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Item 7. Management’s Discussion and Analysis

2024-03-19 compared with 2023-03-23 · 537 added, 406 removed, 131 unchanged (88% of the section changed)

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used in this discussion and analysis, unless the context indicates otherwise, the terms the “Company,” “Harrow”

“we,” “us” and “our” refer to Harrow Health, Inc.

and its consolidated subsidiaries, consisting of

Imprimis Rx NJ, LLC, Imprimis NJOF, LLC, ImprimisRx, LLC, and Harrow Eye, LLC.

are an ophthalmic-focused pharmaceutical company.

Our business specializes in the development, production, sale, and distribution of

innovative prescription medications that offer unique competitive advantages and serve unmet needs in the marketplace through our subsidiaries

and deconsolidated companies.

We serve ophthalmologists and optometrists by providing FDA-approved branded ophthalmic pharmaceuticals

and innovative compounded prescription medicines that are accessible and affordable.

We own the U.S.

commercial rights to ten branded

ophthalmic pharmaceutical products, including IHEEZO TM , IOPIDINE® (both approved concentrations), MAXITROL® eye drops,

MOXEZA®, ILEVRO®, NEVANAC®, VIGAMOX®, MAXIDEX®, and TRIESENCE®.

We own and operate ImprimisRx, one of the nation’s

leading ophthalmology-focused pharmaceutical-compounding businesses, and our branded drugs are marketed under our Harrow name.

we also have non-controlling equity positions in Surface Ophthalmics, Inc.

(“Surface”) and Melt Pharmaceuticals, Inc.

both companies that began as subsidiaries of Harrow and were subsequently carved-out of our corporate structure and deconsolidated from

our financial statements.

We also own royalty rights in certain drug candidates being developed by Surface and Melt.

“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.

are a leading eyecare pharmaceutical company engaged in the discovery, development, and commercialization of innovative ophthalmic pharmaceutical

products for the U.S.

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.

Affecting Our Performance

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See “Liquidity and Capital Resources” below.

following describes certain developments in 2022 to date that are important to understand our financial condition and results of operations.

See the notes to our condensed consolidated financial statements included in this Annual Report for additional information about each

of these developments.

of Non-Ophthalmic Assets

October 2022, we entered into an Asset Purchase Agreement (the “RPC Agreement”) with Innovation Compounding Pharmacy, LLC

(the “Buyer”).

Under the terms of the RPC Agreement, the Company agreed to sell substantially all its assets associated with

its non-ophthalmology related compounding business, including but not limited to, certain intellectual property rights, customer lists,

databases, and formulations (the “RPC Assets”).

The Buyer agreed to make offers of employment to six of the Company’s

employees that were responsible for the sales activities associated with the RPC Assets.

In connection with the RPC Agreement, the Company

entered into a separate transition services agreement with the Buyer related to providing on going services, such as procuring and dispensing

prescription orders associated with RPC Assets.

The Company expects to provide transition services to the Buyer for six to nine months

following the effective date of the RPC Agreement.

Under the terms of the RPC Agreement, the Buyer paid to the Company an aggregate cash

amount of $6,000,000 on October 5, 2022.

In addition, the Buyer is obligated to pay up to $4,500,000 to the Company based on mutually

agreed upon revenue milestones during the calendar year 2023.

Loan Amendments

April and September 2022, we entered into a First Amendment and Second Amendment (collectively the “Amendments”) to our loan

and security agreement previously entered into on September 1, 2021 with Melt.

The Amendments provide for the following:

is required to maintain a minimum cash balance of $7,000,000 for one year following the effective date of the Second Amendment;

a minimum cash balance of $5,000,000 at all times after the one-year anniversary of the effective date of the Amendments.

maturity date by which all amounts owed under the loan agreement are payable was extended to June 1, 2023, which can be extended

further to September 1, 2026 following a qualified financing of at least $10,000,0000, unless otherwise accelerated pursuant to the

terms of the loan agreement.

definition of “material adverse effect” was amended so that such an effect will be deemed to have occurred if the data

from the Phase 2 study of MELT-300 fails to demonstrate the benefit of the combination MELT-300 study drug versus the individual

components of the same MELT-300 study drug, as reasonably determined by us.

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.

