | In
March 2024, the Company entered into an operating lease for |
At
June 30, 2024, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases
held by the Company were
During
the three and six months ended June 30, 2024, cash paid for amounts included for the operating lease liabilities was $
Future lease payments under operating leases as of June 30, 2024 were as follows:
| Operating Leases | ||||
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Less: amount representing interest payments | ( | ) | ||
| Total operating lease obligations | ||||
| Less: current portion, operating lease obligations | ( | ) | ||
| Operating lease obligations, net of current portion | $ | |||
| 17 |
Common Stock
During
the six months ended June 30, 2024, the Company issued shares of common stock and received proceeds of $
During the six months ended June 30, 2024, the Company issued shares of common stock upon the cashless exercise of options to purchase shares at an exercise price of $ per share.
During
the six months ended June 30, 2024, RSUs granted in February 2021 to Andrew R. Boll, the Company’s Chief Financial Officer,
vested, and
During the six months ended June 30, 2024, RSUs granted in February 2021 to Mark L. Baum, the Company’s Chief Executive Officer, vested, and 90,164 shares of the Company’s common stock were issued to Mr. Baum, net of shares of common stock withheld for payroll tax withholdings totaling $.
During
the six months ended June 30, 2024, RSUs granted in February 2021 to John Saharek, the Company’s Chief Commercial Officer,
vested, and
During
the six months ended June 30, 2024, RSUs granted in February 2021 to various other employees, vested, and
During
the six months ended June 30, 2024, the Company issued
During the six months ended June 30, 2024, 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 directors cease 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 June 30, 2024, the 2017 Plan provides for the issuance of a maximum of shares of the Company’s common stock. The purpose of the Plans are to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in the Company’s development and financial success. Under the Plans, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, RSUs and restricted stock. The Plans are administered by the Compensation Committee of the Company’s Board of Directors. The Company had shares available for future issuances under the 2017 Plan at June 30, 2024.
| 18 |
Stock Options
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| Options outstanding – January 1, 2024 | $ | |||||||||||||||
| Options granted | $ | |||||||||||||||
| Options exercised | ( | ) | $ | |||||||||||||
| Options cancelled/forfeited | ( | ) | $ | |||||||||||||
| Options outstanding – June 30, 2024 | $ | $ | ||||||||||||||
| Options exercisable | $ | $ | ||||||||||||||
| Options vested and expected to vest | $ | $ | ||||||||||||||
The aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would have been received by option holders if all option holders had exercised and immediately sold all shares underlying options with an exercise price lower than the market price on June 28, 2024, based on the closing price of the Company’s common stock of $ on that date.
During the six months ended June 30, 2024, the Company granted stock options to certain employees. . 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 %. 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.
| 2024 | ||||
| Weighted-average fair value of options granted | $ | |||
| Expected terms (in years) | ||||
| Expected volatility | % | |||
| Risk-free interest rate | - | % | ||
| Dividend yield | ||||
| 19 |
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life in Years | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
| $ - $ | $ | $ | ||||||||||||||||||
As of June 30, 2024, there was approximately $ of total unrecognized compensation expense related to unvested stock options granted under the Plans. That expense is expected to be recognized over the weighted-average remaining vesting period of years. The stock-based compensation for all stock options was $ and $ during the three and six months ended June 30, 2024, respectively, and $ and $ during the same periods in 2023, respectively.
The intrinsic value of options exercised during the six months ended June 30, 2024 was $.
Restricted Stock Units
RSU awards are granted subject to certain vesting requirements and other restrictions, including time-based and performance-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.
| Number of Shares | Weighted Average Grant Date Fair Value | |||||||
| RSUs unvested - January 1, 2024 | $ | |||||||
| RSUs granted | ||||||||
| RSUs vested | ( | ) | ||||||
| RSUs cancelled/forfeited | ( | ) | ||||||
| RSUs unvested - June 30, 2024 | $ | |||||||
As of June 30, 2024, the total unrecognized compensation expense related to unvested RSUs was approximately $, which is expected to be recognized over a weighted-average period of years, based on estimated and actual vesting schedules of the applicable RSUs. The stock-based compensation for RSUs during the three and six months ended June 30, 2024 was $ and $, respectively, and was $ and $ during the same periods in 2023, respectively.
