Harrow Health
Annual Report 2023

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-K For the fiscal year ended December 31, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-35814 HARROW, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 45-0567010 (IRS Employer Identification No.) 102 Woodmont Blvd., Suite 610 Nashville, TN 37205 (Address of Principal Executive Offices)(Zip Code) (615) 733-4730 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $0.001 par value per share 8.625% Senior Notes due 2026 11.875% Senior Notes due 2027 Trading Symbol HROW HROWL HROWM Name of Each Exchange on Which Registered The Nasdaq Stock Market LLC The Nasdaq Stock Market LLC The Nasdaq Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☐ Non-accelerated filer ☒ Emerging growth company ☐ Accelerated filer ☐ Smaller reporting company ☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of June 30, 2023, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $464 million, based on the closing price of $19.04 for the registrant’s common stock as quoted on The Nasdaq Stock Market LLC on that date. For purposes of this calculation, it has been assumed that shares of common stock held by each director, each officer and each person who owns 10% or more of the outstanding common stock of the registrant are held by affiliates of the registrant. The treatment of these persons as affiliates for purposes of this calculation is not conclusive as to whether such persons are affiliates of the registrant for any other purpose. As of March 18, 2024, there were 35,362,642 shares of the registrant’s common stock outstanding. Portions of the registrant’s definitive Proxy Statement for its 2024 Annual Meeting of Stockholders to be held on June 13, 2024 are incorporated by reference in Part III of this Annual Report on Form 10-K, to the extent stated herein. TABLE OF CONTENTS PART I Business Risk Factors Unresolved Staff Comments Cybersecurity Properties Legal Proceedings Mine Safety Disclosures PART II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities [Reserved] Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Disclosure Regarding Foreign Jurisdictions that Prevent Inspections PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Item 1. Item 1A. Item 1B. Item 1C. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 9C. Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Exhibits, Financial Statement Schedules Form 10-K Summary Item 15. Item 16. SIGNATURES 2 Page 3 19 51 51 52 52 52 52 52 53 66 67 67 67 68 68 68 68 68 68 68 69 73 74 As used in this Annual Report on Form 10-K (this “Annual Report”), unless indicated or the context requires otherwise, the terms the “Company,” “Harrow,” “we,” “us” and “our” refer to Harrow, Inc. and its consolidated subsidiaries. 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 Annual 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 proprietary formulations in a timely manner or at all, identify and acquire additional proprietary formulations, manage our pharmacy operations, service our debt, obtain financing necessary to operate our business, recruit and retain qualified personnel, manage any growth we may experience and successfully realize the benefits of our previous acquisitions and any other acquisitions and collaborative arrangements we may pursue; competition from pharmaceutical companies, outsourcing facilities and pharmacies; general economic and business conditions, 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; our limited operating history; and the other risks and uncertainties described under the heading “Risk Factors” in Part I, Item 1A of this Annual Report. 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. We have registered trademarks, copyrights and/or pending trademark and copyright applications for a number of proprietary names in the United States, including, but not limited to: VEVYE®, IHEEZO®, VIGAMOX®, ILEVRO®, TRIESENCE®, ImprimisRx®, LessDrops®, Dropless Cataract Surgery®, Klarity-C®, MKO Melt®, and Simple Drops®. We may choose to pursue trademark protection in other jurisdictions for one or more of these or other marks in the future. All other trademarks, service marks and trade names included or incorporated by reference into this Annual Report, are the property of their respective owners. PART I ITEM 1. BUSINESS Overview We are a leading eyecare pharmaceutical company engaged in the discovery, development, and commercialization of innovative ophthalmic pharmaceutical products for the U.S. market. Harrow helps U.S. eyecare professionals preserve the gift of sight by making its comprehensive portfolio of prescription and non-prescription pharmaceutical products accessible and affordable to millions of Americans each year. We own commercial rights to one of the largest portfolios of branded ophthalmic pharmaceutical products in North America, all of which are marketed under the Harrow name. We also own and operate ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding businesses. In addition, we have a non- controlling equity interest in Melt