UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
For the fiscal year ended December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35814
HARROW HEALTH, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
45-0567010
(IRS Employer
Identification No.)
102 Woodmont Blvd., Suite 610
Nashville, TN 37205
(Address of Principal Executive Offices)(Zip Code)
(615) 733-4730
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value per share
Trading
Symbol
HROW
Name of Each Exchange on Which Registered
The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Non-accelerated filer ☒
Emerging growth company ☐
Accelerated filer ☐
Smaller reporting 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 check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common
stock held by non-affiliates of the registrant was approximately $125 million, based on the closing price of $5.21 for the registrant’s common stock as
quoted on The NASDAQ Capital Market on that date. For purposes of this calculation, it has been assumed that shares of common stock held by each
director, each officer and each person who owns 10% or more of the outstanding common stock of the registrant are held by affiliates of the registrant. The
treatment of these persons as affiliates for purposes of this calculation is not conclusive as to whether such persons are affiliates of the registrant for any
other purpose.
As of March 8, 2021, there were 25,983,364 shares of the registrant’s common stock outstanding.
Portions of the registrant’s definitive proxy statement for its 2021 Annual Meeting of Stockholders are incorporated by reference in Part III of this annual
report on Form 10-K, to the extent stated herein.
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Exhibits, Financial Statement Schedules
Form 10-K Summary
Item 15.
Item 16.
SIGNATURES
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As used in this Annual Report, unless indicated or the context requires otherwise, the terms the “Company,” “Harrow,” “we,” “us” and “our”
refer to Harrow Health, Inc. and its consolidated subsidiaries.
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 Annual Report other than statements of historical fact are forward-looking statements. These forward-looking
statements involve risks and uncertainties and reflect only our current views, expectations and assumptions with respect to future events and our future
performance. If risks or uncertainties materialize or assumptions prove incorrect, actual results or events could differ materially from those expressed or
implied by such forward-looking statements. Risks that could cause actual results to differ from those expressed or implied by the forward-looking
statements we make include, among others, risks related to: the impact of the COVID-19 pandemic on our financial condition, liquidity or results of
operations, our ability to successfully implement our business plan, develop and commercialize our proprietary formulations in a timely manner or at all,
identify and acquire additional proprietary formulations, manage our pharmacy operations, service our debt, obtain financing necessary to operate our
business, recruit and retain qualified personnel, manage any growth we may experience and successfully realize the benefits of our previous acquisitions
and any other acquisitions and collaborative arrangements we may pursue; competition from pharmaceutical companies, outsourcing facilities and
pharmacies; general economic and business conditions; regulatory and legal risks and uncertainties related to our pharmacy operations and the pharmacy
and pharmaceutical business in general; physician interest in and market acceptance of our current and any future formulations and compounding
pharmacies generally; our limited operating history; and the other risks and uncertainties described under the heading “Risk Factors” in Part I, Item 1A
of this Annual Report. 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.
We have registered trademarks, copyrights and/or pending trademark and copyright applications for a number of proprietary names in the United
States, including, but not limited to: Imprimis®, ImprimisRx®, Harrow Health®, Visionology®, Dropless®, LessDrops®, Dropless Cataract Surgery®,
Klarity-C®, Dropless Therapy®, MKO Melt®, and Simple Drops®. We may choose to pursue trademark protection in other jurisdictions for one or more of
these or other marks in the future. All other trademarks, service marks and trade names included or incorporated by reference into this Annual Report, are
the property of their respective owners.
PART I
ITEM 1. BUSINESS
Overview
Our business specializes in the development, production and sale of innovative medications that offer unique competitive advantages and serve
unmet needs in the marketplace through our subsidiaries and deconsolidated companies. We own and operate one of the nation’s leading ophthalmic
pharmaceutical businesses, ImprimisRx. In addition to wholly owning ImprimisRx, we also have non-controlling equity positions in Eton Pharmaceuticals,
Inc. (“Eton”), Surface Ophthalmics, Inc. (“Surface”), and Melt Pharmaceuticals, Inc. (“Melt”), all companies that began as subsidiaries of Harrow. We also
recently launched a new business called Visionology and are exploring opportunities to launch other subsidiaries. We own royalty rights in various drug
candidates being developed by Surface and Melt. We intend to continue to create and hold equity and royalty rights in new businesses that commercialize
drug candidates that are internally developed or otherwise acquired or licensed from third parties.
ImprimisRx
ImprimisRx is our ophthalmic focused prescription pharmaceutical business. We offer to over 9,000 physician customers and their patients
medically necessary prescription drugs to meet their needs that are otherwise unmet by commercially available drugs. We make our formulations available
at prices that are, in most cases, lower than non-customized commercial drugs. Our current ophthalmic formulary includes over twenty compounded
formulations, many of which are patented or patent-pending, and are customizable for the specific needs of a patient. Some examples of our compounded
medications are various combinations of drugs formulated into one bottle and numerous preservative-free formulations. Depending on the formulation, the
regulations of a specific state, and ultimately the needs of the patient, ImprimisRx products may be dispensed as patient-specific medications from our
503A pharmacy, or for in-office use, made according to federal current good manufacturing practices (or cGMPs) or other FDA guidance documents, in our
FDA-registered New Jersey Outsourcing Facility (“NJOF”).
On August 1, 2020, ImprimisRx entered into a Commercial Alliance Agreement (the “Dexycu Agreement”) with Eyepoint Pharmaceuticals, Inc.
(“Eyepoint”), pursuant to which Eyepoint granted ImprimisRx the non-exclusive right to co-promote DEXYCU® (dexamethasone intraocular suspension)
9% for the treatment of post-operative inflammation following ocular surgery in the United States. Pursuant to the Dexycu Agreement, Eyepoint pays
ImprimisRx a fee that is calculated based on the quarterly sales of DEXCYU in excess of predefined volumes to specific customers of ImprimisRx in the
U.S.
We expect to acquire and/or develop additional FDA-approved ophthalmic drugs that allow us to leverage the commercial infrastructure of
ImprimisRx to promote, sell, and ultimately bring these products to market.
1
Visionology
Visionology is a membership-based online eye health and medication platform. Visionology leverages our experience in the ophthalmic
pharmaceutical business, our relationships with eyecare professionals across the United States, and our expertise in developing and deploying telemedicine
software. We recently launched a proof-of-concept for Visionology in certain states in the southeast area of the U.S. If successful, we expect Visionology
will expand access to its service later in 2021.
Ophthalmology Market
For any ocular procedure, a surgeon may require drugs for sedation, dilation, and inflammation and infection prevention. The cataract surgery
market continues to experience significant growth. According to Market Scope, approximately 4.2 million cataract surgeries were performed in the U.S. in
2019. The National Eye Institute estimates that over 24 million Americans currently have cataracts and that this number will grow to 38 million by 2030
and reach more than 50 million by 2050. In addition, the American Academy of Ophthalmology (AAO) estimates that over one-half of Americans require
some form of vision correction and 43 million of these individuals are candidates for refractive surgery. Nearly 96 percent of the refractive surgery
procedures performed are LASIK (laser in situ keratomileusis) surgeries, an outpatient surgical procedure used to treat nearsightedness, farsightedness, and
astigmatism. According to Statista, an estimated 600,000 LASIK procedures were performed in the U.S. in 2015.
According to the Glaucoma Research Foundation, there are over 3 million Americans with glaucoma but only half are aware they have it. Open-
angle glaucoma (the most common type of glaucoma) is a condition of increased intraocular pressure that causes gradual loss of sight. Glaucoma is
incurable, and if not managed can lead to blindness. Generally, the first line of treatment consists of a prostaglandin analogue (PGA) eye drop regimen. As
the disease progresses, non-PGA products are generally added as a second line treatment. Topical agents, other than PGAs, include beta blockers, alpha
agonists, miotics and steroids. According to a 2013 article in Glaucoma Today, up to 50 percent of glaucoma patients require more than one drug following
a few months of initial treatment and there is a direct correlation between the number of glaucoma bottles and decreased adherence; however, the FDA has
yet to approve a PGA combination product despite combination products including a PGA (Xalacom®, DuoTrav® and Ganfort®) available outside of the
U.S. According to a 2017 Market Scope report, the glaucoma pharmaceuticals market is expected to reach $5.3 billion in 2022.
Dry eye occurs when the eye does not produce enough tears, or when the tears are not of the correct consistency and evaporate too quickly.
Inflammation of the surface of the eye may also occur. We believe that dry eye disease, or DED, affects over 30 million people in the U.S., and a major
epidemiological study, the Beaver Dam Offspring Study, published in 2014 in the American Journal of Ophthalmology, reported that in a cohort of over
3,000 patients, DED was self-reported by 14.5% of the patients. According to a 2017 Market Scope report, the global dry eye treatments market is expected
to grow from $3.7 billion in 2017 to $4.9 billion in 2022. Dry eye is among the most common conditions seen by eye care professionals.
Presbyopia is the normal loss of near focusing ability that occurs with age. Most people begin to notice the effects of presbyopia sometime after
age 40, when they start having trouble seeing small print clearly. According to an American Academy of Ophthalmology report from 2018, there are an
estimated 1.8 billion people worldwide who suffer from presbyopia, with eye glasses (more commonly referred to as “readers”) being the most common
treatment option. Based on our understanding, there are currently four eyedrops undergoing clinical trials/development in the U.S. aiming to be first to
market topical eye drops to treat the symptoms associated with presbyopia. We believe most of these are designed to enhance depth of field via a “pinhole
effect” and in one case to reduce lens stiffening; and some of these medications could be synergistic with each other or combined with refractive surgery to
enhance outcomes. However, as of the date of this Annual Report, none of these drug candidates has received market approval from the FDA.
Pharmaceutical Compounding Businesses
Pharmaceutical Compounding
Pharmaceutical compounding is the science of combining different active pharmaceutical ingredients (APIs), all of which are approved by the
FDA (either as a finished form product or as a bulk drug ingredient), and excipients to create specialized pharmaceutical preparations. Physicians and
healthcare institutions use compounded drugs when commercially available drugs do not optimally treat a patient’s medical needs. In many cases,
compounded drugs, such as ours, have wide market utility and may be clinically appropriate for large patient populations. Examples of compounded
formulations include medications with alternative dosage strengths or unique dosage forms, such as topical creams or gels, suspensions, or solutions with
more tolerable drug delivery vehicles.
Almost all of our sales revenue is derived from making, selling and dispensing our compounded prescription drug formulations as cash pay
transactions between us and our end-user customer. As such, the majority of our commercial transactions do not involve distributors, wholesalers,
insurance companies, pharmacy benefit managers or other middle parties. By not being reliant on insurance company formulary inclusion and pharmacy
benefit manager payment clawbacks, we are able to simplify the prescription transaction process. We believe the outcome of our business model is a simple
and transparent transaction, involving a patient-in-need, a physician’s diagnosis, a fair price and great service for a quality pharmaceutical product. We sell
our products through a network of employees and independent contractors, and we dispense our formulations in all 50 states, Puerto Rico and in selected
markets outside the United States.
2
Our Compounding Facilities
Pharmaceutical compounding businesses are governed by Sections 503A and 503B of the Federal Food Drug and Cosmetic Act (the “FDCA”).
Section 503A of the FDCA provides that a pharmacy is only permitted to compound a drug for an individually identified patient based on a prescription for
a patient and is only permitted to distribute the drug interstate if the pharmacy is licensed to do so in the states where it is compounded and where the
medication is received.
Section 503B of the FDCA provides that a pharmacy engaged in preparing sterile compounded drug formulations may voluntarily elect to register
as an “outsourcing facility.” Outsourcing facilities are permitted to compound large quantities of drugs without a prescription and distribute them out of
state with certain limitations such as the formulation appearing on the FDA’s drug shortage list or the bulk drug substances contained in the formulations
appearing on the FDA’s “clinical need” list. Entities voluntarily registering with FDA as outsourcing facilities are subject to additional requirements that do
not apply to compounding pharmacies (operating under Section 503A of the FDCA), including adhering to standards such as current good manufacturing
practices (cGMP) or other FDA guidance documents and being subject to regular FDA inspection.
We operate two compounding facilities located in Ledgewood, New Jersey. Our New Jersey operations are comprised of two separate entities and
facilities, one of which is registered with the FDA as an outsourcing facility under Section 503B of the FDCA. The other New Jersey facility (“RxNJ”) is a
licensed pharmacy operating under Section 503A of the FDCA. All products that we sell, produce and dispense are made in the United States.
We believe that, with our current compounding pharmacy facilities and licenses and FDA registration of NJOF, we have the infrastructure to scale
our business appropriately under the current regulatory landscape and meet the potential growth in demand we are targeting. We plan to invest in one or
both of our facilities to further their capacity and efficiencies. Also, we may seek to access greater pharmacy, production related redundancy, and
distribution through acquisitions, partnerships or other strategic transactions.
Pharmaceutical Development Businesses
We have ownership interests in Eton, Surface and Melt and hold royalty interests in some of Surface’s and Melt’s drug candidates. These
companies are pursuing market approval for their drug candidates under the FDCA, including in some instances under the abbreviated pathway described
in Section 505(b)(2) which permits the submission of a new drug application (“NDA”) where at least some of the information required for approval comes
from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. In 2018 and 2019, we formed and
created subsidiaries named Radley Pharmaceuticals, Inc. (“Radley”), Mayfield Pharmaceuticals, Inc. (“Mayfield”) and Stowe Pharmaceuticals, Inc.
(“Stowe”). In addition, we may create additional subsidiaries that will be focused on the development and FDA approval of certain proprietary drug
formulations that we currently own, will in-license/acquire and/or otherwise develop. We expect any new subsidiaries to be focused on eye care.
De-Consolidated Businesses (Noncontrolling Equity Interests)
Surface Ophthalmics, Inc.
Surface is a clinical-stage pharmaceutical company focused on development and commercialization of innovative therapeutics for ocular surface
diseases.
During January 2021, Surface announced positive top-line results from a phase 2 trial of its drug candidate SURF-201, a 0.2% betamethasone,
preservative-free ophthalmic solution in the Klarity delivery vehicle for the treatment of post cataract surgery pain and inflammation. According to the
Surface results, SURF-201 was dosed twice daily, met its primary endpoints of absence of inflammation at both Day 8 and Day 15 and was found to be safe
and well-tolerated by the patient group. In addition, a secondary endpoint showed almost 90% of patients given SURF-201 were pain free at Day 15.
SURF-201 marks the first ophthalmic therapeutic in the United States to utilize betamethasone as well as being the first preservative-free unit dose therapy
for the treatment of post-operative pain and inflammation.
Also in January 2021, Surface announced the first patient dosed in a head-to-head phase 2 trial for its drug candidate SURF-100 (mycophenolate
sodium and betamethasone in Klarity vehicle) for the treatment of chronic dry eye disease. The head-to-head study will compare SURF-100 against leading
on-market competitors lifitegrast ophthalmic solution 5% (marketed as Xiidra®) and cyclosporine ophthalmic emulsion 0.05% (marketed as Restasis®).
In February 2021, Surface announced the first patient dosed in a phase 2 trial for its drug candidate SURF-200 (betamethasone in Klarity vehicle)
for the treatment of episodic dry eye flares. The dose ranging study for SURF-200 will be administered in two different low concentration formulations of
betamethasone in the Klarity vehicle. The trial will enroll 120 to 140 patients with a primary endpoint of Symptom Improvement of one unit based on the
University of North Carolina Dry Eye Management Scale by the eighth day.
In 2018, Surface closed on an offering of its Series A Preferred Stock. At that time, we lost our controlling interest and deconsolidated Surface
from our consolidated financial statements. We own 3,500,000 shares of Surface, which was approximately 30% of the equity and voting interests as of
December 31, 2020. Harrow owns mid-single digit royalty rights on net sales of SURF-100, SURF-200 and SURF-201. We expect Surface to complete
another round of financing within the next twelve months.
3
Melt Pharmaceuticals, Inc.
Melt is a clinical-stage pharmaceutical company focused on the development and commercialization of proprietary non-intravenous, sedation and
anesthesia therapeutics for human medical procedures in hospital, outpatient, and in-office settings. Melt intends to seek regulatory approval for its
proprietary technologies, where possible. In December 2018, we entered into an Asset Purchase Agreement with Melt (the “Melt Asset Purchase
Agreement”), and Harrow assigned to Melt the underlying intellectual property for Melt’s current pipeline, including its lead drug candidate MELT-100.
The core intellectual property Melt owns is a patented series of combination non-opioid sedation drug formulations that we estimate to have multitudinous
applications.
MELT-100 is a novel, sublingually delivered, non-IV, opioid-free drug candidate being developed for procedural sedation. Melt filed an
investigational new drug application (“IND”) with the FDA in June 2020 and began its clinical program for MELT-100. In February 2021, Melt announced
data from, and the successful completion of, its phase 1 study. Melt expects to begin its phase 2 study for MELT-100 in the second half of 2021.
In January 2019, Melt closed an offering of its Series A Preferred Stock. At that time, we lost our controlling interest and deconsolidated Melt
from our consolidated financial statements. We own 3,500,000 shares of Melt common stock, which was approximately 44% of the equity and voting
interests issued and outstanding as of December 31, 2020. We expect Melt to complete another round of financing within the next twelve months. Pursuant
to the terms of the Melt Asset Purchase Agreement, Melt is required to make mid-single digit royalty payments to the Company on net sales of MELT-100,
while any patent rights remain outstanding, subject to other conditions. Melt can require the Company to cease compounding like products at the time of
FDA approval of MELT-100. If approved, we do not expect a cessation of compounding like products to have a material impact on our operations and
financial performance.
Eton Pharmaceuticals, Inc.
Eton is a commercial-stage pharmaceutical company focused on developing and commercializing innovative drug products. Its pipeline includes
several products and drug candidates in various stages of development across a variety of dosage forms. In May 2017, Eton closed an offering of its Series
A Preferred Stock. At that time, we gave up our controlling interest and deconsolidated Eton from our consolidated financial statements. In November
2019, Eton completed an initial public offering of its common stock. We own 3,500,000 shares of Eton common stock, which was less than 20% of the
equity and voting interests issued and outstanding as of December 31, 2020.
Consolidated Businesses (Controlling Equity Interests)
Mayfield, Stowe and Radley are consolidated subsidiaries of Harrow. Mayfield is a development-stage pharmaceutical company focused on
developing urology related drug candidates. Stowe is focused on the development of proprietary ophthalmic drug candidates. Radley is a development-
stage pharmaceutical company that has been focused on the development of proprietary drug candidates focused on rare diseases. Recently, we
discontinued nearly all of the activities related to Mayfield, Stowe and Radley, and may not resume those activities in the near term.
We control over 50% of the equity and voting interests issued and outstanding of Mayfield, Stowe and Radley as of the date of this Annual Report.
Section 505(b)(2) New Drug Applications
As an alternate path for FDA approval of new indications or new formulations of previously-approved products, a company may file a Section
505(b)(2) NDA instead of a “stand-alone” or “full” NDA. Section 505(b)(2) of the FDCA was enacted as part of the Drug Price Competition and Patent
Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Amendments. Section 505(b)(2) permits the submission of an NDA where at least
some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right
of reference. Some examples of products that may be allowed to follow a 505(b)(2) path to approval are drugs that have a new dosage form, strength, route
of administration, formulation or indication.
The Hatch-Waxman Amendments permit the applicant to rely upon certain published nonclinical or clinical studies conducted for an approved
product or the FDA’s conclusions from prior review of such studies. The FDA may require companies to perform additional studies or measurements to
support any changes from the approved product. The FDA may then approve the new product for all or some of the labeled indications for which the
reference product has been approved, as well as for any new indication supported by the Section 505(b)(2) application. While references to nonclinical and
clinical data not generated by the applicant or for which the applicant does not have a right of reference are allowed, all development, process, stability,
qualification and validation data related to the manufacturing and quality of the new product must be included in an NDA submitted under Section 505(b)
(2).
To the extent that the Section 505(b)(2) applicant is relying on the FDA’s conclusions regarding studies conducted for an already approved
product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Approved Drug Products with
Therapeutic Equivalence Evaluations, or Orange Book. Specifically, the applicant must certify that: (i) the required patent information has not been filed;
(ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or
(iv) the listed patent is invalid or will not be infringed by the new product. The Section 505(b)(2) application also will not be approved until any non-patent
exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the reference product has expired. Thus, the
Section 505(b)(2) applicant may invest a significant amount of time and expense in the development of its products only to be subject to significant delay
and patent litigation before its products may be commercialized.
4
Sales and Marketing
The focus of our sales and marketing is in the United States. We do, however, believe that our proprietary drug formulations could have
commercial appeal in international markets, and we have engaged distributors and entered into out-licensing arrangements for certain of our proprietary
formulations in certain non-U.S. markets, including Canada. Our sales and marketing efforts are currently organized into two teams, the larger of which
focuses on our ophthalmology pharmaceutical business and the other on our non-ophthalmology pharmaceutical compounding business. Our sales and
marketing activities consist primarily of efforts to educate doctors, ambulatory surgery centers, healthcare systems, hospitals and other users throughout the
U.S. about our compounded formulations. We expect that we may experience growth in the sales of our proprietary pharmaceutical compounded
formulations in future periods, particularly in light of our current and planned launches of new formulations and commercialization campaigns. However,
we may not be successful in doing so, whether due to the safety, quality or availability of our proprietary compounded formulations, the size of the markets
for such formulations, which could be smaller than we expect, the timing of market entry relative to competitive products, the availability of alternative
compounded formulations or FDA-approved drugs, the price of our compounded formulations relative to alternative products or the success of our sales
and marketing efforts, which is dependent on our ability to build and grow a qualified and adequate internal sales function.
We expect to acquire and/or develop additional FDA-approved ophthalmic drugs that allow us to leverage the commercial infrastructure of
ImprimisRx to promote, sell, and ultimately bring these products to market. As we execute this strategy, we will likely expand our sales and marketing
team, expertise and expenses. This would include the addition of market access expertise and team members, where roles include discussions with payors
regarding the costs and benefits of our products for their members, assisting with the addition of our products to the medical policy of payors, and
providing the market with assistance regarding reimbursement queries.
We have entered into various sales and marketing agreements with certain organizations to provide exclusive sales and marketing representation
services to ImprimisRx in select geographies in the U.S., in connection with our pharmaceutical products and compounded formulations. Under the terms
of the sales and marketing agreements, we are required to make commission payments, generally equal to 10% to 14% of net sales for products above and
beyond the initial existing sales amounts. In addition, we are required to make periodic milestone payments to certain organizations in shares of our
restricted common stock if net sales in the assigned territory reach certain future levels by the end of their terms, as applicable. We believe these sales and
marketing agreements will continue to accelerate launches of our new ophthalmology programs and limit our initial capital requirements commonly
associated with new product launches and increased sizes of sales forces.
Competition
The pharmaceutical and pharmacy industries are highly competitive. We compete against branded drug companies, generic drug companies,
outsourcing facilities and other compounding pharmacies. We are significantly smaller than some of our competitors, and we may lack the financial and
other resources needed to develop, produce, distribute, market and commercialize any of our proprietary formulations or compete for market share in these
sectors. The drug products available through branded and generic drug companies with which our formulations compete have been approved for marketing
and sale by the FDA and are required to be manufactured in facilities compliant with cGMP standards. Although we prepare some of our compounded
formulations in accordance with cGMP standards and our other formulations are produced according to the standards provided by United States
Pharmacopoeia (USP) <795> and USP <797> and applicable state and federal law, our proprietary compounded formulations are not required to be, and
have not been, approved for marketing and sale by the FDA. As a result, some physicians may be unwilling to prescribe, and some patients may be
unwilling to use, our formulations. Additionally, under federal and state laws applicable to our current compounding pharmacy operations operating under
Section 503A of the FDCA, we are not permitted to prepare significant amounts of a specific formulation in advance of a prescription, compound quantities
for office use or utilize a wholesaler for distribution of our formulations; instead, our compounded formulations must be prepared and dispensed in
connection with a physician prescription for an individually identified patient. Pharmaceutical companies, on the other hand, are able to sell their FDA-
approved products to large pharmaceutical wholesalers, who can in turn sell to and supply hospitals and retail pharmacies. Even though we have registered
NJOF with the FDA, our business may not be scalable on the scope available to our competitors that produce FDA-approved drugs, which may limit our
potential for profitable operations. These facets of our operations may subject our business to limitations our competitors offering FDA-approved drugs
may not face.
Biotechnology and related pharmaceutical technologies are subject to rapid and significant change. Our future success will depend in large part on
our ability to maintain a competitive position with respect to these technologies. Products developed by our competitors, including FDA-approved drugs
and compounded formulations created by other pharmacies, could render our products and technologies obsolete or unable to compete. Any products that
we develop may become obsolete before we recover expenses incurred in developing the products, which may require that we seek additional funds that
may or may not be available to continue our operations. The competitive environment requires an ongoing, extensive search for medical and technological
innovations and the ability to develop and market these innovations effectively, and we may not be competitive with respect to these factors. Other
competitive factors include the safety and efficacy of a product, the size of the market for a product, the timing of market entry relative to competitive
products, the availability of alternative compounded formulations or approved drugs, the price of a product relative to alternative products, the availability
of third-party reimbursement, the success of sales and marketing efforts, brand recognition and the availability of scientific and technical information about
a product. Although we believe we are positioned to compete favorably with respect to many of these factors, if our proprietary formulations are unable to
compete with the products of our competitors, we may never gain market share or achieve profitability.
5
Factors Affecting Our Performance
We believe the primary factors affecting our performance are our ability to increase revenues of our proprietary compounded formulations and
certain non-proprietary products, grow and gain operating efficiencies in our pharmacy operations, optimize pricing and obtain reimbursement options for
our proprietary compounded formulations, and continue to pursue development and commercialization opportunities for certain of our ophthalmology and
other assets that we have not yet made commercially available as compounded formulations. We believe we have built a tangible and intangible
infrastructure that will allow us to scale revenues efficiently in the long-term. All of these activities will require significant costs and other resources, which
we may not have or be able to obtain from operations or other sources.
Reimbursement Options and Pricing Optimization
Our proprietary ophthalmic compounded formulations are currently primarily available on a cash-pay basis. However, we work with third-party
insurers, pharmacy benefit managers and buying groups to offer patient-specific customizable compounded formulations at accessible prices. We may
devote time and other resources to seek reimbursement and patient pay opportunities for these and other compounded formulations, and we have hired
pharmacy billers to process certain existing reimbursement opportunities for certain formulations. However, we may be unsuccessful in achieving these
goals, as many third-party payors have imposed significant restrictions on reimbursement for compounded formulations in recent years. Moreover, third-
party payors, including Medicare, are increasingly attempting to contain health care costs by limiting coverage and the level of reimbursement for new
drugs and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling
approval. Further, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010
(collectively, the “Health Care Reform Law”), may have a considerable impact on the existing U.S. system for the delivery and financing of health care and
could conceivably have a material effect on our business. As a result, reimbursement from Medicare, Medicaid and other third-party payors may never be
available for any of our products or, if available, may not be sufficient to allow us to sell the products on a competitive basis and at desirable price points.
We are communicating with government and third-payor payors in order to make our formulations available to more patients and at optimized pricing
levels. However, if government and other third-party payors do not provide adequate coverage and reimbursement levels for our formulations, the market
acceptance and opportunity for our formulations may be limited.
Additionally, we have previously made efforts to receive reimbursement and/or optimize the pricing for some of our currently available
pharmaceutical compounded formulations, including applying for transitional pass-through reimbursement status for one of our formulations. Pass-through
status allows for separate payment (i.e., outside the bundled payment) under Medicare Part B for new drugs and other medical technologies that meet well-
established criteria specified by federal regulations governing CMS spending. In September 2020, we were informed by CMS that our application for pass-
through payment was denied for one of our formulations. Any future efforts to attain optimized pricing or reimbursement of our other proprietary
compounded formulations could fail, which could make our products less attractive or unavailable to some patients or could reduce our margins.
Intellectual Property
Our success and ability to compete depends upon our ability to protect our intellectual property. We conduct a fulsome analysis of the intellectual
property landscape prior to acquiring rights to formulations and filing patent applications. In addition, as of March 1, 2021, we owned and/or licensed 105
total issued and pending patent applications, which include 16 U.S. issued patents, 10 international issued patents, and 79 U.S. and foreign/international
patent pending applications. We expect to file additional patent applications in the U.S. and pursue patent protection for certain of our formulations in other
important international jurisdictions in the future.
As of March 1, 2021, we had, on a worldwide basis, 275 issued trademarks, pending trademark and copyright applications, or registered copyright
and/or trademarks including, but not limited to: Imprimis®, ImprimisRx®, Harrow Health®, Dropless®, LessDrops®, Dropless Cataract Surgery®, Dropless
Cataract Therapy®, Dropless Therapy®, MKO Melt®, and Simple Drops®. We may choose to pursue trademark protection in other jurisdictions for any
one or more of these or other marks in the future.
We also rely on unpatented trade secrets and know-how and continuing technological innovation in order to develop our formulations, which we
seek to protect, in part, by confidentiality agreements with our employees, consultants, collaborators and others, including certain service providers. We
also have invention or patent assignment agreements with our current employees and certain consultants. However, our employees and consultants may
breach these agreements, and we may not have adequate remedies for any breach, or our trade secrets may otherwise become known or be independently
discovered by competitors. In addition, inventions relevant to us could be developed by a person not bound by an invention assignment agreement with us,
in which case we may have no rights to use the applicable invention.
6
Governmental Regulation
Our business is subject to federal, state and local laws, regulations, and administrative practices, including, among others: federal, state and local
licensure and registration requirements concerning the operation of pharmacies and the practice of pharmacy; the Health Insurance Portability and
Accountability Act (“HIPAA”); the Health Care Reform Law; statutes and regulations of the FDA, the U.S. Federal Trade Commission, the U.S. Drug
Enforcement Administration and the U.S. Consumer Product Safety Commission, as well as regulations promulgated by comparable state agencies
concerning the sale, advertisement and promotion of the products we sell. The regulatory and quality compliance environment for compounded drugs has
become significantly more rigorous, complex and strict since the passage of The Drug Quality and Security Act of 2013. The complexity of the current
state and federal regulatory environment, as well as the expected continued evolution of state and federal laws governing pharmaceutical compounding,
have and will continue to present potentially significant challenges to our business model and the fulfillment of our mission as a company. Below are
descriptions of some of the various federal and state laws and regulations which may govern or impact our current and planned operations.
Pharmacy Regulation
Our pharmacy operations are regulated by both individual states and the federal government. Every state has laws and regulations addressing
pharmacy operations, including regulations relating specifically to compounding pharmacy operations. These regulations generally include licensing
requirements for pharmacists, pharmacy technicians and pharmacies, as well as regulations related to compounding processes, safety protocols, purity,
sterility, storage, controlled substances, recordkeeping and regular inspections, among other things. State rules and regulations are updated periodically,
generally under the jurisdiction of individual state boards of pharmacy. Failure to comply with the state pharmacy regulations of a particular state could
result in a pharmacy being prohibited from operating in that state, financial penalties and/or becoming subject to additional oversight from that state’s board
of pharmacy. In addition, many states are considering imposing, or have already begun to impose, more stringent requirements on compounding
pharmacies. If our pharmacy operations become subject to additional licensure requirements, are unable to maintain their required licenses or if states place
burdensome restrictions or limitations on pharmacies, our ability to operate in some states could be limited.
Federal law limits compounding pharmacies from engaging in the practice of anticipatory compounding, which involves preparing compounded
medications before the actual receipt of a prescription or practitioner’s order, unless the compounding pharmacy has a history of filling certain prescriptions
for a customer. In such cases, it is acceptable to engage in anticipatory compounding or the preparation of larger batches so that medications will be ready
when they are needed. Anticipatory compounding also reduces the cost of compounded medications, as economies of scale can be realized by producing
larger batches. Anticipatory compounding also leads to less wasted chemicals, dilutions, fillers, and other associated products are produced, and greater
accuracy and uniformity in finished medications, as larger batches decrease the variation caused by preparing multiple, smaller batches. Based on our
history of meeting the needs of our customers, we are able to anticipatorily compound batches of our formulations for our customers, per the applicable
regulations.
Many of the states into which we deliver pharmaceuticals have laws and regulations that require out-of-state pharmacies to register with, or be
licensed by, the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing pharmacy to follow the laws
of the state within which the dispensing pharmacy is located. However, various state pharmacy boards have enacted laws and/or adopted rules or
regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by, among other things, requiring compliance with all laws of the
states into which the out-of-state pharmacy dispenses medications, whether or not those laws conflict with the laws of the state in which the pharmacy is
located, or requiring the pharmacist-in-charge to be licensed in that state. To the extent that such laws or regulations are found to be applicable to our
operations, we believe we comply with them.
Further, under federal law, Section 503A of the FDCA previously had language that implied a limitation of the amount of compounded products
that a pharmacy can distribute interstate. The interpretation and enforcement of this provision is dependent on the FDA entering into a standard
Memorandum of Understanding (“MOU”) with each state setting forth limits on shipments of interstate compounding. In January of 2019, the FDA
released a “2018 Compounding Policy Priorities Plan” (the “2018 Compounding Plan”) which provided an overview of the key priorities the FDA planned
to focus on in 2018 in connection with compounding regulations. One of the priorities outlined in the 2018 Compounding Plan addressed the FDA’s plan to
release a revised MOU (the “Revised MOU”). Pursuant to the statements in the 2018 Compounding Plan, the Revised MOU would consider amounts
shipped interstate by a compounder to be inordinate amounts if the “number of prescriptions of compounded drugs distributed interstate during any
calendar month is greater than 50 percent.” Importantly, instead of that number serving as a “hard limit, for state action,” the 50% target would trigger
certain additional reporting requirements. On October 27, 2020, the FDA announced availability of a final MOU, Addressing Certain Distributions of
Compounded Human Drug Products Between the State Board of Pharmacy or Other Appropriate State Agency and the Food and Drug Administration (the
“Final MOU”). The Final MOU describes the responsibilities of a state board of pharmacy, or other appropriate state agency that chooses to sign the Final
MOU, in investigating and responding to complaints related to drug products compounded in such state and distributed outside such state and in addressing
the interstate distribution of inordinate amounts of compounded human drug products. Additionally, as part of the Final MOU, FDA refined the definition
of “inordinate amount,” a threshold for certain information identification and sharing which does not place a limit on the distribution of compounded
human drug products interstate by a pharmacy located in a state that has entered into the Final MOU. Section 503A of the FDCA sets a five percent limit
on compounded drugs distributed outside the state by a pharmacist, pharmacy or physician located in a state that has not entered into the Final MOU. States
have 365 days to sign the Final MOU, before the FDA intends to enforce the five percent limit described in Section 503A of the FDCA in states that have
not signed the Final MOU. Our pharmacy is based in the state of New Jersey, and based on feedback we have received from the state board of pharmacy in
New Jersey, we believe the state board of pharmacy in New Jersey will sign the MOU and as a result, our operations will not be materially affected by the
Final MOU. In the event New Jersey does not sign the Final MOU, our pharmacy that operates under Section 503A may be materially affected and we will
transition as many prescription orders as possible to our outsourcing facility, which is not subject to the Final MOU.
7
Certain provisions of the FDCA govern the preparation, handling, storage, marketing and distribution of pharmaceutical products. The Drug
Quality and Security Act of 2013 (DQSA) clarifies and strengthens the federal regulatory framework governing compounding pharmacies. Title 1 of the
DQSA, the Compounding Quality Act, modifies provisions of the Section 503A of the FDCA that were found to be unconstitutional by the U.S. Supreme
Court in 2002. In general, Section 503A provides that pharmacies are exempt from the provisions of the FDCA requiring compliance with cGMP, labeling
with adequate directions for use and FDA approval prior to marketing if the pharmacy complies with certain other requirements. Among other things, to
comply with Section 503A, a compounded drug must be compounded by a licensed pharmacist for an identified individual patient on the basis of a valid
prescription. Pharmacies may only compound in limited quantities before receipt of a prescription for an individual patient and are subject to limitations on
anticipatory compounding for distribution, which generally permit anticipatory compounding only based on historical prescription volumes.
The DQSA also contained new Section 503B of the FDCA, which established an outsourcing facility as a new form of entity that is permitted to
compound larger quantities of drug formulations without a prescription, thus permitting the practice of anticipatory compounding, and distributing them out
of state without limitation, if the drug formulations appear on the FDA’s drug shortage list or the bulk drug substances contained in the formulations appear
on a “clinical need” list to be established by the FDA. In January 2017, the FDA issued an Interim Policy on Compounding Using Bulk Drug Substances
Under Section 503B of the FFDCA (“Interim Policy”) that informs stakeholders about how the FDA intends to exercise its enforcement discretion for
compounding with those substances on a “Category 1 list” while the agency compiles and evaluates its clinical needs list, as well as in March 2019 the
FDA issued guidance for industry Evaluation of Bulk Substances Nominated for Use in Compounding Under Section 503B of the Federal Food, Drug and
Cosmetic Act, which further describes the FDA’s policy for evaluating bulk drug substances nominated for use in compounding by outsourcing facilities.
Entities voluntarily registering as outsourcing facilities are subject to cGMP requirements and regular FDA inspection, among other requirements. As
described above, our current pharmacy operations in NJ are governed by Section 503A of the FDCA, and our NJ based outsourcing facility is governed by
Section 503B of the FDCA.
On July 30, 2020, the FDA issued a notice for comments related to certain bulk drug substances to be removed from the 503B Bulk’s List (or
Category 1 List). Included in this notice for comment were certain bulk drug substances which we currently use in some of our compounded products. In
the event one or more of these bulk substances are ultimately removed from the Category 1 List, we intend to utilize commercially available versions of
these substances or similar active pharmaceutical ingredients as replacements of the bulk powders contained in our sterile products. In addition, nothing in
the FDA’s notice affects the dispensing of bulk powder-containing products from our 503A pharmacy. Nonetheless, if all or some of the bulk drug
substances we use are removed from the 503B Bulk’s List, this may result in a disruption in our operations, revenues and cash flows. In addition, during
September 2020 through January 2021, NJOF was inspected by the FDA (the “2020 Inspection”) and certain observations were made by FDA in a Form
483. Five observations made during the 2020 Inspection were considered repeat observations from a 2017 FDA inspection of NJOF. In addition, during the
2020 Inspection, the FDA noted that we were compounding drugs for which there is no change that produces for an individual patient a clinical difference,
as determined by a prescribing practitioner between a compounded drug and the comparable approved drug. We have responded to the FDA regarding all
of their observations from the 2020 Inspection, including providing documentation from prescribing clinicians that indicate a clinical difference between
our compounded drugs and the comparable approved drugs, while also committing to amend our order process to collect “medical necessity/clinical
difference” information for each order of our compounded drugs on a go-forward basis.
In two recent California federal court decisions, Allergan USA, Inc. v. Prescribers Choice, Inc. and Allergan USA, Inc. v. Imprimis
Pharmaceuticals, Inc., the Court made rulings which impact 503B and 503A facilities operating in and shipping to the state of California. In the
Prescribers Choice case, the Court determined that while the FDA’s interim policies do not override the statutory obligations of the DQSA, the Court
supported the FDA’s authority and flexibility as it determines what clinical needs exist and finalizes the bulk drug substances list. The Court would not hold
a party liable under California’s Sherman Food, Drug and Cosmetic Law (“Sherman Law”) for selling, delivering, or giving away any new drug that has
not been approved by the California Department of Health Services or FDA if that party has complied with the FDA’s Interim Policy. In other words, it is
not unlawful in California to utilize bulk drugs appearing on the Category 1 list while the FDA finalizes its clinical needs list. In the Imprimis
Pharmaceuticals case, the Court made clear that its rulings related to violations of California’s Unfair Competition Law (“UCL”) (Cal. Bus. Prof. Code
§17200) were limited in geographical scope to drugs prepared in, dispensed from within or shipped to the State of California. With respect to 503A
facilities, the Court followed FDA’s guidance allowing compounding pharmacies to ship more than 5% of its medications out of state while finalizing the
MOUs. It further held that 503A facilities operating within or shipping into the state of California must follow statutory guidance found in 21 U.S.C.
353(a). With respect to the statutory guidance related to compounding in response to valid prescription orders, the Court added a requirement that the valid
prescription order must contain language that “an FDA-approved drug is not medically appropriate.” The practical effect of these two rulings is that 503A
and 503B facilities operating within or shipping drugs into the State of California now have clear guidance as to what is, and is not, lawful behavior with
respect the California’s UCL and Sherman Law.
8
Confidentiality, Privacy and HIPAA
Our pharmacy operations involve the receipt, use and disclosure of confidential medical, pharmacy and other health-related information. In
addition, we use aggregated and blinded (anonymous) data for research and analysis purposes. The federal privacy regulations under HIPAA are designed
to protect the medical information of a healthcare patient or health plan enrollee that could be used to identify the individual. Among other things, HIPAA
limits certain uses and disclosures of protected health information and requires compliance with federal security regulations regarding the storage,
utilization and transmission of and access to electronic protected health information. The requirements imposed by HIPAA are extensive. In addition, most
states and certain other countries have enacted privacy and security laws that protect identifiable patient information that is not health-related. For example,
California recently enacted the California Consumer Privacy Act, or CCPA, that creates new individual privacy rights for consumers and places increased
privacy and security obligations on entities handling personal data of consumers or households. Effective January 1, 2020, the CCPA gives California
residents expanded privacy rights and protections, and provides civil penalties for violations and a private right of action for data breaches. The CCPA will
likely impact our business activities and exemplifies the vulnerability of our business to not only cyber threats but also the evolving regulatory environment
related to personal data and protected health information. Other countries also have, or are developing, laws governing the collection, use and transmission
of personal information, such as the General Data Protection Regulation (“GDPR”) in the European Union (the “EU”) that became effective in May 2018
and the Personal Information Protection and Electronic Documents Act that became effective in Canada in April 2000. Further, several states have enacted
more protective and comprehensive pharmacy-related privacy legislation that not only applies to patient records but also prohibits the transfer or use for
commercial purposes of pharmacy data that identifies prescribers. These regulations impose substantial requirements on covered entities and their business
associates regarding the storage, utilization and transmission of and access to personal health and non-health information. Many of these laws apply to our
business.
Medicare and Medicaid Reimbursement
Medicare is a federally funded program that provides health insurance coverage for qualified persons age 65 or older and for some disabled
persons with certain specific conditions. State-funded Medicaid programs provide medical benefits to groups of low-income and disabled individuals, some
of whom may have inadequate or no medical insurance. Currently, most of our compounded formulations are sold in cash transactions, and the customers
decide whether or not to seek reimbursement opportunities from Medicare, Medicaid and other third parties. We work with third-party insurers, pharmacy
benefit managers and buying groups to offer patient-specific customizable compounded formulations at accessible prices. We plan to continue to devote
time and other resources to seek reimbursement and patient pay opportunities for these and other compounded formulations, and we have hired pharmacy
billers to process certain existing reimbursement opportunities for certain formulations. Moreover, third-party payors, including Medicare, are increasingly
attempting to contain health care costs by limiting coverage and the level of reimbursement for new drugs and by refusing, in some cases, to provide
coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval. Further, the Health Care Reform Law
may have a considerable impact on the existing U.S. system for the delivery and financing of health care and could conceivably have a material effect on
our business. As a result, reimbursement from Medicare, Medicaid and other third-party payors may never be available for any of our products or, if
available, may not be sufficient to allow us to sell the products on a competitive basis and at desirable price points.
To the extent we obtain third-party reimbursement for our compounded formulations, we may become subject to Medicare, Medicaid and other
publicly financed health benefit plan regulations prohibiting kickbacks, beneficiary inducement and the submission of false claims.
FDA New Drug Application Process
As discussed in other sections of this report, we are and may continue to, alone or with project partners, pursue FDA approval to market and sell
one or more of our formulations through the FDA’s NDA process. To the extent that the Section 505(b)(2) applicant is relying on the FDA’s conclusions
regarding studies conducted for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved
product in the FDA’s Orange Book publication. As a condition of approval, the FDA or other regulatory authorities may require further studies, including
Phase 4 post-marketing studies, to provide additional data. Other post-marketing studies may be required to gain approval for the use of a product as a
treatment for clinical indications other than those for which the product was initially tested and approved. Also, the FDA or other regulatory authorities
require post-marketing reporting to monitor the adverse effects of a drug. Results of post-marketing programs may limit or expand the further marketing of
a product.
The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer
advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. A company can
make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse
publicity, warning letters, corrective advertising, fines and potential civil and criminal penalties.