Performance Stock Units
| Number of Shares | Weighted Average Grant Date Fair Value | |||||||
| PSUs unvested – January 1, 2024 | $ | |||||||
| PSUs granted | ||||||||
| PSUs vested | ||||||||
| PSUs cancelled/forfeited | ||||||||
| PSUs unvested – June 30, 2024 | $ | |||||||
| 20 |
As of June 30, 2024, the total unrecognized compensation expense related to unvested PSUs was approximately $, which is expected to be recognized over a weighted-average period of years, based on estimated and actual vesting schedules of the applicable PSUs. The stock-based compensation for PSUs during the three and six months ended June 30, 2024 was $ and $, respectively, and $ and $ during the same periods in 2023, respectively.
Stock-Based Compensation Summary
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Employees - selling, general and administrative | $ | $ | $ | $ | ||||||||||||
| Employees - research and development | ||||||||||||||||
| Directors - selling, general and administrative | ||||||||||||||||
| Consultants - selling, general and administrative | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 note.
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 note 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). Since July 2021, the complaint has been amended and OSRX added counterclaims alleging ImprimisRx, LLC is violating the Lanham Act with false advertising. The Court granted cross motions for summary judgement on each party’s Lanham Act claims thus leaving only ImprimisRx, LLC’s copyright infringement, trademark infringement and unfair competition claims for trial. ImprimisRx, LLC is seeking damages from OSRX. The matter was expected to go to trial in August 2024, however, due to scheduling conflicts with the Court, the trial will be re-scheduled to a later date that has not yet been determined.
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.
| 21 |
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 and six months ended June 30, 2024, $
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 and six months ended June 30, 2024, $
| 22 |
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.
Contract Manufacturing
The
Company has 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
$
NOTE 15. SEGMENTS AND CONCENTRATIONS
The Company operates its business on the basis of a reportable segment, which is the business of discovery, development, and commercialization of innovative ophthalmic therapies. An operating segment is defined as a component of an entity that engages in business activities from which it may recognize revenues and incur expense, its operating results are regularly reviewed by the entity’s chief operating decision maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance, and its discrete financial information is available. The Company’s CODM, who is the Chief Executive Officer, evaluates the Company as a operating segment, consistent with internal management reporting.
The
Company had one product that accounted for more than
As
of June 30, 2024 and December 31, 2023, accounts receivable from a single customer accounted for
The
Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted for
NOTE 16. SUBSEQUENT EVENTS
The Company has performed an evaluation of events occurring subsequent to June 30, 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
July 2024, the Company issued
shares of common stock and received proceeds of $
In July 2024, the Company issued shares of common stock upon the cashless exercise of options to purchase shares at an exercise price of $ per share.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”). Our condensed consolidated financial statements have been prepared and, unless otherwise stated, the information derived therefrom as presented in this discussion and analysis is presented, in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The information contained in this Quarterly Report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in our other reports filed with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended December 31, 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.
Factors Affecting Our Performance
We believe the primary factors affecting our performance are (1) our ability to increase revenues of our branded pharmaceutical products, proprietary compounded formulations and certain non-proprietary products, and grow and gain operating efficiencies in our operations, (2) potential and ongoing regulatory-related restrictions, (3) our ability to 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.
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Recent Developments
The following is a summary of selected significant developments affecting our business that occurred since December 31, 2023. For additional developments, see our Annual Report on Form 10-K for the year ended December 31, 2023.
TRIESENCE PPQ Batches and Manufacturing
In June 2024, we announced the successful manufacture of a process performance qualification (“PPQ”) batch of TRIESENCE. In order to re-launch TRIESENCE for commercial use, we believe two additional, consecutive and successful PPQ batches (an aggregate of three PPQ batches) of TRIESENCE will need to be made. A second PPQ batch was produced in July 2024, and we are currently waiting for analytical results associated with this batch. If the second PPQ batch was produced successfully, the Company (along with its manufacturing partners) expects to produce a third PPQ batch before the end of the third quarter 2024. If these three PPQ batches are manufactured successfully, we believe TRIESENCE could be re-launched in the U.S. prior to the end of 2024. In accordance with the terms of the Asset Purchase Agreement we entered into with Novartis Technology, LLC and Novartis Innovative Therapies AG (collectively, “Novartis”), a $37,000,000 milestone payment will be due to Novartis upon re-launch in the U.S.