Pharmaceuticals, Inc. (“Melt”), and two other companies that began as subsidiaries of Harrow and were subsequently carved-out of our corporate structure and deconsolidated from our financial statements. Branded Ophthalmic Pharmaceuticals Over the past few years, we have invested in broadening our product portfolio of FDA-approved products. Our investments in this regard have led to the pursuit and completion of several announced transactions, all of which are focused on eyecare pharmaceuticals primarily for the U.S. and Canadian markets. We believe that our continued investments in these and other products will result in our ability to provide more physician prescribers and their patients with access to a complete portfolio of affordable eyecare pharmaceuticals to address their clinical needs. We own U.S. commercial rights to the following products: ● IHEEZO® (chloroprocaine hydrochloride ophthalmic gel) 3% a low-viscosity gel indicated for ocular surface anesthesia. ● VEVYE® (cyclosporine ophthalmic solution) 0.1%, utilizes a novel water-free vehicle (perfluorobutylpentane) based on semifluorinated alkanes, indicated for the treatment of the signs and symptoms associated with dry eye disease. ● TRIESENCE® (triamcinolone acetonide injectable suspension) 40 mg/ml, a steroid injection for the treatment of certain ophthalmic diseases and for visualization during vitrectomy. ● VIGAMOX® (moxifloxacin hydrochloride ophthalmic solution) 0.5%, a fluoroquinolone antibiotic eye drop for the treatment of bacterial conjunctivitis caused by susceptible strains of organisms. ● ILEVRO® (nepafenac ophthalmic suspension) 0.3%, a non-steroidal, anti-inflammatory eye drop indicated for pain and inflammation associated with cataract surgery. 3 ● FLAREX® (fluorometholone acetate ophthalmic suspension) 0.1%, a corticosteroid prepared as a sterile topical ophthalmic suspension indicated for use in the treatment of steroid-responsive inflammatory conditions of the palpebral and bulbar conjunctiva, cornea, and anterior segment of the eye. ● NATACYN® (natamycin ophthalmic suspension) 5%, a sterile, antifungal drug for the treatment of fungal blepharitis, conjunctivitis, and keratitis caused by susceptible organisms, including Fusarium solani keratitis. ● TOBRADEX® ST (tobramycin and dexamethasone ophthalmic suspension) 0.3%/0.05%, a topical antibiotic and corticosteroid combination for steroid-responsive inflammatory ocular conditions for which a corticosteroid is indicated and where superficial bacterial ocular infection or a risk of bacterial ocular infection exists. ● ZERVIATE® (cetirizine ophthalmic solution) 0.24%, a histamine-1 (H1) receptor antagonist indicated for treatment of ocular itching associated with allergic conjunctivitis. ● VERKAZIA® (cyclosporine ophthalmic emulsion) 0.1%, an orphan designated drug that is a calcineurin inhibitor immunosuppressant indicated for the treatment of vernal keratoconjunctivitis. ● NEVANAC® (nepafenac ophthalmic suspension) 0.1%, a non-steroidal, anti-inflammatory eye drop indicated for pain and inflammation associated with cataract surgery. ● FRESHKOTE® Preservative Free (PF) is a lubricant eye drop that does not require a prescription and temporarily relieves burning, itching and other dry eye symptoms. ● MAXITROL® (neomycin and polymyxin B sulfates and dexamethasone ophthalmic suspension) is an eye drop used to treat steroid-responsive inflammatory ocular conditions where bacterial infection or a risk of bacterial ocular infection exist ● MAXIDEX® (dexamethasone ophthalmic suspension) 0.1%, a steroid eye drop for steroid-responsive inflammatory conditions of the palpebral and bulbar conjunctiva, cornea, and anterior segment of the globe. ● IOPIDINE® 1% (apraclonidine hydrochloride) 0.5%, an ophthalmic solution in a sterile isotonic solution indicated to control or prevent post-surgical elevations in intraocular pressure that occur in patients after argon laser trabeculoplasty, argon laser iridotomy or Nd:YAG posterior capsulotomy ● IOPIDINE® 0.5% (apraclonidine hydrochloride) an ophthalmic solution indicated for short-term adjunctive therapy in patients on maximally tolerated medical therapy who require additional intraocular pressure (or IOP) reduction. We also own U.S. rights to some discontinued products. In February 2024, we announced that we out-licensed Canadian rights for VERKAZIA, Cationorm® PLUS (a preservative-free formulation for dry eye or allergy relief), VEVYE, ZERVIATE and IHEEZO to Apotex Inc. (“Apotex”). We also own worldwide rights to NATACYN and FRESHKOTE. ImprimisRx ImprimisRx is our ophthalmology-focused pharmaceutical compounding businesses. From its inception in 2014, ImprimisRx, whose business consists of integrated research and development, production, dispensing/distribution, sales, marketing, and customer-service capabilities, has offered ophthalmologist and optometrist customers and their patients access to critical medicines to meet their clinical needs. Initially, ImprimisRx focused exclusively on compounded medications to serve needs unmet by commercially