9
International Regulation
If we pursue commercialization of our proprietary formulations in countries other than the United States, then we may need to obtain the
approvals required by the regulatory authorities of such foreign countries that are comparable to the FDA and state boards of pharmacy, and we would be
subject to a variety of other foreign statutes and regulations comparable to those relating to our U.S. operations. Regulatory frameworks and requirements
vary by country and could involve significant additional licensing requirements and product testing and review periods.
Environmental and Other Matters
We are or may become subject to environmental laws and regulations governing, among other things, any use and disposal by us of hazardous or
potentially hazardous substances in connection with our research and preparation of our formulations. In addition, we are subject to work safety and labor
laws that govern certain of our operations and our employee relations. In each of these areas, as described above, the FDA and other government agencies
have broad regulatory and enforcement powers, including, among other things, the ability to levy fines and civil penalties, suspend or delay issuance of
approvals, licenses or permits, seize or recall products, and withdraw approvals, any one or more of which could have a material adverse effect on our
business.
COVID-19 Pandemic
A novel strain of coronavirus was first identified in Wuhan, China in December 2020. The disease caused by it, COVID-19, was declared a global
pandemic by the World Health Organization in March 2020. On March 18, 2020, CMS released guidance for U.S. healthcare providers to limit all elective
medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the pendency of the pandemic. In addition
to limiting elective medical procedures, many hospitals and other healthcare providers have strictly limited access to their facilities during the pandemic.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and healthcare delivery, led to social distancing
recommendation, and created significant volatility in financial markets.
In response to the pandemic and business disruptions, first and foremost, we have prioritized the health and safety of our employees, customers,
suppliers and others with whom we partner in our business activities. We have instructed employees to work from home when possible and to maintain
recommended physical distancing when working in our facilities. We also have eliminated non-essential in-person contact with customers, suppliers and
other third parties.
Many of the Company’s customers use its drugs in procedures that were impacted by the CMS guidance to limit elective procedures. In addition,
the Company and our business partners need access to healthcare providers and facilities to conduct clinical trials and other activities required to achieve
regulatory clearance of products under development. We are carefully monitoring rapidly evolving changes in healthcare delivery systems and may adjust
our operating and product development plans accordingly.
Given the unprecedented and dynamic nature of the COVID-19 pandemic, we cannot reasonably estimate the impacts it may have on our financial
condition, results of operations or cash flows in the future. However, the reduction in elective procedures in response to CMS guidance has had a material
adverse impact, on our revenues, profitability and cash flows, in particular during the second quarter of 2020. The extent and duration of future impact will
depend upon the extent of procedure postponements, the duration of the pandemic and any resurgences of it, especially within certain geographies and
states that have retained restrictive measures and social distancing policies. In May 2020 and the following months, some U.S. states and geographies
began easing restrictions associated with the COVID-19 pandemic including those restrictions related to elective procedures, as restrictions were lifted in
those areas there was a correlation with an increase in our revenues. Despite the recent resurgence of the COVID-19 pandemic in certain parts of the U.S.,
we are hopeful that the general trend of easing of restrictions will continue and sales of our products will return to historical norms and historical growth
trends, as other states and governmental authorities continue to ease restrictions associated with elective procedures and the COVID-19 pandemic.
Research and Development Expenses
Our research and development expenses incurred in 2020 and 2019 primarily include expenses related to the development of intellectual property,
researcher and investigator-initiated evaluations, and research and formulation development related primarily to our ophthalmic formulations and certain
other assets, in addition to costs associated with our drug candidate development programs.
During the year ended December 31, 2020, we incurred $2,413,000 in research and development expenses, compared to $2,083,000 during the
year ended December 31, 2019.
10
Financial Information About Segments and Geographic Areas
Beginning on January 1, 2019, the Company began evaluating performance of the Company based on operating segments. Segment performance
for its two operating segments will be based on segment contribution. Our reportable segments consist of (i) our commercial stage pharmaceutical business
(Pharmaceutical Compounding), generally including the operations of our ImprimisRx business; and (ii) our start-up operations associated with
pharmaceutical drug development business (Pharmaceutical Drug Development). Segment contribution for our segments represents net revenues less cost
of sales, research and development, selling and marketing expenses, and select general and administrative expenses. The Company does not evaluate the
following items at the segment level:
● Operating expenses within selling, general and administrative expenses that result from the impact of corporate initiatives. Corporate
initiatives primarily include integration, restructuring, acquisition and other shared costs;
● Selling, general and administrative expenses that result from shared infrastructure, including certain expenses associated with legal
matters, our board of directors and principal executive officers, investor relations and other like shared expenses;
● Other select revenues and operating expenses including R&D expenses, amortization, and asset sales and impairments, net as not all such
information has been accounted for at the segment level, or such information has not been used by all segments; and
● Total assets including capital expenditures.
The Company defines segment net revenues as pharmaceutical compounded drug sales, revenues from licenses and other revenue derived from
related agreements.
Cost of sales within segment contribution includes direct and indirect costs to manufacture formulations and sell products, including active
pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements
depreciation, the write-off of obsolete inventory and other related expenses.
Selling, general and administrative expenses consist mainly of personnel-related costs, marketing and promotion costs, distribution costs,
professional service costs, insurance, depreciation, facilities costs, transaction costs, and professional services costs, which are general in nature and
attributable to the segment.
See Note 18 to our consolidated financial statements included in this Annual Report for more information about our reportable segments.
Human Capital
As of March 1, 2021, we had 125 employees. Our employees are engaged in pharmacy operations, sales, marketing, research, development, and
general and administrative functions. We expect to add additional employees in all departmental functions as we carry out our business plan in the next 12
months. We are not party to any collective bargaining agreements with any of our employees. We have never experienced a work stoppage, and we believe
our employee relations are good. We hire independent contractor labor and consultants on an as-needed basis, our salesforce is comprised primarily of
contract sales organizations and contract labor.
Talent Acquisition and Retention
We recognize that our employees largely contribute to our success. To this end, we support business growth by seeking to attract and retain best-
in-class talent. Our talent acquisition team uses internal and external resources to recruit highly skilled candidates in the US. We believe that we continue to
attract and retain superior talent as measured by our minimal turnover rate and a high employee service tenure.
Total Rewards
Our total rewards philosophy has been to create investment in our workforce by offering competitive compensation and benefits packages. We
provide employees with compensation packages that include base salary, annual incentive bonuses, and long-term equity awards. We also offer
comprehensive employee benefits, such as life, disability, and health insurance, health savings and flexible spending accounts, paid time off, and a 401(k)
plan. It is our expressed intent to be an employer of choice in our industry by providing market-competitive compensation and benefits packages.
Health, Safety, and Wellness
The health, safety, and wellness of our employees is a priority in which we have always invested and will continue to do so. We provide our
employees and their families with access to a variety of innovative, flexible, and convenient health and wellness programs. Program benefits are intended
to provide protection and security, so employees can have peace of mind concerning events that may require time away from work or that may impact their
financial well-being.
These investments and the prioritization of employee health, safety, and wellness took on particular significance in 2020 in light of COVID-19. To
protect and support our essential team members, we have implemented health and safety measures that included maximizing personal workspaces,
changing shift schedules, providing personal protective equipment (PPE), and instituting screening before accessing buildings. In response to local stay-at-
home orders and in alignment with CDC recommendations, we have limited our employees onsite in our office location based in San Diego, California. To
aid in containing the spread of COVID-19, we have implemented remote-work options when appropriate and are limiting employee travel. We will
continue to seek programs to educate and assist employees whenever possible.
11
Diversity, Equity, and Inclusion
We believe a diverse workforce is critical to our success. Our mission is to value differences in races, ethnicities, religions, nationalities, genders,
ages, sexual orientations, as well as education, skill sets and experience. We are focused on inclusive hiring practices, fair and equitable treatment,
organizational flexibility, and training and resources.
Training and Development
We believe in encouraging employees in becoming lifelong learners by providing ongoing learning, training and leadership opportunities. We
provide our employees with a tuition reimbursement program, and in certain instances onsite training programs. While we strive to provide real-time
recognition of employee performance, we have a formal annual review process not only to determine pay and equity adjustments tied to individual
contributions, but to identify areas where training and development may be needed.
Company Information
We were incorporated in Delaware in January 2006 as Bywater Resources, Inc. In September 2007, we closed a merger transaction with Transdel
Pharmaceuticals Holdings, Inc. and changed our name to Transdel Pharmaceuticals, Inc. We changed our name to Imprimis Pharmaceuticals, Inc. in
February 2012. We changed the name of our company to Harrow Health, Inc. in December 2018.
On June 26, 2011, we suspended our operations and filed a voluntary petition for reorganization relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Southern District of California, Case No. 11-10497-11. On December 8, 2011, in
connection with our entry into a line of credit agreement and securities purchase agreement with a third party, our voluntary petition for reorganization
relief was dismissed.
During the summer of 2019, we relocated our executive office previously based in San Diego, California to its current location at 102 Woodmont
Blvd., Suite 610, Nashville, Tennessee and our telephone number at such office is (615) 733-4730. Our website address is harrowinc.com. Information
contained on our website is not deemed part of this Annual Report.
ITEM 1A. RISK FACTORS
Risk Factors Summary
We are subject to a variety of risks and uncertainties, including risks related to our financial position and need for additional capital, the
commercialization of our product candidates, our operations, regulatory approval and other legal compliance matters, human capital, product development,
intellectual property and our common stock, which could have a material adverse effect on our business results of operations, financial condition and
prospects. Risks that we deem material are described under “Risk Factors” below and include, but are not limited to, the following:
● Our ability to achieve profitability for our business;
● Our ability to successfully market, commercialize, and sell current and future products;
● The potential adverse impact of health epidemics, including the recent coronavirus outbreak;
● Securing and maintaining patent or other intellectual property protection for our products and related improvements;
● Market acceptance of compounded drugs and pharmacies;
● Our ability to successfully research, develop and timely manufacture our current and future products;
● Governmental regulations that burden operations or narrow the market for our products;
● Our exposure to liabilities and reputation harm if our products give rise to defects, recalls, patient injury or death;
● Our current indebtedness and ability to access additional capital;
● Our ability to attract customers and increase sales of current and future products;
● Our ability to obtain marketing approval and ongoing expense associated with it for any of our drug candidates, including those we own
royalty rights of;
● Our reliance on third parties for manufacturing certain components and to conduct clinical trials;
● Our ability to enforce protect our intellectual property rights along with the potential of future legal proceedings filed against us claiming
intellectual property infringement;
● Retention, recruitment, and training of senior management and key personnel;
● Volatility of the price of our common stock; and
● Our stock price falling as a result of future offerings or sales.
You should carefully consider the following risk factors in addition to the other information contained in this Annual Report. Our business,
financial condition, results of operations and stock price could be materially adversely affected by any of these risks.
12
Risks Related to Our Financial Position and Need for Additional Capital
Until 2018, we incurred losses in every year of our operations, and we may not be profitable in the future.
Until 2018, we incurred losses in every year of our operations. As of December 31, 2020, our accumulated deficit was $(77,400,000). Our current
projections indicate that we will have operating income and/or net income during 2021; however, these projections may not be correct and our plans could
change. Also, we could incur increasing operating losses in the foreseeable future for our commercialization activities, research and development and our
pharmaceutical compounding business which would impact net income. Recent changes to the accounting for equity investments require those investments
to be measured at fair market value, which may cause our earnings (losses) to become volatile as the stock prices of those equity investments fluctuate.
Although we have been generating revenue from our pharmaceutical compounding operations, our ability to generate the revenues necessary to achieve
profitability will depend on many factors, including those discussed in this “Risk Factors” section. Our business plan and strategies involve costly activities
that are susceptible to failure, and, therefore, we may not be able to generate sufficient revenue to support and sustain our business or reach the level of
sales and revenues necessary to achieve and sustain profitability.
We may not receive sufficient revenue to fund our operations and recover our development costs.
Our business plan involves the preparation and sale of our proprietary formulations through our compounding pharmacies and outsourcing
facilities. We have limited experience operating pharmacies and commercializing compounded formulations, and we may be unable to successfully manage
this business or generate sufficient revenue to recover our development costs and operational expenses. We may have only limited success in marketing and
selling our proprietary formulations. Although we have established and plan to grow our internal sales teams to market and sell our proprietary
formulations and other non-proprietary products, we have limited experience with such activities and may not be able to generate sufficient physician and
patient interest in our formulations to generate significant revenue from sales of these products. In addition, we are substantially dependent on our
ImprimisRx compounding pharmacies and outsourcing facilities, along with any pharmacy partners with which we may contract to compound and sell our
formulations using our quality standards and specifications, in a timely manner and sufficient volumes to accommodate the number of prescriptions they
receive. Our pharmacies may be unable to compound our formulations successfully, and we may be unable to acquire, build or enter into arrangements with
pharmacies or outsourcing facilities of sufficient size, reputation and quality to implement our business plan, which would cause our business to suffer.
Our loan under the Paycheck Protection Program may not be forgiven or may subject us to challenges and investigations regarding qualification for
the loan.
In April 2020, we entered into an unsecured promissory note and related Business Loan Agreement with Renasant Bank, as lender, for a loan (the
“PPP Loan”), which was established under the Federal Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in the principal amount of
$1,967,000. Pursuant to Section 1106 of the CARES Act, during the year ended December 31 ,2020, we applied for forgiveness for all of the PPP Loan,
however as of the date of this Annual Report the U.S. Small Business Administration (the “SBA”) has not made a decision related to our application for
forgiveness. Such forgiveness will be determined, subject to limitations, based on the use of the loan proceeds for qualifying expenses, which include
payroll costs, rent, and utility costs over the allowable measurement period following receipt of the loan proceeds.
The SBA continues to develop and issue new and updated guidance regarding the PPP Loan application and forgiveness process, including
guidance regarding required borrower certifications and requirements for forgiveness of loans made under the program. Given the evolving nature of the
guidance and depending upon our ability to use the loan proceeds for qualifying expenses, we cannot give any assurance that our PPP Loan will be forgiven
in whole or in part.
Additionally, the PPP Loan application required us to certify that the current economic uncertainty made the PPP Loan request necessary to
support our ongoing operations. While we made this certification in good faith after analyzing, among other things, our financial situation and access to
alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan and that our receipt of the PPP Loan is consistent with the
broad objectives of the Paycheck Protection Program of the CARES Act, the certification described above does not contain any objective criteria and is
subject to interpretation. In addition, the SBA has stated that it is unlikely that a public company with substantial market value and access to capital markets
will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the program has resulted in significant
media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good faith belief that we satisfied all
eligibility requirements for the PPP Loan, we are found to have been ineligible to receive the PPP Loan or in violation of any of the laws or regulations that
apply to us in connection with the PPP Loan, including the False Claims Act, we may be subject to penalties, including significant civil, criminal and
administrative penalties, and would be required to repay the PPP Loan. We were also required to make certain certifications in our application for
forgiveness, which will be subject to audit and review by governmental entities and could subject us to significant penalties and liabilities if found to be
inaccurate, including being required to repay the PPP loan. In addition, our receipt of the PPP Loan may result in adverse publicity and damage to our
reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and
management resources. Any of these events could materially harm our business, results of operations and financial condition.
13
We may not be able to correctly estimate our future operating expenses, which could lead to cash shortfalls.
The estimates of our future operating and capital expenditures are based upon our current business plan, our current operations and our current
expectations regarding the commercialization of our proprietary formulations. Our projections have varied significantly in the past as a result of changes to
our business model and strategy, our termination of efforts to pursue FDA approval of a drug candidate in November 2013, our acquisitions of
compounding facilities and various product and corporate development opportunities since 2014, and the expenses in developing our pharmacy facilities
into outsourcing facilities and registering them as such with the FDA. We may not accurately estimate the potential revenues and expenses of our
operations. If we are unable to correctly estimate the amount of cash necessary to fund our business, we could spend our available financial resources much
faster than we expect. If we do not have sufficient funds to continue to operate and develop our business, we could be required to seek additional financing
earlier than we expect, which may not be available when needed or at all, or be forced to delay, scale back or eliminate some or all of our proposed
operations.
We have incurred significant indebtedness, which will require substantial cash to service and which subjects us to certain financial requirements and
business restrictions.
Our ability to make scheduled payments on our indebtedness depends on our future performance and ability to raise additional capital, which is
subject to economic, financial, competitive and other factors, some of which are beyond our control. If we are unable to generate sufficient cash to service
our debt, we may be required to adopt one or more alternatives, such as selling assets, restructuring our debt or obtaining additional capital through equity
sales or incurrence of additional debt on terms that may be onerous or highly dilutive to our stockholders. Our ability to engage in any of these activities
would depend on the capital markets and our financial condition at such time, and we may not be able to do so when needed, on desirable terms or at all,
which could result in a default on our debt obligations. Additionally, our debt instrument with SWK Funding LLC (“SWK”) contains various restrictive
covenants, including, among others, our obligation to deliver to SWK certain financial and other information, our obligation to comply with certain notice
and insurance requirements, and our inability, without SWK’s prior consent, to dispose of certain of our assets, incur certain additional indebtedness, enter
into certain merger, acquisition or change of control transactions, pay certain dividends or distributions on or repurchase any of our capital stock or incur
any lien or other encumbrance on our assets, subject to certain permitted exceptions. Any failure by us to comply with any of these covenants, subject to
certain cure periods, or to make all payments under the debt instruments when due, would cause us to be in default under the applicable debt instrument. In
the event of any such default, SWK may be able to foreclose on our assets that secure the debt or declare all borrowed funds, together with accrued and
unpaid interest, immediately due and payable, thereby potentially causing all of our available cash to be used to pay our indebtedness or forcing us into
bankruptcy or liquidation if we do not then have sufficient cash available. Any such event or occurrence could severely and negatively impact our
operations and prospects.
We may need additional capital in order to continue operating our business, and such additional funds may not be available when needed, on
acceptable terms, or at all.
We only recently started generating cash from operations, but we do not currently earn sufficient revenues to support our operations. We may need
significant additional capital to execute our business plan and fund our proposed business operations. Additionally, our plans may change or the estimates
of our operating expenses and working capital requirements could be inaccurate, we may pursue acquisitions of pharmacies or other strategic transactions
that involve large expenditures, or we may experience growth more quickly or on a larger scale than we expect, any of which may result in the depletion of
capital resources more rapidly than anticipated and could require us to seek additional financing earlier than we expect to support our operations.
We have raised over $59,000,000 in funds through equity and debt financings since January 2015. We may seek to obtain additional capital
through equity or debt financings, funding from corporate partnerships or licensing arrangements, sales of assets or other financing transactions. If we issue
additional equity or convertible debt securities to raise 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 and licensing arrangements or sales of assets, we may have to relinquish potentially valuable rights to our drug candidates or
proprietary technologies, 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
those loans would be available, would increase our liabilities and future cash commitments and may impose restrictions on our activities, such as the
financial and operating covenants included in our loan agreement with SWK. 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 options, convertible notes and warrants, which would
adversely impact our financial results.
Risks Related to the Commercialization of our Product Candidates
We are dependent on market acceptance of compounding pharmacies and compounded formulations, and physicians may be unwilling to prescribe,
and patients may be unwilling to use, our proprietary customizable compounded formulations.
We currently distribute our proprietary formulations through compounding pharmacies and an outsourcing facility. Formulations prepared and
dispensed by compounding pharmacies contain FDA-approved ingredients, but are not themselves approved by the FDA. Thus, our compounded
formulations have not undergone the FDA approval process and only limited data, if any, may be available about the safety and efficacy of our
formulations for any particular indication. Certain compounding pharmacies have been subject to widespread negative media coverage in recent years, and
the actions of these pharmacies have resulted in increased scrutiny of compounding pharmacy activities from the FDA and state governmental agencies.
For example, the FDA has issued formal requests to compounding pharmacies and outsourcing facilities to conduct a recall of all non-expired, purportedly
sterile drug products and to cease sterile compounding operations due to lack of sterility assurance. As a result, some health care providers may be reluctant
to purchase and use compounded drugs. Our growth and future sales depend not only on our ability to demonstrate in the face of increased scrutiny the
quality and safety of our pharmacies and outsourcing facilities and our compliance with more stringent regulatory standards at the federal and state levels,
but also on the continued acceptance of compounded drugs and formulations, particularly outsourced compounded drugs and formulations, in the
marketplace.
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An incident similar to the fungal meningitis outbreak in 2012, which was caused by a compounding pharmacy employing a non-sterile-to-sterile
business model, could cause our customers to reduce their use of compounded formulations significantly or even stop using compounded drugs altogether.
States have in the past, and could in the future, enact regulation prohibiting or restricting the use of compounding pharmacies and outsourcing facilities in
response to such incidents. Such prohibitions or restrictions by states or reduced customer demand as a result of an incident with compounded drugs and
formulations could have a material adverse effect on our business, results of operations and financial condition.
In August 2017, the FDA issued a MedWatch notification regarding our curcumin emulsion and two adverse events that had been associated with
the use of these emulsions by prescribing physicians. We issued a press release on August 7, 2017, clarifying certain facts regarding the notice which
outlined our belief that the adverse events associated with the two patients occurred due to an allergic reaction caused by the products being inappropriately
administered and obtained by the prescribing physician, and our use of curcumin and excipients in our curcumin emulsion formulation met regulatory
standards required for dispensing of the curcumin emulsion. In September 2017, the FDA released a letter confirming that the alleged misuse of certain
ingredients in our curcumin emulsions were due to mislabeling by the underlying supplier, and not of our own misdoing. We no longer compound curcumin
emulsion products. Separately, in December 2017, we were issued a warning letter from the FDA alleging that, in their interpretation of our public
communications, we had made false or misleading claims and omitted risk and side effect information regarding certain of our ophthalmology focused
compounded medications. We immediately performed a full review of our public communications referenced in the warning letter and responded to the
FDA in January 2018. Notwithstanding our continued belief that our public communications were not in fact false and misleading, we have been in
communication with the FDA and are taking steps to address the items outlined in the FDA letter. In June 2019, our outsourcing facility was issued a
warning letter related to an April 2017 inspection and our use of certain active pharmaceutical ingredients in our compounded medications. During
September 2020 through January 2021, our New Jersey based outsourcing facility was inspected by the FDA (the “2020 Inspection”) and certain
observations were made by the FDA in a Form 483. Five observations made during the 2020 Inspection were considered repeat observations from a 2017
FDA inspection. In addition, during the 2020 Inspection, the FDA noted that we were compounding drugs for which there is no change that produces for an
individual patient a clinical difference, as determined by a prescribing practitioner between a compounded drug and the comparable approved drug. We
have responded to the FDA regarding all of their observations from the 2020 Inspection, including providing documentation from prescribing clinicians
that indicate a clinical difference between our compounded drugs and the comparable approved drugs, while also committing to amend our order process to
collect “medical necessity/clinical difference” information for each order of our compounded drugs on a go-forward basis.
We will continue to work and communicate with the FDA to assure that all allegations in the warning letters and 483s have been addressed. We
believe, to date, we have addressed all of the material items of concern in the FDA’s 483, warning letters and those related to the MedWatch notification
(and any other requirements observed by the FDA and noted to us), and we do not believe there will be any further action taken by the FDA in these
matters. Nonetheless, these items increased further scrutiny and negative publicity on us as a company. As part of our commitment to actively work with
regulators, at times, we have become aware of concerns related to certain formulations, and as a result, discontinued compounding certain drug
formulations in an attempt to help mitigate potential regulatory risk. As a result of the MedWatch notice, warning letters and other regulatory notifications,
some physicians may be hesitant to prescribe and some patients may be hesitant to purchase and use non-FDA-approved compounded formulations,
particularly when an FDA-approved potential alternative is available. For other reasons, physicians may be unwilling to prescribe or patients may be
unwilling to use our proprietary compounded formulations, including the following: legal prohibitions on our ability to discuss the efficacy or safety of our
formulations with potential users to the extent applicable data is available; our pharmacy operations are primarily operating on a cash-pay basis and
reimbursement may or may not be available from third-party payors, including the government Medicare and Medicaid programs; and certain formulations
are not required to be prepared and are not presently being prepared in a manufacturing facility governed by cGMP requirements. Any failure by
physicians, patients and/or third-party payors to accept and embrace compounded formulations could substantially limit our market and cause our
operations to suffer.
15
There are many competitive risks related to marketing and selling our proprietary formulations and operating our compounding pharmacy business.
The pharmaceutical and pharmacy industries are highly competitive. We compete against branded drug companies, generic drug companies,
outsourcing facilities and other compounding pharmacies. We are significantly smaller than some of our competitors. Currently we lack some of the
financial and other resources needed to develop, produce, distribute and market our proprietary formulations at a level to capture a significant market share
in these sectors. The drug products available through branded and generic drug companies with which our formulations compete have been approved for
marketing and sale by the FDA and are required to be manufactured in facilities compliant with cGMP standards. Although we prepare our compounded
formulations in accordance with the standards provided by the United States Pharmacopeia (“USP”) <795> and USP <797> and applicable state and
federal law, our proprietary compounded formulations are not required to be, and have not been, approved for marketing and sale by the FDA. As a result,
some physicians may be unwilling to prescribe, and some patients may be unwilling to use, our formulations. Additionally, under federal and state laws
applicable to our current compounding pharmacy operations, we are not permitted to prepare significant amounts of a specific formulation in advance of a
prescription, compound quantities for office use or utilize a wholesaler for distribution of our formulations; instead, our compounded formulations must be
prepared and dispensed in connection with a physician prescription for an individually identified patient. Pharmaceutical companies, on the other hand, are
able to sell their FDA-approved products to large pharmaceutical wholesalers, which can in turn sell to and supply hospitals and retail pharmacies. Even if
we are successful in registering certain of our facilities as outsourcing facilities, our business may not be scalable on the scope available to our competitors
that produce FDA-approved drugs, which may limit our potential for profitable operations. These facets of our operations may subject our business to
limitations our competitors with FDA-approved drugs may not face.
Our future success depends in large part on our ability to maintain a competitive position with respect to biotechnology and related pharmaceutical
technologies.
Biotechnology and related pharmaceutical technologies have undergone and continue to be subject to rapid and significant change. Our future
success will depend in large part on our ability to maintain a competitive position with respect to these technologies. Products developed by our
competitors, including FDA-approved drugs and compounded formulations created by other pharmacies, could render our products and technologies
obsolete or unable to compete. Any products that we develop may become obsolete before we recover expenses incurred in their development, which may
require us to raise additional funds that may or may not be available. The competitive environment requires an ongoing, extensive search for medical and
technological innovations and the ability to develop and market these innovations effectively, and we may not be competitive with respect to these factors.
Other competitive factors include the safety and efficacy of a product, the size of the market for a product, the timing of market entry relative to
competitive products, the availability of alternative compounded formulations or approved drugs, the price of a product relative to alternative products, the
availability of third-party reimbursement, the success of sales and marketing efforts, brand recognition and the availability of scientific and technical
information about a product. Although we believe we are positioned to compete favorably with respect to many of these factors, if our proprietary
formulations are unable to compete with the products of our competitors, we may never gain market share or achieve sustained profitability.
Our ability to generate revenues will be diminished if we fail to obtain acceptable prices or an adequate level of reimbursement from third-party payors.
Currently, our ImprimisRx compounding pharmacies operate on mostly a cash-pay basis and do not submit large amounts of claims for
reimbursement through Medicare, Medicaid or other third-party payors. As part of our Imprimis Cares initiative, we work with third-party insurers,
pharmacy benefit managers and buying groups to offer patient-specific customizable compounded formulations at accessible prices. We plan to continue to
devote time and other resources to seek reimbursement and patient pay opportunities for these and other compounded formulations. We have hired
pharmacy billers to process certain existing reimbursement opportunities for certain formulations. However, we may be unsuccessful in achieving these
goals, as many third-party payors have imposed significant restrictions on reimbursement for compounded formulations in recent years. Moreover, third-
party payors, including Medicare, are attempting to contain health care costs by limiting coverage and the level of reimbursement for new drugs and by
refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval.
Further, the Health Care Reform Law may have a considerable impact on the existing U.S. system for the delivery and financing of health care and could
conceivably have a material effect on our business. As a result, reimbursement from Medicare, Medicaid and other third-party payors may never be
available for any of our products or, if available, may not be sufficient to allow us to sell the products on a competitive basis and at desirable price points. If
government and other third-party payors do not provide adequate coverage and reimbursement levels for our formulations, the market acceptance for our
formulations may be limited.
Additionally, we are making efforts to normalize the pricing for our currently available proprietary compounded formulations. Any efforts to attain
optimized pricing for our Dropless Therapy or any of our other proprietary formulations could fail, which could make our products less attractive or
unavailable to some patients or could reduce our margins.
We may be unable to successfully develop and commercialize our proprietary formulations or any other assets we may acquire.
We have acquired assets related to compoundable formulations, and we have entered into one license agreement for rights to commercialize a
compounding formulation. We are currently pursuing development and commercialization opportunities with respect to certain of these formulations, and
we are in the process of assessing certain of our other assets in order to determine whether to pursue their development or commercialization. In addition,
we expect to consider the acquisition of additional intellectual property rights or other assets in the future. Once we determine to pursue a potential drug
candidate, we develop a commercialization strategy for it, which may include marketing and selling the formulation in compounded form through
compounding pharmacies or outsourcing facilities, or pursuing FDA approval of the drug candidate. We may incorrectly assess the risks and benefits of the
commercialization options or we may not pursue a commercialization strategy that proves to be successful. If we are unable to successfully commercialize
one or more of our proprietary formulations, our operating results would be adversely affected. Even if we are able to successfully sell one or more
proprietary formulations, we may never recoup our investment in acquiring or developing the formulations. Our failure to identify and expend our
resources on formulations and technologies with commercial potential and execute an effective commercialization strategy for each of our formulations
would negatively impact the long-term profitability of our business.
16
Risks Related to Our Operations
The COVID-19 pandemic has had an adverse effect on our business and results of operations and is expected to continue to have further adverse
effects, which could be material, on our business, results of operations, financial condition, liquidity, and capital investments.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The COVID-19 pandemic has negatively
impacted the global economy, disrupted supply chains and created significant volatility in financial markets. We have implemented business policies
intended to protect our employees from the spread of COVID-19. Those policies include employees working from home when possible and employees in
our facilities increasing physical distancing.
On March 18, 2020, the Centers for Medicare & Medicaid Services (“CMS”) released guidance for U.S. healthcare providers to limit all elective
medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the pendency of the pandemic. Many of
our customers use our products in procedures impacted by the guidance. In addition to limiting medical procedures, many hospitals and other healthcare
providers have strictly limited access to their facilities during the pandemic. We cannot predict the duration or scope of the pandemic, actions that may be
taken by governments and businesses in response to the pandemic, or the impacts of the pandemic on healthcare systems. The impacts of the pandemic may
include, but are not limited to:
● Reduced revenues from our customers, including our major customers, whose products are impacted by CMS guidance to limit elective
medical procedures;
● Diminished ability or willingness of third parties to market, distribute and sell our products, due to reduced demand from, or lack of access to,
healthcare facilities and providers;
● Diminished ability, or inability, to complete clinical trials and other activities required to achieve regulatory clearance of our products under
development due to lack of access to healthcare facilities, healthcare providers and patients;
● Diminished or lost access to third party service providers that we use in our research and development or marketing efforts;
● Reduced cash flow from our operations due to reductions in revenues or collections from our customers and increases in operating costs
related to actions we have taken in response to the pandemic;
● Reduced business productivity due to inefficiencies in employees working from home or increasing physical distancing and other pandemic
response protocols in our production facilities;
● Increased susceptibility to the risk of information technology security breaches and other disruptions due to increased volumes of remote
access to our information systems from our employees working at home;
● Inability to source sufficient components used in our products due to disruptions in supply chains;
● Diminished ability to identify, evaluate and acquire, or effectively integrate, complementary businesses, products, materials or technologies
due to travel restrictions, physical distancing protocols, and lack of access to third party service providers related to our development
activities;
● Loss of manufacturing capacity, which could lead to failures to meet product delivery commitments, or increased operating costs if one of our
facilities were to experience a COVID-19 outbreak;
● Difficulties in assessing and securing intellectual property rights due to lack of access to, or delayed responsiveness of, third party service
providers or governmental agencies;
● Diminished ability to retain personnel over concerns about workplace exposure to COVID-19, or to hire and effectively train new personnel,
due to physical distancing protocols; and
● Impairment of goodwill or other assets due to reductions in the fair value of our reporting units.
These and other factors relating to, or arising from, the pandemic could have material adverse effects on our business, results of operations, cash
flows, financial condition, and capital investments. Actual or anticipated adverse effects on our cash flows or financial condition may lead us to seek
additional funding. Any future debt financing into which we enter may impose upon us covenants that restrict our operations, including limitations on our
ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation
or asset sale transactions. We cannot be certain that additional funding will be available on acceptable terms, if at all. If we do not have, or are not able to
obtain, sufficient funds, we may have to delay development or commercialization of our products or otherwise curtail our operations. Any of these events
could materially harm our business and operating results.
17
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our operations, and those of contract research organizations (or CROs), contractors and consultants, could be subject to power shortages,
telecommunications failures, wildfires, water shortages, floods, earthquakes, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics,
such as the COVID-19 pandemic, and other natural or man-made disasters or business interruptions for which we are predominantly self-insured. The
occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. Our
ability to obtain clinical supplies of our product candidates could be disrupted if the operations of our contract manufacturers, or the contract manufacturers
of our development partners, are affected by a man-made or natural disaster or other business interruption.
We sell our proprietary formulations primarily through pharmaceutical compounding facilities we own, but we may not be successful in our efforts to
integrate these businesses into our operations.
We currently have two compounding facilities in New Jersey. We may plan to expand our pharmacy operations and personnel and develop our
facilities into a unified group compounding pharmacy facilities. We have developed “ImprimisRx” as a uniform brand for our compounding facilities and
ophthalmology focused pharmaceutical compounding business. We have limited experience acquiring, building or operating compounding pharmacies or
other prescription dispensing facilities or commercializing our formulations through ownership of or licensing arrangements with pharmacies. In addition,
as we have in the past purchased and operated certain pharmaceutical compounding businesses and pharmacies and subsequently divested or sold those
associated assets, we may pursue similar strategies in the future. Those things considered, we may experience difficulties implementing and/or executing
on our compounding pharmacy strategy, including difficulties that arise as a result of our lack of experience, and we may be unsuccessful and our plans
may change materially. For instance:
● we have experienced delays and increased costs in relation to expansion efforts;
● we may not be able to satisfy applicable federal and state licensing and other requirements for any of our pharmacy businesses in a timely manner
or at all;
● changes to federal and state pharmacy regulations may restrict compounding operations or make them more costly;
● we may be unable to achieve or maintain a sufficient physician and patient customer base to sustain our pharmacy operations;
● market acceptance of compounding pharmacies generally may be curtailed or delayed; and
● we may not be able to enter into licensing or other arrangements with third-party pharmacies or outsourcing facilities when desired, on acceptable
terms or at all.
Moreover, all our efforts to expand pharmacy operations will involve significant costs and other resources, which we may not be able to afford and
may disrupt our other operations and distract management and employees from the other aspects of our business. As a result, our business could materially
suffer if we are unable to further develop a group of unified compounding facilities and, even if we are successful, we may be unable to generate sufficient
revenue to recover our costs.
If we do not successfully identify and acquire rights to potential formulations and successfully integrate them into our operations, our growth
opportunities may be limited.
We plan to pursue the development of new proprietary compounded formulations in the ophthalmology and/or other therapeutic areas, which may
include continued activities to develop and commercialize current assets or, if and as opportunities arise, potential acquisitions of new intellectual property
rights and assets. We also intend to seek opportunities to introduce new lower-cost compounded formulation alternatives to higher-priced FDA-approved
drugs. However, we expect acquisitions of compounding pharmacies to provide us with only limited research and development support and access to
additional novel compounded formulations. We have historically relied, and we expect to continue to rely, primarily upon third parties to provide us with
additional development opportunities. We may seek to enter into acquisition agreements or licensing arrangements to obtain rights to develop new
formulations in the future, but only if we are able to identify attractive formulations and negotiate acquisition or license agreements on terms acceptable to
us, which we may not be able to do. Moreover, we have limited resources to acquire additional potential product development assets and integrate them
into our business. Acquisition opportunities may involve competition among several potential purchasers, which could include large multi-national
pharmaceutical companies and other competitors that have access to greater financial resources than we do. If we are unable to obtain rights to
development opportunities from third parties and we are unable to rely upon our compounding pharmacies and current and future relationships with
pharmacists, physicians and other inventors to provide us with additional development opportunities, our growth and prospects could be limited.
Our product development strategy is to focus on a select few therapeutic areas in which we believe there is broad market potential, large unmet
needs and/or unique value to physicians and patients and to develop and offer formulations within these therapeutic areas that could afford us with gross
margins. However, our expectations and assumptions about market potential and patient needs may prove to be wrong, and we may invest capital and other
resources on formulations that do not generate sufficient revenues for us to recoup our investment.
18
We have in the past and may in the future participate in strategic transactions that could impact our liquidity, increase our expenses and distract our
management.
From time to time we consider engaging in strategic transactions, such as out-licensing or in-licensing of compounds or technologies, acquisitions
of companies, and asset purchases. We may also consider a variety of different business arrangements in the future, including strategic partnerships, joint
ventures, spin-offs, restructurings, divestitures, business combinations and investments. In addition, another entity may pursue us or certain of our assets or
aspects of our operations as an acquisition target. Any such transactions may require us to incur expenses specific to the transaction and not incident to our
operations, may increase our near- and long-term expenditures, may pose significant integration challenges, may require us to hire or otherwise engage
personnel with additional expertise, or may result in our selling or licensing of our assets or technologies under terms that may not prove profitable, any of
which could harm our operations and financial results. Such transactions may also entail numerous other operational and financial risks, including, among
others, exposure to unknown liabilities, disruption of our business and diversion of our management’s time and attention in order to develop acquired
products, drug candidates, technologies or businesses.
As part of our efforts to complete any significant transaction, we would need to expend significant resources to conduct business, legal and
financial due diligence, with the goal of identifying and evaluating material risks involved in the transaction. We may be unsuccessful in ascertaining or
evaluating all the risks and, as a result, we may not realize the expected benefits of the transaction, whether due to unidentified risks, integration
difficulties, regulatory setbacks or other events. We may incur material liabilities for the past activities of any businesses we partner with or acquire. If any
of these events occur, we could be subject to significant costs and damage to our reputation, business, results of operations and financial condition.
Our business and operations would suffer in the event of cybersecurity or other system failures.
Despite the implementation of security measures, our internal computer systems and those of any third parties with which we partner are
vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we
have not experienced any cybersecurity or system failure, accident or breach to date, if an event were to occur, it could result in a material disruption of our
operations, substantial costs to rectify or correct the failure, if possible, and potentially violation of HIPAA and other privacy laws applicable to our
operations. For example, the CCPA became effective on January 1, 2020 and gave California residents expanded rights to access and require deletion of
their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used.
The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation. Although
the CCPA includes exemptions for certain clinical trials data, and HIPAA-protected health information, the law may increase our compliance costs and
potential liability with respect to other personal information we collect about California residents. The CCPA has prompted a number of proposals for new
federal and state privacy legislation. Other countries also have, or are developing, laws governing the collection, use and transmission of personal
information, such as the GDPR in the EU that became effective in May 2018 and the Personal Information Protection and Electronic Documents Act that
became effective in Canada in April 2000. We anticipate that over time we may expand our business to include operations outside of the United States.
With such expansion, we would be subject to increased governmental regulation in the EU countries in which we might operate, including the GDPR.
These laws and similar laws adopted in the future could increase our potential liability, increase our compliance costs and adversely affect our business. If
any disruption or security breach resulted in a loss of or damage to our data or applications or inappropriate disclosure of confidential or protected
information, we could incur liability, further development of our proprietary formulations could be delayed, and our pharmacy operations could be
disrupted, subject to restriction or forced to terminate their operations, any of which could severely harm our business and prospects.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.
From time to time, including recently as a result of the COVID-19 pandemic, global credit and financial markets have experienced extreme
volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth,
increases in unemployment rates and uncertainty about economic stability. Our general business strategy may be adversely affected by any such economic
downturn, volatile business environment and continued unpredictable and unstable market conditions. If the equity and credit markets deteriorate it may
make any debt or equity financing more difficult to complete, more costly, and more dilutive. In the event the Company or one of its subsidiaries needed to
access additional capital, failure to secure financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy,
financial performance and stock price and could require us to delay or abandon development plans. In addition, there is a risk that one or more of our
current service providers, manufacturers and other partners may not survive an economic downturn, which could directly affect our ability to attain our
operating goals on schedule and on budget.
Risks Related to Regulatory Approval and Other Legal Compliance Matters
Our business is significantly impacted by state and federal statutes and regulations.
Our proprietary formulations are comprised of active pharmaceutical ingredients that are components of drugs that have received marketing
approval from the FDA, although our proprietary compounded formulations have not themselves received FDA approval. FDA approval is not required in
order to market and sell our compounded formulations. In the future, we may choose to pursue FDA approval to market and sell certain potential drug
candidates. The marketing and sale of compounded formulations is subject to and must comply with extensive state and federal statutes and regulations
governing compounding pharmacies. These statutes and regulations include, among other things, restrictions on compounding for office use or in advance
of receiving a patient-specific prescription or, for outsourcing facilities, requirements regarding preparation, such as regular FDA inspections and cGMP
requirements, prohibitions on compounding drugs that are essentially copies of FDA-approved drugs, limitations on the volume of compounded
formulations that may be sold across state lines, and prohibitions on wholesaling or reselling. These and other restrictions on the activities of compounding
pharmacies and outsourcing facilities may significantly limit the market available for compounded formulations, compared to the market available for
FDA-approved drugs.
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Our pharmacy business is impacted by federal and state laws and regulations governing the following: the purchase, distribution, management,
compounding, dispensing, reimbursement, marketing and labeling of prescription drugs and related services including: FDA and/or state regulation
affecting the pharmacy and pharmaceutical industries, including state pharmacy licensure and registration or permit standards; rules and regulations issued
pursuant to HIPAA and other state and federal laws related to the use, disclosure and transmission of health information; and state and federal controlled
substance laws. Our failure to comply with any of these laws and regulations could severely limit or curtail our pharmacy operations, which would
materially harm our business and prospects. Further, our business could be adversely affected by changes in these or any newly enacted laws and
regulations, and federal and state agency interpretations of the statutes and regulations. Statutory or regulatory changes could require us to make changes to
our business model and operations and/or could require us to incur significantly increased costs to comply with such regulations.
On July 30, 2020, the FDA issued a notice for comments related to certain bulk drug substances to be removed from the 503B Bulk’s List (or
Category 1 List). Included in this notice for comment were certain bulk drug substances which we currently use in some of our compounded products. In
the event one or more of these bulk substances are ultimately removed from the Category 1 List, we intend to utilize commercially available versions of
these substances or similar active pharmaceutical ingredients as replacements of the bulk powders contained in our sterile products. In addition, nothing in
the FDA’s notice affects the dispensing of bulk powder-containing products from our 503A pharmacy. Nonetheless, if all or some of the bulk drug
substances we use are removed from the 503B Bulk’s List, this may result in a disruption in our operations, revenues and cash flows.
On October 27, 2020, the FDA announced availability of a final Memorandum of Understanding, Addressing Certain Distributions of
Compounded Human Drug Products Between the State Board of Pharmacy or Other Appropriate State Agency and the Food and Drug Administration (the
“MOU”). The MOU describes the responsibilities of a state board of pharmacy, or other appropriate state agency that chooses to sign the MOU, in
investigating and responding to complaints related to drug products compounded in such state and distributed outside such state and in addressing the
interstate distribution of inordinate amounts of compounded human drug products. Additionally, as part of the MOU, FDA refined the definition of
“inordinate amount,” a threshold for certain information identification and sharing which does not place a limit on the distribution of compounded human
drug products interstate by a pharmacy located in a state that has entered into the MOU. Section 503A of the FDCA sets a five percent limit on
compounded drugs distributed outside the state by a pharmacist, pharmacy or physician located in a state that has not entered into the MOU.
States have 365 days to sign the MOU, before the FDA intends to enforce the five percent limit described in Section 503A of the FDCA in states
that have not signed the MOU. Our pharmacy is based in the state of New Jersey, and we believe the state board of pharmacy in New Jersey will sign the
MOU and as a result, our operations will not be materially affected by the MOU. In the event New Jersey does not sign the MOU, our pharmacy that
operates under Section 503A may be materially affected, and we will transition as many prescription orders as possible to our outsourcing facility, which is
not subject to the MOU.
