HARROW, INC. 10-Q

Item 1. Financial Statements HARROW HEALTH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, 2022 2021 (unaudited) ASSETS Current assets Cash and cash equivalents $ 41,948,000 $ 42,167,000 Investment in Eton Pharmaceuticals 8,642,000 8,503,000 Accounts receivable, net 5,995,000 4,470,000 Inventories 4,396,000 4,217,000 Prepaid expenses and other current assets 1,334,000 1,305,000 Total current assets 62,315,000 60,662,000 Property, plant and equipment, net 2,968,000 3,141,000 Capitalized software costs, net 1,471,000 1,313,000 Operating lease right-of-use assets 6,847,000 5,935,000 Intangible assets, net 15,415,000 15,813,000 Investment in Melt Pharmaceuticals 8,247,000 11,133,000 Goodwill 332,000 332,000 TOTAL ASSETS $ 97,595,000 $ 98,329,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued expenses $ 6,758,000 $ 6,337,000 Accrued payroll and related liabilities 1,948,000 3,089,000 Deferred revenue and customer deposits 23,000 16,000 Current portion of operating lease obligations 445,000 272,000 Current portion of finance lease obligations 8,000 8,000 Total current liabilities 9,182,000 9,722,000 Operating lease obligations, net of current portion 6,823,000 6,012,000 Finance lease obligations, net of current portion 7,000 10,000 Loans payable, net of current portion and unamortized debt discount 71,847,000 71,654,000 TOTAL LIABILITIES 87,859,000 87,398,000 Commitments and contingencies - STOCKHOLDERS’ EQUITY Common stock, $ 0.001 par value, 50,000,000 shares authorized, 27,031,127 and 26,902,763 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively 27,000 27,000 Additional paid-in capital 107,909,000 106,666,000 Accumulated deficit ( 97,845,000 ) ( 95,407,000 ) TOTAL HARROW HEALTH STOCKHOLDERS’ EQUITY 10,091,000 11,286,000 Noncontrolling interests ( 355,000 ) ( 355,000 ) TOTAL STOCKHOLDERS’ EQUITY 9,736,000 10,931,000 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 97,595,000 $ 98,329,000 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 3 HARROW HEALTH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 2022 2021 Revenues: Product sales, net $ 20,340,000 $ 14,948,000 Other revenues 1,780,000 495,000 Total revenues 22,120,000 15,443,000 Cost of sales ( 5,963,000 ) ( 3,770,000 ) Gross profit 16,157,000 11,673,000 Operating expenses: Selling, general and administrative 13,398,000 8,164,000 Research and development 658,000 592,000 Total operating expenses 14,056,000 8,756,000 Income from operations 2,101,000 2,917,000 Other (expense) income: Interest expense, net ( 1,792,000 ) ( 513,000 ) Equity in losses of unconsolidated entities ( 2,886,000 ) ( 1,319,000 ) Investment gain (loss) from Eton Pharmaceuticals 139,000 ( 2,835,000 ) Gain on forgiveness of PPP loan - 1,967,000 Total other expense, net ( 4,539,000 ) ( 2,700,000 ) (Loss) income before income taxes ( 2,438,000 ) 217,000 Income taxes - - Net (loss) income attributable to common stockholders $ ( 2,438,000 ) $ 217,000 Basic net (loss) income per share of common stock $ ( 0.09 ) $ 0.01 Diluted net (loss) income per share of common stock $ ( 0.09 ) $ 0.01 Weighted average number of shares of common stock outstanding, basic 27,226,819 26,019,255 Weighted average number of shares of common stock outstanding, diluted 27,226,819 27,480,622 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 4 HARROW HEALTH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Three Months Ended March 31, 2022 and 2021 Preferred Stock Common Stock Additional Total Harrow Health, Inc. Total Non controlling Total Par Par Paid-in Accumulated Stockholders’ Interest Stockholders’ Shares Value Shares Value Capital Deficit Equity Equity Equity Balance at December 31, 2020 - $ - 25,749,875 $ 26,000 $ 104,557,000 $ ( 77,400,000 ) $ 27,183,000 $ ( 355,000 ) $ 26,828,000 Issuance of common stock in connection with: Exercise of employee options 11,301 27,000 - 27,000 - 27,000 Vesting of RSUs - 230,000 - - - - - Shares withheld related to net share settlement of equity awards - - ( 7,500 ) - ( 57,000 ) - ( 57,000 ) - ( 57,000 ) Stock-based compensation expense - - - - 855,000 - 855,000 - 855,000 Net income - - - - - 217,000 217,000 - 217,000 Balance at March 31, 2021 - $ - 25,983,676 $ 26,000 $ 105,382,000 $ ( 77,183,000 ) $ 28,225,000 $ ( 355,000 ) $ 27,870,000 Balance at December 31, 2021 - $ - 26,902,763 $ 27,000 $ 106,666,000 $ ( 95,407,000 ) $ 11,286,000 $ ( 355,000 ) $ 10,931,000 Issuance of common stock in connection with: Exercise of employee options - - 89,986 - 4,000 - 4,000 - 4,000 Vesting of RSUs - - 135,000 1,000 ( 1,000 ) - - - - Shares withheld related to net share settlement of equity awards - - ( 96,622 ) ( 1,000 ) ( 776,000 ) - ( 777,000 ) - ( 777,000 ) Stock-based compensation expense - - - - 2,016,000 - 2,016,000 - 2,016,000 Net loss - - - - - ( 2,438,000 ) ( 2,438,000 ) - ( 2,438,000 ) Balance at March 31, 2022 - $ - 27,031,127 $ 27,000 $ 107,909,000 $ ( 97,845,000 ) $ 10,091,000 $ ( 355,000 ) $ 9,736,000 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 For the Three Months Ended March 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ ( 2,438,000 ) $ 217,000 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 419,000 464,000 Amortization of intangible assets 404,000 40,000 Amortization of operating lease right-of-use assets 124,000 148,000 Provision for bad debt expense 10,000 19,000 Amortization of debt issuance costs and discount 193,000 96,000 Gain on forgiveness of PPP loan - ( 1,967,000 ) Investment (gain) loss from investment in Eton ( 139,000 ) 2,835,000 Equity in losses of unconsolidated entities 2,886,000 1,319,000 Stock-based compensation 2,016,000 855,000 Changes in assets and liabilities: Accounts receivable ( 1,535,000 ) ( 610,000 ) Inventories ( 179,000 ) ( 534,000 ) Prepaid expenses and other current assets ( 29,000 ) ( 32,000 ) Accounts payable and accrued expenses 369,000 1,105,000 Accrued payroll and related liabilities ( 1,141,000 ) ( 684,000 ) Deferred revenue and customer deposits 7,000 ( 63,000 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 967,000 3,208,000 CASH FLOWS FROM INVESTING ACTIVITIES Investment in patent and trademark assets ( 6,000 ) ( 13,000 ) Purchases of property, plant and equipment and capitalized software development costs ( 404,000 ) ( 211,000 ) NET CASH USED IN INVESTING ACTIVITIES ( 410,000 ) ( 224,000 ) CASH FLOWS FROM FINANCING ACTIVITIES Payments on finance lease obligations ( 3,000 ) ( 1,000 ) Principal