available drugs. Our compounded medications include various combinations of drugs formulated into one bottle and numerous preservative-free formulations. Depending on the formulation, the regulations of a specific state, and ultimately the needs of the patient, ImprimisRx products may be dispensed as patient-specific medications from our 503A pharmacy, or for in- office use, made according to current good manufacturing practices (“cGMPs”) or other guidance documents from the U.S. Food and Drug Administration (the “FDA”), in our FDA-registered New Jersey outsourcing facility. Our current ophthalmology formulary includes over 30 compounded formulations, many of which are patented or patent-pending, that are customizable for the specific needs of a patient. We make our formulations available at prices that are, in most cases, lower than non-customized commercial drugs. ImprimisRx’s customer base has grown to include more than 10,000 U.S. eyecare- dedicated prescribers and institutions. 4 Carved-Out Subsidiaries (De-Consolidated Businesses) We have ownership interests in Melt, Surface Ophthalmics, Inc. (“Surface”) and Eton Pharmaceuticals, Inc. (“Eton”) and hold royalty interests in some of Surface’s and Melt’s drug candidates. These companies are pursuing market approval for their drug candidates under the Federal Food Drug and Cosmetic Act (the “FDCA”), including in some instances under the abbreviated pathway described in Section 505(b)(2), which permits the submission of a new drug application (an “NDA”) where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. Melt Pharmaceuticals, Inc. Melt is a clinical-stage pharmaceutical company focused on the development and commercialization of proprietary non-intravenous, sedation and anesthesia therapeutics for human medical procedures in hospital, outpatient, and in-office settings. Melt is seeking regulatory approval for its proprietary technologies, where possible. In December 2018, we entered into an Asset Purchase Agreement with Melt (the “Melt Asset Purchase Agreement”), pursuant to which Harrow assigned to Melt the underlying intellectual property for Melt’s current pipeline, including its lead drug candidate MELT-300. The core intellectual property Melt owns is a patented series of combination non-opioid sedation drug formulations that we estimate to have many clinical applications. MELT-300 is a novel, sublingually delivered, non-IV, opioid-free drug candidate being developed for procedural sedation. In February 2021, Melt announced data from, and the successful completion of, its Phase 1 study. In December 2022, Melt announced topline data from its Phase 2 study for MELT-300 as set forth below: ● In a study of more than 300 patients, undergoing cataract surgery conducted at nine study sites, MELT-300 achieved its primary procedural sedation endpoint, demonstrating statistical superiority for procedural sedation compared to all comparator treatment arms, including midazolam 3mg (P=0.0129) and ketamine 50mg (P=0.0096). ● Using the validated Ramsey Sedation Scale (RSS), MELT-300 treatment arm patients were 50% less likely to require rescue sedation compared to midazolam 3mg (P=0.0198). ● Using the RSS, MELT-300 treatment arm patients were 66% less likely to require rescue sedation pre-operatively compared to the midazolam 3mg treatment arm. ● MELT-300’s safety profile was generally comparable to the placebo arm. Melt expects to begin Phase 3 program activities in 2024, which will consist of a single pivotal study comparing MELT-300 to sublingual midazolam and placebo in subjects undergoing cataract surgery. Beginning in July 2023 through March 1, 2024, Melt had raised over $23,000,000 in gross proceeds from the sale and issuance of Melt’s Series B Preferred Stock. We own 3,500,000 shares of Melt common stock, 2,260,000 shares of Melt’s Series B-1 Preferred Stock and 74,256 shares of Melt’s Series B Preferred Stock, which in aggregate represented approximately 47% and 46% of Melt’s equity and voting interests issued and outstanding as of December 31, 2023 and March 1, 2024, respectively. Melt is required to make mid-single digit royalty payments to the Company on net sales of MELT-300 while any patent rights remain outstanding, subject to other conditions. Melt can require the Company to cease compounding like products at the time of FDA approval of MELT-300. If approved, we do not expect a cessation of compounding like products to have a material impact on our operations and financial performance. 