- Canadian Out-License

February 2024, we entered into a license and supply agreement with Apotex Inc.

Under the terms of the agreement,

Apotex licensed exclusive rights and marketing authorizations of the following products in the Canadian market from Harrow:

(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.

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.

Loan Settlement

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.

Reimbursement, Launch and Studies

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.

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.

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.

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.

the beginning of April 2023, we initiated a regional and targeted launch of IHEEZO (chloroprocaine HCL ophthalmic gel) 3%.

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.

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).

of VEVYE TM U.S.

and Canadian Commercial Rights

July 2023, we acquired commercial rights of VEVYE for the U.S.

and Canadian markets (the “VEVYE Acquisition”).

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.

of Certain U.S.

and Canadian Commercial Rights to Santen and Eyevance Products

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®.

VERKAZIA ® (cyclosporine ophthalmic emulsion)

0.1%, and in Canada:

Cationorm PLUS.

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

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.

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

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.

Stock Offering

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.

Credit and Guaranty Agreement

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.

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

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.

Oaktree Loan is secured by nearly all of the assets, including intellectual property, of the Company and its material subsidiaries.

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).

of ILEVRO, NEVANAC, VIGAMOX, MAXIDEX and TRIESENCE

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Innovative Therapies AG (together, “Novartis”), pursuant to which the Company agreed to purchase from Novartis the exclusive

commercial rights to assets associated with the following ophthalmic products (collectively the “Fab 5 Products”) in the

(the “Fab 5 Acquisition”):

commercial rights to assets associated with the following ophthalmic products (collectively the “NVS 5 Products”) in the

(the “NVS 5 Acquisition”):

(nepafenac ophthalmic suspension) 0.3%, a non-steroidal, anti-inflammatory eye drop indicated for pain and inflammation associated

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for visualization during vitrectomy.

closed the Fab 5 Acquisition on January 20, 2023.

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

1 unchanged sentence

Pursuant to the Purchase Agreement and various ancillary agreements, immediately following the closing and subject to certain conditions,

for a period that we expect to last approximately six months, and prior to the transfer of the Fab 5 Products new drug applications (the

“NDAs”) to us, Novartis will continue to sell the Fab 5 Products on our behalf and transfer the net profit from the sale

of the Fab 5 Products to us.

Novartis has agreed to supply certain Fab 5 Products to the Company for a period of time after the NDAs

are transferred to us and to assist with technology transfer of the Fab 5 Products manufacturing to other third-party manufacturers,

Stock Offering

December 2022, we entered into an underwriting agreement (the “Common Stock Underwriting Agreement”) with B.

Riley Securities,

related to a registered direct offering of shares of the Company’s common stock to certain accredited investors, at an offering

price of $10.52.

Under the terms of the Common Stock Underwriting Agreement we sold 2,376,426 shares of our common stock for gross proceeds

of $25,000,002.

Notes Offering

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

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.

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.

– Senior Notes Offering

December 2022, the Company entered into an underwriting agreement with B.

Riley Securities, Inc., as representative of the several

underwriters named therein, pursuant to which we agreed to sell $35,000,000 aggregate principal amount of 11.875% senior notes due

2027 (the “2027 Notes”) plus up to an additional $5,250,000 aggregate principal amount of 11.875% senior notes due 2027

pursuant to the underwriters’ option to purchase additional 2027 Notes, which was exercised in January 2023.

Riley Loan and Security Agreement

December 14, 2022 (the “Effective Date”), we entered into a Loan and Security Agreement (the “BR Loan”) with

Riley Commercial Capital, LLC, as Administrative Agent for the Lenders.

The proceeds from the BR Loan were used to finance the Fab

5 Acquisition.

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.

Riley Loan and Security Agreement – Paid

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.

BR Loan provided for a loan facility of up to $100,000,000 to the Company with a maturity date of December 14, 2025, at an interest rate

of 10.875% per annum.

The BR Loan is secured by an intellectual property security agreement and by all assets of the Company and its

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, $59,750,000 of principal amount was funded pursuant to the BR Loan simultaneously with the consummation

of the Fab 5 Acquisition.

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 .

of Operations

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of Years Ended December 31, 2023 and 2022

revenues include amounts recorded from sales of proprietary and non-proprietary pharmaceutical compounded drug formulations and revenues

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

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.