If one of our pharmacies fails to comply with state statutes and regulations, the pharmacy could be required to cease operations or become subject to
restrictions that could adversely affect our business.
State pharmacy laws require pharmacy locations in those states be licensed as an in-state pharmacy to dispense pharmaceuticals. In addition, state
controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit standards promulgated by the state’s
pharmacy licensing authority. Pharmacy and controlled substance laws often address the qualification of an applicant’s personnel, the adequacy of its
prescription fulfillment and inventory control practices and the adequacy of its facilities. If one of our pharmacies, or one with which we may partner, is
found not to comply with state pharmacy and controlled substance laws and regulations, the pharmacy could be required to cease operations or become
subject to burdensome restrictions and limitations on its business. For example, in March 2018, the California Board of Pharmacy filed an accusation
against our subsidiary Park related to a compounded formulation we believe was legally dispensed and was, without our knowledge, inappropriately
administered to a patient unknown to us, by the prescribing healthcare professionals. While we dispute all claims against Park, we did enter into a
settlement agreement with the California Board of Pharmacy and surrendered Park’s pharmacy license and ceased its sterile compounding operations. We
have transferred approximately half of Park’s business to our New Jersey based pharmacy. Although we distribute our proprietary formulations through
other compounding pharmacies, and not solely through Park, the loss of Park’s ability to compound sterile formulations could have an adverse impact on
our ability to implement our business plan in a timely manner.
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If we or our partner facilities fail to comply with the Controlled Substances Act, FDCA, or similar state statutes and regulations, the pharmacy facilities
could be required to cease operations or become subject to restrictions that could adversely affect our business.
State pharmacy laws require pharmacy locations in those states to be licensed as an in-state pharmacy to dispense pharmaceuticals. In addition,
state controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit standards promulgated by the
state’s pharmacy licensing authority. Pharmacy and controlled substance laws often address the qualification of an applicant’s personnel, the adequacy of its
prescription fulfillment and inventory control practices and the adequacy of its facilities. These laws also subject pharmacies to oversight by state boards of
pharmacy and other regulators that could impose burdensome requirements or restrictions on operations if a pharmacy is found not in compliance with
these laws. We believe that our compounding pharmacies are in material compliance with applicable regulatory requirements. Further, if any of our
compounding pharmacies (including Park) fail to comply with regulatory requirements, they could be forced to permanently or temporarily cease or limit
their compounding operations, which would severely limit our ability to market and sell our proprietary formulations and would materially harm our
operations and prospects. Any noncompliance could also result in complaints or adverse actions by other state boards of pharmacy. FDA inspection of a
facility to determine compliance with the FDCA, if not successful, may result in the loss of FDCA exemptions provided under Sections 503A and 503B,
warning letters, injunctions, prosecution, fines and loss of required government licenses, certifications and approvals, any of which could involve
significant costs and could cause us to be unable to realize the expected benefits of these pharmacies’ operations. Additionally, the permanent injunction
entered on July 22, 2019, by the United States District Court of the Central District of California in the Allergan litigation (also referenced in Item. 3 Legal
Proceedings), enjoins the Company from engaging in activities that are inconsistent with current FDA guidelines for 503A and 503B operations. While the
Company believes its operations fully comply with the injunction, if the Court were to find the Company to be in violation of the injunction, further
sanctions including fines and limitations on the pharmacies’ operations could occur.
If we seek FDA approval to market and sell any of our proprietary formulations, such as drug candidates that we have royalty interests in that are
being developed by Melt and Surface, we may be unable to demonstrate the necessary safety and efficacy to obtain such FDA approval.
Historically, our business strategy was focused on developing and commercializing product opportunities as compounded formulations. We
recently have, and in the future may, alone or with project partners, seek FDA regulatory approval to market and sell one or more of our assets as a FDA-
approved drug. Obtaining FDA approval to market and sell pharmaceutical products is costly, time consuming, uncertain and subject to unanticipated
delays. The FDA or other regulatory agencies may not approve a drug candidate on a timely basis or at all. Before we obtain FDA approval for the sale of
any potential drug candidates, we will be required to demonstrate through preclinical studies and clinical trials that it is safe and effective for each intended
use, which we may not be able to do. A failure to demonstrate safety and efficacy of a drug candidate to the FDA’s satisfaction would result in our failure to
obtain FDA approval. Moreover, even if the FDA were to grant regulatory approval of a drug candidate, the approval may be limited to specific therapeutic
areas or limited as to its distribution, which could reduce revenue potential, and we will be subject to extensive and costly post-approval requirements and
oversight with respect to commercialization of the drug candidate.
If a compounded drug formulation provided through our compounding services leads to patient injury or death or results in a product recall, we may
be exposed to significant liabilities and reputational harm.
The success of our business, including our proprietary formulations and pharmacy operations, is highly dependent upon medical and patient
perceptions of us and the actual safety and quality of our products. We could be adversely affected if we, any other compounding pharmacies or our
formulations and technologies are subject to negative publicity. We could also be adversely affected if any of our formulations or other products we sell,
any similar products sold by other companies, or any products sold by other compounding pharmacies prove to be, or are asserted to be, harmful to
patients. For instance, if any of the components of approved drugs or other ingredients used to produce our compounded formulations have quality or other
problems that adversely affect the finished compounded preparations, our sales could be adversely affected. Because of our dependence upon medical and
patient perceptions, adverse publicity associated with illness or other adverse effects resulting from the use or misuse of our products, any similar products
sold by other companies, or any other compounded formulations could have a material adverse impact on our business.
To assure compliance with USP guidelines, we have a policy whereby 100% of all sterile compound batches produced by our ImprimisRx
compounding pharmacies are tested prior to their delivery to patients and physicians both in-house and externally by an independent, FDA-registered
laboratory that has represented to us that it operates in compliance with current good laboratory practices. However, we could still become subject to
product recalls and termination or suspension of our state pharmacy licenses if we fail to fully implement this policy, if the laboratory testing does not
identify all contaminated products, or if our products otherwise cause or appear to have caused injury or harm to patients. In addition, laboratory testing
may produce false positives, which could harm our business and impact our pharmacy operations and licensure even if the impacted formulations are
ultimately found to be sterile and no patients are harmed by them. If adverse events or deaths or a product recall, either voluntarily or as required by the
FDA or a state board of pharmacy, were associated with one of our proprietary formulations or any compounds prepared by our ImprimisRx compounding
pharmacies or any pharmacy partner, our reputation could suffer, physicians may be unwilling to prescribe our proprietary formulations or order any
prescriptions from such pharmacies, we could become subject to product and professional liability lawsuits, and our state pharmacy licenses could be
terminated or restricted. If any of these events were to occur, we may be subject to significant litigation or other costs and loss of revenue, and we may be
unable to continue our pharmacy operations and further develop and commercialize our proprietary formulations.
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We carry product and professional liability insurance which may be inadequate.
Although we have secured product and professional liability insurance for our pharmacy operations and the marketing and sale of our
formulations, our current or future insurance coverage may prove insufficient to cover any liability claims brought against us. Because of the increasing
costs of insurance coverage, we may not be able to maintain insurance coverage at a reasonable cost or at a level adequate to satisfy liabilities that may
arise.
Risks Related to Human Capital Matters
We are dependent on our Chief Executive Officer, Mark L. Baum, and other key persons for the continued growth and development of our Company.
Our Chief Executive Officer, Mark L. Baum, has played a primary role in creating and developing our current business model. Further, Mr. Baum
has played a primary role in securing much of our material intellectual property rights and related assets, as well as the means to make and distribute our
current products. We are highly dependent on Mr. Baum for the implementation of our business plan and the future development of our assets and our
business, and the loss of Mr. Baum’s services and leadership would likely materially adversely impact our Company. We presently maintain key man
insurance for Mr. Baum. In addition, our loan agreement identifies other key persons including, but not limited to, our Chief Financial Officer, Andrew R.
Boll, and the President of ImprimisRx, John P. Saharek.
If we are unable to attract and retain key personnel and consultants, we may be unable to maintain or expand our business.
We have been focusing on building our management, pharmacy, research and development, sales and marketing and other personnel to pursue our
current business model. To achieve our planned growth, we may have significant difficulty attracting and retaining necessary employees. Because of the
specialized nature of our business, the ability to develop products and to compete will remain highly dependent upon our ability to attract and retain
qualified pharmacy, scientific, technical and commercial employees and consultants. There is intense competition to hire qualified personnel in our
industry, and we may be unable to continue to attract and retain the qualified personnel necessary for the development of our business. The loss of key
employees or consultants or the failure to recruit or engage new employees and consultants could have a material adverse effect on our business. In
addition, any staffing interruptions resulting from geopolitical actions, including war and terrorism, adverse public health developments such as the
outbreak of the COVID-19 novel coronavirus, or natural disasters including earthquakes, typhoons, floods and fires, could have a material adverse effect on
our business.
If we are unable to establish, train and maintain an effective sales and marketing infrastructure, we will not be able to commercialize our drug
candidates successfully.
We have started to build an internal sales and marketing infrastructure to implement our business plan by developing internal sales teams and
education campaigns to market our proprietary formulations. We will need to expend significant resources to further establish and grow this internal
infrastructure and properly train sales personnel with respect to regulatory compliance matters. We may also choose to engage or enter into other
arrangements with third parties to provide sales and marketing services for us in place of or to supplement our internal commercialization infrastructure.
We may not be able to secure sales personnel or relationships with third-party sales organizations that are adequate in number or expertise to successfully
market and sell our proprietary formulations and pharmacy services. Further, any third-party organizations we may seek to partner with or engage may not
be able to provide sales and marketing services in accordance with our expectations and standards, may be more expensive than we can afford or may not
be available on otherwise acceptable terms or at all. If we are unable to establish and maintain compliant and adequate sales and marketing capabilities,
through our own internal infrastructure or third-party services or other arrangements, we may be unable to sell our formulations or services or generate
meaningful revenue.
We depend upon consultants, outside contractors and other third-party service providers for key aspects of our business.
We are substantially dependent on consultants and other outside contractors and service providers for key aspects of our business. For instance, we
rely upon pharmacist, physician and research consultants and advisors to provide us with significant assistance in the evaluation of product development
opportunities, and we have engaged or supported, and expect to continue to engage or support, consultants, advisors, clinical research organizations
(“CROs”) and others to design, conduct, analyze and interpret the results of any clinical or non-clinical trials or other studies in connection with the
research and development of our products. If any of our consultants or other service providers terminates its engagement with us, or if we are unable to
engage highly qualified replacements as needed on commercially reasonable terms, we may be unable to successfully execute our business plan. We must
effectively manage these third-party service providers to ensure that they successfully carry out their contractual obligations and meet expected deadlines.
However, these third parties often engage in other business activities and may not devote sufficient time and attention to our activities, and we may have
only limited contractual rights in connection with the conduct of the activities we have engaged the service providers to perform. If we are unable to
effectively manage our outsourced activities or if the quality, timeliness or accuracy of the services provided by third-party service providers is
compromised for any reason, our development activities may be extended, delayed or terminated, and we may not be able to commercialize our
formulations or advance our business.
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Risks Related to Product Development
Delays in the completion of, or the termination of, any clinical or non-clinical trials for any drug candidates for which we may seek FDA approval
could adversely affect our business.
Clinical trials are very expensive, time consuming, unpredictable and difficult to design and implement. The results of clinical trials may be
unfavorable, they may continue for several years, and they may take significantly longer to complete and involve significantly more costs than expected.
Delays in the commencement or completion of clinical testing could significantly affect product development costs and plans with respect to any drug
candidate for which we seek FDA approval. The commencement and completion of clinical trials can be delayed and experience difficulties for a number
of reasons, including delays and difficulties caused by circumstances over which we may have no control. For instance, approvals of the scope, design or
trial site may not be obtained from the FDA and other required bodies in a timely manner or at all, agreements with acceptable terms may not be reached in
a timely manner or at all with CROs to conduct the trials, a sufficient number of subjects may not be recruited and enrolled in the trials, and third-party
manufacturers of the materials for use in the trials may encounter delays and problems in the manufacturing process, including failure to produce materials
in sufficient quantities or of an acceptable quality to complete the trials. If we were to experience delays in the commencement or completion of, or if we
were to terminate, any clinical or non-clinical trials we pursue in the future, the commercial prospects for the applicable drug candidates may be limited or
eliminated, which may prevent us from recouping our investment in research and development efforts for the drug candidate and would have a material
adverse effect on our business, results of operations, financial condition and prospects.
We depend on the success of our drug candidates, and those we have royalty rights to, which have not yet demonstrated efficacy for their target or any
other indications. If we are unable to generate revenues from our drug candidates, our ability to create stockholder value will be limited.
Our drug candidates are in the early stages of clinical development. We do not generate revenues from any FDA-approved drug products. We
expect to submit an IND or foreign equivalent to the FDA or international regulatory authorities seeking approval to initiate our clinical trials in humans in
the United States or other countries yet to be determined. We plan on submitting our clinical trial protocols and receive approvals from the FDA and
international regulatory authorities before we can commence any clinical trials. We may not be successful in obtaining acceptance from the FDA or
comparable foreign regulatory authorities to start our clinical trials. If we do not obtain such acceptance, the time in which we expect to commence clinical
programs for any drug candidate will be extended and such extension will increase our expenses and increase our need for additional capital. Moreover,
there is no guarantee that our clinical trials will be successful or that we will continue clinical development in support of an approval from the FDA or
comparable foreign regulatory authorities for any indication. We note that most drug candidates never reach the clinical development stage and even those
that do commence clinical development have only a small chance of successfully completing clinical development and gaining regulatory approval.
Therefore, our business currently depends entirely on the successful development, regulatory approval and commercialization of our drug candidates,
which may never occur.
If we are not able to obtain any required regulatory approvals for our drug candidates, we will not be able to commercialize our drug candidate and our
ability to generate revenue will be limited.
We must successfully complete clinical trials for our drug candidates before we can apply for marketing approval. Even if we complete our
clinical trials, it does not assure marketing approval. Our clinical trials may be unsuccessful, which would materially harm our business. Even if our initial
clinical trials are successful, we are required to conduct additional clinical trials to establish our drug candidates’ safety and efficacy, before an NDA or
Biologics License Application (“BLA”), or their foreign equivalents can be filed with the FDA or comparable foreign regulatory authorities for marketing
approval of our drug candidates.
Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in
early phases of pre-clinical and clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not
necessarily predict final results. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen
events during, or as a result of, the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our drug
candidates. The research, testing, manufacturing, labeling, packaging, storage, approval, sale, marketing, advertising and promotion, pricing, export, import
and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries,
which regulations differ from country to country. We are not permitted to market our drug candidates as prescription pharmaceutical products in the United
States until we receive approval of an NDA from the FDA, or in any foreign countries until we receive the requisite approval from such countries. In the
United States, the FDA generally requires the completion of clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical
development to ensure its quality before an NDA is approved. Regulatory authorities in other jurisdictions impose similar requirements. Of the large
number of drugs in development, only a small percentage result in the submission of an NDA to the FDA and even fewer are eventually approved for
commercialization. We have not submitted an NDA to the FDA or comparable applications to other regulatory authorities. If our development efforts for
our drug candidates, including regulatory approval, are not successful for their planned indications, or if adequate demand for our drug candidates is not
generated, our business will be materially adversely affected.
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Our success depends on the receipt of regulatory approval and the issuance of such regulatory approvals is uncertain and subject to a number of
risks, including the following:
● the results of toxicology studies may not support the filing of an IND for our drug candidates;
● the FDA or comparable foreign regulatory authorities or Institutional Review Boards, or “IRB,” may disagree with the design or
implementation of our clinical trials;
● we may not be able to provide acceptable evidence of our drug candidates’ safety and efficacy;
● the results of our clinical trials may not be satisfactory or may not meet the level of statistical or clinical significance required by the FDA,
European Medicines Agency (the “EMA”), or other regulatory agencies for marketing approval;
● the dosing of our drug candidates in a particular clinical trial may not be at an optimal level;
● patients in our clinical trials may suffer adverse effects for reasons that may or may not be related to our drug candidates;
● the data collected from clinical trials may not be sufficient to support the submission of an NDA, BLA or other submission or to obtain
regulatory approval in the United States or elsewhere;
● the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party
manufacturers with which we contract for clinical and commercial supplies; and
● the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering
our clinical data insufficient for approval.
Failure to obtain regulatory approval for our drug candidates for the foregoing, or any other reasons, will prevent us from commercializing our
drug candidates, and our ability to generate revenue will be materially impaired. We cannot guarantee that regulators will agree with our assessment of the
results of the clinical trials we intend to conduct in the future or that such trials will be successful. The FDA, EMA and other regulators have substantial
discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional
clinical trials, or pre-clinical or other studies. In addition, varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit
or prevent regulatory approval of our drug candidates.
Excluding any activities through our ownership interest in Eton, we have not submitted an NDA or received regulatory approval to market our
drug candidates in any jurisdiction. We have only limited experience in filing the applications necessary to gain regulatory approvals and expect to rely on
consultants and third party contract research organizations, or “CROs,” with expertise in this area to assist us in this process. Securing regulatory approvals
to market a product requires the submission of pre-clinical, clinical, and/or pharmacokinetic data, information about product manufacturing processes and
inspection of facilities and supporting information to the appropriate regulatory authorities for each therapeutic indication to establish a drug candidate’s
safety and efficacy for each indication. Our drug candidates may prove to have undesirable or unintended side effects, toxicities or other characteristics that
may preclude us from obtaining regulatory approval or prevent or limit commercial use with respect to one or all intended indications.
The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based
upon, among other things, the type, complexity and novelty of the drug candidates involved, the jurisdiction in which regulatory approval is sought and the
substantial discretion of the regulatory authorities. Changes in regulatory approval policies during the development period, changes in or the enactment of
additional statutes or regulations, or changes in regulatory review for a submitted product application may cause delays in the approval or rejection of an
application. Regulatory approval obtained in one jurisdiction does not necessarily mean that a drug candidate will receive regulatory approval in all
jurisdictions in which we may seek approval, but the failure to obtain approval in one jurisdiction may negatively impact our ability to seek approval in a
different jurisdiction. Failure to obtain regulatory marketing approval for our drug candidates in any indication will prevent us from commercializing the
drug candidate, and our ability to generate revenue will be materially impaired.
If we fail to successfully commercialize any of our drug candidates, we may need to acquire additional drug candidates and our business will be
adversely affected.
We have never commercialized any drug candidates and do not have any other compounds in pre-clinical testing, lead optimization or lead
identification stages beyond our drug candidates. We cannot be certain that any of our drug candidates will prove to be sufficiently effective and safe to
meet applicable regulatory standards for any indication. If we fail to successfully commercialize any of our drug candidates for their targeted indications,
whether as stand-alone therapies or in combination with other therapeutic agents, our business would be adversely affected.
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Even if we receive regulatory approval for any of our drug candidates, we may not be able to successfully commercialize the product and the revenue
that we generate from its sales, if any, may be limited.
If approved for marketing, the commercial success of our drug candidates will depend upon each product’s acceptance by the medical community,
including physicians, patients and health care payors. The degree of market acceptance for any of our drug candidates will depend on a number of factors,
including:
● demonstration of clinical safety and efficacy;
● relative convenience, dosing burden and ease of administration;
● the prevalence and severity of any adverse effects;
● the willingness of physicians to prescribe our drug candidates, and the target patient population to try new therapies;
● efficacy of our drug candidates compared to competing products;
● the introduction of any new products that may in the future become available targeting indications for which our drug candidates may be
approved;
● new procedures or therapies that may reduce the incidences of any of the indications in which our drug candidates may show utility;
● pricing and cost-effectiveness;
● the inclusion or omission of our drug candidates in applicable therapeutic and vaccine guidelines;
● the effectiveness of our own or any future collaborators’ sales and marketing strategies;
● limitations or warnings contained in approved labeling from regulatory authorities;
● our ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including
Medicare and Medicaid, private health insurers and other third-party payors or to receive the necessary pricing approvals from government
bodies regulating the pricing and usage of therapeutics; and
● the willingness of patients to pay out-of-pocket in the absence of third-party coverage or reimbursement or government pricing approvals.
If any of our drug candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors, and patients, we
may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and third-
party payors on the benefits of our drug candidates may require significant resources and may never be successful.
In addition, even if we obtain regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize our
drug candidates successfully. For example, if the approval process takes too long, we may miss market opportunities and give other companies the ability to
develop competing products or establish market dominance. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-
approval commitments that render our drug candidates not commercially viable. For example, regulatory authorities may approve any of our drug
candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for any of our drug candidates, may grant
approval contingent on the performance of costly post-marketing clinical trials, or may approve any of our drug candidates with a label that does not
include the labeling claims necessary or desirable for the successful commercialization of that indication. Further, the FDA or comparable foreign
regulatory authorities may place conditions on approvals or require risk management plans or a Risk Evaluation and Mitigation Strategy (“REMS”) to
assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS; the FDA will not
approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to
assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA may also require a REMS for an
approved product when new safety information emerges. Any of these limitations on approval or marketing could restrict the commercial promotion,
distribution, prescription or dispensing of our drug candidates. Moreover, product approvals may be withdrawn for non-compliance with regulatory
standards or if problems occur following the initial marketing of the product. Any of the foregoing scenarios could materially harm the commercial success
of our drug candidates.
Even if we obtain marketing approval for any of our drug candidates, we will be subject to ongoing obligations and continued regulatory review, which
may result in significant additional expense. Additionally, our drug candidates could be subject to labeling and other restrictions and withdrawal from
the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our
drug candidates.
Even if we obtain regulatory approval for any of our drug candidates for an indication, the FDA or foreign equivalent may still impose significant
restrictions on their indicated uses or marketing or the conditions of approval, or impose ongoing requirements for potentially costly and time-consuming
post-approval studies, including Phase 4 clinical trials, and post-market surveillance to monitor safety and efficacy. Our drug candidates will also be subject
to ongoing regulatory requirements governing the manufacturing, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion,
recordkeeping and reporting of adverse events and other post-market information. These requirements include registration with the FDA, as well as
continued compliance with current Good Clinical Practices regulations, or “cGCPs,” for any clinical trials that we conduct post-approval. In addition,
manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for
compliance with current cGMP, requirements relating to quality control, quality assurance and corresponding maintenance of records and documents.
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The FDA has the authority to require a REMS as part of an NDA or after approval, which may impose further requirements or restrictions on the
distribution or use of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training,
limiting treatment to patients who meet certain safe-use criteria or requiring patient testing, monitoring and/or enrollment in a registry.
With respect to sales and marketing activities by us or any future partner, advertising and promotional materials must comply with FDA rules in
addition to other applicable federal, state and local laws in the United States and similar legal requirements in other countries. In the United States, the
distribution of product samples to physicians must comply with the requirements of the U.S. Prescription Drug Marketing Act. Application holders must
obtain FDA approval for product and manufacturing changes, depending on the nature of the change. We may also be subject, directly or indirectly through
our customers and partners, to various fraud and abuse laws, including, without limitation, the U.S. Anti-Kickback Statute, U.S. False Claims Act, and
similar state laws, which impact, among other things, our proposed sales, marketing, and scientific/educational grant programs. If we participate in the U.S.
Medicaid Drug Rebate Program, the Federal Supply Schedule of the U.S. Department of Veterans Affairs, or other government drug programs, we will be
subject to complex laws and regulations regarding reporting and payment obligations. All of these activities are also potentially subject to U.S. federal and
state consumer protection and unfair competition laws. Similar requirements exist in many of these areas in other countries.
In addition, if any of our drug candidates are approved for a particular indication, our product labeling, advertising and promotion would be
subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about
prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved
labeling. If we receive marketing approval for our drug candidates, physicians may nevertheless legally prescribe our products to their patients in a manner
that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability and
government fines. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is
found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines
against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested
that companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed or curtailed.
If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or
frequency, problems with the facility where the product is manufactured, or we or our manufacturers fail to comply with applicable regulatory
requirements, we may be subject to the following administrative or judicial sanctions:
● restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product
recalls;
● issuance of warning letters or untitled letters;
● clinical holds;
● injunctions or the imposition of civil or criminal penalties or monetary fines;
● suspension or withdrawal of regulatory approval;
● suspension of any ongoing clinical trials;
● refusal to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product license
approvals;
● suspension or imposition of restrictions on operations, including costly new manufacturing requirements; or
● product seizure or detention or refusal to permit the import or export of product.
The occurrence of any event or penalty described above may inhibit our ability to commercialize our drug candidates and generate revenue. Adverse
regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase our product liability exposure.
Obtaining and maintaining regulatory approval of our drug candidates in one jurisdiction does not mean that we will be successful in obtaining
regulatory approval of our drug candidates in other jurisdictions.
Obtaining and maintaining regulatory approval of our drug candidates in one jurisdiction does not guarantee that we will be able to obtain or
maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect
on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a drug candidate, comparable regulatory
authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the drug candidate in those countries. Approval
procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States, including
additional preclinical studies or clinical trials, as clinical studies conducted in one jurisdiction may not be accepted by regulatory authorities in other
jurisdictions. In many jurisdictions outside the United States, a drug candidate must be approved for reimbursement before it can be approved for sale in
that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.
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Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and
costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in
international markets and/ or to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential
of our drug candidates will be harmed.
Current and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our drug candidates and
affect the prices we may obtain.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes
regarding the healthcare system that could prevent or delay marketing approval for our drug candidates, restrict or regulate post-approval activities and
affect our ability to profitably sell our drug candidates. Legislative and regulatory proposals have been made to expand post-approval requirements and
restrict sales and promotional activities for pharmaceutical products. We do not know whether additional legislative changes will be enacted, or whether the
FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our drug candidates, if
any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as
well as subject us to more stringent product labeling and post-marketing testing and other requirements.
In the United States, the Medicare Modernization Act (“MMA”) changed the way Medicare covers and pays for pharmaceutical products. The
legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices
for drugs. In addition, this legislation authorized Medicare Part D prescription drug plans to use formularies where they can limit the number of drugs that
will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be
additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and
price that we receive for our drug candidates and could seriously harm our business. While the MMA applies only to drug benefits for Medicare
beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in
reimbursement that results from the MMA may result in a similar reduction in payments from private payors.
The Health Care Reform Law is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare
spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes
and fees on the health industry and impose additional health policy reforms. The Health Care Reform Law revised the definition of “average manufacturer
price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, the law imposed a significant annual fee on
companies that manufacture or import branded prescription drug products.
The Health Care Reform Law remains subject to legislative efforts to repeal, modify or delay the implementation of the law. Efforts to date have
generally been unsuccessful. If the Health Care Reform Law is repealed or modified, or if implementation of certain aspects of the Health Care Reform
Law are delayed, such repeal, modification or delay may materially adversely impact our business, strategies, prospects, operating results or financial
condition. We are unable to predict the full impact of any repeal or modification in the implementation of the Health Care Reform Law on us at this time.
In addition, other legislative changes have been proposed and adopted in the United States since the Health Care Reform Law was enacted. We
expect that additional federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state
governments will pay for healthcare products and services, and in turn could significantly reduce the projected value of certain development projects and
reduce or eliminate our profitability.
Our drug candidates may face competition sooner than expected.
Our success will depend in part on our ability to obtain and maintain patent protection for our certain of our drug candidates and technologies and
to prevent third parties from infringing upon our proprietary rights. We must also operate without infringing upon patents and proprietary rights of others,
including by obtaining appropriate licenses to patents or other proprietary rights held by third parties, if necessary. However, the applications we have filed
or may file in the future may never yield patents that protect our inventions and intellectual property assets. Failure to obtain patents that sufficiently cover
our formulations and technologies would limit our protection against compounding pharmacies, outsourcing facilities, generic drug manufacturers,
pharmaceutical companies and other parties who may seek to copy our products, produce products substantially similar to ours or use technologies
substantially similar to those we own.
We also intend to seek data exclusivity or market exclusivity for our drug candidates provided under the FDCA, and similar laws in other
countries. The FDCA provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical
investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval
of the application, for example, for new indications, dosages, or strengths of an existing drug. This three-year exclusivity covers only the conditions
associated with the new clinical investigations and does not prohibit the FDA from approving NDAs for drugs containing the original active agent. Even if
our drug candidates are considered to be reference products eligible for three years of exclusivity under the FDCA, another company could market
competing products if the FDA approves a full NDA for such product containing the sponsor’s own preclinical data and data from adequate and well-
controlled clinical trials to demonstrate the safety, purity and potency of the products. Moreover, an amendment or repeal of the FDCA could result in a
shorter exclusivity period for our drug candidates, which would have a material adverse effect on our business.
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If we market any of our drug candidates in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting laws,
we may be subject to civil or criminal penalties.
The FDA enforces laws and regulations which require that the promotion of pharmaceutical products be consistent with the approved prescribing
information. While physicians may prescribe an approved product for a so-called “off label” use, it is unlawful for a pharmaceutical company to promote
its products in a manner that is inconsistent with its approved label and any company which engages in such conduct can subject that company to
significant liability. Similarly, industry codes in the EU and other foreign jurisdictions prohibit companies from engaging in off-label promotion and
regulatory agencies in various countries enforce violations of the code with civil penalties. While we intend to ensure that our promotional materials are
consistent with our label, regulatory agencies may disagree with our assessment and may issue untitled letters, warning letters or may institute other civil or
criminal enforcement proceedings. In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal
healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include
the U.S. Anti-Kickback Statute, U.S. False Claims Act and similar state laws. Because of the breadth of these laws and the narrowness of the safe harbors,
it is possible that some of our business activities could be subject to challenge under one or more of these laws.
The U.S. Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to
induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under
Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted broadly to apply to arrangements between
pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are several statutory
exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and
practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an
exemption or safe harbor. Our practices may not, in all cases, meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover,
recent health care reform legislation has strengthened these laws. For example, the Health Care Reform Law, among other things, amends the intent
requirement of the U.S. Anti-Kickback Statute and criminal health care fraud statutes; a person or entity no longer needs to have actual knowledge of this
statute or specific intent to violate it. In addition, the Health Care Reform Law provides that the government may assert that a claim including items or
services resulting from a violation of the U.S. Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the U.S. False Claims Act.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government
or knowingly making, or causing to be made, a false statement to get a false claim paid.
Over the past few years, several pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of alleged
promotional and marketing activities, such as: allegedly providing free trips, free goods, sham consulting fees and grants and other monetary benefits to
prescribers; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in
off-label promotion that caused claims to be submitted to Medicare or Medicaid for non-covered, off-label uses; and submitting inflated best price
information to the Medicaid Rebate Program to reduce liability for Medicaid rebates. Most states also have statutes or regulations similar to the U.S. Anti-
Kickback Statute and the U.S. False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several
states, apply regardless of the payor. Sanctions under these federal and state laws may include substantial civil monetary penalties, exclusion of a
manufacturer’s products from reimbursement under government programs, substantial criminal fines and imprisonment.
We will be completely dependent on third parties to manufacture our drug candidates, and our commercialization of our drug candidates could be
halted, delayed or made less profitable if those third parties fail to obtain manufacturing approval from the FDA or comparable foreign regulatory
authorities, fail to provide us with sufficient quantities of our drug candidates or fail to do so at acceptable quality levels or prices.
We do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture the active pharmaceutical ingredient, (“API”),
in our drug candidates for use in our clinical trials or for commercial product, if any. In addition, we do not have the capability to encapsulate any of our
drug candidates as a finished drug product for commercial distribution. As a result, we will be obligated to rely on contract manufacturers, if and when any
of our drug candidates are approved for commercialization. We have not entered into an agreement with any contract manufacturers for commercial supply
and may not be able to engage a contract manufacturer for commercial supply of any of our drug candidates on favorable terms to us, or at all.
The facilities used by our contract manufacturers to manufacture our drug candidates must be approved by the FDA or comparable foreign
regulatory authorities pursuant to inspections that will be conducted after we submit an NDA or BLA to the FDA or their equivalents to other relevant
regulatory authorities. We will not control the manufacturing process of, and will be completely dependent on, our contract manufacturing partners for
compliance with cGMPs for manufacture of both active drug substances and finished drug products. These cGMP regulations cover all aspects of the
manufacturing, testing, quality control and record keeping relating to our drug candidates. If our contract manufacturers do not successfully manufacture
material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain
regulatory approval for their manufacturing facilities. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the
manufacture of our drug candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which
would significantly impact our ability to develop, obtain regulatory approval for or market our drug candidates, if approved.
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Our contract manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies
for compliance with cGMPs and similar regulatory requirements. We will not have control over our contract manufacturers’ compliance with these
regulations and standards. Failure by any of our contract manufacturers to comply with applicable regulations could result in sanctions being imposed on
us, including fines, injunctions, civil penalties, failure to grant approval to market any of our drug candidates, delays, suspensions or withdrawals of
approvals, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business. In addition, we will not have
control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Failure by our
contract manufacturers to comply with or maintain any of these standards could adversely affect our ability to develop, obtain regulatory approval for or
market any of our drug candidates.
If, for any reason, these third parties are unable or unwilling to perform, we may not be able to terminate our agreements with them, and we may
not be able to locate alternative manufacturers or formulators or enter into favorable agreements with them and we cannot be certain that any such third
parties will have the manufacturing capacity to meet future requirements. If these manufacturers or any alternate manufacturer of finished drug product
experiences any significant difficulties in its respective manufacturing processes for our API or finished products or should cease doing business with us,
we could experience significant interruptions in the supply of any of our drug candidates or may not be able to create a supply of our drug candidates at all.
Were we to encounter manufacturing issues, our ability to produce a sufficient supply of any of our drug candidates might be negatively affected. Our
inability to coordinate the efforts of our third party manufacturing partners, or the lack of capacity available at our third party manufacturing partners, could
impair our ability to supply any of our drug candidates at required levels. Because of the significant regulatory requirements that we would need to satisfy
in order to qualify a new bulk or finished product manufacturer, if we face these or other difficulties with our current manufacturing partners, we could
experience significant interruptions in the supply of any of our drug candidates if we decided to transfer the manufacture of any of our drug candidates to
one or more alternative manufacturers in an effort to deal with the difficulties.
Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales. Additionally, we
rely on third parties to supply the raw materials needed to manufacture our existing and potential products. Any business interruptions resulting from
geopolitical actions, including war and terrorism, adverse public health developments such as the outbreak of the COVID-19 coronavirus, or natural
disasters including earthquakes, typhoons, floods and fires, could affect our supply chain. Any reliance on suppliers may involve several risks, including a
potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any unanticipated
disruption to a future contract manufacturer caused by problems at suppliers could delay shipment of any of our drug candidates, increase our cost of goods
sold and result in lost sales.
We cannot guarantee that our future manufacturing and supply partners will be able to reduce the costs of commercial scale manufacturing of any
of our drug candidates over time. If the commercial-scale manufacturing costs of any of our drug candidates are higher than expected, these costs may
significantly impact our operating results. In order to reduce costs, we may need to develop and implement process improvements. However, in order to do
so, we will need, from time to time, to notify or make submissions with regulatory authorities, and the improvements may be subject to approval by such
regulatory authorities. We cannot be sure that we will receive these necessary approvals or that these approvals will be granted in a timely fashion. We also
cannot guarantee that we will be able to enhance and optimize output in our commercial manufacturing process. If we cannot enhance and optimize output,
we may not be able to reduce our costs over time.
We expect to rely on third parties to conduct clinical trials for our drug candidates. If these third parties do not successfully carry out their contractual
duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize any of our drug candidates and our business
would be substantially harmed.
We expect to enter into agreements with third-party CROs to conduct and manage our clinical programs including contracting with clinical sites to
perform our clinical studies. We plan to rely heavily on these parties for execution of clinical studies for our drug candidates and will control only certain
aspects of their activities. Nevertheless, we will be responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol,
legal, regulatory and scientific standards, and our reliance on CROs and clinical sites will not relieve us of our regulatory responsibilities. We and our
CROs will be required to comply with cGCPs, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States
of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA and its foreign
equivalents enforce these cGCP regulations through periodic inspections of trial sponsors, principal investigators and trial sites. If we or our CROs fail to
comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory
authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the
FDA or other regulatory authorities will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with
products produced under cGMP regulations and will require a large number of test subjects. Our failure or the failure of our CROs or clinical sites to
comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to
enforcement action up to and including civil and criminal penalties.
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Although we intend to design the clinical trials for our drug candidates in consultation with CROs, we expect that the CROs will manage all of the
clinical trials conducted at contracted clinical sites. As a result, many important aspects of our drug development programs would be outside of our direct
control. In addition, the CROs and clinical sites may not perform all of their obligations under arrangements with us or in compliance with regulatory
requirements. If the CROs or clinical sites do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with
regulatory requirements, the development and commercialization of any of our drug candidates for the subject indication may be delayed or our
development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs and clinical sites will devote
to our program or any of our drug candidates. If we are unable to rely on clinical data collected by our CROs, we could be required to repeat, extend the
duration of, or increase the size of our clinical trials, which could significantly delay commercialization and require significantly greater expenditures.
If any of our relationships with these third-party CROs or clinical sites terminate, we may not be able to enter into arrangements with alternative
CROs or clinical sites. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced
or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or
for other reasons, any such clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully
commercialize our drug candidates. As a result, our financial results and the commercial prospects for any of our drug candidates would be harmed, our
costs could increase and our ability to generate revenue could be delayed.
Any termination or suspension of, or delays in the commencement or completion of, any necessary studies of any of our drug candidates for any
indications could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects.
The commencement and completion of clinical studies can be delayed for a number of reasons, including delays related to:
● the FDA or a comparable foreign regulatory authority failing to grant permission to proceed and placing the clinical study on hold;
● subjects for clinical testing failing to enroll or remain in our trials at the rate we expect;
● a facility manufacturing any of our drug candidates being ordered by the FDA or other government or regulatory authorities to temporarily or
permanently shut down due to violations of cGMP requirements or other applicable requirements, or cross-contaminations of drug candidates
in the manufacturing process;
● any changes to our manufacturing process that may be necessary or desired;
● subjects choosing an alternative treatment for the indications for which we are developing our drug candidates, or participating in competing
clinical studies;
● subjects experiencing severe or unexpected drug-related adverse effects;
● reports from clinical testing on similar technologies and products raising safety and/or efficacy concerns;
● third-party clinical investigators losing their license or permits necessary to perform our clinical trials, not performing our clinical trials on our
anticipated schedule or employing methods consistent with the clinical trial protocol, cGMP requirements, or other third parties not
performing data collection and analysis in a timely or accurate manner;
● inspections of clinical study sites by the FDA, comparable foreign regulatory authorities, or IRBs finding regulatory violations that require us
to undertake corrective action, result in suspension or termination of one or more sites or the imposition of a clinical hold on the entire study,
or that prohibit us from using some or all of the data in support of our marketing applications;
● third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for
violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or any
of the data produced by such contractors in support of our marketing applications;
● one or more IRBs refusing to approve, suspending or terminating the study at an investigational site, precluding enrollment of additional
subjects, or withdrawing its approval of the trial; reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the
terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
● deviations of the clinical sites from trial protocols or dropping out of a trial;
● adding new clinical trial sites;
● the inability of the CRO to execute any clinical trials for any reason; and
● government or regulatory delays or “clinical holds” requiring suspension or termination of a trial.
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Product development costs for any of our drug candidates will increase if we have delays in testing or approval or if we need to perform more or
larger clinical studies than planned. Additionally, changes in regulatory requirements and policies may occur and we may need to amend study protocols to
reflect these changes. Amendments may require us to resubmit our study protocols to the FDA, comparable foreign regulatory authorities, and IRBs for
reexamination, which may impact the costs, timing or successful completion of that study. If we experience delays in completion of, or if we, the FDA or
other regulatory authorities, the IRB, or other reviewing entities, or any of our clinical study sites suspend or terminate any of our clinical studies of any of
our drug candidates, its commercial prospects may be materially harmed and our ability to generate product revenues will be delayed. Any delays in
completing our clinical trials will increase our costs, slow down our development and approval process and jeopardize our ability to commence product
sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the
factors that cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical studies may also ultimately lead to
the denial of regulatory approval of our drug candidates. In addition, if one or more clinical studies are delayed, our competitors may be able to bring
products to market before we do, and the commercial viability of any of our drug candidates could be significantly reduced.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be
predictive of future trial results.
Clinical testing of drug candidates is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at
any time during the clinical trial process. The results of pre-clinical studies and early clinical trials may not be predictive of the results of later-stage clinical
trials. We cannot assure you that the FDA or comparable foreign regulatory authorities will view the results as we do or that any future trials of any of our
drug candidates will achieve positive results. Drug candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite
having progressed through pre-clinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant
setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Any future clinical
trial results for our drug candidates may not be successful.
In addition, a number of factors could contribute to a lack of favorable safety and efficacy results for any of our drug candidates. For example,
such trials could result in increased variability due to varying site characteristics, such as local standards of care, differences in evaluation period and
surgical technique, and due to varying patient characteristics including demographic factors and health status.
Even though we may apply for orphan drug designation for a drug candidate, we may not be able to obtain orphan drug marketing exclusivity.
There is no guarantee that the FDA, EMA or their foreign equivalents will grant any future application for orphan drug designation for any of our
drug candidates, which would make us ineligible for the additional exclusivity and other benefits of orphan drug designation.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is generally
a disease or condition that affects fewer than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of
developing and making a drug available in the Unites States for this type of disease or condition will be recovered from sales of the product. Orphan drug
designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its
potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of regulatory
review and approval process. In addition to the potential period of exclusivity, orphan designation makes a company eligible for grant funding of up to
$400,000 per year for four years to defray costs of clinical trial expenses, tax credits for clinical research expenses and potential exemption from the FDA
application user fee.
If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such
designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other applications to market the same drug for
the same indication for seven years, except in limited circumstances, such as (i) the drug’s orphan designation is revoked; (ii) its marketing approval is
withdrawn; (iii) the orphan exclusivity holder consents to the approval of another applicant’s product; (iv) the orphan exclusivity holder is unable to assure
the availability of a sufficient quantity of drug; or (v) a showing of clinical superiority to the product with orphan exclusivity by a competitor product. If a
drug designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan drug
exclusivity. There can be no assurance that we will receive orphan drug designation for any of our drug candidates in the indications for which we think
they might qualify, if we elect to seek such applications.
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Although we may pursue expedited regulatory approval pathways for a drug candidate, it may not qualify for expedited development or, if it does
qualify for expedited development, it may not actually lead to a faster development or regulatory review or approval process.
Although we believe there may be an opportunity to accelerate the development of certain of our drug candidates through one or more of the
FDA’s expedited programs, such as fast track, breakthrough therapy, accelerated approval or priority review, we cannot be assured that any of our drug
candidates will qualify for such programs.
For example, a drug may be eligible for designation as a breakthrough therapy if the drug is intended, alone or in combination with one or more
other drugs, to treat a serious or life-threatening condition and preliminary clinical evidence indicates that the drug may demonstrate substantial
improvement over existing therapies on one or more clinically significant endpoints. Although breakthrough designation or access to any other expedited
program may expedite the development or approval process, it does not change the standards for approval. If we apply for breakthrough therapy
designation or any other expedited program for our drug candidates, the FDA may determine that our proposed target indication or other aspects of our
clinical development plans do not qualify for such expedited program. Even if we are successful in obtaining a breakthrough therapy designation or access
to any other expedited program, we may not experience faster development timelines or achieve faster review or approval compared to conventional FDA
procedures. Access to an expedited program may also be withdrawn by the FDA if it believes that the designation is no longer supported by data from our
clinical development program. Additionally, qualification for any expedited review procedure does not ensure that we will ultimately obtain regulatory
approval for such drug candidate.
Risks Related to Intellectual Property
If we are unable to protect our proprietary rights, we may not be able to prevent others from using our intellectual property, which may reduce the
competitiveness and value of the related assets.
Our success will depend in part on our ability to obtain and maintain patent protection for our formulations and technologies and to prevent third
parties from infringing upon our proprietary rights. We must also operate without infringing upon patents and proprietary rights of others, including by
obtaining appropriate licenses to patents or other proprietary rights held by third parties, if necessary. The primary means by which we will be able to
protect our formulations and technologies from unauthorized use by third parties is to obtain valid and enforceable patents that cover them. However, the
applications we have filed or may file in the future may never yield patents that protect our inventions and intellectual property assets. Failure to obtain
patents that sufficiently cover our formulations and technologies would limit our protection against other compounding pharmacies and outsourcing
facilities, generic drug manufacturers, pharmaceutical companies and other parties who may seek to copy our products, produce products substantially
similar to ours or use technologies substantially similar to those we own. We have made, and expect to continue to make, significant investments in certain
of our proprietary formulations prior to the grant of any patents covering these formulations, and we may not receive a sufficient return on these
investments if patent coverage or other appropriate intellectual property protection is not obtained and their competitiveness and value decreases.
