HARROW, INC. (HROW)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and
analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements
and the related notes contained in this Annual Report on Form 10-K (this “Annual Report”). Our consolidated financial statements
have been prepared and, unless otherwise stated, the information derived therefrom as presented in this discussion and analysis is presented,
in accordance with accounting principles generally accepted in the U.S. (GAAP). In addition to historical information, the following
discussion contains forward-looking statements based upon our current views, expectations and assumptions that are subject to risks and
uncertainties. Actual results may differ substantially from those expressed or implied by any forward-looking statements due to a number
of factors, including, among others, the risks described in the “Risk Factors” section and elsewhere in this Annual Report.

As used in this discussion
and analysis, unless the context indicates otherwise, the terms the “Company,” “Harrow” “we,” “us”
and “our” refer to Harrow, Inc. and its consolidated subsidiaries, including Imprimis RxNJ, LLC, Imprimis NJOF, LLC, ImprimisRx,
LLC, Harrow IP, LLC and Harrow Eye, LLC.

Overview

We are a leading eyecare pharmaceutical
company engaged in the discovery, development, and commercialization of innovative ophthalmic pharmaceutical products for the U.S. market.
We help U.S. eyecare professionals preserve the gift of sight by making its comprehensive portfolio of prescription and non-prescription
pharmaceutical products accessible and affordable to millions of Americans each year. We own commercial rights to one of the largest
portfolios of branded ophthalmic pharmaceutical products in North America, all of which are marketed under the Harrow name. We also own
and operate ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding businesses.

Factors Affecting Our Performance

We
believe the primary factors affecting our performance are our ability to increase revenues of our branded pharmaceutical products,
proprietary compounded formulations and certain non-proprietary products, grow and gain operating efficiencies in our operations,
avoid or mitigate any potential regulatory-related restrictions, optimize pricing and obtain reimbursement options for our drug
products, and continue to pursue development and commercialization opportunities for certain of our ophthalmology and other assets
that we have not yet made commercially available. We believe we have built a tangible and intangible infrastructure that will allow
us to scale revenues efficiently in the near and long-term. All of these activities will require significant costs and other
resources, which we may not have or be able to obtain from operations or other sources. See “Liquidity and Capital
Resources” below.

Recent Developments

The following describes certain
developments in 2024 and 2025 to date that are important to understand our financial condition, results of operations, and expectations. See the notes
to our consolidated financial statements included in this Annual Report for additional information about certain developments.

VEVYE
Access for All

In
March 2025, we announced a patient access program called VEVYE Access for All.  The program is designed to increase patient access
to VEVYE at an out-of-pocket cost of $59 or below and, in many cases, reduce the need for prior authorizations, step edits, and other
treatment obstacles facing dry eye patients and their prescribers.

Project
Beagle

We
recently initiated a 360-degree review of opportunities to offer ImprimisRx customers a Harrow-owned FDA-approved product
alternative to a compounded formulation. We call this initiative Project Beagle. In that vein, we began implementing a continuity of
care program to transition approximately 25,000 ImprimisRx patients from our Klarity-C (0.1% cyclosporine) compounded formulation to
VEVYE (0.1% cyclosporine), and we expect to discontinue compounding Klarity-C by June 30, 2025.  We are also discontinuing
another related compounded formulation called Klarity PF. Klarity PF is primarily purchased by a concentrated group of customers
who we expect to accept our FRESHKOTE product as an alternative. As we work through Project Beagle, we will continue to
review opportunities to reduce the size of our compounded formulary, improve and simplify our compounding capabilities, and
transition other ImprimisRx customers from compounded formulations to Harrow’s FDA-approved products.

Cybersecurity Incident

In November
2024, we became aware of a cybersecurity incident that involved unauthorized access of an employee’s email account. Through this
unauthorized access the threat actor was able to fraudulently divert Company funds to its bank account. We detected the incident in a
timeframe management believes minimized any financial, operational or reputational risk to the Company, and at no point was our ability
to generate revenues disrupted.

TRIESENCE Re-Launch,
Oaktree Second Amendment and Draw

In
October 2024, we announced the re-launch of TRIESENCE following the successful manufacturing of three process performance
qualification batches of the product. In March 2025, we announced TRIESENCE was granted temporary pass-through reimbursement status
to be made effective April 1, 2025. In connection with the re-launch, during October 2024 we made a one-time payment of $37,000,000
to Novartis Technology, LLC and Novartis Innovative Therapies AG (together, “Novartis”) pursuant to terms of an asset
purchase agreement between Novartis and the Company. Also, during October 2024, we entered into the Second Amendment (the
“Second Amendment”) to the Credit Agreement and Guaranty originally entered into on March 27, 2023, as amended by that
certain First Amendment to Credit Agreement and Guaranty and Consent, dated as of July 18, 2023 (as amended, the “Oaktree
Loan”), with the lenders from time to time party thereto and Oaktree Fund Administration, LLC, as administrative agent for the
lenders (together “Oaktree”). Upon satisfaction of certain conditions to funding, the Company drew down the principal
amount of $30,000,000 (the “$30,000,000 Draw”) under a pre-existing commitment under the Oaktree Loan to partially fund
the one-time payment to Novartis.

In the
Second Amendment, the Company and Oaktree agreed to certain changes to the Oaktree Loan in connection with the Company’s draw under
the Oaktree Loan. Pursuant to the amendment, Oaktree agreed to waive any make-whole costs associated with the $30,000,000 Draw in the
event of early repayment of the debt under the Oaktree Loan if paid before March 31, 2025. In addition, Oaktree agreed to exclude the
$30,000,000 Draw from the calculation of the Total Leverage Ratio as defined in the Oaktree Loan. No other material changes to the Oaktree
Loan were provided in the Second Amendment.

Following
entry into the Second Amendment and the funding of the Novartis milestone payment, the Company has drawn down a total principal loan
amount of $107,500,000 under the Oaktree Loan and no additional principal loan amount remains available to the Company under the Oaktree
Loan.

Apotex - Canadian Out-License

In February
2024, we entered into a license and supply agreement with Apotex Inc. (“Apotex”). Under the terms of the agreement, Apotex
licensed exclusive rights and marketing authorizations of the following products in the Canadian market from Harrow: VERKAZIA (cyclosporine
ophthalmic emulsion) 0.1% and Cationorm PLUS. Apotex was also granted a license for products Apotex will pursue approval for in Canada:
VEVYE (cyclosporine ophthalmic solution) 0.1%, IHEEZO (chloroprocaine hydrochloride ophthalmic gel) 3%, and ZERVIATE (cetirizine ophthalmic
solution) 0.24% (with VERKAZIA and Cationorm Plus, collectively, the “Apotex Products”). In exchange for these licenses,
Harrow will earn amounts related to manufacturing, regulatory and commercial achievement milestones, in addition to royalties on net
sales of the Apotex Products.

IHEEZO Reimbursement

In January
2024, we met with the Centers for Medicare & Medicaid Services (“CMS”) to request clarification related to its anesthesia
billing policy which has historically not allowed for the separate billing of anesthesia services in the physician’s office. During
the meeting we requested that CMS clarify that J-Code 2403, IHEEZO’s permanent J-Code, is appropriate to be billed for the anesthesia
product itself (i.e., IHEEZO in our case) in the physician office setting. In March 2024, we received communication from a representative
at CMS that the inclusion of J-Code 2403 in CMS’s April 2024 quarterly drug pricing file of the average sales prices (ASP) of some
Medicare Part B-covered drugs and biologicals confirms that IHEEZO is separately payable in the physician office setting.

In February
2024, we made a request to CMS to consider increasing the Medically Unlikely Edits (“MUE”) for IHEEZO’s J-Code from
1 to 2. This request was made because the limitation of one MUE only allowed a single IHEEZO administration (equal to one single-use
vial) to be used and billed, while many ophthalmologists perform bilateral ocular procedures, which would require two vials of IHEEZO
to be used. On March 20, 2024, we received communication from the National Correct Coding Initiative (NCCI) program of CMS stating that
CMS decided to increase the MUE for IHEEZO’s J-Code (J2403) from 1 to 2. The MUE edit was made effective on July 1, 2024.

VEVYE U.S. Launch

In January
2024, we launched VEVYE (cyclosporine ophthalmic solution) 0.1%, the first and only water-free cyclosporine dissolved in a semifluorinated
alkane approved to treat both the signs and symptoms of dry eye disease in the U.S. We partnered with various entities including PhilRx,
Apollo Care and PARx Solutions to enhance our market and patient access program for VEVYE.

Results of Operations

The following period-to-period
comparisons of our financial results are not necessarily indicative of results for any future period.

Comparison of Years Ended December 31, 2024
and 2023

Revenues

Our revenues include amounts
recorded from sales of branded products to wholesalers through a third-party logistics facility, sales of proprietary compounded formulations,
and revenues received from royalty payments owed to us pursuant to out-license and like arrangements. The following presents our revenues:

The increase in revenues
from product sales between the years ended December 31, 2024 and 2023 was largely attributed to increased sales and marketing
efforts, new product launches (e.g. VEVYE) and the closing of certain product acquisitions that occurred in 2023. The decrease in
other revenues between the years ended December 31, 2024 and 2023 was the result of profit transfers from acquired products during
2023, and upon transfer of those product New Drug Applications (“NDAs”) we stopped recording a profit transfer and began
booking revenues from the sale of those products.

Cost of Sales

Our cost of sales includes direct
and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging,
storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements depreciation, the write-off of obsolete
inventory, amortization of acquired product NDAs, and other related expenses.

The following presents our cost
of sales for the years ended December 31, 2024 and 2023:

Branded

The increase in cost of sales
associated with our branded products between the years ended December 31, 2024 and 2023 was largely attributable to the increase in products
sold and amortization of acquired product NDAs which totaled $10,093,000 for the year ended December 31, 2024, compared to $9,314,000
during the prior year.

ImprimisRx

The increase in our ImprimisRx
cost of sales between the years ended December 31, 2024 and 2023 was largely attributable to expenses associated with the increase in
unit volumes sold.

Gross Profit and Margin

Branded

The increase in Branded gross
margin between the years ended December 31, 2024 and 2023 was primarily attributable to an increase in overall sales which reduced the
net impact of our fixed expenses in cost of sales, such as NDA license amortization.

ImprimisRx

The increase in ImprimisRx gross margin between the
years ended December 31, 2024 and 2023 was primarily attributable to an increase in sales of products during 2024 with lower gross margin
profiles as compared to 2023.

Selling, General and Administrative Expenses

Our selling, general and
administrative (“SG&A”) expenses include personnel costs, including wages and stock-based compensation, corporate
facility expenses, and investor relations, consulting, insurance, filing, legal and accounting fees and expenses as well as costs
associated with our marketing activities and sales of our proprietary compounded formulations and other non-proprietary pharmacy
products and formulations.

The following presents our
SG&A expenses for the years ended December 31, 2024 and 2023:

The increase in SG&A
expenses between periods was primarily attributable to the addition of new employees in sales, marketing and other departments to
support current and expected growth, including the commercial launch of VEVYE, which when combined contributed to a $32,743,000
increase in SG&A during the year ended December 31, 2024 compared to the prior year. In addition, stock-based compensation
expense increased by $1,863,000 during the year ended December 31, 2024 compared to the prior year. Regulatory enhancements and
costs to support the transition of recent product acquisitions also caused SG&A to be higher for the year ended December 31,
2024 compared to 2023.

Research and Development Expenses

Our
research and development (“R&D”) expenses primarily included personnel costs, including wages and stock-based compensation,
expenses related to the development of intellectual property, investigator-initiated research and evaluations, formulation development,
acquired in-process R&D and other costs related to the clinical development of our assets.

The following presents our R&D
expenses for the years ended December 31, 2024 and 2023:

The increase in R&D expenses
between the years ended December 31, 2024 and 2023 was primarily attributable to activity related to our expanded branded product portfolio,
technical transfer activities associated with the production of certain products related to our product acquisitions that occurred in
2023, product development efforts, product launches, and clinical and medical support. In addition, during the fourth quarter of 2024,
we recorded $2,000,000 of one-time R&D costs associated with the product development of TRIESENCE.

Impairment and Disposal of Long-Lived Assets

During the year ended December
31, 2024, we recognized an impairment loss of $253,000 related to intellectual property that we expect to no longer utilize in future
revenue generating products and compounded formulations. During the year ended December 31, 2023, we recorded a charge of $548,000, of
which, $380,000 was related to the impairment of licenses, trademarks, patents and patent applications and $168,000 was related to equipment
that was no longer in service.

Interest Expense, net

Interest expense, net was $22,786,000
during the year ended December 31, 2024, compared to $21,324,000 during the year ended December 31, 2023. The increase was primarily
due to an increase in the principal balance of our loans throughout the two periods presented.

Investment Gain (Loss) from Eton

During the year ended December
31, 2024, we recorded a loss of $(3,171,000) related to the change in fair market value of Eton’s common stock at the time of its
sale, including trading expenses and commissions of approximately $436,000, compared to a gain of $3,092,000 during the year ended December
31, 2023.

Loss on Early Extinguishment of Debt

During the year ended December
31, 2023, we recorded a loss on extinguishment of debt of $5,465,000, related to the payoff of a loan. There were no extinguishments
of debt during the year ended December 31, 2024.

Other Income (Expense), net

During the year ended December
31, 2024 we recorded other expense, net of $(185,000) related primarily to income from the sublease of office space in Nashville, offset
by a loss associated with the cybersecurity incident. During the year ended December 31, 2023 we recorded other expense, net of
$(444,000) related primarily to transition services and write-off of inventories associated with the divestment of our non-ophthalmology
business, and a charge related to equipment that was no longer in service.

Tax Expense

During the years ended December
31, 2024 and 2023, we recorded income tax expense of $161,000 and $701,000, respectively.

The following table presents
our net loss for the years ended December 31, 2024 and 2023:

Liquidity and Capital Resources

Liquidity

Our cash on hand at December
31, 2024 was $47,247,000, compared to $74,085,000 at December 31, 2023.

As of the date of this Annual
Report, we believe that cash and cash equivalents of $47,247,000 at December 31, 2024 will be sufficient to sustain our planned level
of operations and capital expenditures for at least the next 12 months. Management expects to refinance the Oaktree Loan during 2025.
Management believes it is probable that we will be able to refinance the Oaktree Loan; however, there can be no assurance that we will
obtain the refinancing on terms acceptable to us, or at all - see the subheading Sources of Capital below for additional discussion
regarding the Oaktree Loan and refinancing plans. In addition, we may consider the sale of certain assets including, but not limited
to, part of, or all of, our investments in Surface and Melt and any of our consolidated subsidiaries. However, we may pursue acquisitions
of products, drug candidates or other strategic transactions that involve large expenditures or we may experience growth more rapidly
or on a larger scale than we expect, any of which could result in the depletion of capital resources more rapidly than anticipated and
could require us to seek additional financing to support our operations.

We expect to use our current
cash position and funds generated from our operations and any financing to pursue our business plan, which includes developing and commercializing
products, drug candidates, compounded formulations and technologies, integrating and developing our operations, pursuing potential future
strategic transactions as opportunities arise, including potential acquisitions of additional drug products, drug candidates, and/or
assets or technologies, pharmacies, outsourcing facilities, drug company and manufacturers, and otherwise fund our operations. We may
also use our resources to conduct clinical trials or other studies in support of our formulations or any drug candidate for which we
pursue FDA approval, to pursue additional development programs or to explore other development opportunities.

Net Cash Flows

The following provides detailed information about
our net cash flows for the years ended December 31, 2024 and 2023:

Operating Activities

Net cash used in operating activities
was $(22,202,000) in 2024, compared to cash provided by of $3,840,000 in the prior year. The decrease in net cash provided by operating
activities between the periods was mainly attributed to changes in our working capital balances including accounts payable, prepaid expenses,
inventories and most notably, accounts receivable. Our accounts receivable balance between periods increased significantly due to an
increase in our branded product sales, which have a longer revenue cycle compared to our ImprimisRx product sales. In addition, during
2024, we extended additional terms to our largest distributor to allow for downstream and end users (e.g. hospitals, clinics and ambulatory
surgery centers) of certain of our branded products additional time to pay for our branded products.

Investing Activities

Net cash used in investing activities
in 2024 and 2023 was $33,164,000 and $152,553,000, respectively. Cash used in investing activities in 2024 was primarily due to the milestone
payment of $37,000,000 related to TRIESENCE offset by cash received from the sale of our investment in Eton for $5,510,000. Cash used
in investing activities in 2023 was primarily associated with the product acquisitions.

Financing Activities

Net cash provided by financing
activities in 2024 and 2023 was $28,528,000 and $126,528,000, respectively. Cash provided by financing activities during the year ended
December 31, 2024 was primarily due to additional borrowings under our long-term debt facility with Oaktree of $29,780,000, net of issuance
costs, and proceeds from the exercise of stock options, offset by the payment of taxes associated with the vesting and exercise of share-based
awards. Cash provided by financing activities during the year ended December 31, 2023 was primarily related to proceeds received from
the issuance of the Oaktree Loan and Oaktree Amendment, issuance of unsecured debt and sale of our equity, offset by payment of payroll
taxes upon vesting of PSUs in exchange for shares withheld from employees.

Sources of Capital

During the year ended December
31, 2024, our principal sources of cash came from proceeds from the Oaktree Amendment. In future periods, including the year ending December
31, 2025, we expect cash to be provided from our operating activities, but our forecasts may not be accurate and our plans may change.
We may also sell some or all of our ownership interests in Surface, Melt or our other subsidiaries

In January 2026 the Oaktree
Loan matures which totals $107,500,000 principal amount outstanding at December 31, 2024. The maturity of this debt obligation could
raise substantial doubt about our ability to continue as a going concern. We are currently in discussions with our current senior
secured lender, Oaktree, and other potential lenders about refinancing the Oaktree Loan. Management expects to move into more
definitive discussions and negotiations with Oaktree and potential lenders in the summer and fall of 2025. Management believes it is
probable that we will be able to refinance its Oaktree Loan based on our collateral strength and expected cash flows from operations; however, there can be no assurance that we will obtain the refinancing
on terms acceptable to us, or at all. If we are unable to successfully refinance the Oaktree Loan, we do not expect to have the
ability to repay the Oaktree Loan in full. We believe that one of the other alternatives available to us is the sale of one or more
of our assets. There can be no assurance that any sale could be completed on a timely basis or on terms acceptable to us.

