HARROW, INC. 10-Q

Item 1. Financial Statements HARROW HEALTH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) June 30, 2020 December 31, 2019 June 30, December 31, 2020 2019 (unaudited) ASSETS Current assets Cash and cash equivalents, including restricted cash of $ 200 $ 4,102 $ 4,949 Investment in Eton Pharmaceuticals 19,075 25,200 Accounts receivable, net 2,018 2,009 Inventories 3,841 3,301 Prepaid expenses and other current assets 1,333 1,308 Total current assets 30,369 36,767 Property, plant and equipment, net 4,993 5,375 Operating lease right-of-use assets 6,259 6,559 Intangible assets, net 1,960 2,337 Investment in Surface Pharmaceuticals 2,809 3,747 Investment in Melt Pharmaceuticals 2,732 3,968 Goodwill 332 332 TOTAL ASSETS $ 49,454 $ 59,085 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued expenses $ 5,780 $ 7,702 Accrued payroll and related liabilities 3,169 2,117 Deferred revenue and customer deposits 53 57 Current portion of paycheck protection program loan payable 827 - Current portion of loan payable, net of unamortized debt discount 2,595 1,772 Current portion of operating lease liabilities 651 629 Current portion of finance lease obligations 8 7 Total current liabilities 13,083 12,284 Operating lease liabilities, net of current portion 6,026 6,338 Finance lease obligations, net of current portion 22 26 Accrued expenses, net of current portion 800 800 Paycheck protection program loan payable, net of current portion 1,140 - Loan payable, net of current portion and unamortized debt discount 12,987 12,219 TOTAL LIABILITIES 34,058 31,667 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY Common stock, $ 0.001 par value, 50,000,000 shares authorized, 25,649,171 and 25,526,931 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively 26 26 Additional paid-in capital 102,889 101,728 Accumulated deficit ( 87,187 ) ( 74,043 ) TOTAL HARROW HEALTH STOCKHOLDERS’ EQUITY 15,728 27,711 Noncontrolling interests ( 332 ) ( 293 ) TOTAL STOCKHOLDERS’ EQUITY 15,396 27,418 TOTAL LIABILITIES AND EQUITY $ 49,454 $ 59,085 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 3 HARROW HEALTH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except for share and per share data) For the Three Months Ended June 30 2020 For the Three Months Ended June 30 2019 For the Six Months Ended June 30 2020 For the Six Months Ended June 30 2019 For the For the For the For the Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2020 2019 2020 2019 Revenues: Product sales, net $ 8,049 $ 13,509 $ 19,859 $ 25,792 License 11 7 18 14 Total revenues 8,060 13,516 19,877 25,806 Cost of sales ( 3,204 ) ( 5,225 ) ( 6,830 ) ( 9,123 ) Gross profit 4,856 8,291 13,047 16,683 Operating expenses: Selling, general and administrative 6,954 8,248 15,370 16,791 Research and development 749 810 1,152 1,215 Impairment of intangible assets 363 - 363 - Total operating expenses 8,066 9,058 16,885 18,006 Loss from operations ( 3,210 ) ( 767 ) ( 3,838 ) ( 1,323 ) Other income (expense): Interest expense, net ( 505 ) ( 716 ) ( 1,065 ) ( 1,319 ) Investment (loss) gain from Melt Pharmaceuticals, net ( 690 ) ( 326 ) ( 1,236 ) 5,199 Investment loss from Surface Pharmaceuticals, net ( 599 ) ( 261 ) ( 938 ) ( 504 ) Investment gain (loss) from Eton Pharmaceuticals, net 4,725 ( 350 ) ( 6,125 ) 6,230 Other income, net 19 - 19 630 Total other (expense) income, net 2,950 ( 1,653 ) ( 9,345 ) 10,236 (Loss) income before income taxes ( 260 ) ( 2,420 ) ( 13,183 ) 8,913 Income tax benefit, net - - - - Total net (loss) income including noncontrolling interests ( 260 ) ( 2,420 ) ( 13,183 ) 8,913 Net loss attributable to noncontrolling interest 23 42 39 67 Net (loss) income attributable to Harrow Health, Inc. $ ( 237 ) $ ( 2,378 ) $ ( 13,144 ) $ 8,980 Basic net (loss) income per share of common stock $ ( 0.01 ) $ ( 0.09 ) $ ( 0.51 ) $ 0.36 Diluted net (loss) income per share of common stock $ ( 0.01 ) $ ( 0.09 ) $ ( 0.51 ) $ 0.34 Weighted average number of shares of common stock outstanding, basic 25,893,629 25,216,565 25,867,478 25,030,012 Weighted average number of shares of common stock outstanding, diluted 25,893,629 25,216,565 25,867,478 26,696,683 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 4 HARROW HEALTH, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Three and Six Months Ended June 30, 2020 and 2019 (In thousands, except for share data) Common Additional Accumul Total Total Total Total Common Stock Additional Harrow Health, Inc. Total Total Par Paid-in Accumulated Stockholders’ Noncontrolling Stockholders’ Shares Value Capital Deficit Equity Interest Equity Balance at March 31, 2019 24,718,649 $ 25 $ 99,887 $ ( 62,853 ) $ 37,059 $ ( 25 ) $ 37,034 Issuance of common stock in connection with: Exercise of warrants 399,354 - 17 - 17 - 17 Exercise of employee stock-based options 20,955 - - - - - - Vesting of RSUs Vesting of RSUs, shares Stock-based payment for services provided Stock-based payment for services provided, shares Stock-based compensation expense - - 367 - 367 - 367 Net loss - - - ( 2,378 ) ( 2,378 ) ( 42 ) ( 2,420 ) Balance at June 30, 2019 25,138,958 $ 25 $ 100,271 $ ( 65,231 ) $ 35,065 $ ( 67 ) $ 34,998 Total Common Stock Additional Harrow Health, Inc. Total Total Par Paid-in Accumulated Stockholders’ Noncontrolling Stockholders’ Shares Value Capital Deficit Equity Interest Equity Balance at March 31, 2020 25,618,918 $ 26 $ 102,261 $ ( 86,950 ) $ 15,337 $ ( 309 ) $ 15,028 Issuance of common stock in connection with: Exercise of employee stock-based options 253 - - - - - - Stock-based payment for services provided 30,000 - 83 - 83 - 83 Stock-based compensation expense - - 545 - 545 - 545 Net loss - - - ( 237 ) ( 237 ) ( 23 ) ( 260 ) Balance at June 30, 2020 25,649,171 $ 26 $ 102,889 $ ( 87,187 ) $ 15,728 $ ( 332 ) $ 15,396 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 5 Total Common Stock Additional Harrow Health, Inc. Total Total Par Paid-in Accumulated Stockholders’ Noncontrolling Stockholders’ Shares Value Capital Deficit Equity Interest Equity Balance at December 31, 2018 24,339,610 $ 24 $ 98,938 $ ( 74,211 ) $ 24,751 $ - $ 24,751 Issuance of common stock in connection with: Exercise of warrants 763,393 1 178 - 179 - 179 Exercise of employee stock-based options 20,955 - - - - - - Stock-based payment for services provided 15,000 - 75 - 75 - 75 Stock-based compensation expense - - 1,080 - 1,080 - 1,080 Net income (loss) - - - 8,980 8,980 ( 67 ) 8,913 Balance at June 30, 2019 25,138,958 $ 25 $ 100,271 $ ( 65,231 ) $ 35,065 $ ( 67 ) $ 34,998 Total Common Stock Additional Harrow Health, Inc. Total Total Par Paid-in Accumulated Stockholders’ Noncontrolling Stockholders’ Shares Value Capital Deficit Equity Interest Equity Balance at December 31, 2019 25,526,931 $ 26 $ 101,728 $ ( 74,043 ) $ 27,711 $ ( 293 ) $ 27,418 Issuance of common stock in connection with: Exercise of employee stock-based options 253 - - - - - - Vesting of RSUs 91,987 - - - - - - Stock-based payment for services provided 30,000 - 83 - 83 - 83 Stock-based compensation expense - - 1,078 - 1,078 - 1,078 Net loss - - - ( 13,144 ) ( 13,144 ) ( 39 ) ( 13,183 ) Balance at June 30, 2020 25,649,171 $ 26 $ 102,889 $ ( 87,187 ) $ 15,728 $ ( 332 ) $ 15,396 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 6 HARROW HEALTH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Six Months Ended June 30 2020 For the Six Months Ended June 30 2019 For the For the Six Months Ended Six Months Ended June 30, June 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income (including noncontrolling interests) $ ( 13,183 ) $ 8,913 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization of property, plant and equipment 913 968 Amortization of intangible assets 88 125 Amortization of operating lease right-of-use assets 341 256 Amortization of debt issuance costs and discount 243 263 Provision for bad debt expense 302 - Investment loss (gain) from Eton, net 6,125 ( 6,230 ) Investment loss from Surface, net 938 504 Investment loss (gain) from Melt, net 1,236 ( 5,199 ) Loss on sale and disposal of assets 5 76 Interest paid-in-kind on loan payable 348 - Impairment of intangible assets 363 - Stock-based payment of consulting services 83 75 Stock-based compensation 