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

the Years Ended December 31,

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

attributable to sales of Dexycu® and transfer of profits from recently acquired products.

In June of 2022, the Company completed

the transfer from the seller to Harrow of Iopidine and Maxitrol NDAs and relaunched those products.

As a result, we will not record revenues

associated with the transfer of profits associated with those products in future periods.

cost of sales includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical

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

improvements depreciation, the write-off of obsolete inventory depreciation and amortization of certain intangibles and other

related expenses.

For the Years Ended December 31,

Product sales, net

$ 117,447,000

Commission revenues

Transfer of acquired product sales/profit

Total revenues

$ 130,193,000

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

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.

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.

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

the Years Ended December 31,

increase in our cost of sales between periods was largely attributable to an increase in unit volumes sold and increased direct and indirect

costs associated with production of our products during the year ended December 31, 2022 compared to 2021.

For the Years Ended December 31,

Cost of sales

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.

Profit and Margin

the Years Ended December 31,

decrease in gross margin is primarily attributable to amortization of acquired NDAs beginning in January 2022, along with a one-time

adverse production related event in April 2022, increased discounts provided during 2022 associated with volume-based purchases and increased

(direct and indirect) production costs incurred during 2022.

For the Years Ended December 31,

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.

General and Administrative Expenses

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

the Years Ended December 31,

general and administrative

increase in selling, general and administrative expenses between periods was primarily attributable to an increase in consulting expenses

associated with regulatory improvements, to support the transition of recent product acquisitions, and an increase in expenses related

to the addition of new employees in sales, marketing and other departments to support current and expected growth, including the anticipated

commercial launch of IHEEZO in 2023.

For the Years Ended December 31,

Selling, general and administrative

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.

and Development Expenses

research and development (“R&D”) expenses primarily include expenses related to acquired in-process R&D, the development

of acquired intellectual property, investigator-initiated research and evaluations and other costs related to the clinical development

of our assets and drug candidates.

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.

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

the Years Ended December 31,

and development

$ (8,034,000 )

the year ended December 31, 2022, research and development expenses decreased from the same period in 2021 primarily as a result of a

one-time payment for acquired research and development incurred in 2021 related to the acquisition of IHEEZO.

For the Years Ended December 31,

Research and development

increase in R&D expenses between periods was primarily attributable to increased activity related to product acquisitions, product

launches, clinical and medical support.

and Disposal of Long-Lived Assets

the year ended December 31, 2021, we recorded a loss of $249,000, of which, $99,000 was related to the impairment of patents and patent

applications and $150,000 was related to equipment that was no longer in service.

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.

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.

increase was primarily due to an increase in the principal balance of our loans throughout the two periods presented.

The increase was primarily due to an increase in the principal balance of our loans throughout the two periods presented.

in Losses of Unconsolidated Entities

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

on our ownership of Melt and Surface.

Loss from Eton

recorded a loss of $2,914,000 related to the change in fair market value of Eton’s common stock for the year ended December 31,

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.

Gain (Loss) from Eton

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

including a realized loss of $1,406,000 from the sale of 1,518,000 shares of Eton’s common stock.

Loss on Early Extinguishment of Debt

the year ended December 31, 2021, we recorded a loss from early extinguishment of $756,000 related the payment of all outstanding

obligations to the Company’s previous senior lender, SWK Funding, LLC, and its partners.

on Forgiveness of PPP Loan

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

on Sale of Non-Ophthalmology Assets

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LLC of $5,259,000.

the year ended December 31, 2022, we recorded other income, net of $102,000 which was primarily the result of income of $102,000 related

to the transition services provided as part of non-ophthalmology related compounding product line.

During the year ended December 31,

2021, we recorded other income, net of $197,000.

This was primarily the result of income of $238,000 related to negotiation of old payables

and expense of $41,000 related to loss on disposal of property, plant and equipment.

on Early Extinguishment of Debt

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.

Income (Expense), net

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

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.

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

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

the Years Ended December 31,

For the Years Ended December 31,

$ (24,411,000 )

$ (14,086,000 )

loss per share, basic and diluted

Net loss per share, basic and diluted

and Capital Resources

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

Since inception through December 31,

2022, we incurred aggregate losses of $109,493,000.