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 for these licenses, 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, we 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. The MUE edit was made effective on July 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.
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Results of Operations
The following period-to-period comparisons of our financial results for the three and six months ended June 30, 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 | For the Six Months Ended | |||||||||||||||||||||||
| June 30, | $ | June 30, | $ | |||||||||||||||||||||
| 2024 | 2023 | Variance | 2024 | 2023 | Variance | |||||||||||||||||||
| Product sales, net | $ | 48,871,000 | $ | 29,542,000 | $ | 19,329,000 | $ | 83,379,000 | $ | 49,995,000 | $ | 33,384,000 | ||||||||||||
| Other revenues | 68,000 | 3,928,000 | (3,860,000 | ) | 147,000 | 9,578,000 | (9,431,000 | ) | ||||||||||||||||
| Total revenues | $ | 48,939,000 | $ | 33,470,000 | $ | 15,469,000 | $ | 83,526,000 | $ | 59,573,000 | $ | 23,953,000 | ||||||||||||
The increase in revenues between periods was related to an increase in sales volumes of our branded ophthalmology products. During the three and six months ended June 30, 2023, the Company recorded $3,928,000 and $9,578,000, respectively, in revenues associated with the transfer of sales and profits of recently acquired products where the product new drug applications (“NDAs”) had not yet transferred to Harrow. During the three months and six months ended June 30, 2024, revenues from branded products totalled $27,292,000 and $41,229,000, respectively, compared to $13,095,000 and $19,367,000 (which included revenues from the transfer of profits) during the same periods in the prior year, respectively. Net sales of IHEEZO were $11,294,000 and $13,616,000 during the three months and six months ended June 30, 2024, respectively.
Cost of Sales
Our cost of sales includes direct and indirect costs to manufacture formulations and 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 | For the Six Months Ended | |||||||||||||||||||||||
| June 30, | $ | June 30, | $ | |||||||||||||||||||||
| 2024 | 2023 | Variance | 2024 | 2023 | Variance | |||||||||||||||||||
| Cost of sales | $ | 12,539,000 | $ | 10,000,000 | $ | 2,539,000 | $ | 23,092,000 | $ | 18,271,000 | $ | 4,821,000 | ||||||||||||
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 | For the Six Months Ended | |||||||||||||||||||||||
| June 30, | $ | June 30, | $ | |||||||||||||||||||||
| 2024 | 2023 | Variance | 2024 | 2023 | Variance | |||||||||||||||||||
| Gross Profit | $ | 36,400,000 | $ | 23,470,000 | $ | 12,930,000 | $ | 60,434,000 | $ | 41,302,000 | $ | 19,132,000 | ||||||||||||
| Gross Margin | 74.38 | % | 70.12 | % | 4.26 | % | 72.35 | % | 69.33 | % | 3.02 | % | ||||||||||||
The increase in gross margin between the three and six months ended June 30, 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.
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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 FDA approved, proprietary compounded formulations and other non-proprietary pharmacy products and formulations.
The following presents our selling, general and administrative expenses:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||
| June 30, | $ | June 30, | $ | |||||||||||||||||||||
| 2024 | 2023 | Variance | 2024 | 2023 | Variance | |||||||||||||||||||
| Selling, general and administrative | $ | 31,817,000 | $ | 19,957,000 | $ | 11,860,000 | $ | 60,630,000 | $ | 35,845,000 | $ | 24,785,000 | ||||||||||||
The increase in selling, general and administrative expenses between periods was primarily attributable to an increase in expenses including 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. Stock-based compensation expense increased by $1,266,000 during the six months ended June 30, 2024 compared to the prior year period.
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, and other costs related to the clinical development of our assets.