payment on SWK loan - ( 750,000 ) Proceeds from the exercise of stock options 4,000 - Payment of taxes upon vesting of RSUs and exercise of stock options ( 777,000 ) ( 30,000 ) NET CASH USED IN FINANCING ACTIVITIES ( 776,000 ) ( 781,000 ) NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH ( 219,000 ) 2,203,000 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period 42,167,000 4,301,000 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period $ 41,948,000 $ 6,504,000 RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH Cash and cash equivalents $ 41,948,000 $ 6,304,000 Restricted cash - 200,000 CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD $ 41,948,000 $ 6,504,000 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ - $ - Cash paid for interest $ 1,617,000 $ 415,000 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Right-of-use assets obtained in exchange for new operating lease obligations $ 1,036,000 $ - 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, 2022 and 2021 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”) is an ophthalmic-focused healthcare company that 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 non-controlling equity positions in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”), both companies that began as subsidiaries of Harrow. In 2020, Harrow created Visionology, Inc. (“Visionology”), which launched a digital eye health platform business during 2021. 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, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 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, 2021. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Harrow consolidates entities in which it has a controlling financial interest. The Company assesses control under the variable interest entity (“VIE”) model to determine whether the Company is the primary beneficiary of that entity’s operations. If an entity is not deemed to be a VIE, the Company consolidates entities 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. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following represents an update for the three months ended March 31, 2022 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Risks, Uncertainties and Liquidity The Company is subject to certain regulatory standards, approvals, guidelines and inspections which could impact the Company’s ability to make, dispense, and sell certain products. If the Company was required to cease compounding and selling certain products as a result of regulatory guidelines or inspections, this may have a material impact on the Company’s financial condition, liquidity and results of operations. Segments Due to shifts in the Company’s strategic plans to further focus on growing the Company’s ImprimisRx business and suspension of activities related to starting up development-stage pharmaceutical companies, along with changes to the Company’s organizational and internal reporting structure, beginning in January 2022 management no longer evaluates the Company’s business in two segments and instead focuses on the performance of the business as a single operating business. 7 Basic and Diluted Net (Loss) Income per Common Share Basic net (loss) income per common share is computed by dividing net (loss) income attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is computed by dividing the net (loss) income attributable to common stockholders for the period by the weighted average number of common and common equivalent shares, such as stock options, restricted stock units (“RSUs”) and warrants, outstanding during the period. Common equivalent shares (using the treasury stock method) from stock options, unvested RSUs and warrants were 5,546,200 and 5,486,678 at March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, 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 (loss) income 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, 2022 and 2021 was 277,405 and 223,219 , respectively. The following table shows the computation of basic net (loss) income per share of common stock for the three months ended March 31, 2022 and 2021: SCHEDULE OF BASIC AND DILUTED EARNINGS PER COMMON SHARE 2022 2021 For the Three Months Ended March 31, 2022 2021 Numerator – net (loss) income attributable to Harrow Health, Inc. common stockholders $ ( 2,438,000 ) $ 217,000 Denominator - weighted average number of shares outstanding, basic 27,226,819 26,019,255 Net (loss) income per share, basic $ ( 0.09 ) $ 0.01 For the three months ended March 31, 2021, 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 three months ended March 31, 2021, consisted of the following: SCHEDULE OF DILUTED COMMON EQUIVALENT SHARES For the Three Months Ended March 31, 2021 Diluted shares related to: Warrants 576,275 Stock options 885,092 Dilutive common equivalent shares 1,461,367 The following table shows the computation of diluted net (loss) income per share of common stock for the three months ended March 31, 2022 and 2021: SCHEDULE OF DILUTED NET INCOME LOSS PER SHARES 2022 2021 For the Three Months Ended March 31, 2022 2021 Numerator – net (loss) income attributable to Harrow Health, Inc. $ ( 2,438,000 ) $ 217,000 Denominator – weighted average number of shares outstanding, basic 27,226,819 26,019,255 Dilutive common equivalent shares - 1,461,367 Number of shares used for diluted earnings per share computation 27,226,819 27,480,622 Net (loss) income per share, diluted $ ( 0.09 ) $ 0.01 8 Investment in Eton Pharmaceuticals, Inc. As of March 31, 2022, the Company owned 1,982,000 shares of Eton common stock, which represents less than 10 % of the equity interests of Eton. At March 31, 2022, the fair market value of Eton’s common stock was $ 4.36 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 gain (loss) from its Eton common stock position of $ 139,000 and $( 2,835,000 ) during the three months ended March 31, 2022 and 2021, respectively, related to the change in fair market value of its investment in Eton during the measurement period. As of March 31, 2022, the fair market value of the Company’s investment in Eton was $ 8,642,000 . Investment in Melt Pharmaceuticals, Inc. – Related Party The Company owns 3,500,000 shares of common stock of Melt (representing approximately 46 % of the equity interests as of March 31, 2022). The Company analyzes its investment in Melt and related agreements on a regular basis to evaluate its position of variable