These losses are primarily due to selling, general and administrative and research

and development expenses incurred in connection with developing and seeking regulatory approval for a former drug candidate, which activities

we have now discontinued, the development and commercialization of novel compounded formulations and the development of our pharmacy

of the date of this Annual Report, we believe that cash and cash equivalents of $96,270,000 at December 31, 2022, along with proceeds

received from the BR Loan will be sufficient to sustain our planned level of operations and capital expenditures for at least the next

We also may consider the sale of certain assets including, but not limited to, part of, or all of, our ownership interest

in Eton, Surface, Melt, and/or any of our consolidated subsidiaries.

However, our plans for this period may change, our estimates of

our operating expenses, capital expenditures and working capital requirements could be inaccurate, we may pursue acquisitions of products,

companies or other strategic transactions that involve large expenditures or we may experience growth more quickly or on a larger scale

than we expect, any of which could result in the depletion of capital resources more rapidly than anticipated and could require us to

seek additional financing earlier than we expect to support our operations.

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.

expect to use our current cash position and funds generated from our operations and any financing to pursue our business plan, which

includes developing and commercializing FDA-approved products, compounded formulations, and technologies, developing our overall operations,

pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of products, compounding pharmacies

and outsourcing facilities, drug companies and manufacturers, and/or assets or technologies, and otherwise fund our operations.

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.

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.

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

the Years Ended

cash provided by (used in):

For the Years Ended

Net cash provided by (used in):

Operating activities

Investing activities

(152,553,000 )

change in cash and cash equivalents

and cash equivalents at beginning of the year

and cash equivalents at end of the year

Financing activities

Net change in cash and cash equivalents

(22,185,000 )

Cash and cash equivalents at beginning of the year

Cash and cash equivalents at end of the year

cash provided by operating activities was $3,840,000 in 2023, compared to $1,705,000 in the prior year.

Net cash provided by operating

activities during the year ended December 31, 2022 decreased primarily as a result of an increase in operating expenses during year in

preparation of the launch of IHEEZO and in support of operationalizing other product acquisitions.

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.

cash used in investing activities in 2023 and 2022 was $(152,553,000) and $(1,743,000), respectively.

Cash used in investing activities

during the 2022 period was primarily associated with equipment and software purchases and upgrades along with investments in our intellectual

property portfolio, offset by cash received on the sale of our non-ophthalmic assets.

Cash used in investing activities in 2021 was primarily

associated with cash payments made in connection with the Melt note receivable and the acquisition of MAXITRO, IOPIDINE and MOXEZA, offset

by cash received through the sale of a portion of our Eton common stock.

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.

cash provided by financing activities in 2023 and 2022 was $126,528,000 and $54,141,000, respectively.

Net cash provided by financing

activities during the year ended December 31, 2022 was primarily related to net proceeds from the sale of $35,000,000 Notes and sale

of common stock.

Net cash provided by financing activities during the year ended December 31, 2021 was primarily related to net proceeds

received from the sale of $75,000,000 senior notes due April 2026, net of the payment of all outstanding obligations to the Company’s

previous senior lender, SWK Funding, LLC, and its partners.

principal sources of cash consist of cash provided by operating activities from our ImprimisRx business, our brand ophthalmic pharmaceuticals

business, proceeds from the sale of the Notes and sale of Eton common stock.

We may also sell some or all of our ownership interests

in Surface, Melt or our other subsidiaries, along with the some or all of the remaining portion of our Eton common stock.

changing trends and overall economic outlook, including the historic interim stay-at-home orders and bans on elective surgeries associated

with the COVID-19 pandemic, created uncertainty surrounding our operating outlook and may impact our future operating results if there

is a resurgence in COVID-19 cases in the U.S.

In addition, we may acquire new products, product candidates and/or businesses and, as

a result, we may need significant additional capital to support our business plan and fund our proposed business operations.

We may receive

additional proceeds from the exercise of stock purchase warrants that are currently outstanding.

We may also seek additional financing

from a variety of sources, including other equity or debt financings, funding from corporate partnerships or licensing arrangements,

sales of assets or any other financing transaction.

If we issue equity or convertible debt securities to raise additional funds, our

existing stockholders may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms

or rights, preferences and privileges senior to those of our existing stockholders.