5 Surface Ophthalmics, Inc. Surface is a clinical-stage pharmaceutical company focused on development and commercialization of innovative therapeutics for ocular surface diseases. Surface is developing four product candidates at various stages of development for certain ocular surface related indications. We own 3,500,000 shares of Surface common stock, which represented approximately 20% of Surface’s equity and voting interests as of December 31, 2023. Harrow owns mid-single-digit royalty rights on net sales on Surface’s drug candidates SURF-100, SURF-200 and SURF-201. Eton Pharmaceuticals, Inc. Eton is an innovative pharmaceutical company focused on developing, acquiring, and commercializing treatments for rare diseases. Eton currently commercializes ALKINDI SPRINKLE® and Carglumic Acid tablets and has additional rare disease products under development, including dehydrated alcohol injection and the ZENEO® hydrocortisone autoinjector. In May 2017, we gave up our controlling interest in Eton. We own 1,982,000 shares of Eton common stock, which represented less than 10% of Eton’s equity and voting interests issued and outstanding as of December 31, 2023. Pharmaceutical Compounding Businesses Pharmaceutical Compounding Pharmaceutical compounding is the science of combining different active pharmaceutical ingredients (APIs), all of which are approved by the FDA (either as a finished form product or as a bulk drug ingredient), and excipients to create specialized pharmaceutical preparations. Physicians and healthcare institutions use compounded drugs when commercially available drugs do not optimally treat a patient’s needs. In many cases, compounded drugs, such as ours, have wide market utility and may be clinically appropriate for large patient populations. Examples of compounded formulations include medications with alternative dosage strengths or unique dosage forms, such as topical creams or gels, suspensions, or solutions with more tolerable drug delivery vehicles. Sales revenue from our compounded products are derived from us making, selling and dispensing our compounded prescription drug formulations as cash payment transactions between us and our end-user customers. As such, the majority of our commercial transactions for compounded products do not involve distributors, wholesalers, insurance companies, pharmacy benefit managers or other middle parties. In regard to our compounded formulations, by not being reliant on insurance company formulary inclusion and pharmacy benefit manager payment clawbacks, we are able to simplify the prescription transaction process. We believe the outcome of our compounding business model is a simple transaction, involving a patient-in-need, a physician’s diagnosis, a fair price and great service for a quality pharmaceutical product. ImprimisRx Compounding Facilities Pharmaceutical compounding businesses are governed by Sections 503A and 503B of the FDCA. Section 503A of the FDCA provides that a pharmacy is only permitted to compound a drug for an individually identified patient based on a prescription for the patient and is only permitted to distribute the drug interstate if the pharmacy is licensed to do so in the states where it is compounded and where the medication is received. Section 503B of the FDCA provides that a pharmacy engaged in preparing sterile compounded drug formulations may voluntarily elect to register as an “outsourcing facility.” Outsourcing facilities are permitted to compound large quantities of drugs without a prescription and distribute them out of state with certain limitations, such as the formulation appearing on the FDA’s drug shortage list or the bulk drug substances contained in the formulations appearing on the FDA’s “clinical need” list. Entities voluntarily registering with FDA as outsourcing facilities are subject to additional requirements that do not apply to compounding pharmacies (operating under Section 503A of the FDCA), including adhering to standards such cGMPs or other FDA guidance documents and being subject to regular FDA inspection. 6 We operate two compounding facilities located in Ledgewood, New Jersey. Our New Jersey operations are comprised of two separate entities and facilities, one of which is registered with the FDA as an outsourcing facility (“NJOF”) under Section 503B of the FDCA. The other New Jersey facility (“RxNJ”) is a licensed pharmacy operating under Section 503A of the FDCA. All of our compounded products that we sell, produce and dispense are made in the United States. We believe that, with our current compounding pharmacy facilities and licenses and FDA registration of NJOF, we have the infrastructure to scale our business appropriately under the current regulatory landscape and meet the potential growth in demand we are targeting. We plan to invest in one or both of our facilities to further their capacity and efficiencies. Also, we may seek to access greater pharmacy and production related redundancy and markets through acquisitions, partnerships or other strategic transactions. Sales and Marketing The focus of our sales and marketing is in the U.S. We do, however, believe that our proprietary drug formulations, drug candidates and drug products could have commercial appeal in international markets, and have engaged distributors and entered into out-licensing arrangements for certain of our products and proprietary formulations in certain non-U.S. markets, including Canada. Our sales and marketing activities consist primarily of efforts to educate doctors, ambulatory surgery centers, healthcare systems, hospitals and other users throughout the U.S. about our