1,078 1,080 Changes in assets and liabilities: Accounts receivable ( 311 ) ( 309 ) Inventories ( 540 ) ( 818 ) Prepaid expenses and other current assets ( 25 ) ( 564 ) Accounts payable and accrued expenses ( 2,253 ) 830 Accrued payroll and related liabilities 1,052 ( 707 ) Deferred revenue and customer deposits ( 4 ) 105 NET CASH USED IN OPERATING ACTIVITIES ( 3,201 ) ( 632 ) CASH FLOWS FROM INVESTING ACTIVITIES Investment in patent and trademark assets ( 74 ) ( 220 ) Purchases of property, plant and equipment ( 536 ) ( 565 ) NET CASH USED IN INVESTING ACTIVITIES ( 610 ) ( 785 ) CASH FLOWS FROM FINANCING ACTIVITIES Payments on finance lease obligations ( 3 ) ( 375 ) Proceeds from SWK debt 1,000 - Principal payments on loan payable - ( 750 ) Payments of costs related to amendment of loan payable - ( 282 ) Net proceeds from Payroll Protection Program loan payable 1,967 - Net proceeds from exercise of warrants - 179 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,964 ( 1,228 ) NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH ( 847 ) ( 2,645 ) CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period 4,949 6,838 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period $ 4,102 $ 4,193 RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH Cash and cash equivalents $ 3,902 $ 3,993 Restricted cash 200 200 CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD $ 4,102 $ 4,193 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ - $ 8 Cash paid for interest $ 408 $ 1,053 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Right-of-use asset obtained in exchange for lease obligation $ 41 $ - Acquisition of property, plant and equipment with finance lease obligations $ - $ 40 Purchase of property, plant and equipment included in accounts payable and accrued expenses $ - $ 11 The accompanying notes are an integral part of these consolidated financial statements. 7 HARROW HEALTH, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Three and Six Months Ended June 30, 2020 and 2019 (Dollar amounts in thousands, except share and per share data) NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Company and Background Harrow Health, Inc. (together with its subsidiaries, partially owned companies and royalty arrangements unless the context indicates or otherwise requires, the “Company” or “Harrow”) specializes in the development, production and sale of innovative medications that offer unique competitive advantages and serve unmet needs in the marketplace through its subsidiaries and deconsolidated companies. The Company owns one of the nation’s leading ophthalmology-focused pharmaceutical businesses, ImprimisRx. In addition to wholly owning ImprimisRx, the Company also has equity positions in Eton Pharmaceuticals, Inc. (“Eton”), Surface Pharmaceuticals, Inc. (“Surface”), and Melt Pharmaceuticals, Inc. (“Melt”), all companies that began as subsidiaries of Harrow. More recently, the Company founded drug development subsidiaries Mayfield Pharmaceuticals, Inc. (“Mayfield”) and Stowe Pharmaceuticals, Inc. (“Stowe”), among others. In 2020, Harrow created Visionology, Inc., which intends to launch an online eye health platform business. Harrow also owns royalty rights in various drug candidates being developed by Surface, Melt and Mayfield. The Company intends to continue to create, and hold equity and royalty rights in, new businesses that commercialize drug candidates that are internally developed or otherwise acquired or licensed from third parties. Basis of Presentation The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or for any other period. For further information, refer to the Company’s audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, as well as Mayfield ( 79% majority controlled) and Stowe ( 70% majority controlled) each subsidiaries of Harrow as of June 30, 2020. The remaining 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-focused drug candidates. The remaining 30 % of Stowe is owned by TGV. Stowe was organized to develop ophthalmic drug candidates. All inter-company accounts and transactions have been eliminated in consolidation. Harrow consolidates entities in which it has 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. The condensed consolidated balance sheets at June 30, 2020 and December 31, 2019 and the condensed consolidated statements of operations, stockholders’ equity and cash flows for the periods ended June 30, 2020 and 2019 include our accounts and those of our wholly owned subsidiaries as well as Mayfield and Stowe. 8 Risks, Uncertainties and Liquidity The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. On March 18, 2020, the Centers for Medicare & Medicaid Services (“CMS”) released guidance for U.S. healthcare providers to limit all elective medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the pendency of the pandemic. In addition to limiting elective medical procedures, many hospitals and other healthcare providers have strictly limited access to their facilities during the pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and healthcare delivery, led to social distancing recommendations, stay-at-home orders and other restrictive measures, and created significant volatility in financial markets. Many of the Company’s customers use its drugs in procedures impacted by the CMS guidance to limit elective procedures. In addition, the Company and our business partners need access to healthcare providers and facilities to conduct clinical trials and other activities required to achieve regulatory clearance of products under development. The Company believes reductions in elective procedures in response to CMS guidance have had, and will continue to have, an adverse impact, which may be material, on the Company’s financial condition, liquidity and results of operations. The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on its customers, all of which are uncertain and cannot be predicted. As of the date of issuance of this Quarterly Report, the extent to which the COVID-19 pandemic may materially impact the Company’s financial condition, liquidity or results of operations is uncertain. For further information, refer to “Risk Factors” in Part II, Item 1A of this Quarterly Report and information in the Company’s other filings with the Securities and Exchange Commission. The Company has incurred significant operating losses and negative cash flows from operations since its inception. The Company incurred operating losses of $ 3,838 and $ 1,323 for the six months ended June 30, 2020 and 2019, respectively, and had an accumulated deficit of $ 87,187 and $ 74,043 as of June 30, 2020 and December 31, 2019, respectively. In addition, the Company used cash in operating activities of $ 3,201 and $ 632 for the six months ended June 30, 2020 and 2019, respectively. While there is no assurance, management of the Company believes existing cash resources and restricted cash of $ 4,102 at June 30, 2020 together with cash generated from revenues, 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 could be incorrect, and 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. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following represents an update for the three and six months ended June 30, 2020 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Segments The Company’s chief operating decision-maker is its Chief Executive Officer who makes resource allocation decisions and assesses performance based on financial information presented as operating segments. The Company has identified two operating segments as reportable segments. See Note 15 for more information regarding the Company’s reportable segments. Noncontrolling Interests The Company recognizes any noncontrolling interest as a separate line item in equity in the condensed consolidated financial statements. A noncontrolling interest represents the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to the Company. 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 income (loss) attributable to noncontrolling interests in consolidated net income (loss) on the face of the condensed consolidated statements of operations. 