The patent and intellectual property positions of pharmacies and pharmaceutical companies, including ours, are uncertain and involve complex
legal and factual questions. There is no guarantee that we have developed or obtained or will in the future develop or obtain the rights to products or
processes that are patentable, that patents will issue from any pending applications or that claims allowed will be sufficient to protect the technology we
have developed or may in the future develop or to which we have acquired or may in the future acquire development rights. In addition, we cannot be
certain that patents issued to us will not be challenged, invalidated, infringed or circumvented, including by our competitors, or that the rights granted
thereunder will provide competitive advantages to us.
We also rely on unpatented trade secrets and know-how and continuing technological innovation in order to develop our formulations, which we
seek to protect, in part, by confidentiality agreements with our employees, consultants, collaborators and others, including certain service providers. We
also have invention or patent assignment agreements with our current employees and certain consultants. Nonetheless, our employees and consultants may
breach these agreements, and we may not have adequate remedies for the breach. Our trade secrets may otherwise become known or be independently
discovered by competitors or could be developed by a person not bound by an invention assignment agreement with us, in which case we may have no
rights to use the applicable invention.
We may face additional competition outside of the U.S. as a result of a lack of patent coverage in some territories and differences in patent prosecution
and enforcement laws in foreign counties.
Filing, prosecuting, defending and enforcing patents on our proprietary formulations throughout the world is extremely expensive. We do not
currently have patent protection outside of the U.S. that covers any of our proprietary formulations or other assets that we are currently pursuing.
Competitors may use our technologies to develop their own products in jurisdictions where we have not obtained patent protection.
Even if the international patent applications we have filed or may in the future file are issued or approved, it is likely that the scope of protection
provided by such patents would be different from, and possibly less than, the scope provided by corresponding U.S. patents. As a result, patent rights we
are able to obtain may not be sufficient to prevent generic competition. Further, the extent of our international market opportunity may be dependent upon
the enforcement of patent rights in various other countries. A number of countries in which we could file patent applications have a history of weak
enforcement and/or compulsory licensing of intellectual property rights. Moreover, the legal systems of certain countries, particularly certain developing
countries, do not favor the aggressive enforcement of patents and other intellectual property protection, particularly those relating to biotechnology and/or
pharmaceuticals, which would make it difficult for us to stop a third party from infringing any of our intellectual property rights. Moreover, attempting to
enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business.
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Our proprietary formulations and technologies could potentially conflict with the rights of others.
The preparation or sale of our proprietary formulations and use of our technologies may infringe on the patent or other intellectual property rights
of others. If our products infringe or conflict with the patent or other intellectual property rights of others, third parties could bring legal actions against us
claiming damages and seeking to enjoin our manufacturing and marketing of our affected products. Patent litigation is costly and time consuming and may
divert management’s attention and our resources. We may not have sufficient resources to bring any actions to a successful conclusion. If we are not
successful in defending against these legal actions should they arise, we may be subject to monetary liability or be forced to alter our products, cease some
or all of our operations relating to the affected products, or seek to obtain a license in order to continue manufacturing and marketing the affected products,
which may not available on acceptable terms or at all.
Risks Related to Our Common Stock
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, which could cause our stock
price to fall.
Effective internal controls are necessary for us to provide reliable financial results. If we cannot provide reliable financial results, our consolidated
financial statements could be misstated, our reputation may be harmed and the trading price of our common stock could decline. As we discussed in Item
9A of this Annual Report, our management concluded that our internal controls over financial reporting were effective as of December 31, 2020. However,
our controls over financial processes and reporting may not continue to be effective or we may identify material weaknesses or significant deficiencies in
our internal controls in the future. Any failure to remediate any future material weaknesses or successfully implement required new or improved controls,
could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our consolidated financial
statements or other public disclosures. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which
could have a negative effect on the trading price of our common stock.
A consistently active trading market for shares of our common stock may not be sustained.
Historically, trading in our common stock has been sporadic and volatile and our common stock has been “thinly-traded.” There have been, and
may in the future be, extended periods when trading activity in our shares is minimal, compared to a seasoned issuer with a large and steady volume of
trading activity. The market for our common stock is also characterized by significant price volatility compared to seasoned issuers, and we expect that
such volatility may continue. As a result, the trading of relatively small quantities of shares may disproportionately influence the market price of our
common stock. A consistently active and liquid trading market in our securities may never develop or be sustained.
Our stock price may be volatile.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in response to various factors, many of which are
beyond our control, including the following: our ability to execute our business plan; operating results that fall below expectations; industry or regulatory
developments; investor perception of our industry or our prospects; economic and other external factors; and the other risk factors discussed in this “Risk
Factors” section.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We have the right to issue shares of preferred stock without obtaining stockholder approval. If we were to issue preferred stock, it may have rights,
preferences and privileges superior to those of our common stock.
We are authorized to issue 5,000,000 shares of “blank check” preferred stock, with such rights, preferences and privileges as may be determined
from time to time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue preferred stock at any time in one
or more series and to fix the dividend rights, dissolution or liquidation preferences, redemption prices, conversion rights, voting rights and other rights,
preferences and privileges for any series of our preferred stock that may be issued. The issuance of shares of preferred stock, depending on the rights,
preferences and privileges attributable to the preferred stock, could reduce the voting rights and powers of our common stockholders and the portion of our
assets allocated for distribution to our common stockholders in a liquidation event, and could also result in dilution to the book value per share of our
common stock. The preferred stock could also be utilized, under certain circumstances, as a method for raising additional capital or discouraging, delaying
or preventing a change in control of our Company.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on an investment will be limited to any appreciation
in the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Any payment of dividends on
our common stock would depend on contractual restrictions, such as those contained in our SWK loan agreement, as well as our earnings, financial
condition and other business and economic factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be
less valuable because a return on your investment will only occur if our stock price appreciates.
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Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
The sale of substantial amounts of our common stock in the public market, or the perception that sales could occur, may cause the market price of
our common stock to fall. Sales could occur upon the expiration of any statutory holding period, such as under Rule 144 under the Securities Act of 1933,
as amended, applicable to outstanding shares, upon expiration of any lock-up periods applicable to outstanding shares, upon our issuance of shares upon the
exercise of outstanding options or warrants, or upon our issuance of shares pursuant offerings of our equity securities. The availability for sale of a
substantial number of shares of our common stock, whether or not sales have occurred or are occurring, also could make it more difficult for us to raise
additional financing through the sale of equity or equity-related securities in the future when needed, on acceptable terms or at all.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We lease approximately 10,200 square feet of office space in San Diego, California, the current lease term for which expires on December 31,
2021 and includes an option to extend the lease through December 31, 2026. This office generally supports the sales, general and administrative functions
of ImprimisRx.
We lease approximately 26,400 square feet of lab, warehouse and office space in Ledgewood, New Jersey, in two separate suites. The current lease
term expires on July 31, 2026 and includes options to extend the lease term through 2036. This space serves as an outsourcing facility and pharmacy for
ImprimisRx.
We lease approximately 5,500 square feet of office space in Nashville, Tennessee. The current lease term expires on December 31, 2024 and
includes options to extend the lease term through 2034. This office serves as our corporate headquarters.
We do not believe additional space will be required in the near-term.
ITEM 3. LEGAL PROCEEDINGS
See Note 17 to our consolidated financial statements included in this Annual Report for information on various legal proceedings, which is
incorporated into this Item by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
PART II
Market Information
Our common stock is listed on The NASDAQ Global Market under the symbol “HROW”.
Holders
As of March 1, 2021, there were approximately 96 stockholders of record (excluding an indeterminable number of stockholders whose shares are
held in street or “nominee” name) of our common stock.
Dividends
We have not paid any dividends on our common stock since our inception and do not expect to pay dividends on our common stock in the
foreseeable future. Further, our SWK loan agreement, described in Note 12 to our consolidated financial statements included in this Annual Report,
restricts our ability to pay cash dividends on our common stock.
Purchase of Equity Securities
We did not purchase any of our equity securities during the period covered by this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
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ITEM 7. 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 the consolidated
financial statements and the related notes contained in this annual report on Form 10-K (Annual Report). Our 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 (GAAP). In addition to historical information, the following discussion contains forward-
looking statements based upon our current views, expectations and assumptions that are subject to risks and uncertainties. Actual results may differ
substantially from those expressed or implied by any forward-looking statements due to a number of factors, including, among others, the risks described in
the “Risk Factors” section and elsewhere in this Annual Report.
As used in this discussion and analysis, unless the context indicates otherwise, the terms the “Company,” “Harrow” “we,” “us” and “our” refer
to Harrow Health, Inc. and its consolidated subsidiaries, consisting of Imprimis Rx NJ, LLC, Imprimis NJOF, LLC, ImprimisRx, LLC, Radley
Pharmaceuticals, Inc., Stowe Pharmaceuticals, Inc. and Mayfield Pharmaceuticals, Inc.
Overview
Our business specializes in the development, production and sale of innovative medications that offer unique competitive advantages and serve
unmet needs in the marketplace through our subsidiaries and deconsolidated companies. We own and operate one of the nation’s leading ophthalmic
pharmaceutical businesses, ImprimisRx. In addition to wholly-owning ImprimisRx, we also have non-controlling equity positions in Eton Pharmaceuticals,
Inc. (“Eton”), Surface Ophthalmics, Inc. (“Surface”), and Melt Pharmaceuticals, Inc. (“Melt”), all companies that began as subsidiaries of Harrow. We also
recently launched a new business called Visionology and are exploring opportunities to launch other subsidiaries. We own royalty rights in various drug
candidates being developed by Surface and Melt. We intend to continue to create and hold equity and royalty rights in new businesses that commercialize
drug candidates that are internally developed or otherwise acquired or licensed from third parties.
ImprimisRx
ImprimisRx is our ophthalmic focused prescription pharmaceutical business. We offer to over 9,000 physician customers and their patients
medically necessary prescription drugs to meet their needs that are otherwise unmet by commercially available drugs. We make our formulations available
at prices that are, in most cases, lower than non-customized commercial drugs. Our current ophthalmic formulary includes over twenty compounded
formulations, many of which are patented or patent-pending, and are customizable for the specific needs of a patient. Some examples of our compounded
medications are various combinations of drugs formulated into one bottle and numerous preservative-free formulations. Depending on the formulation, the
regulations of a specific state, and ultimately the needs of the patient, ImprimisRx products may be dispensed as patient-specific medications from our
503A pharmacy, or for in-office use, made according to federal current good manufacturing practices (or cGMPs) or other FDA guidance documents, in our
FDA-registered New Jersey Outsourcing Facility (“NJOF”).
On August 1, 2020, ImprimisRx entered into a Commercial Alliance Agreement (the “Dexycu Agreement”) with Eyepoint Pharmaceuticals, Inc.
(“Eyepoint”), pursuant to which Eyepoint granted ImprimisRx the non-exclusive right to co-promote DEXYCU® (dexamethasone intraocular suspension)
9% for the treatment of post-operative inflammation following ocular surgery in the United States. Pursuant to the Dexycu Agreement, Eyepoint pays
ImprimisRx a fee that is calculated based on the quarterly sales of DEXCYU in excess of predefined volumes to specific customers of ImprimisRx in the
U.S.
We expect to acquire and/or develop additional FDA-approved ophthalmic drugs that allow us to leverage the commercial infrastructure of
ImprimisRx to promote, sell, and ultimately bring these products to market.
Visionology
Visionology is a membership-based online eye health and medication platform. Visionology leverages our experience in the ophthalmic
pharmaceutical business, our relationships with eyecare professionals across the United States, and our expertise in developing and deploying telemedicine
software. We recently launched a proof-of-concept for Visionology in certain states in the southeast area of the U.S. If successful, we expect Visionology
will expand access to the Visionology service later in 2021.
Pharmaceutical Compounding Businesses
Pharmaceutical Compounding
Pharmaceutical compounding is the science of combining different active pharmaceutical ingredients (APIs), all of which are approved by the
FDA (either as a finished form product or as a bulk drug ingredient) and excipients, to create specialized pharmaceutical preparations. Physicians and
healthcare institutions use compounded drugs when commercially available drugs do not optimally treat a patient’s medical needs. In many cases,
compounded drugs, such as ours, have wide market utility and may be clinically appropriate for large patient populations. Examples of compounded
formulations include medications with alternative dosage strengths or unique dosage forms, such as topical creams or gels, suspensions, or solutions with
more tolerable drug delivery vehicles.
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Almost all of our sales revenue is derived from making, selling and dispensing our compounded prescription drug formulations as cash pay
transactions between us and our end-user customer. As such, the majority of our commercial transactions do not involve distributors, wholesalers,
insurance companies, pharmacy benefit managers or other middle parties. By not being reliant on insurance company formulary inclusion and pharmacy
benefit manager payment clawbacks, we are able to simplify the prescription transaction process. We believe the outcome of our business model is a simple
and transparent transaction, involving a patient-in-need, a physician’s diagnosis, a fair price and great service for a quality pharmaceutical product. We sell
our products through a network of employees and independent contractors, and we dispense our formulations in all 50 states, Puerto Rico and in selected
markets outside the United States.
Our Compounding Facilities
Pharmaceutical compounding businesses are governed by Sections 503A and 503B of the Federal Food Drug and Cosmetic Act (the “FDCA”).
Section 503A of the FDCA provides that a pharmacy is only permitted to compound a drug for an individually identified patient based on a prescription for
a patient and is only permitted to distribute the drug interstate if the pharmacy is licensed to do so in the states where it is compounded and where the
medication is received.
Section 503B of the FDCA provides that a pharmacy engaged in preparing sterile compounded drug formulations may voluntarily elect to register
as an “outsourcing facility.” Outsourcing facilities are permitted to compound large quantities of drugs without a prescription and distribute them out of
state with certain limitations such as the formulation appearing on the FDA’s drug shortage list or the bulk drug substances contained in the formulations
appearing on the FDA’s “clinical need” list. Entities voluntarily registering with FDA as outsourcing facilities are subject to additional requirements that do
not apply to compounding pharmacies (operating under Section 503A of the FDCA), including adhering to standards such as current good manufacturing
practices (cGMP) or other FDA guidance documents and being subject to regular FDA inspection.
We operate two compounding facilities located in Ledgewood, New Jersey. Our New Jersey operations are comprised of two separate entities and
facilities, one of which is registered with the FDA as an outsourcing facility under Section 503B of the FDCA. The other New Jersey facility (“RxNJ”), is a
licensed pharmacy operating under Section 503A of the FDCA. All products that we sell, produce and dispense are made in the United States.
We believe that, with our current compounding pharmacy facilities and licenses and FDA registration of NJOF, we have the infrastructure to scale
our business appropriately under the current regulatory landscape and meet the potential growth in demand we are targeting. We plan to invest in one or
both of our facilities to further their capacity and efficiencies. Also, we may seek to access greater pharmacy, production related redundancy, and
distribution through acquisitions, partnerships or other strategic transactions.
Pharmaceutical Development Businesses
We have ownership interests in Eton, Surface and Melt and hold royalty interests in some of Surface’s and Melt’s drug candidates. These
companies are pursuing market approval for their drug candidates under the FDCA, including in some instances under the abbreviated pathway described
in Section 505(b)(2) which permits the submission of a new drug application (“NDA”) where at least some of the information required for approval comes
from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. In 2018 and 2019, we formed and
created subsidiaries named Radley Pharmaceuticals, Inc. (“Radley”), Mayfield Pharmaceuticals, Inc. (“Mayfield”) and Stowe Pharmaceuticals, Inc.
(“Stowe”). In addition, we may create additional subsidiaries that will be focused on the development and FDA approval of certain proprietary drug
formulations that we currently own, will in-license/acquire and/or otherwise develop, we expect any new subsidiaries to be focused on eye care.
De-Consolidated Businesses (Noncontrolling Equity Interests)
Surface Ophthalmics, Inc.
Surface is a clinical-stage pharmaceutical company focused on development and commercialization of innovative therapeutics for ocular surface
diseases.
During January 2021, Surface announced positive top-line results from a phase 2 trial of its drug candidate SURF-201, a 0.2% betamethasone,
preservative-free ophthalmic solution in the Klarity delivery vehicle for the treatment of post cataract surgery pain and inflammation. According to the
Surface, SURF-201 was dosed twice daily, and met its primary endpoints of absence of inflammation at both Day 8 and Day 15 and was found to be safe
and well-tolerated by the patient group. In addition, a secondary endpoint showed almost 90% of patients given SURF-201 were pain free at Day 15.
SURF-201 marks the first ophthalmic therapeutic in the United States to utilize betamethasone as well as being the first preservative-free unit dose therapy
for the treatment of post-operative pain and inflammation.
Also in January 2021, Surface announced the first patient dosed in a head-to-head phase 2 trial for its drug candidate SURF-100 (mycophenolate
sodium and betamethasone in Klarity vehicle) for the treatment of chronic dry eye disease. The head-to-head study will compare SURF-100 against two
leading on-market competitors lifitegrast ophthalmic solution 5% and cyclosporine ophthalmic emulsion 0.05%.
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In February 2021, Surface announced the first patient dosed in a phase 2 trial for its drug candidate SURF-200 (betamethasone in Klarity vehicle)
for the treatment of episodic dry eye flares. The dose ranging study for SURF-200 will be administered in two different low concentration formulations of
betamethasone in the Klarity vehicle. The trial will enroll 120 to 140 patients with a primary endpoint of Symptom Improvement of one unit based on the
University of North Carolina Dry Eye Management Scale by the eighth day.
In 2018, Surface closed on an offering of its Series A Preferred Stock. At that time, we lost our controlling interest and deconsolidated Surface
from our consolidated financial statements. We own 3,500,000 shares of Surface which is approximately 30% of the equity and voting interests as of
December 31, 2020. Harrow owns mid-single digit royalty rights on net sales of SURF-100, SURF-200 and SURF-201. We expect Surface to complete
another round of financing within the next twelve months.
Melt Pharmaceuticals, Inc.
Melt is a clinical-stage pharmaceutical company focused on the development and commercialization of proprietary non-intravenous, sedation and
anesthesia therapeutics for human medical procedures in hospital, outpatient, and in-office settings. Melt intends to seek regulatory approval for its
proprietary technologies, where possible. In December 2018, we entered into an Asset Purchase Agreement with Melt (the “Melt Asset Purchase
Agreement”), and Harrow assigned to Melt the underlying intellectual property for Melt’s current pipeline, including its lead drug candidate MELT-100.
The core intellectual property Melt owns is a patented series of combination non-opioid sedation drug formulations that we estimate to have multitudinous
applications.
MELT-100 is a novel, sublingually delivered, non-IV, opioid-free drug candidate being developed for procedural sedation. Melt filed an IND in
June 2020 and began its clinical program for MELT-100. In February 2021, Melt announced data from, and successful completion of, its phase 1 study.
Melt expects to begin its phase 2 study for MELT-100 in the second half of 2021.
In January 2019, Melt closed an offering of its Series A Preferred Stock. At that time, we lost our controlling interest and deconsolidated Melt
from our consolidated financial statements. We own 3,500,000 shares of Melt common stock, which was approximately 44% of the equity and voting
interests issued and outstanding, as of December 31, 2020. We expect Melt to complete another round of financing within the next twelve months. Pursuant
to the terms of the Melt Asset Purchase Agreement, Melt is required to make mid-single digit royalty payments to the Company on net sales of MELT-100,
while any patent rights remain outstanding, subject to other conditions. Melt can require the Company to cease compounding like products at the time of
FDA approval of MELT-100. If approved, we do not expect a cessation of compounding like products to have a material impact on our operations and
financial performance.
Eton Pharmaceuticals, Inc.
Eton is a commercial-stage pharmaceutical company focused on developing and commercializing innovative drug products. Its pipeline includes
several products and drug candidates in various stages of development across a variety of dosage forms. In May 2017, Eton closed an offering of its Series
A Preferred Stock. At that time, we lost our controlling interest and deconsolidated Eton from our consolidated financial statements. In November 2019,
Eton completed an initial public offering of its common stock. We own 3,500,000 shares of Eton common stock, which was less than 20% of the equity and
voting interests issued and outstanding of Eton as of December 31, 2020.
Consolidated Businesses (Controlling Equity Interests)
Mayfield, Stowe and Radley are consolidated subsidiaries of Harrow. Mayfield is a development-stage pharmaceutical company focused on
developing urology related drug candidates. Stowe is focused on the development of proprietary ophthalmic drug candidates. Radley is a development-
stage pharmaceutical company that has been focused on the development of proprietary drug candidates focused on rare diseases. Recently, and as part of
our strategic focus within eyecare, we discontinued nearly all of the activities related to Mayfield, Stowe and Radley, and may not resume those activities in
the near term.
We control over 50% of the equity and voting interests issued and outstanding of Mayfield, Stowe and Radley as of the date of this Annual Report.
Factors Affecting Our Performance
We believe the primary factors affecting our performance are our ability to increase revenues of our proprietary compounded formulations and
certain non-proprietary products, grow and gain operating efficiencies in our pharmacy operations, optimize pricing and obtain reimbursement options for
our proprietary compounded formulations, and continue to pursue development and commercialization opportunities for certain of our ophthalmology and
other assets that we have not yet made commercially available as compounded formulations. We believe we have built a tangible and intangible
infrastructure that will allow us to scale revenues efficiently in the long-term. All of these activities will require significant costs and other resources, which
we may not have or be able to obtain from operations or other sources. See “Liquidity and Capital Resources” below.
Recent Developments
The following describes certain developments in 2020 to date that are important to understand our financial condition and results of operations.
See the notes to our consolidated financial statements included in this report for additional information about each of these developments.
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COVID-19 Pandemic
A novel strain of coronavirus was first identified in Wuhan, China in December 2020. The disease caused by it, COVID-19, was declared a global
pandemic by the World Health Organization in March 2020. On March 18, 2020, CMS released guidance for U.S. healthcare providers to limit all elective
medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the pendency of the pandemic. In addition
to limiting elective medical procedures, many hospitals and other healthcare providers have strictly limited access to their facilities during the pandemic.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and healthcare delivery, led to social distancing
recommendation, and created significant volatility in financial markets.
In response to the pandemic and business disruptions, first and foremost, we have prioritized the health and safety of our employees, customers,
suppliers and others with whom we partner in our business activities. We have instructed employees to work from home when possible and to maintain
recommended physical distancing when working in our facilities. We also have eliminated non-essential in-person contact with customers, suppliers and
other third parties.
Many of the Company’s customers use its drugs in procedures that were impacted by the CMS guidance to limit elective procedures. In addition,
the Company and our business partners need access to healthcare providers and facilities to conduct clinical trials and other activities required to achieve
regulatory clearance of products under development. We are carefully monitoring rapidly evolving changes in healthcare delivery systems and may adjust
our operating and product development plans accordingly.
Given the unprecedented and dynamic nature of the COVID-19 pandemic, we cannot reasonably estimate the impacts it may have on our financial
condition, results of operations or cash flows in the future. However, the reduction in elective procedures in response to CMS guidance has had a material
adverse impact, on our revenues, profitability and cash flows, in particular during the second quarter of 2020. The extent and duration of that impact will
depend upon the extent of procedure postponements, the duration of the pandemic and any resurgences of it, especially within certain geographies and
states that have retained restrictive measures and social distancing policies. In May 2020, some U.S. states and geographies began easing restrictions
associated with the COVID-19 pandemic including those restrictions related to elective procedures, as restrictions were lifted in those areas there was a
correlation with an increase in our revenues. Despite the recent resurgence of the COVID-19 pandemic in certain parts of the U.S., we are hopeful that the
general trend of easing of restrictions will continue, and sales of our products will return to historical norms and historical growth trends, as other states and
governmental authorities continue to ease restrictions associated with elective procedures and the COVID-19 pandemic. Assuming the strictest of
lockdown scenarios are avoided, we believe we have sufficient liquidity resources to sustain our planned level of operations.
SWK Amendment
In April 2020, the Company and several of its wholly-owned subsidiaries entered into a second amendment (the “SWK Amendment”) to the term
loan and security agreement dated as of July 19, 2017, as amended (the “SWK Loan”), with SWK Funding LLC, as lender and collateral agent, and certain
other lenders (collectively, “SWK”). A summary of the material changes contained in the SWK Amendment are as follows:
●SWK agreed to make available to the Company, and the Company drew down on, an additional principal amount of $1,000,000;
●The definition of the first amortization date was changed to August 14, 2020, permitting the Company to pay interest only on the principal
amount loaned for the next payment (payments are due on a quarterly basis) following the SWK Amendment; and
●The interest payment due May 14, 2020 will be paid in-kind by increasing the principal amount of the term loans by an amount equal to the
interest that has accrued.
PPP Loan
In April 2020, we entered into the PPP Loan with Renasant Bank in the principal amount of $1,967,100 and received cash proceeds of the same
amount, pursuant to the PPP under the CARES Act, which was enacted March 27, 2020. The PPP is administered by the SBA.
Under the terms of the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the PPP Loan is two
years, unless payment is sooner required in connection with an event of default under the PPP Loan. To the extent the PPP Loan amount is not forgiven
under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the PPP
Loan, until the maturity date.
We applied for forgiveness for all of the PPP Loan during the year ended December 31, 2020, however as of the date of this Annual Report the
SBA has not made a decision related to the Company’s application for forgiveness. The amount of loan proceeds eligible for forgiveness is based on a
formula that takes into account a number of factors, including the amount of loan proceeds used by us during the twenty-four-week period after the loan
origination for certain purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified
utility payments (it being anticipated that at least 75% of the loan amount will be required to be used for eligible payroll costs); the employer maintaining
or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness,
only loan proceeds spent on payroll and other eligible expenses during the covered twenty-four-week period will qualify for forgiveness. While we used
proceeds from the PPP Loan for such qualifying expenses, in particular maintaining continuity of our payroll and workforce (including staff critical to the
timely production and dispensing of medicines we make), no assurance can be provided that we will obtain forgiveness of the PPP Loan in whole or in part.
39
Eyepoint Commercial Alliance Agreement
On August 1, 2020, our wholly owned subsidiary ImprimisRx entered into a Commercial Alliance Agreement (the “Dexycu Agreement”) with
Eyepoint Pharmaceuticals, Inc. (“Eyepoint”), pursuant to which Eyepoint granted ImprimisRx the non-exclusive right to co-promote DEXYCU®
(dexamethasone intraocular suspension) 9% for the treatment of post-operative inflammation following ocular surgery in the United States. Pursuant to the
Dexycu Agreement, Eyepoint will pay ImprimisRx a fee calculated based on the quarterly sales of DEXCYU in excess of predefined volumes to specific
customers of ImprimisRx in the U.S. Under the terms of the Dexycu Agreement, ImprimisRx shall use commercially reasonable efforts to promote and
market DEXCYU in the U.S.
Subject to early termination, the Dexycu Agreement expires on August 1, 2025. Subject to specified notice periods and specified limitations, either
party may terminate the Dexycu Agreement in the event of (i) uncured material breach by the other party or (ii) if DEXCYU ceases to have “pass-through”
payment status. In addition, subject to certain limitations, ImprimisRx may terminate the Dexycu Agreement (i) for convenience subject to an extended
specified notice period or (ii) in the event Eyepoint undergoes a change of control. Eyepoint may terminate the Dexycu Agreement, subject to specified
notice periods and specified limitations, if ImprimisRx fails to achieve certain minimum sales levels during specified periods.
Results of Operations
The following period-to-period comparisons of our financial results are not necessarily indicative of results for any future period.
Comparison of Years Ended December 31, 2020 and 2019
Revenues
Our revenues include amounts recorded from sales of proprietary and non-proprietary pharmaceutical compounded drug formulations and
revenues received from royalty and milestone payments owed to us pursuant to out-license arrangements.
The following presents our revenues for the years ended December 31, 2020 and 2019:
Product sales, net
Other revenues
Total revenues
For the Year Ended December 31,
2020
2019
$
Variance
$
$
48,479,000
392,000
48,871,000
$
$
51,137,000 $
28,000
51,165,000 $
(2,658,000)
364,000
(2,294,000)
The decrease in revenue between periods was largely attributable to the COVID-19 pandemic and CMS guidance to limit elective procedures
during parts of the first and second quarters of 2020. Net revenues generated from our New Jersey based outsourcing facility (“NJOF”) totaled $32,949,000
for the year ended December 31, 2020, compared to $33,240,000 in 2019.
Cost of Sales
Our cost of sales includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients,
personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements depreciation, the write-off
of obsolete inventory and other related expenses.
The following presents our cost of sales for the years ended December 31, 2020 and 2019:
Cost of sales
For the Year Ended December 31,
$
2020
14,463,000 $
2019
16,749,000 $
$
Variance
(2,286,000)
The decrease in our cost of sales between periods was largely due to a decrease in unit volumes sold impacted by the COVID-19 pandemic,
partially offset by continued improved utilization of capacity at our compounding facilities.
40
Gross Profit and Margin
Gross Profit
Gross Margin
For the Year Ended December 31,
2020
34,408,000
$
2019
34,416,000
$
$
70.4%
67.3%
$
Variance
(8,000)
3.1%
The increase in gross margin between periods is largely attributable to increased utilization of capacities as a result of increased output, in
particular, at NJOF and increased per unit sales prices. We estimate gross margins at NJOF were greater than 71% during 2020.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses include personnel costs, including wages and stock-based compensation, corporate facility
expenses, and investor relations, consulting, insurance, filing, legal and accounting fees and expenses as well as costs associated with our marketing
activities and sales of our proprietary compounded formulations and other non-proprietary pharmacy products and formulations.
The following presents our selling, general and administrative expenses for the years ended December 31, 2020 and 2019:
Selling, general and administrative
For the Year Ended December 31,
$
2020
31,247,000 $
2019
33,088,000 $
$
Variance
(1,841,000)
The decrease in selling, general and administrative expenses between periods was largely attributable to decreased legal expenses incurred
associated with certain litigation matters that concluded during 2019, and certain expenses that are correlated with our sales.
Research and Development Expenses
Our research and development expenses primarily include expenses related to the development of acquired intellectual property, investigator-
initiated research and evaluations and other costs related to the clinical development of our assets.
The following presents our research and development expenses for the years ended December 31, 2020 and 2019:
Research and development
$
2,413,000 $
2,083,000 $
330,000
For the Year Ended December 31,
2020
2019
$
Variance
The increase in research and development expenses between periods was primarily attributable to the increase in formulation development studies
with our ImprimisRx subsidiary and the clinical development programs for our subsidiaries Radley, Mayfield and Stowe that occurred during the year
ended December 31, 2020.
Impairment of Long-Lived Assets
During the year ended December 31, 2020, we recorded a loss of $363,000 related to the impairment of patents and patent applications. During the
year ended December 31, 2019, we recorded a loss of $4,040,000 related to the impairment and disposal of long-lived assets. Of these costs $3,781,000
were related to the Park Restructuring and $259,000 of these expenses were related to the impairment of patents and patent applications related to a
terminated asset purchase agreement.
Interest Expense, net
Interest expense, net was $2,236,000 for the year ended December 31, 2020 compared to $2,500,000 in 2019. The decrease during the year ended
December 31, 2020 compared to 2019 was primarily due to interest expense recognition related to a decrease in the amortization of our finance lease
obligations and reduction of the principal balance of our term loan.
Investment Gain (Loss) from Melt, net
During the year ended December 31, 2020, we recorded a loss of $2,313,000 for our share of losses based on our ownership of Melt. During the
year ended December 31, 2019, we recorded a net gain of $3,968,000 related to our investment in Melt. In 2019, we recorded a gain of $5,810,000 for the
deconsolidation of Melt, and a loss of $(1,842,000) for our share of losses based on our ownership of Melt after its deconsolidation. We began using the
equity method accounting for our investment in Melt beginning on January 30, 2019, the date we no longer had a controlling interest. Prior to that date,
Melt’s losses were consolidated within our statements of operations.
41
Investment Loss from Surface
During the year ended December 31, 2020, we recorded a loss of $2,433,000 for our share of losses based on our ownership of Surface. During the
year ended December 31, 2019, we recorded a loss of $1,200,000 for our share of losses based on our ownership of Surface. We began using the equity
method accounting for our investment in Surface beginning on June 11, 2018, the date we no longer had a controlling interest. Prior to that date, Surface’s
losses were consolidated within our statements of operations.
Investment Gain from Eton, net
We recorded a gain of $3,255,000 related to the change in fair market value of Eton’s common stock for the year ended December 31, 2020. We
recorded a gain of $3,780,000 related to the change in fair market value of Eton’s common stock for the year ended December 31, 2019.
Other Income, net
During the year ended December 31, 2020, we recorded other expense, net of $(73,000). This was primarily the result of income of $13,000
related to equipment from our Park facility that was sold during the year ended December 31, 2020 and $(105,000) related to the disposal of property, plant
and equipment related to the discontinued use of certain computer software and hardware. During the year ended December 31, 2019, we recorded other
income, net of $630,000 related to expenses that were paid by us and were reimbursed by Melt following its deconsolidation.
Net Income (Loss)
The following table presents our net income (loss) for the years ended December 31, 2020 and 2019:
Net (loss) income attributable to Harrow Health, Inc.
Net income per share, basic
Net income per share, diluted
$
$
$
2020
(3,357,000) $
(0.13) $
(0.13) $
2019
168,000
0.01
0.01
For the Year Ended December 31,
Liquidity and Capital Resources
Liquidity
Our cash on hand (including restricted cash) at December 31, 2020 was $4,301,000, compared to $4,949,000 at December 31, 2019. Since
inception through December 31, 2020, we have incurred aggregate losses of $77,400,000. These losses are primarily due to selling, general and
administrative and research and development expenses incurred in connection with developing and seeking regulatory approval for a former drug
candidate, which activities we have now discontinued, the development and commercialization of novel compounded formulations and the development of
our pharmacy operations.
As of the date of this Annual Report, we believe that cash and cash equivalents of $4,101,000 and restricted investments of $200,000, totaling
approximately $4,301,000 at December 31, 2020, will be sufficient to sustain our planned level of operations and capital expenditures for at least the next
12 months. We also may consider the sale of certain assets including, but not limited to, part of, or all of, our ownership interest in Eton, Surface, Melt,
and/or any of our consolidated subsidiaries. However, our plans for this period may change, our estimates of our operating expenses, capital expenditures
and working capital requirements could be inaccurate, we may pursue acquisitions of pharmacies or other strategic transactions that involve large
expenditures or we may experience growth more quickly or on a larger scale than we expect, any of which could result in the depletion of capital resources
more rapidly than anticipated and could require us to seek additional financing earlier than we expect to support our operations.
We expect to use our current cash position and funds generated from our operations and any financing to pursue our business plan, which includes
developing and commercializing compounded formulations, FDA-approved products and technologies, integrating and developing our compounding
operations, pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of products, compounding pharmacies and
outsourcing facilities, drug companies and manufacturers, and/or assets or technologies, and otherwise fund our operations. We may also use our resources
to conduct clinical trials or other studies in support of our formulations or any drug candidate for which we pursue FDA approval, to pursue additional
development programs or to explore other development opportunities.
42
Net Cash Flows
The following provides detailed information about our net cash flows for the years ended December 31, 2020 and 2019:
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Operating Activities
For the
Year Ended
December 31,
2020
2019
$
$
(1,100,000) $
(981,000)
1,433,000
(648,000)
4,949,000
4,301,000 $
950,000
(1,833,000)
(1,006,000)
(1,889,000)
6,838,000
4,949,000
Net cash (used in) provided by operating activities was $(1,100,000) in 2020, compared to $950,000 in the prior year. Net cash (used in) provided
by operating activities during the years ended December 31, 2020 was primarily the result of paydown of aged accounts payable and accrued expenses.
Investing Activities
Net cash used in investing activities in 2020 and 2019 was $(981,000) and $(1,833,000), respectively. Cash used in investing activities in 2020 and
2019 were primarily associated with additional equipment purchases, software upgrades, facility expansions and upgrades, and investments in our
intellectual property portfolio.
Financing Activities
Net cash provided by (used in) financing activities in 2020 and 2019 was $1,433,000 and $(1,006,000), respectively. The cash provided by
financing activities during 2020 is primarily related to proceeds received from the amendment to our loan and security agreement with SWK as well as
proceeds received from the PPP Loan. The cash used in financing activities during 2019 is primarily attributable to the principal payments on the SWK
loan payable and finance leases.
Sources of Capital
Our principal sources of cash consist of cash provided by operating activities from our pharmaceutical compounding business. We may also sell
some or all of our ownership interests in Eton, Surface, Melt or our other subsidiaries. We produced cash from operations during 2019; however, we
currently are experiencing a downturn in revenues mostly as a result of the COVID-19 pandemic which will have an impact on our ability to produce cash
in the current year. In addition, prior to 2017, we had not generated sufficient revenues to support our operations and may not be able to do so in the future.
The changing trends and overall economic outlook in light of the COVID-19 pandemic, including the related interim stay at home orders and bans
on elective surgeries, have created uncertainty surrounding our operating outlook and may impact our future operating results. As a result, we may need
significant additional capital to support our business plan and fund our proposed business operations. We may receive additional proceeds from the exercise
of stock purchase warrants that are currently outstanding. We may also seek additional financing from a variety of sources, including other equity or debt
financings, funding from corporate partnerships or licensing arrangements, sales of assets or any other financing transaction. If we issue equity or
convertible debt securities to raise additional funds, our existing stockholders may experience substantial dilution, and the newly issued equity or debt
securities may have more favorable terms or rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds
through collaboration or licensing arrangements or sales of assets, we may be required to relinquish potentially valuable rights to our product candidates or
proprietary technologies or formulations, or grant licenses on terms that are not favorable to us. If we raise funds by incurring additional debt, we may be
required to pay significant interest expenses and our leverage relative to our earnings or to our equity capitalization may increase. Obtaining commercial
loans, assuming they would be available, would increase our liabilities and future cash commitments and may impose restrictions on our activities, such as
the financial and operating covenants included in the agreements governing the SWK Loan. Further, we may incur substantial costs in pursuing future
capital and/or financing transactions, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We
may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which
would adversely impact our financial results.
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.
43
Critical Accounting Policies
We rely on the use of estimates and make assumptions that impact our financial condition and results. These estimates and assumptions are based
on historical results and trends as well as our forecasts of how results and trends might change in the future. Although we believe that the estimates we use
are reasonable, actual results could differ materially from these estimates.
We believe that the accounting policies described below are critical to understanding our business, results of operations and financial condition
because they involve the use of more significant judgments and estimates in the preparation of our consolidated financial statements. An accounting policy
is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the
estimate is made, and any changes in the assumptions used in making the accounting estimates that are reasonably likely to occur could materially impact
our consolidated financial statements.
Revenue Recognition and Deferred Revenue
We account for contracts with customers in accordance with ASC 606, Revenues from Contracts with Customers. We have three primary streams
of revenue: (1) revenue recognized from our sale of products within our pharmacy services (2) revenue recognized from a commission agreement with a
third party and (3) revenue recognized from intellectual property license and asset purchase agreements.
Product Revenues from Pharmacy Services
We sell prescription drugs directly through our pharmacy and outsourcing facility network. Revenue from our pharmacy services divisions
includes: (i) the portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the client, (ii) the price paid to
us by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are not included in revenue. Following the core
principles of ASC 606, we have identified the following:
1.
2.
Identify the contract(s) with a customer: A contract exists with a customer at the time the prescription or order is received by the Company.
Identify the performance obligations in the contract: The order received contains the performance obligations to be met, in almost all cases the product
the customer is wishing to receive. If we are unable to be meet the performance obligation the customer is notified.
3. Determine the transaction price: the transaction price is based on the product being sold to the customer, and any related customer discounts. These
amounts are pre-determined and built into our order management software.
4. Allocate the transaction price to the performance obligations in the contract: The transaction price associated with the product(s) being ordered is
allocated according to the pre-determined amounts.
5. Recognize revenue when (or as) the entity satisfies a performance obligation: At the time of shipment from the pharmacy or outsourcing facility the
performance obligation has been met.
The following revenue recognition policy has been established for the pharmacy services division:
Revenues generated from prescription or office use drugs sold by our pharmacies and outsourcing facility are recognized when the prescription is
shipped. At the time of shipment, the pharmacy services division has performed substantially all of its obligations under its client contracts and does not
experience a significant level of returns or reshipments. Determination of criteria (3) and (4) is based on management’s judgments regarding the fixed
nature of the selling prices of the products delivered and the collectability of those amounts. We record reductions to revenue for discounts at the time of
the initial sale. Estimated returns and allowances and other adjustments are provided for in the same period during which the related sales are recorded and
are based on actual returns history. The rate of returns is analyzed annually to determine historical returns experience. If the historical data we use to
calculate these estimates do not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is
made and revenues in that period could be materially affected. We will defer any revenues received for a product that has not been delivered or is subject to
refund until such time that we and the customer jointly determine that the product has been delivered and no refund will be required.
Commission Revenues
During the year ended December 31, 2020, the Company entered into an agreement whereby it is paid a fee calculated based on sales it generates
from a pharmaceutical product that is owned by a third party. The revenue earned from this arrangement is recognized at the time a customer has ordered
the pharmaceutical product and it has shipped from the third party (or one of its distributors or affiliates), at which point there is no future performance
obligation required by the Company and no consequential continuing involvement on the part of the Company to recognize the associated revenue.
44
Intellectual Property License Revenues
We currently hold four intellectual property license and related agreements in which we have promised to grant a license or sale which provides a
customer with right to access our 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, each of which revenue is recognized at the point of time the performance
obligation is met.
Non-refundable fees that are not contingent on any future performance by us and require no consequential continuing involvement on our part are
recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverable is
delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations and structure-
activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications for such compounded drug
preparations. We defer 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 our performance under
the other elements of the arrangement. In addition, if our 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 us, 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.
Investment in Eton Pharmaceuticals, Inc.
We own 3,500,000 shares of Eton common stock, which represents approximately 14.4% of the equity and voting interests of Eton as of
December 31, 2020. At December 31, 2020, the fair market value of Eton’s common stock was $8.13 per share. In accordance with Accounting Standard
Update (“ASU”) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
for the years ended December 31, 2020 and 2019, we recorded an investment gains from its Eton common stock position of $3,255 and $3,780,
respectively, related to the change in fair market value of our investment in Eton during the measurement periods. As of December 31, 2020 and 2019, the
fair market value of our investment in Eton was $28,455 and $25,200, respectively.
Mark Baum, our Chief Executive Officer, is a member of the board of directors of Eton.
Investment in Surface Ophthalmics, Inc. – Related Party
We own 3,500,000 common shares (which is approximately 30% of the equity interests as of December 31, 2020) of Surface and uses the equity
method of accounting for this investment, as management has determined that we have the ability to exercise significant influence over the operating and
financial decisions of Surface. Under this method, we recognize earnings and losses in Surface in its consolidated financial statements and adjusts the
carrying amount of its investment in Surface accordingly. Our share of earnings and losses are based on our ownership interest of Surface. Any intra-entity
profits and losses are eliminated. We recorded equity in the net loss of Surface of $1,200 during the year ended December 31, 2019. We recorded equity in
the net loss of Surface of $2,433 during the year ended December 31, 2020. As of December 31, 2020 and 2019, the carrying value of our investment in
Surface was $1,314 and $3,747, respectively.
Investment in Melt Pharmaceuticals, Inc. – Related Party
In April 2018, we formed Melt as a wholly-owned subsidiary. In January and March of 2019, Melt entered into definitive stock purchase
agreements (collectively, the “Melt Series A Preferred Stock Agreement”) with certain investors and closed on the purchase and sale of Melt’s Series A
Preferred Stock (the “Melt Series A Stock”), totaling approximately $11,400,000 of proceeds (collectively the “Melt Series A Round”) at a purchase price
of $5.00 per share. As a result, we lost voting and ownership control of Melt and ceased consolidating Melt’s financial statements. In connection with the
Melt Series A Preferred Stock Agreement, Melt also entered into a Registration Rights Agreement and agreed to use commercially reasonable efforts to
file, or confidentially submit, a registration statement on Form S-1 with the United States Securities and Exchange Commission (“SEC”) by September 30,
2020 relating to an initial public offering of its common stock, however, during the year ended December 31, 2020 this requirement was waived by the
majority of Series A Preferred Stock holders.
