HARROW, INC. 10-Q

Item 1. Financial Statements HARROW HEALTH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) March 31, 2021 December 31, 2020 (unaudited) ASSETS Current assets Cash and cash equivalents, including restricted cash of $ 200 $ 6,504 $ 4,301 Investment in Eton Pharmaceuticals 25,620 28,455 Accounts receivable, net 3,253 2,662 Inventories 4,496 3,962 Prepaid expenses and other current assets 763 751 Total current assets 40,636 40,131 Property, plant and equipment, net 4,200 4,453 Operating lease right-of-use assets 6,651 6,799 Intangible assets, net 1,912 1,939 Investment in Surface Ophthalmics 465 1,314 Investment in Melt Pharmaceuticals 2,056 2,506 Goodwill 332 332 TOTAL ASSETS $ 56,252 $ 57,474 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued expenses $ 5,176 $ 3,932 Accrued payroll and related liabilities 1,631 2,315 Deferred revenue and customer deposits 3 66 Current portion of paycheck protection program loan payable - 1,259 Current portion of loan payable, net of unamortized debt discount 2,659 2,639 Current portion of operating lease liabilities 597 580 Current portion of finance lease obligations 8 8 Total current liabilities 10,074 10,799 Operating lease liabilities, net of current portion 6,496 6,652 Finance lease obligations 16 17 Accrued expenses, net of current portion 800 800 Paycheck protection program loan payable, net of current portion - 708 Loan payable, net of current portion and unamortized debt discount 10,996 11,670 TOTAL LIABILITIES 28,382 30,646 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS’ EQUITY Common stock, $ 0.001 par value, 50,000,000 shares authorized, 25,983,676 and 25,749,875 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively 26 26 Additional paid-in capital 105,382 104,557 Accumulated deficit ( 77,183 ) ( 77,400 ) TOTAL HARROW HEALTH STOCKHOLDERS’ EQUITY 28,225 27,183 Noncontrolling interests ( 355 ) ( 355 ) TOTAL EQUITY 27,870 26,828 TOTAL LIABILITIES AND EQUITY $ 56,252 $ 57,474 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 For the Three Months Ended March 31, 2021 March 31, 2020 Revenues: Product sales, net $ 14,948 $ 11,810 Other revenues 495 7 Total revenues 15,443 11,817 Cost of sales ( 3,770 ) ( 3,626 ) Gross profit 11,673 8,191 Operating expenses: Selling, general and administrative 8,164 8,416 Research and development 592 403 Total operating expenses 8,756 8,819 Income (loss) from operations 2,917 ( 628 ) Other income (expense): Interest expense, net ( 513 ) ( 560 ) Investment loss from Melt Pharmaceuticals ( 470 ) ( 546 ) Investment loss from Surface Ophthalmics ( 849 ) ( 339 ) Investment loss from Eton Pharmaceuticals ( 2,835 ) ( 10,850 ) Gain on forgiveness of debt 1,967 - Total other (expense), net ( 2,700 ) ( 12,295 ) Income (loss) before income taxes 217 ( 12,923 ) Income taxes - - Total net income (loss) including noncontrolling interests 217 ( 12,923 ) Net loss attributable to noncontrolling interests - 16 Net income (loss) attributable to Harrow Health, Inc. $ 217 $ ( 12,907 ) Basic net income (loss) per share of common stock $ 0.01 $ ( 0.50 ) Diluted net income (loss) per share of common stock $ 0.01 $ ( 0.50 ) Weighted average number of shares of common stock outstanding, basic 26,019,255 25,867,568 Weighted average number of shares of common stock outstanding, diluted 27,480,622 25,867,568 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 4 HARROW HEALTH, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the three months ended March 31, 2021 and 2020 (In thousands, except for share data) Shares Value Capital Deficit Equity Interest Equity Total Common Stock Additional Harrow Health, Inc. Total Noncontrolling Par Paid-in Accumulated Stockholders’ Equity Total 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 options - Issuance of common stock related to vesting of RSUs 91,987 - - - - - - Shares withheld related to net share settlement of equity awards - Stock-based compensation expense - - 533 - 533 - 533 Net loss - - - ( 12,907 ) ( 12,907 ) ( 16 ) ( 12,923 ) Balance at March 31, 2020 25,618,918 $ 26 $ 102,261 $ ( 86,950 ) $ 15,337 $ ( 309 ) $ 15,028 Balance at December 31, 2020 25,749,875 $ 26 $ 104,557 $ ( 77,400 ) $ 27,183 $ ( 355 ) $ 26,828 Issuance of common stock in connection with: Exercise of employee options 11,301 - 27 - 27 - 27 Issuance of common stock related to vesting of RSUs 230,000 - - - - - - Shares withheld related to net share settlement of equity awards ( 7,500 ) - ( 57 ) - ( 57 ) - ( 57 ) Stock-based compensation expense - - 855 - 855 - 855 Net income - - - 217 217 - 217 Balance at March 31, 2021 25,983,676 $ 26 $ 105,382 $ ( 77,183 ) $ 28,225 $ ( 355 ) $ 27,870 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 5 HARROW HEALTH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the For the Three Months Ended Three Months Ended March 31, 2021 March 31, 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) (including noncontrolling interests) $ 217 $ ( 12,923 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of property, plant and equipment 464 448 Amortization of intangible assets 40 45 Amortization of operating lease right-of-use assets 148 169 Provision for bad debt expense 19 - Amortization of debt issuance costs and discount 96 160 Gain on forgiveness of debt ( 1,967 ) - Investment loss from Eton Pharmaceuticals 2,835 10,850 Investment loss from Surface