We may acquire new products,
product candidates and/or businesses and, as a result, we may need significant additional capital to support our business plan and fund
our proposed business operations. We may receive additional proceeds from the exercise of stock purchase warrants that are currently
outstanding. We may also seek additional financing from a variety of sources, including other equity or debt financings, funding from
corporate partnerships or licensing arrangements, sales of assets or any other financing transaction. If we issue equity or convertible
debt securities to raise additional funds, our existing stockholders may experience substantial dilution, and the newly issued equity
or debt securities may have more favorable terms or rights, preferences and privileges senior to those of our existing stockholders.
If we raise additional funds through collaboration or licensing arrangements or sales of assets, we may be required to relinquish potentially
valuable rights to our product candidates or proprietary technologies or formulations, or grant licenses on terms that are not favorable
to us. If we raise funds by incurring additional debt, we may be required to pay significant interest expenses and our leverage relative
to our earnings or to our equity capitalization may increase. Obtaining commercial loans, assuming they would be available, would increase
our liabilities and future cash commitments and may impose restrictions on our activities, such as the financial and operating covenants.
Further, we may incur substantial costs in pursuing future capital and/or financing transactions, including investment banking fees,
legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses
in connection with certain securities we may issue, such as convertible notes and warrants, which would adversely impact our financial
results.

We may be unable to obtain financing
when necessary as a result of, among other things, our performance, general economic conditions, conditions in the pharmaceuticals and
pharmacy industries, or our operating history. In addition, the fact that we have a limited history of profitability could further impact
the availability or cost to us of future financings. As a result, sufficient funds may not be available when needed from any source or,
if available, such funds may not be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital
needs when needed, then we may need to forego pursuit of potentially valuable development or acquisition opportunities, we may not be
able to continue to operate our business pursuant to our business plan, which would require us to modify our operations to reduce spending
to a sustainable level by, among other things, delaying, scaling back or eliminating some or all of our ongoing or planned investments
in corporate infrastructure, business development, sales and marketing and other activities, or we may be forced to discontinue our operations
entirely.

Critical Accounting Policies and Estimates

We rely on the use of estimates
and make assumptions that impact our financial condition and results. These estimates and assumptions are based on historical results
and trends as well as our forecasts of how results and trends might change in the future. Although we believe that the estimates we use
are reasonable, actual results could differ materially from these estimates.

We believe that the accounting
policies described below are critical to understanding our business, results of operations and financial condition because they involve
the use of more significant judgments and estimates in the preparation of our consolidated financial statements. An accounting policy
is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and any changes in the assumptions used in making the accounting estimates that are reasonably likely
to occur could materially impact our consolidated financial statements.

Revenue Recognition and Deferred Revenue

We account
for contracts with customers in accordance with ASC 606, Revenues from Contracts with Customers. We have three primary streams
of revenue: (1) product revenues, including revenue recognized from sales of products through its pharmacy and outsourcing facility and
sales of branded products to wholesalers through a third-party logistics (“3PL”) partner, (2) revenue recognized from transfer
of acquired product sales and profits, and (3) revenue recognized from intellectual property licenses.

Product Revenues

We sell
prescription medications directly through our pharmacy, outsourcing facility and 3PL partner. Revenue from our pharmacy services includes:
(i) the portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the client, (ii)
the price paid to us by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are not included
in revenue. Following the core principles of ASC 606, we have identified the following:

Variable Consideration

Sales of branded pharmaceutical
products are subject to variable consideration due to chargebacks, government rebates, returns, administrative and other rebates, and
cash discounts. Estimates for these elements of variable consideration require significant judgment.

Chargebacks

Chargebacks, primarily from distributors
and wholesalers, result from arrangements with indirect customers establishing prices for products which the indirect customer purchases
through a wholesaler. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers.
Under either arrangement, we provide a chargeback credit to the wholesaler for any difference between the contracted price with the indirect
customer and the wholesaler’s invoice price, typically Wholesale Acquisition Cost (“WAC”). Prior period chargebacks
claimed by wholesalers are analyzed to determine the actual net price per package (“NPP”) for each product. This calculation
is performed by product by wholesaler. NPPs can be affected by several factors such as:

As necessary, NPPs are adjusted
based on anticipated changes in the factors above.

The difference between NPP and
WAC is recorded as a reduction in both gross revenues in the consolidated statements of operations and accounts receivable in the consolidated
balance sheets, at the time revenue is recognized from the product sale. We continually monitor chargeback activity and adjust NPPs
when we believe that actual selling prices will differ from current NPPs.

Government Rebates

Government rebates reserve consists
of estimated payments due to governmental agencies for utilization of our products by beneficiaries under such governmental programs.
The two largest government programs are Medicaid and Medicare.

We participate in the Medicaid
Drug Rebate Program and pay rebates to the states related on Medicaid beneficiary utilization of our products. Medicaid rebates
are billed within 60-90 days of the end of the quarter in which the product was dispensed to a Medicaid beneficiary. Medicaid rebate
amounts per product unit are established by law, based on the Average Manufacturer Price (“AMP”), which is reported on a
monthly and quarterly basis, and, in the case of branded products, best price, which is reported on a quarterly basis. Medicaid reserves
are based on expected claims from state Medicaid programs. Estimates for expected claims are driven by patient usage, sales mix, calculated
AMP or best price, as well as inventory in the distribution channel that will be subject to a Medicaid rebate. As a result of the delay
between selling the products, dispensing the products and rebate billing, the Medicaid rebate reserve includes both an estimate of outstanding
claims for end-customer sales that have occurred but for which the related claim has not been billed, as well as an estimate for future
claims that will be made when inventory in the distribution channel is sold through to plan participants. Many of the Company’s
branded products are also covered under Medicare. We participate in the Coverage Gap Discount Program in order for its branded products
to be covered by Medicare Part D and must provide a rebate for any products sold under NDAs dispensed to Medicare Part D beneficiaries
while the beneficiaries are in the Coverage Gap phase of the benefit. This applies to all products sold under NDAs. Estimates for these
discounts are based on historical experience with Medicare rebates for products. Medicare rebates are billed quarterly for drugs dispensed
to Medicare beneficiaries in the prior quarter, which is typically 120 days after the product is shipped. As a result of the delay between
selling the products, dispensing the products and rebate billing, Medicare rebate reserve includes both an estimate of outstanding claims
for end-customer sales that have occurred but for which the related claim has not been billed, as well as an estimate for future claims
that will be made when inventory in the distribution channel is sold through to Medicare Part D participants.

To evaluate the adequacy of the
government rebate reserves, reserves are reviewed on a quarterly basis against actual claims data to ensure the liability is fairly stated.
We continually monitor the government rebate reserve and adjust estimates if it is expected that actual government rebates may differ
from established accruals. Accruals for government rebates are recorded as a reduction to gross revenues in the consolidated statements
of operations and as an increase to accrued government rebates in the consolidated balance sheets.

Returns

A returns policy is in place
that allows customers to return product within a specified period prior to and after the expiration date. Generally, product may be returned
for a period beginning six months prior to its expiration date to up to one year after its expiration date. Product
returns are settled through the issuance of a credit to the customer. The estimate for returns is based upon historical experience with
actual returns. While such experience has allowed for reasonable estimation in the past, history may not always be an accurate indicator
of future returns. We continually monitor estimates for returns and adjust when it is expected that actual product returns may differ
from the established accruals. Accruals for returns are recorded as a reduction to gross revenues in the consolidated statements of operations
and as an increase to the return goods reserve in the consolidated balance sheets.

Administrative Fees and Other Rebates

Administrative fees or rebates
are offered to wholesalers, group purchasing organizations, and indirect customers. Fees and rebates are accrued, by product by wholesaler,
at the time of sale based on contracted rates and NPPs. To evaluate the adequacy of the administrative fee accruals, on-hand inventory
counts are obtained from the wholesalers. We continually monitor administrative fee activity and adjust accruals when it is expected
that actual administrative fees may differ from the accruals. Accruals for administrative fees and other rebates are recorded as a reduction
in both gross revenues in the consolidated statements of operations and accounts receivable or accrued expenses in the consolidated balance
sheets.

Co-payment
Assistance

Patients
who meet certain eligibility requirements may receive co-payment assistance funded by us. We record contra-revenue for co-payment assistance
based on actual program participation and estimates of program redemption using data provided by third-party administrators. An accrued
liability is recorded on unredeemed co-payment assistance related to products for which control has been transferred to the customer.

Prompt Payment Discounts

Sales
discounts may be granted to customers for prompt payment. The reserve for prompt payment discounts is based on invoices outstanding.
Based on past experience, it is assumed that all available discounts will be taken. Accruals for prompt payment discounts are recorded
as a reduction in both gross revenues in the consolidated statements of operations and accounts receivable in the consolidated balance
sheets.

Revenues From Transfer of Acquired Product Sales and Profits

We entered
into agreements whereby we purchased the exclusive commercial rights to assets associated with certain ophthalmic products from other
pharmaceutical companies (the “Sellers”). During a temporary, transition period, the Sellers continue to manufacture and
market these products and transfer the net profit from the sale of the products to us. The revenue we recognized from the transfer of
net profit was recognized at the time profit from the product sales were calculated by the Sellers and confirmed by us, typically on
a monthly basis, at which point there is no future performance obligation required and no consequential continuing involvement on our
part to recognize the associated revenue. On a quarterly basis, the Sellers invoiced us for all credits and reimbursements (“Chargebacks”)
made to customers related to the products. We used historical actual experience to estimate Chargebacks associated with the net sales
and profit transferred. The estimated Chargebacks are recorded as a reduction in revenues from transfer of acquired product sales and
profits in our consolidated statements of operations, and recorded as a reduction to accounts receivable in the consolidated balance
sheets, at the time the revenue is recognized.

Intellectual Property License Revenues

We currently
hold five intellectual property licenses and related agreements pursuant to which we have agreed to license or sell to a customer with
the right to access our intellectual property. License arrangements may consist of non-refundable upfront license fees, data transfer
fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and
various performance or sales milestones. These arrangements can be multiple-element arrangements, 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 and require no consequential continuing involvement on our part are recognized
as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverables are
delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations
and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications
for such compounded drug preparations. We defer recognition of non-refundable fees if it has continuing performance obligations without
which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and
that are separate and independent of our performance under the other elements of the arrangement. In addition, if our continued involvement
is required, through research and development services that are related to its proprietary know-how and expertise of the delivered technology
or can only be performed by us, then such non-refundable fees are deferred and recognized over the period of continuing involvement.
Guaranteed minimum annual royalties are recognized on a straight-line basis over the applicable term.

Income Taxes

As part of the process of preparing
our consolidated financial statements, we must estimate the actual current tax assets and liabilities and assess permanent and temporary
differences that result from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred
tax assets and liabilities, which are included within the consolidated balance sheets. We must assess the likelihood that the deferred
tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not more likely than not, a valuation
allowance must be established which reduces the amount of deferred tax assets recorded on the consolidated balance sheets. To the extent
we establish a valuation allowance or increase or decrease this allowance in a period, the impact will be included in income tax expense
in the consolidated statements of operations.

We account for income taxes under
the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740,
Income Taxes. As of December 31, 2024 and 2023, there was $2,858,000 and $2,822,000, respectively, of unrecognized tax benefits
included in the consolidated balance sheets that would, if recognized, affect the effective tax rate. Our practice is to recognize interest
and/or penalties related to income tax matters in income tax expense. We had an accrual for interest or penalties of $69,000 and $40,000
in the consolidated balance sheets at December 31, 2024 and 2023, respectively, and have recognized interest and/or penalties in the
consolidated statements of operations for the years ended December 31, 2024 and 2023 of $69,000 and $40,000, respectively. We are subject
to taxation in the U.S., California, New Jersey, Tennessee, and various other states. Our tax years since 2000 may be subject to examination
by the federal and state tax authorities due to the carryforward of unutilized net operating losses.

Goodwill and Intangible Assets

Patents and trademarks are recorded
at cost and capitalized at a time when the future economic benefits of such patents and trademarks become more certain. At that time,
we capitalize third-party legal costs and filing fees associated with obtaining and prosecuting claims related to its patents and trademarks.
Once the patents have been issued, we amortize these costs over the shorter of the legal life of the patent or its estimated economic
life, generally 20 years, using the straight-line method. Acquired product rights, including NDAs, are amortized over their estimated
useful lives, generally 4-15 years, based on a straight-line method. Trademarks are an indefinite-lived intangible asset and are assessed
for impairment based on future projected cash flows as further described below.

We review our goodwill and indefinite-lived
intangible assets for impairment as of January 1 of each year and when an event or a change in circumstances indicates the fair value
of a reporting unit may be below its carrying amount. Events or changes in circumstances considered as impairment indicators include
but are not limited to the following:

The goodwill impairment test
consists of a two-step process as follows:

Step 1. We compare the fair value of each
reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting unit is determined using a discounted
cash flow valuation analysis. The carrying amount of each reporting unit is determined by specifically identifying and allocating the
assets and liabilities to each reporting unit based on headcount, relative revenues or other methods as deemed appropriate by management.
If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired, and we then perform the second step
of the impairment test to measure the impairment loss. If the fair value of a reporting unit exceeds its carrying amount, no further
analysis is required.

Step 2. If the carrying amount of the reporting
unit exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess, limited to the total amount of goodwill
allocated to that reporting unit.

As a result of our assessments
in 2024 and 2023, we concluded that goodwill is not impaired as of December 31, 2024 and 2023.

Impairment of Other Long-Lived Assets

Other
long-lived assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant
adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition of an asset. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying
amount of the asset exceeds the fair value of the asset. The fair value of the asset is based on the discounted value of its estimated
future cash flows. Assets to be disposed of would be separately presented in the consolidated balance
sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections
of the consolidated balance sheet, if material.

As a result of its assessment
in 2024 and 2023, we recorded an impairment charge of $253,000 and $380,000, respectively, related to the impairment of certain licenses,
trademarks, patents and patent applications (see Note 11 to our consolidated financial statements).

Stock-Based Compensation

All stock-based payments to employees,
directors and consultants, including grants of stock options, warrants, restricted stock units (“RSUs”), performance stock
units (“PSUs) and restricted stock, are recognized in the consolidated financial statements based upon their estimated fair values.
We use the Black-Scholes-Merton option pricing model and Monte Carlo simulation model to estimate the fair value of stock-based awards.
The estimated fair value is determined at the date of grant. The financial statement effect of forfeitures is estimated at the time of
grant and revised, if necessary, if the actual effect differs from those estimates.

Off-Balance Sheet Arrangements

We do not have any off-balance
sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated
financial statements and the related notes contained in this Annual Report on Form 10-K (this “Annual Report”). Our consolidated
financial statements have been prepared and, unless otherwise stated, the information derived therefrom as presented in this discussion
and analysis is presented, in accordance with accounting principles generally accepted in the United States (GAAP). In addition to historical
information, the following discussion contains forward-looking statements based upon our current views, expectations and assumptions
that are subject to risks and uncertainties. Actual results may differ substantially from those expressed or implied by any forward-looking
statements due to a number of factors, including, among others, the risks described in the “Risk Factors” section and elsewhere
in this Annual Report.

As
used in this discussion and analysis, unless the context indicates otherwise, the terms the “Company,” “Harrow”
“we,” “us” and “our” refer to Harrow, Inc. and its consolidated subsidiaries, including Imprimis
RxNJ, LLC, Imprimis NJOF, LLC, ImprimisRx, LLC, Harrow IP, LLC and Harrow Eye, LLC.

Overview

We
are a leading eyecare pharmaceutical company engaged in the discovery, development, and commercialization of innovative ophthalmic pharmaceutical
products for the U.S. market. Harrow helps U.S. eyecare professionals preserve the gift of sight by making its comprehensive portfolio
of prescription and non-prescription pharmaceutical products accessible and affordable to millions of Americans each year. We own commercial
rights to one of the largest portfolios of branded ophthalmic pharmaceutical products in North
America, all of which are marketed under the Harrow name. We also own and operate ImprimisRx, one of the nation’s leading
ophthalmology-focused pharmaceutical-compounding businesses. In addition, we have a non-controlling
equity interest in Melt Pharmaceuticals, Inc. (“Melt”), and two other companies that began as subsidiaries of Harrow and
were subsequently carved-out of our corporate structure and deconsolidated from our financial statements.

Factors
Affecting Our Performance

We
believe the primary factors affecting our performance are our ability to increase revenues of our branded pharmaceutical products, proprietary
compounded formulations and certain non-proprietary products, grow and gain operating efficiencies in our operations, potential regulatory-related
restrictions, optimize pricing and obtain reimbursement options for our drug products, and continue to pursue development and commercialization
opportunities for certain of our ophthalmology and other assets that we have not yet made commercially available. We believe we have
built a tangible and intangible infrastructure that will allow us to scale revenues efficiently in the near and long-term. All of these
activities will require significant costs and other resources, which we may not have or be able to obtain from operations or other sources.
See “Liquidity and Capital Resources” below.

Recent
Developments

The
following describes certain developments in 2023 and 2024 to date that are important to understand our financial condition and results
of operations. See the notes to our consolidated financial statements included in this Annual Report for additional information about
each of these developments.

Apotex
- Canadian Out-License

In
February 2024, we entered into a license and supply agreement with Apotex Inc. (“Apotex”). Under the terms of the agreement,
Apotex licensed exclusive rights and marketing authorizations of the following products in the Canadian market from Harrow: VERKAZIA
(cyclosporine ophthalmic emulsion) 0.1% and Cationorm PLUS. Apotex was also granted a license for products Apotex will pursue approval
for in Canada: VEVYE (cyclosporine ophthalmic solution) 0.1%, IHEEZO (chloroprocaine hydrochloride ophthalmic gel) 3%, and ZERVIATE (cetirizine
ophthalmic solution) 0.24% (with VERKAZIA and Cationorm Plus, collectively, the “Apotex Products”). In exchange, Apotex will
make payments to Harrow for milestones related to manufacturing arrangements, regulatory and commercial achievements, in addition to
royalties on net sales of the Apotex Products.

