Good afternoon, and welcome to the conference call covering Imprimis Pharmaceuticals Financial Results and Business Update for the Third Quarter 2018. My name is Brock, and I will be your operator for today's call. [Operator Instructions] By now you should have received a copy of the earnings press release.

If you have not received a copy, please go on the Investor Relations page of the company's website at www.imprimisrx.com..

Before we begin today, let me remind you that the company's remarks include forward-looking statements within the meanings of federal securities laws.

Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Imprimis' control, including risks and uncertainties described from time to time in its SEC filings, such as risks and uncertainties related to Imprimis' ability to make commercially available its compounded formulations and technologies, and FDA approval of certain drug candidates in a timely manner or at all.

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For a list and description of those risks and uncertainties, please see the Risk Factor section of the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. Imprimis results may differ materially from those projected.

Imprimis disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of today..

Additionally, Imprimis will refer to non-GAAP financial metrics, specifically, adjusted EBITDA and/or adjusted earnings. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in the company's press release available on the website..

With that, I will now turn the call over to Mark Baum, Chief Executive Officer of Imprimis.

Mark?.

Thanks for joining us today as we discussed the performance of our business during the third quarter. During this period, our team was able to deliver on strong year-over-year revenue growth, continued adjusted earnings, record-high gross margins and we made significant progress with our Project 15 spinout businesses.

There's plenty to discuss and let me start by providing a brief overview of the company for any new listeners in attendance today. .

Our vision is to ensure that Americans have access to innovative medicines they need at prices they can afford. In furtherance of our vision, we own a diversified portfolio of health care businesses, including the nation's leading ophthalmology-focused pharmaceutical compounder, ImprimisRx.

And we've used our significant experience with compounded drugs, including how they perform and practice in thousands of doctors' offices, surgery centers and hospitals across our country to create and fund entirely new pharmaceutical companies to develop these medicines as drug candidates for FDA approval through the FDA's 505(b)(1) or (b)(2) development pathways.

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Our strategy is to create shareholder value through equity ownership in these businesses and to generate cash from profits and royalties we hold in drug candidates they are developing.

Because of the growth we've delivered on over the past 4 years, our core pharmaceutical compounding business has arguably never been more successful and valuable, but our shareholders are beginning to also see the value in our ownership of our spinout or Project 15 companies, including the royalty interests we own in many of the drugs they are developing.

To better reflect the entirety of what our company is, and our diversification of assets, our Board of Directors recently voted to change the name of our company to Harrow Health, Inc. .

Our new proposed name will reflect the future of our company and our ability to continue to prepare the ground, if you will, like a harrow, so that the valuable seeds we've created are planted for growth and yield.

We expect the proposed name change, which requires shareholder approval, will be included in a special proxy we hope to file during Q1 of 2019. Now with that bit of news, let's discuss our third quarter numbers..

I'm pleased to report that our continued strong performance in 2018 generated record third quarter revenue of $10.7 million. That's a 66% increase compared to the third quarter of 2017 and a modest but sequential increase from the second quarter of 2018.

Like the second quarter of 2018, we've seen improvement and new records in nearly critical metric we track, although I continue to see areas we can improve on, particularly in improving operating efficiencies, which should eventually yield higher gross margins. .

I've always believed that customers vote with their dollars and our ophthalmology business, which continues to shine, the growing number of ophthalmology customers and the many thousands of their patients we serve week in and week out are a testament that we are getting a growing number of votes from those who matter most. .

During Q3, our ophthalmology business contributed $8.9 million in gross revenues. That's an 81% increase compared to the third quarter of 2017. Overall, gross margins held steady as well, slightly besting last quarter by hitting an all-time high of 61%.

However, I believe there is a lot of room for margin improvement and I'm optimistic we can achieve an additional 10-plus percentage points of gross margin as we execute on our medium and longer-term goals. As Andrew will discuss in more detail, adjusted EBITDA for the third quarter was $424,000.

However, excluding other onetime costs related to investments we chose to make in Project 15 businesses and legal expenses, we would have exceeded $1 million in adjusted EBITDA for the quarter. .

one, we continue to harvest record numbers of new customers, including hundreds of new leads from the recent American Academy of Ophthalmology meeting in Chicago, coupled with growth in our commission-only-based sales force, which effectively quintupled our boots on the ground since this time last year, we are poised to continue to add new accounts.

