HARROW, INC. 10-Q

Item 1A. Risk Factors In addition to the other information contained in this Quarterly Report you should consider the risk factors and the other information in our Annual Report on Form 10-K for the year ended December 31, 2024, including our audited financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” If any such risks actually occur, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. Below we provide in supplemental form the material changes to our risk factors as previously disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2024. Our risk factors disclosed in the Annual Report on Form 10-K provide additional disclosure for these supplemental risks and are incorporated herein by reference. Disruptions at the FDA, CMS, the SEC, and other government agencies resulting from the U.S. government shutdown and reported staffing reductions could adversely affect our operations, regulatory interactions, and access to capital. A prolonged or repeated shutdown of the U.S. federal government, or other significant disruptions to the operations of federal agencies, could adversely affect our business, financial condition, and results of operations. The U.S. government shutdown that began on October 1, 2025 has caused many federal agencies to scale back operations and furlough portions of their workforce. Certain agencies that are important to our business, including the U.S. Department of Health and Human Services (“HHS”) and its operating divisions such as the Centers for Medicare & Medicaid Services (“CMS”) and the FDA, and the SEC, may experience resource constraints or temporary delays in certain activities as a result of the shutdown or related funding limitations. Any such disruptions could delay the FDA’s review and processing of submissions, the CMS’s issuance of reimbursement guidance, or the SEC’s review of our filings, which could in turn affect our ability to develop, market, and sell our products or raise capital in a timely manner. In addition, reports of staffing and budget reductions at HHS and its agencies earlier in 2025 have created further uncertainty regarding the federal government’s capacity to carry out regulatory and policy functions. In March 2025, the Secretary of HHS announced a departmental reorganization and reduction-in-force initiative that included workforce adjustments at the FDA and other HHS components. Although the precise scope and timing of these changes remain uncertain, further reductions in agency staffing or funding could limit the government’s ability to provide timely guidance, review regulatory submissions, or issue reimbursement decisions. Similarly, proposed future budget constraints for HHS could affect CMS’s ability to update coverage and payment policies, which may influence healthcare providers’ adoption of our products. Significant changes to the operations, priorities, or funding of these agencies—whether resulting from shutdowns, staffing reductions, or shifting policy directives—could cause additional delays or disruptions. If the FDA, CMS, or other agencies are unable to maintain adequate staffing or operational continuity, it could result in increased regulatory uncertainty, slower review and approval timelines, or reimbursement decisions that negatively affect utilization of our products by healthcare providers. In addition, continued or future government shutdowns or funding freezes could negatively affect broader economic conditions, including volatility in the capital markets and reduced liquidity, which could make it more difficult for us to access capital or maintain adequate financing for our operations. If these disruptions persist or worsen, our business, financial condition, results of operations, and ability to execute our strategic plans could be materially and adversely affected. We sell our proprietary formulations primarily through pharmaceutical compounding facilities we own, and our results of operations may be negatively impacted if such facilities do not comply with regulatory requirements or lose their licenses. 40 We currently have two Imprimis compounding facilities in New Jersey. We have developed “ImprimisRx” as a uniform brand for our compounding pharmaceutical business. As we have in the past purchased and operated certain pharmaceutical compounding businesses and pharmacies and subsequently divested or sold those associated assets, we may pursue similar strategies in the future. Those things considered, we may experience difficulties implementing and/or executing on our compounding pharmacy strategy, including difficulties that arise as a result of our lack of experience, and we may be unsuccessful and our plans may change materially. For instance: ● we have experienced delays and increased costs in relation to expansion efforts; ● we may not be able to satisfy applicable federal licensing, state board of pharmacy licensing and other requirements for any of our pharmacy businesses in a timely manner or at all; ● changes to federal and state pharmacy regulations may restrict compounding operations or make them more costly; ● we may be unable to achieve or maintain a sufficient physician and patient customer base to sustain our pharmacy operations; ● market acceptance of compounding pharmacies generally may be curtailed or delayed; and ● We may not be able to enter into licensing or other arrangements with third-party pharmacies or outsourcing facilities when desired, on acceptable terms, or at all. Our ImprimisRx subsidiary completed an in-person meeting with the FDA in October 2025 regarding its efforts to remediate certain deficiencies at its New Jersey site. At the FDA meeting, ImprimisRx presented, among other data, its safety record, which includes an adverse event (ADE) rate of approximately 2 per million units, which is meaningfully better than known ADE rates for FDA-approved products. FDA ultimately decided to allow ImprimisRx to continue with its remediation efforts on a voluntary basis. Additionally, Imprimis is currently subject to an administrative accusation by the California State Board of Pharmacy relating to certain alleged regulatory compliance matters. ImprimisRx is actively engaged in discussions with the California Board of Pharmacy regarding a resolution to the administrative action and the potential denial of ImprimisRx’s 503B out-of-state outsourcing facility renewal application. Although the loss of the California nonresident outsourcing facility pharmacy license would restrict sales and dispensing of our compounded products in that state and would reduce revenues from the affected state, we believe that, based on our current concentration of sales and geographic diversification, such loss would not be material to our consolidated statement of operations. Nevertheless, if additional states were to take similar actions, or if broader or longer-term restrictions were imposed, the cumulative effect could be material . Moreover, all our efforts to expand pharmacy operations will involve significant costs and other resources, which we may not be able to afford and may disrupt our other operations and distract management and employees from the other aspects of our business. As a result, our business could materially suffer if we are unable to further develop a group of unified compounding facilities and, even if we are successful, we may be unable to generate sufficient revenue to recover our costs. The federal government could pursue enforcement actions against us to the extent we are unable to demonstrate compliance with cGMPs and other required regulations, the effects of which could be costly to us and could result in adverse consequences to our business. 