branded drug products and compounded formulations. We expect that we may experience growth in the sales of our products in future periods, particularly in light of our recent product launches and commercial campaigns. However, we may not be successful in doing so, whether due to the safety, quality or availability of our products and proprietary compounded formulations, the size of the markets for such products, which could be smaller than we expect, the timing of market entry relative to competitive products, the availability of alternative compounded formulations or FDA-approved drugs, the price of our products relative to alternative products or the success of our sales and marketing efforts, which is dependent on our ability to further build and continue to grow a qualified and adequate internal sales function. We expect to continue to acquire and/or develop additional FDA-approved ophthalmic products that allow us to leverage our existing commercial infrastructure to promote, sell, and ultimately bring these products to market. As we execute this strategy, we will continue to expand our sales and marketing team, expertise and expenses. Ophthalmology Market For any ocular procedure, a surgeon may require drugs for sedation, dilation, anesthesia, inflammation and infection prevention, and ocular surface preservation. The cataract surgery market continues to experience significant growth. According to Market Scope, approximately 4.8 million lens procedures were performed in the U.S. in 2021, 97% of which were cataracts, with the number expected to grow to 5.5 million lens procedures in 2026. Nearly 96% of the refractive surgery procedures performed are LASIK (laser in situ keratomileusis) surgeries, an outpatient surgical procedure used to treat nearsightedness, farsightedness, and astigmatism. According to an article published in 2021 in Clinical Ophthalmology, an estimated 800,000 eyes were treated with laser correction surgery (such as LASIK) each year for the previous ten years. Dry eye occurs when the eye does not produce enough tears, or when the tears are not of the correct consistency and evaporate too quickly. Inflammation of the surface of the eye may also occur. According to a 2023 Market Scope report, there are 39 million people in the U.S. that suffer from both signs and symptoms of dry eye, with 49% of diagnosed dry eye patients having moderate to severe dry eye. The same report stated the global dry eye product market is expected to grow from $5.8 billion in 2023 to $7.5 billion in 2028. Dry eye is among the most common conditions seen by eyecare professionals. Intravitreal injections are one of the most common procedures performed by ophthalmologists in the United States. According to a 2023 article published in Healio, approximately 8 million intravitreal injections were expected to be performed that year. These injections are utilized to administer critical medications into the eye that treat diseases including but not limited to proliferative diabetic retinopathy, diabetic macular edema, wet age-related macular degeneration, neovascular glaucoma, retinal vein occlusions, intraocular tumors, and endophthalmitis. In addition, products and product candidates are being developed and used to treat symptoms associated with an eye disease known as geographic atrophy. Most of the medicines in these products and product candidates are administered via intravitreal injection. Therefore, we believe as these products and product candidates gain commercial adoption, the number of annual intravitreal injections should increase further and at an increased rate as compared to recent years. 7 Vitrectomy is a surgical procedure undertaken by a specialist where the vitreous humor gel that fills the eye cavity is removed to provide better access to the retina. This allows for a variety of repairs, including the removal of scar tissue, laser repair of retinal detachments and treatment of macular holes. According to an October 2022 article published on the Cleveland Clinic website, U.S. surgeons perform about 225,000 vitrectomies each year. The number is likely to continue to grow as eye care providers find more uses for vitrectomy. Chronic non-infectious uveitis affecting the posterior segment of the eye is an inflammatory disease that afflicts people of all ages, producing swelling and destroying eye tissues, which can lead to severe vision loss and blindness. Based on internal estimates and information published on the MedScape website (which was updated as of March 2023) that cites various ranges of prevalence of uveitis, we estimate this disease affects approximately 100,000 people each year in the U.S. The standard of care treatment for this disease typically involves the use of short-acting corticosteroids to reduce uveitic flares (such as TRIESENCE) followed by additional treatments of sustained release, lower dose steroids to minimize the risk of further flares. Competition The pharmaceutical and pharmacy industries are highly competitive. We compete against branded drug companies, generic drug