# HARROW, INC. (HROW) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HARROW, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1360214/000149315224010518/form10-k.htm
Accession: 0001493152-24-010518
Filing date: 2024-03-19
Report date: 2023-12-31
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference.
Confidence: high

Company profile: /company/HROW/
All MD&A years: /company/HROW/mda/
Previous year: /company/HROW/mda/fy2022/ (FY 2022)
Next year: /company/HROW/mda/fy2024/ (FY 2024)

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.

53

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”):

[[GREPCENT_TABLE]]
[["\u25cf","ILEVRO (nepafenac ophthalmic suspension) 0.3%, a non-steroidal, anti-inflammatory eye drop indicated for pain and inflammation associated with cataract surgery."],["\u25cf","NEVANAC (nepafenac ophthalmic suspension) 0.1%, a non-steroidal, anti-inflammatory eye drop indicated for pain and inflammation associated with cataract surgery."],["\u25cf","VIGAMOX (moxifloxacin hydrochloride ophthalmic solution) 0.5%, a fluoroquinolone antibiotic eye drop for the treatment of bacterial conjunctivitis caused by susceptible strains of organisms."],["\u25cf","MAXIDEX (dexamethasone ophthalmic suspension) 0.1%, a steroid eye drop for steroid-responsive inflammatory conditions of the palpebral and bulbar conjunctiva, cornea, and anterior segment of the globe."],["\u25cf","TRIESENCE (triamcinolone acetonide injectable suspension) 40 mg/ml, a steroid injection for the treatment of certain ophthalmic diseases and for visualization during vitrectomy."]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,","","","$"],["","","2023","","","2022","","","Variance"],["Product sales, net","","$","117,447,000","","","$","83,524,000","","","$","33,923,000"],["Commission revenues","","","-","","","","3,866,000","","","","(3,866,000",")"],["Transfer of acquired product sales/profit","","","12,746,000","","","","1,205,000","","","","11,541,000"],["Total revenues","","$","130,193,000","","","$","88,595,000","","","$","41,598,000"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,","","","$"],["","","2023","","","2022","","","Variance"],["Cost of sales","","$","39,640,000","","","$","25,383,000","","","$","14,257,000"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,","","","$"],["","","2023","","","2022","","","Variance"],["Gross profit","","$","90,553,000","","","$","63,212,000","","","$","27,341,000"],["Gross margin","","","69.6","%","","","71.3","%","","","(1.7",")%"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,","","","$"],["","","2023","","","2022","","","Variance"],["Selling, general and administrative","","$","83,090,000","","","$","58,243,000","","","$","24,847,000"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,","","","$"],["","","2023","","","2022","","","Variance"],["Research and development","","$","6,652,000","","","$","3,050,000","","","$","3,602,000"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,"],["","","2023","","","2022"],["Net loss","","$","(24,411,000",")","","$","(14,086,000",")"],["Net loss per share, basic and diluted","","$","(0.75",")","","$","(0.51",")"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,"],["","","2023","","","2022"],["Net cash provided by (used in):"],["Operating activities","","$","3,840,000","","","$","1,705,000"],["Investing activities","","","(152,553,000",")","","","(1,743,000",")"],["Financing activities","","","126,528,000","","","","54,141,000"],["Net change in cash and cash equivalents","","","(22,185,000",")","","","54,103,000"],["Cash and cash equivalents at beginning of the year","","","96,270,000","","","","42,167,000"],["Cash and cash equivalents at end of the year","","$","74,085,000","","","$","96,270,000"]]
[[/GREPCENT_TABLE]]

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.

61

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:

[[GREPCENT_TABLE]]
[["1.","Identify the contract(s) with a customer: A contract is deemed to exist when the customer places an order through receipt of a prescription, via an online order or via receipt of a purchase order from a customer. For branded products, orders are received through the Company\u2019s 3PL partner, and the customer takes title of the products via formal purchase orders placed and fulfilled."],["2.","Identify the performance obligations in the contract: Obligations for fulfillment of our contracts consist of delivering the product to customers at their specified destination. For shipping and handling activities under ASC 606, if the customer takes control of the goods after shipment, shipping and handling activities would always be considered a fulfillment activity and not treated as a separate performance obligation. If the customer takes control of the goods before shipment, entities must make an accounting policy election to treat shipping and handling activities as either a fulfillment cost or as a separate performance obligation. We have elected to treat its shipping and handling activities as a fulfillment cost."],["3.","Determine the transaction price: The transaction price is based on an amount that reflects the consideration to which we expect to be entitled, net of accruals for estimated rebates, wholesaler chargebacks, discounts, copay assistance and other deductions (collectively, sales deductions) and an estimate for returns and replacements established at the time of sale. We utilize the services of a third-party professional services firm to estimate rebates and chargebacks associated with sales of our branded products. The transfer of promised goods is satisfied within a year, and therefore there are no significant financing components. There is no non-cash consideration related to product sales."],["4.","Allocate the transaction price to the performance obligations in the contract: Because there is only one performance obligation for product sales, no allocation is necessary."],["5.","Recognize revenue when (or as) the entity satisfies a performance obligation: Revenue from products is recognized upon transfer of control of a product to a customer. This generally occurs upon shipment unless contractual terms with a customer state that transfer of control occurs at delivery."]]
[[/GREPCENT_TABLE]]

62

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).

63

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:

[[GREPCENT_TABLE]]
[["","","Cost Basis","","","Share of Equity Method Losses","","","Net Carrying value"],["Common stock","","$","5,810,000","","","$","(5,810,000",")","","$","-"],["Preferred stock","","","18,397,000","","","","(18,397,000",")","","","-"],["","","$","24,207,000","","","$","(24,207,000",")","","$","-"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Cost Basis","","","Share of Equity Method Losses","","","Paid-in-Kind Interest","","","In-substance Capital Contributions","","","Net Carrying value"],["Common stock","","$","5,810,000","","","$","(5,810,000",")","","$","-","","","$","-","","","$","-"],["Loan","","","13,500,000","","","","(13,500,000",")","","","2,484,000","","","","(2,484,000",")","","","-"],["","","$","19,310,000","","","$","(19,310,000",")","","$","2,484,000","","","$","(2,484,000",")","","$","-"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","\u25cf","significant underperformance of the Company\u2019s business relative to expected operating results;"],["","\u25cf","significant adverse economic and industry trends;"],["","\u25cf","significant decline in the Company\u2019s market capitalization for an extended period of time relative to net book value; and"],["","\u25cf","expectations that a reporting unit will be sold or otherwise disposed."]]
[[/GREPCENT_TABLE]]

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.