Ophthalmics 849 339 Investment loss from Melt Pharmaceuticals 470 546 Stock-based compensation 855 533 Changes in assets and liabilities: Accounts receivable ( 610 ) ( 20 ) Inventories ( 534 ) ( 688 ) Prepaid expenses and other assets ( 32 ) ( 8 ) Accounts payable and accrued expenses 1,105 ( 337 ) Accrued payroll and related liabilities ( 684 ) 333 Deferred revenue and customer deposits ( 63 ) 3 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,208 ( 550 ) CASH FLOWS FROM INVESTING ACTIVITIES Investment in patent and trademark assets ( 13 ) ( 53 ) Purchases of property, plant and equipment ( 211 ) ( 220 ) NET CASH USED IN INVESTING ACTIVITIES ( 224 ) ( 273 ) CASH FLOWS FROM FINANCING ACTIVITIES Payments on finance lease obligations ( 1 ) ( 2 ) Principal payments on SWK loan ( 750 ) - Net proceeds from exercise of stock options, net of taxes remitted upon vesting of RSU’s and options ( 30 ) - NET CASH USED IN FINANCING ACTIVITIES ( 781 ) ( 2 ) NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 2,203 ( 825 ) CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period 4,301 4,949 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period $ 6,504 $ 4,124 RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH Cash and cash equivalents $ 6,304 $ 3,924 Restricted cash 200 200 CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD $ 6,504 $ 4,124 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ - $ - Cash paid for interest $ 415 $ 408 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Right-of-use asset obtained in exchange for lease obligation $ - $ 41 Changes in accrued property and equipment purchases $ - $ 5 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 6 HARROW HEALTH, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Three Months Ended March 31, 2021 and 2020 (All dollar amounts are expressed in thousands, except share and per share data) NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Company and Background Harrow Health, Inc. (together with its subsidiaries, partially owned companies and royalty arrangements unless the context indicates or otherwise requires, the “Company” or “Harrow”) specializes in the development, production and sale of innovative medications that offer unique competitive advantages and serve unmet needs in the marketplace through its subsidiaries and deconsolidated companies. The Company owns one of the nation’s leading ophthalmology-focused pharmaceutical businesses, ImprimisRx. In addition to wholly owning ImprimisRx, the Company also has equity positions in Eton Pharmaceuticals, Inc. (“Eton”), Surface Ophthalmics, Inc. (“Surface”), and Melt Pharmaceuticals, Inc. (“Melt”), all companies that began as subsidiaries of Harrow. In 2020, Harrow created Visionology, Inc. (“Visionology”), which will launch an online eye health platform business. Harrow also owns royalty rights in various drug candidates being developed by Surface and Melt. Basis of Presentation The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 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, 2020. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. Harrow consolidates entities in which it has a controlling financial interest. The Company consolidates subsidiaries in which it holds and/or controls, 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 March 31, 2021 and December 31, 2020 and the condensed consolidated statements of operations, stockholders’ equity and cash flows for the periods ended March 31, 2021 and 2020 include our accounts and those of our wholly owned subsidiaries, as well as our inactive majority owned subsidiaries Mayfield Pharmaceuticals, Inc. and Stowe Pharmaceuticals, Inc. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following represents an update for the three months ended March 31, 2021 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Risks, Uncertainties and Liquidity 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. 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 of our operating segments. The Company has identified two operating segments as reportable segments. See Note 16 for more information regarding the Company’s reportable segments. 7 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. 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 interest 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 net income (loss) attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of common and common equivalent shares, such as stock options, unvested restricted stock units (“RSUs”) and warrants, outstanding during the period. Basic and diluted net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Common equivalent shares (using the treasury stock or “if converted” method) from stock options, RSUs and warrants were 5,486,678 and 5,253,638 at March 31, 2021 and 2020, respectively. For the three months ended March 31, 2020, the common equivalent shares are excluded in the calculation of diluted net loss per share 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 March 31, 2021 and 2020 was 223,219 and 244,460 , respectively. The following table shows the computation of basic net income (loss) per share of common stock for the three months ended March 31, 2021 and 2020: SCHEDULE OF BASIC EARNINGS PER COMMON SHARE 2021 2020 For the Three Months Ended March 31, 2021 2020 Numerator – net income (loss) attributable