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VEVYE
U.S. Launch

In
January 2024, we launched VEVYE (cyclosporine ophthalmic solution) 0.1%, the first and only water-free cyclosporine dissolved in a semifluorinated
alkane approved to treat both the signs and symptoms of dry eye disease, in the U.S. We partnered with various entities including PhilRx,
Apollo Care and PARx Solutions to enhance our market and patient access program for VEVYE.

Melt
Loan Settlement

In
December 2023, we terminated the Loan and Security Agreement (the “Loan Agreement”), dated as of September 1, 2021, as amended,
by and between us, as lender, and Melt, as borrower, which provided for a senior secured term loan with an initial aggregate principal
amount of $13,500,000 bearing interest at 12.50% per annum. As of the date of termination, approximately $18,400,000 remained outstanding
under the Loan Agreement. Pursuant to the terms of a Settlement and Payoff Agreement, dated as of December 28, 2023, by and between us
and Melt (the “Settlement Agreement”), we received 2,260,000 shares of Melt’s Series B-1 Preferred Stock and 74,256
shares of Melt’s Series B Preferred Stock in consideration for the full payment of all amounts outstanding under the Loan Agreement.
The Settlement Agreement contains customary representations, warranties and releases of the parties and requires the parties to enter
into a registration rights agreement providing us with rights consistent with other holders of preferred stock of Melt.

IHEEZO
Reimbursement, Launch and Studies

In
February 2023, we announced that the Centers for Medicare & Medicaid Services (“CMS”) had issued a permanent, product
specific J-code for IHEEZO (J2403) which became effective under the Healthcare Procedure Coding System (HCPCS) on April 1, 2023, which
physicians can use for reimbursement purposes of that product. New drugs approved by the U.S. Food and Drug Administration (“FDA”)
that are used in surgeries performed in hospital outpatient departments or ambulatory surgical centers may receive a transitional pass-through
reimbursement under Medicare, provided they meet certain criteria, including a “not insignificant” cost criterion. Pass-through
status allows for separate payment (i.e., outside the packaged payment rate for the surgical procedure) under Medicare Part B, which
consists of Medicare reimbursement for a drug based on a defined formula for calculating the minimum fee that a manufacturer may charge
for the drug. Under current regulations of CMS, pass-through status applies for a period of three years; which is measured from the date
Medicare makes its first pass-through payment for the product. Following the three-year period, the product would be incorporated into
the cataract bundled payment system, which could significantly reduce the pricing for that product. Temporary pass-through reimbursement
for IHEEZO was awarded by CMS and made effective in April 2023.

We
are also working to ensure our continued access to the Medicare market for the ambulatory surgery center (ASC), hospital and outpatient
department (HOPD), and in-office use market for IHEEZO. In this regard, we are designing and intend to execute, during 2024, clinical
studies to build data sets that could be presented to Centers for Medicare & Medicaid Services (CMS) to extend our temporary pass-through
period for IHEEZO in ASCs and HOPDs. We also met with CMS in January 2024 to request clarification related to its anesthesia billing
policy which has historically not allowed for the separate billing of anesthesia services in the physician’s office. During the
meeting we requested that CMS clarify that J-Code 2403, IHEEZO’s permanent J-Code, is appropriate to be billed for the anesthesia
product itself (i.e., IHEEZO in our case) in the physician office setting. As of the date of this Annual Report, we had not received
feedback from CMS following our meeting in January 2024.

At
the beginning of April 2023, we initiated a regional and targeted launch of IHEEZO (chloroprocaine HCL ophthalmic gel) 3%. In early May
2023, our full commercial launch of IHEEZO occurred, with the product being highlighted by our commercial team at the ASCRS (American
Society of Cataract and Refractive Surgery) Annual Meeting.

Recently
we invested in an in-vivo (in human) study to compare the effects of IHEEZO with povidone-iodine (PVI) compared to a low-viscosity tetracaine
ophthalmic solution with PVI. The primary intent of the study is to show that IHEEZO does not act as a “barrier” to PVI,
which had otherwise been shown with other ocular anesthetic gels. Findings from the study are positive and showed that IHEEZO demonstrated
a similar barrier risk to tetracaine (e.g., a non-gel anesthetic).

54

Acquisition
of VEVYETM U.S. and Canadian Commercial Rights

In
July 2023, we acquired commercial rights of VEVYE for the U.S. and Canadian markets (the “VEVYE Acquisition”). VEVYE, which
is dispensed topically in a unique ten microliter per one drop and is labeled for twice-daily (BID) dosing, is the first and only cyclosporine-based
product indicated for the treatment of both signs and symptoms of dry eye disease (DED). VEVYE was approved on May 30, 2023 by the FDA.
We acquired the commercial rights to VEVYE by entering into a license agreement with Novaliq GmbH (“Novaliq”). As consideration,
we made initial payments to Novaliq totaling $8,000,000 and will pay low double-digit royalties on net sales of VEVYE along with potential
commercial milestone payments. In February 2024, we agreed to license rights for VEVYE in Canada to Apotex.

Acquisition
of Certain U.S. and Canadian Commercial Rights to Santen and Eyevance Products

In
July 2023, we entered into an Asset Purchase Agreement with Eyevance Pharmaceuticals, LLC and a License Agreement with Santen S.A.S.
(collectively, the “Santen Agreements”), each a subsidiary of Santen Pharmaceuticals Co., Ltd. (collectively, “Santen”).
Pursuant to the Santen Agreements, we acquired the exclusive commercial rights to assets associated with the following ophthalmic products
(collectively, the “Santen Products”), in the U.S.: FLAREX® (fluorometholone acetate ophthalmic suspension) 0.1%, NATACYN®
(natamycin ophthalmic suspension) 5%, TOBRADEX® ST (tobramycin and dexamethasone ophthalmic suspension) 0.3%/0.05%, ZERVIATE®
(cetirizine ophthalmic solution) 0.24%, and FRESHKOTE®. In the U.S. and Canada: VERKAZIA ® (cyclosporine ophthalmic emulsion)
0.1%, and in Canada: Cationorm PLUS.

The
transactions pursuant to the Santen Agreements are referred to in this Annual Report as the “Santen Products Acquisition.”

Under
the terms of the Santen Agreements, we made an initial one-time payment of $8,000,000. In addition, the Santen Agreements provide for
various one-time milestone payments associated with certain manufacturing-related events as well as low-double digit royalty payments
on net sales of VERKAZIA and high-single digit royalty payments on net sales of Cationorm PLUS. Under the Santen Agreements, we also
assumed certain obligations associated with other third parties that require royalties on sales of FRESHKOTE and ZERVIATE. Immediately
following the closing and subject to certain conditions, prior to the transfer of the Santen Product NDAs and other marketing authorizations
to us, Santen continued to sell the Santen Products on our behalf and transfer the net profit from the sale of the Santen Products to
us. In October 2023, we completed the transfer of the U.S. NDAs and rights of the Santen Products. The Canadian marketing authorizations
of VERKAZIA and Cationorm PLUS will be transferred to Apotex during 2024.

Common
Stock Offering

In
July 2023, we closed a public offering of shares of our common stock at an offering price of $17.75 per share (the “Offering”).
We sold 3,887,324 shares of our common stock in the Offering, resulting in us receiving aggregate net proceeds of $64,520,000, after
deducting underwriting discounts and commissions and other offering expenses of $4,480,000.

Oaktree
Credit and Guaranty Agreement

On
March 27, 2023, we entered into a Credit Agreement and Guaranty (the “Oaktree Loan”) with Oaktree Fund Administration, LLC,
as administrative agent for the lenders (together, “Oaktree”), providing for a loan to us with a principal amount of up to
$100,000,000. Upon entering into the Oaktree Loan, we drew a principal amount of $65,000,000 from the Oaktree Loan and used the net proceeds
to repay all amounts owed by us pursuant to the BR Loan (as defined below). No remaining amounts are due under the BR Loan, and no exit
or prepayment fees were paid as a result of the payoff of the BR Loan. The additional principal loan amount of up to $35,000,000 available
under the Oaktree Loan (the “Tranche B”) will be made available to the Company upon the commercialization of TRIESENCE.

55

On
July 18, 2023, we entered into the First Amendment to the Oaktree Loan (the “Oaktree Amendment”). Under the Oaktree Amendment,
the overall credit facility size was increased from $100,000,000 to $112,500,000, and we made other changes related to the Santen Products
Acquisition. Upon satisfaction of certain conditions to funding, we drew down a principal amount of $12,500,000 (the “Loan Increase”)
on August 1, 2023 to fund the initial one-time payment associated with the Santen Products Acquisition and for other working capital
and general corporate purposes. No other material changes to the Oaktree Loan were provided in the Oaktree Amendment. Following entry
into the Oaktree Amendment and the funding of the Loan Increase upon closing of the Santen Products Acquisition, we have drawn down a
total principal loan amount of $77,500,000 under the Oaktree Loan and an additional Tranche B loan amount of up to $35,000,000 remains
available to us upon the commercialization of TRIESENCE, provided, that if Tranche B is not drawn by the Company on or before March 27,
2024, the amount available under Tranche B will decrease to $30,000,000.

The
Oaktree Loan is secured by nearly all of the assets, including intellectual property, of the Company and its material subsidiaries. The
Oaktree Loan has a maturity date of January 19, 2026 and carries an interest rate equal to the Secured Overnight Financing Rate plus
6.5% per annum. The Oaktree Loan requires interest-only payments through its term (there is no amortization of the principal amount or
excess cash flow sweeps during the term of the Oaktree Loan).

Acquisition
of ILEVRO, NEVANAC, VIGAMOX, MAXIDEX and TRIESENCE

In
December 2022, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Novartis Technology, LLC and Novartis
Innovative Therapies AG (together, “Novartis”), pursuant to which the Company agreed to purchase from Novartis the exclusive
commercial rights to assets associated with the following ophthalmic products (collectively the “NVS 5 Products”) in the
U.S. (the “NVS 5 Acquisition”):

We
closed the NVS 5 Acquisition on January 20, 2023. Under the terms of the Purchase Agreement, we made a one-time payment of $130,000,000
at closing, with up to another $45,000,000 due in a milestone payment related to the timing of the commercial availability of TRIESENCE.
Pursuant to the Purchase Agreement and various ancillary agreements, immediately following the closing and subject to certain conditions,
for a period that lasted approximately nine months, and prior to the transfer of the NVS 5 Products new drug applications (the “NDAs”)
to us, Novartis continued to sell the NVS 5 Products on our behalf and transferred the net profit from the sale of the NVS 5 Products
to us. Novartis has agreed to supply certain NVS 5 Products to the Company for a period of time after the NDAs are transferred to us
and to assist with technology transfer of the NVS 5 Products manufacturing to other third-party manufacturers, if needed.

On
April 28, 2023, we transferred the NDAs for ILEVRO, NEVANAC and MAXIDEX. In July 2023, we transferred the NDA for VIGAMOX, and the
NDA for TRIESENCE was transferred in November 2023. The milestone payment due upon commercial availability for TRIESENCE decreased
from $45,000,000 to $37,000,000 on January 20, 2024. We expect Novartis to produce a performance process qualification
(“PPQ”) batch during April 2024. If this PPQ batch is successful, our manufacturing partners will need to complete two
additional, consecutive and successful PPQ batches (an aggregate of three PPQ batches) of TRIESENCE before the product can be
released for commercial use. We believe it is possible TRIESENCE could be re-launched before the end of 2024 if these PPQ batches
are successful, at which point the $37,000,000 milestone payment will become due to Novartis.

56

HROWM
– Senior Notes Offering

In
December 2022, the Company entered into an underwriting agreement with B. Riley Securities, Inc., as representative of the several underwriters
named therein, pursuant to which we agreed to sell $35,000,000 aggregate principal amount of 11.875% Senior Notes due 2027 (the “2027
Notes”) plus up to an additional $5,250,000 aggregate principal amount of 2027 Notes pursuant to an option granted to the underwriters
to purchase additional 2027 Notes. In January 2023, the underwriters exercised their option to purchase the additional $5,250,000 aggregate
principal amount of 2027 Notes.

B.
Riley Loan and Security Agreement – Paid

On
December 14, 2022, we entered into a Loan and Security Agreement (the “BR Loan”) with B. Riley Commercial Capital, LLC, as
administrative agent for the lenders from time to time party thereto. The proceeds of the BR Loan were used to finance the NVS 5 Acquisition.

The
BR Loan provided for a loan facility of up to $100,000,000 to the Company with a maturity date of December 14, 2025, at an interest rate
of 10.875% per annum. The BR Loan was secured by an intellectual property security agreement and by all assets of the Company and its
material subsidiaries. In January 2023, the Company drew $59,750,000 of the BR Loan simultaneously with the consummation of the NVS 5
Acquisition, and subsequently paid back the BR Loan in March 2023 at the time of closing the Oaktree Loan. No remaining amounts are due
under the BR Loan, and no exit or prepayment fees were paid as a result of the payoff of the BR Loan.

Results
of Operations

The
following period-to-period comparisons of our financial results are not necessarily indicative of results for any future period.

Comparison
of Years Ended December 31, 2023 and 2022

Revenues

Our
revenues include amounts recorded from sales of proprietary compounded formulations, sales of branded products to wholesalers through
a third-party logistics facility, commissions from third parties and revenues received from royalty payments owed to us pursuant to out-license
arrangements.

The
following presents our revenues for the years ended December 31, 2023 and 2022:

The
increase in revenues between periods was related to an increase in sales of our branded ophthalmology products, as well as an increase
in the transfer of acquired products sales and profits related to the NVS 5 Acquisition and Santen Products Acquisition. This increase
in 2023 was offset slightly by a decrease in commissions attributable to sales of DEXYCU® (which agreement terminated January 1,
2023) and a decrease in sales from our non-ophthalmology compounded products as a result of our sale of those assets in the fourth quarter
of 2022. During the year ended December 31, 2023, revenues, including transfer of acquired product sales and profits, from branded products
totaled $50,258,000, as compared to $2,716,000 in the prior year.

57

Cost
of Sales

Our
cost of sales includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients,
personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements depreciation,
the write-off of obsolete inventory, amortization of acquired product NDAs, and other related expenses.

The
following presents our cost of sales for the years ended December 31, 2023 and 2022:

The
increase in our cost of sales was largely attributable to the amortization of acquired product NDAs which totaled $9,314,000 for the
year ended December 31, 2023, compared to $1,364,000 during the prior year, offset by lesser increases in expenses associated with unit
volumes sold and increased direct and indirect costs associated with production of our products.

Gross
Profit and Margin

The
decrease in gross margin between the years ended December 31, 2023 and 2022 was primarily attributable to amortization of acquired NDAs
from the NVS 5 Acquisition, beginning in January 2023.

Selling,
General and Administrative Expenses

Our
selling, general and administrative expenses include personnel costs, including wages and stock-based compensation, corporate facility
expenses, and investor relations, consulting, insurance, filing, legal and accounting fees and expenses as well as costs associated with
our marketing activities and sales of our proprietary compounded formulations and other non-proprietary pharmacy products and formulations.

The
following presents our selling, general and administrative expenses for the years ended December 31, 2023 and 2022:

The
increase in selling, general and administrative expenses between periods was primarily attributable to an increase in stock-based
compensation expense, including new expenses associated with performance stock units (“PSUs”) granted in April 2023 of
$7,722,000 for the year ended December 31, 2023, compared to the prior year. Other areas of increased expenses included $3,257,000
related to new regulatory costs and enhancements and a $6,844,000 increase in expenses related to the addition of new employees in
sales, marketing and other departments to support current and expected growth, including the transition of the Santen Products, and
the commercial launch of IHEEZO in April 2023 and VEVYE in December 2023.

58

Research
and Development Expenses

Our
research and development (“R&D”) expenses primarily included personnel costs, including wages and stock-based compensation,
expenses related to the development of intellectual property, investigator-initiated research and evaluations, formulation development,
acquired in-process R&D and other costs related to the clinical development of our assets.

The
following presents our R&D expenses for the years ended December 31, 2023 and 2022:

The
increase in R&D expenses between periods was primarily attributable to increased activity related to product acquisitions, product
launches, clinical and medical support.

Impairment
and Disposal of Long-Lived Assets

During
the year ended December 31, 2023, we recorded a charge of $548,000, of which, $380,000 was related to the impairment of licenses, trademarks,
patents and patent applications and $168,000 was related to equipment that was no longer in service.

Interest
Expense, net

Interest
expense, net was $21,324,000 during the year ended December 31, 2023, compared to $7,244,000 during the year ended December 31, 2022.
The increase was primarily due to an increase in the principal balance of our loans throughout the two periods presented.

Equity
in Losses of Unconsolidated Entities

During
the years ended December 31, 2023 and 2022, we recorded a loss of $0 and $11,133,000, respectively, for our share of losses based on
our ownership of Melt and Surface.

Investment
Gain (Loss) from Eton

We
recorded a gain of $3,092,000 related to the change in fair market value of our investment in Eton’s common stock for the year
ended December 31, 2023. We recorded a loss of $2,914,000 related to our investment in Eton’s common stock for the year ended December
31, 2022.

Gain
on Sale of Non-Ophthalmology Assets

During
the year ended December 31, 2022, we recorded a gain on the sale of our non-ophthalmology assets to Innovation Compounding Pharmacy,
LLC of $5,259,000.

Loss
on Early Extinguishment of Debt

During
the year ended December 31, 2023, we recorded a loss on extinguishment of debt of $5,465,000, related to the payoff of the BR Loan.

Other
Income (Expense), net

During
the year ended December 31, 2023 we recorded other expense, net of $444,000 related primarily to transition services and write-off of
inventories associated with the divestment of our non-ophthalmology business, and a charge related to equipment that was no longer in
service. During the year ended December 31, 2022, we recorded other income, net of $102,000 related to the transition services provided
as part of our non-ophthalmology related compounding product line.

Tax
Expense

During
the years ended December 31, 2023 and 2022, we recorded income tax expense of $701,000 and $75,000, respectively.