The following presents our research and development expenses:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||
| June 30, | $ | June 30, | $ | |||||||||||||||||||||
| 2024 | 2023 | Variance | 2024 | 2023 | Variance | |||||||||||||||||||
| Research and development | $ | 3,053,000 | $ | 1,161,000 | $ | 1,892,000 | $ | 5,202,000 | $ | 1,895,000 | $ | 3,307,000 | ||||||||||||
The increase in R&D expenses between periods was primarily attributable to activity related to our expanded branded product portfolio, technical transfer activities associated with the production of certain products related to our product acquisitions that occurred in 2023, product development efforts, product launches, and clinical and medical support.
Interest Expense, Net
Interest expense, net was $5,471,000 and $10,886,000 for the three and six months ended June 30, 2024, respectively, compared to $5,704,000 and $10,451,000 for the same periods in 2023, respectively. The decrease during the three months ended June 30, 2024 compared to the same period in 2023 was primarily the result of increased interest income earned. The increase during the six months ended June 30, 2024 compared to the same period in 2023 was primarily the result of the increase in the outstanding principal amount of our debt obligations.
Investment (Loss) Gain from Eton
During the three and six months ended June 30, 2024, we recorded a loss of $(1,923,000) and $(3,171,000), respectively, related to the change in fair market value of Eton’s common stock at the time of its sale, including trading expenses and commissions of approximately $436,000, compared to a loss of $(714,000) and gain of $1,328,000, respectively, during the same periods in 2023.
Loss on Extinguishment of Debt
During the six months ended June 30, 2023, we recorded a loss on extinguishment of debt of $5,465,000, related to the early payoff of a loan.
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Other Income, Net
During the three and six months ended June 30, 2024, we recorded other income of $46,000 and $72,000, respectively, related to a sublease of lab and office space in Nashville. During the three and six months ended June 30, 2023, we recorded other expense, net of $178,000 and $149,000, respectively, related primarily to transition services and write-off of inventories associated with the divestment of our non-ophthalmology business.
Tax (Expense)/Benefit
During the three and six months ended June 30, 2024, we recorded income tax expense of $(655,000) and tax benefit of $15,000 and $303,000, during the same periods in 2023, respectively. The income tax expense in 2024 is primarily related to the timing differences related to the tax deductibility for stock-based compensation, interest expense and loss on our investment in Eton. We expect the timing differences will result in taxable income for the year ending December 31, 2024.
Liquidity and Capital Resources
Liquidity
Our cash on hand at June 30, 2024 was $70,968,000, compared to $74,085,000 at December 31, 2023.
As of the date of this Quarterly Report, we believe that our cash and cash equivalents will be sufficient to sustain our planned level of operations and capital expenditures for at least the next 12 months. In addition, we may consider the sale of certain assets including, but not limited to, part of, or all of, our investments in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”) and any of our consolidated subsidiaries. However, we may pursue acquisitions of revenue generating products or drug candidates or other strategic transactions that involve large expenditures or we may experience growth more rapidly or on a larger scale than we expect, any of which could result in the depletion of capital resources more rapidly than anticipated and could require us to seek additional financing to support our operations.
We expect to use our current cash position and funds generated from our operations and any financing to pursue our business plan, which includes developing and commercializing drug candidates, compounded formulations and technologies, integrating and developing our operations, pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of additional drug products, drug candidates, and/or assets or technologies, pharmacies, outsourcing facilities, drug company and manufacturers, and otherwise fund our operations. We may also use our resources to conduct clinical trials or other studies in support of our formulations or any drug candidate for which we pursue FDA approval, to pursue additional development programs or to explore other development opportunities.
Net Cash Flow
The following provides detailed information about our net cash flows:
| For the Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash (used in) provided by: | ||||||||
| Operating activities | $ | (7,374,000 | ) | $ | (3,648,000 | ) | ||
| Investing activities | 4,993,000 | (132,219,000 | ) | |||||
| Financing activities | (736,000 | ) | 62,351,000 | |||||
| Net change in cash and cash equivalents | (3,117,000 | ) | (73,516,000 | ) | ||||
| Cash and cash equivalents at beginning of the period | 74,085,000 | 96,270,000 | ||||||
| Cash and cash equivalents at end of the period | $ | 70,968,000 | $ | 22,754,000 | ||||
Operating Activities
Net cash used in operating activities during the six months ended June 30, 2024 was $(7,374,000) compared to $(3,648,000) during the same period in the prior year. The increase in net cash used in operating activities between the periods was mainly attributed to increase in operating expenses associated with the commercial launch of VEVYE in January 2024, including increased headcount associated with the sales force, recent product acquisition integrations and increased costs of goods sold.
