What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-11 compared with 2020-11-09 · 450 added, 543 removed, 72 unchanged (93% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

following discussion and analysis of our financial condition and results of operations should be read in conjunction with our

unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly

Report on Form 10-Q (this “Quarterly Report”).

Our condensed 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 of America (“GAAP”).

following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited

condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form

10-Q (this “Quarterly Report”).

Our condensed 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 of America (“GAAP”).

information contained in this Quarterly Report is not a complete description of our business or the risks associated with an investment

in our common stock.

We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report

and in our other reports filed with the U.S.

Securities and Exchange Commission (the “SEC”), including our Annual

Report on Form 10-K for the fiscal year ended December 31, 2019 and subsequent reports, which discuss our business in greater

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 Park Compounding, Inc., ImprimisRx, LLC, ImprimisRx NJ, LLC dba ImprimisRx, Imprimis NJOF, LLC, Radley

Pharmaceuticals, Inc., Mayfield Pharmaceuticals, Inc., and Stowe Pharmaceuticals, Inc.

In this discussion and analysis, we refer

to our consolidated subsidiaries ImprimisRx, LLC, ImprimisRx NJ, LLC and Imprimis NJOF, LLC collectively as “ImprimisRx.”

addition to historical information, the following discussion contains forward-looking statements regarding future events and our

future performance.

We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report and in

our other reports filed with the U.S.

Securities and Exchange Commission (the “SEC”), including our Annual Report on Form

10-K for the fiscal year ended December 31, 2020 and subsequent reports, which discuss our business in greater detail.

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 Park Compounding,

Inc., ImprimisRx, LLC, ImprimisRx NJ, LLC dba ImprimisRx, Imprimis NJOF, LLC, Radley Pharmaceuticals, Inc., Mayfield Pharmaceuticals,

Inc., and Stowe Pharmaceuticals, Inc.

In this discussion and analysis, we refer to our consolidated subsidiaries ImprimisRx, LLC, ImprimisRx

NJ, LLC and Imprimis NJOF, LLC collectively as “ImprimisRx.”

addition to historical information, the following discussion contains forward-looking statements regarding future events and our future

In some cases, you can identify forward-looking statements by terminology such as “will”, “may”,

“should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”,

“predicts”, “forecasts”, “potential” or “continue” or the negative of these terms

or other comparable terminology.

“predicts”, “forecasts”, “potential” or “continue” or the negative of these terms or

other comparable terminology.

All statements made in this Quarterly Report other than statements of historical fact are forward-looking

These forward-looking statements involve risks and uncertainties and reflect only our current views, expectations

and assumptions with respect to future events and our future performance.

If risks or uncertainties materialize or assumptions

prove incorrect, actual results or events could differ materially from those expressed or implied by such forward-looking statements.

Risks that could cause actual results to differ from those expressed or implied by the forward-looking statements we make include,

among others, risks related to:

These forward-looking statements involve risks and uncertainties and reflect only our current views, expectations and assumptions

with respect to future events and our future performance.

If risks or uncertainties materialize or assumptions prove incorrect, actual

results or events could differ materially from those expressed or implied by such forward-looking statements.

Risks that could cause

actual results to differ from those expressed or implied by the forward-looking statements we make include, among others, risks related

the impact of the COVID-19 pandemic on our financial condition, liquidity or results of operations;

our ability to successfully implement our business plan, develop and commercialize our proprietary formulations in a timely manner

or at all, identify and acquire additional proprietary formulations, manage our pharmacy operations, service our debt, obtain

financing necessary to operate our business, recruit and retain qualified personnel, manage any growth we may experience and successfully

realize the benefits of our previous acquisitions and any other acquisitions and collaborative arrangements we may pursue;

from pharmaceutical companies, outsourcing facilities and pharmacies;

our ability to successfully implement

our business plan, develop and commercialize our proprietary formulations in a timely manner or at all, identify and acquire additional

proprietary formulations, manage our pharmacy operations, service our debt, obtain financing necessary to operate our business, recruit

and retain qualified personnel, manage any growth we may experience and successfully realize the benefits of our previous acquisitions

and any other acquisitions and collaborative arrangements we may pursue;

competition from pharmaceutical companies, outsourcing facilities

and pharmacies;

general economic and business conditions;

regulatory and

legal risks and uncertainties related to our pharmacy operations and the pharmacy and pharmaceutical business in general;

interest in and market acceptance of our current and any future formulations and compounding pharmacies generally;

operating history;

and the other risks and uncertainties described under the heading “Risk Factors” in Part II, Item

1A of this Quarterly Report and in our other filings with the Securities and Exchange Commission.

You should not place undue reliance

on forward-looking statements.

Forward-looking statements speak only as of the date they are made and, except as required by law,

we undertake no obligation to revise or publicly update any forward-looking statement for any reason.

regulatory and legal risks and uncertainties related to our pharmacy operations

and the pharmacy and pharmaceutical business in general;

physician interest in and market acceptance of our current and any future formulations

and compounding pharmacies generally;

our limited operating history;

and the other risks and uncertainties described under the heading

“Risk Factors” in Part II, Item 1A of this Quarterly Report and in our other filings with the SEC.

You should not place undue

reliance on forward-looking statements.

Forward-looking statements speak only as of the date they are made and, except as required by

law, we undertake no obligation to revise or publicly update any forward-looking statement for any reason.

business specializes in the development, production and sale of innovative medications that offer unique competitive advantages

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In addition to wholly owning ImprimisRx, we also have

non-controlling equity positions in Eton Pharmaceuticals, Inc.

equity positions in Eton Pharmaceuticals, Inc.

(“Eton”), Surface Ophthalmics, Inc.

and Melt Pharmaceuticals, Inc.