59

The
following table presents our net loss for the years ended December 31, 2023 and 2022:

Liquidity
and Capital Resources

Liquidity

Our
cash on hand at December 31, 2023 was $74,085,000, compared to $96,270,000 at December 31, 2022.

As
of the date of this Annual Report, we believe that cash and cash equivalents of $74,085,000 at December 31, 2023 will be sufficient to
sustain our planned level of operations and capital expenditures for at least the next 12 months. In addition, we may consider the sale
of certain assets including, but not limited to, part of, or all of, our investments in Eton, Surface, and Melt. However, we may pursue
acquisitions of products, drug candidates or other strategic transactions that involve large expenditures or we may experience growth
more rapidly or on a larger scale than we expect, any of which could result in the depletion of capital resources more rapidly than anticipated
and could require us to seek additional financing to support our operations.

We
expect to use our current cash position and funds generated from our operations and any financing to pursue our business plan, which
includes developing and commercializing products, drug candidates, compounded formulations and technologies, integrating and developing
our operations, pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of additional
drug products, drug candidates, and/or assets or technologies, pharmacies, outsourcing facilities, drug company and manufacturers, and
otherwise fund our operations. We may also use our resources to conduct clinical trials or other studies in support of our formulations
or any drug candidate for which we pursue FDA approval, to pursue additional development programs or to explore other development opportunities.

Net
Cash Flows

The
following provides detailed information about our net cash flows for the years ended December 31, 2023 and 2022:

Operating
Activities

Net
cash provided by operating activities was $3,840,000 in 2023, compared to $1,705,000 in the prior year. Operating cash flow improved
despite the increased net loss due to increased non-cash charges in 2023 compared to the prior year. Notably an increase in amortization
expense of intangible assets to $10,082,000 for the year ended December 31, 2023 compared to $1,578,000 in 2022, an increase in amortization
of debt issuance costs and debt discounts to $4,097,000 for the year ended December 31, 2023 compared to $782,000 in 2022, an increase
in expense related to stock-based compensation to $15,696,000 for the year ended December 31, 2023 compared to $7,974,000 in 2022, as
well as $5,465,000 related to loss on extinguishment of our B. Riley senior debt.

60

Investing
Activities

Net
cash used in investing activities in 2023 and 2022 was $(152,553,000) and $(1,743,000), respectively. Cash used in investing activities
in 2023 was primarily associated with the NVS 5 Acquisition, Santen Products Acquisition and VEVYE Acquisition. Cash used in investing
activities during the 2022 period was primarily associated with equipment and software purchases and upgrades along with investments
in our intellectual property portfolio, offset by cash received on the sale of our non-ophthalmic assets.

Financing
Activities

Net
cash provided by financing activities in 2023 and 2022 was $126,528,000 and $54,141,000, respectively. Cash provided by financing activities
during the year ended December 31, 2023 was primarily related to proceeds received from the sale of the 2027 Notes, the Oaktree Loan
and Oaktree Amendment, and the Offering, offset by payment of payroll taxes upon vesting of PSUs in exchange for shares withheld from
employees. Net cash provided by financing activities during the year ended December 31, 2022 was
primarily related to net proceeds from the sale of the 2027 Notes and sale of common stock.

Sources
of Capital

Our
principal sources of cash consist of cash provided by operating activities, and in 2023 and 2022, proceeds from the sale of the 2027
Notes, the Offering and the Oaktree Loan and Oaktree Amendment. We may also sell some or all of our ownership interests in Surface, Melt
or our other subsidiaries, along with some or all of the remaining portion of our Eton common stock.

We
may acquire new products, product candidates and/or businesses and, as a result, we may need significant additional capital to support
our business plan and fund our proposed business operations. We may receive additional proceeds from the exercise of stock purchase warrants
that are currently outstanding. We may also seek additional financing from a variety of sources, including other equity or debt financings,
funding from corporate partnerships or licensing arrangements, sales of assets or any other financing transaction. If we issue equity
or convertible debt securities to raise additional funds, our existing stockholders may experience substantial dilution, and the newly
issued equity or debt securities may have more favorable terms or rights, preferences and privileges senior to those of our existing
stockholders. If we raise additional funds through collaboration or licensing arrangements or sales of assets, we may be required to
relinquish potentially valuable rights to our product candidates or proprietary technologies or formulations, or grant licenses on terms
that are not favorable to us. If we raise funds by incurring additional debt, we may be required to pay significant interest expenses
and our leverage relative to our earnings or to our equity capitalization may increase. Obtaining commercial loans, assuming they would
be available, would increase our liabilities and future cash commitments and may impose restrictions on our activities, such as the financial
and operating covenants. Further, we may incur substantial costs in pursuing future capital and/or financing transactions, including
investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to
recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which would adversely
impact our financial results.

We
may be unable to obtain financing when necessary as a result of, among other things, our performance, general economic conditions, conditions
in the pharmaceuticals and pharmacy industries, or our operating history,. In addition, the fact that we have a limited history of profitability
could further impact the availability or cost to us of future financings. As a result, sufficient funds may not be available when needed
from any source or, if available, such funds may not be available on terms that are acceptable to us. If we are unable to raise funds
to satisfy our capital needs when needed, then we may need to forego pursuit of potentially valuable development or acquisition opportunities,
we may not be able to continue to operate our business pursuant to our business plan, which would require us to modify our operations
to reduce spending to a sustainable level by, among other things, delaying, scaling back or eliminating some or all of our ongoing or
planned investments in corporate infrastructure, business development, sales and marketing and other activities, or we may be forced
to discontinue our operations entirely.

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Critical
Accounting Policies

We
rely on the use of estimates and make assumptions that impact our financial condition and results. These estimates and assumptions are
based on historical results and trends as well as our forecasts of how results and trends might change in the future. Although we believe
that the estimates we use are reasonable, actual results could differ materially from these estimates.

We
believe that the accounting policies described below are critical to understanding our business, results of operations and financial
condition because they involve the use of more significant judgments and estimates in the preparation of our consolidated financial statements.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that
are highly uncertain at the time the estimate is made, and any changes in the assumptions used in making the accounting estimates that
are reasonably likely to occur could materially impact our consolidated financial statements.

Revenue
Recognition and Deferred Revenue

We
account for contracts with customers in accordance with ASC 606, Revenues from Contracts with Customers. We have three primary
streams of revenue (four in 2022): (1) product revenues, including revenue recognized from sales of products through its pharmacy and
outsourcing facility and sales of branded products to wholesalers through a third-party logistics (“3PL”) partner, (2) revenue
recognized from a commission agreement with a third party in 2022, (3) revenue recognized from transfer of acquired product sales and
profits, and (4) revenue recognized from intellectual property licenses.

Product
Revenues

We
sell prescription medications directly through our pharmacy, outsourcing facility and 3PL partner. Revenue from our pharmacy services
includes: (i) the portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the
client, (ii) the price paid to us by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are
not included in revenue. Following the core principles of ASC 606, the Company has identified the following:

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Commission
Revenues

We
have entered into an agreement whereby it is paid a fee calculated based on sales we generate from a pharmaceutical product that is owned
by a third party. The revenue earned from this arrangement is recognized, at which point there is no future performance obligation required
by us and no consequential continuing involvement on our part to recognize the associated revenue.

Revenues
From Transfer of Acquired Product Sales and Profits

We
entered into agreements whereby we purchased the exclusive commercial rights to assets associated with certain ophthalmic products from
other pharmaceutical companies (the “Sellers”). During a temporary, transition period, the Sellers continue to manufacture
and market these products and transfer the net profit from the sale of the products to us. The revenue we recognized from the transfer
of net profit was recognized at the time profit from the product sales were calculated by the Sellers and confirmed by us, typically
on a monthly basis, at which point there is no future performance obligation required and no consequential continuing involvement on
our part to recognize the associated revenue. On a quarterly basis, the Sellers invoiced us for all credits and reimbursements (“Chargebacks”)
made to customers related to the products. We used historical actual experience to estimate Chargebacks associated with the net sales
and profit transferred. The estimated Chargebacks are recorded as a reduction in revenues from transfer of acquired product sales and
profits in our consolidated statements of operations, and recorded as a reduction to accounts receivable in the consolidated balance
sheets, at the time the revenue is recognized.

Intellectual
Property License Revenues

We
currently hold five intellectual property licenses and related agreements pursuant to which we have agreed to license or sell to a customer
with the right to access our intellectual property. License arrangements may consist of non-refundable upfront license fees, data transfer
fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and
various performance or sales milestones. These arrangements can be multiple-element arrangements, 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 and require no consequential continuing involvement on our part are recognized
as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverables are
delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations
and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications
for such compounded drug preparations. We defer recognition of non-refundable fees if it has continuing performance obligations without
which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and
that are separate and independent of our performance under the other elements of the arrangement. In addition, if our continued involvement
is required, through research and development services that are related to its proprietary know-how and expertise of the delivered technology
or can only be performed by us, then such non-refundable fees are deferred and recognized over the period of continuing involvement.
Guaranteed minimum annual royalties are recognized on a straight-line basis over the applicable term.

Debt
Issuance Costs and Debt Discount

Debt
issuance costs and the debt discount are recorded net of notes payable in the consolidated balance sheets. Amortization of debt issuance
costs and the debt discount is calculated using the effective interest method over the term of the related debt and is recorded in interest
expense in the accompanying consolidated statements of operations. At December 31, 2022, we recorded deferred financing costs of $1,950,000
related to the B. Riley Loan and Security Agreement (the “BR Loan”), which was recorded as a debt issuance cost and net of
the related BR Loan when it funded in January 2023 (see the accompany Note 13 to our consolidated financial statements).

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Intellectual
Property

The
costs of acquiring intellectual property rights to be used in the research and development process, including licensing fees and milestone
payments, are charged to research and development expense as incurred in situations where we have not identified an alternative future
use for the acquired rights, and are capitalized in situations where we have identified an alternative future use for the acquired rights.
Patents and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks
become more certain (see subheading “Goodwill and Intangible Assets” below). If costs are not capitalized they are expensed
as incurred.

Income
Taxes

As
part of the process of preparing our consolidated financial statements, we must estimate the actual current tax assets and liabilities
and assess permanent and temporary differences that result from differing treatment of items for tax and accounting purposes. The temporary
differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. We must assess
the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery
is not more likely than not, a valuation allowance must be established which reduces the amount of deferred tax assets recorded on the
consolidated balance sheets. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, the
impact will be included in income tax expense in the consolidated statements of operations.

We
account for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 740, Income Taxes. As of December 31, 2023 and 2022, there was $2,853,000 and $0, respectively, of unrecognized
tax benefits included in the consolidated balance sheets that would, if recognized, affect the effective tax rate. Our practice is to
recognize interest and/or penalties related to income tax matters in income tax expense. We had an accrual for interest or penalties
of $40,000 and $0 in the consolidated balance sheets at December 31, 2023 and 2022, respectively, and have recognized interest and/or
penalties in the consolidated statements of operations for the years ended December 31, 2023 and 2022 of $40,000 and $0, respectively.
We are subject to taxation in the United States, California, New Jersey,
Tennessee and various other states. Our tax years since 2000 may be subject to examination by the federal and state tax authorities due to
the carryforward of unutilized net operating losses.

Investment
in Melt Pharmaceuticals, Inc. – Related Party

We
own 3,500,000 shares of common stock and 2,334,256 shares of preferred stock of Melt (representing in aggregate approximately 47% of
the equity interests as of December 31, 2023). We analyze our investment in Melt and related agreements on a regular basis to evaluate
its position of variable interests in Melt. We have determined that we do not have the ability to control Melt, however we have 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, we recognize earnings and losses in Melt in its 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, we reduced the carrying value of our investment in Melt to $0 as a result of recording our share of equity losses in Melt since
its deconsolidation in 2019. As of December 31, 2022, and at the time of entering into the Melt Loan Agreement (see Note 5 to our consolidated
financials statements), we owned 100% of Melt’s indebtedness. Following the reduction of the carrying value of our common stock
investment in Melt to $0, we began recording 100% of the equity method losses of Melt, based on its ownership of Melt’s total indebtedness.
In addition, we treated interest paid in kind on the Melt Loan Agreement as an in-substance capital contribution and reduced our investment
in Melt accordingly, rather than recording interest income.

On
a quarterly basis, we assess whether there are any indicators that the carrying value of our equity method investments 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, we 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, we will recognize
an impairment loss based on the estimated fair value of the equity method investments. During the year ended December 31, 2023, the Melt
Loan Agreement (as defined in Note 5 to our consolidated financial statements) was settled in exchange for Melt preferred stock (see
the Note 5 to our consolidated financial statements for loan settlement disclosure). We reduced the Melt Loan Agreement and subsequent
preferred stock investment in Melt to $0 as a result of recording our share of equity losses of Melt. We have no other investments in
Melt and no other requirements to advance funds to Melt.

64

The
following table summarizes our investments in Melt as of December 31, 2023:

The
following table summarizes our investments in Melt as of December 31, 2022:

At
December 31, 2023 and 2022, we recorded $89,000 and $139,000, respectively, due from Melt for reimbursable expenses and amounts due under
a Management Services Agreement, which are included in prepaid expenses and other current assets in the accompanying consolidated balance
sheets.

See
the Note 5 to our consolidated financial statements for more information and related party disclosure regarding Melt.

Goodwill
and Intangible Assets

Patents
and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks become
more certain. At that time, we capitalize third-party legal costs and filing fees associated with obtaining and prosecuting claims related
to its patents and trademarks. Once the patents have been issued, we amortize these costs over the shorter of the legal life of the patent
or its estimated economic life, generally 20 years, using the straight-line method. Acquired product rights, including new drug applications
(“NDAs”), are amortized over their estimated useful lives, generally 4-15 years, based on a straight-line method. Trademarks
are an indefinite-lived intangible asset and are assessed for impairment based on future projected cash flows as further described below.

We
review our goodwill and indefinite-lived intangible assets for impairment as of January 1 of each year and when an event or a change
in circumstances indicates the fair value of a reporting unit may be below its carrying amount. Events or changes in circumstances considered
as impairment indicators include but are not limited to the following:

65

The
goodwill impairment test consists of a two-step process as follows:

Step
1. We compare the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting
unit is determined using a discounted cash flow valuation analysis. The carrying amount of each reporting unit is determined by specifically
identifying and allocating the assets and liabilities to each reporting unit based on headcount, relative revenues or other methods as
deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired,
and we then perform the second step of the impairment test to measure the impairment loss. If the fair value of a reporting unit exceeds
its carrying amount, no further analysis is required.

Step
2. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to the
excess, limited to the total amount of goodwill allocated to that reporting unit.

As
a result of its assessment in 2023, we concluded that goodwill is not impaired as of December 31, 2023.

Impairment
of Other Long-Lived Assets

Other
long-lived assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant
adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition of an asset. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying
amount of the asset exceeds the fair value of the asset. The fair value of the asset is based on the discounted value of its estimated
future cash flows. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group
classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance
sheet, if material.

As
a result of its assessment in 2023, we recorded an impairment charge of $380,000 related to the impairment of certain licenses, trademarks,
patents and patent applications (see the Note 11 to our consolidated financial statements).

Stock-Based
Compensation

All
stock-based payments to employees, directors and consultants, including grants of stock options, warrants, restricted stock units (“RSUs”),
performance stock units (“PSUs) and restricted stock, are recognized in the consolidated financial statements based upon their
estimated fair values. We use the Black-Scholes-Merton option pricing model and Monte Carlo simulation model to estimate the fair value
of stock-based awards. The estimated fair value is determined at the date of grant. The financial statement effect of forfeitures is
estimated at the time of grant and revised, if necessary, if the actual effect differs from those estimates.

Off-Balance
Sheet Arrangements

Since
our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of
structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated
financial statements and the related notes contained in this Annual Report on Form 10-K (this “Annual Report”). Our consolidated
financial statements have been prepared and, unless otherwise stated, the information derived therefrom as presented in this discussion
and analysis is presented, in accordance with accounting principles generally accepted in the United States (GAAP). In addition to historical
information, the following discussion contains forward-looking statements based upon our current views, expectations and assumptions
that are subject to risks and uncertainties. Actual results may differ substantially from those expressed or implied by any forward-looking
statements due to a number of factors, including, among others, the risks described in the “Risk Factors” section and elsewhere
in this Annual Report.

As
used in this discussion and analysis, unless the context indicates otherwise, the terms the “Company,” “Harrow”
“we,” “us” and “our” refer to Harrow Health, Inc. and its consolidated subsidiaries, consisting of
Imprimis Rx NJ, LLC, Imprimis NJOF, LLC, ImprimisRx, LLC, and Harrow Eye, LLC.

Overview

We
are an ophthalmic-focused pharmaceutical company. Our business specializes in the development, production, sale, and distribution of
innovative prescription medications that offer unique competitive advantages and serve unmet needs in the marketplace through our subsidiaries
and deconsolidated companies. We serve ophthalmologists and optometrists by providing FDA-approved branded ophthalmic pharmaceuticals
and innovative compounded prescription medicines that are accessible and affordable. We own the U.S. commercial rights to ten branded
ophthalmic pharmaceutical products, including IHEEZOTM, IOPIDINE® (both approved concentrations), MAXITROL® eye drops,
MOXEZA®, ILEVRO®, NEVANAC®, VIGAMOX®, MAXIDEX®, and TRIESENCE®. We own and operate ImprimisRx, one of the nation’s
leading ophthalmology-focused pharmaceutical-compounding businesses, and our branded drugs are marketed under our Harrow name. In addition,
we also have non-controlling equity positions in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”),
both companies that began as subsidiaries of Harrow and were subsequently carved-out of our corporate structure and deconsolidated from
our financial statements. We also own royalty rights in certain drug candidates being developed by Surface and Melt.

Factors
Affecting Our Performance

We
believe the primary factors affecting our performance are our ability to increase revenues of our branded pharmaceutical products, proprietary
compounded formulations and certain non-proprietary products, grow and gain operating efficiencies in our operations, potential regulatory-related
restrictions, optimize pricing and obtain reimbursement options for our drug products, and continue to pursue development and commercialization
opportunities for certain of our ophthalmology and other assets that we have not yet made commercially available. We believe we have
built a tangible and intangible infrastructure that will allow us to scale revenues efficiently in the near and long-term. All of these
activities will require significant costs and other resources, which we may not have or be able to obtain from operations or other sources.
See “Liquidity and Capital Resources” below.