Two, we are seeing broader account penetration because of our growing portfolio of products. My belief is that we should capture every revenue opportunity we can and our team continues to make progress in this regard. Three, expected demographic growth, which should be about 6% annually.

Four, pricing optimization programs to better associate the price of our products with the value they deliver. Five, at least 5 planned new product launches in ophthalmology in 2019.

And finally, six, we are planning to expand our contract sales force to market existing products we own that we believe will have therapeutic appeal outside of ophthalmology. One such product is the MKO Melt. .

And before I transition to our Project 15 businesses, I'd like to highlight that we recently terminated our ATM equity financing vehicle. This is reflected in a Form 8-K we filed with the SEC earlier this month.

Based on where our company is, we no longer see the need to utilize the ATM shelf offering and barring the material or strategic change to our business, the need to raise capital through dilutive equity sales period. On to Project 15..

The goal of Project 15, which kicked into gear last year, is to create diversification in our business and to create new businesses that start out as subsidiaries of Imprimis. These businesses are seeded with drug formulation assets that Imprimis owns and that we believe should be drug candidates for FDA approval.

Our analysis process is based on what we know about how these drugs perform. Our real-world experience of having made and dispensed compounded versions of these drug candidates. We believe this information cannot only derisk the drug development process but also our understanding of the commercial opportunities for a drug, once approved. .

Our process also involves hiring equity-incentivized management teams, specific to the therapeutic area we are pursuing and financing the business with outside capital to critical milestones and value inflection points.

Once funded and managed outside of Imprimis, we deconsolidate the business from our balance sheet, retain a significant equity stake in the company and retain royalty rights on the drug formulations we contributed. Now let me give you a real-world example of how this has worked in practice..

In April of 2017, we incorporated Eton Pharmaceuticals and soon thereafter, vended in 2 drug formulation assets we own. On June 20 of 2017, about 2 months later, we completed a $20 million Series A financing. Between the date we incorporated Eton until the time we closed on the Series A financing, Imprimis invested about $250,000 in Eton.

After the Series A financing was completed, Eton paid Imprimis back for nearly every direct expense so Imprimis was out, essentially nothing.

Imprimis retained an investment in Eton of 3.5 million shares of common stock and following Eton's recent initial public offering, our nearly 20% equity stake in Eton was valued at approximately $21 million based on the IPO pricing. From a financial perspective, this translates into an ROI greater than 8,000% in about 1.5 years.

Eton is now traded on the NASDAQ under the ticker symbol ETON. .

Under Sean Brynjelsen's leadership, Eton now has a pipeline of more than 8 drug development programs, and I just returned from an Eton Board of Directors meeting and based on what I saw and heard, I'm extremely confident that Sean and the Eton team are building a very valuable, pharmaceutical business.

With Eton's IPO complete, if you'd like more information about Eton, I refer you to Eton's publicly available information. .

Eton is a great case study, though, on how we were able to create a tremendous return on invested capital in a relatively abbreviated time frame, and retain a potentially lucrative royalty in Eton's CT 100 program, which is a potential competitor to Mallinckrodt's H.P. Acthar Gel, a drug that had sales last year of more than $1 billion.

Because we own a lot of drug formulation assets, our intent is to see the creation of more Project 15 companies.

While there is a short-term cost to making these investments, such as the stunted adjusted EBITDA you saw this quarter, we have been able to get these investments back and the value we've received for taking the small risk has been phenomenal..

Here's where we are with our other Project 15 businesses. Surface Pharmaceuticals is focused on ocular surface disease. We invested about $250,000 to start Surface.

And earlier this year, Surface completed an oversubscribed $21 million Series A financing, which allowed Imprimis to receive back most of its invested cost and retain a $3.5 million common share stake in Surface, or roughly 30% of the voting interest. .

Additionally, we own a mid-single-digit royalty on all 3 of Surface's current drug candidates, which if approved, will compete in what we believe are underserved $1 billion markets.