interests in Melt. The Company has determined that it does not have the ability to control Melt, however it has the ability to exercise significant influence over the operating and financial decisions of Melt and uses the equity method of accounting for this investment. Under this method, the Company recognizes earnings and losses in Melt in its condensed consolidated financial statements and adjusts the carrying amount of its investment in Melt accordingly. Any intra-entity profits and losses are eliminated. During the year ended December 31, 2021, the Company reduced the carrying value of its common stock investment in Melt to $ 0 as a result of the Company recording its share of equity losses in Melt since its deconsolidation in 2019. As of March 31, 2022 and at the time of entering into the Melt Loan Agreement (see Note 4), the Company owned 100 % of Melt’s indebtedness. Following the reduction of the carrying value of the Company’s common stock investment in Melt to $ 0 , the Company began recording 100 % of the equity method losses of Melt, based on its ownership of Melt’s total indebtedness. In addition, the Company treats interest paid in kind on the Melt Loan Agreement as an in-substance capital contribution and reduces its investment in Melt accordingly, rather than recording interest income. The Company has no other requirements to advance funds to Melt. The following table summarizes the Company’s investments in Melt as of March 31, 2022: SCHEDULE OF INVESTMENT Cost Share of Equity Paid-in-Kind In-substance Capital Net Basis Method Losses Interest Contributions Carrying value Common stock $ 5,810,000 $ ( 5,810,000 ) $ - $ $ Loan 13,500,000 ( 5,253,000 ) 1,021,000 ( 1,021,000 ) 8,247,000 $ 19,310,000 $ ( 11,063,000 ) $ 1,021,000 $ ( 1,021,000 ) $ 8,247,000 During the three months ended March 31, 2022 and 2021, the Company recorded $ 30,000 due from Melt for reimbursable expenses and amounts payable pursuant to a Management Services Agreement between the Company and Melt (the “Melt MSA”), which are included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. 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 of Surface (representing approximately 20 % of Surface’s equity interests following the closing of a round of financing completed by Surface in July 2021) and uses the equity method of accounting for this investment, as management has determined that the Company has the ability to exercise significant influence over the operating and financial decisions of Surface. Under this method, the Company recognizes earnings and losses in Surface in its consolidated financial statements and adjusts the carrying amount of its investment in Surface accordingly. The Company’s share of earnings and losses are based on the Company’s ownership interest of Surface. Any intra-entity profits and losses are eliminated. During the year ended December 31, 2021, the Company reduced its common stock investment in Surface to $ 0 as a result of the Company recording its share of equity losses of Surface. The Company has no other investments in Surface. The following table summarizes the Company’s investment in Surface as of March 31, 2022: SCHEDULE OF INVESTMENT Cost Share of Equity Net Basis Method Losses Carrying value Common stock $ 5,320,000 $ ( 5,320,000 ) $ - See Note 5 for more information and related party disclosure regarding Surface. 9 Impairment of Equity Method Investments and Note Receivable On a quarterly basis, management assesses whether there are any indicators that the carrying value of the Company’s equity method investments and note receivable may be other than temporarily impaired. Indicators include financial condition, operating performance, and near-term prospects of the investee. To the extent indicators suggest that a loss in value may have occurred, the Company will evaluate both quantitative and qualitative factors to determine if the loss in value is other than temporary. If a potential loss in value is determined to be other than temporary, the Company will recognize an impairment loss based on the estimated fair value of the equity method investments and note receivable. At March 31, 2022 and December 31, 2021, no indicators of impairment existed. NOTE 3. REVENUES The Company accounts for contracts with customers in accordance with Accounting Standards Codification (“ASC”) 606, Revenues from Contracts with Customers. The Company has two primary streams of revenue: (1) revenue recognized from its sale of products within pharmacy services and (2) revenue recognized from intellectual property license and asset purchase agreements. Product Revenues The Company sells prescription drugs directly through its pharmacy and outsourcing facility. Revenue from the Company’s pharmacy services includes: (i) the portion of the price the client pays directly to the Company, net of any volume-related or other discounts paid back to the client, (ii) the price paid to the Company by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are not included in revenue. Following the core principles of ASC 606, the Company has identified the following: 1. Identify the contract(s) with a customer: A contract 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 obligations 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 the Company’s 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 Company’s pharmacy services: Revenues generated from prescription or office use drugs sold by the Company’s pharmacies and outsourcing facility are recognized when the prescription is shipped. At the time of shipment, the pharmacy services 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. 