Recent
Developments

The
following describes certain developments in 2022 to date that are important to understand our financial condition and results of operations.
See the notes to our condensed consolidated financial statements included in this Annual Report for additional information about each
of these developments.

Divestiture
of Non-Ophthalmic Assets

In
October 2022, we entered into an Asset Purchase Agreement (the “RPC Agreement”) with Innovation Compounding Pharmacy, LLC
(the “Buyer”). Under the terms of the RPC Agreement, the Company agreed to sell substantially all its assets associated with
its non-ophthalmology related compounding business, including but not limited to, certain intellectual property rights, customer lists,
databases, and formulations (the “RPC Assets”). The Buyer agreed to make offers of employment to six of the Company’s
employees that were responsible for the sales activities associated with the RPC Assets. In connection with the RPC Agreement, the Company
entered into a separate transition services agreement with the Buyer related to providing on going services, such as procuring and dispensing
prescription orders associated with RPC Assets. The Company expects to provide transition services to the Buyer for six to nine months
following the effective date of the RPC Agreement. Under the terms of the RPC Agreement, the Buyer paid to the Company an aggregate cash
amount of $6,000,000 on October 5, 2022. In addition, the Buyer is obligated to pay up to $4,500,000 to the Company based on mutually
agreed upon revenue milestones during the calendar year 2023.

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Melt
Loan Amendments

In
April and September 2022, we entered into a First Amendment and Second Amendment (collectively the “Amendments”) to our loan
and security agreement previously entered into on September 1, 2021 with Melt. The Amendments provide for the following:

Acquisition
of ILEVRO, NEVANAC, VIGAMOX, MAXIDEX and TRIESENCE

In
December 2022, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Novartis Technology, LLC and Novartis
Innovative Therapies AG (together, “Novartis”), pursuant to which the Company agreed to purchase from Novartis the exclusive
commercial rights to assets associated with the following ophthalmic products (collectively the “Fab 5 Products”) in the
U.S. (the “Fab 5 Acquisition”):

We
closed the Fab 5 Acquisition on January 20, 2023. Under the terms of the Purchase Agreement, we made a one-time payment of $130,000,000
at closing, with up to another $45,000,000 due in a milestone payment related to the timing of the commercial availability of TRIESENCE.
Pursuant to the Purchase Agreement and various ancillary agreements, immediately following the closing and subject to certain conditions,
for a period that we expect to last approximately six months, and prior to the transfer of the Fab 5 Products new drug applications (the
“NDAs”) to us, Novartis will continue to sell the Fab 5 Products on our behalf and transfer the net profit from the sale
of the Fab 5 Products to us. Novartis has agreed to supply certain Fab 5 Products to the Company for a period of time after the NDAs
are transferred to us and to assist with technology transfer of the Fab 5 Products manufacturing to other third-party manufacturers,
if needed.

Common
Stock Offering

In
December 2022, we entered into an underwriting agreement (the “Common Stock Underwriting Agreement”) with B. Riley Securities,
Inc. related to a registered direct offering of shares of the Company’s common stock to certain accredited investors, at an offering
price of $10.52. Under the terms of the Common Stock Underwriting Agreement we sold 2,376,426 shares of our common stock for gross proceeds
of $25,000,002.

Senior
Notes Offering

In
December 2022, the Company entered into an underwriting agreement with B. Riley Securities, Inc., as representative of the several
underwriters named therein, pursuant to which we agreed to sell $35,000,000 aggregate principal amount of 11.875% senior notes due
2027 (the “2027 Notes”) plus up to an additional $5,250,000 aggregate principal amount of 11.875% senior notes due 2027
pursuant to the underwriters’ option to purchase additional 2027 Notes, which was exercised in January 2023.

43

B.
Riley Loan and Security Agreement

On
December 14, 2022 (the “Effective Date”), we entered into a Loan and Security Agreement (the “BR Loan”) with
B. Riley Commercial Capital, LLC, as Administrative Agent for the Lenders. The proceeds from the BR Loan were used to finance the Fab
5 Acquisition.

The
BR Loan provided for a loan facility of up to $100,000,000 to the Company with a maturity date of December 14, 2025, at an interest rate
of 10.875% per annum. The BR Loan is secured by an intellectual property security agreement and by all assets of the Company and its
material subsidiaries. In January 2023, $59,750,000 of principal amount was funded pursuant to the BR Loan simultaneously with the consummation
of the Fab 5 Acquisition.

Results
of Operations

The
following period-to-period comparisons of our financial results are not necessarily indicative of results for any future period.

Comparison
of Years Ended December 31, 2022 and 2021

Revenues

Our
revenues include amounts recorded from sales of proprietary and non-proprietary pharmaceutical compounded drug formulations and revenues
received from royalty and milestone payments owed to us pursuant to out-license arrangements.

The
following presents our revenues for the years ended December 31, 2022 and 2021:

The
increase in revenues between periods was related to an increase in sales volumes of our ophthalmology products, an increase in commissions
attributable to sales of Dexycu® and transfer of profits from recently acquired products. In June of 2022, the Company completed
the transfer from the seller to Harrow of Iopidine and Maxitrol NDAs and relaunched those products. As a result, we will not record revenues
associated with the transfer of profits associated with those products in future periods.

Cost
of Sales

Our
cost of sales includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical
ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant
improvements depreciation, the write-off of obsolete inventory depreciation and amortization of certain intangibles and other
related expenses.

The
following presents our cost of sales for the years ended December 31, 2022 and 2021:

The
increase in our cost of sales between periods was largely attributable to an increase in unit volumes sold and increased direct and indirect
costs associated with production of our products during the year ended December 31, 2022 compared to 2021.

Gross
Profit and Margin

44

The
decrease in gross margin is primarily attributable to amortization of acquired NDAs beginning in January 2022, along with a one-time
adverse production related event in April 2022, increased discounts provided during 2022 associated with volume-based purchases and increased
(direct and indirect) production costs incurred during 2022.

Selling,
General and Administrative Expenses

Our
selling, general and administrative expenses include personnel costs, including wages and stock-based compensation, corporate facility
expenses, and investor relations, consulting, insurance, filing, legal and accounting fees and expenses as well as costs associated with
our marketing activities and sales of our proprietary compounded formulations and other non-proprietary pharmacy products and formulations.

The
following presents our selling, general and administrative expenses for the years ended December 31, 2022 and 2021:

The
increase in selling, general and administrative expenses between periods was primarily attributable to an increase in consulting expenses
associated with regulatory improvements, to support the transition of recent product acquisitions, and an increase in expenses related
to the addition of new employees in sales, marketing and other departments to support current and expected growth, including the anticipated
commercial launch of IHEEZO in 2023.

Research
and Development Expenses

Our
research and development (“R&D”) expenses primarily include expenses related to acquired in-process R&D, the development
of acquired intellectual property, investigator-initiated research and evaluations and other costs related to the clinical development
of our assets and drug candidates.

The
following presents our R&D expenses for the years ended December 31, 2022 and 2021:

During
the year ended December 31, 2022, research and development expenses decreased from the same period in 2021 primarily as a result of a
one-time payment for acquired research and development incurred in 2021 related to the acquisition of IHEEZO.

Impairment
and Disposal of Long-Lived Assets

During
the year ended December 31, 2021, we recorded a loss of $249,000, of which, $99,000 was related to the impairment of patents and patent
applications and $150,000 was related to equipment that was no longer in service.

Interest
Expense, net

Interest
expense, net was $7,244,000 during the year ended December 31, 2022 compared to $5,436,000 during the year ended December 31, 2021. The
increase was primarily due to an increase in the principal balance of our loans throughout the two periods presented.

Equity
in Losses of Unconsolidated Entities

During
the years ended December 31, 2022 and 2021, we recorded a loss of $11,133,000 and $5,334,000, respectively, for our share of losses based
on our ownership of Melt and Surface.

Investment
Loss from Eton

We
recorded a loss of $2,914,000 related to the change in fair market value of Eton’s common stock for the year ended December 31,
2022. We recorded a loss of $10,126,000 related to our investment in Eton’s common stock for the year ended December 31, 2021,
including a realized loss of $1,406,000 from the sale of 1,518,000 shares of Eton’s common stock.

Loss on Early Extinguishment of Debt

During
the year ended December 31, 2021, we recorded a loss from early extinguishment of $756,000 related the payment of all outstanding
obligations to the Company’s previous senior lender, SWK Funding, LLC, and its partners.

Gain
on Forgiveness of PPP Loan

During
the year ended December 31, 2021, we recorded gain on forgiveness of loan of $1,967,000 related to the forgiveness of our PPP Loan.

45

Gain
on Sale of Non-Ophthalmology Assets

During
the year ended December 31, 2022, we recorded a gain on the sale of our non-ophthalmology assets to Innovation Compounding Pharmacy,
LLC of $5,259,000.

Other
Income, net

During
the year ended December 31, 2022, we recorded other income, net of $102,000 which was primarily the result of income of $102,000 related
to the transition services provided as part of non-ophthalmology related compounding product line. During the year ended December 31,
2021, we recorded other income, net of $197,000. This was primarily the result of income of $238,000 related to negotiation of old payables
and expense of $41,000 related to loss on disposal of property, plant and equipment.

The
following table presents our net loss for the years ended December 31, 2022 and 2021:

Liquidity
and Capital Resources

Liquidity

Our
cash on hand at December 31, 2022 was $96,270,000, compared to $42,167,000 at December 31, 2021. Since inception through December 31,
2022, we incurred aggregate losses of $109,493,000. These losses are primarily due to selling, general and administrative and research
and development expenses incurred in connection with developing and seeking regulatory approval for a former drug candidate, which activities
we have now discontinued, the development and commercialization of novel compounded formulations and the development of our pharmacy
operations.

As
of the date of this Annual Report, we believe that cash and cash equivalents of $96,270,000 at December 31, 2022, along with proceeds
received from the BR Loan will be sufficient to sustain our planned level of operations and capital expenditures for at least the next
12 months. We also may consider the sale of certain assets including, but not limited to, part of, or all of, our ownership interest
in Eton, Surface, Melt, and/or any of our consolidated subsidiaries. However, our plans for this period may change, our estimates of
our operating expenses, capital expenditures and working capital requirements could be inaccurate, we may pursue acquisitions of products,
companies or other strategic transactions that involve large expenditures or we may experience growth more quickly or on a larger scale
than we expect, any of which could result in the depletion of capital resources more rapidly than anticipated and could require us to
seek additional financing earlier than we expect to support our operations.

We
expect to use our current cash position and funds generated from our operations and any financing to pursue our business plan, which
includes developing and commercializing FDA-approved products, compounded formulations, and technologies, developing our overall operations,
pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of products, compounding pharmacies
and outsourcing facilities, drug companies and manufacturers, and/or assets or technologies, and otherwise fund our operations. We may
also use our resources to conduct clinical trials or other studies in support of our formulations or any drug candidate for which we
pursue FDA approval, to pursue additional development programs or to explore other development opportunities.

Net
Cash Flows

The
following provides detailed information about our net cash flows for the years ended December 31, 2022 and 2021:

46

Operating
Activities

Net
cash provided by operating activities was $1,705,000 in 2022, compared to $5,082,000 in the prior year. Net cash provided by operating
activities during the year ended December 31, 2022 decreased primarily as a result of an increase in operating expenses during year in
preparation of the launch of IHEEZO and in support of operationalizing other product acquisitions.

Investing
Activities

Net
cash used in investing activities in 2022 and 2021 was $(1,743,000) and $(18,686,000), respectively. Cash used in investing activities
during the 2022 period was primarily associated with equipment and software purchases and upgrades along with investments in our intellectual
property portfolio, offset by cash received on the sale of our non-ophthalmic assets. Cash used in investing activities in 2021 was primarily
associated with cash payments made in connection with the Melt note receivable and the acquisition of MAXITRO, IOPIDINE and MOXEZA, offset
by cash received through the sale of a portion of our Eton common stock.

Financing
Activities

Net
cash provided by financing activities in 2022 and 2021 was $54,141,000 and $51,470,000, respectively. Net cash provided by financing
activities during the year ended December 31, 2022 was primarily related to net proceeds from the sale of $35,000,000 Notes and sale
of common stock. Net cash provided by financing activities during the year ended December 31, 2021 was primarily related to net proceeds
received from the sale of $75,000,000 senior notes due April 2026, net of the payment of all outstanding obligations to the Company’s
previous senior lender, SWK Funding, LLC, and its partners.

Sources
of Capital

Our
principal sources of cash consist of cash provided by operating activities from our ImprimisRx business, our brand ophthalmic pharmaceuticals
business, proceeds from the sale of the Notes and sale of Eton common stock. We may also sell some or all of our ownership interests
in Surface, Melt or our other subsidiaries, along with the some or all of the remaining portion of our Eton common stock.

The
changing trends and overall economic outlook, including the historic interim stay-at-home orders and bans on elective surgeries associated
with the COVID-19 pandemic, created uncertainty surrounding our operating outlook and may impact our future operating results if there
is a resurgence in COVID-19 cases in the U.S. In addition, we may acquire new products, product candidates and/or businesses and, as
a result, we may need significant additional capital to support our business plan and fund our proposed business operations. We may receive
additional proceeds from the exercise of stock purchase warrants that are currently outstanding. We may also seek additional financing
from a variety of sources, including other equity or debt financings, funding from corporate partnerships or licensing arrangements,
sales of assets or any other financing transaction. If we issue equity or convertible debt securities to raise additional funds, our
existing stockholders may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms
or rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration
or licensing arrangements or sales of assets, we may be required to relinquish potentially valuable rights to our product candidates
or proprietary technologies or formulations, or grant licenses on terms that are not favorable to us. If we raise funds by incurring
additional debt, we may be required to pay significant interest expenses and our leverage relative to our earnings or to our equity capitalization
may increase. Obtaining commercial loans, assuming they would be available, would increase our liabilities and future cash commitments
and may impose restrictions on our activities, such as the financial and operating covenants. Further, we may incur substantial costs
in pursuing future capital and/or financing transactions, including investment banking fees, legal fees, accounting fees, printing and
distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we
may issue, such as convertible notes and warrants, which would adversely impact our financial results.

We
may be unable to obtain financing when necessary as a result of, among other things, our performance, general economic conditions, conditions
in the pharmaceuticals and pharmacy industries, or our operating history, including our past bankruptcy proceedings. In addition, the
fact that we have a limited history of profitability could further impact the availability or cost to us of future financings. As a result,
sufficient funds may not be available when needed from any source or, if available, such funds may not be available on terms that are
acceptable to us. If we are unable to raise funds to satisfy our capital needs when needed, then we may need to forego pursuit of potentially
valuable development or acquisition opportunities, we may not be able to continue to operate our business pursuant to our business plan,
which would require us to modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back
or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing
and other activities, or we may be forced to discontinue our operations entirely.

Critical
Accounting Policies

We
rely on the use of estimates and make assumptions that impact our financial condition and results. These estimates and assumptions are
based on historical results and trends as well as our forecasts of how results and trends might change in the future. Although we believe
that the estimates we use are reasonable, actual results could differ materially from these estimates.

47

We
believe that the accounting policies described below are critical to understanding our business, results of operations and financial
condition because they involve the use of more significant judgments and estimates in the preparation of our consolidated financial statements.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that
are highly uncertain at the time the estimate is made, and any changes in the assumptions used in making the accounting estimates that
are reasonably likely to occur could materially impact our consolidated financial statements.

Revenue
Recognition and Deferred Revenue

We
account for contracts with customers in accordance with Accounting Standards Codification (“ASC”) 606, Revenues from Contracts
with Customers. We have two primary streams of revenue: (1) revenue recognized from our sale of products within our pharmacy services
and (2) revenue recognized from intellectual property license and asset purchase agreements.

Product
Revenues from Pharmacy Services

We sell
prescription medications directly through our pharmacy, outsourcing facility and 3PL partner. Revenue from our pharmacy services includes:
(i) the portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the client, (ii)
the price paid to us by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are not included
in revenue. Following the core principles of ASC 606, we have identified the following:

Commission Revenues

We entered into an
agreement whereby we are paid a fee calculated based on sales we generate from a pharmaceutical product that is owned by a third party.
The revenue earned from this arrangement is recognized, at which point there is no future performance obligation required by us and no
consequential continuing involvement on our part to recognize the associated revenue.

Revenues From Transfer of Acquired Product Profit

We entered
into an agreement whereby we 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 continued to
manufacture and market these products and transfer the net profit from the sale of the products to us. The revenue we recognized from
the transfer of net profit was recognized at the time profit from the product sales was calculated by the Seller and confirmed by us,
typically on a monthly basis, at which point there is no future performance obligation required and no consequential continuing involvement
on our part to recognize the associated revenue. On a quarterly basis, the Seller invoiced us for all credits and reimbursements (“Chargebacks”)
made to customers related to the products. We used historical actual experience to estimate Chargebacks associated with the net profit
transferred. The estimate is recorded as a reduction in revenues in our consolidated statements of operations and accounts receivable
in the consolidated balance sheets at the time the revenue is recognized.

48

Intellectual Property License Revenues

We currently
hold five intellectual property licenses and related agreements pursuant to which we have agreed to license or sell to a customer with
the right to access our intellectual property. License arrangements may consist of non-refundable upfront license fees, data transfer
fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and various
performance or sales milestones. These arrangements can be multiple-element arrangements, 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 and require no consequential continuing involvement on our part are recognized as revenue
when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverable is delivered.
Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations and structure-activity
relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications for such compounded
drug preparations. We defer recognition of non-refundable fees if it has continuing performance obligations without which the technology,
right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and that are separate and
independent of our performance under the other elements of the arrangement. In addition, if our continued involvement is required, through
research and development services that are related to its proprietary know-how and expertise of the delivered technology or can only
be performed by us, then such non-refundable fees are deferred and recognized over the period of continuing involvement. Guaranteed minimum
annual royalties are recognized on a straight-line basis over the applicable term.