If we raise additional funds through collaboration

or licensing arrangements or sales of assets, we may be required to relinquish potentially valuable rights to our product candidates

or proprietary technologies or formulations, or grant licenses on terms that are not favorable to us.

If we raise funds by incurring

additional debt, we may be required to pay significant interest expenses and our leverage relative to our earnings or to our equity capitalization

may increase.

Obtaining commercial loans, assuming they would be available, would increase our liabilities and future cash commitments

and may impose restrictions on our activities, such as the financial and operating covenants.

Further, we may incur substantial costs

in pursuing future capital and/or financing transactions, including investment banking fees, legal fees, accounting fees, printing and

distribution expenses and other costs.

We may also be required to recognize non-cash expenses in connection with certain securities we

may issue, such as convertible notes and warrants, which would adversely impact our financial results.

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

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.

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.

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.

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.

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.

Accounting Policies

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Recognition and Deferred Revenue

account for contracts with customers in accordance with Accounting Standards Codification (“ASC”) 606, Revenues from Contracts

with Customers.

We have two primary streams of revenue:

(1) revenue recognized from our sale of products within our pharmacy services

and (2) revenue recognized from intellectual property license and asset purchase agreements.

Revenues from Pharmacy Services

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

Following the core principles of ASC 606, we have identified the following:

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 our 3PL partner, and the customer takes title of the products via formal purchase orders placed and fulfilled.

Identify the performance obligations in the contract :

Obligations for fulfillment of our contracts consist of delivering the product to customers at their specified destination.

ASU 2016-10 was issued in April 2016 and amended ASC 606 for shipping and handling activities as follows:

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.

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 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 its 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.

Allocate the transaction price to the performance obligations in the contract :

Given that there is only one performance obligation for product sales, no allocation is necessary.

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.

Commission Revenues

We entered into an

agreement whereby we are paid a fee calculated based on sales we generate from a pharmaceutical product that is owned by a third party.

The revenue earned from this arrangement is recognized, at which point there is no future performance obligation required by us and no

consequential continuing involvement on our part to recognize the associated revenue.

Revenues From Transfer of Acquired Product Profit

into an agreement whereby we purchased the exclusive commercial rights to assets associated with certain ophthalmic products from another

pharmaceutical company (the “Seller”).

During a temporary, six month transition period, the Seller continued to

manufacture and market these products and transfer the net profit from the sale of the products to us.

The revenue we recognized from

the transfer of net profit was recognized at the time profit from the product sales was calculated by the Seller and confirmed by us,

typically on a monthly basis, at which point there is no future performance obligation required and no consequential continuing involvement

on our part to recognize the associated revenue.

On a quarterly basis, the Seller invoiced us for all credits and reimbursements (“Chargebacks”)

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.

sell prescription medications directly through our pharmacy, outsourcing facility and 3PL partner.

Revenue from our pharmacy services

(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:

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’s

3PL partner, and the customer takes title of the products via formal purchase orders placed and fulfilled.

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.

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

the transaction price to the performance obligations in the contract:

Because there is only one performance obligation for product

sales, no allocation is necessary.

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.

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.

From Transfer of Acquired Product Sales and Profits

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 profit

The estimate is recorded as a reduction in revenues in our consolidated statements of operations and accounts receivable

in the consolidated balance sheets at the time the revenue is recognized.

Intellectual Property License Revenues

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.

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.

Property License Revenues

currently hold five intellectual property licenses and related agreements pursuant to which we have agreed to license or sell to a customer

with the right to access our intellectual property.

License arrangements may consist of non-refundable upfront license fees, data transfer

fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and various

performance or sales milestones.

These arrangements can be multiple-element arrangements, the revenue of which is recognized at the point

in time that the performance obligation is met.

Non-refundable fees

that are not contingent on any future performance and require no consequential continuing involvement on our part are recognized as revenue

when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverable is delivered.

Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations and structure-activity

relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications for such compounded

drug preparations.

We defer recognition of non-refundable fees if it has continuing performance obligations without which the technology,

right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and that are separate and

independent of our performance under the other elements of the arrangement.

In addition, if our continued involvement is required, through

research and development services that are related to its proprietary know-how and expertise of the delivered technology or can only

be performed by us, then such non-refundable fees are deferred and recognized over the period of continuing involvement.