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Investing Activities
Net cash provided by (used in) investing activities during the six months ended June 30, 2024 was $4,993,000 compared to $(132,219,000) during the same period in the prior year. Cash used in investing activities in 2023 was primarily related to the acquisition of five branded products completed in January 2023. Cash provided by investing activities in 2024 was primarily related to the sale of our investment position in Eton.
Financing Activities
Net cash (used in) provided by financing activities during the six months ended June 30, 2024 and 2023 was $(736,000) and $62,351,000, respectively. Cash used in financing activities during the six months ended June 30, 2024 was primarily related to payment of payroll taxes upon vesting of RSUs in exchange for shares withheld from employees. Cash provided by financing activities during the six months ended June 30, 2023 was primarily related to proceeds received from the sale of notes in our 2023 capital markets transactions and entering into loan arrangements, offset by repayment of the B. Riley senior secured note and payment of payroll taxes upon vesting and exercise of equity instruments in exchange for shares withheld from employees.
Sources of Capital
Our principal sources of cash have consisted of sales of our common stock, debt issuances, sales of our investments, and on an annual basis (e.g. for the year ended December 31, 2023) cash generated from operating activities. We may also sell some or all of our ownership interests in Surface, Melt or our other subsidiaries.
We may acquire new products, product candidates and/or businesses and, as a result, we may need significant additional capital to support our business plan and fund our proposed business operations. We may receive additional proceeds from the exercise of stock options that are currently outstanding. We may also seek additional financing from a variety of sources, including other equity or debt financings, funding from corporate partnerships or licensing arrangements, sales of assets or any other financing transaction. If we issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms or rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration or licensing arrangements or sales of assets, we may be required to relinquish potentially valuable rights to our product candidates or proprietary technologies or formulations, or grant licenses on terms that are not favorable to us. If we raise funds by incurring additional debt, we may be required to pay significant interest expenses and our leverage relative to our earnings or to our equity capitalization may increase. Obtaining commercial loans, assuming they would be available, would increase our liabilities and future cash commitments and may impose restrictions on our activities, such as the financial and operating covenants. Further, we may incur substantial costs in pursuing future capital and/or financing transactions, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which would adversely impact our financial results.
We may be unable to obtain financing when necessary as a result of, among other things, our performance, general economic conditions, conditions in the pharmaceuticals and pharmacy industries, or our operating history, including our past bankruptcy proceedings. In addition, the fact that we have a limited history of profitability could further impact the availability or cost to us of future financings. As a result, sufficient funds may not be available when needed from any source or, if available, such funds may not be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital needs when needed, then we may need to forego pursuit of potentially valuable development or acquisition opportunities, we may not be able to continue to operate our business pursuant to our business plan, which would require us to modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing and other activities, or we may be forced to discontinue our operations entirely.
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Recently Issued and Adopted Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as they existed on June 30, 2024. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective to achieve their stated purpose as of June 30, 2024, the end of the period covered by this Quarterly Report.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 14 to our unaudited condensed consolidated financial statements included in this Quarterly Report for information on various legal proceedings, which is incorporated into this Item by reference.
Item 1A. Risk Factors
In addition to the other information contained in this Quarterly Report you should consider the risk factors and the other information in our Annual Report on Form 10-K for the year ended December 31, 2023, including our audited financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” If any such risks actually occur, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit Number |
Description | |
| 31.1* | Certification of Mark L. Baum, principal executive officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. | |
| 31.2* | Certification of Andrew R. Boll, principal financial and accounting officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. | |
| 32.1** | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Mark L. Baum, principal executive officer, and Andrew R. Boll, principal financial and accounting officer. | |
| 101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, has been formatted in Inline XBRL. |
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Harrow, Inc. | ||
| Dated: August 7, 2024 | By: | /s/ Mark L. Baum |
| Mark L. Baum | ||
| Chief Executive Officer and Director | ||
| (Principal Executive Officer) | ||
| By: | /s/ Andrew R. Boll | |
| Andrew R. Boll | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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