Investment
in Eton Pharmaceuticals, Inc.

We
own 1,982,000 shares of Eton common stock, which represented approximately 8% of the equity and voting interests of Eton as of December
31, 2022. At December 31, 2022, the fair market value of Eton’s common stock was $2.82 per share. In accordance with Accounting
Standard Update (“ASU”) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities, for the years ended December 31, 2022 and 2021, we recorded an investment loss from our Eton common
stock position of $2,914,000 and $10,126,000 respectively, related to the change in fair market value of our investment in Eton during
the measurement periods, including a realized loss of $1,406,000 from the sale of 1,518,000 shares of Eton’s common stock during
the year ended December 31, 2021. As of December 31, 2022 and 2021, the fair market value of our investment in Eton was $5,589,000 and
$8,503,000, respectively.

Investment
in Surface Ophthalmics, Inc. – Related Party

We
own 3,500,000 common shares of Surface, which represented approximately 20% of the equity and voting interests as of December 31, 2022,
and use the equity method of accounting for this investment, as management has determined that we have the ability to exercise significant
influence over the operating and financial decisions of Surface. Under this method, we recognize earnings and losses in Surface in its
consolidated financial statements and adjusts the carrying amount of its investment in Surface accordingly. Our share of earnings and
losses are based on our ownership interest of Surface. Any intra-entity profits and losses are eliminated. We recorded equity in the
net loss of Surface of $1,314,000 during the year ended December 31, 2021. As of December 31, 2022 and 2021, the carrying value of our
investment in Surface was $0 and $0, respectively.

See
Note 6 to our consolidated financial statements for more information and related party disclosure regarding Surface.

Investment
in Melt Pharmaceuticals, Inc. – Related Party

In
April 2018, we formed Melt as a wholly-owned subsidiary. In January and March of 2019, Melt entered into definitive stock purchase agreements
(collectively, the “Melt Series A Preferred Stock Agreement”) with certain investors and closed on the purchase and sale
of Melt’s Series A Preferred Stock (the “Melt Series A Stock”), totaling approximately $11,400,000 of proceeds (collectively
the “Melt Series A Round”) at a purchase price of $5.00 per share. As a result, we lost voting and ownership control of Melt
and ceased consolidating Melt’s financial statements.

At
the time of deconsolidation, we recorded a gain of $5,810,000 and adjusted the carrying value in Melt to reflect the increased valuation
of Melt and our new ownership interest in accordance with ASC 810-10-40-4(c), Consolidation.

We
own 3,500,000 common shares of Melt, which represented approximately 46% of its equity and voting interests as of December 31, 2022.
We analyze our investment in Melt and related agreements on a regular basis to evaluate our position of variable interests in Melt. We
no longer have a controlling position in Melt; however, we do have the ability to exercise significant influence over the operating and
financial decisions of Melt. We use the equity method of accounting for this investment. Under this method, we recognize earnings and
losses of Melt in its consolidated financial statements and adjusts the carrying amount of its investment in Melt accordingly. Our share
of earnings and losses are based on our ownership interest of Melt. Any intra-entity profits and losses are eliminated. During the year
ended December 31, 2021 we reduced our common stock investment in Melt to $0. As of December 31, 2022 and 2021 and at the time of entering
into the Melt Loan Agreement, we owned 100% of the debt owed by Melt. Following the reduction of the carrying value of our common stock
investment in Melt to $0 we began recording 100% of the equity method losses of Melt, based on our ownership of total debt owed by Melt.
We recorded equity in net losses of Melt of $11,133,000 and $4,020,000 during the years ended December 31, 2021 and 2022, respectively.
As of December 31, 2022, our investment in Melt was $0 and $139,000 is due from Melt for reimbursable expenses and amounts due under
the Melt Master Service Agreement (“Melt MSA”).

See
Notes 2 and 5 to our consolidated financial statements for more information and related party disclosure regarding Melt.

49

Stock-Based
Compensation

All
stock-based payments to employees, directors and consultants, including grants of stock options, warrants, restricted stock units and
restricted stock, are recognized in the consolidated financial statements based upon their estimated fair values. We use the Black-Scholes
option pricing model and Monte-Carlo simulation model to estimate the fair value of stock-based awards. Fair value is determined at the
date of grant. The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual
effect differs from those estimates.

Income
Taxes

As
part of the process of preparing our consolidated financial statements, we must estimate the actual current tax assets and liabilities
and assess permanent and temporary differences that result from differing treatment of items for tax and accounting purposes. The temporary
differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. We must assess
the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery
is not more likely than not, a valuation allowance must be established which reduces the amount of deferred tax assets recorded on the
consolidated balance sheets. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, the
impact will be included in income tax expense in the consolidated statements of operations.

We
account for income taxes under the provisions of Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification
(“ASC”) 740, Income Taxes. As of December 31, 2022 and 2021, there were no unrecognized tax benefits included in the
consolidated balance sheets that would, if recognized, affect the effective tax rate. Our practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. We had no accrual for interest or penalties in its consolidated balance sheets at
December 31, 2022 and 2021, and have not recognized interest and/or penalties in the consolidated statements of operations for the years
ended December 31, 2022 and 2021. We are subject to taxation in the United States, California, Florida, Georgia, Illinois, New Jersey,
New York, Tennessee, and Wisconsin. Our tax years since 2000 may be subject to examination by the federal and state tax authorities due
to the carryforward of unutilized net operating losses.

Research
and Development

R&D
expenses consist of expenses incurred in performing research and development activities, including salaries and benefits, other overhead
expenses, and costs related to clinical trials, contract services and outsourced contracts. We expense all costs related to R&D as
they are incurred.

Upfront
and milestone payments related to the acquisition and licensing of technology for drug and product candidates that are not yet approved
by the FDA are considered acquisition of in process R&D and expensed as R&D in the period in which the expense occurs.

Intellectual
Property

The
costs of acquiring intellectual property rights to be used in the research and development process, including licensing fees and milestone
payments, are charged to research and development expense as incurred in situations where we have not identified an alternative future
use for the acquired rights, and are capitalized in situations where we have identified an alternative future use for the acquired rights.
Patents and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks
become more certain (See “—Goodwill and Intangible Assets” below). We began capitalizing certain costs associated with
acquiring intellectual property rights during 2015, if costs are not capitalized, they are expensed as incurred.

Impairment
of Long-Lived Assets

Long-lived
assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed would
be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to
sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately
in the appropriate asset and liability sections of the consolidated balance sheet, if material.

50

Goodwill
and Intangible Assets

Patents
and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks become
more certain. At that time, we capitalize third-party legal costs and filing fees associated with obtaining and prosecuting claims related
to its patents and trademarks. Once the patents have been issued, we amortize these costs over the shorter of the legal life of the patent
or its estimated economic life, generally 20 years, using the straight-line method. Trademarks are an indefinite life intangible asset
and are assessed for impairment based on future projected cash flows as further described below.

We
review our goodwill and indefinite-lived intangible assets for impairment as of January 1 of each year and when an event or a change
in circumstances indicates the fair value of a reporting unit may be below its carrying amount. Events or changes in circumstances considered
as impairment indicators include but are not limited to the following:

The
goodwill impairment test consists of a two-step process as follows:

Step
1. We compare the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting
unit is determined using a discounted cash flow valuation analysis. The carrying amount of each reporting unit is determined by specifically
identifying and allocating the assets and liabilities to each reporting unit based on headcount, relative revenues or other methods as
deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting
unit’s goodwill may be impaired and we then perform the second step of the impairment test. If the fair value of a reporting unit
exceeds its carrying amount, no further analysis is required.

Step
2. If further analysis is required, we compare the implied fair value of the reporting unit’s goodwill, determined by allocating
the reporting unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to
its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment loss will be
recognized in an amount equal to the excess.

Debt
Issuance Costs and Debt Discount

Debt
issuance costs and the debt discount are recorded net of loans payable in the consolidated balance sheet. Amortization of debt issuance
costs and the debt discount is calculated using the effective interest method over the term of the debt and is recorded in interest expense
in the accompanying consolidated statement of operations.

Off-Balance
Sheet Arrangements

Since
our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of
structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

51

ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated
financial statements and the related notes contained in this Annual Report on Form 10-K (this “Annual Report”). Our consolidated
financial statements have been prepared and, unless otherwise stated, the information derived therefrom as presented in this discussion
and analysis is presented, in accordance with accounting principles generally accepted in the United States (GAAP). In addition to historical
information, the following discussion contains forward-looking statements based upon our current views, expectations and assumptions
that are subject to risks and uncertainties. Actual results may differ substantially from those expressed or implied by any forward-looking
statements due to a number of factors, including, among others, the risks described in the “Risk Factors” section and elsewhere
in this Annual Report.

As
used in this discussion and analysis, unless the context indicates otherwise, the terms the “Company,” “Harrow”
“we,” “us” and “our” refer to Harrow Health, Inc. and its consolidated subsidiaries, consisting of
Imprimis Rx NJ, LLC, Imprimis NJOF, LLC, ImprimisRx, LLC, Radley Pharmaceuticals, Inc., Stowe Pharmaceuticals, Inc. and Mayfield Pharmaceuticals,
Inc.

Overview

We
are an ophthalmic-focused healthcare company. Our business specializes in the development, production and sale of innovative medications
that offer unique competitive advantages and serve unmet needs in the marketplace through our subsidiaries and deconsolidated companies.
We own and operate ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical businesses, and Visionology, Inc.
(“Visionology”), a direct-to-consumer eyecare subsidiary focused on chronic vision care. In addition, we also have non-controlling
equity positions in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”), both companies
that began as subsidiaries of Harrow and were subsequently deconsolidated. We also own royalty rights in various drug candidates being
developed by Surface and Melt.

ImprimisRx

ImprimisRx
is our ophthalmology-focused prescription pharmaceutical business. From its inception in 2014, ImprimisRx, which consists of integrated
research and development, production, dispensing/distribution, sales, marketing, and customer serve capabilities, has offered physician
customers and their patients access to critical medicines to meet their clinical needs. Initially, ImprimisRx focused exclusively on
compounded medications to serve needs unmet by commercially available drugs. We make our formulations available at prices that are, in
most cases, lower than non-customized commercial drugs, ImprimisRx’s customer base has grown to include more than 10,000 U.S. eyecare
dedicated prescribers and institutions. Our current ophthalmology formulary includes over twenty compounded formulations, many of which
are patented or patent-pending, and are customizable for the specific needs of a patient. Some of our compounded medications are various
combinations of drugs formulated into one bottle and numerous preservative free formulations. Depending on the formulation, the regulations
of a specific state and ultimately the needs of the patient, ImprimisRx products may be dispensed as patient-specific medications from
our 503A pharmacy, or for in-office use, made according to current good manufacturing practices (or “cGMPs”) or other FDA-guidance
documents, in our FDA-registered New Jersey outsourcing facility (“NJOF”).

Over
the past two years, in order to more fully serve the needs of our growing customer base, we have invested in broadening ImprimisRx’s
product portfolio to include FDA-approved products. Our investments in this regard have led to commercial partnerships to sell DEXYCU®
and Avenova, the acquisition of two later stage drug candidates, and the recent acquisition of U.S. rights to four FDA-approved ophthalmic
products. These transactions, and those we are continuing to pursue, are focused in eyecare pharmaceuticals. We believe that our continued
investments in these and other products will result in our ability to provide more physician prescribers and their patients with access
to a complete portfolio of affordable eyecare pharmaceuticals to address their clinical needs.

DEXYCU®

ImprimisRx
entered into a Commercial Alliance Agreement (the “Dexycu Agreement”) with Eyepoint Pharmaceuticals, Inc. (“Eyepoint”),
pursuant to which Eyepoint granted ImprimisRx the right to promote DEXYCU® (dexamethasone intraocular suspension) 9% for the treatment
of post-operative inflammation following ocular surgery in the United States. Pursuant to the Dexycu Agreement, Eyepoint pays ImprimisRx
a fee that is calculated based on the quarterly sales of DEXYCU in the U.S.

IOPIDINE®,
MAXITROL® EYE DROPS, MOXEZA®

In
December 2021, we acquired U.S. commercial rights to four FDA-approved ophthalmic medicines: IOPIDINE 1% and 0.5% (apraclonidine hydrochloride);
MAXITROL (neomycin/polymyxin B/dexamethasone) eye drops; and MOXEZA (moxifloxacin hydrochloride). We believe by expanding our product
portfolio to include branded FDA-approved products, we will be uniquely positioned to leverage our ImprimisRx platform to introduce unique
lifecycle management strategies that could grow sales and address needs of our customers that we are unable to meet with our other compounded
product offerings.

At
the time of closing, we agreed to a transitional period with the seller, which is expect to last approximately six months following the
closing of the transaction. During the transition period, the seller will continue to sell the products and transfer the net profit to
us. Following the transition period, we expect to have the products manufactured by third parties and commercialize the products for
the U.S. market.

38

AMP-100

In
July 2021, we acquired the exclusive marketing and supply rights to AMP-100 in the U.S. and Canada from Sintetica S.A. (“Sintetica”).
AMP-100 is a patented, ophthalmic topical anesthetic drug candidate. If FDA-approved, the active ingredient used in AMP-100 will be the
first approved use of this active ingredient in the U.S. ophthalmic market. A new drug application (“NDA”) for AMP-100 was
submitted by Sintetica to the FDA in the fourth quarter of 2021 and the FDA has assigned the application standard review and a Prescription
Drug User Fee Act (PDUFA) target action date of October 16, 2022.

MAQ-100

In
August 2021, we acquired exclusive the marketing rights to MAQ-100 in the U.S. and Canada from Wakamoto Pharmaceutical Co., Ltd. (“Wakamoto”).
MAQ-100 is a preservative-free triamcinolone acetonide ophthalmic injection drug candidate. MAQ-100 is marketed and sold by Wakamoto
in Japan as MaQaid®. Following Japan’s Ministry of Health Labor and Welfare (“MHLW”) approval, MaQaid was launched
in Japan in 2010, indicated as an intravitreal injection for visualization for vitrectomy. Since its initial MHLW approval, the indication
for MaQaid was expanded to include (a) treatments for alleviation of diabetic macular edema, (b) macular edema associated with retinal
vein occlusion (or RVO), and (c) non-infectious uveitis. We intend to leverage the clinical data used for Japanese market approval of
MaQaid to support a clinical program and U.S. market NDA submission of MAQ-100 for visualization during vitrectomy. We intend to request
a meeting with FDA during the first half of 2022 to discuss our planned clinical program for MAQ-100.

We
expect to acquire and/or develop additional FDA-approved/approvable ophthalmic products and product candidates that will allow us to
leverage the commercial infrastructure of ImprimisRx to promote, sell, and ultimately bring these products to market.

Visionology

Visionology,
a direct-to-consumer online eye health platform, leverages our experience in the ophthalmic pharmaceutical business as well as our relationships
with eyecare professionals across the United States. We recently launched a proof-of-concept model for Visionology within certain U.S.
markets, and if successful, will expand the launch on a nationwide basis in 2022.

Pharmaceutical
Compounding Businesses

Pharmaceutical
Compounding

Pharmaceutical
compounding is the science of combining different active pharmaceutical ingredients (APIs), all of which are approved by the FDA (either
as a finished form product or as a bulk drug ingredient), and excipients to create specialized pharmaceutical preparations. Physicians
and healthcare institutions use compounded drugs when commercially available drugs do not optimally treat a patient’s needs. In
many cases, compounded drugs, such as ours, have wide market utility and may be clinically appropriate for large patient populations.
Examples of compounded formulations include medications with alternative dosage strengths or unique dosage forms, such as topical creams
or gels, suspensions, or solutions with more tolerable drug delivery vehicles.

Almost
all of our sales revenue is derived from making, selling and dispensing our compounded prescription drug formulations as cash pay transactions
between us and our end-user customer. As such, the majority of our commercial transactions do not involve distributors, wholesalers,
insurance companies, pharmacy benefit managers or other middle parties. By not being reliant on insurance company formulary inclusion
and pharmacy benefit manager payment clawbacks, we are able to simplify the prescription transaction process. We believe the outcome
of our business model is a simple transaction, involving a patient-in-need, a physician’s diagnosis, a fair price and great service
for a quality pharmaceutical product. We sell our products through a network of employees and independent contractors, and we dispense
our formulations in all 50 states, Puerto Rico and in select markets outside the United States.

Our
Compounding Facilities

Pharmaceutical
compounding businesses are governed by Sections 503A and 503B of the Federal Food Drug and Cosmetic Act (the “FDCA”). Section
503A of the FDCA provides that a pharmacy is only permitted to compound a drug for an individually identified patient based on a prescription
for the patient and is only permitted to distribute the drug interstate if the pharmacy is licensed to do so in the states where it is
compounded and where the medication is received.

Section
503B of the FDCA provides that a pharmacy engaged in preparing sterile compounded drug formulations may voluntarily elect to register
as an “outsourcing facility.” Outsourcing facilities are permitted to compound large quantities of drugs without a prescription
and distribute them out of state with certain limitations, such as the formulation appearing on the FDA’s drug shortage list or
the bulk drug substances contained in the formulations appearing on the FDA’s “clinical need” list. Entities voluntarily
registering with FDA as outsourcing facilities are subject to additional requirements that do not apply to compounding pharmacies (operating
under Section 503A of the FDCA), including adhering to standards such as current good manufacturing practices (cGMP) or other FDA guidance
documents and being subject to regular FDA inspection.

39

We
operate two compounding facilities located in Ledgewood, New Jersey. Our New Jersey operations are comprised of two separate entities
and facilities, one of which is registered with the FDA as an outsourcing facility (“NJOF”) under Section 503B of the FDCA.
The other New Jersey facility (“RxNJ”) is a licensed pharmacy operating under Section 503A of the FDCA. All products that
we sell, produce and dispense are made in the United States.

We
believe that, with our current compounding pharmacy facilities and licenses and FDA registration of NJOF, we have the infrastructure
to scale our business appropriately under the current regulatory landscape and meet the potential growth in demand we are targeting.
We plan to invest in one or both of our facilities to further their capacity and efficiencies. Also, we may seek to access greater pharmacy
and production related redundancy and markets through acquisitions, partnerships or other strategic transactions.