The team at Surface expects to file INDs and start Phase II clinical studies during 2019 and is on track to have data readouts from these studies in the first half of 2020 or sooner. Success in any one of these programs next year would likely be a considerable value inflection point. We are excited by the progress our CEO, Dr.

Kamran Hosseini, is making, and we will provide updates to Imprimis shareholders as frequently as possible. .

On our last call, we introduced Melt Pharmaceuticals, which we've invested about $350,000 in so far. Melt's drug candidates are based on technology patented in the U.S. and abroad. Melt will seek FDA approval via the 505(b)(2) pathway for non-opioid, non-intravenous, sublingual, conscious sedation and analgesia drugs as alternatives to IV sedation. .

Our belief is that patients and physicians will prefer a non-opioid dissolving sublingual tablet to IV sedation. And our belief is based on having dispensed the compounded versions of Melt's formulations more than 100,000 times.

According to our estimates, they're in excess of 100 million procedures in the U.S., annually, that may be appropriate for Melt's drug candidates, ranging from ocular surgeries, dental, dermatological and cosmetic procedures, sedation for chronic pain steroid injections, claustrophobia relief during MRI scans and sedation for colonoscopies, vasectomies and other in-office procedures.

The value of these markets in the aggregate is several billion dollars, annually, including $1 billion alone from ocular surgery, where we believe Melt's lead drug candidate would be eligible for payment by CMS or the Medicare system. A few additional points on Melt..

A pre-IND meeting is scheduled with the FDA in January of 2019 for Melt's lead drug candidate and we expect the formal clinical development program for this candidate to start in 2019. Finally, I'm happy to report that we've agreed to terms with an excellent and experienced CEO candidate for Melt.

Once the business is financed, his name will be revealed. If you'd like to learn more about Melt, we recently released the Melt corporate presentation deck via an 8-K filing on October 29. And we will update our shareholders as our progress with Melt continues..

On our last call, I said that we were reviewing the potential of creating additional drug development companies. I'm happy to report that we have formed and are working diligently on both Mayfield Pharmaceuticals and Radley Pharmaceuticals.

Our expectation is that like Eton, Surface and Melt, they too will execute 505(b)(2) clinical development programs for proprietary medicines that have traditionally been compounded. We intend to continue to develop and finance these businesses during 2019. .

We believe our shareholders will be pleased with the potential for both Mayfield and Radley, and we expect to discuss these businesses more in the coming quarters as we make meaningful progress with their respective strategies.

Critical to our Project 15 companies is the continued positive interest we've seen from investors, who participated in financing Eton and Surface.

If things continue in the direction we've seen recently, our internal goal is to have created and financed up to 5 drug development businesses, that's Eton, Surface, Melt, Mayfield and Radley, by this time next year, 2019. .

The future of our company, the future of Harrow Health is significant ownership of a growing and diversified portfolio of businesses that develop high-quality, innovative medicines at prices people can afford.

Beyond our equity ownership, from a cash flow perspective, our intent is to also own royalties in many of the drugs these businesses are developing. We're extremely excited about our future and believe the continued execution of our strategy can generate tremendous returns for our shareholders, for many years to come. .

Now I will turn the call over to Andrew for more detail on our financials before I provide closing comments. .

Hi, everyone. Thank you for joining our call today. As Mark stated previously during the third quarter of 2018, we're able to build upon the milestones we reached during the second quarter. .

Total revenues for the third quarter were just over $10.7 million compared to $6.5 million a year ago, a 66% increase. Total cost of sales for the third quarter 2018 was just under $4.2 million, yielding a gross profit of about $6.6 million and a gross margin of 61%.

This is compared to a gross profit of $3.1 million last year and a gross margin of 48%. .

The revenue growth was driven by our ImprimisRx ophthalmology business. When looking at this revenue, year-over-year, one of the key drivers of growth between our third quarter in 2018 compared to the third quarter last year, was a steady increase in sales associated with new products that we launched in the past year.

Now in 2018, quarter-after-quarter, we're seeing growing revenues impacted by increasing reaccelerates from chronic care medications, which are affected much less by seasonal factors..

We continued our trend for record-high gross margins of 61%, which is just slightly above our 60% figure from last quarter. While we are still perfecting our production processes, and we should expect some variability in our efficiencies, our intent is to remain near these levels as we find incremental ways to improve in the coming quarters. .