(“Surface”), and Melt

Pharmaceuticals, Inc.

(“Melt”), all companies that began as subsidiaries of Harrow.

More recently, we founded

drug development subsidiaries Mayfield Pharmaceuticals, Inc.

(“Mayfield”) and Stowe Pharmaceuticals, Inc.

among others.

We also intend to launch a new business called Visionology.

We own royalty rights in various drug candidates being

developed by Surface, Melt and Mayfield.

We intend to continue to create and hold equity and royalty rights in new businesses

that commercialize drug candidates that are internally developed or otherwise acquired or licensed from third parties.

In 2020, Harrow created Visionology,

(“Visionology”) and will launch an online eye health platform business in certain regions.

royalty rights in various drug candidates being developed by Surface and Melt.

is our ophthalmology focused prescription pharmaceutical business.

We offer to over 9,000 physician customers and their patients

critical medicines to meet their needs that are unmet by commercially available drugs.

We make our formulations available at prices

that are, in most cases, lower than non-customized commercial drugs.

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 examples 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”).

is expected to be an online eye health platform.

Visionology will leverage our experience in the ophthalmic pharmaceutical business

as well as our relationships with eyecare professionals across the United States.

We expect to launch a proof-of-concept model

for Visionology within a certain region of the U.S after securing financing.

If successful, Visionology will expand the launch

on a nationwide basis later in 2021.

We offer to over 10,000 physician customers and their patients critical

medicines to meet their needs that are unmet by commercially available drugs.

We make our formulations available at prices that are,

in most cases, lower than non-customized commercial drugs.

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 examples 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”).

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 expect to launch a proof-of-concept model for

Visionology within a certain region of the U.S., and if successful, will expand the launch on a nationwide basis later in 2021.

Pharmaceutical

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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

In many cases, compounded drugs, such as ours, have wide market utility and may be clinically appropriate for large patient

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.

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 selected markets outside the United States.

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.

and healthcare institutions use compounded drugs when commercially available drugs do not optimally treat a patient’s needs.

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.

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 selected markets outside the United States.

Compounding Facilities

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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 a 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.

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 a 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.

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”

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.

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.

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 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.

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.

believe that, with our current compounding pharmacy facilities and licenses and FDA registration of NJOF, we have the infrastructure

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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.

Also, we may seek to access greater pharmacy

and production related redundancy and markets through acquisitions, partnerships or other strategic transactions.

Pharmaceutical

Development Businesses

have ownership interests in Eton, Surface, Melt, Mayfield, and Stowe and hold royalty interests in certain of their 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.

We intend to create additional subsidiaries that will be focused on the development and

FDA approval of certain proprietary drug formulations that we currently own, will in-license/acquire and/or otherwise develop.

Businesses (Controlling Equity Interests)

Pharmaceuticals, Inc.

is a consolidated subsidiary of Harrow that was formed in 2019, focused on the development of its proprietary ophthalmic drug

candidate STE-006.

STE-006 is a patented, new chemical entity, small molecule topical drug candidate intended to treat various

bacterial, fungal, and viral infections in the eye and ear.

In initial preclinical models, STE-006 was shown to be significantly

more effective compared to current conventional therapies against numerous bacterial and viral pathogens, including strains of

methicillin-resistant staphylococcus aureus, or MRSA, and herpes simplex virus.

STE-006 has several patents covering matter of

composition, methods of production, methods of use and molecule, which are valid until 2038.

In October 2020, we completed

in vivo preclinical studies of certain anti-viral activity of STE-006 along with another asset DS-007.

We also conducted in vitro

studies earlier in the year, that studied certain antibacterial activity of STE-006.

While the initial data from our studies were

positive, we were unable to replicate as strong of data as previously produced on STE-006.

Therefore, while we remain interested

in pathogen-agnostic topical agents to treat non-specific conjunctivitis, we do not intend to invest further in STE-006.

currently evaluating the market and clinical potential of DS-007 and other Harrow formulations in the anti-infective category.

own 2,500,000 shares of Stowe common stock, and control 70% of the equity and voting interests issued and outstanding of Stowe,

at September 30, 2020.

Pharmaceuticals, Inc.

a consolidated subsidiary of Harrow, is a development-stage pharmaceutical company focused on consequential products that address

the conspicuous unmet needs of patients.

Its development programs focus on using known molecules in dosage forms for new indications,

and by developing new chemical entities with known mechanisms of action.

Mayfield recently licensed worldwide rights to a first-in-class

antimicrobial drug candidate, called MAY-66, which is being studied to treat recurrent bacterial vaginosis.

In February 2019,

Mayfield acquired drug formulation assets and intellectual property, including three recently issued patents, for MAY-44, a drug

candidate for the treatment of dyspareunia, or pain experienced by women during sexual intercourse.

In addition to MAY-44, Mayfield

is also developing MAY-88 for patients suffering from interstitial cystitis, which it will acquire from Harrow at the closing

of a deconsolidating transaction.

own 2,500,000 shares of Mayfield common stock, and control 79% of the equity and voting interests issued and outstanding of Mayfield,

at September 30, 2020.

We are currently pursuing a deconsolidating transaction for Mayfield.

We have contracted with an experienced

life science executive that we expect to lead Mayfield once deconsolidated.

Pharmaceuticals, Inc.

(“Radley”), a consolidated subsidiary of Harrow, is a development-stage pharmaceutical company

that has been focused on the development of proprietary drug candidates focused on rare diseases.

Radley currently has three drug

programs in its pipeline.

During the second quarter of 2020, we suspended all activities related to Radley to focus attention

and capital on other projects.