to Harrow Health, Inc. $ 217 $ ( 12,907 ) Denominator – weighted average number of shares outstanding, basic 26,019,255 25,867,568 Net income (loss) per share, basic $ 0.01 $ ( 0.50 ) For the three months ended March 31, 2021, 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 three months ended March 31, 2021, consisted of the following: SCHEDULE OF DILUTED COMMON EQUIVALENT SHARES March 31, 2021 Diluted shares related to: Warrants 576,275 Stock options 885,092 Dilutive common equivalent shares 1,461,367 8 The following table shows the computation of diluted net income (loss) per share using the weighted-average number of common shares and dilutive common equivalent shares outstanding for the three months ended March 31, 2021 and 2020: SCHEDULE OF DILUTED EARNINGS PER COMMON SHARE 2021 2020 For the Three Months Ended March 31, 2021 2020 Numerator – net income (loss) $ 217 $ ( 12,907 ) Weighted average number of shares outstanding, basic 26,019,255 25,867,568 Dilutive common equivalent shares 1,461,367 - Denominator – number of shares used for diluted earnings per share computation 27,480,622 25,867,568 Net income (loss) per share, diluted $ 0.01 $ ( 0.50 ) Investment in Eton Pharmaceuticals, Inc. As of March 31, 2021, the Company owned 3,500,000 shares of Eton common stock, which represented approximately 14.3 % of the equity interests of Eton. At March 31, 2021, the fair market value of Eton’s common stock was $ 7.32 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 , the Company recorded an unrealized investment loss from its Eton common stock position of $ 2,835 and $ 10,850 during the three months ended March 31, 2021 and 2020, respectively, related to the change in fair market value of its investment in Eton during the measurement period. As of March 31, 2021, the fair market value of the Company’s investment in Eton was $ 25,620 . During the three months ended March 31, 2021, Mark L. Baum, the Company’s Chief Executive Officer, resigned as a member of the board of directors of Eton. In April 2021, the Company sold 1,518,000 shares of its Eton common stock (see Note 17 for more information related to this subsequent event). In light of these events, the Company has determined that Eton is no longer a related party. Investment in Melt Pharmaceuticals, Inc. – Related Party The Company owns 3,500,000 common shares (which is approximately 44 % of the equity interests as of March 31, 2021) of Melt 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. During the three months ended March 31, 2021 and 2020, the Company recorded equity in the net losses of Melt of $ 470 and $ 546 , respectively. As of March 31, 2021 and December 31, 2020, the Company’s investment in Melt was $ 2,056 and $ 2,506 , respectively, which includes $ 881 and $ 851 , respectively, due from Melt for reimbursable expenses and amounts due under a Management Services Agreement between the Company and Melt (the “Melt 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 March 31, 2021) 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 losses of Surface of $ 849 and $ 339 during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021 and December 31, 2020, the Company’s investment in Surface was $ 465 and $ 1,314 , respectively. See Note 5 for more information and related party disclosure regarding Surface. 9 Recently Adopted 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 became effective for the Company on January 1, 2021 on a prospective basis. Adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements. 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. Product Revenues from Pharmacy Services The Company sells prescription drugs directly through our pharmacy and outsourcing facility network. Revenue 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 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. 10 Intellectual Property License Revenues As of March 31, 2021, we are party to four intellectual property licenses and asset purchase agreements in which we have agreed to grant a license and which provide 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 in time at which 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. Revenue disaggregated by revenue source for the three months ended March 31, 2021 and 2020, consists of the following: SCHEDULE OF DISAGGREGATED REVENUE For the Three Months Ended March 31, 2021 2020 Product sales, net $ 14,948 $ 11,810 Commissions 485 - Licenses 10 7 Total revenues $ 15,443 $ 11,817 Deferred revenue and customer deposits at March 31, 2021 and December 31, 2020, were $ 3 and $ 66 , respectively. All deferred revenue and customer deposit amounts at December 31, 2020 were recognized as revenue during the three months ended March 31, 2021. NOTE 4. INVESTMENT IN MELT PHARMACEUTICALS, INC. - 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 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 March 31, 2021 and December 31, 2020, the Company was due $ 881 and $ 851 , respectively, from Melt for reimbursable expenses and amounts due under the Melt MSA. Melt did not make any payments to the Company during the three months ended March 31, 2021. The Company’s Chief Executive Officer, Mark L. Baum, and Chief Medical Officer, Larry Dillaha, M.D. are members of the Melt board of directors, and several employees of the Company (including Mr. Baum, Dr. Dillaha and the