41 In August 2017, the FDA issued a MedWatch notification regarding a curcumin emulsion and two adverse events that had been associated with the use of these emulsions by prescribing physicians. We issued a press release on August 7, 2017, clarifying certain facts regarding the notice which outlined our belief that the adverse events associated with the two patients occurred due to an allergic reaction caused by the products being inappropriately administered and obtained by the prescribing physician, and our use of curcumin and excipients in our curcumin emulsion formulation met regulatory standards required for dispensing of the curcumin emulsion. In September 2017, the FDA released a letter confirming that the alleged misuse of certain ingredients in our curcumin emulsions was due to mislabeling by the underlying supplier and not of our own misdoing. We no longer compound curcumin emulsion products. Separately, in December 2017, we were issued a warning letter from the FDA alleging that, in its interpretation of our public communications, we had made false or misleading claims and omitted risk and side effect information regarding certain of our ophthalmology-focused compounded medications. We immediately performed a full review of our public communications referenced in the warning letter and responded to the FDA in January 2018; notwithstanding our continued belief that our public communications were not, in fact, false and misleading, we remained in communication with the FDA and took steps to address the items outlined in the FDA letter. The Company received another warning letter from the FDA in June 2022 related to our alleged marketing activities. We immediately responded to the warning letter and the FDA sent the Company notice in January 2023 that our corrective actions appear adequate. In June 2019, our New Jersey-based outsourcing facility (“NJOF”) was issued a warning letter related to an April 2017 inspection and our use of certain active pharmaceutical ingredients in our compounded medications. During September 2020 through January 2021, our New Jersey based outsourcing facility was inspected by the FDA (the “2020 Inspection”) and certain observations were made by the FDA in a Form 483. Five observations made during the 2020 Inspection were considered repeat observations from a 2017 FDA inspection. In addition, during the 2020 inspection, the FDA noted that we were compounding drugs for which there is no change that produces a clinical difference for an individual patient, as determined by a prescribing practitioner between a compounded drug and the comparable approved drug. We have responded to the FDA regarding all of their observations from the 2020 Inspection, including providing documentation from prescribing clinicians that indicate a clinical difference between our compounded drugs and the comparable approved drugs, while also committing to amend our order process to collect “medical necessity/clinical difference” information for each order of our compounded drugs on a go-forward basis. Our pharmacy was inspected in August 2022 and received a Form 483 with several observations from the FDA. In May 2023, our pharmacy received a warning letter related to the inspection that occurred in August 2022. The warning letter indicated that our corrective actions from the inspection had appeared to be adequate; however, the FDA could not fully evaluate the adequacy of our actions because we did not include sufficient information or supporting documentation. As an example, we stated that smoke studies related to airflow in our laminar airflow hoods had been redone to satisfy FDA requirements, however, we did not provide the FDA with supporting documentation (such as smoke study protocol, updated detailed report and/or videos). We have responded to this warning letter and provided the FDA with additional information requested. From March 2024 through April 2024, NJOF was inspected by the FDA (the “2024 Inspection”), and the FDA issued a Form 483 with five observations. Since January 2025, we engaged in separate but related discussions with the federal government regarding the NJOF quality system and the 2024 Inspection. NJOF voluntarily recalled certain products and provided regular updates to the FDA regarding its remediation activities and other commitments, including Project Beagle. The government has notified us that these discussions are now closed. Future regulatory actions could increase scrutiny and could create negative publicity on us as a company. As part of our commitment to actively work with regulators, at times, we have become aware of concerns related to certain formulations, and as a result, discontinued compounding certain drug formulations in an attempt to help mitigate potential regulatory risk. For other reasons, including, but not limited to, the following, physicians may be unwilling to prescribe or patients may be unwilling to use our compounded formulations: legal prohibitions on our ability to discuss the efficacy or safety of our formulations with potential users to the extent applicable data is available; our pharmacy operations are primarily operating on a cash-pay basis and reimbursement may or may not be available from third-party payors, including the government Medicare and Medicaid programs; and certain formulations are not required to be prepared and are not presently being prepared in a manufacturing facility governed by cGMP requirements. These factors and any future regulatory action could continue to limit our production, and our ability to dispense and distribute our compounded products, which would negatively affect sales of our compounded products. Our sales depend on coverage and reimbursement from government and commercial third-party payers, and pricing and reimbursement pressures have affected, and are likely to continue to affect, our