Currently, we do not intend to resume the activities related to Radley.

have ownership interests in Eton, Surface and Melt and hold royalty interests in some of the drug candidates of Surface and Melt.

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.

2018 and 2019, we formed and created subsidiaries named Radley Pharmaceuticals, Inc.

(“Radley”), Mayfield Pharmaceuticals,

(“Mayfield”), and Stowe Pharmaceuticals, Inc.

In 2020, we halted nearly all operating activities

related to these subsidiaries to invest resources in other areas and may not restart any or all activities related to these businesses.

De-Consolidated

Businesses (Noncontrolling Equity Interests)

Pharmaceuticals, Inc.

is a pharmaceutical company focused on developing and commercializing innovative products utilizing the FDA’s 505(b)(2)

regulatory pathway.

Its pipeline includes several products and drug candidates in various stages of development across a variety

of dosage forms.

Eton’s pipeline is focused on innovative 505(b)(2) products and obtaining FDA marketing approval for currently

marketed but unapproved drugs.

May 2017, Eton closed an offering of its Series A Preferred Stock and we lost our controlling interest in it.

In November 2018,

Eton completed an initial public offering of its common stock.

We own 3,500,000 shares of Eton common stock, which is less than

20% of the equity and voting interests issued and outstanding of Eton as of September 30, 2020.

Ophthalmics, Inc.

(f/k/a Surface Pharmaceuticals, Inc.)

is a development-stage pharmaceutical company focused on development and commercialization of innovative therapeutics for ocular

surface diseases and is seeking FDA approval for the commercialization of its drug candidates through the Section 505(b)(2) regulatory

pathway under the FDCA.

In 2017 and amended in April 2018, Harrow entered into asset purchase and license agreements (the “Surface

License Agreements”) and transferred to Surface its current drug pipeline, which consists of three proprietary drug candidates.

Surface’s patent-pending topical eye drop drug candidates, SURF-100 and SURF-200, utilize a patented delivery vehicle known

as Klarity Drops (“Klarity”), that was invented by Harrow board member and Surface’s chairman of the board,

renowned ophthalmologist Dr.

Richard Lindstrom.

the fourth quarter of 2019, Surface filed an investigational new drug application (“IND”) for its drug program SURF-201.

SURF-201 is a novel steroid topical eye drop drug candidate for treating pain and inflammation post-ocular surgery.

Surface submitted

an IND for its lead drug candidate, SURF-100, in May 2020, for treating signs and symptoms associated with chronic dry eye disease.

Surface also filed a third IND during the first half of 2020.

We expect Surface may release certain clinical data related to these

programs near the end of 2020 and beginning of 2021, however such clinical programs were delayed as a result of the ongoing COVID-19

pandemic and as a result, data from these clinical programs will likely be delayed as well.

May and July 2018, Surface closed on an offering of its Series A Preferred Stock.

At that time, we lost our controlling interest

and deconsolidated Surface from our consolidated financial statements.

We own 3,500,000 shares of Surface which is approximately

30% of the equity and voting interests as of September 30, 2020.

We expect Surface to complete another round of financing within

the next twelve months.

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

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.

SURF-201 marks the first ophthalmic therapeutic in the United States to utilize betamethasone

as well as being the first preservative-free unit dose therapy for the treatment of post-operative pain and inflammation.

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.

The head-to-head study will compare SURF-100

against leading on-market competitors lifitegrast ophthalmic solution 5% (marketed as Xiidra®) and cyclosporine ophthalmic emulsion

0.05% (marketed as Restasis®).

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.

The dose ranging study for SURF-200 will be administered in two different low

concentration formulations of betamethasone in the Klarity vehicle.

The trial will enroll 120 to 140 patients with a primary endpoint

of Symptom Improvement of one unit based on the University of North Carolina Dry Eye Management Scale by the eighth day.

2018, Surface closed on an offering of its Series A Preferred Stock.

At that time, we lost our controlling interest and deconsolidated

Surface from our consolidated financial statements.

We own 3,500,000 shares of Surface which was approximately 30% of the equity and

voting interests as of March 31, 2021.

Harrow owns mid-single digit royalty rights on net sales of SURF-100, SURF-200 and SURF-201.

expect Surface to complete another round of financing within the next six months.

Pharmaceuticals, Inc.

is a development-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.

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”), and Harrow assigned to Melt the underlying intellectual

property for Melt’s current pipeline, including its lead drug candidate MELT-100.

The core intellectual property Melt owns

is a patented series of combination non-opioid sedation drug formulations that we estimate to have multitudinous applications.

Pursuant to the terms of the Melt Asset Purchase Agreement, Melt is required to make royalty payments to the Company equal to

5% of net sales of MELT-100, while any patent rights remain outstanding, subject to other conditions.

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”), and Harrow assigned to Melt the underlying intellectual property for Melt’s current

pipeline, including its lead drug candidate MELT-100.

The core intellectual property Melt owns is a patented series of combination non-opioid

sedation drug formulations that we estimate to have multitudinous applications.

is a novel, sublingually delivered, non-IV, opioid-free drug candidate being developed for procedural sedation.

Melt filed an

IND in June 2020 and has begun its clinical program for MELT-100.

We expect Melt will announce topline data from its Phase 1 study

during the fourth quarter of 2020 or first quarter of 2021.

January 2019, Melt closed an offering of its Series A Preferred Stock and we lost our controlling interest in it.

We own 3,500,000

shares of Melt common stock, which is approximately 44% of the equity and voting interests issued and outstanding of Melt, as

of September 30, 2020.

We expect Melt to complete another round of financing within the next twelve months.

Melt filed an investigational

new drug application (“IND”) with the FDA in June 2020 and began its clinical program for MELT-100.

In February 2021, Melt

announced data from, and the successful completion of, its phase 1 study.