10 Commission Revenues The Company has entered into an agreement whereby it is paid a fee calculated based on sales the Company 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 Company’s part to recognize the associated revenue. Transfer of Acquired Product Profit Revenues The Company has entered into an agreement whereby it purchased the exclusive commercial rights to assets associated with certain ophthalmic products from another pharmaceutical company (the “Seller”). During a temporary, six month transition period, the Seller will continue to manufacture and market these products and transfer the net profit from the sale of the products to the Company. The revenue recognized by the Company from the transfer of net profit is recognized at the time profit from the products sales has been calculated by the Seller and confirmed by the Company, typically on a monthly basis, at which point there is no future performance obligation required by the Company and no consequential continuing involvement on the Company’s part to recognize the associated revenue. On a quarterly basis, the Seller invoices the Company for all credits and reimbursements (“Chargebacks”) made to customers related to the products. The Company uses historical actual experience to estimate Chargebacks associated with the net profit transferred. The estimate is recorded as a reduction in revenues in the Company’s condensed consolidated statements of operations and accounts receivable in the condensed consolidated balance sheets, at the time the revenue is recognized. Intellectual Property License Revenues The Company currently holds five intellectual property licenses and related agreements in which the Company has agreed to license or sell to 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 that the performance obligation is met. Non-refundable fees that are not contingent on any future performance by the Company and require no consequential continuing involvement on the part of the Company are recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other 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, 2022 and 2021, consists of the following: SCHEDULE OF DISAGGREGATED REVENUE 2022 2021 For the Three Months Ended March 31, 2022 2021 Product sales, net $ 20,340,000 $ 14,948,000 Commissions 1,320,000 485,000 Transfer of profit 460,000 - License - 10,000 Total revenues $ 22,120,000 $ 15,443,000 Deferred revenue and customer deposits at March 31, 2022 and December 31, 2021 were $ 23,000 and $ 16,000 , respectively. All deferred revenue and customer deposit amounts at December 31, 2021 were recognized as revenue during the three months ended March 31, 2022. 11 NOTE 4. INVESTMENT IN, AND NOTE RECEIVABLE FROM MELT PHARMACEUTICALS, INC. - RELATED PARTY TRANSACTIONS In December 2018, the Company entered into an asset purchase agreement with Melt (the “Melt 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 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 $ 10,000 . As of March 31, 2022 and December 31, 2021, the Company was due $ 70,000 and $ 48,000 , 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, 2022. The Company’s Chief Executive Officer, Mark L. Baum, was previously a member of the Melt board of directors until his resignation during the year ended December 31, 2021. Following Mr. Baum’s departure, the Company no longer has any representation on Melt’s board of directors. The unaudited condensed results of operations information of Melt is summarized below: SCHEDULE OF CONDENSED INCOME STATEMENT 2022 2021 For the Three Months Ended March 31, 2022 2021 Revenues, net $ - $ - Loss from operations ( 3,337,000 ) ( 1,099,000 ) Net loss $ ( 3,337,000 ) $ ( 1,099,000 ) The unaudited condensed balance sheet information of Melt is summarized below: SCHEDULE OF CONDENSED BALANCE SHEET At March 31, At December 31, 2022 2021 Current assets $ 9,025,000 $ 11,278,000 Non-current assets 360,000 - Total assets $ 9,385,000 $ 11,278,000 Total liabilities $ 17,313,000 $ 15,732,000 Total preferred stock and stockholders’ deficit ( 7,928,000 ) ( 4,454,000 ) Total liabilities and stockholders’ deficit $ 9,385,000 $ 11,278,000 Melt Note Receivable In September 2021, the Company entered into a loan and security agreement in the principal amount of $ 13,500,000 (the “Melt Loan Agreement”), as lender, with Melt, as borrower. Amounts borrowed under the Melt Loan Agreement bear interest at twelve and one-half percent ( 12.50 %) per annum, which interest can be paid in-kind at the option of Melt until the maturity date. The Melt Loan Agreement permits Melt to pay interest only on the principal amount loaned thereunder through the term and all amounts owed will be due and payable on September 1, 2022. Melt may elect to prepay all, but not less than all, of the amounts owed prior to the maturity date at any time without penalty. 12 Melt has granted the Company a security interest in substantially all of its personal property, rights and assets, including intellectual property rights, to secure the payment of all amounts owed under the Melt Loan Agreement. The Melt Loan Agreement contains customary representations, warranties and covenants, including covenants by Melt limiting additional indebtedness, liens, mergers and acquisitions, dispositions, investments, distributions, subordinated debt, and transactions with affiliates. The Melt Loan Agreement includes customary events of default, and upon the occurrence of an event of default (subject to cure periods for certain events of default), all amounts owed by Melt thereunder may be declared immediately due and payable by the Company, and the interest rate on the loan may be increased by three percent ( 3 %) per annum. See Note 17 regarding an Amendment to the Melt Loan Agreement entered into in April 2022. In connection with the Melt Loan Agreement, the Company and Melt entered into a Right of First Refusal Agreement providing the Company with the right, but not the obligation, to match any offer received by Melt associated with the commercial rights to any of Melt’s drug candidates for a period of five years following the effective date of the Melt Loan Agreement. The net funds received by Melt excluded $ 908,000 for amounts owed to the Company for reimbursable expenses and amounts due under the Melt MSA prior to the effective date of the note receivable. 