Operating expenses totaled $7.2 million, which resulted in a loss from operations of approximately $650,000 during the third quarter of 2018. Compared to the third quarter last year, we reported operating expenses of $5.8 million and operating loss of approximately $2.8 million.

Our adjusted EBITDA for the third quarter in 2018 was $424,000, which is the second time in 2 quarters in a row Imprimis has recorded adjusted earnings figure that was positive.

As Mark alluded to, our consolidated adjusted EBITDA metric was negatively impacted this quarter by more than $600,000 of expenses incurred by our subsidiary, Melt Pharmaceuticals and related to current litigation matters. .

That said, despite our current cash balance, we'll continue to keep a watchful eye on these and other operating expenses and believe that despite these short-term costs, we will keep a positive adjusted EBITDA figure going forward, especially in the seasonally stronger revenue quarters which are now upcoming. .

As I just indicated, we saw our operating business produced positive cash flow again in the third quarter. In addition, we received over $2.5 million in cash proceeds from warrant exercises in the third quarter. And we saw our cash balance increased quarter-over-quarter yet again. This is now the third quarter in a row that has happened. .

During the third quarter, we invested some of that cash received from warrant exercises and increasing long-term capacities that are both at our 503(a) and 503(b) facilities in New Jersey.

We're also considering investing in a similar amount in the next few quarters and updated automation equipment that will allow long-term capacity in our 503(b) facility to at least triple for our most popular product lines. .

As Mark mentioned, we recently terminated our ATM financing vehicle. We've rarely used our ATM as a means to finance the business and after several months of it being dormant, we felt it was time to make a statement to the market in regard to how we feel about our financial and operating position by terminating this agreement. .

Eton Pharmaceuticals announced its NASDAQ IPO at $6 a share and we owned 3.5 million shares of the common stock. The Eton IPO is very well received and ultimately turned such high demand that it was subsidized at the last minute to accommodate all interested parties.

Assuming the underwriters' over-allotment is exercised in full, I estimate that our ownership in Eton will fall just below 20%, following the close of its IPO. .

As a result, beginning in the fourth quarter of 2018, we will move away from equity method accounting for investment in Eton and account for our ownership stake in Eton according to the fair market value of its common stock.

Assuming the value of Eton's common stock holds through the balance of the year, it will create a significant asset on our balance sheet, and increase our total asset values by more than 70%. .

As we look at the rest of 2018, we expect revenues on a year-over-year basis to continue to grow at their current rate. As we move into 2019, we expect revenue growth to continue at a very strong pace.

However, for example, in our ophthalmology business, we might not be able to achieve 80-plus percent year-over-year revenue growth like we did this past quarter. We expect the operating expenses to remain mostly consistent going forward. The outlier will be our sales and marketing expenses, which will continue to grow as our revenues increase.

This is because our strategic transition to a primarily commission-only-based sales force. .

We do continue to expect our profitability numbers to continue to grow as revenues grow.

As we're looking further out beyond 2019 and start thinking our operating margins, as we hopefully approach our $100 million revenue run rate, assuming all things remain consistent, we believe achieving adjusted operating margins of 25% are certainly achievable, with aspirations of doing even better..

We feel we recently hit an inflection point, breaking through our breakeven point in the second quarter and maintaining that level here in the third. The operating business and infrastructure is scalable and ready to start producing significant value for shareholders as revenues grow.

With a sustainable, value-creating operating business, growing drug pipeline and ongoing execution of our Project 15 strategy, and the execution by those Project 15 management teams, we continue to believe there's a lot more upside from here. .

With that, I'll turn the call over to Mark for closing remarks. .

Thanks, Andrew. After 7 years of building and refining our company, we are hitting a good stride. Our team appreciates our long-time investors and those who are now taking a look at our company. I firmly believe that our best days of creativity and value creation are ahead of us by taking advantage of what we know and planting new seeds to grow.

At this time, I'd like to open up the call to questions from our participants. .

[Operator Instructions] Our first question today comes from Brooks O'Neil of Lake Street Capital Markets. .