Melt expects to begin its phase 2 study for MELT-100 in the

second half of 2021.

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 44% of the equity

and voting interests issued and outstanding of as of March 31, 2021.

We expect Melt to complete another round of financing within the

next six months.

Pursuant to the terms of the Melt Asset Purchase Agreement, Melt is required to make mid-single digit royalty payments

to the Company on net sales of MELT-100, 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-100.

If approved, we do not expect a cessation of compounding

like products to have a material impact on our operations and financial performance.

Pharmaceuticals, Inc.

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, Eton closed an offering

of its Series A Preferred Stock and we lost our controlling interest in it.

In November 2018, Eton completed an initial public offering

of its common stock.

At that time, we gave up our controlling interest and deconsolidated Eton from our consolidated financial statements.

As of the date of this Quarterly Report and following our April 2021 sale, we own 1,982,000 shares of Eton common stock.

We owned less

than 20% of the equity and voting interests issued and outstanding of Eton as of March 31, 2021.

Affecting Our Performance

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, 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 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.

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.

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However, we work with third-party

insurers, pharmacy benefit managers and buying groups to offer patient-specific customizable compounded formulations at accessible

We may devote time and other resources to seek reimbursement and patient pay opportunities for these and other compounded

formulations and we have hired pharmacy billers to process certain existing reimbursement opportunities for certain formulations.

However, we may be unsuccessful in achieving these goals, as many third-party payors have imposed significant restrictions on

reimbursement for compounded formulations 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

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.

for the delivery and financing of health care and could conceivable have a material 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-payor payors in order to make our formulations 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 formulations,

the market acceptance and opportunity for our formulations may be limited.

Additionally,

we have previously made efforts to receive reimbursement and/or optimize the pricing for some of our currently available pharmaceutical

compounded formulations, including applying for transitional pass-through reimbursement status for one of our formulations.

status allows for separate payment (i.e., outside the bundled payment) under Medicare Part B for new drugs and other medical technologies

that meet well-established criteria specified by federal regulations governing CMS spending.

In September 2020, we were informed

by CMS that our application for pass-through payment was denied for one of our formulations.

Any future efforts to attain optimized

pricing or reimbursement of our other proprietary compounded formulations could fail, which could make our products less attractive

or unavailable to some patients or could reduce our margins.

following describes certain developments in 2020 to date that are important to understand our financial condition and results

of operations as well as operating trends and prospects.

See the notes to our condensed consolidated financial statements included

in this report for additional information about each of these developments.

insurers, pharmacy benefit managers and buying groups to offer patient-specific customizable compounded formulations at accessible prices.

We may devote time and other resources to seek reimbursement and patient pay opportunities for these and other compounded formulations

and we have hired pharmacy billers to process certain existing reimbursement opportunities for certain formulations.

However, we may

be unsuccessful in achieving these goals, as many third-party payors have imposed significant restrictions on reimbursement for compounded

formulations 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

conceivable have a material 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 formulations 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 formulations, the market acceptance and opportunity for our formulations may be limited.

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.

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.

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.

response to the pandemic and business disruptions, first and foremost, we have prioritized the health and safety of our employees,

customers, suppliers and others with whom we partner in our business activities.

We have instructed employees to work from home

when possible and to maintain recommended physical distancing when working in our facilities.

We also have eliminated non-essential

in-person contact with customers, suppliers and other third parties.

of the Company’s customers use its drugs in procedures that were impacted by the CMS guidance to limit elective procedures.

In addition, the Company and our business partners need access to healthcare providers and facilities to conduct clinical trials

and other activities required to achieve regulatory clearance of products under development.

We are carefully monitoring rapidly

evolving changes in healthcare delivery systems and may adjust our operating and product development plans accordingly.

the unprecedented and dynamic nature of the COVID-19 pandemic, we cannot reasonably estimate the impacts it may have on our financial

condition, results of operations or cash flows in the future.

However, the reduction in elective procedures in response to CMS

guidance has had a material adverse impact, on our revenues, profitability and cash flows, in particular during the second quarter

The extent and duration of future impact will depend upon the extent of procedure postponements, the duration of the

pandemic and any resurgences of it, especially within certain geographies and states that have retained restrictive measures and

social distancing policies.

In May 2020 and the following months, some U.S.

states and geographies began easing restrictions associated

with the COVID-19 pandemic including those restrictions related to elective procedures, as restrictions were lifted in those areas

there was a correlation with an increase in our revenues.

Despite the recent resurgence of the COVID-19 pandemic in certain parts

of the U.S., we are hopeful that the general trend of easing of restrictions will continue, and sales of our products will return

to historical norms and historical growth trends, as other states and governmental authorities continue to ease restrictions associated

with elective procedures and the COVID-19 pandemic.

April 2020, the Company and several of its wholly owned subsidiaries entered into a second amendment (the “SWK Amendment”)

to the term loan and security agreement dated as of July 19, 2017, as amended (the “SWK Loan”), with SWK Funding LLC,

as lender and collateral agent, and certain other lenders (collectively, “SWK”).

A summary of the material changes

contained in the SWK Amendment are as follows:

agreed to make available to the Company, and the Company drew down on, an additional principal amount of $1,000,000;

definition of the first amortization date was changed to August 14, 2020, permitting the Company to pay interest only on the

principal amount loaned for the next payment (payments are due on a quarterly basis) following the SWK Amendment;

interest payment due May 14, 2020 will be paid in-kind by increasing the principal amount of the term loans by an amount equal

to the interest that has accrued.

April 2020, we entered into the PPP Loan with Renasant Bank in the principal amount of $1,967,100 and received cash proceeds of

the same amount, pursuant to the PPP under the CARES Act, which was enacted March 27, 2020.