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, 2022, the Company owned 3,500,000 shares of Surface common stock (representing approximately 20 % of Surface’s 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. Dr. Lindstrom is a principal of Flying L Partners, an affiliate of an investor who purchased Surface Series A Preferred Stock. The unaudited condensed results of operations information of Surface is summarized below: SUMMARY OF CONDENSED INCOME STATEMENT 2022 2021 For the Three Months Ended March 31, 2022 2021 Revenues, net $ - $ - Loss from operations ( 1,996,000 ) ( 2,831,000 ) Net loss $ ( 1,996,000 ) $ ( 2,831,000 ) The unaudited condensed balance sheet information of Surface is summarized below: SUMMARY OF CONDENSED BALANCE SHEET At March 31, At December 31, 2022 2021 Current assets $ 19,920,000 $ 21,731,000 Non-current assets 411,000 412,000 Total assets $ 20,331,000 $ 22,143,000 Total liabilities $ 1,937,000 $ 1,514,000 Total preferred stock and stockholders’ deficit 18,394,000 20,629,000 Total liabilities and stockholders’ equity $ 20,331,000 $ 22,143,000 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 March 31, 2022 and December 31, 2021 was as follows: SCHEDULE OF INVENTORIES March 31, 2022 December 31, 2021 Raw materials $ 2,441,000 $ 2,441,000 Work in progress 44,000 - Finished goods 1,911,000 1,776,000 Total inventories $ 4,396,000 $ 4,217,000 13 NOTE 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets at March 31, 2022 and December 31, 2021, consisted of the following: SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS March 31, 2022 December 31, 2021 Prepaid insurance $ 455,000 $ 728,000 Due from Melt Pharmaceuticals 70,000 48,000 Other prepaid expenses 757,000 437,000 Deposits and other current assets 52,000 92,000 Total prepaid expenses and other current assets $ 1,334,000 $ 1,305,000 NOTE 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at March 31, 2022 and December 31, 2021, consisted of the following: SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT March 31, 2022 December 31, 2021 Property, plant and equipment, net: Computer hardware $ 786,000 $ 772,000 Furniture and equipment 521,000 443,000 Lab and pharmacy equipment 4,142,000 4,056,000 Leasehold improvements 5,728,000 5,703,000 Property, plant and equipment, gross 11,177,000 10,974,000 Accumulated depreciation ( 8,209,000 ) ( 7,833,000 ) Property, plant and equipment, net $ 2,968,000 $ 3,141,000 For the three months ended March 31, 2022 and 2021, depreciation related to the property, plant and equipment was $ 376,000 and $ 436,000 , respectively. NOTE 9. CAPITALIZED SOFTWARE DEVELOPMENT COSTS Capitalized software development costs at March 31, 2022 and December 31, 2021 consisted of the following: SCHEDULE OF FINITE LIVED INTANGIBLE ASSETS March 31, 2022 December 31, 2021 Capitalized internal-use software development costs $ 942,000 $ 942,000 Acquired third-party software license for internal-use 159,000 159,000 Total gross capitalized software for internal-use 1,101,000 1,101,000 Accumulated amortization ( 612,000 ) ( 569,000 ) Capitalized internal-use software in process 982,000 781,000 Total finite lived intangible assets net $ 1,471,000 $ 1,313,000 The Company recorded amortization expense of $ 43,000 and $ 28,000 related to capitalized software development costs during the three months ended March 31, 2022 and 2021, respectively. 14 NOTE 10. INTANGIBLE ASSETS AND GOODWILL The Company’s intangible assets at March 31, 2022 consisted of the following: SCHEDULE OF INTANGIBLE ASSETS Amortization Periods (in years) Cost Accumulated Amortization Impairment Net Carrying Value Patents 17 - 19 $ 972,000 $ ( 97,000 ) $ - $ 875,000 Licenses 20 100,000 ( 15,000 ) - 85,000 Trademarks Indefinite 260,000 - - 260,000 Acquired NDAs 10 13,635,000 ( 341,000 ) - 13,294,000 Customer relationships 3 - 15 1,519,000 ( 619,000 ) - 900,000 Trade name 5 5,000 ( 5,000 ) - - Non-competition clause 3 - 4 50,000 ( 50,000 ) - - State pharmacy licenses 25 8,000 ( 7,000 ) - 1,000 $ 16,549,000 $ ( 1,134,000 ) $ - $ 15,415,000 Amortization expense for intangible assets for the three months ended March 31, 2022 and 2021 was as follows: SCHEDULE OF AMORTIZATION EXPENSES FOR INTANGIBLE ASSETS 2022 2021 For the Three Months Ended March 31, 2022 2021 Patents $ 22,000 $ 6,000 Licenses 8,000 1,000 Acquired NDAs 341,000 - Customer relationships 33,000 33,000 Amortization of intangible assets $ 404,000 $ 40,000 Estimated future amortization expense for the Company’s intangible assets at March 31, 2022 is as follows: SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE Remainder of 2022 $ 1,194,000 2023 1,592,000 2024 1,592,000 2025 1,592,000 2026 1,595,000 Thereafter 7,590,000 Intangible assets $ 15,155,000 NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at March 31, 2022 and December 31, 2021 consisted of the following: SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES March 31, 2022 December 31, 2021 Accounts payable $ 5,595,000 $ 5,174,000 Other accrued expenses 49,000 49,000 Accrued interest 1,114,000 1,114,000 Total accounts payable and accrued expenses 6,758,000 6,337,000 15 NOTE 12. DEBT 8.625% Senior Notes Due 2026 In April 2021, the Company closed an offering of $ 50,000,000 aggregate principal amount of 8.625% senior notes due April 2026, and in May 2021 issued an additional $ 5,000,000 of such notes pursuant to the full exercise of the underwriters’ option to purchase additional notes (collectively, the “April Notes”). The April Notes were sold to investors at a par value of $ 25.00 per April Note and the offering resulted in net proceeds to the Company of approximately $ 51,909,000 after deducting underwriting discounts and commissions and expenses of $ 3,091,000 . In June 2021, in a further issuance of the April Notes, the Company sold an additional $ 20,000,000 aggregate principal amount of such notes (the “June Notes,” and together with the April Notes, the “Notes”), at a price of $ 25.75 per June Note, with interest of $ 278,000 on the June Notes being accrued from April 20, 2021 as of the date of issuance. The June offering resulted in net proceeds to the Company of approximately $ 19,164,000 after deducting underwriting discounts and commissions and expenses of $ 1,158,000 and a premium on note issuance of $ 322,000 . The June Notes are treated as a single series with the April Notes under the indenture governing the April Notes, dated as of April 20, 2021, and have the same terms as the April Notes (other than the initial offering price and issue date). The 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 a 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. The issuance costs were recorded as a debt discount and are being amortized as interest expense, net of the amortization of the premium on note issuance, over the term of the Notes using the effective interest rate method. 