At the time of deconsolidation, we recorded a gain of $5,810,000 and adjusted the carrying value in Melt to reflect the increased valuation of Melt
and our new ownership interest in accordance with ASC 810-10-40-4(c), Consolidation.
We own 3,500,000 common shares (which is approximately 44% of the equity interest as of December 31, 2020) of Melt and uses the equity
method of accounting for this investment, as management has determined that we have the ability to exercise significant influence over the operating and
financial decisions of Melt. Under this method, we recognize earnings and losses of Melt in its consolidated financial statements and adjusts the carrying
amount of its investment in Melt accordingly. Our share of earnings and losses are based on our ownership interest of Melt. Any intra-entity profits and
losses are eliminated. We recorded equity in net loss of Melt of $2,313,000 during the year ended December 31, 2020. As of December 31, 2020, our
investment in Melt was $2,506,000 of which $1,655,000 was the carrying value of our investment in Melt and $851,000 due from Melt for reimbursable
expenses and amounts due under the Melt Master Service Agreement (“Melt MSA”).
45
Stock-Based Compensation
All stock-based payments to employees, directors and consultants, including grants of stock options, warrants, restricted stock units and restricted
stock, are recognized in the consolidated financial statements based upon their estimated fair values. We use the Black-Scholes option pricing model and
Monte-Carlo simulation model to estimate the fair value of stock-based awards. Fair value is determined at the date of 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.
Income Taxes
As part of the process of preparing our consolidated financial statements, we must estimate the actual current tax assets and liabilities and assess
permanent and temporary differences that result from differing treatment of items for tax and accounting purposes. The temporary differences result in
deferred tax assets and liabilities, which are included within the consolidated balance sheets. We must assess the likelihood that the deferred tax assets will
be recovered from future taxable income and, to the extent we believe that recovery is not more likely than not, a valuation allowance must be established
which reduces the amount of deferred tax assets recorded on the consolidated balance sheets. To the extent we establish a valuation allowance or increase
or decrease this allowance in a period, the impact will be included in income tax expense in the consolidated statements of operations.
We account for income taxes under the provisions of Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification
(“ASC”) 740, Income Taxes. As of December 31, 2020 and 2019, there were no unrecognized tax benefits included in the consolidated balance sheets that
would, if recognized, affect the effective tax rate. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
We had no accrual for interest or penalties in its consolidated balance sheets at December 31, 2020 and 2019, and have not recognized interest and/or
penalties in the consolidated statements of operations for the years ended December 31, 2020 and 2019. We are subject to taxation in the United States,
California, Florida, Georgia, Illinois, New Jersey, New York, Tennessee, and Wisconsin. Our tax years since 2000 may be subject to examination by the
federal and state tax authorities due to the carryforward of unutilized net operating losses.
Research and Development
We expense all costs related to research and development as they are incurred. Research and development expenses consist of expenses incurred in
performing research and development activities, including salaries and benefits, other overhead expenses, and costs related to clinical trials, contract
services and outsourced contracts.
Intellectual Property
The costs of acquiring intellectual property rights to be used in the research and development process, including licensing fees and milestone
payments, are charged to research and development expense as incurred in situations where we have not identified an alternative future use for the acquired
rights, and are capitalized in situations where we have identified an alternative future use for the acquired rights. Patents and trademarks are recorded at
cost and capitalized at a time when the future economic benefits of such patents and trademarks become more certain (see “—Goodwill and Intangible
Assets” below). We began capitalizing certain costs associated with acquiring intellectual property rights during 2015, if costs are not capitalized, they are
expensed as incurred.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed would be separately presented in the consolidated balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group
classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material.
Goodwill and Intangible Assets
Patents and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks become
more certain. At that time, we capitalize third party legal costs and filing fees associated with obtaining and prosecuting claims related to its patents and
trademarks. Once the patents have been issued, we amortize these costs over the shorter of the legal life of the patent or its estimated economic life,
generally 20 years, using the straight-line method. Trademarks are an indefinite life intangible asset and are assessed for impairment based on future
projected cash flows as further described below.
46
We review our goodwill and indefinite-lived intangible assets for impairment as of January 1 of each year and when an event or a change in
circumstances indicates the fair value of a reporting unit may be below its carrying amount. Events or changes in circumstances considered as impairment
indicators include but are not limited to the following:
● significant underperformance of the our business relative to expected operating results;
● significant adverse economic and industry trends;
● significant decline in the our market capitalization for an extended period of time relative to net book value; and
● expectations that a reporting unit will be sold or otherwise disposed.
The goodwill impairment test consists of a two-step process as follows:
Step 1. We compare the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting unit is
determined using a discounted cash flow valuation analysis. The carrying amount of each reporting unit is determined by specifically identifying and
allocating the assets and liabilities to each reporting unit based on headcount, relative revenues or other methods as deemed appropriate by management. If
the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and we then perform
the second step of the impairment test. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required.
Step 2. If further analysis is required, we compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair
value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to its carrying amount. If the carrying amount of the reporting
unit’s goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess.
Debt Issuance Costs and Debt Discount
Debt issuance costs and the debt discount are recorded net of loans payable in the consolidated balance sheet. Amortization of debt issuance costs
and the debt discount is calculated using the effective interest method over the term of the debt and is recorded in interest expense in the accompanying
consolidated statement of operations.
Off-Balance Sheet Arrangements
Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of
structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to stockholders.
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are included in this Annual Report beginning on page F-1 immediately
following the signature page hereto and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”), our principal executive officer, and
our Chief Financial Officer (“CFO”), our principal financial and accounting officer, conducted an evaluation of the effectiveness of our disclosure controls
and procedures as of December 31, 2020, the end of the period covered by this Annual Report, pursuant to Rules 13a-15(b) and 15d-15(b) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”).
In connection with that evaluation, our CEO and CFO concluded that, as of December 31, 2020, our disclosure controls and procedures were
effective. For the purpose of this review, disclosure controls and procedures means controls and procedures designed to ensure that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to
management, including our principal executive officer, principal financial officer and principal accounting officer, as appropriate to allow timely decisions
regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO
and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management, under the
supervision and with the participation of our CEO and CFO, conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations. Based on such
evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
This report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial
reporting, in accordance with applicable SEC rules that permit us to provide only management’s report in the annual 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 year
ended December 31, 2020, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, do not expect that our disclosure controls or our internal control over financial reporting will
prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
ITEM 9B. OTHER INFORMATION
None.
48
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the information set forth under the captions “Election of Directors,”
“Executive Officers,” “Corporate Governance,” “Corporate Governance — Delinquent Section 16(a) Reports,” and “Corporate Governance — Code of
Business Conduct and Ethics” in the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information set forth under the captions “Executive Compensation” and
“Director Compensation” in the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by reference to the information set forth under the captions “Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters” and “Executive Compensation — Securities Authorized for Issuance Under Equity
Compensation Plans” in the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the information set forth under the captions “Corporate Governance —
Transactions with Related Persons” and “Corporate Governance — Director Independence” in the Company’s Proxy Statement for the 2021 Annual
Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the information set forth under the caption “Ratification of Selection of
Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders.
49
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of the following documents filed as part of the report:
PART IV
(1) See the index to our consolidated financial statements on page F-1 for a list of the financial statements being filed in this Annual Report.
(2) All financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated
financial statements or the notes thereto.
(3) See Item 15(b) below for all exhibits being filed or incorporated by reference herein.
(b) Exhibits:
Exhibit
No.
Description
EXHIBIT INDEX
2.1
3.1
Agreement and Plan of Merger, dated as of September 17, 2007, by and among Imprimis Pharmaceuticals, Inc., Transdel Pharmaceuticals
Holdings, Inc. and Trans-Pharma Acquisition Corp. Incorporation (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form
8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on September 21, 2007)
Amended and Restated Certificate of Incorporation, as amended by the Certificate of Amendment to Amended and Restated Certificate of
Incorporation effective February 28, 2012, as further amended by the Certificate of Amendment to Amended and Restated Certificate of
Incorporation effective February 7, 2013, and as further amended by the Certificate of Amendment to Amended and Restated Certificate of
Incorporation effective September 10, 2014
3.2
Amended and Restated Bylaws of Imprimis Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 3.2 to the Annual Report on Form
8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on March 28, 2014)
3.3
Certificate of Designation of Series A Convertible Preferred Stock of Imprimis Pharmaceuticals, Inc. (incorporated herein by reference to
Exhibit 3.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on
December 20, 2011)
3.4
Amended and Restated Certificate of Incorporation, filed July 2, 2018 (incorporated herein by reference to Exhibit 3.1 to the Current Report on
Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on July 2, 2018)
3.5
Amendment to the Restated Certificate of Incorporation for the name change, filed as of December 27, 2018 (incorporated herein by reference to
Exhibit 3.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on
December 31, 2018)
4.1*
Description of the Company’s Securities
10.1
Form of Directors and Officers Indemnification Agreement (incorporated herein by reference to Exhibit 10.8 to the Current Report on Form 8-K
of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on September 21, 2007)
10.2#
Imprimis Pharmaceuticals, Inc. Amended and Restated 2007 Stock Incentive and Awards Plan (incorporated herein by reference to Exhibit 10.3
to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on May 8, 2013)
10.3#
Amendment No. 1 to Imprimis Pharmaceuticals, Inc. Amended and Restated 2007 Incentive Stock and Awards Plan (incorporated herein by
reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange
Commission on November 6, 2013)
10.4#
Form of Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.12 to the Current Report on Form 8-K of Imprimis
Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on September 21, 2007)
10.5#
Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.13 to the Current Report on Form 8-K of
Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on September 21, 2007)
50
10.6#
Form of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Imprimis
Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on May 8, 2013)
10.7#
Stand-alone Restricted Stock Unit Agreement, dated July 18, 2012, granted by Imprimis Pharmaceuticals, Inc. to Mark L. Baum (incorporated
herein by reference to Exhibit 10.40 to the Company’s Registration Statement on Form S-1 (File No. 333-182846) filed on July 25, 2012)
10.8#
Stand-alone Restricted Stock Unit Agreement, dated July 18, 2012, granted by Imprimis Pharmaceuticals, Inc. to Robert J. Kammer
(incorporated herein by reference to Exhibit 10.41 to the Company’s Registration Statement on Form S-1 (File No. 333-182846) filed on July 25,
2012)
10.9
Form of Underwriter’s Warrant (incorporated herein by reference to Exhibit 10.41 to the Company’s Registration Statement on Form S-1 (File
No. 333-182846) filed on October 26, 2012)
10.10# Amended and Restated Employment Agreement, dated May 2, 2013, by and between Imprimis Pharmaceuticals, Inc. and Mark L. Baum
(incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the
Securities and Exchange Commission on May 8, 2013)
10.11# Performance Stock Units Agreement, dated May 2, 2013, by and between Imprimis Pharmaceuticals, Inc. and Mark L. Baum (incorporated
herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and
Exchange Commission on August 14, 2013)
10.12# Amended and Restated Employment Agreement, effective as of February 1, 2015, by and between Imprimis Pharmaceuticals, Inc. and Andrew
R. Boll (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the
Securities and Exchange Commission on February 2, 2015)
10.13# Performance Stock Units Award Agreement, effective as of February 1, 2015, by and between Imprimis Pharmaceuticals, Inc. and Andrew R.
Boll (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the
Securities and Exchange Commission on February 2, 2015)
10.14# Employment Agreement, effective as of February 1, 2015, by and between Imprimis Pharmaceuticals, Inc. and John P. Saharek (incorporated
herein by reference to Exhibit 10.3 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange
Commission on February 2, 2015)
10.15
Warrant to Purchase Stock, dated May 11, 2015, issued by Imprimis Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.2 to
the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on May 12, 2015)
10.16
10.17
10.18
10.19
10.20
Warrant Amendment to Purchase Stock, dated December 27, 2016, issued by Imprimis Pharmaceuticals, Inc. (incorporated herein by reference
to Exhibit 10.3 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on
December 29, 2016)
Form of Securities Purchase Agreement, dated March 21, 2017, between the Registrant and the Investors (incorporated herein by reference to
Exhibit 10.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on March
22, 2017)
License Agreement dated April 1, 2017 between Imprimis Pharmaceuticals, Inc. and Richard L. Lindstrom, M.D. (incorporated herein by
reference to Exhibit 10.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange
Commission on April 6, 2017)
Strategic Sales & Marketing Agreement dated April 13, 2017 between Imprimis Pharmaceuticals, Inc. and Cameron Ehlen Group, Inc.
(incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities
and Exchange Commission on April 17, 2017)
Strategic Sales & Marketing Agreement dated April 28, 2017 between Imprimis Pharmaceuticals, Inc. and SightLife Surgical, Inc. (incorporated
herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange
Commission on May 2, 2017)
10.21# Consulting Agreement dated May 1, 2017 between Eton Pharmaceuticals, Inc. and Mark L. Baum (incorporated herein by reference to Exhibit
10.8 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on August 10,
2017)
10.22# Consulting Agreement dated May 1, 2017 between Eton Pharmaceuticals, Inc. and Andrew R. Boll (incorporated herein by reference to Exhibit
10.9 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on August 10,
2017)
10.23# Consulting Agreement dated May 1, 2017 between Eton Pharmaceuticals, Inc. and John P. Saharek (incorporated herein by reference to Exhibit
10.10 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on August
10, 2017)
51
10.24
10.25
10.26
10.27
Asset Purchase and License Agreement (pentoxifylline) dated May 9, 2017 between Imprimis Pharmaceuticals, Inc. and Eton Pharmaceuticals,
Inc. (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the
Securities and Exchange Commission on June 20, 2017)
Asset Purchase and License Agreement (corticotropin) dated May 9, 2017 between Imprimis Pharmaceuticals, Inc. and Eton Pharmaceuticals,
Inc. (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the
Securities and Exchange Commission on June 20, 2017)
Management Services Agreement dated May 1, 2017 between Imprimis Pharmaceuticals, Inc. and Eton Pharmaceuticals, Inc. (incorporated
herein by reference to Exhibit 10.4 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange
Commission on June 20, 2017)
Loan and Security Agreement, dated July 19, 2017, by and between Imprimis Pharmaceuticals, Inc. and SWK Funding LLC (incorporated
herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange
Commission on July 20, 2017)
10.28
Imprimis Pharmaceuticals, Inc. 2017 Incentive Stock and Awards Plan (incorporated herein by reference to Exhibit 10.1 to the Registration
Statement on Form S-8 of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on August 25, 2017)
10.29
Form of Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Imprimis
Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on June 16, 2017)
10.30
Form of Non-Statutory Stock Option Agreement (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of
Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on June 16, 2017)
10.31
Form of Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K of Imprimis
Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on June 16, 2017)
10.32
Form of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-K of Imprimis
Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on June 16, 2017)
10.33# Consulting Agreement dated October 27, 2017 between Surface Pharmaceuticals, Inc. and Mark L. Baum (incorporated herein by reference to
Exhibit 10.53 to the Annual Report on Form 10-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on
March 8, 2018)
10.34# Consulting Agreement dated October 27, 2017 between Surface Pharmaceuticals, Inc. and Andrew R. Boll (incorporated herein by reference to
Exhibit 10.54 to the Annual Report on Form 10-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on
March 8, 2018)
10.35# Consulting Agreement dated October 27, 2017 between Surface Pharmaceuticals, Inc. and John P. Saharek (incorporated herein by reference to
Exhibit 10.55 to the Annual Report on Form 10-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on
March 8, 2018)
10.36
10.37
10.38
10.39
Asset Purchase and License Agreement dated September 28, 2017 between Imprimis Pharmaceuticals, Inc. and Surface Pharmaceuticals, Inc.
(incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities
and Exchange Commission on May 15, 2018)
Amended and Restated Asset Purchase and License Agreement dated April 10, 2018 between Imprimis Pharmaceuticals, Inc. and Surface
Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc.
filed with the Securities and Exchange Commission on May 15, 2018)
Amended and Restated License Agreement dated April 10, 2018 between Imprimis Pharmaceuticals, Inc. and Richard L. Lindstrom, M.D.
(incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the
Securities and Exchange Commission on August 6, 2018)
Consulting Agreement dated March 1, 2018 between Surface Pharmaceuticals, Inc. and Richard L. Lindstrom, M.D. (incorporated herein by
reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange
Commission on August 6, 2018)
10.40# Consulting Agreement dated May 1, 2018 between Melt Pharmaceuticals, Inc. and Mark L. Baum (incorporated herein by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on November
13, 2018)
10.41# Consulting Agreement dated May 1, 2018 between Melt Pharmaceuticals, Inc. and Andrew R. Boll (incorporated herein by reference to Exhibit
10.2 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on November
13, 2018)
52
10.42#
Consulting Agreement dated May 1, 2018 between Melt Pharmaceuticals, Inc. and John P. Saharek (incorporated herein by reference to Exhibit
10.3 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on November
13, 2018)
10.43
10.44
10.45
10.46
10.47#
10.48#
10.49#
10.50
10.51
10.52#
10.53#
10.54#
10.55
10.56
Asset Purchase Agreement dated December 11, 2018 between Harrow Health, Inc. (fka Imprimis Pharmaceuticals, Inc.) and Melt
Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Harrow Health, Inc. filed with the
Securities and Exchange Commission on February 5, 2019)
Asset Purchase Agreement dated February 1, 2019 between Harrow Health, Inc. and Mayfield Pharmaceuticals, Inc. (incorporated herein by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Harrow Health, Inc. filed with the Securities and Exchange Commission on
May 9, 2019)
Asset Purchase Agreement dated February 1, 2019 between Harrow Health, Inc. and Elle Pharmaceuticals, Inc. (incorporated herein by
reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Harrow Health, Inc. filed with the Securities and Exchange Commission on
May 9, 2019)
Joinder and First Amendment to Loan and Security Agreement, dated May 24, 2019, by and between Harrow Health, Inc., each of its wholly-
owned subsidiaries and SWK Funding LLC. (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Harrow
Health, Inc. filed with the Securities and Exchange Commission on May 29, 2019)
Consulting Agreement dated June 3, 2019 between Mayfield Pharmaceuticals, Inc. and Mark L. Baum (incorporated herein by reference to
Exhibit 10.3 to the Quarterly Report on Form 10-Q of Harrow Health, Inc. filed with the Securities and Exchange Commission on August 14,
2019)
Consulting Agreement dated June 3, 2019 between Mayfield Pharmaceuticals, Inc. and Andrew R. Boll (incorporated herein by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q of Harrow Health, Inc. filed with the Securities and Exchange Commission on August 14,
2019)
Consulting Agreement dated June 3, 2019 between Mayfield Pharmaceuticals, Inc. and John P. Saharek (incorporated herein by reference to
Exhibit 10.4 to the Quarterly Report on Form 10-Q of Harrow Health, Inc. filed with the Securities and Exchange Commission on August 14,
2019)
License Agreement, dated July 28, 2019, among Mayfield Pharmaceuticals, Inc., TGV-Health, LLC and TGV-Gyneconix, LLC (incorporated
herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Harrow Health, Inc. filed with the Securities and Exchange
Commission on November 13, 2019)
License Agreement, dated July 29, 2019, among Stowe Pharmaceuticals, Inc., TGV-Health, LLC and TGV-Ophthalnix, LLC (incorporated
herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Harrow Health, Inc. filed with the Securities and Exchange
Commission on November 13, 2019)
Consulting Agreement dated February 13, 2020 between Stowe Pharmaceuticals, Inc. and Mark L. Baum (incorporated herein by reference to
Exhibit 10.64 to the Annual Report on Form 10-K of Harrow Health, Inc. filed with the Securities and Exchange Commission on March 13,
2020)
Consulting Agreement dated February 13, 2020 between Stowe Pharmaceuticals, Inc. and Andrew R. Boll (incorporated herein by reference to
Exhibit 10.65 to the Annual Report on Form 10-K of Harrow Health, Inc. filed with the Securities and Exchange Commission on March 13,
2020)
Consulting Agreement dated February 13, 2020 between Stowe Pharmaceuticals, Inc. and John P. Saharek (incorporated herein by reference to
Exhibit 10.66 to the Annual Report on Form 10-K of Harrow Health, Inc. filed with the Securities and Exchange Commission on March 13,
2020)
Second Amendment, dated as of April 1, 2020, to the Loan and Security Agreement by and among Harrow Health, Inc., several of its wholly-
owned subsidiaries and the Lenders named therein (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of
Harrow Health, Inc. filed with the Securities and Exchange Commission on April 4, 2020)
Business Loan Agreement with Renasant Bank pursuant to the Paycheck Protection Program, dated April 27, 2020 (incorporated herein by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Harrow Health, Inc. filed with the Securities and Exchange Commission on
August 10, 2020)
10.57#* Consulting Agreement dated July 1, 2020 between Visionology, Inc. and Mark L. Baum
10.58#* Consulting Agreement dated July 1, 2020 between Visionology, Inc. and Andrew R. Boll
10.59++ Commercial Alliance Agreement between Eyepoint Pharmaceuticals, Inc. and ImprimisRx, LLC dated August 1, 2020. (incorporated herein by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q of Harrow Health, Inc. filed with the Securities and Exchange Commission on
November 9, 2020)
10.60*++ First Amendment to Commercial Alliance Agreement between Eyepoint Pharmaceuticals, Inc. and ImprimisRx, LLC dated November 13,
2020.
21.1*
List of Subsidiaries
53
23.1*
Consent of Independent Registered Public Accounting Firm
24.1*
Power of Attorney (included on the signature page to this Annual Report)
31.1*
Certification of Mark L. Baum, Chief 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, Chief Financial 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, Chief Executive Officer.
32.2**
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Andrew
R. Boll, Chief Financial Officer.
101.INS* XBRL Instant 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 Annual Report on Form 10-K for the year ended December 31, 2020 has been formatted in Inline XBRL
# Management contract or compensatory plan or arrangement.
*
Filed herewith.
** Furnished herewith.
+ Confidential treatment has been granted with respect to portions of this exhibit pursuant to Rule 24b-2 of the Exchange Act and these confidential
portions have been redacted from the filing that is incorporated herein by reference. A complete copy of this exhibit, including the redacted terms, has
been separately filed with the Securities and Exchange Commission.
++ Portions of this exhibit have been omitted in compliance with item 601 of Regulation S-K
ITEM 16. FORM 10-K SUMMARY
None.
54
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
HARROW HEALTH, INC.
/s/ Mark L. Baum
By:
Name: Mark L. Baum
Title: Chief Executive Officer (Principal Executive Officer)
Date: March 8, 2021
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark L. Baum and
Andrew R. Boll, and each of them individually, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities to any or all amendments to this Annual Report, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents or any of them
the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as full to all
intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Mark L. Baum
Mark L. Baum
/s/ Andrew R. Boll
Andrew R. Boll
/s/ Robert J. Kammer
Robert J. Kammer
/s/ Teresa F. Sparks
Teresa F. Sparks
/s/ Richard L. Lindstrom
Richard L. Lindstrom
/s/ R. Lawrence Van Horn
R. Lawrence Van Horn
Chief Executive Officer and Director
March 8, 2021
(Principal Executive Officer)
Chief Financial Officer
March 8, 2021
(Principal Accounting and Financial Officer)
Chairman of the Board of Directors
March 8, 2021
Director
Director
Director
55
March 8, 2021
March 8, 2021
March 8, 2021
FINANCIAL STATEMENTS
Harrow Health, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
Notes to the Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Harrow Health, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Harrow Health, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and
2019, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31,
2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Stock-Based Compensation – Modified Stock Option
Critical Audit Matter Description
As described further in Note 14 to the consolidated financial statements, during the year ended December 31, 2020, the Company amended an employee
option to purchase 600,000 shares of the Company’s common stock, which is subject to the satisfaction of certain market-based vesting criteria, by
extending the vesting term and contractual term. Management performed a valuation of the stock option at the date of modification with the assistance of a
third-party valuation specialist, which involved estimation of the fair value of the modified option. The Company estimated the fair value of the modified
stock option using the Monte-Carlo simulation and Black-Scholes option pricing models.
Auditing management’s valuation of the modified stock option required auditor judgment and required a high degree of subjectivity as estimates underlying
the determination of fair value were based on various inputs and significant assumptions used in the Monte-Carlo simulation and Black-Scholes option
pricing models, including the probability of triggering the market-based targets, and the number of shares to be vested.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures included, among others, reading the relevant Board of Directors minutes and modified stock option agreement for accuracy and
completeness of the modified stock option terms. We involved our valuation specialist to assist in the evaluation of the Company’s determination of the fair
value of the modified stock option, which included testing the appropriateness of the methodologies and underlying assumptions used, and whether the
methods used for determining fair value were applied consistently with the valuation of similar grants in prior periods. We evaluated the significant
assumptions used by management to calculate the fair value of the modified stock option, which included the expected option term and an independent
calculation of the expected volatility based upon actual historical stock price movements over a period equal to the expected option term. We developed an
independent estimate of the fair value for the modified stock option with the assistance of our valuation specialist and compared our estimate of fair value
to the fair value determined by management.
/s/ KMJ Corbin & Company LLP
We have served as the Company’s auditor since 2007.
Irvine, California
March 8, 2021
F-2
HARROW HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
2020
2019
ASSETS
Current assets
Cash and cash equivalents, including restricted cash of $200
Investment in Eton Pharmaceuticals
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Operating lease right-of-use assets
Intangible assets, net
Investment in Surface Ophthalmics
Investment in Melt Pharmaceuticals
Goodwill
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses
Accrued payroll and related liabilities
Deferred revenue and customer deposits
Current portion of paycheck protection program loan payable
Current portion of loan payable, net of unamortized debt discount
Current portion of operating lease liabilities
Current portion of finance lease obligations
Total current liabilities
Operating lease liabilities, net of current portion
Finance lease obligations, net of current portion
Accrued expenses, net of current portion
Paycheck protection program loan payable, net of current portion
Loan payable, net of current portion and unamortized debt discount
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value, 50,000,000 shares authorized, 25,749,875 and
25,526,931 shares issued and outstanding at December 31, 2020 and December 31,
2019, respectively
Additional paid-in capital
Accumulated deficit
TOTAL HARROW HEALTH STOCKHOLDERS’ EQUITY
Noncontrolling interests
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
$
$
$
$
4,301 $
28,455
2,662
3,962
751
40,131
4,453
6,799
1,939
1,314
2,506
332
57,474 $
3,932 $
2,315
66
1,259
2,639
580
8
10,799
6,652
17
800
708
11,670
30,646
26
104,557
(77,400)
27,183
(355)
26,828
57,474 $
4,949
25,200
2,009
3,301
586
36,045
5,375
6,559
2,337
3,747
4,690
332
59,085
7,702
2,117
57
-
1,772
629
7
12,284
6,338
26
800
-
12,219
31,667
26
101,728
(74,043)
27,711
(293)
27,418
59,085
The accompanying notes are an integral part of these consolidated financial statements
F-3
HARROW HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share data)
For the Years Ended December 31,
2019
2020
Revenues:
Product sales, net
Other revenues
Total revenues
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Impairment of long-lived assets
Total operating expenses
Income (loss) from operations
Other income (expense):
Interest expense, net
Investment (loss) gain from Melt Pharmaceuticals, net
Investment loss from Surface Ophthalmics, net
Investment gain from Eton Pharmaceuticals, net
Other (loss) income, net
Total other (loss) income, net
Loss before income tax provision
Income tax provision
Total net loss including noncontrolling interests
Net loss attributable to noncontrolling interests
Net (loss) income attributable to Harrow Health, Inc.
Basic net (loss) income per share of common stock
Diluted net (loss) income per share of common stock
Weighted average number of common shares outstanding, basic
Weighted average number of common shares outstanding, diluted
$
$
$
$
48,479 $
392
48,871
(14,463)
34,408
31,247
2,413
363
34,023
385
(2,236)
(2,313)
(2,433)
3,255
(73)
(3,800)
(3,415)
4
(3,419)
62
(3,357) $
(0.13) $
(0.13) $
25,895,352
25,895,352
51,137
28
51,165
(16,749)
34,416
33,088
2,083
4,040
39,211
(4,795)
(2,500)
3,968
(1,200)
3,780
630
4,678
(117)
8
(125)
293
168
0.01
0.01
25,323,159
26,466,098
The accompanying notes are an integral part of these consolidated financial statements
F-4
HARROW HEALTH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2020 and 2019
(In thousands, except for share data)
Common Stock
Additional
Total
Harrow
Health,
Inc.
Total
Noncontrolling
Total
Par
Paid-in Accumulated
Shares
24,339,610 $
Value Capital
24 $
98,938 $
Deficit
(74,211)
$
24,751
Stockholders’
Equity
Equity Stockholders’
Interest
-
$
24,751
Equity
$
Balance at January 1, 2019
Issuance of common stock in
connection with:
Exercise of warrants
Exercise of employee
options, net of tax
withholding
Stock-based payment for
services provided
1,142,528
2
811
29,793
15,000
-
-
(44)
234
-
-
-
Stock-based compensation
expense
Net income (loss)
Balance at December 31, 2019
-
-
25,526,931
-
-
26
1,789
-
101,728
-
168
(74,043)
Issuance of common stock in
connection with:
Exercise of employee
options, net of tax
withholding
Issuance of common stock
related to vesting of RSUs
Stock-based payment for
services provided
Stock-based compensation
expense
Net loss
Balance at December 31, 2020
7,159
185,785
30,000
-
-
-
-
-
-
-
(29)
-
83
2,775
-
25,749,875 $
26 $ 104,557 $
-
-
-
-
(3,357)
(77,400)
$
813
(44)
234
1,789
168
27,711
(29)
-
83
2,775
(3,357)
27,183
-
-
-
-
(293)
(293)
-
-
-
813
(44)
234
1,789
(125)
27,418
(29)
-
83
-
(62)
(355)
$
$
2,775
(3,419)
26,828
The accompanying notes are an integral part of these consolidated financial statements
F-5
HARROW HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
2019
2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (including noncontrolling interests)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
$
(3,419) $
Depreciation and amortization of property, plant and equipment
Amortization of intangible assets
Amortization of operating lease right-of-use assets
Provision for bad debt expense
Interest paid-in-kind on SWK Loan
Amortization of debt issuance costs and discount
Investment gain from Eton Pharmaceuticals, net
Investment loss from Surface Ophthalmics, net
Investment loss (gain) from Melt Pharmaceuticals, net
Loss on disposal of equipment
Impairment of long-lived assets
Stock-based payment of consulting services
Stock-based compensation
Changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Accrued payroll and related liabilities
Deferred revenue and customer deposits
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale and disposal of assets
Investment in patent and trademark assets
Purchases of property, plant and equipment
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on finance lease obligations
Proceeds from SWK loan
Principal payments on SWK loan
Payments of costs related to amendment of SWK loan
Proceeds from Paycheck protection program loan payable
Net proceeds from exercise of warrants and stock options, net of taxes remitted for
RSU’s and options
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents
Restricted cash
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes
Cash paid for interest
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Purchase of property, plant and equipment included in accounts payable and accrued
expenses
New and revaluation of right-of-use assets obtained in exchange for lease obligation
$
$
$
$
$
$
$
1,880
167
696
213
358
457
(3,255)
2,433
2,313
105
363
83
2,775
(866)
(661)
(294)
(4,655)
198
9
(1,100)
13
(132)
(862)
(981)
(8)
1,000
(1,497)
-
1,967
(29)
1,433
(648)
4,949
4,301 $
4,101 $
200
4,301 $
4 $
1,791 $
214 $
936 $
The accompanying notes are an integral part of these consolidated financial statements
F-6
(125)
1,936
209
518
-
-
512
(3,780)
1,200
(3,968)
108
4,040
234
1,789
(95)
(2,271)
(471)
1,342
(166)
(62)
950
4
(369)
(1,468)
(1,833)
(743)
-
(750)
(282)
-
769
(1,006)
(1,889)
6,838
4,949
4,749
200
4,949
17
1,967
39
753
HARROW HEALTH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2020 and 2019
(all dollar amounts are expressed in thousands, except share and per share data)
NOTE 1. ORGANIZATION
Harrow Health, Inc. (together with its subsidiaries, partially owned companies and royalty arrangements unless the context indicates or otherwise requires,
the “Company” or “Harrow”) specializes in the development, production and sale of innovative medications that offer unique competitive advantages and
serve unmet needs in the marketplace through its subsidiaries and deconsolidated companies. The Company owns one of the nation’s leading
ophthalmology-focused pharmaceutical businesses, ImprimisRx. In addition to wholly owning ImprimisRx, the Company also has equity positions in Eton
Pharmaceuticals, Inc. (“Eton”), Surface Ophthalmics, Inc. (“Surface”), and Melt Pharmaceuticals, Inc. (“Melt”), all companies that began as subsidiaries of
Harrow. In 2020, Harrow created Visionology, Inc. (“Visionology”), which intends to launch an online eye health platform business. Harrow also owns
royalty rights in various drug candidates being developed by Surface and Melt. The Company intends to continue to create, and hold equity and royalty
rights in, new businesses that commercialize drug candidates that are internally developed or otherwise acquired or licensed from third parties.
During and subsequent to the year ended December 31, 2020, the Company discontinued the majority of operational efforts related to its subsidiaries Stowe
Pharmaceuticals, Inc. (“Stowe”), Radley Pharmaceuticals, Inc. (“Radley”) and Mayfield Pharmaceuticals, Inc. (“Mayfield”) to allocate resources to other
areas of the Company’s business. The Company does not expect the suspension of these operations to have a material impact on the financial results of the
Company.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Harrow has prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States
of America (“GAAP”). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as
well as Mayfield, 79% majority controlled, and Stowe, 70% majority controlled as of December 31, 2020. The remaining 21% of Mayfield is owned by
Elle Pharmaceutical, LLC (“Elle”), TGV-Health, LLC and its affiliated entities (collectively “TGV”) or other consultants. Mayfield was organized to
develop women’s health and urological focused drug candidates. The remaining 30% of Stowe was owned by TGV. Stowe was organized to develop
ophthalmic drug candidates. The Company controls 100% of the equity interests in Visionology. All inter-company accounts and transactions have been
eliminated in consolidation.
Harrow consolidates entities in which we have a controlling financial interest. We consolidate subsidiaries in which we hold and/or control, directly or
indirectly, more than 50% of the voting rights. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and
expenses during the reporting periods. Significant estimates made by management are, among others, allowance for doubtful accounts and contractual
adjustments, renewal periods and discount rates for leases, realizability of inventories, valuation of investments, realizability of deferred taxes,
recoverability of goodwill and long-lived assets, valuation of contingent acquisition obligations and deferred acquisition obligations, fair value of loans
payable, and valuation of stock-based transactions with employees and non-employees. Actual results could differ from those estimates.
Risks, Uncertainties and Liquidity
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. On March 18, 2020, the Centers for Medicare & Medicaid
Services (“CMS”) released guidance for U.S. healthcare providers to limit all elective medical procedures in order to conserve personal protective
equipment and limit exposure to COVID-19 during the pendency of the pandemic. In addition to limiting elective medical procedures, many hospitals and
other healthcare providers have strictly limited access to their facilities during the pandemic. The COVID-19 pandemic has negatively impacted the global
economy, disrupted global supply chains and healthcare delivery, led to social distancing recommendations, stay-at-home orders and other restrictive
measures, and created significant volatility in financial markets.
F-7
Many of the Company’s customers use its drugs in procedures impacted by the CMS guidance to limit elective procedures. In addition, the Company and
our business partners need access to healthcare providers and facilities to conduct clinical trials and other activities required to achieve regulatory clearance
of products under development.
Management believes reductions in elective procedures in response to CMS guidance have had, and will continue to have, an adverse impact, which may
be material, on the Company’s financial condition, liquidity and results of operations. The severity of the impact of the COVID-19 pandemic on the
Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity
of the impact on its customers, all of which are uncertain and cannot be predicted. As of the date of the filing of this Annual Report on Form 10-K, the
extent to which the COVID-19 pandemic may materially impact the Company’s financial condition, liquidity or results of operations is uncertain. In
addition, the Company is subject to certain regulatory standards, 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.
Prior to 2020, the Company had incurred significant operating losses and negative cash flows from operations since its inception. The Company recorded
operating income of $385 for the year ended December 31, 2020 and recorded an operating loss of $4,795 for the year ended December 31, 2019. The
Company has an accumulated deficit of $77,400 and $74,043 as of December 31, 2020 and 2019, respectively. In addition, the Company used cash in
operating activities of $1,100 for the year ended December 31, 2020 and cash provided by operating activities was $950 for the year ended December 31,
2019.
While there is no assurance, management of the Company believes existing cash resources and restricted cash of $4,301 at December 31, 2020 together
with cash generated from operations, will be sufficient to sustain the Company’s planned level of operations for at least the next twelve months. However,
estimates of operating expenses and working capital requirements and the future impact of the COVID-19 pandemic on its business could be incorrect. The
Company could use its cash resources faster than anticipated. Further, some or all of the ongoing or planned activities may not be successful and could
result in further losses.
The Company may seek to increase liquidity and capital resources through a variety of means which may include, but are not limited to: the sale of assets,
investments and/or businesses, obtaining financing through the issuance of equity, debt, or convertible securities; and working to increase revenue growth
through sales. There is no guarantee that the Company will be able to obtain capital when needed on terms management deems acceptable, or at all.
Segments
The Company’s chief operating decision-maker is its Chief Executive Officer who makes resource allocation decisions and assesses performance based on
financial information presented as operating segments. The Company has identified two operating segments as reportable segments. See Note 18 for more
information regarding the Company’s reportable segments.
Noncontrolling Interests
The Company recognizes any noncontrolling interest as a separate line item in equity in the consolidated financial statements. A noncontrolling interest
represents the portion of equity ownership in a less-than-wholly-owned subsidiary not attributable to the Company. Generally, any interest that holds less
than 50% of the outstanding voting shares is deemed to be a noncontrolling interest; however, there are other factors, such as decision-making rights, that
are considered as well. The Company includes the amount of net loss attributable to noncontrolling interests in consolidated net loss on the face of the
consolidated statements of operations.
The Company provides in the consolidated statements of stockholders’ equity a reconciliation at the beginning and the end of the period of the carrying
amount of total equity, equity attributable to the parent, and equity attributable to the noncontrolling interests that separately discloses:
(1) net income or loss;
(2) transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and
(3) each component of other income or loss.
Revenue Recognition and Deferred Revenue
The Company recognizes revenue at the time of transfer of promised goods to customers in an amount that reflects the consideration to which the Company
expects to be entitled in exchange for those goods or services (see Note 3).
F-8
Cost of Sales
Cost of sales includes direct and indirect costs to manufacture formulations and other products sold, including active pharmaceutical ingredients, personnel
costs, packaging, storage, royalties, shipping and handling costs and the write-off of obsolete inventory.
Research and Development
The Company expenses all costs related to research and development as they are incurred. Research and development expenses consist of expenses
incurred in performing research and development activities, including salaries and benefits, other overhead expenses, and costs related to clinical trials,
contract services and outsourced contracts.
Debt Issuance Costs and Debt Discount
Debt issuance costs and the debt discount are recorded net of loans payable and finance lease obligations in the consolidated balance sheets. Amortization
of debt issuance costs and the debt discount is calculated using the effective interest method over the term of the related debt and is recorded in interest
expense in the accompanying consolidated statements of operations.
Intellectual Property
The costs of acquiring intellectual property rights to be used in the research and development process, including licensing fees and milestone payments, are
charged to research and development expense as incurred in situations where the Company has not identified an alternative future use for the acquired
rights, and are capitalized in situations where we have identified an alternative future use for the acquired rights. Patents and trademarks are recorded at
cost and capitalized at a time when the future economic benefits of such patents and trademarks become more certain (see “—Goodwill and Intangible
Assets” below). The Company began capitalizing certain costs associated with acquiring intellectual property rights during 2015; if costs are not capitalized
they are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 740, Income Taxes. As part of the process of preparing the Company’s consolidated financial statements, the Company must estimate the actual
current tax assets and liabilities and assess permanent and temporary differences that result from differing treatment of items for tax and accounting
purposes. The temporary differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. The Company
must assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent the Company believes that recovery is
not more likely than not, a valuation allowance must be established which reduces the amount of deferred tax assets recorded on the consolidated balance
sheets. To the extent the Company establishes a valuation allowance or increase or decrease this allowance in a period, the impact will be included in
income tax expense in the consolidated statements of operations.
Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition.
Concentrations of Credit Risk
The Company places its cash with financial institutions deemed by management to be of high credit quality. The Federal Deposit Insurance Corporation
(“FDIC”) provides basic deposit coverage with limits up to $250 per owner. From time to time the Company has cash deposits in excess of FDIC limits.
F-9
Investment in Eton Pharmaceuticals, Inc. – Related Party
The Company owns 3,500,000 shares of Eton common stock, which represents approximately 14.4% of the equity and voting interests of Eton as of
December 31, 2020. At December 31, 2020, the fair market value of Eton’s common stock was $8.13 per share. In accordance with Accounting Standard
Update (“ASU”) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
for the years ended December 31, 2020 and 2019, the Company recorded investment gains from its Eton common stock position of $3,255 and $3,780,
respectively, related to the change in fair market value of the Company’s investment in Eton during the measurement periods. As of December 31, 2020 and
2019, the fair market value of the Company’s investment in Eton was $28,455 and $25,200, respectively.
Mark Baum, the Company’s Chief Executive Officer, is a member of the board of directors of Eton.
Accounts Receivable
Accounts receivable are stated net of allowances for doubtful accounts and contractual adjustments. The accounts receivable balance primarily includes
amounts due from customers the Company has invoiced or from third-party providers (e.g., insurance companies and governmental agencies), but for
which payment has not been received. Charges to bad debt are based on both historical write-offs and specifically identified receivables. Accounts
receivable are presented net of allowances for doubtful accounts and contractual adjustments in the amount of $98 and $76 as of December 31, 2020 and
2019, respectively.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The Company evaluates the carrying value
of inventories on a regular basis, based on the price expected to be obtained for products in their respective markets compared with historical cost. Write-
downs of inventories are considered to be permanent reductions in the cost basis of inventories.
The Company also regularly evaluates its inventories for excess quantities and obsolescence (expiration), taking into account such factors as historical and
anticipated future sales or use in production compared to quantities on hand and the remaining shelf life of products and active pharmaceutical ingredients
on hand. The Company establishes reserves for excess and obsolete inventories as required based on its analyses.
Investment in Melt Pharmaceuticals, Inc. – Related Party
In April 2018, the Company formed Melt as a wholly-owned subsidiary. In January and March of 2019, Melt entered into definitive stock purchase
agreements (collectively, the “Melt Series A Preferred Stock Agreement”) with certain investors and closed on the sale of Melt’s Series A Preferred Stock
(the “Melt Series A Stock”), totaling approximately $11,400 of proceeds (collectively, the “Melt Series A Round”) at a purchase price of $5.00 per share.
As a result, the Company lost voting and ownership control of Melt and ceased consolidating Melt’s financial statements.
In January 2019, the Company deconsolidated Melt and recorded a gain of $5,810 and adjusted the carrying value in Melt to reflect the increased valuation
of Melt and the Company’s new ownership interest in accordance with ASC 810-10-40-4(c), Consolidation.
The Company owns 3,500,000 common shares of Melt (which is approximately 44% of the equity interests as of December 31, 2020) and uses the equity
method of accounting for this investment, as management has determined that the Company has the ability to exercise significant influence over the
operating and financial decisions of Melt. Under this method, the Company recognizes earnings and losses in Melt in its consolidated financial statements
and adjusts the carrying amount of its investment in Melt accordingly. The Company’s share of earnings and losses are based on the Company’s ownership
interest of Melt. Any intra-entity profits and losses are eliminated. The Company recorded equity in the net gain of Melt of $3,968 during the year ended
December 31, 2019. The Company recorded equity in the net loss of Melt of $2,313 during the year ended December 31, 2020. As of December 31, 2020
and 2019, the Company’s investment in Melt was $2,506 and $4,690, respectively, which includes $851 and $722, respectively, due from Melt for
reimbursable expenses and amounts due under the Melt Master Services Agreement (“MSA”).
See Note 4 for more information and related party disclosure regarding Melt.