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.

given the unprecedented and dynamic nature of the COVID-19 pandemic, 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.

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 report for additional information about each of these

developments.

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 (the “SBA”).

the terms of the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum.

The term of the PPP Loan

is two years, unless sooner required in connection with an event of default under the PPP Loan.

To the extent the PPP Loan amount

is not forgiven under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning seven

months from the date of the PPP Loan, until the maturity date.

CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed.

Under the PPP, the Company may apply

for and be granted forgiveness for all or part of the PPP Loan.

The amount of loan proceeds eligible for forgiveness is based

on a formula that takes into account a number of factors, including the amount of loan proceeds used by the Company during the

eight-week period after the loan origination for certain purposes including payroll costs, interest on certain mortgage obligations,

rent payments on certain leases, and certain qualified utility payments (it being anticipated that at least 75% of the loan amount

will be required to be used for eligible payroll costs);

the employer maintaining or rehiring employees and maintaining salaries

at certain levels;

and other factors.

Subject to the other requirements and limitations on loan forgiveness, only loan proceeds

spent on payroll and other eligible expenses during the covered eight-week period will qualify for forgiveness.

While we used

proceeds from the PPP Loan for such qualifying expenses, in particular maintaining continuity of our payroll and workforce (including

staff critical to the timely production and dispensing of medicines we make), no assurance can be provided that we will apply

for or obtain forgiveness of the PPP Loan in whole or in part.

Commercial Alliance Agreement

August 1, 2020, our wholly-owned subsidiary ImprimisRx entered into a Commercial Alliance Agreement (the “Dexycu Agreement”)

with Eyepoint Pharmaceuticals, Inc.

(“Eyepoint”), pursuant to which Eyepoint granted ImprimisRx the non-exclusive

right to co-promote DEXYCU ® (dexamethasone intraocular suspension) 9% for the treatment of post-operative inflammation

following ocular surgery in the United States.

to the Dexycu Agreement , Eyepoint will pay ImprimisRx

a fee calculated based on the quarterly sales of DEXCYU in excess of predefined volumes to specific customers of ImprimisRx

Under the terms of the Dexycu Agreement , ImprimisRx

shall use commercially reasonable efforts to promote and market DEXCYU in the U.S.

to early termination, the Dexycu Agreement expires on August 1, 2025.

specified notice periods and specified limitations, either party may terminate the Dexycu

Agreement in the event of (i) uncured material breach by the other party or (ii) if DEXCYU ceases to have “pass-through”

payment status.

In addition, subject to certain limitations, ImprimisRx may terminate

the Dexycu Agreement (i) for convenience subject to an extended specified notice

period or (ii) in the event Eyepoint undergoes a change of control.

Eyepoint may terminate the Dexycu

Agreement , subject to specified notice periods and specified limitations, if ImprimisRx

fails to achieve certain minimum sales levels during specified periods.

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.

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 approximately 8.1% of the equity interests issued and outstanding of Eton as of April 12, 2021.

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).

The Company expects to use the net proceeds from the Eton Stock

Sale for general corporate purposes, including funding future strategic product acquisitions and related investments, making capital

expenditures and funding working capital.

Senior Notes Due 2026

April 2021, we closed an offering of $50,000,000 aggregate principal amount of 8.625% Senior Notes due 2026 (the “Notes”)

and in May 2021, the underwriters exercised their option to purchase an additional $5,000,000 aggregate principal amount of the Notes

($55,000,000 in total).

T he Notes are senior unsecured

obligations of the Company and rank equally in right of payment with all of our other existing and future senior unsecured and unsubordinated

indebtedness.

The Notes are effectively subordinated in right of payment to all of 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, commencing on July 31, 2021.

The Notes will mature on April 30, 2026.

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

The Company expects to use the net proceeds from the Notes for general corporate

purposes, including funding future strategic product acquisitions and related investments, making capital expenditures and funding

working capital.

B Cumulative Preferred Stock

May 5, 2021, we issued 440,000 shares of Series B Cumulative Preferred Stock (“Series B Preferred Stock”) for

gross proceeds of $11,000.

The Series B Preferred Stock is not convertible into our common stock, has no voting rights, except

as required by Delaware law, and is redeemable by us at any time.

Holders of Series B Preferred Stock, when and as authorized

by the our Board of Directors, are entitled to cumulative cash dividends at the rate of 9.50% of the $25.00 liquidation preference

per year (equivalent to $2.375 per share per year);

provided, however, that for each thirty (30) day period following May 5, 2021,

the dividend rate shall be increased in increments of fifty (50) basis points, and effective September 30, 2021, the dividend

rate shall be set at 12%, and for each thirty (30) day period thereafter, the dividend rate shall be increased in increments of

one hundred (100) basis points except as otherwise limited by applicable law.

Dividends will be payable quarterly in arrears,

on or about the 15th of January, April, July and October, beginning on or about July 15, 2021.

In the event of any liquidation,

dissolution or winding-up of the Company, the holders of the Series B Preferred Stock will have preference to holders of our common

stock at $25.00 per share plus any accrued and unpaid dividends (whether authorized or declared).

The Company expects to use

the net proceeds from the Series B Preferred Stock for general corporate purposes, including funding future strategic product

acquisitions and related investments, making capital expenditures and funding working capital.

Pharmaceuticals MAY-66 License Termination

May 2021, Mayfield terminated the License Agreement (the “TGV License”) with TGV-Health, LLC and affiliated entities (collectively,

“TGV”), pursuant to which it acquired intellectual property rights for use in the women’s health field, related to

Mayfield’s proprietary drug candidate MAY-66.