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. Interest expense related to the Notes totaled $ 1,810,000 for the three months ended March 31, 2022, and included amortization of debt issuance costs and discount of $ 193,000 for three months ended March 31, 2022. At March 31, 2022, future minimum payments under the Company’s debt were as follows: SUMMARY OF FUTURE MINIMUM PAYMENTS Amount Remainder of 2022 $ 4,852,000 2023 6,469,000 2024 6,469,000 2025 6,469,000 2026 77,158,000 Total minimum payments 101,417,000 Less: amount representing interest payments ( 26,417,000 ) Notes payable, gross 75,000,000 Less: unamortized discount, net of premium ( 3,153,000 ) Notes payable, net of unamortized discount $ 71,847,000 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 five years and contain various clauses for renewal at the Company’s option. ● An operating lease for 5,789 square feet of office space in Carlsbad, California, which commenced in January 2022 and will expire in July 2027 . ● An operating lease for 35,326 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 another amendment entered into in May 2021 that extended the term of the lease to July 2027 and added 8,900 square feet of space. ● 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. 16 At March 31, 2022, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases held by the Company were 6.34 % and 13.45 years, respectively. During the three months ended March 31, 2022 and 2021, cash paid for amounts included for the operating lease liabilities was $ 166,000 and $ 251,000 , respectively, and the Company recorded operating lease expense of $ 238,000 and $ 261,000 , included in selling, general and administrative expenses, respectively. Future lease payments under operating leases as of March 31, 2022 were as follows : SCHEDULE OF FUTURE LEASE PAYMENT UNDER OPERATING LEASES Operating Leases Remainder of 2022 $ 655,000 2023 944,000 2024 970,000 2025 796,000 2026 810,000 Thereafter 6,648,000 Total minimum lease payments 10,823,000 Less: amount representing interest payments ( 3,555,000 ) Total operating lease liabilities 7,268,000 Less: current portion, operating lease liabilities ( 445,000 ) Operating lease liabilities, net of current portion $ 6,823,000 The Company also has a finance lease that is included in its lease accounting but is not considered significant. Future lease payments under the non-cancelable finance lease as of March 31, 2022 were as follows : SCHEDULE OF FUTURE LEASE PAYMENT UNDER FINANCE LEASE Finance Lease Remainder of 2022 $ 6,000 2023 9,000 2024 1,000 Total minimum lease payments 16,000 Less: amount representing interest payments ( 1,000 ) Present value of future minimum lease payments 15,000 Less: current portion, finance lease obligation ( 8,000 ) Finance lease obligation, net of current portion $ 7,000 At March 31, 2022, the incremental borrowing rate and the remaining lease term for the finance lease held by the Company were 6.36 % and 1.83 years, respectively. For the three months ended March 31, 2022 and 2021, depreciation expense related to the equipment held under the finance lease obligation was $ 2,000 and $ 2,000 , respectively. For the three months ended March 31, 2022 and 2021, cash paid and expense recognized for interest expense related to the finance lease obligation was $ 0 and $ 1,000 , respectively. NOTE 14. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION Preferred Stock At March 31, 2022 and December 31, 2021, the Company had 5,000,000 shares of preferred stock, $ 0.001 par value, authorized and no shares of preferred stock issued and outstanding. Common Stock During the three months ended March 31, 2022, the Company issued 53,594 shares of common stock to Mark L. Baum, the Company’s Chief Executive Officer, upon the cashless exercise of options to purchase 125,000 shares at an exercise price of $ 2.40 per share. The Company withheld from Mr. Baum 36,014 shares as consideration for the cashless exercise and an additional 35,392 shares for payroll tax obligations totaling $ 295,000 . 17 50,000 RSUs granted in February 2019 to Andrew R. Boll, the Company’s Chief Financial Officer, vested, and in February 2022, the Company issued 29,395 shares of common stock to Mr. Boll, net of 20,605 shares of common stock withheld for payroll tax withholdings totaling $ 162,000 . 50,000 RSUs granted in February 2019 to John P. Saharek, the President of ImprimisRx, vested, and in February 2022, the Company issued 24,077 shares of common stock to Mr. Saharek, net of 25,923 shares of common stock withheld for payroll tax withholdings totaling $ 204,000 . 35,000 RSUs granted in February 2019 vested, and in February 2022, the Company issued 20,298 shares of common stock, net of 14,702 shares of common stock withheld for payroll tax withholdings totaling $ 116,000 . During the three months ended March 31, 2022, the Company issued 1,000 shares of common stock and received net proceeds of $ 4,000 upon the exercise of options to purchase 1,000 shares of common stock with exercise price of $ 3.95 per share. During the three months ended March 31, 2022, 9,644 shares of the Company’s common stock underlying RSUs issued to directors vested, but the issuance and delivery of these shares are deferred until the applicable director 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 which was subsequently amended on June 3, 2021 (as amended, the “2017 Plan” together with the 2007 Plan, the “Plans”). As of March 31, 2022, the 2017 Plan provides for the issuance of a maximum of 6,000,000 shares of the Company’s common stock. The purposes of the Plans are to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in the Company’s development and financial success. Under the Plans, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, restricted stock units and restricted stock. The Plans are administered by the Compensation Committee of the Company’s Board of Directors. The Company had 2,229,399 shares available for future issuances under the 2017 Plan at March 31, 2022. Stock Options A summary of stock option activity under the Plans for the three months ended March 31, 2022 is as follows: SCHEDULE OF STOCK OPTION PLAN ACTIVITY Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value Options outstanding – January 1, 2022 3,039,546 $ 5.52 Options granted 170,250 $ 7.60 Options exercised ( 126,000 ) $ 2.41 Options cancelled/forfeited - $ - Options outstanding – March 31, 2022 3,083,796 $ 5.76 5.01 $ 4,781,000 Options exercisable 2,408,629 $ 5.29 4.61 $ 4,639,000 Options vested and expected to vest 3,083,796 $ 5.76 5.01 $ 4,781,000 The aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would have been received by option holders if all option holders had exercised and immediately sold all shares underlying options with an exercise price lower than the market price on March 31, 2022, based on the closing price of the Company’s common stock of $ 6.82 on that date. 18 During the three months ended March 31, 2022, 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 during the three months ended March 31, 2022 included the following vesting schedule: 25% of the shares subject to the option vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the shares subject to the option vest and become exercisable quarterly in equal installments thereafter over three years. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans) and in the event of certain modifications to the option award agreement. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The expected term of options granted to employees and directors was determined in accordance with the “simplified approach,” as the Company has limited, relevant, historical data on employee exercises and post-vesting employment termination behavior. The expected risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual effect differs from those estimates. For option grants to employees and directors, the Company assigns a forfeiture factor of 10 %. These factors could change in the future, which would affect the determination of stock-based compensation expense in future periods. Utilizing these assumptions, the fair value is determined at the date of grant. The table below illustrates the fair value per share determined using the Black-Scholes-Merton option pricing model with the following assumptions used for valuing options granted to employees: SCHEDULE OF FAIR VALUE ASSUMPTIONS 2022 Weighted-average fair value of options granted $ 4.65 Expected terms (in years) 6.11 Expected volatility 70 % Risk-free interest rate 1.54 % Dividend yield - The following table summarizes information about stock options outstanding and exercisable at March 31, 2022: 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 - $ 1.73 312,887 5.70 $ 1.72 312,887 $ 1.72 $ 2.23 - $ 2.60 313,068 4.84 $ 2.26 312,943 $ 2.26 $ 2.76 - $ 3.50 25,500 7.95 $ 3.49 12,906 $ 3.48 $ 3.95 370,000 4.00 $ 3.95 370,000 $ 3.95 $ 4.08 - $ 6.30 578,850 5.71 $ 5.76 525,027 $ 5.85 $ 6.81 - $ 7.37 388,995 6.27 $ 7.30 297,495 $ 7.30 $ 7.52 - $ 7.79 221,823 8.33 $ 7.61 49,323 $ 7.66 $ 7.87 600,000 3.33 $ 7.87 300,000 $ 7.87 $ 7.89 - $ 8.98 92,673 7.47 $ 8.16 48,048 $ 8.22 $ 8.99 180,000 1.09 $ 8.99 180,000 $ 8.99 $ 1.47 - $ 8.99 3,083,796 5.01 $ 5.76 2,408,629 $ 5.29 As of March 31, 2022, there was approximately $ 1,806,000 of total unrecognized compensation expense related to unvested stock options granted under the Plans. That expense is expected to be recognized over the weighted-average remaining vesting period of 4.89 years. The stock-based compensation for all stock options was $ 272,000 and $ 452,000 during the three months ended March 31, 2022 and 2021, respectively. The intrinsic value of options exercised during the three months ended March 31, 2022 was $ 745,000 . 19 Restricted Stock Units/Performance 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. A summary of the Company’s RSU activity (including performance stock units) and related information for the three months ended March 31, 2022 is as follows: SCHEDULE OF RESTRICTED STOCK UNITS ACTIVITY Number of RSUs Weighted Average Grant Date Fair Value RSUs unvested - January 1, 2022 2,233,202 $ 6.78 RSUs granted - $ - RSUs vested ( 144,644 ) $ 6.57 RSUs cancelled/forfeited - - RSUs unvested at March 31, 2022 2,088,558 $ 6.79 As of March 31, 2022, the total unrecognized compensation expense related to unvested RSUs was approximately $ 8,756,000 , which is expected to be recognized over a weighted-average period of 1.33 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, 2022 and 2021 was $ 1,744,000 and $ 346,000 , 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. A summary of warrant activity for the three months ended March 31, 2022 is as follows: SCHEDULE OF WARRANTS ACTIVITY Number of Shares Subject to Warrants Outstanding Weighted Average Exercise Price Warrants outstanding - January 1, 2022 373,847 $ 2.08 Granted - Exercised - Expired - Warrants outstanding and exercisable - March 31, 2022 373,847 $ 2.08 Weighted average remaining contractual life of the outstanding warrants in years - March 31, 2022 2.3 Warrants outstanding and exercisable as of March 31, 2022 are as follows: SCHEDULE OF WARRANTS OUTSTANDING AND WARRANTS EXERCISABLE Warrant Series Issue Date Warrants Outstanding Exercise Price Expiration Date Lender warrants 7/19/2017 373,847 $ 2.08 7/19/2024 Subsidiary Stock-Based Transactions The Company recognized $ 0 and $ 57,000 in stock-based compensation expense related to subsidiary stock options during the three months ended March 31, 2022 and 2021. 20 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, 2022 2021 Employees - selling, general and administrative $ 1,676,000 $ 755,000 Employees – research and development 186,000 - Directors - selling, general and administrative 100,000 100,000 Consultants – research and development 54,000 - Total $ 2,016,000 $ 855,000 NOTE 15. COMMITMENTS AND CONTINGENCIES Legal 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. Product and Professional Liability Product and professional liability litigation represents an inherent risk to all firms in the pharmaceutical and pharmacy industry. We utilize traditional third-party insurance policies with regard to our product and professional liability claims. Such insurance coverage at any given time reflects current market conditions, including cost and availability, when the policy is written. Indemnities In addition to the indemnification provisions contained in the Company’s 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, 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 was required to make certain milestone payments to Dr. Lindstrom. All of the above referenced milestone payments were payable at the Company’s election in cash or shares of the Company’s restricted common stock. Payments totaling $ 30,000 and $ 35,000 were made during the three months ended March 31, 2022 and 2021, respectively. $ 71,000 and $ 35,000 were incurred as royalty expenses during the three months ended March 31, 2022 and 2021, respectively, and was 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 $ 33,000 upon execution of the Lindstrom APA. Dr. Lindstrom was paid $ 8,000 and $ 7,000 in cash during the three months ended March 31, 2022 and 2021, respectively. The Company incurred $ 7,000 and $ 7,000 for royalty expenses related to the Lindstrom APA during the three months ended March 31, 2022 and 2021. 