Company’s Chief Financial Officer, Andrew R. Boll) entered into consulting agreements and provide consulting services to Melt. 11 The unaudited condensed results of operations information of Melt is summarized below: SCHEDULE OF CONDENSED INCOME STATEMENT For the Three Months Ended March 31, 2021 March 31, 2020 Revenues, net $ - $ - Loss from operations ( 1,099 ) ( 1,235 ) Net loss $ ( 1,099 ) $ ( 1,235 ) The unaudited condensed balance sheet information of Melt is summarized below: SCHEDULE OF CONDENSED BALANCE SHEET At March 31, At December 31, 2021 2020 Current assets $ 2,267 $ 2,947 Non-current assets 79 11 Total assets 2,346 2,958 Total liabilities 2,133 1,778 Total stockholders equity 213 1,180 Total liabilities and stockholders’ equity $ 2,346 $ 2,958 NOTE 5. INVESTMENT IN SURFACE OPHTHALMICS, INC. - 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 March 31, 2021, 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 minority owner 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 provide consulting services to Surface. The unaudited condensed results of operations information of Surface is summarized below: SUMMARY OF CONDENSED INCOME STATEMENT For the Three Months Ended March 31, 2021 March 31, 2020 Revenues, net $ - $ - Loss from operations ( 2,831 ) ( 1,131 ) Net loss $ ( 2,831 ) $ ( 1,131 ) The unaudited condensed balance sheet information of Surface is summarized below: SUMMARY OF CONDENSED BALANCE SHEET At March 31, At December 31, 2021 2020 Current assets $ 6,013 $ 9,074 Non current assets 44 45 Total assets 6,057 9,119 Total liabilities 1,328 1,666 Total stockholders equity 4,729 7,453 Total liabilities and stockholders’ equity $ 6,057 $ 9,119 12 NOTE 6. RESTRICTED CASH The restricted cash at March 31, 2021 and December 31, 2020 consisted of funds held in a money market account. At March 31, 2021 and December 31, 2020, the restricted cash was recorded at amortized cost, which approximates fair value. At March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020 was as follows: SCHEDULE OF INVENTORIES March 31, 2021 December 31, 2020 Raw materials $ 2,512 $ 2,501 Work in progress 3 17 Finished goods 1,981 1,444 Total inventories $ 4,496 $ 3,962 NOTE 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets at March 31, 2021 and December 31, 2020, consisted of the following: SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS March 31, 2021 December 31, 2020 Prepaid insurance $ 171 $ 160 Other prepaid expenses 399 401 Deposits and other current assets 193 190 Total prepaid expenses and other current assets $ 763 $ 751 NOTE 9. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at March 31, 2021 and December 31, 2020, consisted of the following: SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT March 31, 2021 December 31, 2020 Property, plant and equipment, net: Computer software and hardware $ 1,900 $ 1,707 Furniture and equipment 422 418 Lab and pharmacy equipment 3,436 3,426 Leasehold improvements 5,725 5,720 Property, plant and equipment, gross 11,483 11,271 Accumulated depreciation and amortization ( 7,283 ) ( 6,818 ) Property, plant and equipment, net $ 4,200 $ 4,453 For the three months ended March 31, 2021 and 2020, depreciation and amortization related to the property, plant and equipment was $ 464 and $ 448 , respectively. 13 NOTE 10. INTANGIBLE ASSETS AND GOODWILL The Company’s intangible assets at March 31, 2021 consisted of the following: SCHEDULE OF INTANGIBLE ASSETS Amortization periods (in years) Cost Accumulated amortization Impairment Net carrying value Patents 17 - 19 years $ 532 $ ( 54 ) $ - $ 478 Licenses 20 years 50 ( 6 ) - 44 Trademarks Indefinite 357 - - 357 Customer relationships 3 - 15 years 1,519 ( 487 ) - 1,032 Trade name 5 years 5 ( 5 ) - - Non-competition clause 3 - 4 years 50 ( 50 ) - - State pharmacy licenses 25 years 8 ( 7 ) - 1 $ 2,521 $ ( 609 ) $ - $ 1,912 Amortization expense for intangible assets for the three months ended March 31, 2021 and 2020 was as follows: SCHEDULE OF AMORTIZATION EXPENSES FOR INTANGIBLE ASSETS For the Three Months Ended March 31, 2021 2020 Patents $ 6 $ 11 Licenses 1 1 Customer relationships 33 33 Trade name - - State pharmacy licenses - - $ 40 $ 45 Estimated future amortization expense for the Company’s intangible assets at March 31, 2021 is as follows: SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE 2021 Remainder of 2021 $ 149 2022 188 2023 188 2024 161 2025 148 Thereafter 721 Intangible assets $ 1,555 14 NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following: SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES March 31, 2021 December 31, 2020 Accounts payable $ 4,941 $ 3,645 Other accrued expenses 49 49 Accrued interest 186 238 Accrued exit fee for note payable 800 800 Total accounts payable and accrued expenses 5,976 4,732 Less: Current portion ( 5,176 ) ( 3,932 ) Non-current total accrued expenses $ 800 $ 800 NOTE 12. DEBT SWK Senior Note – 2017 In July 2017, the Company and several of its wholly owned subsidiaries 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 were not achieved. The SWK Loan was 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. The SWK Loan bore an interest rate that was 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 provided 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 four. Subsequent to March 31, 2021, the Company completed an