Concurrent with the termination, TGV returned to Mayfield 300,000 shares of Mayfield’s

common stock, constituting all of the equity held by TVG.

Mayfield has no outstanding or remaining obligations under the TGV License.

Pharmaceuticals MAY-44 APA Termination

May 2021, Mayfield and Harrow terminated their asset purchase agreement dated January 2020 for intellectual property rights associated

with Mayfield’s drug candidate MAY-44 with Elle Pharmaceutical LLC (the “MAY-44 APA”).

As part of the termination,

Mayfield re-acquired 350,000 shares of its common stock from Elle for $350.

Mayfield has no outstanding or remaining obligations

related to the MAY-44 APA.

License Termination

May 2021, Stowe terminated the License Agreement (the “Stowe License”) with TGV, pursuant to which it acquired intellectual

property rights for use in the ophthalmic field, related to Stowe’s proprietary drug candidate STE-006.

Concurrent with the termination,

TGV returned to Stowe 1,750,000 shares of Stowe’s common stock, constituting all of the equity held by TVG.

Stowe has no outstanding

or remaining obligations under the Stowe License.

of Operations

following period-to-period comparisons of our financial results for the three and nine months ended September 30, 2020 and 2019,

are not necessarily indicative of results for the current period or any future period.

revenues include amounts recorded from sales of proprietary compounded formulations and revenues received from royalty payments

owed to us pursuant to out-license arrangements.

following presents our revenues for the three and nine months ended September 30, 2020 and 2019:

following period-to-period comparisons of our financial results for the three months ended March 31, 2021 and 2020, are not necessarily

indicative of results for the current period or any future period.

revenues include amounts recorded from sales of proprietary compounded formulations, commissions from third parties and revenues received

from royalty payments owed to us pursuant to out-license arrangements.

following presents our revenues for the three months ended March 31, 2021 and 2020:

For the Three Months Ended

For the Nine Months Ended

Product sales, net

$ (4,296,000 )

Other revenues

Total revenues

$ (4,285,000 )

increase in revenues between the three months ended September 30, 2020 and the same period in the prior year was largely attributable

to an increase in customer demand and unit volumes sold.

The decrease in revenues between the nine months ended September 30,

2020 and the same period in the prior year was largely attributed to the COVID-19 pandemic and CMS guidance to limit elective

procedures during parts of the first and second quarters of 2020.

Net revenues generated from NJOF totaled $10,205,000 and $23,010,000

during the three and nine months ended September 30, 2020, and $8,860,000 and $24,102,000 during the three and nine months ended

September 30, 2019, respectively.

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.

following presents our cost of sales for the three and nine months ended September 30, 2020 and 2019:

increase in revenues between periods was related to an increase in sales volumes of our ophthalmology products and commissions

attributable to sales of Dexycu®.

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.

following presents our cost of sales for the three months ended March 31, 2021 and 2020:

For the Three Months Ended

For the Nine Months Ended

Cost of sales

$ (2,658,000 )

decrease in our cost of sales between the three months ended September 30, 2020 and the same period in the prior year was largely

attributable to increased efficiencies and the August 2019 closure of our Irvine, California based pharmacy.

The decrease in cost

of goods sold between the nine months ended September 30, 2020 and the same period in the prior year was largely due to a decrease

in unit volumes sold impacted by the COVID-19 pandemic, partially offset by continued improved utilization of capacity at our

compounding facilities.

increase in our cost of sales between periods was largely attributable to an increase in unit volumes sold.

Profit and Margin

For the Three Months Ended

For the Nine Months Ended

$ (1,627,000 )

efficiencies in our production process, extension of beyond using dating, or BUD, of some of our products, the closure of our

Irvine, California based pharmacy in August 2019 and an increase in sales prices has contributed to our gross margin increase.

increase in gross 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.

General and Administrative Expenses

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.

following presents our selling, general and administrative expenses for the three and nine months ended September 30, 2020 and

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.

following presents our selling, general and administrative expenses for the three months ended March 31, 2021 and 2020:

For the Three Months Ended

For the Nine Months Ended

general and administrative

$ (1,593,000 )

decrease in selling, general and administrative expenses between periods was largely attributable to decreased legal expenses

incurred associated with certain litigation matters that concluded during 2019, and certain expenses that are correlated with

Selling, general and administrative

decrease in selling, general and administrative expenses between periods was mostly attributable to a slight decrease in sales and marketing

expenses associated with our pharmacy operations.

and Development Expenses

research and development expenses primarily include expenses related to the development of acquired intellectual property, investigator-initiated

research and evaluations and other costs related to the clinical development of our assets.

following presents our research and development expenses for the three and nine months ended September 30, 2020 and 2019:

research and development expenses primarily include personnel costs, including wages and stock-based compensation, expenses related to

the development of intellectual property, investigator-initiated research and evaluations, formulation development, and other costs related

to the clinical development of our assets.

following presents our research and development expenses for the three months ended March 31, 2021 and 2020:

For the Three Months Ended

For the Nine Months Ended

and development

The increase in research

and development expenses between periods was primarily attributable to formulation development studies for new ophthalmic

formulations and clinical programs related to our drug development segment during the three and nine months ended September 30,

expense, net was $498,000 and $1,563,000 for the three and nine months ended September 30, 2020, compared to $620,000 and $1,939,000

for the same respective periods last year.

The decrease during the period ended September 30, 2020 compared to the same period

in 2019 was primarily due to interest expense recognition related to a decrease in the amortization of our finance lease obligations.

Gain (Loss) from Melt, net

the three and nine months ended September 30, 2020, we recorded a loss of $300,000 and $1,536,000, respectively, for our share

of losses based on our ownership of Melt.

During the nine months ended September 30, 2019, we recorded a net gain of $4,517,000

related to our investment in Melt.