companies, outsourcing facilities and compounding pharmacies. We are smaller than some of our competitors, and we may lack the financial and other resources needed to develop, produce, distribute, market and commercialize any of our branded products and proprietary formulations or compete for market share in these sectors. The drug products available through branded and generic drug companies with which our products and formulations compete have been approved for marketing and sale by the FDA and are required to be manufactured in facilities compliant with cGMP standards. Although we prepare some of our compounded formulations in accordance with cGMP standards and our other formulations are produced according to the standards provided by United States Pharmacopoeia (USP) Chapter <795> (“USP 795”) and USP Chapter <797> (“USP 797”) and applicable state and federal law, our compounded formulations are not required to be, and have not been, approved for marketing and sale by the FDA. As a result, some physicians may be unwilling to prescribe, and some patients may be unwilling to use, our compounded formulations. Additionally, under federal and state laws applicable to our current compounding pharmacy operations operating under Section 503A of the FDCA, we are not permitted to prepare significant amounts of a specific formulation in advance of a prescription, compound quantities for office use or utilize a wholesaler for distribution of our formulations; instead, our compounded formulations must be prepared and dispensed in connection with a physician prescription for an individually identified patient. Pharmaceutical companies, on the other hand, are able to sell their FDA-approved products to large pharmaceutical wholesalers, who can in turn sell to and supply hospitals and retail pharmacies. Even though we have registered NJOF with the FDA, our compounding business may not be scalable on the scope available to our competitors that produce FDA-approved drugs, which may limit our potential for profitable operations. These facets of our operations may subject our business to limitations our competitors offering only FDA-approved drugs may not face. Biotechnology and related pharmaceutical technologies are subject to rapid and significant change. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies. Products developed by our competitors, including FDA-approved drugs and compounded formulations created by other pharmacies, could render our products and technologies obsolete or unable to compete. Any products that we develop may become obsolete before we recover expenses incurred in developing the products, which may require that we seek additional funds that may or may not be available to continue our operations. The competitive environment requires an ongoing, extensive search for medical and technological innovations and the ability to develop and market these innovations effectively, and we may not be competitive with respect to these factors. Other competitive factors include the safety and efficacy of a product, the size of the market for a product, the timing of market entry relative to competitive products, the availability of alternative compounded formulations or approved drugs, the price of a product relative to alternative products, the availability of third-party reimbursement, the success of sales and marketing efforts, brand recognition and the availability of scientific and technical information about a product. Although we believe we are positioned to compete favorably with respect to many of these factors, if our proprietary formulations are unable to compete with the products of our competitors, we may never gain a significant market share or achieve profitability. 8 Factors Affecting Our Performance We believe the primary factors affecting our performance are our ability to increase revenues of our ophthalmic products, grow and gain operating efficiencies in our pharmacy operations, successfully adjust our operations to account for any future regulatory-related restrictions, optimize pricing and obtain reimbursement options for our ophthalmic 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 or have been recently launched. 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 increased 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. Medicare, Medicaid and Other Reimbursement Options Sales in the United States of our marketed products are dependent, in large part, on the availability and extent of reimbursement from third-party payors, including private payor healthcare and insurance programs, health maintenance organizations, pharmacy benefit management companies, and government programs such as Medicare and Medicaid, see also Part I, Item 1A. “Risk Factors” for additional risks related to reimbursement and government programs. We participate in, and have certain price reporting obligations to, the Medicaid Drug Rebate program, state Medicaid supplemental rebate program(s), and other governmental pricing programs. We also have obligations to report the average sales price for certain