profitability. Sales of our products depend on the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans. Governments and private payers continue to pursue initiatives to manage drug utilization and contain costs. Further, pressures on healthcare budgets from the economic downturn and inflation continue and are likely to increase, across the markets we serve. Payers are increasingly focused on costs, which has resulted, and is expected to continue to result, in lower reimbursement rates for our products and/or narrower patient populations for which payers will reimburse. Continued intense public scrutiny of the price of drugs and other healthcare costs, together with payer dynamics, have limited, and are likely to continue to limit, our ability to set or adjust the price of our products based on their value, which can have a material adverse effect on our business. In the United States, particularly over the past few years, a number of legislative and regulatory proposals have been introduced and/or signed into law to lower drug prices. These include provisions in the Inflation Reduction Act that enable the U.S. government to set prices for certain drugs in Medicare, redesign Medicare Part D benefits to shift a greater proportion of the costs to manufacturers and health plans and enable the U.S. government to impose penalties if drug prices are increased at a rate faster than inflation. Additional proposals focused on drug pricing continue to be debated, and additional executive orders or regulatory initiatives focused on drug pricing and competition are likely to be adopted and implemented in some form. It is unclear what policies will advance with respect to other drug pricing proposals, including international reference pricing or changes to healthcare regulations affecting pharmaceuticals. Further, state government activity has been dynamic, including certain states enacting new laws limiting drug reimbursement under state run Medicaid programs and prohibiting restrictions on 340B Program use. Such state laws could also eventually be adopted at the federal level 42 We are unable to predict which or how many policy, regulatory, administrative or legislative changes may ultimately be, or effectively estimate the consequences to our business if, enacted and implemented. However, to the extent that payer actions further decrease or modify the coverage or reimbursement available for our products, require that we pay increased rebates or shift other costs to us, limit or affect our decisions regarding the pricing of or otherwise reduce the use of our products, such actions could have a material adverse effect on our business and results of operations. Global economic conditions may negatively affect us and may magnify certain risks that affect our business. Our operations and performance have been, and may continue to be, affected by global economic conditions. The economic downturn resulting from the COVID-19 pandemic precipitated a global recession, which was followed by high rates of inflation and actions taken by financial regulators to raise interest rates. Instability in the financial system, tighter lending standards and higher interest rates have added stress that may create additional vulnerabilities in the global economy, the effects of which may be of an extended duration. Additionally, with higher interest rates, deficits (including those associated with the pandemic), and other fiscal pressures, governments may be unable to sustain their previously high levels of fiscal spending. As a result of global economic conditions, some third-party payers may delay or be unable to satisfy their reimbursement obligations. Job losses or other economic hardships (including inflation) may also affect patients’ ability to afford healthcare as a result of increased co-pay or deductible obligations, greater cost sensitivity to existing co-pay or deductible obligations, lost healthcare insurance coverage or for other reasons. We believe such conditions could lead to reduced demand for our products, which could have a material adverse effect on our product sales, business and results of operations. The cumulative effects of inflationary pressures, an uncertain trade environment with escalating and rapidly-changing tariffs, and the effects from the armed conflict in Ukraine (including the effects of the sanctions that were implemented in response to the conflict and the resulting impacts on the commodity market and supply chains) and the Middle East may also increase our operating expenses. Some of our operational costs, including the cost of energy, cost of goods, other materials, labor, distribution and our other operational costs are subject to market conditions and have been adversely affected by inflationary pressures. Although we monitor our distributors’, customers’ and suppliers’ financial condition and their liquidity to mitigate our business risks, some of our distributors, customers and suppliers may become insolvent, which could have a material adverse effect on our product sales, business and results of operations. Changes in U.S. trade policy—including the possible imposition of significant tariffs on pharmaceuticals and raw materials—could materially increase our costs, disrupt our supply chain, and impair our competitive position. Recent public statements by U.S. policymakers contemplate phased tariff rates of up to 150% (or more) on imported finished drugs, active pharmaceutical ingredients (“APIs”), and key excipients. Although we manufacture a significant amount of our finished ophthalmic products in the United States, we rely on third-party suppliers, many of which source APIs, sterile bottles, dropper tips, and other critical components from non-U.S. jurisdictions. If one or more rounds of tariffs are enacted, we could experience: ● Higher input costs that we may be unable to pass through to customers under existing supply and reimbursement arrangements, compressing gross margins; ● Customs delays or shortages if overseas suppliers elect to redirect shipments to non-U.S. customers to avoid tariff exposure; ● Retaliatory measures by foreign governments that could hinder our ability to procure specialized equipment or to out-license our products abroad; and ● Working-capital pressure, as we may need to build additional safety stock or advance-pay duties before goods clear U.S. customs. 43 While we are evaluating mitigation strategies—including dual-sourcing, qualifying U.S. or free-trade-area suppliers, and tariff-engineering options—there can be no assurance that these actions will be successful or fully offset potential cost increases. Material tariff-related cost inflation or supply disruptions could adversely affect our financial condition, results of operations and cash flows.