Carved-Out
Businesses (De-Consolidated Businesses)

We
have ownership interests in Surface, Melt, and Eton Pharmaceuticals, Inc. (“Eton”) and hold royalty interests in some of
Surface’s and Melt’s drug candidates. These companies are pursuing market approval for their drug candidates under the FDCA,
including in some instances under the abbreviated pathway described in Section 505(b)(2), which permits the submission of a new drug
application (“NDA”) where at least some of the information required for approval comes from studies not conducted by or for
the applicant and for which the applicant has not obtained a right of reference.

In
2018 and 2019, we formed and created subsidiaries named Radley Pharmaceuticals, Inc. (“Radley”), Mayfield Pharmaceuticals,
Inc. (“Mayfield”), and Stowe Pharmaceuticals, Inc. (“Stowe”). In 2020, we halted nearly all operating activities
related to these subsidiaries to invest resources in other areas, and we may not restart any or all activities related to these businesses.
In addition, we terminated license and acquisition agreements for Mayfield’s MAY-66 and MAY-44 drug candidates, and Stowe’s
STE-006 drug candidate.

Noncontrolling
Equity Interests

Surface
Ophthalmics, Inc.

Surface
is a clinical-stage pharmaceutical company focused on development and commercialization of innovative therapeutics for ocular surface
diseases.

In
January 2021, Surface announced positive top-line results from a Phase 2 trial of its drug candidate SURF-201, a 0.2% betamethasone,
preservative-free ophthalmic solution in the Klarity delivery vehicle for the treatment of post cataract surgery pain and inflammation.
According to the Surface results, SURF-201 was dosed twice daily, met its primary endpoints of absence of inflammation at both Day 8
and Day 15 and was found to be safe and well-tolerated by the patient group. In addition, a secondary endpoint showed almost 90% of patients
given SURF-201 were pain free at Day 15. Also in January 2021, Surface announced the first patient dosed in a head-to-head Phase 2 trial
for its drug candidate SURF-100 (mycophenolate sodium and betamethasone in Klarity vehicle) for the treatment of chronic dry eye disease.
In February 2021, Surface announced the first patient dosed in a Phase 2 trial for its drug candidate SURF-200 (betamethasone in Klarity
vehicle) for the treatment of episodic dry eye flares.

In
2018, Surface closed an offering of its Series A Preferred Stock. At that time, we lost our controlling interest and deconsolidated Surface
from our consolidated financial statements. During May, June and July of 2021, Surface closed an offering of its preferred stock at a
purchase price of $4.50 per share resulting in gross proceeds to Surface of approximately $25,000,000 (the “Surface Series B Offering”).
We own 3,500,000 shares of Surface common stock, which was approximately 20% of the equity and voting interests as of December 31, 2021.
Harrow owns mid-single digit royalty rights on net sales of SURF-100, SURF-200 and SURF-201.

Melt
Pharmaceuticals, Inc.

Melt
is a clinical-stage pharmaceutical company focused on the development and commercialization of proprietary non-intravenous, sedation
and anesthesia therapeutics for human medical procedures in hospital, outpatient, and in-office settings. Melt intends to seek regulatory
approval for its proprietary technologies, where possible. In December 2018, we entered into an Asset Purchase Agreement with Melt (the
“Melt Asset Purchase Agreement”), pursuant to which Harrow assigned to Melt the underlying intellectual property for Melt’s
current pipeline, including its lead drug candidate MELT-300. The core intellectual property Melt owns is a patented series of combination
non-opioid sedation drug formulations that we estimate to have multitudinous applications.

MELT-300
is a novel, sublingually delivered, non-IV, opioid-free drug candidate being developed for procedural sedation. Melt filed an investigational
new drug application (“IND”) with the FDA in June 2020 and began its clinical program for MELT-300. In February 2021, Melt
announced data from, and the successful completion of, its Phase 1 study. Melt recently began enrolling patients in its Phase 2 study
for MELT-300.

In
January 2019, Melt closed an offering of its Series A Preferred Stock. At that time, we lost our controlling interest and deconsolidated
Melt from our consolidated financial statements. We own 3,500,000 shares of Melt common stock, which was approximately 46% of the equity
and voting interests issued and outstanding as of December 31, 2021. In September 2021, we provided Melt with a senior secured loan in
the amount of $13,500,000, which is intended to fund the Phase 2 program of MELT-300. In connection with the loan we provided Melt, we
also were provided the right, but not the obligation, to match any offer received by Melt associated with the commercial rights to any
of its drug candidates for a period of five years. Melt is required to make mid-single digit royalty payments to the Company on net sales
of MELT-300, while any patent rights remain outstanding, subject to other conditions. Melt can require the Company to cease compounding
like products at the time of FDA approval of MELT-300. If approved, we do not expect a cessation of compounding like products to have
a material impact on our operations and financial performance.

40

Eton
Pharmaceuticals, Inc.

Eton
is a commercial-stage pharmaceutical company focused on developing and commercializing innovative drug products. Its pipeline includes
several products and drug candidates in various stages of development across a variety of dosage forms. In May 2017, we gave up our controlling
interest in Eton. We own 1,982,000 shares of Eton common stock, which is less than 10% of the equity and voting interests issued and
outstanding of Eton as of December 31, 2021.

Factors
Affecting Our Performance

We
believe the primary factors affecting our performance are our ability to increase revenues of our proprietary compounded formulations
and certain non-proprietary products, grow and gain operating efficiencies in our pharmacy operations, potential regulatory-related restrictions,
optimize pricing and obtain reimbursement options for our proprietary compounded formulations, and continue to pursue development and
commercialization opportunities for certain of our ophthalmology and other assets that we have not yet made commercially available as
compounded formulations. We believe we have built a tangible and intangible infrastructure that will allow us to scale revenues efficiently
in the near and long-term. All of these activities will require significant costs and other resources, which we may not have or be able
to obtain from operations or other sources. See “Liquidity and Capital Resources” below.

Reimbursement
Options

Dexycu
is covered under Medicare Part B, and we are developing drug candidates that we believe will be covered under Medicare Part B. New drugs
approved by the FDA that are used in surgeries performed in a hospital outpatient departments or ambulatory surgical centers may receive
a transitional pass-through reimbursement under Medicare, provided they meet certain criteria, including a “not insignificant”
cost criterion. Pass-through status allows for separate payment (i.e., outside the packaged payment rate for the surgical procedure)
under Medicare Part B, which consists of Medicare reimbursement for a drug based on a defined formula for calculating the minimum fee
that a manufacturer may charge for the drug. Under current regulations of the Centers for Medicare & Medicaid Services (“CMS”),
pass-through status applies for a period of three years, measured from the date Medicare makes its first pass-through payment for the
product, following which the product would be incorporated into the cataract bundled payment system, which could significantly reduce
the pricing for that product. Following expiration of pass-through status, under current CMS policy, non-opioid pain management surgical
drugs when used on Medicare Part B patients in the ASC setting can qualify for ongoing separate payment. CMS’ current non-opioid
separate payment policy, like other CMS policies, can be changed by CMS through its annual rulemaking and comment process. We believe
that CMS will continue its separate payment policy for non-opioid pain management surgical drugs, which has been in effect since 2019.

We
are working with outside consultants to potentially gain an extension to the transitional payment system, or to separate the drug payment
from the bundled cataract surgery payment after the three-year transitional payment ends and continue to be reimbursed separately for
a longer period of time, potentially through patent life. Unless extended, Dexycu transitional pass-through reimbursement status will
expire on December 31, 2022, which will have an adverse impact on our commission revenues from this product.

Our
proprietary ophthalmic compounded formulations are currently primarily available on a cash-pay basis. However, we expect that MOXEZA,
MAXITROL and IOPIDINE are, and we expect that other drug candidates we are developing, if approved, will be eligible for reimbursement
by third-party payors. We may devote time and other resources to seek reimbursement and patient pay opportunities for these and other
drug products and candidates. However, we may be unsuccessful in achieving these goals, as many third-party payors have imposed significant
challenges for products to be eligible for reimbursement in recent years. Moreover, third-party payors, including Medicare, are increasingly
attempting to contain health care costs by limiting coverage and the level of reimbursement for new drugs and by refusing, in some cases,
to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval. Further,
the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010
(collectively, the “Health Care Reform Law”), may have a considerable impact on the existing U.S. system for the delivery
and financing of health care and could conceivably have a material
adverse effect on our business. As a result, reimbursement from Medicare, Medicaid and other third-party
payors may never be available for any of our products or, if available, may not be sufficient to allow us to sell the products on a competitive
basis and at desirable price points. We are communicating with government and third-party payors in order to make our drug products and
candidates available to more patients and at optimized pricing levels. However, if government and other third-party payors do not provide
adequate coverage and reimbursement levels for our drug products and candidates, the market acceptance and opportunity for them may be
limited.

41

COVID-19
Pandemic

A
novel strain of coronavirus was first identified in Wuhan, China in December 2019. The disease caused by it, COVID-19, was declared a
global pandemic by the World Health Organization in March 2020. On March 18, 2020, CMS released guidance for U.S. healthcare providers
to limit all elective medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the
pendency of the pandemic. In addition to limiting elective medical procedures, many hospitals and other healthcare providers have strictly
limited access to their facilities during the pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global
supply chains and healthcare delivery, led to social distancing recommendation, and created significant volatility in financial markets.
In May 2020 and the following months, U.S. states and geographies began easing restrictions associated with the COVID-19 pandemic including
those restrictions related to elective procedures. We have since seen sales of our products return to near historical norms and trends
as restrictions associated with elective procedures and the COVID-19 pandemic have continued to ease.

However,
given the unprecedented and dynamic nature of the COVID-19 pandemic virus, including any mutations/variants, we may not be able to reasonably
estimate the impacts it may have on our financial condition, results of operations or cash flows in the future, especially if there are
new restrictions in elective procedures in the future which would have an adverse impact, which may be material, on our future revenues,
profitability and cash flows.

Recent
Developments

The
following describes certain developments in 2021 to date that are important to understand our financial condition and results of operations.
See the notes to our condensed consolidated financial statements included in this Annual Report for additional information about each
of these developments.

Acquisition
of U.S. Rights to MAXITROL Eye Drops, IOPIDINE and MOXEZA

On
December 17, 2021 (the “Closing Date”), we entered into an Asset Purchase Agreement (the “NVS Agreement”) with
Novartis Technology, LLC and Novartis Ophthalmics AG (together, “ NVS”), pursuant to which the Company purchased from NVS
the exclusive commercial rights to assets associated with ophthalmic products Moxeza® (moxifloxacin) 0.5%, Iopidine® (apraclonidine
hydrochloride) 1% and 0.5%, and Maxitrol® (Neomycin/Polymyxin B/Dexamethasone) eyedrops suspension (collectively the “NVS Products”)
in the U.S.. On the Closing Date, we made a one-time
payment of $14,050,000 to NVS for the U.S. rights to the NVS
Products and their related intellectual property.

Pursuant
to the NVS Agreement and various ancillary agreements, immediately following the Closing
Date and subject to certain conditions, for a period of up to six months, and prior to the transfer of the NVS
Products NDAs to the Company, Novartis will continue to sell the NVS Products on
our behalf and transfer the net profit from the sale of the NVS Products to us. NVS
has agreed to supply certain NVS Products to us for a period of time after the NDAs
are transferred to the Company and to assist with technology transfer of the NVS Products
manufacturing to other third-party manufacturers, if needed.

PPP
Loan

In
April 2020, we entered into an unsecured promissory note and related Business Loan Agreement with Renasant Bank, as lender, for a loan
(the “PPP Loan”) in the principal amount of $1,967,000 and received cash proceeds of the same amount, pursuant to the Paycheck
Protection Program (the “PPP”) under the Federal Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),
which was enacted March 27, 2020. The PPP is administered by the U.S. Small Business Administration. On March 30, 2021, the Company received
a notice of forgiveness of the full balance of the PPP Loan, including all accrued interest, in accordance with the terms and conditions
of the CARES Act and accordingly recognized a gain on forgiveness of debt of $1,967,000.

Eton
Stock Sale

In
April 2021, we closed an underwritten public offering of 1,518,000 shares of our Eton common stock at a public offering price of $7.00
per share (the “Eton Stock Sale”). The gross proceeds to us from the Eton Stock Sale were $10,626,000 before deducting underwriting
discounts and commissions and other offering expenses payable by the Company. Following such sale, we own 1,982,000 shares of Eton common
stock, which represented less than 10% of the equity interests issued and outstanding of Eton as of December 31, 2021.

As
part of the Eton Stock Sale, we also agreed, for a period of 180 days, not to conduct any further sales of shares of its common stock
of Eton or otherwise dispose of, directly or indirectly, any common stock of Eton (or any securities convertible into, or exercisable
or exchangeable for, the common stock of Eton).

8.625%
Senior Notes Due 2026

During
April, May and June 2021, we closed offerings totaling $75,000,000 aggregate principal amount of 8.625% senior notes due 2026 (the “Notes”).
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 our existing and future secured indebtedness and structurally subordinated
to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The Notes bear interest at the
rate of 8.625% per annum. Interest on the Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each
year, and commenced on July 31, 2021. The Notes will mature on April 30, 2026.

42

Prior
to February 1, 2026, we may, at our 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. We 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.

Series
B Cumulative Preferred Stock - Redeemed

On
May 5, 2021, we sold 440,000 shares of Series B Cumulative Preferred Stock (the “Series B Preferred Stock”) for net proceeds
of $10,655,000. On June 17, 2021, we redeemed all of the outstanding shares of the Series B Preferred Stock. The redemption price
for the 440,000 shares of the Series B Preferred Stock outstanding was equal to $25.00 per share, plus accrued and unpaid dividends,
which in aggregate totaled $11,127,000.

Sintetica
Agreement

In
July 2021, we 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, $5,000,000 of which was paid
shortly after the signing of the Sintetica Agreement, $3,117,000 upon the submission of the AMP-100 NDA 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.

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, we 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 us, and we will pay Wakamoto a per unit transfer price to supply MAQ-100.
In addition, we are 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 Wakamoto Agreements,
we are responsible for regulatory filings and fees for MAQ-100 in the U.S. and Canada.

Subject
to certain limitations, the term of the Wakamoto 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.

Melt
Loan

In
September 2021, we 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 can be paid in kind interest 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.

Melt
has granted us 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 us, and the interest rate on the loan may be increased by three percent
(3%) per annum.

In
connection with the Melt Loan Agreement, we entered into a Right of First Refusal Agreement with Melt providing us 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.

Results
of Operations

The
following year-to-year comparisons of our financial results are not necessarily indicative of results for any future period.

43

Comparison
of Years Ended December 31, 2021 and 2020

Revenues

Our
revenues include amounts recorded from sales of proprietary and non-proprietary pharmaceutical compounded drug formulations and revenues
received from royalty and milestone payments owed to us pursuant to out-license arrangements.

The
following presents our revenues for the years ended December 31, 2021 and 2020:

The
increase in revenue between periods was largely attributable to an increase in sales volumes of our ophthalmology formulations, and products
and commissions attributable to sales of Dexycu®. During the year ended December 31, 2020, we believe sales of our ophthalmology
formulations were adversely impacted due to the onset and influence of the COVID-19 pandemic.

Cost
of Sales

Our
cost of sales includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients,
personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements depreciation,
the write-off of obsolete inventory and other related expenses.

The
following presents our cost of sales for the years ended December 31, 2021 and 2020:

The
increase in our cost of sales between periods was largely attributable to an increase in unit volumes sold during the year ended December
31, 2021 compared to 2020.

Gross
Profit and Margin

The
increase in gross profit and margin between periods is largely attributable to increased unit volumes sold, efficiencies in our production
process, including increased batch sizes, and improved utilization of capacities as a result of increased output during the year ended
December 31, 2021.

Selling,
General and Administrative Expenses

Our
selling, general and administrative expenses include personnel costs, including wages and stock-based compensation, corporate facility
expenses, and investor relations, consulting, insurance, filing, legal and accounting fees and expenses as well as costs associated with
our marketing activities and sales of our proprietary compounded formulations and other non-proprietary pharmacy products and formulations.

The
following presents our selling, general and administrative expenses for the years ended December 31, 2021 and 2020:

44

The
increase in selling, general and administrative expenses between periods was primarily attributable to an increase in legal expenses
associated with a lawsuit that went to trial in 2021, an increase in stock-based compensation associated with performance stock units
that were granted during 2021, commissions and other expenses related to increased sales, and an increase in sales and marketing expenses
related to in-person conferences and new employee costs to support sales growth. In addition, during the year ended December 31, 2021,
the Company recorded $1,500,000 in expenses related to a litigation settlement.

Research
and Development Expenses

Our
research and development (“R&D”) expenses primarily include expenses related to acquired in-process R&D, the development
of acquired intellectual property, investigator-initiated research and evaluations and other costs related to the clinical development
of our assets and drug candidates.

The
following presents our R&D expenses for the years ended December 31, 2021 and 2020:

The
increase in R&D expenses between periods was primarily as a result of milestone payments of $8,117,000 to Sintetica along with increased
costs associated with the clinical program for MAQ-100.

Impairment
and Disposal of Long-Lived Assets

During
the year ended December 31, 2021, we recorded a loss of $249,000, of which, $99,000 was related to the impairment of patents and patent
applications and $150,000 was related to equipment that was no longer in service, compared to $363,000 during the year ended December
31, 2020.

Interest
Expense, net

Interest
expense, net was $5,436,000 during the year ended December 31, 2021 compared to $2,236,000 during the year ended December 31, 2020. The
increase was primarily due to interest expense recognition related to an increase in the principal balance of our loans.

Equity in Losses from Unconsolidated Entities

During
the years ended December 31, 2021 and 2020, we recorded a loss of $4,020,000 and $2,313,000, respectively, for our share of losses
based on our ownership of Melt. During the years ended December 31, 2021 and 2020, we recorded a loss of $1,314,000 and $2,433,000, respectively,
for our share of losses based on our ownership of Surface.