drugs to the Medicare program. Under the Medicaid Drug Rebate program, we are required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made available for our drugs under Medicaid and Part B of the Medicare program. Medicare is a federal program that is administered by the federal government that covers individuals age 65 and over or that are disabled as well as those with certain health conditions. Medicare Part B generally covers drugs that must be administered by physicians or other health care practitioners; are provided in connection with certain durable medical equipment; or are certain oral anti-cancer drugs and certain oral immunosuppressive drugs. Medicare Part B pays for such drugs under a payment methodology based on the average sales price of the drugs. Manufacturers, including us, are required to report average sales price information to the Centers for Medicare & Medicaid Services (“CMS”) on a quarterly basis. The manufacturer-submitted information may be used by CMS to calculate Medicare payment rates. Starting in 2023, manufacturers are now required to pay refunds to Medicare for single-source drugs or biological products, or biosimilar biological products, reimbursed under Medicare Part B and packaged in single-dose containers or single-use packages for units of discarded drug reimbursed by Medicare Part B in excess of 10% of total allowed charges under Medicare Part B for that drug. Manufacturers that fail to pay refunds could be subject to civil monetary penalties. Further, starting in 2023, the Inflation Reduction Act of 2022 (“IRA”) established a Medicare Part B inflation rebate scheme, effective in 2023, under which, generally speaking, manufacturers will owe rebates if the average sales price of a Part B drug increases faster than the pace of inflation. Failure to timely pay a Part B inflation rebate is subject to a civil monetary penalty. The IRA also created a drug price negotiation program under which, after being on the market for a certain period of time, the prices for certain high Medicare spending drugs and biological products provided to Medicare patients without generic or biosimilar competition will be capped by reference to, among other things, a specified non-federal average manufacturer price, starting in 2026. Failure to comply with requirements under the drug price negotiation program is subject to an excise tax and a civil monetary penalty. This or any other legislative change could impact the market conditions for our products. 9 IHEEZO and TRIESENCE are covered under Medicare Part B and we may develop other drug candidates and/or acquire drug products that are also covered under Medicare Part B. In February 2023, we announced that CMS had issued a permanent, product specific J-code for IHEEZO (J2403) which will become effective under the Healthcare Procedure Coding System (HCPCS) on April 1, 2023. TRIESENCE has a permanent product specific J- code (J3300) as well, which physicians can use for reimbursement purposes of that product. New drugs approved by the FDA that are used in surgeries performed in a hospital outpatient departments or ambulatory surgical centers may receive a transitional pass-through reimbursement under Medicare, provided they meet certain criteria, including a “not insignificant” cost criterion. Pass-through status allows for separate payment (i.e., outside the packaged payment rate for the surgical procedure) under Medicare Part B, which consists of Medicare reimbursement for a drug based on a defined formula for calculating the minimum fee that a manufacturer may charge for the drug. Under current regulations of CMS, pass-through status applies for a period of three years; which is measured from the date Medicare makes its first pass-through payment for the product. Following the three-year period, the product would be incorporated into the cataract bundled payment system, which could significantly reduce the pricing for that product. Temporary pass-through reimbursement for IHEEZO was awarded by CMS and made effective in the second quarter of 2023. Following the expiration of pass-through status, under current CMS policy, non-opioid pain management surgical drugs when used on Medicare Part B patients in an outpatient setting can qualify for ongoing separate payments. CMS’ current non-opioid separate payment policy, like other CMS policies, can be changed by CMS through its annual rulemaking and comment process. We are also working to ensure our continued access to the Medicare market for the ambulatory surgery center (ASC), hospital and outpatient department (HOPD), and in-office use markets 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 CMS to extend our temporary pass-through period for IHEEZO in ASCs and HOPDs. We also met with CMS in January 2024 to request clarification related to its anesthesia billing policy which has historically not allowed for the separate billing of anesthesia services in the physician’s office. During the meeting we requested that CMS clarify that J-Code 2403, IHEEZO’s permanent J-Code, is appropriate to