offering of unsecured senior notes in the aggregate principal amount of $ 55,000 and used a portion of the proceeds to pay off all outstanding obligations and indebtedness related to the SWK Loan (see Note 17 for additional information). Interest expense related to the SWK Loan Agreement, as amended, amounted to $ 509 and $ 560 for the three months ended March 31, 2021 and 2020, respectively, and included amortization of debt issuance costs and discount of $ 96 and $ 160 for the three months ended March 31, 2021 and 2020, 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”). On March 30, 2021, the Company received a notice of forgiveness of the full balance of the PPP Loan, including all accrued interest, in accordance with the terms and conditions of the CARES Act. Related to the forgiveness, the Company recorded a gain on the forgiveness of debt for the loan balance of $ 1,967 in the accompanying condensed consolidated statement of operations for the period ended March 31, 2021. 15 At March 31, 2021, future minimum payments under the Company’s debt were as follows: SUMMARY OF FUTURE MINIMUM PAYMENTS Amount Remainder of 2021 $ 3,395 2022 3,966 2023 9,511 Total minimum payments 16,872 Less: amount representing interest ( 2,511 ) Notes payable, gross 14,361 Less: unamortized discount ( 706 ) Notes payable 13,655 Less: current portion, net of unamortized discount ( 2,659 ) Note payable, net of current portion and unamortized debt discount $ 10,996 NOTE 13. LEASES The Company leases office and laboratory space under non-cancelable operating leases listed below. These lease agreements have remaining 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 . Future lease payments under operating leases as of March 31, 2021 were as follows : SCHEDULE OF FUTURE LEASE PAYMENTS UNDER OPERATING LEASES Operating Leases Remainder of 2021 $ 766 2022 1,038 2023 1,064 2024 1,090 2025 916 Thereafter 5,141 Total minimum lease payments 10,015 Less: amount representing interest payments ( 2,922 ) Total operating lease liabilities 7,093 Less: current portion, operating lease liabilities ( 597 ) Operating lease liabilities, net of current portion $ 6,496 At March 31, 2021, the weighted-average discount rate and the weighted-average remaining lease term for the operating leases held by the Company were 6.33 % and 11.02 years, respectively. During the three months ended March 31, 2021 and 2020, cash paid for amounts included for the operating lease liabilities was $ 251 and $ 271 , respectively, and the Company recorded operating lease expense of $ 261 and $ 278 , respectively, included in selling, general and administrative expenses. The Company also has a finance lease that is included in its lease accounting but is not considered significant. 16 Future lease payments under the non-cancelable finance lease as of March 31, 2021 were as follows : SCHEDULE OF FUTURE LEASE PAYMENTS UNDER FINANCE LEASE Finance Leases Remainder of 2021 $ 7 2022 9 2023 9 2024 1 Total minimum lease payments 26 Less: amount representing interest payments ( 2 ) Present value of future minimum lease payments 24 Less: current portion, finance lease obligation ( 8 ) Finance lease obligation, net of current portion $ 16 At March 31, 2021, the weighted average incremental borrowing rate and the weighted average remaining lease term for the finance lease held by the Company were 6.36 % and 2.83 years, respectively. For the three months ended March 31, 2021, depreciation expense related to the equipment held under the finance lease obligation was $ 2 . For the three months ended March 31, 2021, cash paid and expense recognized for interest expense related to the finance lease obligation was $ 1 . NOTE 14. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION Common Stock During the three months ended March 31, 2021, the Company issued 11,301 shares of its common stock upon the exercise of options to purchase 11,301 shares of common stock, with exercise prices ranging between $ 1.70 to $ 3.96 per share and received net proceeds of $ 27 . During the three months ended March 31, 2021, the Company issued 200,000 shares of its common stock to Mark L. Baum, its CEO, related to the vesting of 200,000 performance-based restricted stock units. During the three months ended March 31, 2021, the Company issued 22,500 shares of common stock to Andrew R. Boll, its CFO, related to the vesting of 30,000 performance-based restricted stock units. The Company withheld issuance of 7,500 shares of common stock to Mr. Boll for payroll tax purposes valued at $ 57 . During the three months ended March 31, 2021, 22,755 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. Preferred Stock At March 31, 2021 and 2020, the Company had 5,000,000 shares of preferred stock, $ 0.001 par value, authorized and no shares of preferred stock issued and outstanding. Subsequent to March 31, 2021, the Company sold 440,000 shares of Series B Cumulative Preferred Stock for gross proceeds of $ 11,000 (see Note 17 for additional information). 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 March 31, 2021, 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 4,077 shares available for future issuances under the 2017 Plan at March 31, 2021. 