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. The Dexycu Agreement expires on August 1, 2025 , subject to early termination in accordance with the terms set forth therein. Either party may terminate the Dexycu Agreement, subject to specified notice periods and limitations, 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, 2022 and 2021, the Company recorded $ 1,320,000 and $ 485,000 , respectively, 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. Commission expenses of $ 1,047,000 and $ 804,000 were incurred under these agreements during the three months ended March 31, 2022 and 2021, 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. During the three months ended March 31, 2022 and 2021, $ 213,000 and $ 232,000 were incurred under these agreements as royalty expenses, respectively. Sintetica Agreement In July 2021, the Company entered into a License and Supply Agreement (the “Sintetica Agreement”) with Sintetica S.A. (“Sintetica”), pursuant to which Sintetica granted the Company the exclusive license and marketing rights to its patented ophthalmic drug candidate (“AMP-100”) in the U.S. and Canada. Pursuant to the Sintetica Agreement, the Company will pay Sintetica a per unit transfer price to supply AMP-100, along with a per unit royalty for units sold. The Company is required to pay Sintetica up to $ 18,000,000 in one-time milestone payments including a $ 5,000,000 payment (the “Upfront Payment”) due within 30 days of signing the Sintetica Agreement and the balance of payments due upon achievement of certain regulatory and commercial milestones. Under the terms of the Sintetica Agreement, Sintetica will be responsible for regulatory filings for AMP-100 in the U.S. The Upfront Payment along with an additional milestone payment of $ 3,117,000 was paid and recorded as a R&D expenses during the year ended December 31, 2021. For the three months ended March 31, 2022, no amounts have been paid or accrued under the Sintetica agreement. Subject to certain limitations, the term of the Sintetica Agreement is ten years, and allows for a ten-year extension if certain sales thresholds are met. Wakamoto Agreement In August 2021, the Company entered into a License Agreement and a Basic Sale and Purchase Agreement (together, the “Wakamoto Agreements”) with Wakamoto Pharmaceutical Co., Ltd. (“Wakamoto”), pursuant to which Wakamoto granted the Company the exclusive license and marketing rights to its ophthalmic drug candidate (“MAQ-100”) in the U.S. and Canada. Pursuant to the Wakamoto Agreements, Wakamoto will supply MAQ-100 to the Company, and the Company will pay Wakamoto a per unit transfer price to supply MAQ-100. In addition, the Company is required to pay Wakamoto various one-time milestone payments totaling up to $ 2,000,000 upon the achievement of certain regulatory milestones and up to $ 6,200,000 upon the achievement of certain commercial milestones. Under the terms of the Agreements, the Company will be responsible for regulatory filings and fees for MAQ-100 in the U.S. and Canada. Through March 31, 2022, no amounts have been paid or accrued under the Wakamoto agreement. Subject to certain limitations, the term of the Agreements is for five years from the date of the FDA’s market approval of MAQ-100 and allows for a five-year extension if certain unit sales thresholds are met. Presbyopia Asset Purchase Agreement – Related Party In December 2019, the Company entered into an asset purchase agreement (the “Presbyopia APA”) with Richard L. Lindstrom, M.D., a member of its Board of Directors. Pursuant to the terms of the Presbyopia APA, the Company acquired certain intellectual property and related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license an ophthalmic topical product to treat presbyopia (the “Presbyopia Product”). Under the terms of the Presbyopia Product, the Company is required to make royalty payments to Dr. Lindstrom ranging from 2% to 4% of net sales, dependent upon the final formulation and patent protection of the Presbyopia Product sold . Dr. Lindstrom was paid $ 0 in cash during the periods ended March 31, 2022 and 2021, and was due $ 0 at March 31, 2022 and 2021. The Company incurred $ 0 for royalty expenses related to the Presbyopia APA during the periods ended March 31, 2022 and 2021. 23 NOTE 16. CONCENTRATIONS The Company has two products that each comprised more than 10% of total revenues. These products collectively accounted for 32 % and 36 % of revenues during the three months ended March 31, 2022 and 2021, respectively. 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 during the three months ended March 31, 2022 and 2021. The Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted for 74 % and 82 % of active pharmaceutical ingredient purchases during the three months ended March 31, 2022 and 2021, respectively. NOTE 17. SUBSEQUENT EVENTS The Company has performed an evaluation of events occurring subsequent to March 31, 2022 through the filing date of this Quarterly Report. Based on its evaluation, no events other than those described below need to be disclosed. Conditional Melt Loan Amendment In April 2022, the Company entered into a First Amendment (the “Amendment”) to its loan and security agreement previously entered into on September 1, 2021 with Melt. The Amendment provides for: ● Melt is required to maintain a minimum cash balance of $7,000,000 for one (1) year following the effective date of the Amendment; and a minimum cash balance of $5,000,000 at all times after the one year anniversary of the effective date of the Amendment . ● The maturity date by which all amounts owed under the loan agreement are payable was extended to September 1, 2026, unless otherwise accelerated pursuant to the terms of the loan agreement. ● The definition of Material Adverse Effect was amended so that such an effect will be deemed to have occurred if the data from the phase 2 study of MELT-300 fails to demonstrate the benefit of the combination MELT-300 study drug versus the individual components of the same MELT-300 study drug, as reasonably determined by the Company. ● The effectiveness of the Amendment is subject to, among other conditions, Melt consummating a qualifying financing of a minimum amount of $ 15,000,000 from third party investors by August 31, 2022. 24