Okay, Mark, Andrew, I have a couple of questions.

The first one is pretty basic and some of your longer-term shareholders might know the answer but could you just describe the difference between your compounded medications and the FDA-approved medications you're developing in some of your Project 15 companies, following the 505(b)(2) pathway?.

Sure. I think the fundamental difference is in making sort of the final steps to getting to a complete chemistry manufacturing and a CMC dossier. The drugs that we are taking through the 505(b)(2) pathway through the spinout businesses are made to GMP spec in our FDA-registered facility. So fundamentally, there isn't that much of a difference.

We're buying the same chemicals, we're using the same analytical methods to determine stability and purity and potency. So there isn't that much of a difference. There is, however, a little bit of additional paperwork and controls that are completed once a drug is eligible for an NDA submission under 505(b)(2). .

Great. And then secondly, I was hoping you might just describe in a little bit more detail your move to the commission-only sales organization and the potential you see to continue growing your sales using that approach in 2019 and beyond. .

Sure. The strategy was executed towards the end of last year. We went from a little more than a handful of W-2 reps to about 25 1099 reps, commission-only reps in the first quarter. In the second quarter, you saw that during that period, we had some of the fastest growth that we've experienced in the history of the company.

Part of that was due to the increase in 1099 reps, these commission-only reps. But I think it's important is that between the second quarter and the third quarter, the middle part of the third quarter, we actually added to our rep count and more than doubled from the second quarter to the middle of the third quarter.

And so what we're excited about is the work that those reps are going to do and have done here towards the end of the third quarter and getting into the fourth quarter. We're actually seeing that already in the fourth quarter, actually last month, the month of October, was the best month that we've had in the history of the company by far.

So the strategy of bringing on more commission-only reps is definitely working and we think it will continue to work this year and then the next year and beyond. .

Great. And then you also, I think, mentioned the potential for additional new products to complement the growth of your sales organization.

Are you willing to say anything about some of the things you're thinking about or working on in terms of new product development at the base company?.

You know, we've -- there've been points in time, as we've developed the business, that we thought about providing specific metrics by product or by therapeutic category. But what we've come to learn is that one of the great advantages that we have is that there is no IMS data on what we sell. We have -- our data is a trade secret.

And we really want to preserve that, particularly in ophthalmology where our business is performing so well. So we do have 5 exciting projects -- products that we're going to launch next year. Some of the products are smaller market products, but some of them are very large market products.

There's no guarantee that any one of them is going to meet our expectations, but we do believe that the opportunity for continued growth will be hinged, in part, on those launches, along with the other 5 factors that I mentioned. .

The next question is from Philip Belcher, a private investor. .

Terrific quarter. You're right on track. Everyone, I'm sure, is fairly pleased with what you've presented. Could you comment a little bit on -- I have just 3 quick items. The first is the Allergan Restasis situation, the enzyme or ownership of the company and any research coverage you might be able to garner going forward. .

Sure. With respect to Allergan and Restasis, we're not commenting on Allergan or any matter connected to Restasis. As far as insider ownership goes, myself and Andrew retained a significant percentage ownership of the company.

Some years ago, when we were negotiating our compensation agreement, some of you may know that I really believed in the future of the business and as did Andrew. And so we asked our Board of Directors to give us performance stock units. And so we would earn equity on an "eat what you kill" basis as the stock performed.

And so our options are contingent on our stock price reaching certain levels. One of the reasons why we call our spinout business as Project 15 is because a $15 stock target is where our Board of Directors has incentivized us to get our stock price so that we can get all of our equity incentives.

So we are heavily equity incentivized, Andrew, myself and the rest of the senior management team. And we'd be happy, offline, to give you that information, specifically, if you can't find it. As far as coverage goes, we did have coverage, a couple of years ago. And we have not had coverage recently.

We were hopeful that reputable folks will begin to take a look at what we're doing, the excitement in the company and I think, importantly, on this management team's ability to save it, we're going to do something and actually deliver. We think that matters. We think shareholders are taking notice and we hope that analysts do as well. .

Our next question is from Andrew D'Silva of B. Riley FBR. .

Just actually 2 quick ones.