17 Stock Options A summary of stock option activity under the Plans for the three months ended March 31, 2021 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, 2021 3,030,033 $ 5.43 Options granted 67,000 $ 8.07 Options exercised ( 11,301 ) $ 2.42 Options cancelled/forfeited ( 28,195 ) $ 5.45 Options outstanding - March 31, 2021 3,057,537 $ 5.50 5.54 $ 5,287 Options exercisable 2,169,441 $ 4.85 5.04 $ 4,944 Options vested and expected to vest 2,968,979 $ 5.45 5.50 $ 5,254 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 March 31, 2021, based on the closing price of the Company’s common stock of $ 6.75 on that date. During the three months ended March 31, 2021, 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 March 31, 2021 were as follows: 25% of the shares subject to the option vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the shares subject to the option vest and become exercisable quarterly in equal installments thereafter over three years. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans) and in the event of certain modifications to the option award agreement. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The expected term of options granted to employees and directors was determined in accordance with the “simplified approach,” as the Company has limited, relevant, historical data on employee exercises and post-vesting employment termination behavior. The expected risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual effect differs from those estimates. For option grants to employees and directors, the Company assigns a forfeiture factor of 10%. These factors could change in the future, which would affect the determination of stock-based compensation expense in future periods. Utilizing these assumptions, the fair value is determined at the date of grant. The table below illustrates the fair value per share determined using the Black-Scholes-Merton option pricing model with the following assumptions used for valuing options granted to employees: SCHEDULE OF FAIR VALUE ASSUMPTIONS 2021 Weighted-average fair value of options granted $ 4.96 Expected terms (in years) 6.11 Expected volatility 69 % Risk-free interest rate 0.39 - 0.45 % Dividend yield - 18 The following table summarizes information about stock options outstanding and exercisable at March 31, 2021: SCHEDULE OF STOCK OPTION OUTSTANDING AND EXERCISABLE Options Outstanding Options Exercisable Range of Exercise Prices Number Outstanding Weighted Average Remaining Contractual Life in Years Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price $ 1.47 - $ 2.60 760,318 5.38 $ 2.06 750,557 $ 2.06 $ 2.76 - $ 4.66 513,628 5.51 $ 3.98 442,498 $ 3.97 $ 5.49 - $ 6.36 470,350 6.84 $ 6.12 320,023 $ 6.13 $ 6.64 - $ 8.99 1,313,241 5.18 $ 7.86 656,363 $ 7.99 $ 1.47 - $ 8.99 3,057,537 5.54 $ 5.50 2,169,441 $ 4.85 As of March 31, 2021, there was approximately $ 2,582 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 4.59 years. The stock-based compensation for all stock options was $ 452 and $ 263 during the three months ended March 31, 2021 and 2020, respectively. The intrinsic value of options exercised during the three months ended March 31, 2021 was $ 63 . 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 months ended March 31, 2021, 300,000 RSUs with a fair market value of $ 2,670 were issued to certain employees; the RSUs vest in full on the third anniversary of the grant date. A summary of the Company’s RSU activity and related information for the three months ended March 31, 2021 is as follows: SCHEDULE OF RESTRICTED STOCK UNITS ACTIVITY Number of RSUs Weighted Average Grant Date Fair Value RSUs unvested - January 1, 2021 1,601,509 $ 3.14 RSUs granted 300,000 $ 8.90 RSUs vested ( 252,755 ) $ 2.38 RSUs cancelled/forfeited - - RSUs unvested at March 31, 2021 1,648,754 $ 4.30 As of March 31, 2021, the total unrecognized compensation expense related to unvested RSUs was approximately $ 3,687 , which is expected to be recognized over a weighted-average period of 0.82 years, based on estimated and actual vesting schedules of the applicable RSUs. The stock-based compensation for RSUs during the three months ended March 31, 2021 and 2020 was $ 346 and $ 259 , 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. 19 A summary of warrant activity for the three months ended March 31, 2021 is as follows: SCHEDULE OF WARRANTS ACTIVITY Number of Shares Subject to Warrants Outstanding Weighted Avg. Exercise Price Warrants outstanding - January 1, 2021 780,386 $ 2.12 Granted - - Exercised - - Expired - - Warrants outstanding and exercisable - March 31, 2021 780,386 $ 2.12 Weighted average remaining contractual life of the outstanding warrants in years - March 31, 2021 3.28 Warrants outstanding and exercisable as of March 31, 2021 are as follows: SCHEDULE OF WARRANTS OUTSTANDING AND WARRANTS EXERCISABLE Warrant Series Issue Date Warrants Outstanding Exercise Price Expiration 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 The Company recognized $57 in stock-based compensation expense related to subsidiary stock options during the three months ended March 31, 2021. 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 Three Months Ended March 31, 2021 2020 Employees - selling, general and administrative $ 755 $ 436 Directors - selling, general and administrative 100 97 Total $ 855 $ 533 NOTE 15. COMMITMENTS AND CONTINGENCIES Legal 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. 