Investment in Surface Ophthalmics, Inc. – Related Party
The Company owns 3,500,000 common shares (which is approximately 30% of the equity interests as of December 31, 2020) of Surface and uses the
equity method of accounting for this investment, as management has determined that the Company has the ability to exercise significant influence over the
operating and financial decisions of Surface. Under this method, the Company recognizes earnings and losses in Surface in its consolidated financial
statements and adjusts the carrying amount of its investment in Surface accordingly. The Company’s share of earnings and losses are based on the
Company’s ownership interest of Surface. Any intra-entity profits and losses are eliminated. The Company recorded equity in the net loss of Surface of
$1,200 during the year ended December 31, 2019. The Company recorded equity in the net loss of Surface of $2,433 during the year ended December 31,
2020. As of December 31, 2020 and 2019, the carrying value of the Company’s investment in Surface was $1,314 and $3,747, respectively.
See Note 5 for more information and related party disclosure regarding Surface.
F-10
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated using the
straight-line method over the estimated useful life of the asset. Leasehold improvements and capital lease equipment are amortized over the estimated
useful life or remaining lease term, whichever is shorter. Computer software and hardware and furniture and equipment are depreciated over three to five
years.
Business Combinations
The Company accounts for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair values on the acquisition date. The purchase price allocation process requires management to make significant estimates and
assumptions, especially with respect to intangible assets, estimated contingent consideration payments and pre-acquisition contingencies. Examples of
critical estimates in valuing certain of the intangible assets the Company has acquired or may acquire in the future include but are not limited to:
● future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts, and acquired developed
technologies and patents; and
● discount rates utilized in valuation estimates.
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Additionally,
any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the
acquisition date, such as changes in our estimates of relevant revenue or other targets, will be recognized in earnings in the period of the estimated fair
value change. A change in fair value of the acquisition-related contingent consideration or the occurrence of events that cause results to differ from our
estimates or assumptions could have a material effect on the consolidated financial position, statements of operations or cash flows in the period of the
change in the estimate.
Goodwill and Intangible Assets
Patents and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks become more
certain. At that time, the Company capitalizes third-party legal costs and filing fees associated with obtaining and prosecuting claims related to its patents
and trademarks. Once the patents have been issued, the Company amortizes these costs over the shorter of the legal life of the patent or its estimated
economic life, generally 20 years, using the straight-line method. Trademarks are an indefinite life intangible asset and are assessed for impairment based
on future projected cash flows as further described below.
The Company reviews its goodwill and indefinite-lived intangible assets for impairment as of January 1 of each year and when an event or a change in
circumstances indicates the fair value of a reporting unit may be below its carrying amount. Events or changes in circumstances considered as impairment
indicators include but are not limited to the following:
● significant underperformance of the Company’s business relative to expected operating results;
● significant adverse economic and industry trends;
● significant decline in the Company’s market capitalization for an extended period of time relative to net book value; and
● expectations that a reporting unit will be sold or otherwise disposed.
The goodwill impairment test consists of a two-step process as follows:
Step 1. The Company compares the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting
unit is determined using a discounted cash flow valuation analysis. The carrying amount of each reporting unit is determined by specifically identifying and
allocating the assets and liabilities to each reporting unit based on headcount, relative revenues or other methods as deemed appropriate by management. If
the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company then
performs the second step of the impairment test. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required.
F-11
Step 2. If further analysis is required, the Company compares the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting
unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to its carrying amount. If the carrying amount of the
reporting unit’s goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet
and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group
classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material.
Park Restructuring
In August 2019, the Company’s subsidiary, Park Compounding, Inc. (“Park”), and Noice Rx, LLC (“Noice”) terminated an Asset Purchase Agreement
dated July 26, 2019 (the “Park Purchase Agreement”), between the parties. Under the terms of the Park Purchase Agreement, Park had agreed to sell
substantially all its assets associated with its non-ophthalmology pharmaceutical compounding business to Noice, including its pharmacy facility and
equipment located in Irvine, California. The closing of the sale transaction was dependent on the California State Board of Pharmacy approving of the sale
and issuing a temporary pharmacy and sterile license permit to Noice, which did not occur and led to Park ceasing operations at the close of business on
August 27, 2019. As a result, the Company restructured its Park business, ceased operations at its Irvine, California-based pharmacy, and facilitated the
transition of certain compounded formulations and related equipment from Park to the Company’s New Jersey-based compounded pharmaceutical
production facilities (the “Park Restructuring”). As a result of the Park Restructuring, the Company incurred non-cash impairment costs of approximately
$3,781 related to assets held at Park, primarily associated with property, plant, equipment, inventory, goodwill and other intangible assets, and $480 in one-
time costs related to severance packages and other costs associated with the Park Restructuring during the year ended December 31, 2019.
The Company has reduced the Park compounded product formulary to seven base formulations, based on factors including unit order volumes, revenues
and gross margin percentages, and ImprimisRx retained approximately half of Park’s historical revenues during the first quarter of 2020.
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.
● 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, 2020 and 2019, the Company measured its investment in Eton on a recurring basis. The Company’s investment in Eton is classified as
Level 1 as the fair value is determined using quoted market prices in active markets for the same securities. As of December 31, 2020 and 2019, the fair
market value of the Company’s investment in Eton was $28,455 and $25,200, respectively.
F-12
The Company’s financial instruments include cash and cash equivalents, restricted cash, investment in Eton, accounts receivable, accounts payable and
accrued expenses, accrued payroll and related liabilities, deferred revenue and customer deposits, loans payable and operating and finance lease liabilities.
The carrying amount of these financial instruments, except for loans payable and operating and finance lease liabilities, approximates fair value due to the
short-term maturities of these instruments. The Company’s restricted cash which is comprised of short-term investments are carried at amortized cost,
which approximates fair value. Based on borrowing rates currently available to the Company, the carrying values of the loans payable and operating and
finance lease liabilities approximate their respective fair values.
Stock-Based Compensation
All stock-based payments to employees, directors and consultants, including grants of stock options, warrants, restricted stock units (“RSUs”) and
restricted stock, are recognized in the consolidated financial statements based upon their estimated fair values. The Company uses the Black-Scholes-
Merton option pricing model and Monte Carlo simulation model to estimate the fair value of stock-based awards. The estimated fair value is determined at
the date of 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.
Basic and Diluted Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing income (loss) attributable to common stockholders for the period by the weighted
average number of common shares outstanding during the period. Diluted income (loss) per share is computed by dividing the income (loss) attributable to
common stockholders for the period by the weighted average number of common and common equivalent shares, such as stock options and warrants,
outstanding during the period.
Basic and diluted net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period.
Common stock equivalents (using the treasury stock or “if converted” method) from stock options, unvested restricted stock units (“RSUs”) and warrants
were 5,411,929 and 4,848,459 at December 31, 2020 and 2019, respectively, and are excluded in the calculation of diluted net income (loss) per share for
the periods presented, because the effect is anti-dilutive for that time period. Included in the basic and diluted net income (loss) per share calculation were
RSUs awarded to directors that had vested, but the issuance and delivery of the shares are deferred until the director resigns. The number of shares
underlying vested RSUs at December 31, 2020 and 2019 was 200,463 and 324,303, respectively.
The following table shows the computation of basic net income (loss) per share of common stock for the years ended December 31, 2020 and 2019 (in
000’s, except share and per share amounts):
For the Year Ended December 31,
2020
2019
Numerator – net (loss) income attributable to Harrow
Health, Inc.
Denominator – weighted average number of shares
outstanding, basic
Net (loss) income per share, basic
$
$
(3,357) $
168
25,895,352
(0.13) $
25,323,159
0.01
For the year end December 31, 2019, the Company computed diluted net income per share using the weighted-average number of common shares and
dilutive common equivalent shares outstanding during that period. Diluted common equivalent shares for the year ended December 31, 2019 consisted of
the following (in 000’s, except share and per share amounts):
Diluted shares related to:
Warrants
Stock options
Dilutive common equivalent shares
For the Year Ended
December 31, 2019
488,498
654,441
1,142,939
F-13
The following table shows the computation of diluted net income per share using the weighted-average number of common shares and dilutive common
equivalent shares outstanding for the year ended December 31, 2019 (in 000’s, except share and per share amounts):
Numerator – net income
Weighted average number of shares outstanding, basic
Dilutive common equivalents
Denominator – number of shares used for diluted earnings per share computation
Net income per share, diluted
Recently Adopted Accounting Pronouncements
For the Year Ended
December 31, 2019
$
$
168
25,323,159
1,142,939
26,466,098
0.01
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, which
requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred
loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. The Company adopted
ASU 2016-13 on January 1, 2020, and adoption of the standard did not have a material effect on the Company’s consolidated financial position, results of
operations and cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other. This guidance simplifies the accounting for goodwill impairment for all
entities by requiring impairment charges to be based on the first step in the current two-step impairment test under ASC 350. The updated standard
eliminates the requirement to calculate a goodwill impairment charge using Step 2. If a reporting unit’s carrying amount exceeds its fair value, an entity
will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.
The Company adopted ASU 2017-04 on January 1, 2020, and adoption of the standard did not have a material effect on the Company’s consolidated
financial position, results of operations and cash flows.
In August 2018, the FASB issued ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements, which improved the effectiveness of
disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements.
The Company adopted ASU 2018-13 on January 1, 2020, and adoption of the standard did not have a material effect on the Company’s consolidated
financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, which simplifies the accounting for
income taxes. This guidance will be effective for the Company in the first quarter of 2021 on a prospective basis, and early adoption is permitted. The
Company does not expect a material impact of the new guidance on its consolidated financial statements.
Reclassifications
Certain prior period items and amounts have been reclassified to conform to the classifications used to prepare the consolidated financial statements for the
year ended December 31, 2020. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations, or
cash flows as previously reported.
NOTE 3. REVENUES
The Company accounts for contracts with customers in accordance with ASC 606, Revenues from Contracts with Customers. The Company has three
primary streams of revenue: (1) revenue recognized from our sale of products within our pharmacy services (2) revenue recognized from a commission
agreement with a third party and (3) revenue recognized from intellectual property license and asset purchase agreements.
F-14
Product Revenues from Pharmacy Services
The Company sells prescription drugs directly through our pharmacy and outsourcing facility network. Revenue from our pharmacy services divisions
includes: (i) the portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the client, (ii) the price paid to
us by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are not included in revenue. Following the core
principles of ASC 606, we have identified the following:
1.
2.
Identify the contract(s) with a customer: A contract exists with a customer at the time the prescription or order is received by the Company.
Identify the performance obligations in the contract: The order received contains the performance obligations to be met, in almost all cases the product
the customer is wishing to receive. If we are unable to be meet the performance obligation the customer is notified.
3. Determine the transaction price: the transaction price is based on the product being sold to the customer, and any related customer discounts. These
amounts are pre-determined and built into our order management software.
4. Allocate the transaction price to the performance obligations in the contract: The transaction price associated with the product(s) being ordered is
allocated according to the pre-determined amounts.
5. Recognize revenue when (or as) the entity satisfies a performance obligation: At the time of shipment from the pharmacy or outsourcing facility the
performance obligation has been met.
The following revenue recognition policy has been established for the pharmacy services division:
Revenues generated from prescription or office use drugs sold by our pharmacies and outsourcing facility are recognized when the prescription is shipped.
At the time of shipment, the pharmacy services division has performed substantially all of its obligations under its client contracts and does not experience
a significant level of returns or reshipments. Determination of criteria (3) and (4) is based on management’s judgments regarding the fixed nature of the
selling prices of the products delivered and the collectability of those amounts. The Company records reductions to revenue for discounts at the time of the
initial sale. Estimated returns and allowances and other adjustments are provided for in the same period during which the related sales are recorded and are
based on actual returns history. The rate of returns is analyzed annually to determine historical returns experience. If the historical data we use to calculate
these estimates do not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made
and revenues in that period could be materially affected. The Company will defer any revenues received for a product that has not been delivered or is
subject to refund until such time that the Company and the customer jointly determine that the product has been delivered and no refund will be required.
Commission Revenues
During the year ended December 31, 2020, the Company entered into an agreement whereby it is paid a fee calculated based on sales it generates from a
pharmaceutical product that is owned by a third party. The revenue earned from this arrangement is recognized at the time a customer has ordered the
pharmaceutical product and it has shipped from the third party (or one of its distributors or affiliates), at which point there is no future performance
obligation required by the Company and no consequential continuing involvement on the part of the Company to recognize the associated revenue.
Intellectual Property License Revenues
The Company currently holds five intellectual property license and related agreements in which the Company has promised to grant a license or sale which
provides a customer with the right to access the Company’s intellectual property. License arrangements may consist of non-refundable upfront license fees,
data transfer fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and various
performance or sales milestones. These arrangements can be multiple-element arrangements, the revenue of which is recognized at the point of time the
performance obligation is met.
Non-refundable fees that are not contingent on any future performance by the Company and require no consequential continuing involvement on the part of
the Company are recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other
deliverable is delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations
and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications for such
compounded drug preparations. The Company defers recognition of non-refundable fees if it has continuing performance obligations without which the
technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and that are separate and
independent of the Company’s performance under the other elements of the arrangement. In addition, if the Company’s continued involvement is required,
through research and development services that are related to its proprietary know-how and expertise of the delivered technology or can only be performed
by the Company, then such non-refundable fees are deferred and recognized over the period of continuing involvement. Guaranteed minimum annual
royalties are recognized on a straight-line basis over the applicable term.
F-15
Revenue disaggregated by revenue source for the years ended December 31, 2020 and 2019, consists of the following:
Product sales, net
Commissions
License
Total revenues
For the Years Ended December 31,
2020
2019
$
$
48,479 $
356
36
48,871 $
51,137
-
28
51,165
Deferred revenue and customer deposits at December 31, 2020 and 2019, were $66 and $57, respectively. All deferred revenue and customer deposit
amounts at December 31, 2019 were recognized as revenue during the year ended December 31, 2020.
NOTE 4. INVESTMENT IN MELT PHARMACEUTICALS, INC. AND AGREEMENTS - RELATED PARTY TRANSACTIONS
In December 2018, the Company entered into an asset purchase agreement with Melt (the “Melt Asset Purchase Agreement”). Pursuant to the terms of the
Melt Asset Purchase Agreement, Melt was assigned certain intellectual property and related rights from the Company to develop, formulate, make, sell, and
sub-license certain Company conscious sedation and analgesia related formulations (collectively, the “Melt Products”). Under the terms of the Melt Asset
Purchase Agreement, Melt is required to make 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 January and March 2019, the Company entered into the Melt Series A Preferred Stock Agreement, see
also Note 2, under the subheading Investment in Melt Pharmaceuticals, Inc.
In February 2019, the Company and Melt entered into a Management Services Agreement (the “Melt MSA”), whereby the Company provides to Melt
certain administrative services and support, including bookkeeping, web services and human resources related activities, and Melt is required to pay the
Company a monthly amount of $10.
As of December 31, 2020 and 2019, the Company was due $851 and $722, respectively, from Melt for reimbursable expenses and amounts due under the
Melt MSA. Melt did not make any payments to the Company during the year ended December 31, 2020 and paid the Company $50 during the year ended
December 31, 2019.
The Company’s Chief Executive Officer, Mark L. Baum, and Chief Medical Officer, Larry Dillaha, are members of the Melt board of directors, and several
employees of the Company (including Mr. Baum, Mr. Dillaha and the Company’s Chief Financial Officer, Andrew Boll) entered into consulting
agreements and provide consulting services to Melt.
The unaudited condensed results of operations information of Melt is summarized below:
Revenues, net
Loss from operations
Net loss
For the Years Ended December 31,
2020
2019
$
$
- $
5,019
(5,019) $
-
4,381
(4,381)
The unaudited condensed balance sheet information of Melt is summarized below:
Current assets
Non current assets
Total assets
Total liabilities
Total preferred stock and stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2020
2019
$
$
$
$
2,947 $
11
2,958 $
1,778 $
1,180
2,958 $
F-16
7,449
5
7,454
1,691
5,763
7,454
NOTE 5. INVESTMENT IN SURFACE OPHTHALMICS, INC. AND AGREEMENTS - RELATED PARTY TRANSACTIONS
The Company entered into an asset purchase and license agreement with Surface in 2017 and amended it in April 2018 (the “Surface License
Agreements”). Pursuant to the terms of the Surface License Agreements, the Company assigned and licensed to Surface certain intellectual property and
related rights associated with Surface’s drug candidates (collectively, the “Surface Products”). Surface is required to make mid-single-digit royalty
payments to the Company on net sales of the Surface Products while any patent rights remain outstanding.
As of December 31, 2020, the Company owned 3,500,000 shares of Surface common stock (approximately 30% of the issued and outstanding equity
interests). A Company director, Richard L. Lindstrom, and the Company’s Chief Executive Officer, Mark L. Baum, are directors of Surface. Surface is
required to make royalty payments to Dr. Lindstrom of 3% of net sales of certain Surface Products while certain patent rights remain outstanding. Dr.
Lindstrom is also a principal of Flying L Partners, an affiliate of the funding investor who purchased the Surface Series A Preferred Stock. Several
employees and a director of the Company (including Mr. Baum and Dr. Lindstrom) entered into consulting agreements and provided consulting services to
Surface.
The unaudited condensed results of operations information of Surface is summarized below:
Revenues, net
Loss from operations
Net loss
For the Years Ended December 31,
2020
2019
$
$
- $
8,109
(8,109) $
-
4,000
(4,000)
The unaudited condensed balance sheet information of Surface is summarized below:
Current assets
Non current assets
Total assets
Total liabilities
Total stockholders’ equity
Total liabilities and stockholders’ equity
NOTE 6. RESTRICTED CASH
December 31,
2020
2019
9,074 $
45
9,119
1,666 $
7,453
9,119 $
15,942
47
15,989
619
15,370
15,989
$
$
$
The restricted cash at December 31, 2020 and 2019 consisted of funds held in a money market account. At December 31, 2020 and 2019, the restricted cash
was recorded at amortized cost, which approximates fair value.
At December 31, 2020 and 2019, the funds held in a money market account of $200 were classified as a current asset. The money market account funds are
required as collateral as additional security for the Company’s New Jersey facility lease.
NOTE 7. INVENTORIES
Inventories are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, commercial pharmaceutical
products, related laboratory supplies and active pharmaceutical ingredients. The composition of inventories as of December 31, 2020 and 2019 was as
follows:
Raw materials
Work in progress
Finished goods
Total inventories
December 31,
2020
2019
$
$
2,501 $
17
1,444
3,962 $
F-17
2,405
20
876
3,301
NOTE 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
Prepaid insurance
Other prepaid expenses
Deposits and other current assets
Total prepaid expenses and other current assets
NOTE 9. PROPERTY, PLANT AND EQUIPMENT
December 31,
2020
2019
$
$
160 $
401
190
751 $
123
358
105
586
Property, plant and equipment, net at December 31, 2020 and 2019 consisted of the following:
Property, plant and equipment, net:
Computer software and hardware
Furniture and equipment
Lab and pharmacy equipment
Leasehold improvements
Accumulated depreciation and amortization
December 31,
2020
2019
$
$
1,707 $
418
3,426
5,720
11,271
(6,818)
4,453 $
1,732
363
3,164
5,510
10,769
(5,394)
5,375
During the year ended December 31, 2020, the Company disposed of property, plant and equipment with a net book value of $105 related to the
discontinued use of certain computer software and hardware and was included within other (loss) income of the consolidated statements of operations. The
Company recorded depreciation and amortization expense of $1,880 and $1,936 during the years ended December 31, 2020 and 2019, respectively.
NOTE 10. INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets at December 31, 2019 consisted of the following:
Patents
Licenses
Trademarks
Customer relationships
Trade name
Non-competition clause
State pharmacy licenses
Amortization
periods
(in years)
17-19 years
20 years
Indefinite
3-15 years
5 years
3-4 years
25 years
$
$
Cost
Accumulated
amortization
Impairment
Carrying value
Net
1,102 $
50
340
3,000
16
294
45
4,847 $
(97) $
(5)
-
(1,165)
(14)
(274)
(9)
(1,564) $
(259) $
-
-
(630)
(2)
(20)
(35)
(946) $
746
45
340
1,205
-
-
1
2,337
During the year ended December 31, 2019, the Company incurred impairment charges of $612 related to intangible assets, including customer
relationships, trade name, and state pharmacy licenses as a part of the Park Restructuring and $259 of impairment charges related to patents associated with
the termination of an asset agreement.
F-18
The Company’s intangible assets at December 31, 2020 consisted of the following:
Patents
Licenses
Trademarks
Customer relationships
Trade name
Non-competition clause
State pharmacy licenses
Amortization
periods
(in years)
17-19 years
20 years
Indefinite
3-15 years
5 years
3-4 years
25 years
$
$
Cost
Accumulated
amortization
Impairment
Carrying value
Net
929 $
50
356
1,519
5
50
8
2,917 $
(93) $
(6)
-
(454)
(5)
(50)
(7)
(615) $
(363) $
-
-
-
-
-
-
(363) $
473
44
356
1,065
-
-
1
1,939
During the year ended December 31, 2020, the Company recorded impairment charges of $363 related to patent filings and trademarks that were
abandoned and/or were associated with products the Company was no longer actively selling.
Amortization expense for intangible assets for the years ended December 31, 2020 and 2019 were as follows:
Patents
Licenses
Customer relationships
Trade name
State pharmacy licenses
For the Years Ended
December 31,
2020
2019
$
$
32 $
1
134
-
-
167 $
48
5
151
1
4
209
Estimated future amortization expense for the Company’s intangible assets at December 31, 2020 is as follows:
Years ending December 31,
2021
2022
2023
2024
2025
Thereafter
187
187
187
160
147
715
1,583
$
There were no changes in the carrying value of the Company’s goodwill during the year ended December 31, 2020. Changes in the carrying value of the
Company’s goodwill during the year ended December 31, 2019 were as follows:
Balance at December 31, 2018
Impairment of Park goodwill (see Note 2)
Balance at December 31, 2019
$
$
2,227
(1,895)
332
NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2020 and 2019 consisted of the following:
Accounts payable
Other accrued expenses
Accrued interest (see Note 12)
Accrued exit fee for note payable (see Note 12)
Total accounts payable and accrued expenses
Less: Current portion
Non-current total accrued expenses
December 31,
2020
2019
$
$
3,645 $
49
238
800
4,732
(3,932)
800 $
F-19
7,409
49
244
800
8,502
(7,702)
800
NOTE 12. DEBT
SWK Senior Note – 2017
In July 2017, the Company entered into a term loan and security agreement in the principal amount of $16,000 (the “SWK Loan Agreement” or “SWK
Loan”) with SWK Funding LLC and its partners (“SWK”), as lender and collateral agent. The SWK Loan Agreement was fully funded at closing with a
five-year term, however, such term could be reduced to four years if certain revenue requirements are not achieved.
Prior to the loan refinance in May 2019 (see below), the SWK Loan bore interest at a variable rate equal to the three-month London Inter-Bank Offered
Rate (subject to a minimum of 1.50% and maximum of 3.00%), plus an applicable margin of 10.50%. The SWK Loan Agreement permitted the Company
to pay interest only on the principal amount borrowed thereunder for the first six payments (payments are due on a quarterly basis), which interest-only
period could have been reduced to four payments if the Company had not met certain minimum revenue requirements. Following the interest-only period,
the Company was required to pay interest, plus repayments of the principal amount borrowed under the SWK Loan Agreement, in quarterly payments,
which shall not exceed $750 per quarter. All amounts owed under the SWK Loan Agreement, including an exit fee equal to 5% of the aggregate principal
amount loaned thereunder, were originally due and payable on July 19, 2022. The Company is obligated under the SWK Loan Agreement to pay for certain
expenses incurred by SWK through and after the date of the SWK Loan Agreement, including certain fees and expenses relating to the preparation and
administration of the SWK Loan Agreement. The Company incurred expenses and an exit fee of approximately $1,282 in connection with the SWK Loan
Agreement. The exit fee and expenses were recorded as a debt discount and are being amortized as interest expense over the term of the SWK Loan using
the effective interest rate method and the related liability of $800 for the exit fee is included in accrued expenses (see Note 11) in the accompanying
consolidated balance sheets as of December 31, 2020 and 2019.
In connection with the SWK Loan Agreement, the Company issued to SWK warrants to purchase up to 415,586 shares of the Company’s common stock
(the “Lender Warrants”) with an exercise price of $3.08. In August 2017, the Company and SWK amended the warrants, to allow for the purchase of up to
615,386 warrants with an exercise price of $2.08. The Lender Warrants are exercisable immediately, and have a term of seven years. The Lender Warrants
are subject to a cashless exercise feature, with the exercise price and number of shares issuable upon exercise subject to change in connection with stock
splits, dividends, reclassifications and other conditions. The relative fair value of the Lender Warrants was approximately $982 and was estimated using the
Black-Scholes-Merton option pricing model with the following assumptions: fair value of the Company’s common stock at issuance of $2.08 per share;
seven-year contractual term; 113.5% volatility; 0% dividend rate; and a risk-free interest rate of 1.77%. The relative fair value of the Lender Warrants was
recorded as a debt discount which is being amortized as interest expense over the term of the SWK Loan using the effective interest rate method.
SWK Refinance – May 2019
In May 2019, the Company entered into a joinder and amendment (the “Amendment”) to the SWK Loan and with SWK, as lender and collateral agent. A
summary of the material changes contained in the Amendment are as follows:
● The interest rate calculation that the loan bears is now equal to the three-month London Inter-Bank Offered Rate (subject to a minimum of 2.00%),
plus an applicable margin of 10.00% (the “Margin Rate”); provided that, if, two days prior to a payment date, the Company provides SWK
evidence that the Company has achieved a leverage ratio as of such date of less than 4.00:1:00, the Margin Rate shall equal 9.00%; and if the
Company has achieved a leverage ratio as of such date of less than 3.00:1:00, the Margin Rate shall equal 7.00%;
● Leverage ratio in the Amendment means, as of any date of determination, the ratio of: (a) indebtedness as of such date to (b) EBITDA (as defined
in the SWK Loan), of the Company for the immediately preceding twelve (12) month period, adding-back (i) actual litigation expenses for the
immediately preceding twelve (12) month period, minus (ii) actual litigation expenses for the immediately preceding three (3) month period
multiplied by four (4);
● The definition of the first amortization date was changed to May 14, 2020, permitting the Company to pay interest only on the principal amount
loaned for the next four payments (payments are due on a quarterly basis) following the Amendment;
● Subject to the satisfaction of certain revenue and market capitalization requirements and conditions, SWK agreed to make available to the
Company an additional principal amount of up to $5,000; and
● The maturity date was changed to July 19, 2023.
F-20
Related to the Amendment, the Company incurred expenses related to legal and lender costs of $282 that are included in debt discount and will be
amortized over the remaining term of the SWK Loan.
In addition to the terms described above, the Amendment joined the Company’s recently created subsidiaries to the SWK Loan and added definitions
related to excluded subsidiaries that are not considered co-borrowers and are subsidiaries of the Company which the Company believes it will eventually
deconsolidate from its financial statements and lose 50% or more of the equity interests of the subsidiary.
Second Amendment to SWK Loan
On April 1, 2020, the Company and several of its wholly owned subsidiaries entered into a second amendment (the “SWK Second Amendment”) to the
SWK Loan with SWK. A summary of the material changes contained in the SWK Second Amendment are as follows:
● SWK agreed to make available to the Company, and the Company drew down on, an additional principal amount of $1,000;
● The definition of the first amortization date was changed to August 14, 2020, permitting the Company to pay interest only on the principal amount
loaned for the next payment (payments are due on a quarterly basis) following the SWK Second Amendment; and
● The interest payment of $358 due May 14, 2020 was paid in-kind by increasing the principal amount of the term loans by an amount equal to the
interest accrued as of such date.
Interest expense related to the SWK Loan Agreement, as amended, amounted to $1,768 and $1,960 for the years ended December 31, 2020 and 2019,
respectively, and included amortization of debt issuance costs and discount of $457 and $512 for the years ended December 31, 2020 and 2019,
respectively.
Paycheck Protection Program Loan
In April 2020, the Company entered into an unsecured promissory note and related Business Loan Agreement with Renasant Bank, as lender, for a loan (the
“PPP Loan”) in the principal amount of $1,967 and received cash proceeds of the same amount, pursuant to the Paycheck Protection Program (the “PPP”)
under the Federal Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted March 27, 2020. The PPP is administered
by the U.S. Small Business Administration (the “SBA”).
Under the terms of the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the PPP Loan is two years, unless
payment is sooner required in connection with an event of default under the PPP Loan. To the extent the PPP Loan amount is not forgiven under the PPP,
the Company is obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the PPP Loan, until the
maturity date.
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company applied for forgiveness
for all of the PPP Loan during the year ended December 31, 2020, however the SBA has not made a decision related to the Company’s application for
forgiveness. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of
loan proceeds used by the Company during the 24-week period after the loan origination for certain purposes including payroll costs, interest on certain
mortgage obligations, rent payments on certain leases, and certain qualified utility payments (it being anticipated that at least 75% of the loan amount will
be required to be used for eligible payroll costs); the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other
factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible expenses during the
covered twenty-four-week period will qualify for forgiveness. While the Company has used proceeds from the PPP Loan for such qualifying expenses, in
particular maintaining continuity of its payroll and workforce (including staff critical to the timely production and dispensing of medicines the Company
produces), no assurance can be provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. No interest expense was recognized
for the year ended December 31, 2020 related to the PPP Loan.
F-21
At December 31, 2020, future minimum payments under the Company’s debt were as follows:
2021
2022
2023
Total minimum payments
Less: amount representing interest
Notes payable, gross
Less: unamortized discount
Notes payable
Less: current portion, net of unamortized discount
Note payable, net of current portion and unamortized debt discount
NOTE 13. LEASES
Amount
5,794
4,700
9,511
20,005
(2,927)
17,078
(802)
16,276
(3,898)
12,378
$
$
The Company leases office and laboratory space under the non-cancelable operating leases listed below. These lease agreements have remaining lease
terms between one to four years and contain various clauses for renewal at the Company’s option.
● An operating lease for 10,200 square feet of office space in San Diego, California, that expires in December 2021, with an option to extend the
term for a five-year period;
● An operating lease for 26,400 square feet of lab, warehouse and office space in Ledgewood, New Jersey, that expires in July 2026, with an option
to extend the term for two additional five-year periods. This includes an amendment that was made effective July 2020 that extended the term of
the original lease and added 1,400 of additional square footage to the lease; and
● An operating lease for 5,500 square feet of office space in Nashville, Tennessee, that expires in December 2024, with an option to extend the term
for two additional five-year periods.
During the year ended December 31, 2020, the Company terminated its operating lease for 4,500 square feet of office and lab space in Irvine, California,
that had an expiration date in December 2020. In connection with the termination, the Company recorded a gain of $4 which was recognized in other
income (expense) on the consolidated statements of operations.
At December 31, 2020 and 2019, the weighted-average discount rate and the weighted-average remaining lease term for the operating leases held by the
Company were 6.3% and 6.3% and 11.2 and 10.21 years, respectively.
During the years ended December 31, 2020 and 2019, cash paid for amounts included for the operating lease liabilities was $1,052 and $905, respectively,
and the Company recorded operating lease expense of $1,066 and $892, respectively, included in selling, general and administrative expenses.
Future lease payments under operating leases (including options to extend) as of December 31, 2020 were as follows:
2021
2022
2023
2024
2025
Thereafter
Total minimum lease payments
Less: amount representing interest payments
Total operating lease liabilities
Less: current portion, operating lease liabilities
Operating lease liabilities, net of current portion
Operating Leases
1,017
$
1,038
1,064
1,090
916
5,141
10,266
(3,034)
7,232
(580)
6,652
$
The Company also has a finance lease for equipment which requires monthly payments of $1 through January 2024.
F-22
Future lease payments under the finance lease as of December 31, 2020 were as follows:
2021
2022
2023
2024
Total minimum lease payments
Less: amount representing interest payments
Present value of future minimum lease payments
Less: current portion, finance lease obligation
Finance lease obligation, net of current portion
Finance Lease
$
$
9
9
9
1
28
(3)
25
(8)
17
At December 31, 2020 and 2019, the weighted-average discount rate and the weighted-average remaining lease term for the finance lease held by the
Company were 6.36% and 6.36% and 3.08 and 4.08 years, respectively.
For the years ended December 31, 2020 and 2019:
● debt discount amortization related to a finance lease obligation was $0 and $17, respectively;
● amortization expense related to the equipment held under the finance lease obligations was $8 and $150, respectively; and
● cash paid and expense recognized for interest expense related to the finance lease obligation was $2 and $18, respectively.
NOTE 14. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Common Stock
At December 31, 2020 and 2019, the Company had 50,000,000 shares of common stock, $0.001 par value, authorized, respectively.
Issuances During the Year Ended December 31, 2019
During the year ended December 31, 2019:
● the Company issued 15,000 shares of its restricted common stock, with a fair value of $75, as consideration for commission expenses incurred
during the year ended December 31, 2018;
● the Company issued 27,671 shares of its common stock upon the cashless exercise of options to purchase 82,929 shares of common stock, with
exercise prices ranging from $1.70 to $4.17 per share, net of 8,806 shares of common stock withheld for payroll tax withholdings totaling $50;
● the Company issued 2,122 shares of its common stock upon the exercise of options to purchase 2,122 shares of common stock, with exercise
prices ranging from $1.70 to $3.20 per share, and received net proceeds of $6;
● the Company issued 688,473 shares of its common stock upon the cashless exercise of warrants to purchase 964,532 shares of common stock with
an exercise price of $1.79 per share;
● the Company issued 454,055 shares of its common stock upon the exercise of warrants to purchase 454,055 shares of common stock with an
exercise price of $1.79 per share, and received net proceeds of $813; and
● the Company issued 87,610 shares of its common stock underlying RSUs issued to directors vested, but the issuance and delivery of these shares
are deferred until the director resigns.
F-23
Issuances During the Year Ended December 31, 2020
During the year ended December 31, 2020:
● the Company issued 30,000 shares of its restricted common stock, with an initial fair value of $167, as consideration for commission expenses
incurred during the year ended December 31, 2019 and the year ended December 31, 2020;
● the Company issued 4,161 shares of its common stock upon the cashless exercise of options to purchase 16,750 shares of common stock, with
exercise prices ranging from $1.70 to $4.05 per share, net of 3,564 shares of common stock withheld for payroll tax withholdings;
● the Company issued 2,998 shares of its common stock upon the exercise of options to purchase 2,998 shares of common stock, with exercise
prices ranging from $3.04 to $3.20 per share, and paid $8 related to payroll tax withholdings;
● the Company issued 185,785 shares of its common stock underlying RSUs held by directors that resigned. The RSUs had previously vested,
including 26,721 RSUs during the year ended December 31, 2020, but the issuance and delivery of the shares were deferred until the director
resigned; and
● 35,224 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 resignation of a director.
Preferred Stock
At December 31, 2020 and 2019, the Company had 5,000,000 shares of preferred stock, $0.001 par value, authorized and no shares of preferred stock
issued and outstanding.
Stock Option Plan
On September 17, 2007, the Company’s Board of Directors and stockholders adopted the Company’s 2007 Incentive Stock and Awards Plan, which was
subsequently amended on November 5, 2008, February 26, 2012, July 18, 2012, May 2, 2013 and September 27, 2013 (as amended, the “2007 Plan”). The
2007 Plan reached its term in September 2017, and we can no longer issue additional awards under this plan, however, options previously issued under the
2007 Plan will remain outstanding until they are exercised, reach their maturity or are otherwise cancelled/forfeited. On June 13, 2017, the Company’s
Board of Directors and stockholders adopted the Company’s 2017 Incentive Stock and Awards Plan (the “2017 Plan” together with the 2007 Plan, the
“Plans”). As of December 31, 2020, the 2017 Plan provides for the issuance of a maximum of 2,000,000 shares of the Company’s common stock. The
purpose of the Plans are to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a
sense of proprietorship and to stimulate an active interest of such persons in the Company’s development and financial success. Under the Plans, the
Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, non-qualified stock options,
restricted stock units and restricted stock. The Plans are administered by the Compensation Committee of the Company’s Board of Directors. The Company
had 342,882 shares available for future issuances under the 2017 Plan at December 31, 2020.
Stock Options
A summary of stock option activity under the Plan for the year ended December 31, 2020 is as follows:
Options outstanding - January 1, 2020
Options granted
Options exercised
Options cancelled/forfeited
Options outstanding - December 31, 2020
Options exercisable
Options vested and expected to vest
Number of shares
2,656,683
414,500
(19,748)
(21,402)
3,030,033
1,908,849
2,918,298
$
$
$
$
$
$
$
Weighted Avg.
Exercise Price
Weighted Avg.
Remaining
Contractual Life
Aggregate
Intrinsic Value
5.31
6.44
3.19
12.77
5.43
4.49
5.37
5.72 $
5.25 $
5.69 $
5,569
5,051
5,519
The aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would have been received
by option holders if all option holders had exercised and immediately sold all options with an exercise price lower than the market price on December 31,
2020, based on the closing price of the Company’s common stock of $6.86 on that date.
The intrinsic value of the options exercised in 2020 was $50.
F-24
During the year ended December 31, 2020, the Company granted stock options to certain employees and a consultant. The stock options were granted with
an exercise price equal to the current market price of the Company’s common stock, as reported by the securities exchange on which the common stock
was then listed, at the grant date and have contractual terms of 10 years. Vesting terms for options granted to employees and consultants during the year
ended December 31, 2020 generally included one of the following vesting schedules: 25% of the shares subject to the option vest and become exercisable
on the first anniversary of the grant date and the remaining 75% of the shares subject to the option vest and become exercisable quarterly in equal
installments thereafter over three years; and 100% of the shares subject to the option vest on a quarterly basis in equal installments over three years. Certain
option awards provide for accelerated vesting if there is a change in control (as defined in the Plans) and in the event of certain modifications to the option
award agreement.
On July 31, 2015, the Company granted to its Chief Executive Officer, Mark Baum, an option to purchase 600,000 shares of the Company’s common stock
(the “Baum Performance Option”) at an exercise price of $7.87 per share under the 2007 Plan subject to the satisfaction of certain market-based vesting
criteria. The market-based vesting criteria are separated into five tranches and require that the Company achieve and maintain certain average stock price
targets ranging from $9 per share to $15 per share during the five year period following the grant date. On June 4, 2020, the Company amended the Baum
Performance Option, to extend the vesting and contractual term by 5 years. The Company treated this amendment as a modification to the Baum
Performance Option for accounting purposes. The fair value of the modification was $1,876 using a Monte Carlo simulation model with a five-year life,
70% volatility and a risk-free interest rate of 0.40%.
With the exception of the Baum Performance Option, the fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton
option pricing model. Beginning on April 1, 2019, the Company began calculating expected volatility based solely on the historical volatilities of the
common stock of the Company. Prior to April 1, 2019, the expected volatility was based on the historical volatilities of the common stock of the Company
and comparable publicly traded companies. The Company previously utilized this methodology based on its estimate that it had limited relevant historical
data regarding the volatility of its stock price on which to base a meaningful estimate of expected volatility. The expected term of options granted was
determined in accordance with the “simplified approach,” as the Company has limited, relevant, historical data on employee exercises and post-vesting
employment termination behavior. The expected risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of
the option in effect at the time of the grant. The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the
actual effect differs from those estimates. For option grants to employees and directors, the Company assigns a forfeiture factor of 10%. These factors
could change in the future, which would affect the determination of stock-based compensation expense in future periods. Utilizing these assumptions, the
fair value is determined at the date of grant.
The table below illustrates the fair value per share determined using the Black-Scholes-Merton option pricing model with the following assumptions used
for valuing options granted to employees:
Weighted-average fair value of options granted
Expected terms (in years)
Expected volatility
Risk-free interest rate
Dividend yield
$
2020
3.86
0.50 - 6.11
$
67 – 71%
0.34 – 1.64%
-
2019
3.72
5.07 - 7.00
64 - 78%
1.83 – 2.68%
-
The following table summarizes information about stock options outstanding and exercisable at December 31, 2020:
Range of Exercise Prices
$1.47 - $2.60
$3.04 - $4.50
$5.49 - $6.36
$6.64 - $8.99
$1.47 - $8.99
Weighted
Average
Remaining
Contractual
Life in Years
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Number
Exercisable
5.64 $
5.75 $
7.22 $
5.17 $
5.72 $
2.06
3.98
6.10
7.85
5.43
745,255 $
438,873 $
291,919 $
432,802 $
1,908,849 $
2.06
3.98
6.13
8.09
4.49
Number
Outstanding
770,440
517,002
496,350
1,246,241
3,030,033
As of December 31, 2020, there was approximately $2,794 of total unrecognized compensation expense related to unvested stock options granted under the
Plan. That expense is expected to be recognized over the weighted-average remaining vesting period of 3.96 years. The stock-based compensation for all
stock options was $1,579 and $889 during the years ended December 31, 2020 and 2019, respectively.
Restricted Stock Units
RSU awards are granted subject to certain vesting requirements and other restrictions, including performance and market-based vesting criteria. The grant-
date fair value of the RSUs, which has been determined based upon the market value of the Company’s common stock on the grant date, is expensed over
the vesting period of the RSUs.
F-25
Grants During the Year Ended December 31, 2019
During the year ended December 31, 2019, 185,000 RSUs with a fair market value of $1,139 were issued to certain employees; the RSUs vest in full on the
third anniversary of the grant date.
During the year ended December 31, 2019, the Company’s board of directors were granted 38,860 RSUs with a fair market value of $300 which vests on a
quarterly basis, over a one-year term in equal installments, subject to the director’s continued service at the vesting date, but the issuance and delivery of
these shares are deferred until the director resigns.
A summary of the Company’s RSU activity and related information for the year ended December 31, 2019 is as follows:
RSUs unvested - January 1, 2019
RSUs granted
RSUs vested
RSUs cancelled/forfeited
RSUs unvested at December 31, 2019
Grants During the Year Ended December 31, 2020
Number of RSUs
Weighted Average
Grant
Date Fair Value
1,275,680 $
223,860 $
(87,610) $
-
1,411,930 $
2.16
6.43
3.42
2.76
During the year ended December 31, 2020, 161,000 RSUs with a fair market value of $1,025 were issued to certain employees; the RSUs vest in full on the
third anniversary of the grant date.
During the year ended December 31, 2020, the Company’s board of directors were granted 90,524 RSUs with a fair market value $511 which vest on a
quarterly basis, over a one-year term in equal installments, subject to the director’s continued service at the vesting date, but the issuance and delivery of
these shares are deferred until the director resigns.
A summary of the Company’s RSU activity and related information for the year ended December 31, 2020 is as follows:
RSUs unvested - January 1, 2020
RSUs granted
RSUs vested
RSUs cancelled/forfeited
RSUs unvested at December 31, 2020
Number of RSUs
Weighted Average
Grant
Date Fair Value
1,411,930 $
251,524 $
(61,945) $
-
1,601,509 $
2.76
6.11
6.46
3.14
As of December 31, 2020, the total unrecognized compensation expense related to unvested RSUs was approximately $1,363 which is expected to be
recognized over a weighted-average period of 3.14 years, based on estimated vesting schedules. The stock-based compensation for RSUs was $1,167 and
$879 during the years ended December 31, 2020 and 2019, respectively.
Subsidiary Stock-Based Transactions
Mayfield Pharmaceuticals, Inc. - 2019
During the year ended December 31, 2019:
● Mayfield issued 1,000,000 shares of its common stock to Elle in connection with the acquisition of certain drug candidate intellectual property and
rights in February 2019;
● Mayfield issued 300,000 shares of its common stock to TGV in connection with the acquisition of certain drug candidate intellectual property and
rights in July 2019; and
● the Company recognized $26 in stock-based compensation related to equity instruments granted by Mayfield for 2,450,000 shares of its restricted
common stock that vest upon various performance based milestones and service periods to consultants of Mayfield, including Mayfield’s CEO
candidate and to Harrow employees, including 725,000 shares to Mark Baum, CEO of the Company, and 362,500 shares to Andrew Boll, CFO of
the Company.
F-26
Mayfield Pharmaceuticals, Inc. - 2020
During the year ended December 31, 2020:
● Mayfield repurchased 650,000 shares of its common stock from Elle, for an aggregate purchase price of $1;
● 500,000 shares of Mayfield’s restricted common stock were forfeited by a consultant; and
● Mayfield issued 475,000 shares of its restricted common stock, with a fair value of $11, that vest upon various performance-based milestones and
over a four-year service period to Mayfield’s Chief Executive Officer candidate.
During the year ended December 31, 2020, the Company recognized $20 in stock-based compensation for Mayfield stock options.