First, as far as the IPO goes, could you maybe discuss the transition between equity and cost method and how you're going to be recognizing that on the balance sheet now that you have, I guess, the benchmark to do that against? And then my second question is just related to the launch of Dexycu, which you expected to happen next year and if you see that impacting maybe your sales that you're seeing right now.

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Sure, Andrew, do you want to tackle the first question? I'll tackle the second. .

Sure. Hey, Andy. On the Eton IPO, so right now, before it actually closes, we're just above 20% still equity method.

Based on what I calculated out, and assuming the underwriter exercises their overallotment in full, we'll fall just below 20%, which means we'll move away from that equity method accounting and should be booking those on our balance sheet at fair market value. So in other words, the trading price of the stock at the end of the quarter.

What that does for us from a balance sheet perspective is pretty impactful. It should create, assuming their stock price remains near what it is at right now, creates a $21 million asset on our books. .

And as far as the Dexycu launch goes, we have not heard anything that we believe will impact our relationships with our customers about that product launch, or really anything that is on the horizon. There are multiple reasons why physicians choose to use our formulations. And they go far beyond any one simple factor.

Dexycu happens to be a single active ingredient product and as you may know, for post-cataract surgery treatment for inflammation and infection, there are typically 3 medicines that are used and we believe that physicians will continue to choose to want to have access or have onboard all 3 of those medications.

Our formulations uniquely provide that ability. And we suspect that, at least from an FDA-approved competition going forward, it will be very difficult to see a combination post-cataract surgery medication that contains 2 -- even 2 of those active ingredients that are typically onboard. .

Great.

And actually one more quick question and I'm sorry if you mentioned this before, I was actually hopping between calls, but has there been any change from a regulatory standpoint that you're aware of related to either of your compounding facilities? I know that there are some guidance that was issued a little while ago and I wasn't sure if there was anything updated there that could either be beneficial or be a headwind for you.

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Yes, nothing material has come from the FDA in terms of guidance documents. From a regulatory perspective, we continue to -- we believed to be in good standing and we've continued to respond to any questions or comments the FDA has had about our facilities or the formulations that we make.

So we continue to service thousands and thousands of customers of expositions in the United States. And we have not seen any impact in our business related to regulatory concerns. .

[Operator Instructions] Our next question is from Sandy Greenberg of SDG Consulting. .

Great, great quarter. Really interesting the way you're doing the spinouts. It's very exciting. It appears to me you're not going to have a lot of trouble realizing that value where your incentives are there. Just a couple of questions. I think Andrew covered it.

The cash balance that you have right now on hand and I think you mentioned that there's been about $2.2 million in warrants that came in that were exercised for cash.

Can you, if possible, disclose the amount that's still outstanding of potential warrants that could come in?.

Sure. Hey, Sandy. The cash balance at the end of the quarter was $6.3 million and so that's up over the past few quarters, including end of the year last year, which is about $4.2 million. That was -- we received about $2.6 million in warrant exercises or from warrant exercises during the quarter. So that leaves about $4.3 million outstanding.

After the quarter had ended, we received another, let's say, about 685,000 warrants that were exercised. And we have another $1 million in cash after the quarter had closed. That's in our subsequent events footnote in the 10-Q that was filed. .

Okay. And then you have... .

Sandy, we have not had this level of cash in nearly 2 years. Our cash balances are in pretty good shape on a relative basis. .

It looks like you're in great shape. You're not really burning any cash. And that spinout strategy, is excellent. I mean, you're talking about Eton or these others maintaining their value of the IPO but it could also go up. So it's a great way to participate. And I said a very impressive quarter. Congratulations to you guys and keep it up. .

There are no further questions at this time. I'll turn the call back to Mark Baum for closing remarks. .

Thank you, and I want to just thank everyone for attending. I want to mention, as I alluded to on the call, we really appreciate all of our shareholders' support. We're building a unique, diversified business, a unique diversified portfolio of assets. And from an operational perspective, the business is in good shape.

We just had, I'm proud to say, our best month in our company's history. So thank you so much for your support. Our team really appreciates it. .

If you have any investor-related questions, please contact our Investor Relations associate, Jon Patton. His direct number is (858) 704-4587. And this will conclude our call. Thank you..