20 Product and Professional Liability Product and professional liability litigation represents an inherent risk to all firms in the pharmaceutical and pharmacy industry. We utilize traditional third-party insurance policies with regard to our product and professional liability claims. Such insurance coverage at any given time reflects current market conditions, including cost and availability, when the policy is written. 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. 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 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% - 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 $ 35 and $ 55 were made during the three months ended March 31, 2021 and 2020, respectively. $ 35 and $ 29 was incurred as royalty expense during the three months ended March 31, 2021 and 2020, respectively, and included in accounts payable to Dr. Lindstrom. 21 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 $ 7 and $ 7 in cash during the three months ended March 31, 2021 and 2020, respectively. The Company incurred $ 7 and $ 38 for royalty expenses related to the Lindstrom APA during the three months ended March 31, 2021 and 2020. 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 DEXYCU 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 DEXYCU 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 DEXYCU 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 three months ended March 31, 2021, the Company recorded $ 485 in commission revenues related to the Dexycu Agreement. Sales and Marketing Agreements The Company has entered various sales and marketing agreements with certain organizations, to provide exclusive and non-exclusive sales and marketing representation services to Harrow in select geographies in the U.S., in connection with the Company’s ophthalmic pharmaceutical compounded formulations or related products. Under the terms of the sales and marketing agreements, the Company is, generally, required to make commission payments equal to 10 % - 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. $ 0 and $ 83 of stock-based payments were recorded and $ 804 and $ 603 were incurred under these agreements for commission expenses during the three months ended March 31, 2021 and 2020, respectively. 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. 22 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. $ 232 and $ 144 were incurred under these agreements as royalty expenses and included in accounts payable at March 31, 2021 and 2020, respectively. NOTE 16. 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 business known as ImprimisRx; 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 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. ● Total assets including capital expenditures. The Company defines segment net revenues as pharmaceutical compounded drug sales, licenses, commissions 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. 23 Segment net revenues, segment operating expenses and segment contribution information consisted of the following for the three months ended March 31, 2021: SCHEDULE OF SEGMENT NET REVENUES, SEGMENT OPERATING EXPENSES AND SEGMENT CONTRIBUTION For the Three Months Ended March 31, 2021 ImprimisRx Pharmaceutical Drug Development Total Net revenues $ 15,443 $ - $ 15,443 Cost of sales ( 3,770 ) - ( 3,770 ) Gross profit 11,673 - 11,673 Operating expenses: Selling, general and administrative 5,771 - 5,771 Research and development 210 13 223 Segment contribution 5,692 ( 13 ) 5,679 Corporate 2,353 Research and development 369 Amortization 40 Operating income $ 2,917 For the Three Months Ended March 31, 2020 ImprimisRx Pharmaceutical Drug Development Total Net revenues $ 11,817 $ - $ 11,817 Cost of sales ( 3,626 ) - ( 3,626 ) Gross profit 8,191 - 8,191 Operating expenses: Selling, general and administrative 6,640 44 6,684 Research and development 43 11 54 Segment contribution 1,508 ( 55 ) 1,453 Corporate 1,687 Research and development 349 Amortization 45 Operating loss $ ( 628 ) 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 March 31, 2021 and December 31, 2020 were located in the U.S. 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 three months ended March 31, 2021 and 2020. The Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted for 82 % and 78 % of active pharmaceutical ingredient purchases during the three months ended March 31, 2021 and 2020, respectively. NOTE 17. SUBSEQUENT EVENTS The Company has performed an evaluation of events occurring subsequent to March 31, 2021 through the filing date of this Quarterly Report. Based on its evaluation, no events other than those described below need to be disclosed. Vesting and Exercise of Equity Awards In April 2021, the Company issued 515,871 shares of its common stock to Mark L. Baum, its Chief Executive Officer, upon the vesting of 850,000 performance-based restricted stock units. The Company withheld issuance of 334,129 shares of common stock valued at $ 2,760 for payroll tax purposes. 