Investment
(Loss) Gain from Eton

We
recorded a loss of $10,126,000 related to our investment in Eton’s common stock for the year ended December 31, 2021,
including a realized loss of $1,406,000 from the sale of 1,518,000 shares of Eton’s common stock. We recorded a gain of $3,255,000
related to the change in fair market value of Eton’s common stock for the year ended December 31, 2020.

Gain
on Forgiveness of PPP Loan

During
the year ended December 31, 2021, we recorded gain on forgiveness of PPP loan of $1,967,000 related to the forgiveness of our PPP Loan.

Other
Expense, net

During the year ended December
31, 2021, we recorded other income, net of $197,000. This was primarily the result of income of $238,000 related to forgiveness
of old payables and expense of $41,000 related to loss on disposal of property, plant and equipment. During the year
ended December 31, 2020, we recorded other expense, net of $(73,000). This was primarily the result of income of $13,000 related to equipment
that was sold during the year ended December 31, 2020 and an expense of $105,000 related to the disposal of property, plant and equipment
related to the discontinued use of certain computer software and hardware.

Net
Loss

45

The
following table presents our net loss attributable to common stockholders for the years ended December 31, 2021 and 2020:

Liquidity
and Capital Resources

Liquidity

Our
cash on hand at December 31, 2021 was $42,167,000, compared to $4,301,000 (including restricted cash) at December 31, 2020. Since inception
through December 31, 2021, we incurred aggregate losses of $95,407,000. These losses are primarily due to selling, general and administrative
and research and development expenses incurred in connection with developing and seeking regulatory approval for a former drug candidate,
which activities we have now discontinued, the development and commercialization of novel compounded formulations and the development
of our pharmacy operations.

As
of the date of this Annual Report, we believe that cash and cash equivalents of $42,167,000 at December 31, 2021, will be sufficient
to sustain our planned level of operations and capital expenditures for at least the next 12 months. We also may consider the sale of
certain assets including, but not limited to, part of, or all of, our ownership interest in Eton, Surface, Melt, and/or any of our consolidated
subsidiaries. However, our plans for this period may change, our estimates of our operating expenses, capital expenditures and working
capital requirements could be inaccurate, we may pursue acquisitions of pharmacies or other strategic transactions that involve large
expenditures or we may experience growth more quickly or on a larger scale than we expect, any of which could result in the depletion
of capital resources more rapidly than anticipated and could require us to seek additional financing earlier than we expect to support
our operations.

We
expect to use our current cash position and funds generated from our operations and any financing to pursue our business plan, which
includes developing and commercializing compounded formulations, FDA-approved products and technologies, integrating and developing our
compounding operations, pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of
products, compounding pharmacies and outsourcing facilities, drug companies and manufacturers, and/or assets or technologies, and otherwise
fund our operations. We may also use our resources to conduct clinical trials or other studies in support of our formulations or any
drug candidate for which we pursue FDA approval, to pursue additional development programs or to explore other development opportunities.

Net
Cash Flows

The
following provides detailed information about our net cash flows for the years ended December 31, 2021 and 2020:

Operating
Activities

Net
cash provided by (used in) operating activities was $5,081,000 in 2021, compared to $(1,100,000) in the prior year. Net cash provided
by operating activities during the years ended December 31, 2021 was primarily attributed to the increase in product sales and associated
revenues and production efficiencies.

Investing
Activities

Net
cash used in investing activities in 2021 and 2020 was $(18,685,000) and $(981,000), respectively. Cash used in investing activities
in 2021 was primarily associated with cash payments made in connection with the issuance of the Melt note receivable and the acquisition
of the NVS Products, offset by cash received through the sale of a portion of our Eton Common Stock. Cash used in investing activities
during the 2020 period was primarily associated with equipment and software purchases and upgrades along with investments in our intellectual
property portfolio.

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Financing
Activities

Net
cash provided by financing activities in 2021 and 2020 was $51,470,000 and $1,433,000, respectively. Cash provided by financing activities
during the year ended December 31, 2021 was primarily related to proceeds received from the sale of the Notes, net of the payment of
all outstanding obligations to the Company’s previous senior lender, SWK Funding, LLC and its partners (“SWK”). The
cash provided by financing activities during 2020 is primarily related to proceeds received from the amendment to our loan and security
agreement with SWK as well as proceeds received from the PPP Loan.

Sources
of Capital

Our
principal sources of cash consist of cash provided by operating activities from our ImprimisRx business, and recently, proceeds from
the sale of the Notes and sale of Eton common stock. We may also sell some or all of our ownership interests in Surface, Melt or our
other subsidiaries, along with the some or all of the remaining portion of our Eton common stock.

The
changing trends and overall economic outlook in light of the COVID-19 pandemic, including the historic interim stay-at-home orders and
bans on elective surgeries, created uncertainty surrounding our operating outlook and may impact our future operating results if there
is a resurgence in COVID-19 cases in the U.S. In addition, we may acquire new products, product candidates and/or businesses and, as
a result, we may need significant additional capital to support our business plan and fund our proposed business operations. We may receive
additional proceeds from the exercise of stock purchase warrants that are currently outstanding. We may also seek additional financing
from a variety of sources, including other equity or debt financings, funding from corporate partnerships or licensing arrangements,
sales of assets or any other financing transaction. If we issue equity or convertible debt securities to raise additional funds, our
existing stockholders may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms
or rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration
or licensing arrangements or sales of assets, we may be required to relinquish potentially valuable rights to our product candidates
or proprietary technologies or formulations, or grant licenses on terms that are not favorable to us. If we raise funds by incurring
additional debt, we may be required to pay significant interest expenses and our leverage relative to our earnings or to our equity capitalization
may increase. Obtaining commercial loans, assuming they would be available, would increase our liabilities and future cash commitments
and may impose restrictions on our activities, such as the financial and operating covenants. Further, we may incur substantial costs
in pursuing future capital and/or financing transactions, including investment banking fees, legal fees, accounting fees, printing and
distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we
may issue, such as convertible notes and warrants, which would adversely impact our financial results.

We
may be unable to obtain financing when necessary as a result of, among other things, our performance, general economic conditions, conditions
in the pharmaceuticals and pharmacy industries, or our operating history, including our past bankruptcy proceedings. In addition, the
fact that we have a limited history of profitability could further impact the availability or cost to us of future financings. As a result,
sufficient funds may not be available when needed from any source or, if available, such funds may not be available on terms that are
acceptable to us. If we are unable to raise funds to satisfy our capital needs when needed, then we may need to forego pursuit of potentially
valuable development or acquisition opportunities, we may not be able to continue to operate our business pursuant to our business plan,
which would require us to modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back
or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing
and other activities, or we may be forced to discontinue our operations entirely.

Critical
Accounting Policies

We
rely on the use of estimates and make assumptions that impact our financial condition and results. These estimates and assumptions are
based on historical results and trends as well as our forecasts of how results and trends might change in the future. Although we believe
that the estimates we use are reasonable, actual results could differ materially from these estimates.

We
believe that the accounting policies described below are critical to understanding our business, results of operations and financial
condition because they involve the use of more significant judgments and estimates in the preparation of our consolidated financial statements.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that
are highly uncertain at the time the estimate is made, and any changes in the assumptions used in making the accounting estimates that
are reasonably likely to occur could materially impact our consolidated financial statements.

Revenue
Recognition and Deferred Revenue

We
account for contracts with customers in accordance with ASC 606, Revenues from Contracts with Customers. We have two primary streams
of revenue: (1) revenue recognized from our sale of products within our pharmacy services and (2) revenue recognized from intellectual
property license and asset purchase agreements.

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Product
Revenues from Pharmacy Services

We
sell prescription drugs directly through our pharmacy and outsourcing facility network. Revenue from our pharmacy services divisions
includes: (i) the portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the
client, (ii) the price paid to us by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are
not included in revenue. Following the core principles of ASC 606, we have identified the following:

The
following revenue recognition policy has been established for the pharmacy services division:

Revenues
generated from prescription or office use drugs sold by our pharmacies and outsourcing facility are recognized when the prescription
is shipped. At the time of shipment, the pharmacy services division has performed substantially all of its obligations under its client
contracts and does not experience a significant level of returns or reshipments. Determination of criteria (3) and (4) is based on management’s
judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. We record
reductions to revenue for discounts at the time of the initial sale. Estimated returns and allowances and other adjustments are provided
for in the same period during which the related sales are recorded and are based on actual returns history. The rate of returns is analyzed
annually to determine historical returns experience. If the historical data we use to calculate these estimates do not properly reflect
future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that
period could be materially affected. We will defer any revenues received for a product that has not been delivered or is subject to refund
until such time that we and the customer jointly determine that the product has been delivered and no refund will be required.

Commission
Revenues

During
the year ended December 31, 2020, we entered into an agreement whereby we are paid a fee calculated based on sales we generate 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 us and no consequential continuing involvement on our part to recognize the associated
revenue.

Transfer
of Profit Revenues

During
the year ended December 31, 2021, we entered into an agreement to purchase the exclusive commercial
rights to assets associated with certain ophthalmic products from another pharmaceutical company (the “Seller”). During a
temporary, transition period, the Seller will continue to manufacture and market these products, and transfer the net profit from
the sale of the products to us. The revenue recognized by us 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 us, typically on a monthly basis, at which point there is no future
performance obligation required by us and no consequential continuing involvement on the us in part to recognize the associated revenue.

Intellectual
Property License Revenues

We
currently hold four intellectual property license and related agreements in which we have promised to grant a license or sale which provides
a customer with right to access our intellectual property. License arrangements may consist of non-refundable upfront license fees, data
transfer fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees,
and various performance or sales milestones. These arrangements can be multiple element arrangements, each of which revenue is recognized
at the point of time the performance obligation is met.

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Non-refundable
fees that are not contingent on any future performance by us and require no consequential continuing involvement on our part are recognized
as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverable is
delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations
and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications
for such compounded drug preparations. We defer recognition of non-refundable fees if it has continuing performance obligations without
which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and
that are separate and independent of our performance under the other elements of the arrangement. In addition, if our continued involvement
is required, through research and development services that are related to its proprietary know-how and expertise of the delivered technology
or can only be performed by us, then such non-refundable fees are deferred and recognized over the period of continuing involvement.
Guaranteed minimum annual royalties are recognized on a straight-line basis over the applicable term.

Investment
in Eton Pharmaceuticals, Inc.

We
own 1,982,000 shares of Eton common stock, which represents approximately 8 % of the equity and voting interests of Eton as of December
31, 2021. At December 31, 2021, the fair market value of Eton’s common stock was $4.29 per share. In accordance with Accounting
Standard Update (“ASU”) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities, for the years ended December 31, 2021 and 2020, we recorded an investment (loss) gain from our
Eton common stock position of $(10,126,000) and $3,255,000 respectively, related to our investment in Eton during the measurement periods,
including a realized loss of $1,406,000 from the sale of 1,518,000 shares of Eton’s common stock. As of December 31, 2021 and
2020, the fair market value of our investment in Eton was $8,503,000 and $28,455,000, respectively.

Investment
in Surface Ophthalmics, Inc. – Related Party

We
own 3,500,000 common shares of Surface, which is approximately 20% of its equity interests as of December 31, 2021, and use the equity
method of accounting for this investment, as management has determined that we have the ability to exercise significant influence over
the operating and financial decisions of Surface. Under this method, we recognize earnings and losses in Surface in its consolidated
financial statements and adjusts the carrying amount of its investment in Surface accordingly. Our share of earnings and losses are based
on our ownership interest of Surface. Any intra-entity profits and losses are eliminated. We recorded equity in the net loss of Surface
of $2,433 during the year ended December 31, 2020. We recorded equity in the net loss of Surface of $1,314 during the year ended December
31, 2021. As of December 31, 2021 and 2020, the carrying value of our investment in Surface was $0 and $1,314, respectively.

See
Note 5 for more information and related party disclosure regarding Surface.

Investment
in Melt Pharmaceuticals, Inc. – Related Party

In
April 2018, we formed Melt as a wholly-owned subsidiary. In January and March of 2019, Melt entered into definitive stock purchase agreements
(collectively, the “Melt Series A Preferred Stock Agreement”) with certain investors and closed on the purchase and sale
of Melt’s Series A Preferred Stock (the “Melt Series A Stock”), totaling approximately $11,400,000 of proceeds (collectively
the “Melt Series A Round”) at a purchase price of $5.00 per share. As a result, we lost voting and ownership control of Melt
and ceased consolidating Melt’s financial statements.

At
the time of deconsolidation, we recorded a gain of $5,810,000 and adjusted the carrying value in Melt to reflect the increased valuation
of Melt and our new ownership interest in accordance with ASC 810-10-40-4(c), Consolidation.

We
own 3,500,000 common shares of Melt, which is approximately 46% of its equity interests as of December 31, 2021. We analyze our investment
in Melt and related agreements on a regular basis to evaluate our position of variable interests in Melt. We no longer have a controlling
position in Melt; however, we do have the ability to exercise significant influence over the operating and financial decisions of Melt.
We use the equity method of accounting for this investment. Under this method, we recognize earnings and losses of Melt in its consolidated
financial statements and adjusts the carrying amount of its investment in Melt accordingly. Our share of earnings and losses are based
on our ownership interest of Melt. Any intra-entity profits and losses are eliminated. During the year ended December 31, 2021 we reduced
our common stock investment in Melt to $0. As of December 31, 2021 and at the time of entering into the Melt Loan Agreement, we owned
100% of the debt owed by Melt. Following the reduction of the carrying value of our common stock investment in Melt to $0 we began recording
100% of the equity method losses of Melt, based on our ownership of total debt owed by Melt. We recorded equity in net loss of Melt of
$4,020,000 and $2,313,000 during the year ended December 31, 2021 and 2020, respectively. Our investment in Melt was $11,133,000
and $2,506,000 and $48,000 and $851,000 is due from Melt for reimbursable expenses and amounts due under the Melt Master
Service Agreement (“Melt MSA”) as of December 31, 2021 and 2020, respectively.

See
Notes 2 and 4 for more information and related party disclosure regarding Melt.

Stock-Based
Compensation

All
stock-based payments to employees, directors and consultants, including grants of stock options, warrants, restricted stock units and
restricted stock, are recognized in the consolidated financial statements based upon their estimated fair values. We use the Black-Scholes
option pricing model and Monte-Carlo simulation model to estimate the fair value of stock-based awards. Fair value is determined at the
date of grant. The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual
effect differs from those estimates.

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Income
Taxes

As
part of the process of preparing our consolidated financial statements, we must estimate the actual current tax assets and liabilities
and assess permanent and temporary differences that result from differing treatment of items for tax and accounting purposes. The temporary
differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. We must assess
the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery
is not more likely than not, a valuation allowance must be established which reduces the amount of deferred tax assets recorded on the
consolidated balance sheets. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, the
impact will be included in income tax expense in the consolidated statements of operations.

We
account for income taxes under the provisions of Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification
(“ASC”) 740, Income Taxes. As of December 31, 2021 and 2020, there were no unrecognized tax benefits included in the
consolidated balance sheets that would, if recognized, affect the effective tax rate. Our practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. We had no accrual for interest or penalties in its consolidated balance sheets at
December 31, 2021 and 2020, and have not recognized interest and/or penalties in the consolidated statements of operations for the years
ended December 31, 2021 and 2020. We are subject to taxation in the United States, California, Florida, Georgia, Illinois, New Jersey,
New York, Tennessee, and Wisconsin. Our tax years since 2000 may be subject to examination by the federal and state tax authorities due
to the carryforward of unutilized net operating losses.

Research
and Development

R&D
expenses consist of expenses incurred in performing research and development activities, including salaries and benefits, other overhead
expenses, and costs related to clinical trials, contract services and outsourced contracts. We expense all costs related to R&D as
they are incurred.

Upfront
and milestone payments related to the acquisition and licensing of technology for drug and product candidates that are not yet approved
by the FDA are considered acquisition of in process R&D and expensed as R&D in the period in which the expense occurs.

Intellectual
Property

The
costs of acquiring intellectual property rights to be used in the research and development process, including licensing fees and milestone
payments, are charged to research and development expense as incurred in situations where we have not identified an alternative future
use for the acquired rights, and are capitalized in situations where we have identified an alternative future use for the acquired rights.
Patents and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks
become more certain (see “—Goodwill and Intangible Assets” below). We began capitalizing certain costs associated with
acquiring intellectual property rights during 2015, if costs are not capitalized, they are expensed as incurred.

Impairment
of Long-Lived Assets

Long-lived
assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed would
be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to
sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately
in the appropriate asset and liability sections of the consolidated balance sheet, if material.

Goodwill
and Intangible Assets

Patents
and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks become
more certain. At that time, we capitalize third-party legal costs and filing fees associated with obtaining and prosecuting claims related
to its patents and trademarks. Once the patents have been issued, we amortize these costs over the shorter of the legal life of the patent
or its estimated economic life, generally 20 years, using the straight-line method. Trademarks are an indefinite life intangible asset
and are assessed for impairment based on future projected cash flows as further described below.

We
review our goodwill and indefinite-lived intangible assets for impairment as of January 1 of each year and when an event or a change
in circumstances indicates the fair value of a reporting unit may be below its carrying amount. Events or changes in circumstances considered
as impairment indicators include but are not limited to the following:

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The
goodwill impairment test consists of a two-step process as follows:

Step
1. We compare the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting
unit is determined using a discounted cash flow valuation analysis. The carrying amount of each reporting unit is determined by specifically
identifying and allocating the assets and liabilities to each reporting unit based on headcount, relative revenues or other methods as
deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting
unit’s goodwill may be impaired and we then perform the second step of the impairment test. If the fair value of a reporting unit
exceeds its carrying amount, no further analysis is required.

Step
2. If further analysis is required, we compare the implied fair value of the reporting unit’s goodwill, determined by allocating
the reporting unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to
its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment loss will be
recognized in an amount equal to the excess.

Debt
Issuance Costs and Debt Discount

Debt
issuance costs and the debt discount are recorded net of loans payable in the consolidated balance sheet. Amortization of debt issuance
costs and the debt discount is calculated using the effective interest method over the term of the debt and is recorded in interest expense
in the accompanying consolidated statement of operations.

Off-Balance
Sheet Arrangements

Since
our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of
structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

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