Stowe Pharmaceuticals, Inc. - 2019
In July 2019, Stowe agreed to issue 1,750,000 shares of its common stock to TGV in connection with the acquisition of certain drug candidate intellectual
property and rights.
Visionology, Inc. - 2020
During the year ended December 31, 2020, Visionology granted 2,000,000 shares of its restricted common stock, with a fair value of $96 that vest upon
various performance based milestones and service periods to consultants of Visionology, including Visionology’s CEO candidate and to Harrow employees,
including 700,000 shares to Mark Baum, CEO of the Company, and 350,000 shares to Andrew Boll, CFO of the Company.
The Company recorded stock-based compensation (including issuance of common stock for services and accrual for stock-based compensation) related to
equity instruments granted to employees, directors and consultants as follows:
Employees – selling, general and administrative
Directors – selling, general and administrative
Consultants – selling, general and administrative
Total
Warrants
For the Years Ended December 31,
2020
2019
$
$
2,289 $
473
96
2,858 $
1,464
300
259
2,023
From time to time, the Company issues warrants to purchase shares of the Company’s common stock to investors, lenders (see Note 12), underwriters and
other non-employees for services rendered or to be rendered in the future.
A summary of warrant activity during the year ended December 31, 2020 is as follows:
Number of Shares Subject
to Warrants Outstanding
Weighted Avg. Exercise
Price
Warrants outstanding - January 1, 2020
Granted
Exercised
Expired
Warrants outstanding and exercisable - December 31, 2020
Weighted average remaining contractual life of the outstanding warrants in years - December
31, 2020
780,386 $
-
-
-
780,386 $
3.53
2.12
-
-
2.12
All warrants outstanding as of December 31, 2020 are included in the following table:
Warrant Series
Lender warrants
Settlement warrants
Lender warrants (see Note 12)
Issue Date
5/11/2015
8/16/2016
7/19/2017
Warrants Outstanding
Warrants
Outstanding
125,000
40,000
615,386
780,386
$
$
$
$
F-27
Warrants Exercisable
Exercise
Price
Warrants
Exercisable
1.79
3.75
2.08
2.12
125,000
40,000
615,386
780,386
Expiration
Date
5/11/2025
8/16/2021
7/19/2024
NOTE 15. INCOME TAXES
The Company is subject to taxation in the United States, California, Florida, Georgia, Illinois, New Jersey, New York, Tennessee and Wisconsin. The
Company’s income tax provision consists of the following:
Current:
Federal
State
Total current expense
Deferred:
Federal
State
Change in valuation allowance
Total deferred expense
Income tax provision
December 31,
2020
2019
$
$
- $
4
4
(771)
138
633
-
4 $
-
8
8
669
(148)
(521)
-
8
A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income tax provision to the income
tax provision is as follows:
U.S. federal statutory tax rate
State tax benefit, net
Stock-based compensation
Other
Valuation allowance
Effective income tax rate
December 31,
2020
2019
21.00%
(0.11)%
5.52%
(0.38)%
(26.14)%
(0.11)%
21.00%
(6.73)%
3.10%
(358.67)%
334.57%
(6.73)%
Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows:
Deferred tax assets (liabilities):
NOL’s
Depreciation and amortization
Other
Research and development credits
Deferred stock-based compensation
Basis difference in Melt
Basis difference in Surface
Basis difference in Eton
Capital losses
Park stock purchase identifiable intangibles
Limitation under 163(j)
ASC 842 lease liability
ASC 842 ROU asset
Total deferred tax assets, net
Valuation allowance
Net deferred tax assets
December 31,
2020
2019
19,685 $
528
413
596
4,024
(398)
(502)
(8,626)
63
(274)
195
2,192
(2,061)
15,835
(15,835)
- $
19,827
224
641
596
3,533
(1,119)
(1,185)
(7,528)
63
(270)
299
2,082
(1,959)
15,202
(15,202)
-
$
$
F-28
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance. The valuation allowance increased by $633 and decreased by $521 during 2020 and 2019,
respectively.
At December 31, 2020, the Company has federal and state net operating loss carryforwards of approximately $62,856 and $60,908 which will begin to
expire in 2027, unless previously utilized, and will begin to expire for state purposes in 2026. In addition, the Company has federal net operating loss
carryforwards of $3,865 generated after 2017 that can be carried over indefinitely and may be used to offset up to 80% of federal taxable income. At
December 31, 2020, the Company has federal and state research and development tax credits of approximately $354 and $305, respectively. The federal
research tax credit begins to expire in 2026, unless previously utilized, and the state research and development tax credit has no expiration date.
Utilization of the net operating loss (“NOL”) and research and development (“R&D”) carryforwards maybe subject to a substantial annual limitation due to
ownership change limitations that might have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986,
as amended (the “Code”), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit
carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by
Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than
50 percentage points of the outstanding stock of a company by certain stockholders or public groups. Since the Company’s formation, the Company has
raised capital through the issuance of capital stock on several occasions which, combined with the purchasing stockholders’ subsequent disposition of those
shares, may have resulted in such an ownership change, or could result in an ownership change in the future upon subsequent disposition.
The Company has not completed a study to assess whether an ownership change or changes have occurred. If the Company has experienced an ownership
change, utilization of the NOL or R&D credit carryforwards would be subject to an annual limitation under Section 382 of the Code, which is determined
by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be
subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before
utilization. Further, until a study is complete and any limitation is known, no amounts are being considered as an uncertain tax position or disclosed as an
unrecognized tax benefit. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with
a corresponding reduction of the valuation allowance.
As of December 31, 2020 and 2019, there were no unrecognized tax benefits included in the consolidated balance sheets that would, if recognized, affect
the effective tax rate. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company
had no accrual for interest or penalties in its consolidated balance sheets at December 31, 2020 and 2019, and has not recognized interest and/or penalties in
the consolidated statements of operations for the years ended December 31, 2020 and 2019. The Company’s tax years since 2000 may be subject to
examination by the federal and state tax authorities due to the carryforward of unutilized net operating losses.
F-29
NOTE 16. EMPLOYEE SAVINGS PLAN
The Company has established an employee savings plan pursuant to Section 401(k) of the Internal Revenue Code, effective January 1, 2014. The plan
allows participating employees to deposit into tax deferred investment accounts up to 100% of their salary, subject to annual limits. The Company makes
certain matching contributions to the plan in amounts up to 4% of the participants’ annual cash compensation, subject to annual limits. The Company
contributed approximately $272 and $312 to the plan during the years ended December 31, 2020 and 2019, respectively.
NOTE 17. COMMITMENTS AND CONTINGENCIES
Legal
Dr. Sobol
In December 2016, Louis L. Sobol, M.D. (“Sobol”) filed a lawsuit in the U.S. District Court for the Eastern District of Michigan, Southern Division against
the Company, asserting claims on behalf of himself and an as-yet-uncertified class of consumers. The claims allege violations under the Telephone
Consumer Protection Act, 47 U.S.C. § 227 via the Company’s alleged transmittal of advertisements to its clients via facsimile. The Court approved the
parties’ proposed settlement agreement in the spring of 2019. During the year ended December 31, 2018, the Company accrued $640 for expected damages
related to this matter and the proposed settlement amount. As a result of the low claim rate of approximately 1.4%, the Company’s total damages were
$571, which was paid in October 2019. This formally resolved all known disputes between the parties.
Allergan USA
In September 2017, Allergan USA, Inc. (“Allergan”) filed a lawsuit in the U.S. District Court for the Central District of California against the Company,
primarily claiming violations under the federal Lanham Act and California’s Sherman Act. The Court granted in part and denied in part each parties’
motions for summary judgement, resolving all issues except for whether Allergan was entitled to damages related to the Company’s purported Lanham Act
violations. The parties went to trial in May 2019 to litigate damages related to the Lanham Act, and a jury found the Company liable for only $49 in lost
profit damages, which was accrued as an expense during the year ended December 31, 2019 (see Note 11). In July 2019, the Court entered a permanent
injunction, the scope of which is limited to compounded drugs prepared in, dispensed from within, or shipped to the state of California. The injunction
requires the Company to: (1) only dispense drugs from a 503(a) facility with a “Valid Prescription Order”; (2) abide by the FDA’s anticipatory
compounding guidelines; and (3) only use bulk drug substances identified on a list established by the Secretary of Health and Human Services or FDA’s
interim “Category 1” list. The Company believes it was already in compliance with the order, prior to the injunction being ordered. On October 2, 2019,
Allergan and the Company filed a joint stipulation to voluntarily dismiss each parties’ respective pending appeals arising out of the lawsuit. No economic
consideration was exchanged between the parties related to the filing of the joint stipulation. This formally resolved all known disputes between the parties.
California Board of Pharmacy
In March 2018, the California Board of Pharmacy filed an accusation against Park related to a compounded formulation the Company believes was legally
dispensed and was, without its knowledge, inappropriately administered to a patient unknown to Park, by the prescribing healthcare professional. Park filed
a response to the accusation and requested a formal hearing. In April 2019, Park agreed to, and the California State Board of Pharmacy approved terms of a
settlement agreement (the “Settlement Agreement”) that became effective on May 29, 2019. Pursuant to the terms of the Settlement Agreement, Park was
required to, and did, surrender its California pharmacy license by August 27, 2019. This formally resolved all known disputes between the parties.
Novel Drug Solutions et al.
In April 2018, Novel Drug Solutions, LLC and Eyecare Northwest, PA (collectively “NDS”) filed a lawsuit against the Company in the U.S. District Court
of Delaware asserting claims for breach of contract. The claims stem from an asset purchase agreement between the Company and NDS entered into in
2013. In July 2019, NDS filed a second amended complaint which added a claim related to its purported termination of the APA. In October 2019, NDS
voluntarily dismissed all claims related to breach of contract, leaving only claims related to the scope of the post-termination obligations to be litigated. On
October 29, 2020, at a hearing on the various dispositive motions before it, the Court found that there were triable issues of fact and reopened discovery for
limited purposes. NDS is seeking unspecified damages, interest, attorney’s fees and other costs. The Company believes the claims are meritless and has
previously and will continue to dispute all claims asserted against it and intends to vigorously defend against these allegations. Nonetheless, the Company
cannot predict the eventual outcome of this litigation and it could result in substantial costs, losses and a diversion of management’s resources and
attention, which could harm the Company’s business and the value of its common stock.
F-30
Product and Professional Liability
Product and professional liability litigation represents an inherent risk to all firms in the pharmaceutical and pharmacy industry. We utilize traditional third-
party insurance policies with regard to our product and professional liability claims. Such insurance coverage at any given time reflects current market
conditions, including cost and availability, when the policy is written.
John Erick et al.
In January 2018, John Erick and Deborah Ferrell, successors-in-interest and heirs of Jade Erick, (collectively “Erick”) filed a lawsuit in the San Diego
County Superior against Kim Kelly, ND, MPH asserting claims related to the death of Jade Erick. In April 2018, Erick filed an amendment to the lawsuit,
naming the Company as a co-defendant. In September 2018, co-defendant Dr. Kelly filed a cross-complaint against the Company and various entities
affiliated with Spectrum Laboratory Products, Inc., Spectrum Chemical Manufacturing Corp. and Spectrum Pharmacy Products, Inc. (collectively
“Spectrum”). The cross-complaint seeks indemnity and contribution from the Company and Spectrum. The Company answered the claims filed by Dr.
Kelly in October 2018. The case is currently in the discovery phase. Erick is seeking unspecified damages, interest, attorney’s fees and other costs. The
Company believes the claims are meritless and has previously and will continue to dispute all claims asserted against it and intends to vigorously defend
against these allegations. Nonetheless, the Company cannot predict the eventual outcome of this litigation, it could result in substantial costs, losses and a
diversion of management’s resources and attention, which could harm the Company’s business and the value of its common stock.
Anna Sue Gaukel et al.
In June 2019, Anna Sue Gaukel and Lawrence Gaukel served the Company with a lawsuit filed in state court in Idaho against Imprimis Pharmaceuticals,
Inc. asserting class action allegations and product liability claims related to Mrs. Gaukel’s doctor’s use of a compounded drug injection in each of her eyes.
In June 2019, the Company removed the case to Federal Court and subsequently answered the complaint. On January 24, 2019, the plaintiffs and the
Company filed a joint stipulation, and the case was dismissed with prejudice. No economic consideration was exchanged between the parties related to the
filing of the joint stipulation. This formally resolved all known disputes between the parties as connected to this matter.
General and Other
In the ordinary course of business, the Company may face various claims brought by third parties and it may, from time to time, make claims or take legal
actions to assert its rights, including intellectual property disputes, contractual disputes and other commercial disputes. Any of these claims could subject
the Company to litigation.
Indemnities
In addition to the indemnification provisions contained in the Company’s 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. 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 consolidated balance sheets.
Sales and Marketing Agreements
The Company has entered various sales and marketing agreements with certain organizations, to provide sales and marketing representation services to
ImprimisRx in select geographies in the U.S., in connection with the Company’s ophthalmic compounded formulations.
Under the terms of the sales and marketing agreements, the Company is required to make commission payments generally equal to 10% to 14% of net sales
for products above and beyond the initial existing sales amounts. In addition, the Company is required to make periodic milestone payments to certain
organizations in shares of the Company’s restricted common stock if net sales in the assigned territory reach certain future levels by the end of their terms,
as applicable. The Company accrued and recorded in additional paid in capital $83 and $159 related to stock-based payments for these agreements during
the year ended December 31, 2020 and 2019, respectively, and $2,434 and $2,700 were incurred under these agreements for commission expenses during
the years ended December 31, 2020 and 2019, respectively.
F-31
Asset Purchase, License and Related Agreements
The Company has acquired and sourced intellectual property rights related to certain proprietary innovations from certain inventors and related parties (the
“Inventors”) through multiple asset purchase agreements, license agreements, strategic agreements and commission agreements. In general, these
agreements provide that the Inventors will cooperate with the Company in obtaining patent protection for the acquired intellectual property and that the
Company will use commercially reasonable efforts to research, develop and commercialize a product based on the acquired intellectual property. In
addition, the Company has acquired a right of first refusal on additional intellectual property and drug development opportunities presented by these
Inventors.
In consideration for the acquisition of the intellectual property rights, the Company is obligated to make payments to the Inventors based on the completion
of certain milestones, generally consisting of: (1) a payment payable within 30 days after the issuance of the first patent in the United States arising from
the acquired intellectual property (if any); (2) a payment payable within 30 days after the Company files the first investigational new drug application
(“IND”) with the 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. $224 and $371 were accrued in accounts payable and accrued expenses under these agreements during the years
ended December 31, 2020 and 2019, respectively, and $682 and $846 were incurred under these agreements as royalty expenses for the years ended
December 31, 2020 and 2019, respectively.
Mayfield License
In July 2020, Mayfield entered into a License Agreement (the “TGV License”) with TGV to acquire intellectual property rights for use in the women’s
health field, related to Mayfield’s proprietary drug candidate MAY-66. The TGV License provides that TGV will cooperate with Mayfield in transferring
all embodiments of the intellectual property (including know-how) related to the TGV License, assist in obtaining and protecting its patent rights for the
acquired intellectual property and that Mayfield will use commercially reasonable efforts to research, develop and commercialize products based on the
acquired intellectual property. In connection with the TGV License, Mayfield is obligated to make royalty payments to TGV equal to a low single digit
percentage of net sales received by Mayfield in connection with the sale or licensing of any product based on the licensed intellectual property. In addition,
Mayfield issued 300,000 shares of its common stock to TGV and is required to make certain milestone payments to TGV over the development of MAY-66
and any related products based on the licensed intellectual property.
Stowe License
In July 2020, Stowe entered into a License Agreement (the “Stowe License”) with TGV, to acquire intellectual property rights for use in the ophthalmology
and otic health field, related to Stowe’s proprietary drug candidate STE-006. The Stowe License provides that TGV will cooperate with Stowe in
transferring all embodiments of the intellectual property (including know-how) related to the Stowe License, assist in obtaining and protecting its patent
rights for the acquired intellectual property and that Stowe will use commercially reasonable efforts to research, develop and commercialize products based
on the acquired intellectual property. In connection with the Stowe License, Stowe is obligated to make royalty payments to TGV equal to a low single
digit percentage of net sales received by Stowe in connection with the sale or licensing of any product based on the licensed intellectual property. In
addition, Stowe issued 1,750,000 shares of its common stock to TGV and is required to make certain milestone payments to TGV over the development of
STE-006 and any related products based on the licensed intellectual property.
Klarity License Agreement – Related Party
In April 2017, the Company entered into a license agreement (the “Klarity License Agreement”) with Richard L. Lindstrom, M.D., a member of its Board
of Directors. Pursuant to the terms of the Klarity License Agreement, the Company licensed certain intellectual property and related rights from Dr.
Lindstrom to develop, formulate, make, sell, and sub-license the topical ophthalmic solution Klarity designed to protect and rehabilitate the ocular surface
(the “Klarity Product”).
Under the terms of the Klarity License Agreement, the Company is required to make royalty payments to Dr. Lindstrom ranging from 3% to 6% of net
sales, dependent upon the final formulation of the Klarity Product sold. In addition, the Company is required to make certain milestone payments to Dr.
Lindstrom including: (i) an initial payment of $50 upon execution of the Klarity License Agreement, (ii) a second payment of $50 following the first $50 in
net sales of the Klarity Product; and (iii) a final payment of $50 following the first $100 in net sales of the Klarity Product. All of the above referenced
milestone payments were payable at the Company’s election in cash or shares of the Company’s restricted common stock. Dr. Lindstrom was paid $149 and
$63 in cash during the years ended December 31, 2020 and 2019, respectively, and was due an additional $35 and $55 at December 31, 2020 and 2019,
respectively. The Company incurred $129 and $103 for royalty expenses related to the Klarity License Agreement during the years ended December 31,
2020 and 2019, respectively.
F-32
Injectable Asset Purchase Agreement – Related Party
In December 2019, the Company entered into an asset purchase agreement (the “Lindstrom APA”) with Dr. Lindstrom, a member of its Board of Directors.
Pursuant to the terms of the Lindstrom APA, the Company acquired certain intellectual property and related rights from Dr. Lindstrom to develop,
formulate, make, sell, and sub-license an ophthalmic injectable product (the “Lindstrom Product”).
Under the terms of the Lindstrom APA, the Company is required to make royalty payments to Dr. Lindstrom ranging from 2% to 3% of net sales,
dependent upon the final formulation and patent protection of the Lindstrom Product sold. In addition, the Company is required to make certain milestone
payments to Dr. Lindstrom including an initial payment of $33 upon execution of the Lindstrom APA. Dr. Lindstrom was paid $55 and $0 in cash during
the years ended December 31, 2020 and 2019, respectively, and was due $7 and $40 at December 31, 2020 and 2019, respectively. The Company incurred
$55 and $40 for royalty expenses related to the Lindstrom APA during the years ended December 31, 2020 and 2019, respectively.
Presbyopia Asset Purchase Agreement – Related Party
In December 2019, the Company entered into an asset purchase agreement (the “Presbyopia APA”) with Richard L. Lindstrom, M.D., a member of its
Board of Directors. Pursuant to the terms of the Presbyopia APA, the Company acquired certain intellectual property and related rights from Dr. Lindstrom
to develop, formulate, make, sell, and sub-license an ophthalmic topical product to treat presbyopia (the “Presbyopia Product”).
Under the terms of the Presbyopia APA, the Company is required to make royalty payments to Dr. Lindstrom ranging from 2% to 4% of net sales,
dependent upon the final formulation and patent protection of the Presbyopia Product sold. Dr. Lindstrom was paid $0 in cash during the years ended
December 31, 2020 and 2019, and was due $0 at December 31, 2020 and 2019. The Company incurred $0 for royalty expenses related to the Presbyopia
APA during the years ended December 31, 2020 and 2019.
Eyepoint Commercial Alliance Agreement
In August 2020, the Company, through its wholly owned subsidiary ImprimisRx, LLC, entered into a Commercial Alliance Agreement (the “Dexycu
Agreement”) with Eyepoint Pharmaceuticals, Inc. (“Eyepoint”), pursuant to which Eyepoint granted the Company the non-exclusive right to co-promote
DEXYCU® (dexamethasone intraocular suspension) 9% for the treatment of post-operative inflammation following ocular surgery in the United States.
Pursuant to the Dexycu Agreement, Eyepoint will pay the Company a fee calculated based on the quarterly sales of DEXCYU in excess of predefined
volumes to specific customers of the Company in the U.S. Under the terms of the Dexycu Agreement, the Company shall use commercially reasonable
efforts to promote and market DEXCYU in the U.S.
Subject to early termination, the Dexycu Agreement expires on August 1, 2025, subject to specified notice periods and specified limitations, either party
may terminate the Dexycu Agreement in the event of (i) uncured material breach by the other party or (ii) if DEXCYU ceases to have “pass-through”
payment status. In addition, subject to certain limitations, the Company may terminate the Dexycu Agreement (i) for convenience subject to an extended
specified notice period or (ii) in the event Eyepoint undergoes a change of control. Eyepoint may terminate the Dexycu Agreement, subject to specified
notice periods and specified limitations, if the Company fails to achieve certain minimum sales levels during specified periods. During the year ended
December 31, 2020, the Company recorded $357 in commission revenues related to the Dexycu Agreement.
NOTE 18. SEGMENT INFORMATION AND CONCENTRATIONS
Beginning on January 1, 2019, the Company began evaluating performance of the Company based on operating segments. Segment performance for its two
operating segments are based on segment contribution. The Company’s reportable segments consist of (i) its commercial stage pharmaceutical
compounding business (Pharmaceutical Compounding), generally including the operations of ImprimisRx and the former Park businesses; and (ii) its start-
up operations associated with pharmaceutical drug development business (Pharmaceutical Drug Development). Segment contribution for the segments
represents net revenues less cost of sales, research and development, selling and marketing expenses, and select general and administrative expenses. The
Company does not evaluate the following items at the segment level:
● Selling, general and administrative expenses that result from shared infrastructure, including certain expenses associated with legal matters, public
company costs (e.g. investor relations), board of directors and principal executive officers and other like shared expenses;
F-33
● Operating expenses within selling, general and administrative expenses that result from the impact of corporate initiatives. Corporate initiatives
primarily include integration, restructuring, acquisition and other shared costs;
● Other select revenues and operating expenses including R&D expenses, amortization, and asset sales and impairments, net as not all such
information has been accounted for at the segment level, or such information has not been used by all segments; and
● Total assets including capital expenditures.
The Company defines segment net revenues as pharmaceutical compounded drug sales, licenses and other revenue derived from related agreements.
Cost of sales within segment contribution includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical
ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements depreciation,
the write-off of obsolete inventory and other related expenses.
Selling, general and administrative expenses consist mainly of personnel-related costs, marketing and promotion costs, distribution costs, professional
service costs, insurance, depreciation, facilities costs, transaction costs, and professional services costs which are general in nature and attributable to the
segment.
Segment net revenues, segment operating expenses and segment contribution information consisted of the following for the years ended December 31,
2020 and 2019:
Net revenues
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Segment contribution
Corporate
Research and development
Amortization
Asset sales and impairments, net
Operating income
Net revenues
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Segment contribution
Corporate
Research and development
Amortization
Asset sales and impairments, net
Operating loss
$
$
$
$
For the Year Ended December 31, 2020
Pharmaceutical
Drug
Development
Pharmaceutical
Compounding
Total
48,871 $
(14,463)
34,408
22,691
759
10,958 $
- $
-
-
144
88
(232)
$
48,871
(14,463)
34,408
22,835
847
10,726
(8,245)
(1,566)
(167)
(363)
385
For the Year Ended December 31, 2019
Pharmaceutical
Drug
Development
Pharmaceutical
Compounding
Total
51,165 $
(16,749)
34,416
24,460
1,006
8,934 $
- $
-
-
174
361
(535)
$
51,165
(16,749)
34,416
24,634
1,367
8,399
(8,245)
(716)
(209)
(4,040)
(4,795)
The Company categorizes revenues by geographic area based on selling location. All operations are currently located in the U.S.; therefore, total revenues
are attributed to the U.S. All long-lived assets at December 31, 2020 and December 31, 2019 are located in the U.S.
F-34
Concentrations
The Company sells its compounded formulations to a large number of customers. There were no customers who comprised more than 10% of the
Company’s total pharmacy sales for the years ended December 31, 2020 and 2019.
The Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted for 77% of active
pharmaceutical ingredient purchases during the year ended December 31, 2020, and 73% during the year ended December 31, 2019.
NOTE 19. SUBSEQUENT EVENTS
In March 2021, the Company issued 10,989 shares of its common stock upon the exercise of options to purchase 10,989 shares of common stock, with
exercise prices ranging between $1.70 to $3.96 per share, and received net proceeds of $27.
Restricted stock units granted in February 2015 to Andrew R. Boll, the Company’s Chief Financial Officer, vested, and in February 2021, 22,500 shares the
Company’s common stock were issued to Mr. Boll, net of 7,500 shares of common stock withheld for payroll tax withholdings totaling $58.
Restricted stock units granted in February 2015 to Mark L. Baum, the Company’s Chief Executive Officer, vested, and in February 2021, 200,000 shares
the Company’s common stock were issued to Mr. Baum.
The Company has performed an evaluation of events occurring subsequent to December 31, 2020 through the filing date of this Annual Report and
determined that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosures in the notes
thereto, other than as disclosed in the accompanying notes.
F-35
DESCRIPTION OF THE COMPANY’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934
Exhibit 4.1
Harrow Health, Inc. has one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended: our common stock, par
value $0.001 per share.
In this exhibit, when we refer to “Company”, “Harrow”, “we”, “us” and “our” or when we otherwise refer to ourselves, we mean Harrow Health, Inc.,
excluding, unless otherwise expressly stated or the context requires, our subsidiaries.
The following is a summary of the rights of our common and preferred stock and of certain provisions of our Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws. For more detailed information, please see our Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws, which are incorporated by reference as exhibits to the Annual Report on Form 10-K to which this description is an exhibit.
Authorized Capital Stock
Our authorized capital stock consists of 55,000,000 shares, 50,000,000 of which are designated as common stock, par value $0.001 per share, and
5,000,000 of which are designated as preferred stock, par value $0.001 per share. As of March 5, 2021, there were 25,983,364 shares of our common stock
and no shares of our preferred stock issued and outstanding.
Capital Stock Issued and Outstanding
As of March 1, 2021, there were approximately 96 stockholders of record (excluding an indeterminable number of stockholders whose shares are
held in street or “nominee” name) of our common stock. In addition, as of December 31, 2019, there are outstanding (i) options to acquire 2,656,683 shares
of our common stock with a weighted average exercise price of $5.31 per share, (ii) warrants to purchase 780,386 shares of common stock with a weighted
average exercise price of $2.12 per share, (iii) 1,411,930 unvested restricted stock units and (iv) 324,303 restricted stock units award to directors that had
vested, but issuance and delivery of the shares are deferred until the director resigns or otherwise leaves the Board of Directors.
Description of Common Stock
We are authorized to issue 50,000,000 shares of common stock, par value $0.001 per share. The holders of our common stock are entitled to one
vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Our Amended and Restated Certificate of
Incorporation does not provide for cumulative voting in the election of directors. Subject to any preferential rights of any outstanding series of preferred
stock created by our Board of Directors from time to time the holders of our common stock will be entitled to cash dividends as may be declared, if any, by
our Board of Directors from funds available. Subject to any preferential rights of any outstanding series of preferred stock that we may issue, upon
liquidation, dissolution or winding up of our company, the holders of our common stock will be entitled to receive pro rata all assets available for
distribution to the holders.
Description of Preferred Stock
Our Board of Directors has the authority, without further action by our stockholders, to issue up to 5,000,000 shares of preferred stock, par value
$0.001 per share, in one or more series. Our Board of Directors may designate the rights, preferences, privileges and restrictions of the preferred stock,
including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, sinking fund terms, and number of shares
constituting any series and the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on our common
stock, diluting the voting power of our common stock, impairing the liquidation rights of our common stock, or delaying or preventing a change in control.
The ability to issue preferred stock could delay or impede a change in control.
1
Anti-Takeover Provisions
We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a “business combination’’ with an “interested stockholder’’ for a period of three years
after the date of the transaction in which such stockholder became an interested stockholder, unless the business combination is approved in a prescribed
manner. For purposes of Section 203, a “business combination’’ includes a merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an “interested stockholder’’ is a stockholder who, together with affiliates and associates, owns, or within three years prior, did
own, 15% or more of the voting stock.
Liability and Indemnification of Directors and Officers
Section 145 of the DGCL provides, in general, that a corporation incorporated under the laws of the State of Delaware, such as us, may indemnify
any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than a
derivative action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another enterprise, against expenses (including
attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. In the case of a
derivative action, a Delaware corporation may indemnify any such person against expenses (including attorneys’ fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation, except that no indemnification will be made in respect of any claim, issue or matter
as to which such person will have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of
Delaware or any other court in which such action was brought determines such person is fairly and reasonably entitled to indemnity for such expenses.
Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws provide that we will indemnify our directors, officers,
employees and agents to the extent and in the manner permitted by the provisions of the DGCL, as amended from time to time, subject to any permissible
expansion or limitation of such indemnification, as may be set forth in any stockholders’ or directors’ resolution or by contract.
We also have director and officer indemnification agreements with each of our executive officers and directors that provide, among other things,
for the indemnification to the fullest extent permitted or required by Delaware law, provided that such indemnitee shall not be entitled to indemnification in
connection with any proceedings or claims initiated or brought voluntarily by the indemnitee and not by way of defense, unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by our Board of Directors, (iii) indemnification is provided by us, in our sole
discretion, pursuant to powers vested in us under the DGCL, or (iv) the proceeding is brought to establish or enforce a right to indemnification under the
indemnification agreement or any other statute or law or otherwise as required under Section 145 of the DGCL. We are not required to indemnify the
indemnitee for any amounts paid in settlement of a proceeding unless we consent to such settlement.
Any repeal or modification of these provisions approved by our stockholders shall be prospective only, and shall not adversely affect any
limitation on the liability of a director or officer existing as of the time of such repeal or modification.
We have purchased and intend to maintain insurance on our behalf and on behalf of any person who is or was a director or officer against any loss
arising from any claim asserted against him or her and incurred by him or her in that capacity, subject to certain exclusions and limits of the amount of
coverage.
Listing; Transfer Agent
Our common stock is listed on The NASDAQ Global Market under the symbol “HROW”. The transfer agent and registrar for our common stock
is Action Stock Transfer Corporation, 2469 E. Fort Union Blvd., Suite 214, Salt Lake City, UT 84121.
2
VISIONOLOGY, INC.
CONSULTING AGREEMENT
EXHIBIT 10.57
This Consulting Agreement (this “Agreement”) is made and entered into as of July 1, 2020 (the “Effective Date”) by and between Visionology,
Inc., a Delaware corporation with its principal place of business at 102 Woodmont Blvd., Suite 610, Nashville, TN 37205 (the “Company”), and Mark L.
Baum, an individual with a principal place of business at 102 Woodmont Blvd., Suite 610, Nashville, TN 37205 (“Consultant”) (each herein referred to
individually as a “Party,” or collectively as the “Parties”).
The Company desires to retain Consultant as an independent contractor to perform consulting services for the Company, and Consultant is willing
to perform such services, on the terms described below. In consideration of the mutual promises contained herein, the Parties agree as follows:
1. Services and Compensation
Consultant shall perform the services described in Exhibit A (the “Services”) for the Company (or its designee), and the Company agrees to pay
Consultant the compensation described in Exhibit A for Consultant’s performance of the Services.
2. Confidentiality
A. Definition of Confidential Information. “Confidential Information” means any information (including any and all combinations of
individual items of information) that relates to the actual or anticipated business and/or products, research or development of the Company, its affiliates or
subsidiaries, or to the Company’s, its affiliates’ or subsidiaries’ technical data, trade secrets, or know-how, including, but not limited to, research, product
plans, or other information regarding the Company’s, its affiliates’ or subsidiaries’ products or services and markets therefor, customer lists and customers
(including, but not limited to, customers of the Company on whom Consultant called or with whom Consultant became acquainted during the term of this
Agreement), software, developments, inventions, discoveries, ideas, processes, formulas, technology, designs, drawings, engineering, hardware
configuration information, marketing, finances, and other business information disclosed by the Company, its affiliates or subsidiaries, either directly or
indirectly, in writing, orally or by drawings or inspection of premises, parts, equipment, or other property of Company, its affiliates or subsidiaries.
Notwithstanding the foregoing, Confidential Information shall not include any such information which Consultant can establish (i) was publicly known or
made generally available prior to the time of disclosure to Consultant; (ii) becomes publicly known or made generally available after disclosure to
Consultant through no wrongful action or inaction of Consultant; or (iii) is in the rightful possession of Consultant, without confidentiality obligations, at
the time of disclosure as shown by Consultant’s then-contemporaneous written records; provided that any combination of individual items of information
shall not be deemed to be within any of the foregoing exceptions merely because one or more of the individual items are within such exception, unless the
combination as a whole is within such exception.
B. Nonuse and Nondisclosure. During and after the term of this Agreement, Consultant will hold in the strictest confidence, and take all
reasonable precautions to prevent any unauthorized use or disclosure of Confidential Information, and Consultant will not (i) use the Confidential
Information for any purpose whatsoever other than as necessary for the performance of the Services on behalf of the Company, or (ii) subject to
Consultant’s right to engage in Protected Activity (as defined below), disclose the Confidential Information to any third party without the prior written
consent of an authorized representative of the Company, except that Consultant may disclose Confidential Information to the extent compelled by
applicable law; provided however, prior to such disclosure, Consultant shall provide prior written notice to Company and seek a protective order or such
similar confidential protection as may be available under applicable law. Consultant agrees that no ownership of Confidential Information is conveyed to
the Consultant. Without limiting the foregoing, Consultant shall not use or disclose any Company property, intellectual property rights, trade secrets or
other proprietary know-how of the Company to invent, author, make, develop, design, or otherwise enable others to invent, author, make, develop, or
design identical or substantially similar designs as those developed under this Agreement for any third party. Consultant agrees that Consultant’s
obligations under this Section 2.B shall continue after the termination of this Agreement.
C. Other Client Confidential Information. Consultant agrees that Consultant will not improperly use, disclose, or induce the Company to
use any proprietary information or trade secrets of any former or current employer of Consultant or other person or entity with which Consultant has an
obligation to keep in confidence. Consultant also agrees that Consultant will not bring onto the Company’s premises or transfer onto the Company’s
technology systems any unpublished document, proprietary information, or trade secrets belonging to any third party unless disclosure to, and use by, the
Company has been consented to in writing by such third party.
D. Third Party Confidential Information. Consultant recognizes that the Company has received and in the future will receive from third
parties their confidential or proprietary information subject to a duty on the Company’s part to maintain the confidentiality of such information and to use it
only for certain limited purposes. Consultant agrees that at all times during the term of this Agreement and thereafter, Consultant owes the Company and
such third parties a duty to hold all such confidential or proprietary information in the strictest confidence and not to use it or to disclose it to any person,
firm, corporation, or other third party except as necessary in carrying out the Services for the Company consistent with the Company’s agreement with such
third party.
3. Ownership
A. Assignment of Inventions. Consultant agrees that all right, title, and interest in and to any copyrightable material, notes, records,
drawings, designs, inventions, improvements, developments, discoveries, ideas and trade secrets conceived, discovered, authored, invented, developed or
reduced to practice by Consultant, solely or in collaboration with others, during the term of this Agreement and arising out of, or in connection with,
performing the Services under this Agreement and any copyrights, patents, trade secrets, mask work rights or other intellectual property rights relating to
the foregoing (collectively, “Inventions”), are the sole property of the Company. Consultant also agrees to promptly make full written disclosure to the
Company of any Inventions and to deliver and assign (or cause to be assigned) and hereby irrevocably assigns fully to the Company all right, title and
interest in and to the Inventions.
B. Pre-Existing Materials. Subject to Section 3.A, Consultant will provide the Company with prior written notice if, in the course of
performing the Services, Consultant incorporates into any Invention or utilizes in the performance of the Services any invention, discovery, idea, original
works of authorship, development, improvements, trade secret, concept, or other proprietary information or intellectual property right owned by Consultant
or in which Consultant has an interest, prior to, or separate from, performing the Services under this Agreement (“Prior Inventions”), and the Company is
hereby granted a nonexclusive, royalty-free, perpetual, irrevocable, transferable, worldwide license (with the right to grant and authorize sublicenses) to
make, have made, use, import, offer for sale, sell, reproduce, distribute, modify, adapt, prepare derivative works of, display, perform, and otherwise exploit
such Prior Inventions, without restriction, including, without limitation, as part of or in connection with such Invention, and to practice any method related
thereto. Consultant will not incorporate any invention, discovery, idea, original works of authorship, development, improvements, trade secret, concept, or
other proprietary information or intellectual property right owned by any third party into any Invention without Company’s prior written permission.
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C. Moral Rights. Any assignment to the Company of Inventions includes all rights of attribution, paternity, integrity, modification,
disclosure and withdrawal, and any other rights throughout the world that may be known as or referred to as “moral rights,” “artist’s rights,” “droit moral,”
or the like (collectively, “Moral Rights”). To the extent that Moral Rights cannot be assigned under applicable law, Consultant hereby waives and agrees
not to enforce any and all Moral Rights, including, without limitation, any limitation on subsequent modification, to the extent permitted under applicable
law.
D. Maintenance of Records. Consultant agrees to keep and maintain adequate, current, accurate, and authentic written records of all
Inventions made by Consultant (solely or jointly with others) during the term of this Agreement, and for a period of three (3) years thereafter. The records
will be in the form of notes, sketches, drawings, electronic files, reports, or any other format that is customary in the industry and/or otherwise specified by
the Company. Such records are and remain the sole property of the Company at all times and upon Company’s request, Consultant shall deliver (or cause to
be delivered) the same.
E. Further Assurances. Consultant agrees to assist Company, or its designee, at the Company’s expense, in every proper way to secure
the Company’s rights in Inventions in any and all countries, including the disclosure to the Company of all pertinent information and data with respect
thereto, the execution of all applications, specifications, oaths, assignments and all other instruments that the Company may deem necessary in order to
apply for, register, obtain, maintain, defend, and enforce such rights, and in order to deliver, assign and convey to the Company, its successors, assigns and
nominees the sole and exclusive right, title, and interest in and to all Inventions and testifying in a suit or other proceeding relating to such Inventions.
Consultant further agrees that Consultant’s obligations under this Section 3.E shall continue after the termination of this Agreement.
F. Attorney-in-Fact. Consultant agrees that, if the Company is unable because of Consultant’s unavailability, dissolution, mental or
physical incapacity, or for any other reason, to secure Consultant’s signature with respect to any Inventions, including, without limitation, for the purpose of
applying for or pursuing any application for any United States or foreign patents or mask work or copyright registrations covering the Inventions assigned
to the Company in Section 3.A, then Consultant hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as
Consultant’s agent and attorney-in-fact, to act for and on Consultant’s behalf to execute and file any papers and oaths and to do all other lawfully permitted
acts with respect to such Inventions to further the prosecution and issuance of patents, copyright and mask work registrations with the same legal force and
effect as if executed by Consultant. This power of attorney shall be deemed coupled with an interest, and shall be irrevocable.
4. Conflicting Obligations
A. Consultant represents and warrants that Consultant has no agreements, relationships, or commitments to any other person or entity that
conflict with the provisions of this Agreement, Consultant’s obligations to the Company under this Agreement, and/or Consultant’s ability to perform the
Services. Consultant will not enter into any such conflicting agreement during the term of this Agreement.
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5. Return of Company Materials
Upon the termination of this Agreement, or upon Company’s earlier request, Consultant will immediately deliver to the Company, and will not
keep in Consultant’s possession, recreate, or deliver to anyone else, any and all Company property, including, but not limited to, Confidential Information,
tangible embodiments of the Inventions, all devices and equipment belonging to the Company, all electronically-stored information and passwords to
access such property, those records maintained pursuant to Section 3.D and any reproductions of any of the foregoing items that Consultant may have in
Consultant’s possession or control.
6. Term and Termination
A. Term. Consultant commenced providing Services to the Company on or about December 1, 2019 and shall provide the Services
through the earlier of (i) one year from the Effective Date, (ii) a Change in Control (as defined in the Company’s 2020 Equity Incentive Plan (the “Plan”)),
(iii) the date of any underwriting agreement between the Company and the underwriter(s) managing an initial public offering of Common Stock (as defined
in the Plan), pursuant to which the Common Stock is priced for an initial public offering, (iv) a Qualified Financing (as defined in Exhibit A attached
hereto) or (v) such earlier date as the Services are terminated by the Company or Consultant as provided in Section 6.B (the “Term”).
B. Termination. The Company may terminate this Agreement upon giving Consultant fourteen (14) days prior written notice of such
termination pursuant to Section 12.G of this Agreement. The Company may terminate this Agreement immediately and without prior notice if Consultant
refuses to or is unable to perform the Services or is in breach of any material provision of this Agreement.
C. Survival. Upon any termination, all rights and duties of the Company and Consultant toward each other shall cease except:
(1) The Company will pay, within thirty (30) days after the effective date of termination, all amounts owing to Consultant for
Services completed and accepted by the Company prior to the termination date and related reimbursable expenses, if any, submitted in accordance with the
Company’s policies and in accordance with the provisions of Section 1 of this Agreement; and
(2) Section 2 (Confidentiality), Section 3 (Ownership), Section 5 (Return of Company Materials), Section 6 (Term and
Termination), Section 7 (Independent Contractor; Benefits), Section 8 (Indemnification), Section 9 (Nonsolicitation), Section 10 (Limitation of Liability),
Section 11 (Dispute Resolution), and Section 12 (Miscellaneous) will survive termination or expiration of this Agreement in accordance with their terms.
7. Independent Contractor; Benefits
A. Independent Contractor. It is the express intention of the Company and Consultant that Consultant perform the Services as an
independent contractor to the Company. Nothing in this Agreement shall in any way be construed to constitute Consultant as an agent, employee or
representative of the Company. Without limiting the generality of the foregoing, Consultant is not authorized to bind the Company to any liability or
obligation or to represent that Consultant has any such authority. Consultant agrees to furnish (or reimburse the Company for) all tools and materials
necessary to accomplish this Agreement and shall incur all expenses associated with performance. Consultant acknowledges and agrees that Consultant is
obligated to report as income all compensation received by Consultant pursuant to this Agreement. Consultant agrees to and acknowledges the obligation to
pay all self-employment and other taxes on such income.
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B. Benefits. The Company and Consultant agree that Consultant will receive no Company-sponsored benefits from the Company such as,
but not limited to, paid vacation, sick leave, medical insurance and 401k participation; provided, however, that Consultant shall be eligible for awards
granted under the Plan. If Consultant is reclassified by a state or federal agency or court as the Company’s employee, Consultant will become a reclassified
employee and will receive no benefits from the Company, except those mandated by state or federal law, even if by the terms of the Company’s benefit
plans or programs of the Company in effect at the time of such reclassification, Consultant would otherwise be eligible for such benefits.
8. Indemnification
Consultant agrees to indemnify and hold harmless the Company and its affiliates and their directors, officers and employees from and against all
taxes, losses, damages, liabilities, costs and expenses, including attorneys’ fees and other legal expenses, arising directly or indirectly from or in connection
with (i) any negligent, reckless or intentionally wrongful act of Consultant, (ii) a determination by a court or agency that the Consultant is not an
independent contractor, (iii) any breach by the Consultant of any of the covenants contained in this Agreement, (iv) any failure of Consultant to perform the
Services in accordance with all applicable laws, rules and regulations, or (v) any violation or claimed violation of a third party’s rights resulting in whole,
or in part, from the Company’s use of the Inventions or other deliverables of Consultant under this Agreement.
9. Nonsolicitation
To the fullest extent permitted under applicable law, from the date of this Agreement until twelve (12) months after the termination of this
Agreement for any reason, Consultant will not, without the Company’s prior written consent, directly or indirectly, solicit any of the Company’s employees
to leave their employment, or attempt to solicit employees of the Company, either for Consultant or for any other person or entity. Consultant agrees that
nothing in this Section 9 shall affect Consultant’s continuing obligations under this Agreement during and after this twelve (12) month period, including,
without limitation, Consultant’s obligations under Section 2.