Guaranteed minimum

annual royalties are recognized on a straight-line basis over the applicable term.

in Eton Pharmaceuticals, Inc.

own 1,982,000 shares of Eton common stock, which represented approximately 8% of the equity and voting interests of Eton as of December

At December 31, 2022, the fair market value of Eton’s common stock was $2.82 per share.

In accordance with Accounting

Standard Update (“ASU”) 2016-01, Financial Instruments-Overall (Subtopic 825-10):

Recognition and Measurement of Financial

Assets and Financial Liabilities , for the years ended December 31, 2022 and 2021, we recorded an investment loss from our Eton common

stock position of $2,914,000 and $10,126,000 respectively, related to the change in fair market value of our investment in Eton during

the measurement periods, including a realized loss of $1,406,000 from the sale of 1,518,000 shares of Eton’s common stock during

the year ended December 31, 2021.

As of December 31, 2022 and 2021, the fair market value of our investment in Eton was $5,589,000 and

$8,503,000, respectively.

in Surface Ophthalmics, Inc.

– Related Party

own 3,500,000 common shares of Surface, which represented approximately 20% of the equity and voting interests as of December 31, 2022,

and use the equity method of accounting for this investment, as management has determined that we have the ability to exercise significant

influence over the operating and financial decisions of Surface.

Under this method, we recognize earnings and losses in Surface in its

consolidated financial statements and adjusts the carrying amount of its investment in Surface accordingly.

Our share of earnings and

losses are based on our ownership interest of Surface.

Any intra-entity profits and losses are eliminated.

We recorded equity in the

net loss of Surface of $1,314,000 during the year ended December 31, 2021.

As of December 31, 2022 and 2021, the carrying value of our

investment in Surface was $0 and $0, respectively.

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

in Melt Pharmaceuticals, Inc.

– Related Party

April 2018, we formed Melt as a wholly-owned subsidiary.

In January and March of 2019, Melt entered into definitive stock purchase agreements

(collectively, the “Melt Series A Preferred Stock Agreement”) with certain investors and closed on the purchase and sale

of Melt’s Series A Preferred Stock (the “Melt Series A Stock”), totaling approximately $11,400,000 of proceeds (collectively

the “Melt Series A Round”) at a purchase price of $5.00 per share.

As a result, we lost voting and ownership control of Melt

and ceased consolidating Melt’s financial statements.

the time of deconsolidation, we recorded a gain of $5,810,000 and adjusted the carrying value in Melt to reflect the increased valuation

of Melt and our new ownership interest in accordance with ASC 810-10-40-4(c), Consolidation .

own 3,500,000 common shares of Melt, which represented approximately 46% of its equity and voting interests as of December 31, 2022.

We analyze our investment in Melt and related agreements on a regular basis to evaluate our position of variable interests in Melt.

no longer have a controlling position in Melt;

however, we do have the ability to exercise significant influence over the operating and

financial decisions of Melt.

We use the equity method of accounting for this investment.

Under this method, we recognize earnings and

losses of Melt in its consolidated financial statements and adjusts the carrying amount of its investment in Melt accordingly.

of earnings and losses are based on our ownership interest of Melt.

Any intra-entity profits and losses are eliminated.

During the year

ended December 31, 2021 we reduced our common stock investment in Melt to $0.

As of December 31, 2022 and 2021 and at the time of entering

into the Melt Loan Agreement, we owned 100% of the debt owed by Melt.

Following the reduction of the carrying value of our common stock

investment in Melt to $0 we began recording 100% of the equity method losses of Melt, based on our ownership of total debt owed by Melt.

We recorded equity in net losses of Melt of $11,133,000 and $4,020,000 during the years ended December 31, 2021 and 2022, respectively.

As of December 31, 2022, our investment in Melt was $0 and $139,000 is due from Melt for reimbursable expenses and amounts due under

the Melt Master Service Agreement (“Melt MSA”).

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

stock-based payments to employees, directors and consultants, including grants of stock options, warrants, restricted stock units and

restricted stock, are recognized in the consolidated financial statements based upon their estimated fair values.

We use the Black-Scholes

option pricing model and Monte-Carlo simulation model to estimate the fair value of stock-based awards.

Fair value is determined at the

date of grant.

The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual

effect differs from those estimates.