We recorded a gain of $5,810,000 for the deconsolidation of Melt, and a loss of $1,293,000

for our share of losses based on our ownership of Melt.

We began using the equity method accounting for our investment

in Melt beginning on January 30, 2019, the date we no longer had a controlling interest.

Prior to that date, Melt’s losses

were consolidated within our statements of operations.

Loss from Surface, net

the three and nine months ended September 30, 2020, we recorded a loss of $756,000 and $1,694,000, respectively, for our share

of losses based on our ownership of Surface.

During the three and nine months ended September 30, 2019, we recorded a loss of

$400,000 and $904,000, respectively, for our share of losses based on our ownership of Surface.

We began using the

equity method accounting for our investment in Surface beginning on June 11, 2018, the date we no longer had a controlling interest.

Prior to that date, Surface’s losses were consolidated within our statements of operations.

Gain (Loss) from Eton, net

We recorded a gain of

$8,575,000 and $2,450,000 related to the change in fair market value of Eton’s common stock for the three and nine months

ended September 30, 2020, respectively.

We recorded a loss of $(5,530,000) and a gain of $700,000 related to the change

in fair market value of Eton’s common stock for the three and nine months ended September 30, 2019, respectively.

We began recording our investment in Eton at fair market value and ceased using the equity method accounting for our investment

in Eton in November 2018 following Eton’s Initial Public Offering and our ownership falling below 20%.

the nine months ended September 30, 2019, we recorded other income, net of $630,000.

This was the result of income of $630,000

related to expenses that were paid by us and will be reimbursed by Melt following its deconsolidation.

During the nine months

ended September 30, 2020, we recorded other income, net of $24,000.

This was primarily the result of income of $19,000

related to equipment from our Park facility that was sold during the nine months ended September 30, 2020.

following table presents our net income (loss) for the three and nine months ended September 30, 2020 and 2019:

Research and development

The increase in

research and development expenses between periods was primarily attributable to formulation development studies for

new ophthalmic formulations and clinical programs related to our drug development segment during the three months ended March

expense, net was $513,000 for the three months ended March 31, 2021, compared to $560,000 for the same period last year.

during the period ended March 31, 2021 compared to the same period in 2020 was primarily due to interest expense recognition related

to a decrease in the outstanding principal amount of our debt obligations.

Loss from Melt

the three months ended March 31, 2021 and 2020, we recorded a net loss of $470,000 and $546,000, respectively, related to our share of

losses in Melt.

Loss from Surface

the three months ended March 31, 2021 and 2020, we recorded a loss of $849,000 and $339,000, respectively, for our share of losses based

on our ownership of Surface.

Loss from Eton

recorded an unrealized loss of $2,835,000 and $10,850,000 related to the change in fair market value of Eton’s common stock for

the three months ended March 31, 2021 and 2020, respectively.

on Forgiveness of Debt

the three months ended March 31, 2021, we recorded gain on forgiveness of debt of $1,967,000, related to the forgiveness of our PPP Loan.

Income (Loss)

following table presents our net income (loss) and per share net income (loss) for the three months ended March 31, 2021 and 2020:

For the Three Months Ended

For the Nine Months Ended

– net income (loss)

Net income (loss)

per share, basic

Net income (loss)

per share, diluted

Net income (loss) attributable to Harrow Health, Inc.

$ (12,907,000 )

Net income (loss) per share, basic

Net income (loss) per share, diluted

Information About Segments and Geographic Areas

evaluates performance of the Company based on operating segments.

Segment performance for our two operating segments are based

on segment contribution.

Our reportable segments consist of (i) our commercial stage pharmaceutical compounding business (Pharmaceutical

Compounding), generally including the operations of our ImprimisRx and Park businesses;

and (ii) the start-up operations associated

with our pharmaceutical drug development business (Pharmaceutical Drug Development).

Segment contribution for the segments represents

net revenues less cost of sales, research and development, selling and marketing expenses, and select general and administrative

Segment performance for our two operating segments are based on segment

contribution.

Our reportable segments consist of (i) our commercial stage pharmaceutical business ImprimisRx;

and (ii) the start-up operations

associated with our pharmaceutical drug development business (Pharmaceutical Drug Development).

Segment contribution for the segments

represents net revenues less cost of sales, research and development, selling and marketing expenses, and select general and administrative

We do not evaluate the following items at the segment level:

general and administrative expenses that result from shared infrastructure, including certain expenses associated with litigation

and other legal matters, public company costs (e.g.

investor relations), board of directors and principal executive officers,

and other like shared expenses.

expenses within selling, general and administrative expenses that result from the impact of corporate initiatives.

initiatives primarily include integration, restructuring, acquisition and other shared costs.

select revenues and operating expenses including research and development expenses, amortization, and asset sales and impairments,

net as not all such information has been accounted for at the segment level, or such information has not been used by all

assets including capital expenditures.

Company defines segment net revenues as pharmaceutical compounded drug sales, licenses and other revenue derived from related

of sales within segment contribution includes direct and indirect costs to manufacture formulations and sell products, including

active pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing

equipment and tenant improvements depreciation, the write-off of obsolete inventory and other related expenses.

general and administrative expenses consist mainly of personnel-related costs, marketing and promotion costs, distribution costs,

professional service costs, insurance, depreciation, facilities costs, transaction costs, and professional services costs which

are general in nature and attributable to the segment.

Selling, general and administrative expenses that result from shared infrastructure, including certain expenses associated with litigation and other legal matters, public company costs (e.g.

investor relations), board of directors and principal executive officers, and other like shared expenses.

Operating expenses within selling, general and administrative expenses that result from the impact of corporate initiatives.

Corporate initiatives primarily include integration, restructuring, acquisition and other shared costs.

Other select revenues and operating expenses including R&D expenses, amortization, and asset sales and impairments, net as not all such information has been accounted for at the segment level, or such information has not been used by all segments.

Total assets including capital expenditures.

Company defines segment net revenues as pharmaceutical compounded drug sales, licenses and other revenue derived from related agreements.

of sales within segment contribution includes direct and indirect costs to manufacture formulations and sell products, including active

pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and

tenant improvements depreciation, the write-off of obsolete inventory and other related expenses.

general and administrative expenses consist mainly of personnel-related costs, marketing and promotion costs, distribution costs, professional

service costs, insurance, depreciation, facilities costs, transaction costs, and professional services costs which are general in nature

and attributable to the segment.

Note 16 to our condensed consolidated financial statements included in this Quarterly Report for more information about our reportable

and Capital Resources

cash on hand (including restricted cash) at September 30, 2020 was $5,727,000, compared to $4,949,000 at December 31, 2019.

inception, July 24, 1998, through September 30, 2020, we have incurred aggregate losses of $78,549,000.

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 discontinued in 2013, the development and commercialization

of novel compounded formulations and the development of our pharmacy operations.

of the date of this Quarterly Report, we believe that cash and cash equivalents of $5,527,000 and restricted cash of $200,000,

totaling approximately $5,727,000 at September 30, 2020 together with cash generated from revenues, 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 interests 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.

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 and technologies, integrating and developing our compounding

operations, pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of additional

pharmacy, outsourcing facilities, drug company 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.

cash on hand (including restricted cash) at March 31, 2021 was $6,504,000, compared to $4,301,000 at December 31, 2020.

of the date of this Quarterly Report, we believe that cash and cash equivalents of $6,304,000 and restricted investments of $200,000,

totaling approximately $6,504,000 at March 31, 2021, along with gross proceeds received from the Eton Stock Sale of $10,626,000,

$55,000,000 from the issuance of the Notes and $11,000,000 from the issuance of our Series B Cumulative Preferred

Stock 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 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, revenue generating products, drug candidates 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

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 and technologies, integrating and developing our operations, pursuing

potential future strategic transactions as opportunities arise, including potential acquisitions of additional pharmacy, outsourcing

facilities, drug company and manufacturers, drug products, drug candidates, 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.

following provides detailed information about our net cash flows:

the Nine Months Ended September 30,

Net cash (used in) provided by:

For the Three months Ended

Net cash provided by (used in):

Operating activities

Investing activities

Financing activities

Net change in cash and cash equivalents

cash equivalents and restricted cash at beginning of the period

cash equivalents and restricted cash at end of the period

cash used in operating activities was $(534,000) during the nine months ended September 30, 2020, compared to $(702,000) in operating

activities during the same period in the prior year.

The decrease in net cash used in operating activities during the period was

mainly attributed to the increase in revenue during the quarter ended September 30, 2020 and increased operational efficiencies.

cash used in investing activities during the nine months ended September 30, 2020 and 2019 was $(891,000) and $(864,000), respectively.

Cash used in investing activities in 2020 and 2019 was primarily associated with equipment purchases and upgrades and investments

in our intellectual property portfolio.

cash provided by (used in) financing activities during the nine months ended September 30, 2020 and 2019 was $2,203,000 and $(1,641,000),

respectively.

Cash provided by financing activities during the nine months ended September 30, 2020 was related to proceeds received

from the amendment to our loan and security agreement with SWK as well as proceeds received from the PPP Loan.

principal sources of cash consist of cash provided by operating activities from our pharmaceutical compounding business.

also sell some or all of our ownership interests in Eton, Surface, Melt or our other subsidiaries.

We produced cash from operations

during 2018 and 2019, and during the third quarter of 2020;

however, during the second quarter of 2020, we experienced a significant

downturn in revenues mostly as a result of the COVID-19 pandemic which may have an impact on our ability to produce cash for the

current year.

In addition, prior to 2017, we had not generated sufficient revenues to support our operations and may not be able

to do so in the future.

changing trends and overall economic outlook in light of the COVID-19 pandemic, including any related interim stay-at-home orders

and future bans on elective surgeries, have created uncertainty surrounding our operating outlook and may impact our future operating

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.

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.

Cash, cash equivalents and restricted cash at beginning of the period

Cash, cash equivalents and restricted cash at end of the period

cash provided by operating activities was $3,208,000 compared to net cash used in operating activities of $550,000 during the same period

in the prior year.

The increase in net cash provided by operating activities during the periods was mainly attributed to the increase

cash used in investing activities during the three months ended March 31, 2021 and 2020 was $(224,000) and $(273,000), respectively.

Cash used in investing activities in 2021 and 2020 was primarily associated with equipment and software purchases and upgrades along

with investments in our intellectual property portfolio.

cash used in financing activities during the three months ended March 31, 2021 and 2020 was $(781,000) and $(2,000), respectively.

used in financing activities during the three months ended March 31, 2021 was related to principal payments on our SWK loan.

principal sources of cash consist of cash provided by operating activities from our pharmaceutical compounding business, in addition

to proceeds received subsequent to March 31, 2021 from the sale of the Notes, Series B Preferred Stock and sale of Eton Stock.

also sell some or all of our ownership interests in Surface, Melt or our other subsidiaries, along with the remaining portion of our

Eton common stock.

changing trends and overall economic outlook in light of the COVID-19 pandemic, including the historical 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 rise in COVID-19 related cases in the US.

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 included in the agreements governing the SWK Loan.

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.

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

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.

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.

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.

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.

Issued and Adopted Accounting Pronouncements

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What changed 10-Q

Item 2. Management’s Discussion and Analysis