10. Limitation of Liability
IN NO EVENT SHALL COMPANY BE LIABLE TO CONSULTANT OR TO ANY OTHER PARTY FOR ANY INDIRECT, INCIDENTAL,
SPECIAL OR CONSEQUENTIAL DAMAGES, OR DAMAGES FOR LOST PROFITS OR LOSS OF BUSINESS, HOWEVER CAUSED AND
UNDER ANY THEORY OF LIABILITY, WHETHER BASED IN CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHER THEORY OF
LIABILITY, REGARDLESS OF WHETHER COMPANY WAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND
NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. IN NO EVENT SHALL COMPANY’S LIABILITY
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT EXCEED THE AMOUNTS PAID BY COMPANY TO CONSULTANT UNDER
THIS AGREEMENT FOR THE SERVICES, DELIVERABLES OR INVENTION GIVING RISE TO SUCH LIABILITY.
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11. Dispute Resolution
Any controversy, dispute or claim arising out of or relating to this Agreement or the breach or alleged breach hereof, including whether the
controversy, dispute or claim is arbitrable (each, a “Dispute”), shall be resolved by submitting such Dispute to binding arbitration administered by the
American Health Lawyers Association Dispute Resolution Services or its successor (“AHLA”) and held in Nashville, Tennessee, and judgment on the
arbitration award may be entered in any court having jurisdiction thereof. The arbitration will be conducted in accordance with applicable AHLA rules and
procedures before a single arbitrator selected and appointed in accordance with such rules. Each party will bear and pay equally the fees and expenses of
AHLA (including the fees and expenses of the arbitrator), and each party will bear its own attorneys’ fees, costs and other expenses; provided, however,
that the arbitrator may award reasonable attorneys’ fees and expenses to the prevailing party as contemplated in Section 12.H. Any arbitration will be
governed by the Federal Arbitration Act (9 U.S.C. §§ 1 et seq.). The provisions of this Section 11 shall survive expiration or other termination of this
Agreement regardless of the cause of such expiration or termination, and shall not restrict the right of the parties hereto to institute a proceeding in any
court of law or equity to enable such party to obtain or otherwise seek injunctive relief, specific performance or other equitable remedies during the
pendency of any arbitration or without submitting such matter to arbitration.
12. Miscellaneous
A. Governing Law; Consent to Personal Jurisdiction and Venue; Waiver of Trial by Jury. This Agreement shall be governed by the
laws of the State of Delaware, without regard to the conflicts of law provisions of any jurisdiction. To the extent that any lawsuit is permitted under this
Agreement, the Parties hereby expressly consent to the personal and exclusive jurisdiction and venue of the state and federal courts located in Nashville,
Tennessee. Each party hereby waives any objection to the personal or subject matter jurisdiction and venue of such courts. EACH PARTY HEREBY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH
RESPECT TO ANY DISPUTE, ACTION OR CLAIM ARISING OUT OF THIS AGREEMENT.
B. Assignability. This Agreement will be binding upon Consultant’s heirs, executors, assigns, administrators, and other legal
representatives, and will be for the benefit of the Company, its successors, and its assigns. There are no intended third-party beneficiaries to this
Agreement, except as expressly stated. Except as may otherwise be provided in this Agreement, Consultant may not sell, assign or delegate any rights or
obligations under this Agreement. Notwithstanding anything to the contrary herein, Company may assign this Agreement and its rights and obligations
under this Agreement to any successor to all or substantially all of Company’s relevant assets, whether by merger, consolidation, reorganization,
reincorporation, sale of assets or stock, change of control or otherwise.
C. Entire Agreement. This Agreement constitutes the entire agreement and understanding between the Parties with respect to the subject
matter herein and supersedes all prior written and oral agreements, discussions, or representations between the Parties. Consultant represents and warrants
that Consultant is not relying on any statement or representation not contained in this Agreement. To the extent any terms set forth in any exhibit or
schedule conflict with the terms set forth in this Agreement, the terms of this Agreement shall control unless otherwise expressly agreed by the Parties in
such exhibit or schedule.
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D. Headings. Headings are used in this Agreement for reference only and shall not be considered when interpreting this Agreement.
E. Severability. If a court or other body of competent jurisdiction finds, or the Parties mutually believe, any provision of this Agreement,
or portion thereof, to be invalid or unenforceable, such provision will be enforced to the maximum extent permissible so as to effect the intent of the
Parties, and the remainder of this Agreement will continue in full force and effect.
F. Modification, Waiver. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be
effective unless in a writing signed by the Parties. Waiver by the Company of a breach of any provision of this Agreement will not operate as a waiver of
any other or subsequent breach.
G. Notices. Any notice or other communication required or permitted by this Agreement to be given to a Party shall be in writing and
shall be deemed given (i) if delivered personally or by commercial messenger or courier service, (ii) when sent by confirmed facsimile, or (iii) if mailed by
U.S. registered or certified mail (return receipt requested), to the Party at the Party’s address written below or at such other address as the Party may have
previously specified by like notice. If by mail, delivery shall be deemed effective three business days after mailing in accordance with this Section 12.G.
(1) If to the Company, to:
Visionology, Inc.
102 Woodmont Blvd., Suite 610
Nashville, TN 37205
Attention: Chief Executive Officer
last address of Consultant provided by Consultant to the Company.
(2) If to Consultant, to the address for notice on the signature page to this Agreement or, if no such address is provided, to the
H. Attorneys’ Fees. In any court action at law or equity that is brought by one of the Parties to this Agreement to enforce or interpret the
provisions of this Agreement, the prevailing Party will be entitled to reasonable attorneys’ fees, in addition to any other relief to which that Party may be
entitled.
I. Signatures. This Agreement may be signed in two counterparts, each of which shall be deemed an original, with the same force and
effectiveness as though executed in a single document.
J. Applicability to Past Activities. Consultant agrees that if and to the extent that Consultant provided any services or made efforts on
behalf of or for the benefit of Company, or related to the current or prospective business of Company in anticipation of Consultant’s involvement with the
Company, that would have been “Services” if performed during the term of this Agreement (the “Prior Consulting Period”) and to the extent that during
the Prior Consulting Period: (i) Consultant received access to any information from or on behalf of Company that would have been “Confidential
Information” if Consultant received access to such information during the term of this Agreement; or (ii) Consultant (a) conceived, created, authored,
invented, developed or reduced to practice any item (including any intellectual property rights with respect thereto) on behalf of or for the benefit of
Company, or related to the current or prospective business of Company in anticipation of Consultant’s involvement with Company, that would have been an
Invention if conceived, created, authored, invented, developed or reduced to practice during the term of this Agreement; or (b) incorporated into any such
item any pre-existing invention, improvement, development, concept, discovery or other proprietary information that would have been a Prior Invention if
incorporated into such item during the term of this Agreement; then any such information shall be deemed Confidential Information hereunder and any
such item shall be deemed an Invention or Prior Invention hereunder, and this Agreement shall apply to such activities, information or item as if disclosed,
conceived, created, authored, invented, developed or reduced to practice during the term of this Agreement. Consultant further acknowledges that
Consultant has been fully compensated for all services provided during any such Prior Consulting Period.
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K. Protected Activity Not Prohibited. Consultant understands that nothing in this Agreement shall in any way limit or prohibit Consultant
from engaging in any Protected Activity. For purposes of this Agreement, “Protected Activity” shall mean filing a charge, complaint, or report with, or
otherwise communicating, cooperating, or participating in any investigation or proceeding that may be conducted by, any federal, state or local government
agency or commission, including the Securities and Exchange Commission (“Government Agencies”). Consultant understands that in connection with such
Protected Activity, Consultant is permitted to disclose documents or other information as permitted by law, and without giving notice to, or receiving
authorization from, the Company. Notwithstanding the foregoing, Consultant agrees to take all reasonable precautions to prevent any unauthorized use or
disclosure of any information that may constitute Company confidential information to any parties other than the Government Agencies. Consultant further
understands that “Protected Activity” does not include the disclosure of any Company attorney-client privileged communications. Pursuant to the Defend
Trade Secrets Act of 2016, Consultant is notified that an individual will not be held criminally or civilly liable under any federal or state trade secret law for
the disclosure of a trade secret that (i) is made in confidence to a federal, state, or local government official (directly or indirectly) or to an attorney solely
for the purpose of reporting or investigating a suspected violation of law, or (ii) is made in a complaint or other document filed in a lawsuit or other
proceeding, if (and only if) such filing is made under seal. In addition, an individual who files a lawsuit for retaliation by an employer for reporting a
suspected violation of law may disclose the trade secret to the individual’s attorney and use the trade secret information in the court proceeding, if the
individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.
(signature page follows)
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IN WITNESS WHEREOF, the Parties hereto have executed this Consulting Agreement as of the date first written above.
CONSULTANT
/s/ Mark L. Baum
By:
Name: Mark L. Baum
Address for Notice:
VISIONOLOGY, INC.
/s/ Andrew R. Boll
By:
Name: Andrew R. Boll
Title: CFO
EXHIBIT A
SERVICES AND COMPENSATION
1. Contact. Consultant’s principal Company contact:
Name: Andrew R. Boll_____________________
Title: CFO______________________________
Email: aboll@harrowinc.com_________________
Phone: (615) 733-4731______________________
2. Services. Consultant shall provide management advisory services to the Company relating to its establishment, financing activities and other
related services as may be requested from time to time by the Company.
3. Compensation.
A. Upon or shortly following commencement of Consultant’s Services to the Company, and subject to the approval of the Company’s
Board of Directors, the Company shall issue to Consultant 700,000 shares of the Company’s common stock (“Common Stock”), par value $0.001 per share
(the “Shares”). The Shares shall be subject to the terms and conditions of the Plan and a restricted stock award agreement between the Company and
Consultant.
B. The Shares subject to the Restricted Stock Award shall vest upon the earliest of:
(1) a Change in Control (as defined in the Plan);
(2) the date of any underwriting agreement between the Company and the underwriter(s) managing an initial public
offering of Common Stock, pursuant to which the Common Stock is priced for initial public offering; or
(3) the date of closing of a bona-fide equity financing with third party investors resulting in cash gross proceeds to the
Company of at least $10,000,000 (the “Qualified Financing”);
and in any case of (1), (2) and (3), (each a “Vesting Event”), subject to Consultant’s continuous status as a Service Provider (as defined in the Plan) through
the date of such Vesting Event; provided, however, in the event Consultant’s continuous status as a Service Provider is terminated by the Company (other
than for Cause or by the Consultant (as defined in the Plan)) prior to the completion of the Term (as defined in this Agreement), the Shares shall vest
immediately upon such termination.
C. All payments and benefits provided for under this Agreement are intended to be exempt from or otherwise comply with the
requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and guidance thereunder (together, “Section 409A”),
so that none of the payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities
or ambiguous terms herein will be interpreted to be exempt or so comply. Each payment and benefit payable under this Agreement is intended to constitute
a separate payment for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. In no event will the Company reimburse Consultant for any taxes
that may be imposed on Consultant as a result of Section 409A.
This Exhibit A is accepted and agreed upon as of July 1, 2020.
CONSULTANT
/s/ Mark L. Baum
By:
Name: Mark L. Baum
VISIONOLOGY, INC.
/s/ Andrew R. Boll
By:
Name: Andrew R. Boll
Title: CFO
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VISIONOLOGY, INC.
CONSULTING AGREEMENT
EXHIBIT 10.58
This Consulting Agreement (this “Agreement”) is made and entered into as of July 1, 2020 (the “Effective Date”) by and between Visionology,
Inc., a Delaware corporation with its principal place of business at 102 Woodmont Blvd., Suite 610, Nashville, TN 37205 (the “Company”), and Andrew
Boll, an individual with a principal place of business at 102 Woodmont Blvd., Suite 610, Nashville, TN 37205 (“Consultant”) (each herein referred to
individually as a “Party,” or collectively as the “Parties”).
The Company desires to retain Consultant as an independent contractor to perform consulting services for the Company, and Consultant is willing
to perform such services, on the terms described below. In consideration of the mutual promises contained herein, the Parties agree as follows:
1. Services and Compensation
Consultant shall perform the services described in Exhibit A (the “Services”) for the Company (or its designee), and the Company agrees to pay
Consultant the compensation described in Exhibit A for Consultant’s performance of the Services.
2. Confidentiality
A. Definition of Confidential Information. “Confidential Information” means any information (including any and all combinations of
individual items of information) that relates to the actual or anticipated business and/or products, research or development of the Company, its affiliates or
subsidiaries, or to the Company’s, its affiliates’ or subsidiaries’ technical data, trade secrets, or know-how, including, but not limited to, research, product
plans, or other information regarding the Company’s, its affiliates’ or subsidiaries’ products or services and markets therefor, customer lists and customers
(including, but not limited to, customers of the Company on whom Consultant called or with whom Consultant became acquainted during the term of this
Agreement), software, developments, inventions, discoveries, ideas, processes, formulas, technology, designs, drawings, engineering, hardware
configuration information, marketing, finances, and other business information disclosed by the Company, its affiliates or subsidiaries, either directly or
indirectly, in writing, orally or by drawings or inspection of premises, parts, equipment, or other property of Company, its affiliates or subsidiaries.
Notwithstanding the foregoing, Confidential Information shall not include any such information which Consultant can establish (i) was publicly known or
made generally available prior to the time of disclosure to Consultant; (ii) becomes publicly known or made generally available after disclosure to
Consultant through no wrongful action or inaction of Consultant; or (iii) is in the rightful possession of Consultant, without confidentiality obligations, at
the time of disclosure as shown by Consultant’s then-contemporaneous written records; provided that any combination of individual items of information
shall not be deemed to be within any of the foregoing exceptions merely because one or more of the individual items are within such exception, unless the
combination as a whole is within such exception.
B. Nonuse and Nondisclosure. During and after the term of this Agreement, Consultant will hold in the strictest confidence, and take all
reasonable precautions to prevent any unauthorized use or disclosure of Confidential Information, and Consultant will not (i) use the Confidential
Information for any purpose whatsoever other than as necessary for the performance of the Services on behalf of the Company, or (ii) subject to
Consultant’s right to engage in Protected Activity (as defined below), disclose the Confidential Information to any third party without the prior written
consent of an authorized representative of the Company, except that Consultant may disclose Confidential Information to the extent compelled by
applicable law; provided however, prior to such disclosure, Consultant shall provide prior written notice to Company and seek a protective order or such
similar confidential protection as may be available under applicable law. Consultant agrees that no ownership of Confidential Information is conveyed to
the Consultant. Without limiting the foregoing, Consultant shall not use or disclose any Company property, intellectual property rights, trade secrets or
other proprietary know-how of the Company to invent, author, make, develop, design, or otherwise enable others to invent, author, make, develop, or
design identical or substantially similar designs as those developed under this Agreement for any third party. Consultant agrees that Consultant’s
obligations under this Section 2.B shall continue after the termination of this Agreement.
C. Other Client Confidential Information. Consultant agrees that Consultant will not improperly use, disclose, or induce the Company to
use any proprietary information or trade secrets of any former or current employer of Consultant or other person or entity with which Consultant has an
obligation to keep in confidence. Consultant also agrees that Consultant will not bring onto the Company’s premises or transfer onto the Company’s
technology systems any unpublished document, proprietary information, or trade secrets belonging to any third party unless disclosure to, and use by, the
Company has been consented to in writing by such third party.
D. Third Party Confidential Information. Consultant recognizes that the Company has received and in the future will receive from third
parties their confidential or proprietary information subject to a duty on the Company’s part to maintain the confidentiality of such information and to use it
only for certain limited purposes. Consultant agrees that at all times during the term of this Agreement and thereafter, Consultant owes the Company and
such third parties a duty to hold all such confidential or proprietary information in the strictest confidence and not to use it or to disclose it to any person,
firm, corporation, or other third party except as necessary in carrying out the Services for the Company consistent with the Company’s agreement with such
third party.
3. Ownership
A. Assignment of Inventions. Consultant agrees that all right, title, and interest in and to any copyrightable material, notes, records,
drawings, designs, inventions, improvements, developments, discoveries, ideas and trade secrets conceived, discovered, authored, invented, developed or
reduced to practice by Consultant, solely or in collaboration with others, during the term of this Agreement and arising out of, or in connection with,
performing the Services under this Agreement and any copyrights, patents, trade secrets, mask work rights or other intellectual property rights relating to
the foregoing (collectively, “Inventions”), are the sole property of the Company. Consultant also agrees to promptly make full written disclosure to the
Company of any Inventions and to deliver and assign (or cause to be assigned) and hereby irrevocably assigns fully to the Company all right, title and
interest in and to the Inventions.
B. Pre-Existing Materials. Subject to Section 3.A, Consultant will provide the Company with prior written notice if, in the course of
performing the Services, Consultant incorporates into any Invention or utilizes in the performance of the Services any invention, discovery, idea, original
works of authorship, development, improvements, trade secret, concept, or other proprietary information or intellectual property right owned by Consultant
or in which Consultant has an interest, prior to, or separate from, performing the Services under this Agreement (“Prior Inventions”), and the Company is
hereby granted a nonexclusive, royalty-free, perpetual, irrevocable, transferable, worldwide license (with the right to grant and authorize sublicenses) to
make, have made, use, import, offer for sale, sell, reproduce, distribute, modify, adapt, prepare derivative works of, display, perform, and otherwise exploit
such Prior Inventions, without restriction, including, without limitation, as part of or in connection with such Invention, and to practice any method related
thereto. Consultant will not incorporate any invention, discovery, idea, original works of authorship, development, improvements, trade secret, concept, or
other proprietary information or intellectual property right owned by any third party into any Invention without Company’s prior written permission.
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C. Moral Rights. Any assignment to the Company of Inventions includes all rights of attribution, paternity, integrity, modification,
disclosure and withdrawal, and any other rights throughout the world that may be known as or referred to as “moral rights,” “artist’s rights,” “droit moral,”
or the like (collectively, “Moral Rights”). To the extent that Moral Rights cannot be assigned under applicable law, Consultant hereby waives and agrees
not to enforce any and all Moral Rights, including, without limitation, any limitation on subsequent modification, to the extent permitted under applicable
law.
D. Maintenance of Records. Consultant agrees to keep and maintain adequate, current, accurate, and authentic written records of all
Inventions made by Consultant (solely or jointly with others) during the term of this Agreement, and for a period of three (3) years thereafter. The records
will be in the form of notes, sketches, drawings, electronic files, reports, or any other format that is customary in the industry and/or otherwise specified by
the Company. Such records are and remain the sole property of the Company at all times and upon Company’s request, Consultant shall deliver (or cause to
be delivered) the same.
E. Further Assurances. Consultant agrees to assist Company, or its designee, at the Company’s expense, in every proper way to secure
the Company’s rights in Inventions in any and all countries, including the disclosure to the Company of all pertinent information and data with respect
thereto, the execution of all applications, specifications, oaths, assignments and all other instruments that the Company may deem necessary in order to
apply for, register, obtain, maintain, defend, and enforce such rights, and in order to deliver, assign and convey to the Company, its successors, assigns and
nominees the sole and exclusive right, title, and interest in and to all Inventions and testifying in a suit or other proceeding relating to such Inventions.
Consultant further agrees that Consultant’s obligations under this Section 3.E shall continue after the termination of this Agreement.
F. Attorney-in-Fact. Consultant agrees that, if the Company is unable because of Consultant’s unavailability, dissolution, mental or
physical incapacity, or for any other reason, to secure Consultant’s signature with respect to any Inventions, including, without limitation, for the purpose of
applying for or pursuing any application for any United States or foreign patents or mask work or copyright registrations covering the Inventions assigned
to the Company in Section 3.A, then Consultant hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as
Consultant’s agent and attorney-in-fact, to act for and on Consultant’s behalf to execute and file any papers and oaths and to do all other lawfully permitted
acts with respect to such Inventions to further the prosecution and issuance of patents, copyright and mask work registrations with the same legal force and
effect as if executed by Consultant. This power of attorney shall be deemed coupled with an interest, and shall be irrevocable.
4. Conflicting Obligations
A. Consultant represents and warrants that Consultant has no agreements, relationships, or commitments to any other person or entity that
conflict with the provisions of this Agreement, Consultant’s obligations to the Company under this Agreement, and/or Consultant’s ability to perform the
Services. Consultant will not enter into any such conflicting agreement during the term of this Agreement.
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5. Return of Company Materials
Upon the termination of this Agreement, or upon Company’s earlier request, Consultant will immediately deliver to the Company, and will not
keep in Consultant’s possession, recreate, or deliver to anyone else, any and all Company property, including, but not limited to, Confidential Information,
tangible embodiments of the Inventions, all devices and equipment belonging to the Company, all electronically-stored information and passwords to
access such property, those records maintained pursuant to Section 3.D and any reproductions of any of the foregoing items that Consultant may have in
Consultant’s possession or control.
6. Term and Termination
A. Term. Consultant commenced providing Services to the Company on or about December 1, 2019 and shall provide the Services
through the earlier of (i) one year from the Effective Date, (ii) a Change in Control (as defined in the Company’s 2020 Equity Incentive Plan (the “Plan”)),
(iii) the date of any underwriting agreement between the Company and the underwriter(s) managing an initial public offering of Common Stock (as defined
in the Plan), pursuant to which the Common Stock is priced for an initial public offering, (iv) a Qualified Financing (as defined in Exhibit A attached
hereto) or (v) such earlier date as the Services are terminated by the Company or Consultant as provided in Section 6.B (the “Term”).
B. Termination. The Company may terminate this Agreement upon giving Consultant fourteen (14) days prior written notice of such
termination pursuant to Section 12.G of this Agreement. The Company may terminate this Agreement immediately and without prior notice if Consultant
refuses to or is unable to perform the Services or is in breach of any material provision of this Agreement.
C. Survival. Upon any termination, all rights and duties of the Company and Consultant toward each other shall cease except:
(1) The Company will pay, within thirty (30) days after the effective date of termination, all amounts owing to Consultant for
Services completed and accepted by the Company prior to the termination date and related reimbursable expenses, if any, submitted in accordance with the
Company’s policies and in accordance with the provisions of Section 1 of this Agreement; and
(2) Section 2 (Confidentiality), Section 3 (Ownership), Section 5 (Return of Company Materials), Section 6 (Term and
Termination), Section 7 (Independent Contractor; Benefits), Section 8 (Indemnification), Section 9 (Nonsolicitation), Section 10 (Limitation of Liability),
Section 11 (Dispute Resolution), and Section 12 (Miscellaneous) will survive termination or expiration of this Agreement in accordance with their terms.
7. Independent Contractor; Benefits
A. Independent Contractor. It is the express intention of the Company and Consultant that Consultant perform the Services as an
independent contractor to the Company. Nothing in this Agreement shall in any way be construed to constitute Consultant as an agent, employee or
representative of the Company. Without limiting the generality of the foregoing, Consultant is not authorized to bind the Company to any liability or
obligation or to represent that Consultant has any such authority. Consultant agrees to furnish (or reimburse the Company for) all tools and materials
necessary to accomplish this Agreement and shall incur all expenses associated with performance. Consultant acknowledges and agrees that Consultant is
obligated to report as income all compensation received by Consultant pursuant to this Agreement. Consultant agrees to and acknowledges the obligation to
pay all self-employment and other taxes on such income.
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B. Benefits. The Company and Consultant agree that Consultant will receive no Company-sponsored benefits from the Company such as,
but not limited to, paid vacation, sick leave, medical insurance and 401k participation; provided, however, that Consultant shall be eligible for awards
granted under the Plan. If Consultant is reclassified by a state or federal agency or court as the Company’s employee, Consultant will become a reclassified
employee and will receive no benefits from the Company, except those mandated by state or federal law, even if by the terms of the Company’s benefit
plans or programs of the Company in effect at the time of such reclassification, Consultant would otherwise be eligible for such benefits.
8. Indemnification
Consultant agrees to indemnify and hold harmless the Company and its affiliates and their directors, officers and employees from and against all
taxes, losses, damages, liabilities, costs and expenses, including attorneys’ fees and other legal expenses, arising directly or indirectly from or in connection
with (i) any negligent, reckless or intentionally wrongful act of Consultant, (ii) a determination by a court or agency that the Consultant is not an
independent contractor, (iii) any breach by the Consultant of any of the covenants contained in this Agreement, (iv) any failure of Consultant to perform the
Services in accordance with all applicable laws, rules and regulations, or (v) any violation or claimed violation of a third party’s rights resulting in whole,
or in part, from the Company’s use of the Inventions or other deliverables of Consultant under this Agreement.
9. Nonsolicitation
To the fullest extent permitted under applicable law, from the date of this Agreement until twelve (12) months after the termination of this
Agreement for any reason, Consultant will not, without the Company’s prior written consent, directly or indirectly, solicit any of the Company’s employees
to leave their employment, or attempt to solicit employees of the Company, either for Consultant or for any other person or entity. Consultant agrees that
nothing in this Section 9 shall affect Consultant’s continuing obligations under this Agreement during and after this twelve (12) month period, including,
without limitation, Consultant’s obligations under Section 2.
10. Limitation of Liability
IN NO EVENT SHALL COMPANY BE LIABLE TO CONSULTANT OR TO ANY OTHER PARTY FOR ANY INDIRECT, INCIDENTAL,
SPECIAL OR CONSEQUENTIAL DAMAGES, OR DAMAGES FOR LOST PROFITS OR LOSS OF BUSINESS, HOWEVER CAUSED AND
UNDER ANY THEORY OF LIABILITY, WHETHER BASED IN CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHER THEORY OF
LIABILITY, REGARDLESS OF WHETHER COMPANY WAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND
NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. IN NO EVENT SHALL COMPANY’S LIABILITY
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT EXCEED THE AMOUNTS PAID BY COMPANY TO CONSULTANT UNDER
THIS AGREEMENT FOR THE SERVICES, DELIVERABLES OR INVENTION GIVING RISE TO SUCH LIABILITY.
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11. Dispute Resolution
Any controversy, dispute or claim arising out of or relating to this Agreement or the breach or alleged breach hereof, including whether the
controversy, dispute or claim is arbitrable (each, a “Dispute”), shall be resolved by submitting such Dispute to binding arbitration administered by the
American Health Lawyers Association Dispute Resolution Services or its successor (“AHLA”) and held in Nashville, Tennessee, and judgment on the
arbitration award may be entered in any court having jurisdiction thereof. The arbitration will be conducted in accordance with applicable AHLA rules and
procedures before a single arbitrator selected and appointed in accordance with such rules. Each party will bear and pay equally the fees and expenses of
AHLA (including the fees and expenses of the arbitrator), and each party will bear its own attorneys’ fees, costs and other expenses; provided, however,
that the arbitrator may award reasonable attorneys’ fees and expenses to the prevailing party as contemplated in Section 12.H. Any arbitration will be
governed by the Federal Arbitration Act (9 U.S.C. §§ 1 et seq.). The provisions of this Section 11 shall survive expiration or other termination of this
Agreement regardless of the cause of such expiration or termination, and shall not restrict the right of the parties hereto to institute a proceeding in any
court of law or equity to enable such party to obtain or otherwise seek injunctive relief, specific performance or other equitable remedies during the
pendency of any arbitration or without submitting such matter to arbitration.
12. Miscellaneous
A. Governing Law; Consent to Personal Jurisdiction and Venue; Waiver of Trial by Jury. This Agreement shall be governed by the
laws of the State of Delaware, without regard to the conflicts of law provisions of any jurisdiction. To the extent that any lawsuit is permitted under this
Agreement, the Parties hereby expressly consent to the personal and exclusive jurisdiction and venue of the state and federal courts located in Nashville,
Tennessee. Each party hereby waives any objection to the personal or subject matter jurisdiction and venue of such courts. EACH PARTY HEREBY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH
RESPECT TO ANY DISPUTE, ACTION OR CLAIM ARISING OUT OF THIS AGREEMENT.
B. Assignability. This Agreement will be binding upon Consultant’s heirs, executors, assigns, administrators, and other legal
representatives, and will be for the benefit of the Company, its successors, and its assigns. There are no intended third-party beneficiaries to this
Agreement, except as expressly stated. Except as may otherwise be provided in this Agreement, Consultant may not sell, assign or delegate any rights or
obligations under this Agreement. Notwithstanding anything to the contrary herein, Company may assign this Agreement and its rights and obligations
under this Agreement to any successor to all or substantially all of Company’s relevant assets, whether by merger, consolidation, reorganization,
reincorporation, sale of assets or stock, change of control or otherwise.
C. Entire Agreement. This Agreement constitutes the entire agreement and understanding between the Parties with respect to the subject
matter herein and supersedes all prior written and oral agreements, discussions, or representations between the Parties. Consultant represents and warrants
that Consultant is not relying on any statement or representation not contained in this Agreement. To the extent any terms set forth in any exhibit or
schedule conflict with the terms set forth in this Agreement, the terms of this Agreement shall control unless otherwise expressly agreed by the Parties in
such exhibit or schedule.
D. Headings. Headings are used in this Agreement for reference only and shall not be considered when interpreting this Agreement.
E. Severability. If a court or other body of competent jurisdiction finds, or the Parties mutually believe, any provision of this Agreement,
or portion thereof, to be invalid or unenforceable, such provision will be enforced to the maximum extent permissible so as to effect the intent of the
Parties, and the remainder of this Agreement will continue in full force and effect.
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F. Modification, Waiver. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be
effective unless in a writing signed by the Parties. Waiver by the Company of a breach of any provision of this Agreement will not operate as a waiver of
any other or subsequent breach.
G. Notices. Any notice or other communication required or permitted by this Agreement to be given to a Party shall be in writing and
shall be deemed given (i) if delivered personally or by commercial messenger or courier service, (ii) when sent by confirmed facsimile, or (iii) if mailed by
U.S. registered or certified mail (return receipt requested), to the Party at the Party’s address written below or at such other address as the Party may have
previously specified by like notice. If by mail, delivery shall be deemed effective three business days after mailing in accordance with this Section 12.G.
(1) If to the Company, to:
Visionology, Inc.
102 Woodmont Blvd., Suite 610
Nashville, TN 37205
Attention: Chief Executive Officer
last address of Consultant provided by Consultant to the Company.
(2) If to Consultant, to the address for notice on the signature page to this Agreement or, if no such address is provided, to the
H. Attorneys’ Fees. In any court action at law or equity that is brought by one of the Parties to this Agreement to enforce or interpret the
provisions of this Agreement, the prevailing Party will be entitled to reasonable attorneys’ fees, in addition to any other relief to which that Party may be
entitled.
I. Signatures. This Agreement may be signed in two counterparts, each of which shall be deemed an original, with the same force and
effectiveness as though executed in a single document.
J. Applicability to Past Activities. Consultant agrees that if and to the extent that Consultant provided any services or made efforts on
behalf of or for the benefit of Company, or related to the current or prospective business of Company in anticipation of Consultant’s involvement with the
Company, that would have been “Services” if performed during the term of this Agreement (the “Prior Consulting Period”) and to the extent that during
the Prior Consulting Period: (i) Consultant received access to any information from or on behalf of Company that would have been “Confidential
Information” if Consultant received access to such information during the term of this Agreement; or (ii) Consultant (a) conceived, created, authored,
invented, developed or reduced to practice any item (including any intellectual property rights with respect thereto) on behalf of or for the benefit of
Company, or related to the current or prospective business of Company in anticipation of Consultant’s involvement with Company, that would have been an
Invention if conceived, created, authored, invented, developed or reduced to practice during the term of this Agreement; or (b) incorporated into any such
item any pre-existing invention, improvement, development, concept, discovery or other proprietary information that would have been a Prior Invention if
incorporated into such item during the term of this Agreement; then any such information shall be deemed Confidential Information hereunder and any
such item shall be deemed an Invention or Prior Invention hereunder, and this Agreement shall apply to such activities, information or item as if disclosed,
conceived, created, authored, invented, developed or reduced to practice during the term of this Agreement. Consultant further acknowledges that
Consultant has been fully compensated for all services provided during any such Prior Consulting Period.
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K. Protected Activity Not Prohibited. Consultant understands that nothing in this Agreement shall in any way limit or prohibit Consultant
from engaging in any Protected Activity. For purposes of this Agreement, “Protected Activity” shall mean filing a charge, complaint, or report with, or
otherwise communicating, cooperating, or participating in any investigation or proceeding that may be conducted by, any federal, state or local government
agency or commission, including the Securities and Exchange Commission (“Government Agencies”). Consultant understands that in connection with such
Protected Activity, Consultant is permitted to disclose documents or other information as permitted by law, and without giving notice to, or receiving
authorization from, the Company. Notwithstanding the foregoing, Consultant agrees to take all reasonable precautions to prevent any unauthorized use or
disclosure of any information that may constitute Company confidential information to any parties other than the Government Agencies. Consultant further
understands that “Protected Activity” does not include the disclosure of any Company attorney-client privileged communications. Pursuant to the Defend
Trade Secrets Act of 2016, Consultant is notified that an individual will not be held criminally or civilly liable under any federal or state trade secret law for
the disclosure of a trade secret that (i) is made in confidence to a federal, state, or local government official (directly or indirectly) or to an attorney solely
for the purpose of reporting or investigating a suspected violation of law, or (ii) is made in a complaint or other document filed in a lawsuit or other
proceeding, if (and only if) such filing is made under seal. In addition, an individual who files a lawsuit for retaliation by an employer for reporting a
suspected violation of law may disclose the trade secret to the individual’s attorney and use the trade secret information in the court proceeding, if the
individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.
(signature page follows)
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IN WITNESS WHEREOF, the Parties hereto have executed this Consulting Agreement as of the date first written above.
CONSULTANT
/s/ Andrew Boll
By:
Name: Andrew Boll
Address for Notice:
VISIONOLOGY, INC.
/s/ Mark Baum
By:
Name: Mark Baum
Title: CEO
EXHIBIT A
SERVICES AND COMPENSATION
1. Contact. Consultant’s principal Company contact:
Name: Mark Baum____________
Title: CEO__________________
Email: mark@harrowinc.com_____
Phone: (615) 733-4733__________
2. Services. Consultant shall provide management advisory services to the Company relating to its establishment, financing activities and other
related services as may be requested from time to time by the Company.
3. Compensation.
A. Upon or shortly following commencement of Consultant’s Services to the Company, and subject to the approval of the Company’s
Board of Directors, the Company shall issue to Consultant 350,000 shares of the Company’s common stock (“Common Stock”), par value $0.001 per share
(the “Shares”). The Shares shall be subject to the terms and conditions of the Plan and a restricted stock award agreement between the Company and
Consultant.
B. The Shares subject to the Restricted Stock Award shall vest upon the earliest of:
(1) a Change in Control (as defined in the Plan);
(2) the date of any underwriting agreement between the Company and the underwriter(s) managing an initial public
offering of Common Stock, pursuant to which the Common Stock is priced for initial public offering; or
(3) the date of closing of a bona-fide equity financing with third party investors resulting in cash gross proceeds to the
Company of at least $10,000,000 (the “Qualified Financing”);
and in any case of (1), (2) and (3), (each a “Vesting Event”), subject to Consultant’s continuous status as a Service Provider (as defined in the Plan) through
the date of such Vesting Event; provided, however, in the event Consultant’s continuous status as a Service Provider is terminated by the Company (other
than for Cause or by the Consultant (as defined in the Plan)) prior to the completion of the Term (as defined in this Agreement), the Shares shall vest
immediately upon such termination.
C. All payments and benefits provided for under this Agreement are intended to be exempt from or otherwise comply with the
requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and guidance thereunder (together, “Section 409A”),
so that none of the payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities
or ambiguous terms herein will be interpreted to be exempt or so comply. Each payment and benefit payable under this Agreement is intended to constitute
a separate payment for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. In no event will the Company reimburse Consultant for any taxes
that may be imposed on Consultant as a result of Section 409A.
This Exhibit A is accepted and agreed upon as of July 1, 2020.
CONSULTANT
/s/ Andrew Boll
By:
Name: Andrew Boll
VISIONOLOGY, INC.
/s/ Mark Baum
By:
Name: Mark Baum
Title: CEO
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Exhibit 10.60
12264 El Camino Real
Suite 350
San Diego, CA 92130
Main: 844.446.6979
Facsimile: 858.345.1745
www.imprimisrx.com
November 12, 2020
VIA EMAIL
EyePoint Pharmaceuticals, Inc.
480 Pleasant Street
Suite B300
Watertown, Massachusetts 02472
Attn: Nancy Lurker
Email: nlurker@eyepointpharma.com
Re:
Amendment One to the Commercial Alliance Agreement
Dear Ms. Lurker:
EyePoint Pharmaceuticals, Inc. (“EyePoint”) and ImprimisRx, LLC (“Imprimis”) have entered into a Commercial Alliance Agreement effective as of
August 1, 2020 (the “Agreement”). Capitalized terms used but not defined in this letter have their respective meanings set forth in the Agreement. All
changes to the Agreement described below shall be effective as of October 1, 2020. For good and valuable consideration, the sufficiency of which is hereby
acknowledged, the Parties hereby agree as follows:
Changes to the Agreement:
Notwithstanding anything to the contrary in the Agreement, the terms of this letter describe (a) the distinction between Customers and EyePoint Accounts,
(b) the Baseline Period and (c) certain definitions and provisions related to the term of the Agreement and the timing of Imprimis’ obligations and
minimum sales.
● All Group A Customers, Group B Customers, and Group 2 (Exhibit D) are Customers under the Agreement. Section 1.1.11 is thus amended and
replaced with the following:
“Customers” means, collectively, (a) the Group A Customers, (b) the Group B Customers, (c) Group 2 (Referred to in Exhibit D and
specifically in Exhibit F to this Amendment One to the Commercial Alliance Agreement) and (c) if added to this Agreement pursuant to
Section 3.4, any other such Third Party.
● As mutually agreed by the Parties, EyePoint has identified certain customer accounts to be EyePoint growth accounts that are not and will not be
“Customers” under the Agreement and for which Imprimis will receive no Remittance Amount unless otherwise agreed by the Parties in writing.
These accounts consist fifty-one (51) Imprimis customers for products other than for steroid products for injectable administration and one
hundred twelve (112) accounts that are not currently purchasing any products from Imprimis (collectively, “EyePoint Accounts”). The EyePoint
Accounts are set forth on Exhibit E attached to this Amendment One to the Commercial Alliance Agreement. For purposes of clarity and the
avoidance of doubt, if a surgeon uses a Product that was purchased by an Exhibit E EyePoint Account, the Remittance Percentage for such
Product shall be zero.
● Any Imprimis customer that is not a Customer and is not using Product purchased by an EyePoint Account (i) may be added as a Customer to the
Agreement pursuant to Section 3.4 (in the event of a bona fide inquiry received by Imprimis for sale of a Product from a Third Party that is not an
existing Customer or an EyePoint Account) or, in all other cases, (ii) may be added either as a Customer or as an EyePoint Account, as shall be
determined in good faith by the Commercialization Committee.
● The Parties agree to simplify the calculation for the “Baseline Period.” Accordingly, Section 1.1.3 is amended and replaced with the following:
○ “Baseline Period” means (a) with respect to the Group A Customers, the Group B Customers and the Group C Customers, the non-
consecutive [***] period consisting of [***], and (b) with respect to any other Customer, such [***]period as determined by the
Commercialization Committee pursuant to Section 7.1.2.
● If Imprimis achieves bona fide Customer orders (i.e., Customer Demand in excess of Baseline Demand) for [***] or more units of Product in the
aggregate from the Effective Date through [***] (the “[***] Threshold”), then three months shall be added to the first Minimum Year. If the [***]
Threshold is achieved, the definition of “Minimum Year” shall be amended to read as follows: “(a) the first [***] period of the Term and (b)
beginning the first day of the calendar quarter immediately after such period, each successive one-year period thereafter during the Term.”
Otherwise, regardless of whether the [***] Threshold may be achieved, the definition of “Minimum Year” is hereby amended to read as follows:
“(a) the [***] period of the Term and (b) beginning the first day of the calendar quarter immediately after such period, each successive one-year
period thereafter during the Term.”
● Three months is added to the end of the Term. The Term commenced on the Effective Date (August 1, 2020) and now expires on November 1,
2025. Section 13.1 is amended accordingly.
Additional Terms:
Imprimis understands that EyePoint may need to hire additional employees to ramp up production and sales of the Product. Imprimis also understands that
in order to support the growth of Imprimis’ sales of the Product, Imprimis will likely need to hire additional employees, including employees focused on
reimbursement matters and Customer training. Subject to the Parties’ mutual written agreement, Imprimis will cover all or a substantial portion of these
costs and will discuss the details in the Commercialization Committee.
With respect to Group 2 (Exhibit D), the Parties agree that these are “overlap accounts” and that they shall collaboratively work to determine sales tactics to
sell Products to these accounts.
Imprimis understands that EyePoint makes samples and training units of the Product available to Customers. Imprimis agrees that EyePoint will have the
right to deduct from the Remittance Amount an amount equal to EyePoint’s cost (from its CMO and estimated to be [***] per unit) for samples and
training units of Product made available to Customers of Imprimis during each calendar quarter. Any deductions for samples will not be included in the
calculation of Net Sales and Net Selling Price associated with the Product.
The Parties will engage in good faith discussions regarding EyePoint selling Imprimis products. This may include a commission rate on those sales or a
credit back to EyePoint based on Dexycu sales.
This letter will be governed by and construed under and in accordance with the laws of the State of Delaware, without regard to the conflicts of laws
principles thereof.
If the foregoing is acceptable to you, please sign and return one fully-executed copy of this letter to us at your earliest convenience, which shall evidence
your acknowledgement and acceptance thereto. This letter may be executed in counterparts, each of which shall be deemed to be an original and together
shall be deemed to be one and the same document.
[Signature Page Follows.]
Very truly yours,
ImprimisRx, LLC
/s/ John Saharek
By:
Name: John Saharek
Title: President
Agreed to and accepted:
EyePoint Pharmaceuticals, Inc.
/s/ Nancy Lurker
By:
Name: Nancy Lurker
Title: President & CEO
Date: 11/13/2020
HARROW HEALTH, INC. SUBSIDIARIES
as of December 31, 2020
Exhibit 21.1
Name of Subsidiary
ImprimisRx, LLC
Imprimis NJOF, LLC
ImprimisRx NJ, LLC
Park Compounding, Inc.
Harrow IP, LLC
Eton Pharma Equity, LLC
Surface Pharma Equity, LLC
Melt Pharma Equity, LLC
Stowe Pharma Equity, LLC
Mayfield Pharma Equity, LLC
Visionology Equity, LLC
Stowe Pharmaceuticals, Inc.
Radley Pharmaceuticals, Inc.
Mayfield Pharmaceuticals, Inc.
Visionology, Inc.
Visionology MSO, Inc.
State of
Incorporation or
Organization
Delaware
New Jersey
New Jersey
California
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-159159, 333-183488, 333-198674 and 333-220186 on Form S-8 and
Registration Statement Nos. 333-215672 and 333-239669 on Form S-3 of our report dated March 8, 2021, relating to the consolidated financial statements
of Harrow Health, Inc. and subsidiaries, appearing in this Annual Report on Form 10-K of Harrow Health, Inc. for the year ended December 31, 2020.
Exhibit 23.1
/s/ KMJ Corbin & Company LLP
Irvine, California
March 8, 2021
\
Exhibit 31.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Mark L. Baum, certify that:
(1) I have reviewed this Form 10-K for the fiscal year ended December 31, 2020 of Harrow Health, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in the report any change in this registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 8, 2021
/s/ Mark L. Baum
Mark L. Baum
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Andrew R. Boll, certify that:
(1) I have reviewed this Form 10-K for the fiscal year ended December 31, 2020 of Harrow Health, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in the report any change in this registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 8, 2021
/s/ Andrew R. Boll
Andrew R. Boll
Chief Financial Officer
HARROW HEALTH, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Mark L. Baum, Chief Executive Officer of Harrow Health Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) the Annual Report on Form 10-K of the Company for the annual period ended December 31, 2020 (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 8, 2021
/s/ Mark L. Baum
Mark L. Baum
Chief Executive Officer
The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 1350 of Title
18 of the United States Code and, accordingly, is not being filed with the U.S. Securities and Exchange Commission as part of the Report and is not to be
incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or
after the date of the Report, irrespective of any general incorporation language contained in such filing).
HARROW HEALTH, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Andrew R. Boll, Chief Financial Officer of Harrow Health Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) the Annual Report on Form 10-K of the Company for the annual period ended December 31, 2020 (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 8, 2021
/s/ Andrew R. Boll
Andrew R. Boll
Chief Financial Officer
The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 1350 of Title
18 of the United States Code and, accordingly, is not being filed with the U.S. Securities and Exchange Commission as part of the Report and is not to be
incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or
after the date of the Report, irrespective of any general incorporation language contained in such filing).