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

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.

Issuance Costs and Debt Discount

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).

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

part of the process of preparing our consolidated financial statements, we must estimate the actual current tax assets and liabilities

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impact will be included in income tax expense in the consolidated statements of operations.

account for income taxes under the provisions of Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification

account for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification

(“ASC”) 740, Income Taxes .

As of December 31, 2022 and 2021, there were no unrecognized tax benefits included in the

consolidated balance sheets that would, if recognized, affect the effective tax rate.

Our practice is to recognize interest and/or penalties

related to income tax matters in income tax expense.

We had no accrual for interest or penalties in its consolidated balance sheets at

December 31, 2022 and 2021, and have not recognized interest and/or penalties in the consolidated statements of operations for the years

ended December 31, 2022 and 2021.

We are subject to taxation in the United States, California, Florida, Georgia, Illinois, New Jersey,

New York, Tennessee, and Wisconsin.

Our tax years since 2000 may be subject to examination by the federal and state tax authorities due

to the carryforward of unutilized net operating losses.

and Development

expenses consist of expenses incurred in performing research and development activities, including salaries and benefits, other overhead

expenses, and costs related to clinical trials, contract services and outsourced contracts.

We expense all costs related to R&D as

they are incurred.

and milestone payments related to the acquisition and licensing of technology for drug and product candidates that are not yet approved

by the FDA are considered acquisition of in process R&D and expensed as R&D in the period in which the expense occurs.

costs of acquiring intellectual property rights to be used in the research and development process, including licensing fees and milestone

payments, are charged to research and development expense as incurred in situations where we have not identified an alternative future

use for the acquired rights, and are capitalized in situations where we have identified an alternative future use for the acquired rights.

Patents and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks

become more certain (See “—Goodwill and Intangible Assets” below).

We began capitalizing certain costs associated with

acquiring intellectual property rights during 2015, if costs are not capitalized, they are expensed as incurred.

of Long-Lived Assets

assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are reviewed

for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability

of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows

expected to be generated by the asset.

If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge

is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Assets to be disposed would

be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to

sell, and are no longer depreciated.

The assets and liabilities of a disposal group classified as held-for-sale would be presented separately

in the appropriate asset and liability sections of the consolidated balance sheet, if material.

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.

in Melt Pharmaceuticals, Inc.

– Related Party

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

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.

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.

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.

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

Share of Equity

Method Losses

Net Carrying value

$ (5,810,000 )

Preferred stock

(18,397,000 )

$ (24,207,000 )

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

Share of Equity

Method Losses

Capital Contributions

Carrying value

$ (5,810,000 )

(13,500,000 )

$ (19,310,000 )

$ (2,484,000 )

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

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

and Intangible Assets

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or its estimated economic life, generally 20 years, using the straight-line method.

Trademarks are an indefinite life intangible asset

and are assessed for impairment based on future projected cash flows as further described below.

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.

are an indefinite-lived intangible asset and are assessed for impairment based on future projected cash flows as further described below.

review our goodwill and indefinite-lived intangible assets for impairment as of January 1 of each year and when an event or a change

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as impairment indicators include but are not limited to the following:

underperformance of the our business relative to expected operating results;

underperformance of the Company’s business relative to expected operating results;

adverse economic and industry trends;

decline in the our market capitalization for an extended period of time relative to net book value;

decline in the Company’s market capitalization for an extended period of time relative to net book value;

that a reporting unit will be sold or otherwise disposed.

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deemed appropriate by management.

If the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting

unit’s goodwill may be impaired and we then perform the second step of the impairment test.

If the fair value of a reporting unit

exceeds its carrying amount, no further analysis is required.

If further analysis is required, we compare the implied fair value of the reporting unit’s goodwill, determined by allocating

the reporting unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to

its carrying amount.

If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment loss will be

recognized in an amount equal to the excess.

Issuance Costs and Debt Discount

issuance costs and the debt discount are recorded net of loans payable in the consolidated balance sheet.

Amortization of debt issuance

costs and the debt discount is calculated using the effective interest method over the term of the debt and is recorded in interest expense

in the accompanying consolidated statement of operations.

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.

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.

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

of Other Long-Lived Assets

long-lived assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are

reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

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.

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 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.

Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis