HARROW, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with 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”). The 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, 2023 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, Inc. and its consolidated subsidiaries, including ImprimisRx, LLC, ImprimisRx NJ, LLC dba ImprimisRx, Imprimis NJOF, LLC, Harrow IP, LLC and Harrow Eye, LLC. In this discussion and analysis, we refer to our consolidated subsidiaries ImprimisRx, LLC, ImprimisRx NJ, LLC and Imprimis NJOF, LLC collectively as “ImprimisRx.” In addition to historical information, the following discussion contains forward-looking statements regarding future events and our future performance. 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. All statements made in this Quarterly Report other than statements of historical fact are forward-looking statements. 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: liquidity or results of operations; our ability to successfully implement our business plan, develop and commercialize our products, product candidates and proprietary formulations in a timely manner or at all, identify and acquire additional products, 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, including inflation and supply chain challenges; 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; 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. Overview We are a leading eyecare pharmaceutical company engaged in the discovery, development, and commercialization of innovative ophthalmic pharmaceutical products for the U.S. market. Harrow helps U.S. eyecare professionals preserve the gift of sight by making its comprehensive portfolio of prescription and non-prescription pharmaceutical products accessible and affordable to millions of Americans each year. We own commercial rights to one of the largest portfolios of branded ophthalmic pharmaceutical products in North America, all of which are marketed under the Harrow name. We also own and operate ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding businesses. Factors Affecting Our Performance We believe the primary factors affecting our performance are (1) our ability to increase revenues of our branded pharmaceutical products, proprietary compounded formulations and certain non-proprietary products, and grow and gain operating efficiencies in our operations, (2) potential and ongoing regulatory-related restrictions, (3) our ability to optimize pricing and obtain reimbursement options for our drug products, and continue to pursue development and commercialization opportunities for certain of our ophthalmology and other assets that we have not yet made commercially available. We believe we have built a tangible and intangible infrastructure that will allow us to scale revenues efficiently in the near and long-term. All of these activities will require significant costs and other resources, which we may not have or be able to obtain from operations or other sources. See “Liquidity and Capital Resources” below. 27 Recent Developments The following is a summary of selected significant developments affecting our business that occurred since December 31, 2023. For additional developments, see our Annual Report on Form 10-K for the year ended December 31, 2023. Cybersecurity Incident In November 2024, we became aware of a cybersecurity incident that involved unauthorized access of an employee’s email account. Through this unauthorized access the threat actor was able to fraudulently divert Company funds to its bank account. We detected the incident in a time that management believes minimized any financial, operational or reputational risk to the Company, we believe this early detection will result in an immaterial impact to the Company’s financial results and at no point was our ability to generate revenues disrupted. We, along with our external cybersecurity experts, are continuing to work diligently to fully investigate and assess the impact of the incident and we have notified, and are cooperating with, federal law enforcement. As the investigation of the incident is ongoing, the full scope, nature and impact of the incident are not yet fully known. TRIESENCE Re-Launch, Oaktree Second Amendment and Draw In October 2024, we announced the re-launch of TRIESENCE following the successful manufacturing of three process performance qualification batches of the product. In connection with the re-launch, during October 2024 we made a one-time payment of $37,000,000 to Novartis Technology, LLC and Novartis Innovative Therapies AG (together, “Novartis”) pursuant to terms of an asset purchase agreement between Novartis and the Company. Also, during October 2024, we entered into the Second Amendment (the “Second Amendment”) to the Credit Agreement and Guaranty originally entered into on March 27, 2023, as amended by that certain First Amendment to Credit Agreement and Guaranty and Consent, dated as of July 18, 2023 (as amended, the “Oaktree Loan”), with the lenders from time to time party thereto and Oaktree Fund Administration, LLC, as administrative agent for the lenders (“Oaktree”). Upon satisfaction of certain conditions to funding, the Company drew down the principal amount of $30,000,000 (the “$30,000,000 Draw”) under a pre-existing commitment under the Oaktree Loan to partially fund the one-time payment to Novartis. In the Second Amendment, the Company and Oaktree agreed to certain changes to the Oaktree Loan in connection with the Company’s draw under the Oaktree Loan. Pursuant to the amendment, Oaktree agreed to waive any make-whole costs associated with the $30,000,000 Draw in the event of early repayment of the debt under the Oaktree Loan if paid before March 31, 2025. In addition, Oaktree agreed to exclude the $30,000,000 Draw from the calculation of the Total Leverage Ratio as defined in the Oaktree Loan. No other material changes to the Oaktree Loan were provided in the Second Amendment. Following entry into the Second Amendment and the funding of the Novartis milestone payment, the Company has drawn down a total principal loan amount of $107,500,000 under the Oaktree Loan and no additional principal loan amount remains available to the Company under the Oaktree Loan. Apotex - Canadian Out-License In February 2024, we entered into a license and supply agreement with Apotex Inc. (“Apotex”). Under the terms of the agreement, Apotex licensed exclusive rights and marketing authorizations of the following products in the Canadian market from Harrow: VERKAZIA (cyclosporine ophthalmic emulsion) 0.1% and Cationorm PLUS. Apotex was also granted a license for products Apotex will pursue approval for in Canada: VEVYE (cyclosporine ophthalmic solution) 0.1%, IHEEZO (chloroprocaine hydrochloride ophthalmic gel) 3%, and ZERVIATE (cetirizine ophthalmic solution) 0.24% (with VERKAZIA and Cationorm Plus, collectively, the “Apotex Products”). In exchange for these licenses, Harrow will earn amounts related to manufacturing, regulatory and commercial achievement milestones, in addition to royalties on net sales of the Apotex Products. IHEEZO Reimbursement In January 2024, we met with the Centers for Medicare & Medicaid Services (“CMS”) to request clarification related to its anesthesia billing policy which has historically not allowed for the separate billing of anesthesia services in the physician’s office. During the meeting we requested that CMS clarify that J-Code 2403, IHEEZO’s permanent J-Code, is appropriate to be billed for the anesthesia product itself (i.e., IHEEZO in our case) in the physician office setting. In March 2024, we received communication from a representative at CMS that the inclusion of J-Code 2403 in CMS’s April 2024 quarterly drug pricing file of the average sales prices (ASP) of some Medicare Part B-covered drugs and biologicals confirms that IHEEZO is separately payable in the physician office setting. In February 2024, we made a request to CMS to consider increasing the Medically Unlikely Edits (“MUE”) for IHEEZO’s J-Code from 1 to 2. This request was made because the limitation of one MUE only allowed a single IHEEZO administration (equal to one single-use vial) to be used and billed, while many ophthalmologists perform bilateral ocular procedures, which would require two vials of IHEEZO to be used. On March 20, 2024, we received communication from the National Correct Coding Initiative (NCCI) program of CMS stating that CMS decided to increase the MUE for IHEEZO’s J-Code (J2403) from 1 to 2. The MUE edit was made effective on July 1, 2024. 28 VEVYE U.S. Launch In January 2024, we launched VEVYE (cyclosporine ophthalmic solution) 0.1%, the first and only water-free cyclosporine dissolved in a semifluorinated alkane approved to treat both the signs and symptoms of dry eye disease in the U.S. We partnered with various entities including PhilRx, Apollo Care and PARx Solutions to enhance our market and patient access program for VEVYE. Results of Operations The following period-to-period comparisons of our financial results for the three and nine months ended September 30, 2024 and 2023 are not necessarily indicative of results for any future period. Revenues Our revenues include amounts recorded from sales of proprietary compounded formulations, sales of branded products to wholesalers through a third-party logistics facility, commissions from third parties and revenues received from royalty payments owed to us pursuant to out-license arrangements. The following presents our revenues: For the Three Months Ended For the Nine Months Ended September 30, $ September 30, $ 2024 2023 Variance 2024 2023 Variance IHEEZO $ 12,882,000 $ 5,927,000 $ 6,955,000 $ 26,498,000 $ 10,073,000 $ 16,425,000 VEVYE 5,186,000 - 5,186,000 12,099,000 - 12,099,000 Other branded products (Anterior Segment) 10,256,000 6,605,000 3,651,000 30,808,000 13,205,000 17,603,000 Other revenues, net 228,000 1,964,000 (1,736,000 ) 375,000 10,585,000 (10,2109,000 ) Branded revenue, net 28,552,000 14,496,000 14,056,000 69,780,000 33,863,000 35,917,000 ImprimisRx revenue, net 20,705,000 19,769,000 936,000 63,003,000 59,975,000 3,028,000 Total revenues, net $ 49,257,000 $ 34,265,000 $ 14,992,000 $ 132,783,000 $ 93,838,000 $ 38,945,000 Cost of Sales Our cost of sales includes direct and indirect costs to manufacture formulations and 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. Branded The following presents our Branded cost of sales: For the Three Months Ended For the Nine Months Ended September 30, $ September 30, $ 2024 2023 Variance 2024 2023 Variance Cost of sales $ 5,169,000 $ 3,335,000 $ 1,834,000 $ 14,406,000 $ 8,396,000 $ 6,010,000 The increase in our Branded cost of sales was largely attributable to expenses associated with unit volumes sold. 29 ImprimisRx The following presents our ImprimisRx cost of sales: For the Three Months Ended For the Nine Months Ended September 30, $ September 30, $ 2024 2023 Variance 2024 2023 Variance Cost of sales $ 6,849,000 $ 6,732,000 $ 117,000 $ 20,704,000 $ 19,942,000 $ 762,000 The increase in our ImprimisRx cost of sales was largely attributable to expenses associated with unit volumes sold and increased direct and indirect costs associated with production of our products. Gross Profit and Margin Branded For the Three Months Ended For the Nine Months Ended September 30, $ September 30, $ 2024 2023 Variance 2024 2023 Variance Gross Profit $ 23,383,000 $ 11,161,000 $ 12,222,000 $ 55,374,000 $ 25,467,000 $ 29,907,000 Gross Margin 81.9 % 77.0 % 4.9 % 79.4 % 75.2 % 4.2 % The increase in Branded gross margin between the three and nine months ended September 30, 2024 and 2023 was primarily attributable to an increase in sales reducing the impact of our fixed expenses, such as license amortization. ImprimisRx For the Three Months Ended For the Nine Months Ended September 30, $ September 30, $ 2024 2023 Variance 2024 2023 Variance Gross Profit $ 13,856,000 $ 13,037,000 $ 819,000 $ 42,299,000 $ 40,033,000 $ 2,266,000 Gross Margin 66.9 % 65.9 % 1.0 % 67.1 % 66.7 % 0.4 % Selling, General and Administrative Expenses Our selling, general and administrative expenses include personnel costs, including wages and stock-based compensation, corporate facility expenses, and investor relations, consulting, insurance, filing, legal and accounting fees and expenses as well as costs associated with our marketing activities and sales of our FDA approved, proprietary compounded formulations and other non-proprietary pharmacy products and formulations. For the Three Months Ended For the Nine Months Ended September 30, $ September 30, $ 2024 2023 Variance 2024 2023 Variance Selling, general and administrative $ 33,645,000 $ 21,033,000 $ 12,612,000 $ 94,275,000 $ 56,878,000 $ 37,397,000 The increase in selling, general and administrative expenses between periods was primarily attributable to an increase in expenses including regulatory enhancements, costs 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 commercial launch of VEVYE in December 2023. Stock-based compensation expense increased by $1,227,000 during the nine months ended September 30, 2024 compared to the prior year period. 30 Research and Development Expenses Our research and development (“R&D”) 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. For the Three Months Ended For the Nine Months Ended September 30, $ September 30, $ 2024 2023 Variance 2024 2023 Variance Research and development $ 2,273,000 $ 1,421,000 $ 852,000 $ 7,475,000 $ 3,316,000 $ 4,159,000 The increase in R&D expenses between periods was primarily attributable to activity related to our expanded branded product portfolio, technical transfer activities associated with the production of certain products related to our product acquisitions that occurred in 2023, product development efforts, product launches, and clinical and medical support. Interest Expense, Net Interest expense, net was $5,525,000 and $16,411,000 for the three and nine months ended September 30, 2024, respectively, compared to $5,749,000 and $16,200,000 for the same periods in 2023, respectively. The decrease during the three months ended September 30, 2024 compared to the same period in 2023 was primarily the result of increased interest income earned. The increase during the nine months ended September 30, 2024 compared to the same period in 2023 was primarily the result from the increase in the outstanding principal amount of our debt obligations. Investment (Loss) Gain from Eton During the nine months ended September 30, 2024, we recorded a loss of $3,171,000 related to the change in fair market value of Eton’s common stock at the time of its sale, including trading expenses and commissions of approximately $436,000, compared to a gain of $1,348,000 and gain of $2,676,000 during the three and nine months ended September 30, 2023, respectively. Loss on Extinguishment of Debt During the nine months ended September 30, 2023, we recorded a loss on extinguishment of debt of $5,465,000, related to the early payoff of a loan. Other Income, Net During the three and nine months ended September 30, 2024, we recorded other income of $4,000 and $76,000, respectively, related to a sublease of lab and office space in Nashville. During the three and nine months ended September 30, 2023, we recorded other expense, net of $195,000 and $344,000, respectively, related primarily to transition services and write-off of inventories associated with the divestment of our non-ophthalmology business. Liquidity and Capital Resources Liquidity Our cash on hand at September 30, 2024 was $72,601,000, compared to $74,085,000 at December 31, 2023. In October 2024, we made a one-time payment of $37,000,000 upon the achievement of a milestone associated with one of our asset purchase agreements which was funded, in part, from our availability under the delayed draw commitments of our Oaktree debt facility. As of the date of this Quarterly Report, we believe that our cash and cash equivalents 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 Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”) and any of our consolidated subsidiaries. However, we may pursue acquisitions of revenue generating products or 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. 31 We expect to use our current cash position and funds generated from our operations and any financing to pursue our business plan, which includes developing and commercializing drug candidates, compounded formulations and technologies, integrating and developing our operations, pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of additional drug products, drug candidates, and/or assets or technologies, pharmacies, outsourcing facilities, drug company and manufacturers, and otherwise fund our operations. We may also use our resources to conduct clinical trials or other studies in support of our formulations or any drug candidate for which we pursue FDA approval, to pursue additional development programs or to explore other development opportunities. Net Cash Flow The following provides detailed information about our net cash flows: For the Nine Months Ended September 30, 2024 2023 Net cash (used in) provided by: Operating activities $ (4,423,000 ) $ (4,856,000 ) Investing activities 4,396,000 (152,350,000 ) Financing activities (1,457,000 ) 126,546,000 Net change in cash and cash equivalents (1,484,000 ) (30,660,000 ) Cash and cash equivalents at beginning of the period 74,085,000 96,270,000 Cash and cash equivalents at end of the period $ 72,601,000 $ 65,610,000 Operating Activities Net cash used in operating activities during the nine months ended September 30, 2024 was $(4,423,000) compared to $(4,856,000) during the same period in the prior year. The decrease in net cash used in operating activities between the periods was mainly attributed to changes in our working capital balances including accounts receivable, accounts payable, prepaid expenses and inventories. Investing Activities Net cash provided by (used in) investing activities during the nine months ended September 30, 2024 was $4,396,000 compared to $(152,350,000) during the same period in the prior year. Cash used in investing activities in 2023 was primarily related to the acquisition of branded products completed in 2023. Cash provided by investing activities in 2024 was primarily related to the sale of our investment in Eton. Financing Activities Net cash (used in) provided by financing activities during the nine months ended September 30, 2024 and 2023 was $(1,457,000) and $126,546,000, respectively. Cash used in financing activities during the nine months ended September 30, 2024 was primarily related to payment of payroll taxes upon vesting of RSUs in exchange for shares withheld from employees. Cash provided by financing activities during the nine months ended September 30, 2023 was primarily related to proceeds received from the sale of notes and common stock in our 2023 capital markets transactions and entering into loan arrangements, offset by repayment of the B. Riley senior secured note and payment of payroll taxes upon vesting and exercise of equity instruments in exchange for shares withheld from employees. Sources of Capital Our principal sources of cash have consisted of sales of our common stock, debt issuances, sales of our investments, and on an annual basis (e.g. for the year ended December 31, 2023) cash generated from operating activities. We may also sell some or all of our ownership interests in Surface, Melt or our other subsidiaries. 32 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 options that are currently outstanding. We may also seek additional financing from a variety of sources, including other equity or debt financings, funding from corporate partnerships or licensing arrangements, sales of assets or any other financing transaction. If we issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms or rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration or licensing arrangements or sales of assets, we may be required to relinquish potentially valuable rights to our product candidates or proprietary technologies or formulations, or grant licenses on terms that are not favorable to us. If we raise funds by incurring additional debt, we may be required to pay significant interest expenses and our leverage relative to our earnings or to our equity capitalization may increase. Obtaining commercial loans, assuming they would be available, would increase our liabilities and future cash commitments and may impose restrictions on our activities, such as the financial and operating covenants. Further, we may incur substantial costs in pursuing future capital and/or financing transactions, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which would adversely impact our financial results. We may be unable to obtain financing when necessary as a result of, among other things, our performance, general economic conditions, conditions in the pharmaceuticals and pharmacy industries, or our operating history, including our past bankruptcy proceedings. In addition, the fact that we have a limited history of profitability could further impact the availability or cost to us of future financings. As a result, sufficient funds may not be available when needed from any source or, if available, such funds may not be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital needs when needed, then we may need to forego pursuit of potentially valuable development or acquisition opportunities, we may not be able to continue to operate our business pursuant to our business plan, which would require us to modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing and other activities, or we may be forced to discontinue our operations entirely. Recently Issued and Adopted Accounting Pronouncements See Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.