9 The Company provides in the condensed consolidated statements of stockholders’ equity a reconciliation at the beginning and the end of the period of the carrying amount of total equity, equity attributable to the parent, and equity attributable to the noncontrolling interests that separately discloses: (1) net income or loss; (2) transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and (3) each component of other income or loss. Basic 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 5,414,504 and 5,331,883 at June 30, 2020 and 2019, respectively, and, except for the six months ended June 30, 2019, are excluded from the calculation of diluted net income (loss) per share for the periods presented, because the effect is anti-dilutive. 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 June 30, 2020 and 2019 was 251,746 and 304,873 , respectively. The following table shows the computation of basic net income (loss) per share of common stock for the three and six months ended June 30, 2020 and 2019: SCHEDULE OF BASIC EARNINGS PER COMMON SHARE 2020 2019 2020 2019 For the Three Months Ended For the Six Months Ended June 30, June 30, 2020 2019 2020 2019 Numerator – net (loss) income attributable to Harrow Health, Inc. $ ( 237 ) $ ( 2,378 ) $ ( 13,144 ) $ 8,980 Denominator – weighted average number of shares outstanding, basic 25,893,629 25,216,565 25,867,478 25,030,012 Net (loss) income per share, basic $ ( 0.01 ) $ ( 0.09 ) $ ( 0.51 ) $ 0.36 For the six months ended June 30, 2019, the Company had net income. As a result, the Company computed diluted net income per share using the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period. Diluted common equivalent shares for the six months ended June 30, 2019, consisted of the following: SCHEDULE OF DILUTED COMMON EQUIVALENT SHARES For the Six Months Ended June 30, 2019 Diluted shares related to: Warrants 1,028,780 Stock options 637,891 Dilutive common equivalent shares 1,666,671 10 The following table shows the computation of diluted net income (loss) per share of common stock for the three and six months ended June 30, 2020 and 2019: SCHEDULE OF DILUTED EARNINGS PER COMMON SHARE 2020 2019 2020 2019 For the Three Months Ended For the Six Months Ended June 30, June 30, 2020 2019 2020 2019 Numerator – net (loss) income attributable to Harrow Health, Inc. $ ( 237 ) $ ( 2,378 ) $ ( 13,144 ) $ 8,980 Denominator – weighted average number of shares outstanding, basic 25,893,629 25,216,565 25,867,478 25,030,012 Dilutive common equivalents - - - 1,666,671 Number of shares used for diluted income (loss) per share computation 25,893,629 25,216,565 25,867,478 26,696,683 Net (loss) income per share, basic $ ( 0.01 ) $ ( 0.09 ) $ ( 0.51 ) $ 0.34 Investment in Eton Pharmaceuticals, Inc. – Related Party The Company owns 3,500,000 shares of Eton common stock, which represents approximately 16.7 % of the equity and voting interests of Eton as of June 30, 2020. At June 30, 2020 the fair market value of Eton’s common stock was $ 5.45 per share. In accordance with the Accounting Standards Update (“ASU”) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities , for the three and six months ended June 30, 2020, the Company recorded an investment gain (loss) from its Eton common stock position of $ 4,725 and $ ( 6,125 ), respectively , related to the change in fair market value of the Company’s investment in Eton during the measurement periods. As of June 30, 2020, the fair market value of the Company’s investment in Eton was $ 19,075 . Mark Baum, the Company’s Chief Executive Officer, is a member of the board of directors of Eton. Investment in Melt Pharmaceuticals, Inc. – Related Party In April 2018, the Company formed Melt as a wholly owned subsidiary. In January and March of 2019, Melt entered into definitive stock purchase agreements (collectively, the “Melt Series A Preferred Stock Agreement”) with certain investors and closed on the sale of Melt’s Series A Preferred Stock (the “Melt Series A Stock”), totaling approximately $ 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 Accounting Standard Codification (“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 June 30, 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 condensed 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 loss of Melt of $690 and $ 1,236 during the three and six months ended June 30, 2020, respectively. The Company recorded equity in the net loss of Melt of $ 326 and $ 611 during the three and six months ended June 30, 2019, respectively. As of June 30, 2020, the carrying value of the Company’s investment in Melt was $ 2,732 . See Note 4 for more information and related party disclosure regarding Melt. 11 Investment in Surface Pharmaceuticals, Inc. – Related Party The Company owns 3,500,000 common shares (which is approximately 30 % of the equity interests as of June 30, 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 condensed 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 $ 599 and $ 938 during the three and six months ended June 30, 2020, respectively. The Company recorded equity in the net loss of Surface of $ 261 and $ 504 during the three and six months ended June 30, 2019, respectively. As of June 30, 2020, the carrying value of the Company’s investment in Surface was $ 2,809 . See Note 5 for more information and related party disclosure regarding Surface. Recently Adopted Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments , which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. The Company adopted ASU 2016-13 on January 1, 2020, and adoption of the standard did not have a material effect on the Company’s consolidated financial position, results of operations and cash flows. In August 2018, the FASB issued ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements , which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements. The Company adopted ASU 2018-13 on January 1, 2020, and adoption of the standard did not have a material effect on the Company’s consolidated financial position, results of operations and cash flows. In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other . This guidance simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the current two-step impairment test under ASC 350. The updated standard eliminates the requirement to calculate a goodwill impairment charge using Step 2. If a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for reporting periods beginning after December 31, 2019 on a prospective basis, and early adoption is permitted. The Company adopted ASU 2017-04 on January 1, 2020, and adoption of the standard did not have a material effect on the Company’s consolidated financial position, results of operations and cash flows. Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes , as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted. The Company does not expect ASU 2019-12 to have a material impact on its consolidated financial position, results of operations and cash flows. NOTE 3. REVENUES The Company accounts for contracts with customers in accordance with ASC 606, Revenues from Contracts with Customers . The Company has two primary streams of revenues: (1) revenues recognized from our sale of products within our pharmacy services and (2) revenues recognized from intellectual property license and asset purchase agreements. 12 Product Revenues from Pharmacy Services The Company sells prescription drugs directly through our pharmacy and outsourcing facility network. Revenues from our pharmacy services division includes: (i) the portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the client, (ii) the price paid to us by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are not included in revenue. Following the core principle of ASC 606, we have identified the following: 1. Identify the contract(s) with a customer: A contract exists with a customer at the time the prescription or order is received by the Company. 2. Identify the performance obligations in the contract: The order received contains the performance obligations to be met, in almost all cases the product the customer is wishing to receive. If we are unable to be meet the performance obligation, the customer is notified. 3. Determine the transaction price: the transaction price is based on the product being sold to the customer, and any related customer discounts. These amounts are pre-determined and built into our order management software. 4. Allocate the transaction price to the performance obligations in the contract: The transaction price associated with the product(s) being ordered is allocated according to the pre-determined amounts. 5. Recognize revenue when (or as) the entity satisfies a performance obligation: At the time of shipment from the pharmacy or outsourcing facility, the performance obligation has been met. The following revenue recognition policy has been established for the pharmacy services division: Revenues generated from prescription or office use drugs sold by our pharmacies and outsourcing facility are recognized when the prescription is shipped. At the time of shipment, the pharmacy services division has performed substantially all of its obligations under its client contracts and does not experience a significant level of returns or reshipments. Determination of criteria (3) and (4) is based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. The Company records reductions to revenue for discounts at the time of the initial sale. Estimated returns and allowances and other adjustments are provided for in the same period during which the related sales are recorded and are based on actual returns history. The rate of returns is analyzed annually to determine historical returns experience. If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. The Company will defer any revenues received for a product that has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered and no refund will be required. Intellectual Property License Revenues The Company currently holds five intellectual property license and related agreements in which the Company has sold or granted a license which provides a customer with the right to access the Company’s intellectual property. License arrangements may include or require non-refundable upfront license fees, data transfer fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and various performance or sales milestones. These arrangements can be multiple-element arrangements, the revenue of which is recognized at the point of time the performance obligation is met. Non-refundable fees that are not contingent on any future performance by the Company and require no consequential continuing involvement on the part of the Company are recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverable is delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications for such compounded drug preparations. The Company defers recognition of non-refundable fees if it has continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and that are separate and independent of the Company’s performance under the other elements of the arrangement. In addition, if the Company’s continued involvement is required, through research and development services that are related to its proprietary know-how and expertise of the delivered technology or can only be performed by the Company, then such non-refundable fees are deferred and recognized over the period of continuing involvement. Guaranteed minimum annual royalties are recognized on a straight-line basis over the applicable term. 13 Revenue disaggregated by revenue source for the three and six months ended June 30, 2020 and 2019, consists of the following: SCHEDULE OF DISAGGREGATED REVENUE For the Three Months Ended For the Six Months Ended June 30, June 30, 2020 2019 2020 2019 Product sales, net $ 8,049 $ 13,509 $ 19,859 $ 25,792 License 11 7 18 14 Total revenues $ 8,060 $ 13,516 $ 19,877 $ 25,806 Deferred revenue and customer deposits at June 30, 2020 and December 31, 2019, was $ 53 and $ 57 , respectively. All deferred revenue and customer deposit amounts at December 31, 2019 were recognized as revenue during the six months ended June 30, 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 royalty payments to the Company up to 5 % of 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. In February 2019, the Company and Melt entered into a Management Services Agreement (the “Melt MSA”), whereby the Company provides to Melt certain administrative services and support, including bookkeeping, web services and human resources related activities, and Melt pays the Company a monthly amount of $ 10 . As of June 30, 2020, the Company was due $ 785 from Melt for reimbursable expenses and amounts due under the Melt MSA and are included in prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets. During the three and six months ended June 30, 2020, Melt paid the Company $ 0 . The Company’s Chief Executive Officer, Mark L. Baum, and Chief Medical Officer, Larry Dillaha, are members of the Melt board of directors. The unaudited condensed results of operations information of Melt is summarized below: SCHEDULE OF CONDENSED INCOME STATEMENT For the Six Months Ended June 30, 2020 Revenues, net $ - Loss from operations 2,574 Net loss $ ( 2,574 ) The unaudited condensed balance sheet information of Melt is summarized below: 14 SCHEDULE OF CONDENSED BALANCE SHEET June 30, 2020 Current assets $ 4,789 Non-current assets 12 Total assets $ 4,801 Total liabilities $ 1,495 Total preferred stock and stockholders’ equity 3,306 Total liabilities and stockholders’ equity $ 4,801 NOTE 5. INVESTMENT IN SURFACE PHARMACEUTICALS, INC. AND AGREEMENTS - RELATED PARTY TRANSACTIONS The Company entered into an asset purchase and license agreement with Surface in 2017, and amended it in April 2018 (the “Surface License Agreements”). Pursuant to the terms of the Surface License Agreements, the Company assigned and licensed to Surface certain intellectual property and related rights to develop, formulate, make, sell, and sub-license ophthalmic formulations (collectively, the “Surface Products”). Surface is required to make royalty payments to the Company of 4 %- 6 % of net sales of the Surface Products while any patent rights remain outstanding. 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. The unaudited condensed results of operations information of Surface is summarized below: SUMMARY OF CONDENSED INCOME STATEMENT For the Six Months Ended June 30, 2020 Revenues, net $ - Loss from operations 3,127 Net loss $ ( 3,127 ) The unaudited condensed balance sheet information of Surface is summarized below: SUMMARY OF CONDENSED BALANCE SHEET June 30, 2020 Current assets $ 12,911 Non-current assets 45 Total assets $ 12,956 Total liabilities $ 642 Total stockholders’ equity 12,314 Total liabilities and stockholders’ equity $ 12,956 NOTE 6. INVENTORIES Inventories are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, commercial pharmaceutical products, related laboratory supplies and active pharmaceutical ingredients. The composition of inventories as of June 30, 2020 and December 31, 2019 was as follows: SCHEDULE OF INVENTORIES 15 2020 2019 June 30, December 31, 2020 2019 Raw materials $ 2,758 $ 2,405 Work in progress 2 20 Finished goods 1,081 876 Total inventories $ 3,841 $ 3,301 NOTE 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consisted of the following: SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS June 30, December 31, 2020 2019 Prepaid insurance $ 98 $ 123 Other prepaid expenses 361 358 Receivable due from Melt 785 722 Deposits and other current assets 89 105 Total prepaid expenses and other current assets $ 1,333 $ 1,308 NOTE 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, net consisted of the following: SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT 2020 2019 June 30, December 31, 2020 2019 Property, plant and equipment, net: Computer software and hardware $ 1,760 $ 1,732 Furniture and equipment 463 363 Lab and pharmacy equipment 3,399 3,164 Leasehold improvements 5,674 5,510 Property, plant and equipment, gross 11,296 10,769 Accumulated depreciation and amortization ( 6,303 ) ( 5,394 ) Property, plant and equipment, Net $ 4,993 $ 5,375 For the three and six months ended June 30, 2020, depreciation and amortization related to the property, plant and equipment was $ 465 and $ 913 , respectively. For the three and six months ended June 30, 2019, depreciation and amortization related to the property, plant and equipment was $ 491 and $ 968 , respectively. 16 NOTE 9. INTANGIBLE ASSETS AND GOODWILL The Company’s intangible assets at June 30, 2020 consisted of the following: SCHEDULE OF INTANGIBLE ASSETS Amortization periods Accumulated Net (in years) Cost amortization Impairment Carrying value Patents 17 - 19 years $ 879 $ ( 80 ) $ ( 363 ) $ 436 Licenses 20 years 50 ( 6 ) - 44 Trademarks Indefinite 348 - - 348 Customer relationships 3 - 15 years 1,519 ( 388 ) - 1,131 Trade name 5 years 5 ( 5 ) - - Non-competition clause 3 - 4 years 50 ( 50 ) - - State pharmacy licenses 25 years 8 ( 7 ) - 1 $ 2,859 $ ( 536 ) $ ( 363 ) $ 1,960 During the three and six months ended June 30, 2020, the Company recorded impairment charges of $ 363 related to patent filings associated with the products that the Company was no longer actively selling. Amortization expense for intangible assets for the three and six months ended June 30, 2020 and 2019 was as follows: SCHEDULE OF AMORTIZATION EXPENSES FOR INTANGIBLE ASSETS For the For the For the For the Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2020 2019 2020 2019 Patents $ 8 $ 11 $ 19 $ 15 Licenses - 1 1 5 Customer relationships 35 51 68 102 Trade name - - - 2 State pharmacy licenses - - - 1 $ 43 $ 63 $ 88 $ 125 Estimated future amortization expense for the Company’s intangible assets at June 30, 2020 is as follows: SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE 2020 Remainder of 2020 $ 85 2021 166 2022 166 2023 166 2024 138 Thereafter 891 Intangible assets $ 1,612 There have been no changes in the carrying value of the Company’s goodwill during the three and six months ended June 30, 2020. 17 NOTE 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following: SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2020 2019 June 30, December 31, 2020 2019 Accounts payable $ 5,530 $ 7,409 Other accrued expenses - 49 Accrued interest 250 244 Accrued exit fee for note payable 800 800 Total accounts payable and accrued expenses 6,580 8,502 Less: Current portion ( 5,780 ) ( 7,702 ) Non-current total accrued expenses $ 800 $ 800 NOTE 11. DEBT 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 (collectively, “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. The SWK Loan is secured by substantially all of the Company’s assets, including its intellectual property rights. The SWK Loan was subsequently amended in May 2019 and again in April 2020 (see below). The SWK Loan bears an interest rate that is 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%. The leverage ratio 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 12 month period, adding-back (i) actual litigation expenses for the immediately preceding 12 month period, minus (ii) actual litigation expenses for the immediately preceding 3 month period multiplied by 4. Second Amendment to SWK Loan On April 1, 2020, the Company and several of its wholly owned subsidiaries entered into a second amendment (the “SWK Amendment”) to the SWK Loan, with SWK. A summary of the material changes contained in the SWK Amendment are as follows: ● SWK agreed to make available to the Company, and the Company drew down on, an additional principal amount of $ 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 Amendment; and ● The interest payment due May 14, 2020 will be paid in kind by increasing the principal amount of the term loans by an amount equal to the interest accrued as of such date. Paycheck Protection Program Loan In April 2020, the Company entered into an unsecured promissory note and related Business Loan Agreement with Renasant Bank, as lender, for a loan (the “PPP Loan”) in the principal amount of $ 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. Under the terms of the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0 % per annum. The term of the PPP Loan is two years, unless sooner required in connection with an event of default under the PPP Loan. To the extent the PPP Loan amount is not forgiven under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the PPP Loan, until the maturity date. 18 The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company may apply for and be granted forgiveness for all or part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the eight-week period after the loan origination for certain purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments ( it being anticipated that at least 75% of the loan amount will be required to be used for eligible payroll costs ); the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible expenses during the covered eight-week period will qualify for forgiveness. While the Company intends to use 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. At June 30, 2020, future minimum payments under the Company’s debt agreements were as follows: SUMMARY OF FUTURE MINIMUM PAYMENTS 2020 Amount Remainder of 2020 $ 2,439 2021 5,430 2022 4,437 2023 9,738 Total minimum payments 22,044 Less: amount representing estimated interest ( 3,479 ) Loans payable, gross 18,565 Less: unamortized discount ( 1,016 ) Notes payable 17,549 Less: current portion, net of unamortized discount ( 3,422 ) Loans payable, net of current portion and unamortized debt discount $ 14,127 For the three and six months ended June 30, 2020, debt discount amortization related to the SWK Loan was $ 83 and $ 243 , respectively. For the three and six months ended June 30, 2019, debt discount amortization related to the SWK Loan was $ 125 and $ 263 , respectively. NOTE 12. LEASES The Company leases office and laboratory space under the non-cancelable operating leases listed below. These lease agreements have remaining lease terms between one to four years and contain various clauses for renewal at our option. ● An operating lease for 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 4,500 square feet of office and lab space in Irvine, California that expires in December 2020 , with an option to extend the term for up to two five-year periods . As part of the Company’s restructuring of the Park Compounding, Inc. (“Park”) business, the Company assessed its obligations under this lease. As of the date of this Quarterly Report, management expects the Company to sublease this space and has determined that there is a practical ability to do so, and as a result did not recognize any impairment costs related to this lease and the Company’s right to use the asset; ● An operating lease for 25,000 square feet of lab, warehouse and office space in Ledgewood, New Jersey that expires in July 2024 , with an option to extend the term for two additional five-year periods ; 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 . 19 In March 2020, the Company amended its New Jersey lease for the expansion of an additional 1,400 square feet of space which is expected to commence in September 2020 and expire in July 2026 . The March 2020 lease is not included below since the new lease term has not commenced as of June 30, 2020. At June 30, 2020, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases held by the Company were 6.32 % and 9.85 years, respectively. During the three and six months ended June 30, 2020, cash paid for amounts included for the operating lease liabilities was $ 276 and $ 547 and the Company recorded operating lease expense of $ 280 and $ 555 included in selling, general and administrative expenses, respectively. Future lease payments under operating leases as of June 30, 2020 were as follows : SCHEDULE OF FUTURE LEASE PAYMENT UNDER OPERATING LEASES 2020 Operating Leases Remainder of 2020 $ 556 2021 987 2022 1,008 2023 1,032 2024 1,035 Thereafter 4,465 Total minimum lease payments 9,083 Less: amount representing interest payments ( 2,406 ) Total operating lease liabilities 6,677 Less: current portion, operating lease liabilities ( 651 ) Operating lease liabilities, net of current portion $ 6,026 The Company also has a lease that is included in its lease accounting but is not considered significant. Future lease payments under finance leases as of June 30, 2020 were as follows : SCHEDULE OF FUTURE LEASE PAYMENT UNDER FINANCE LEASE 2020 Finance Leases Remainder of 2020 $ 5 2021 9 2022 9 2023 9 2024 1 Total minimum lease payments 33 Less: amount representing interest payments ( 3 ) Present value of future minimum lease payments 30 Less: current portion, finance lease obligation ( 8 ) Finance lease obligation, net of current portion $ 22 At June 30, 2020, the incremental borrowing rate and the remaining lease term for the finance lease held by the Company were 6.36 % and 3.58 years, respectively. For the three and six months ended June 30, 2020, depreciation expense related to the equipment held under the finance lease obligation was $ 2 and $ 4 , respectively. For each of the three and six months ended June 30, 2020, cash paid and expense recognized for interest expense related to the finance lease obligation was $ 0 and $ 1 , respectively. 20 NOTE 13. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION Common Stock In May 2020, the Company issued 30,000 shares of its restricted common stock, with a fair value of $ 167 , as consideration for commission expenses incurred during the year ended December 31, 2019 and the six months ended June 30, 2020. During the six months ended June 30, 2020, the Company issued 253 shares of its common stock upon the cashless exercise of options to purchase 750 shares of common stock, with an exercise price of $ 3.04 per share, net of 69 shares of common stock withheld for payroll tax withholdings. During the six months ended June 30, 2020, the Company issued 91,987 shares of its common stock underlying RSUs issued to a director that resigned. The RSUs had previously vested, including 2,429 RSUs during the six months ended June 30, 2020, but the issuance and delivery of the shares were deferred until the director resigned. During the six months ended June 30, 2020, 17,001 shares of the Company’s common stock underlying RSUs issued to directors vested, but the issuance and delivery of these shares are deferred until the director resigns. Stock Option Plan On September 17, 2007, the Company’s Board of Directors and stockholders adopted the Company’s 2007 Incentive Stock and Awards Plan, which was subsequently amended on November 5, 2008, February 26, 2012, July 18, 2012, May 2, 2013 and September 27, 2013 (as amended, the “2007 Plan”). The 2007 Plan reached its term in September 2017, and we can no longer issue additional awards under this plan, however, options previously issued under the 2007 Plan will remain outstanding until they are exercised, reach their maturity or are otherwise cancelled/forfeited. On June 13, 2017, the Company’s Board of Directors and stockholders adopted the Company’s 2017 Incentive Stock and Awards Plan (the “2017 Plan” together with the 2007 Plan, the “Plans”). As of June 30, 2020, the 2017 Plan provides for the issuance of a maximum of 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 414,382 shares available for future issuances under the 2017 Plan at June 30, 2020. Stock Options A summary of stock option activity under the Plans for the six months ended June 30, 2020 is as follows: SCHEDULE OF STOCK OPTION PLAN ACTIVITY Number of shares Weighted Avg. Exercise Price Weighted Avg. Remaining Contractual Life Aggregate Intrinsic Value Options outstanding - January 1, 2020 2,656,683 $ 5.30 Options granted 355,500 $ 6.57 Options exercised ( 750 ) $ 3.04 Options cancelled/forfeited ( 8,839 ) $ 3.79 Options outstanding - June 30, 2020 3,002,594 $ 5.46 6.14 $ 3,118 Options exercisable – June 30, 2020 1,779,188 $ 4.53 5.48 $ 2,749 Options vested and expected to vest – June 30, 2020 2,887,635 $ 5.40 6.09 $ 3,107 21 The aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would have been received by option holders if all option holders had exercised and immediately sold all options with an exercise price lower than the market price on June 30, 2020, based on the closing price of the Company’s common stock of $ 5.21 on that date. During the six months ended June 30, 2020, the Company granted stock options to certain employees and a consultant. The stock options were granted with an exercise price equal to the current market price of the Company’s common stock, as reported by the securities exchange on which the common stock was then listed, at the grant date and have contractual terms of 10 years. Vesting terms for options granted to employees and consultants during the three months ended June 30, 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 (the “Baum Performance Option”) to purchase 600,000 shares of the Company’s common stock 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 with a five year life, 70 % volatility and a risk-free interest rate of 0.40 %. The fair value of the modification will be recognized as stock-based compensation expense over the service period. With the exception of the Baum Performance Option, the fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The expected term of options granted to employees and directors was determined in accordance with the “simplified approach,” as the Company has limited, relevant, historical data on employee exercises and post-vesting employment termination behavior. The expected risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual effect differs from those estimates. For option grants to employees and directors, the Company assigns a forfeiture rate of 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 by the Black-Scholes-Merton option pricing model with the following assumptions used for valuing options granted to employees: SCHEDULE OF FAIR VALUE ASSUMPTIONS 2020 Weighted-average fair value of options granted $ 3.93 Expected terms (in years) 0.5 – 6.11 Expected volatility 66 % - 71 % Risk-free interest rate 0.50 % - 1.64 % Dividend yield - 22 The following table summarizes information about stock options outstanding and exercisable at June 30, 2020: SCHEDULE OF STOCK OPTION OUTSTANDING AND EXERCISABLE Options Outstanding Options Exercisable Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life in Years Price Exercisable Price $ 1.47 - $ 2.60 778,690 6.15 $ 2.05 699,301 $ 2.08 $ 2.76 - $ 4.66 535,283 6.21 $ 3.98 455,531 $ 3.98 $ 5.49 - $ 6.36 437,350 7.40 $ 6.15 235,710 $ 6.11 $ 6.64 - $ 8.99 1,246,241 5.67 $ 7.85 383,616 $ 8.19 $ 42.80 5,030 0.12 $ 42.80 5,030 $ 42.80 $ 1.47 - $ 42.80 3,002,594 6.14 $ 5.46 1,779,188 $ 4.53 As of June 30, 2020, there was approximately $ 6,383 of total unrecognized compensation expense related to unvested stock options granted under the Plans. That expense is expected to be recognized over the weighted-average remaining vesting period of 4.09 years. The stock-based compensation expense for all stock options was $ 271 and $ 534 during the three and six months ended June 30, 2020, respectively. Restricted Stock Units RSU awards are granted subject to certain vesting requirements and other restrictions, including performance and market-based vesting criteria. The grant date fair value of the RSUs, which has been determined based upon the market value of the Company’s common stock on the grant date, is expensed over the vesting period of the RSUs. During the three and six months ended June 30, 2020, the Company’s board of directors were granted 68,024 RSUs with a fair market value $ 400 which vest on a quarterly basis, over one year in equal installments. During the three and six months ended June 30, 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 six months ended June 30, 2020, the Company granted 10,000 RSUs to a new member of its board of directors, with a fair market value of $ 39 which vest on the one-year anniversary of the date granted. A summary of the Company’s RSU activity and related information for the six months ended June 30, 2020 is as follows: SCHEDULE OF RESTRICTED STOCK UNITS ACTIVITY Number of RSUs Weighted Average Grant Date Fair Value RSUs unvested - January 1, 2020 1,411,930 $ 2.76 RSUs granted 239,024 $ 6.13 RSUs vested ( 19,430 ) $ 7.72 RSUs cancelled/forfeited - RSUs unvested at June 30, 2020 1,631,524 $ 3.19 As of June 30, 2020, the total unrecognized compensation expense related to unvested RSUs was approximately $ 1,967 , which is expected to be recognized over a weighted-average period of 0.5 years, based on estimated and actual vesting schedules of the applicable RSUs. The stock-based compensation for RSUs during the three and six months ended June 30, 2020 was $ 268 and $ 527 , respectively. Warrants From time to time, the Company issues warrants to purchase shares of the Company’s common stock to investors, lenders, underwriters and other non-employees for services rendered or to be rendered in the future, or pursuant to settlement agreements. 23 A summary of warrant activity for the six months ended June 30, 2020 is as follows: SCHEDULE OF WARRANTS ACTIVITY Number of Shares Subject to Warrants Outstanding Weighted Avg. Exercise Price Warrants outstanding - January 1, 2020 780,386 $ 2.12 Granted - Exercised - - Expired - Warrants outstanding and exercisable - June 30, 2020 780,386 $ 2.12 Weighted average remaining contractual life of the outstanding warrants in years - June 30, 2020 4.03 Warrants outstanding and exercisable as of June 30, 2020 are as follows: SCHEDULE OF WARRANTS OUTSTANDING AND WARRANTS EXERCISABLE Warrants Exercise Expiration Warrant Series Issue Date Outstanding Price Date Lender warrants 5/11/2015 125,000 $ 1.79 5/11/2025 Settlement warrants 8/16/2016 40,000 $ 3.75 8/16/2021 Lender warrants 7/19/2017 615,386 $ 2.08 7/19/2024 780,386 $ 2.12 Subsidiary Stock-Based Transactions Mayfield Pharmaceuticals, Inc. During the six months ended June 30, 2020, Mayfield repurchased 650,000 shares of its common stock from Elle, for an aggregate purchase price of $ 1 . During the six months ended June 30, 2020, 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 three and six months ended June 30, 2020, the Company recognized $ 6 and $ 17 , respectively, in stock-based compensation tied to the Mayfield stock options. During the six months ended June 30, 2020, 500,000 shares of Mayfield’s restricted common stock were forfeited by a consultant. Stock-Based Compensation Summary The Company recorded stock-based compensation related to equity instruments granted to employees, directors and consultants as follows: SCHEDULE OF STOCK BASED COMPENSATION GRANTED TO EMPLOYEES DIRECTORS CONSULTANTS For the For the Three Months Ended Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Employees - selling, general and administrative $ 436 $ 268 $ 872 $ 906 Directors - selling, general and administrative 96 75 193 150 Consultants - selling, general and administrative 96 24 96 99 Total $ 628 $ 367 $ 1,161 $ 1,155 24 NOTE 14. COMMITMENTS AND CONTINGENCIES Novel Drug Solutions et al. In April 2018, Novel Drug Solutions, LLC and Eyecare Northwest, PA (collectively “NDS”) filed a lawsuit against the Company in the U.S. District Court of Delaware asserting claims for breach of contract. The claims stem from an asset purchase agreement between the Company and NDS entered into in 2013. In July 2019, NDS filed a second amended complaint which added a claim related to its purported termination of the APA. In October 2019, NDS voluntarily dismissed all claims related to breach of contract, leaving only claims related to the scope of the post-termination obligations to be litigated. NDS is seeking unspecified damages, interest, attorney’s fees and other costs. The Company believes the claims are meritless and has previously and will continue to dispute all claims asserted against it and intends to vigorously defend against these allegations. Nonetheless, the Company cannot predict the eventual outcome of this litigation and it could result in substantial costs, losses and a diversion of management’s resources and attention, which could harm the Company’s business and the value of its common stock. Product and Professional Liability Product and professional liability litigation represents an inherent risk to all firms in the pharmaceutical and pharmacy industry. We utilize traditional third-party insurance policies with regard to our product and professional liability claims. Such insurance coverage at any given time reflects current market conditions, including cost and availability, when the policy is written. John Erick et al. In January 2018, John Erick and Deborah Ferrell, successors-in-interest and heirs of Jade Erick, (collectively “Erick”) filed a lawsuit in the San Diego County Superior against Kim Kelly, ND, MPH asserting claims related to the death of Jade Erick. In April 2018, Erick filed an amendment to the lawsuit, naming us as a co-defendant. In September 2018, co-defendant Dr. Kelly filed a cross-complaint against the Company and various entities affiliated with Spectrum Laboratory Products, Inc., Spectrum Chemical Manufacturing Corp. and Spectrum Pharmacy Products, Inc. (collectively “Spectrum”). The cross-complaint seeks indemnity and contribution from the Company and Spectrum. The Company answered the claims filed by Dr. Kelly in October 2018. The case is currently in the discovery phase. Erick is seeking unspecified damages, interest, attorney’s fees and other costs. The Company believes the claims are meritless and has previously and will continue to dispute all claims asserted against it and intends to vigorously defend against these allegations. Nonetheless, the Company cannot predict the eventual outcome of this litigation, it could result in substantial costs, losses and a diversion of management’s resources and attention, which could harm the Company’s business and the value of its common stock. General and Other In the ordinary course of business, the Company may face various claims brought by third parties and it may, from time to time, make claims or take legal actions to assert its rights, including intellectual property disputes, contractual disputes and other commercial disputes. Any of these claims could subject the Company to litigation. Indemnities In addition to the indemnification provisions contained in the Company’s governing documents, the Company generally enters into separate indemnification agreements with each of the Company’s directors and officers. These agreements require the Company, among other things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys’ fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or proceeding arising out of the individual’s status or service as the Company’s director or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to indemnification by the Company. The Company also indemnifies its lessors in connection with its facility leases for certain claims arising from the use of the facilities. These indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities in the accompanying condensed consolidated balance sheets. 25 Klarity License Agreement – Related Party The Company entered into a license agreement in April 2017 and as amended in April 2018, (the “Klarity License Agreement”) with Richard L. Lindstrom, M.D., a member of its Board of Directors. Pursuant to the terms of the Klarity License Agreement, the Company licensed certain intellectual property and related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license the topical ophthalmic solution Klarity used to protect and rehabilitate the ocular surface (the “Klarity Product”). 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 are payable at the Company’s election in cash or shares of the Company’s restricted common stock. Payments totaling $ 0 and $ 55 were made during the three and six months ended June 30, 2020, respectively. Royalty expense of $ 27 and $ 56 was incurred during the three and six months ended June 30, 2020, respectively, and is included in accounts payable and is due to Dr. Lindstrom at June 30, 2020. 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 $ 0 and $ 7 in cash during the three and six months ended June 30, 2020, respectively, and an additional $ 42 was payable to Dr. Lindstrom at June 30, 2020. The Company incurred royalty expense of $ 4 and $ 42 related to the Lindstrom APA during the three and six months ended June 30, 2020, respectively. Sales and Marketing Agreements The Company has entered various sales and marketing agreements with certain organizations, to provide exclusive sales and marketing representation services to Harrow in select geographies in the U.S., in connection with our ophthalmic compounded formulations. Under the terms of the sales and marketing agreements, the Company is required to make commission payments equal to 10% to 14% of net sales for products above and beyond the initial existing sales amounts. In addition, the Company is required to issue shares of the Company’s restricted common stock to certain organizations if net sales in the assigned territory reach certain future milestone levels by the end of their terms, as applicable. Commission expenses of $ 318 and $ 921 were incurred under these agreements during the three and six months ended June 30, 2020, respectively, of which $ 0 and $ 83 were stock-based payments. 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. 26 In consideration for the acquisition of the intellectual property rights, the Company is obligated to make payments to the Inventors based on the completion of certain milestones, generally consisting of: (1) a payment payable within 30 days after the issuance of the first patent in the United States arising from the acquired intellectual property (if any); (2) a payment payable within 30 days after the Company files the first investigational new drug application (“IND”) with the U.S. Food and Drug Administration (“FDA”) for the first product arising from the acquired intellectual property (if any); (3) for certain of the Inventors, a payment payable within 30 days after the Company files the first new drug application with the FDA for the first product arising from the acquired intellectual property (if any); and (4) certain royalty payments based on the net receipts received by the Company in connection with the sale or licensing of any product based on the acquired intellectual property (if any), after deducting (among other things) the Company’s development costs associated with such product. If, following five years after the date of the applicable asset purchase agreement, the Company either (a) for certain of the Inventors, has not filed an IND or, for the remaining Inventors, has not initiated a study where data is derived, or (b) has failed to generate royalty payments to the Inventors for any product based on the acquired intellectual property, the Inventors may terminate the applicable asset purchase agreement and request that the Company re-assign the acquired technology to the Inventors. Royalty expenses of $ 117 and $ 261 and $ 274 and $ 465 were incurred under these agreements for the three and six months ended June 30, 2020 and 2019, respectively, and $ 431 and $ 274 are included in accounts payable at June 30, 2020 and 2019, respectively. NOTE 15. SEGMENT INFORMATION AND CONCENTRATIONS Management evaluates performance of the Company based on operating segments. Segment performance for its two operating segments is 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 the ImprimisRx business; 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. ● Operating expenses within selling, general and administrative expenses that result from the impact of corporate initiatives. Corporate initiatives primarily include integration, restructuring, acquisition and other shared costs. ● Other select revenues and operating expenses including research and development expenses, amortization, and asset sales and impairments, net as not all such information has been accounted for at the segment level, or such information has not been used by all segments. ● Total assets including capital expenditures. The Company defines segment net revenues as pharmaceutical compounded drug sales, licenses and other revenue derived from related agreements. Cost of sales within segment contribution includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements depreciation, the write-off of obsolete inventory and other related expenses. Selling, general and administrative expenses consist mainly of personnel-related costs, marketing and promotion costs, distribution costs, professional service costs, insurance, depreciation, facilities costs, transaction costs, and professional services costs which are general in nature and attributable to the segment. 27 Segment net revenues, segment operating expenses and segment contribution information consisted of the following for the three and six months ended June 30, 2020: Schedule of Segment Net Revenues, Segment Operating Expenses and Segment Contribution For the Three Months Ended June 30, 2020 Pharmaceutical Pharmaceutical Drug Compounding Development Total Net revenues $ 8,060 $ - $ 8,060 Cost of sales ( 3,204 ) - ( 3,204 ) Gross profit 4,856 - 4,856 Operating expenses: Selling, general and administrative 4,598 43 4,641 Research and development 497 46 543 Segment contribution ( 239 ) ( 89 ) ( 328 ) Corporate 2,270 Research and development 206 Amortization 43 Asset sales and impairments, net 363 Operating loss $ ( 3,210 ) For the Six Months Ended June 30, 2020 Pharmaceutical Pharmaceutical Drug Compounding Development Total Net revenues $ 19,877 $ - $ 19,877 Cost of sales ( 6,830 ) - ( 6,830 ) Gross profit 13,047 - 13,047 Operating expenses: Selling, general and administrative 11,238 87 11,325 Research and development 540 57 597 Segment contribution 1,269 ( 144 ) 1,125 Corporate 3,957 Research and development 555 Amortization 88 Asset sales and impairments, net 363 Operating loss $ ( 3,838 ) For the Three Months Ended June 30, 2019 Pharmaceutical Pharmaceutical Compounding Drug Development Total Net revenues $ 13,516 $ - $ 13,516 Cost of sales ( 5,225 ) - ( 5,225 ) Gross profit 8,291 - 8,291 Operating expenses: Selling, general and administrative 5,804 43 5,847 Research and development 533 127 660 Segment contribution 1,954 ( 170 ) 1,784 Corporate 2,342 Research and development 150 Amortization 59 Asset sales and impairments, net - Operating loss $ ( 767 ) 28 For the Six Months Ended June 30, 2019 Pharmaceutical Pharmaceutical Drug Compounding Development Total Net revenues $ 25,806 $ - $ 25,806 Cost of sales ( 9,123 ) - ( 9,123 ) Gross profit 16,683 - 16,683 Operating expenses: Selling, general and administrative 11,519 86 11,605 Research and development 658 263 921 Segment contribution 4,506 ( 349 ) 4,157 Corporate 5,061 Research and development 294 Amortization 125 Operating loss $ ( 1,323 ) The Company categorizes revenues by geographic area based on selling location. All operations are currently located in the U.S.; therefore, total revenues are attributed to the U.S. All long-lived assets at June 30, 2020 and December 31, 2019 are located in the U.S. The Company sells its compounded formulations to a large number of customers. No customer accounted for more than 10 % of the Company’s total pharmacy sales for the three and six months ended June 30, 2020 and 2019. The Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted for 60 % and 70 % of active pharmaceutical ingredient purchases during the three and six months ended June 30, 2020, respectively, and 69 % and 65 % during the three and six months ended June 30, 2019, respectively. NOTE 16. SUBSEQUENT EVENTS The Company has performed an evaluation of events occurring subsequent to June 30, 2020 through the filing date of this Quarterly Report. Based on its evaluation, no events other than those described below need to be disclosed. In July 2020, the Company issued 500 shares of its common stock upon the exercise of options to purchase 500 shares of common stock, with an exercise price of $ 3.20 per share, and received net proceeds of $ 2 . Eyepoint Commercial Alliance Agreement On August 1, 2020, the Company, through its wholly-owned subsidiary ImprimisRx, LLC, entered into a Commercial Alliance Agreement (the “Dexycu Agreement”) with Eyepoint Pharmaceuticals, Inc. (“Eyepoint”), pursuant to which Eyepoint granted the Company the non-exclusive right to co-promote DEXYCU ® (dexamethasone intraocular suspension) 9% for the treatment of post-operative inflammation following ocular surgery in the United States. Pursuant to the Dexycu Agreement , Eyepoint will pay the Company a fee calculated based on the quarterly sales of DEXCYU in excess of predefined volumes to specific customers of the Company in the U.S. Under the terms of the Dexycu Agreement , the Company shall use commercially reasonable efforts to promote and market DEXCYU in the U.S. Subject to early termination, the Dexycu Agreement expires on 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. 29