24 In April 2021, the Company issued 77,668 shares of common stock to Andrew R. Boll, its Chief Financial Officer, upon the vesting of 127,500 performance-based restricted stock units. The Company withheld issuance of 49,832 shares of common stock valued at $ 411 for payroll tax purposes. In April 2021, the Company issued 5,000 shares of its common stock upon the exercise of options to purchase 5,000 shares of common stock, with an exercise price of $ 4.29 per share, and received net proceeds of $ 21 . Sale of Eton Stock In April 2021, the Company closed the underwritten public offering of 1,518,000 shares of its Eton common stock at a public offering price of $ 7.00 per share (the “Eton Stock Sale”). The gross proceeds to the Company from the Eton Stock Sale were $ 10,626 , before deducting underwriting discounts and commissions and other offering expenses payable by the Company. Following such sale, the Company owns 1,982,000 shares of Eton common stock, which represented approximately 8.1 % of the equity and voting interests issued and outstanding of Eton as of April 12, 2021. As part of the Eton Stock Sale, the Company also agreed, for a period of 180 days, not to conduct any further sales of shares of its common stock of Eton or otherwise dispose of, directly or indirectly, any common stock of Eton (or any securities convertible into, or exercisable or exchangeable for, the common stock of Eton). 8.625% Senior Notes Due 2026 In April 2021, we closed an offering of $ 50,000 aggregate principal amount of 8.625 % Senior Notes due 2026 (the “Notes”) and in May 2021, the underwriters exercised their option to purchase an additional $ 5,000 aggregate principal amount of the Notes ($ 55,000 in total). T he Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of our other existing and future senior unsecured and unsubordinated indebtedness. The Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The Notes bear interest at the rate of 8.625% per annum. Interest on the Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on July 31, 2021. The Notes will mature on April 30, 2026 . Prior to February 1, 2026, the Company may, at its option, redeem the Notes, in whole at any time or in part from time to time, at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus a make-whole amount, if any, plus accrued and unpaid interest to, but excluding, the date of redemption. The Company may redeem the Notes for cash in whole or in part at any time at our option on or after February 1, 2026 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes. SWK Loan Repayment In April 2021, the Company paid $ 15,540 related to all outstanding obligations to SWK under the SWK Loan, including outstanding principal, accrued interest, accrued exit fee and related expenses. Series B Cumulative Preferred Stock In May 2021, the Company issued 440,000 shares of the Company’s Series B Cumulative Preferred Stock, par value $ 0.001 per share and liquidation preference of $ 25.00 per share (the “Series B Preferred Stock”), for a net purchase price of approximately $ 10,670 . The Series B Preferred Stock is not convertible into our common stock, has no voting rights, except as required by Delaware law, and is redeemable by the Company at any time. Holders of Series B Preferred Stock, when and as authorized by the Company’s Board of Directors, are entitled to cumulative cash dividends at the rate of 9.50 % of the $25.00 liquidation preference per year (equivalent to $2.375 per share per year); provided, however, that for each thirty (30) day period following May 5, 2021, the dividend rate shall be increased in increments of fifty (50) basis points, and effective September 30, 2021, the dividend rate shall be set at 12%, and for each thirty (30) day period thereafter, the dividend rate shall be increased in increments of one hundred (100) basis points except as otherwise limited by applicable law. Dividends will be payable quarterly in arrears, on or about the 15th of January, April, July and October, beginning on or about July 15, 2021. In the event of any liquidation, dissolution or winding-up of the Company, the holders of the Series B Preferred Stock will have preference to holders of our common stock at $ 25.00 per share plus any accrued and unpaid dividends (whether or not authorized or declared). 25 Mayfield Pharmaceuticals MAY-66 License Termination In May 2021, Mayfield terminated the License Agreement (the “TGV License”) with TGV-Health, LLC and affiliated entities (collectively, “TGV”), pursuant to which it acquired intellectual property rights for use in the women’s health field, related to Mayfield’s proprietary drug candidate MAY-66. Concurrent with the termination, TGV returned to Mayfield 300,000 shares of Mayfield’s common stock, constituting all of the equity held by TGV. Mayfield has no outstanding or remaining obligations under the TGV License. Mayfield Pharmaceuticals MAY-44 APA Termination In May 2021, Mayfield and Harrow terminated their asset purchase agreement dated January 2020 for intellectual property rights associated with Mayfield’s drug candidate MAY-44 with Elle Pharmaceutical LLC (the “MAY-44 APA”). As part of the termination, Mayfield re-acquired 350,000 shares of its common stock from Elle. Mayfield has no outstanding or remaining obligations related to the MAY-44 APA. Stowe License Termination In May 2021, Stowe terminated the License Agreement (the “Stowe License”) with TGV, pursuant to which it acquired intellectual property rights for use in the ophthalmic field, related to Stowe’s proprietary drug candidate STE-006. Concurrent with the termination, TGV returned to Stowe 1,750,000 shares of Stowe’s common stock, constituting all of the equity held by TGV. Stowe has no outstanding or remaining obligations under the Stowe License. 26