be billed for the anesthesia product itself (i.e., IHEEZO in our case) in the physician’s office setting. As of the date of this Annual Report, we have not received feedback from CMS following our meeting in January 2024. Medicaid is a joint federal and state program that is administered by the states for low-income and disabled beneficiaries. Medicaid rebates are based on pricing data reported by us on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid and Medicare programs. These data include the average manufacturer price and, in the case of innovator products, the best price for each drug which, in general, represents the lowest price available from the manufacturer to any entity in the U.S. in any pricing structure, calculated to include all sales and associated rebates, discounts, and other price concessions. The amount of the rebate is adjusted upward if the average manufacturer price increases at a faster rate than inflation (measured by reference to the Consumer Price Index – Urban). The rebate was previously capped at 100% of the average manufacturer price, but effective January 1, 2024, this cap on the rebate was removed, and our rebate liability could increase accordingly. If we become aware that our reporting for a prior quarter was incorrect or has changed as a result of recalculation of the pricing data, we are obligated to resubmit the corrected data for up to three years after those data originally were due, which revisions could affect our rebate liability for prior quarters. The federal Patient Protection and Affordable Care Act (the “PPACA” or “Health Care Reform Law”) made significant changes to the Medicaid Drug Rebate program, and CMS issued a final regulation, which became effective on April 1, 2016, to implement the changes to the Medicaid Drug Rebate program under the PPACA. Effective in 2022, CMS modified Medicaid Drug Rebate program regulations to, among other things, permit reporting multiple best price figures with regard to value-based purchasing arrangements and provide definitions for “line extension,” “new formulation,” and related terms with the practical effect of expanding the scope of drugs considered to be line extensions. Civil monetary penalties can be applied if we are found to have knowingly submitted any false pricing or other information to the government, if we are found to have made a misrepresentation in the reporting of our average sales price, or if we fail to submit the required data on a timely basis. Such conduct also could be grounds for CMS to terminate our Medicaid drug rebate agreement, in which case federal payments may not be available under Medicaid or Medicare Part B for our covered outpatient drugs. Federal law requires that any company that participates in the Medicaid Drug Rebate program also participate in the Public Health Service’s 340B drug pricing program (the “340B program”) in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B program, which is administered by the Health Resources and Services Administration (“HRSA”), requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. Covered entities include hospitals that serve a disproportionate share of financially needy patients, community health clinics, and other entities that receive certain types of grants under the Public Health Service Act. The PPACA expanded the list of covered entities to include certain free-standing cancer hospitals, critical access hospitals, rural referral centers, and sole community hospitals, but exempts “orphan drugs” from the ceiling price requirements for these covered entities. The 340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price and Medicaid rebate amount for the covered outpatient drug as calculated under the Medicaid Drug Rebate program. In general, products subject to Medicaid price reporting and rebate liability are also subject to the 340B ceiling price calculation and discount requirement. 10 HRSA issued a final regulation regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities, which became effective on January 1, 2019. It is currently unclear how HRSA will apply its enforcement authority under this regulation. Any charge by HRSA that we have violated the requirements of the regulation could result in civil monetary penalties. Moreover, under a final regulation effective January 13, 2021, HRSA established a new administrative dispute resolution (“ADR”) process for claims by covered entities that a manufacturer has engaged in overcharging, and by manufacturers that a covered entity violated the prohibitions against diversion or duplicate discounts. Such claims are to be resolved through an ADR panel of government officials rendering a decision that could be appealed only in federal court. An ADR proceeding could subject us to onerous procedural requirements and could result in additional liability. On November 30, 2022, HRSA issued a notice of proposed rulemaking that proposes several changes to the ADR process. HRSA also implemented a price reporting system under which we are required to report our 340B ceiling prices to HRSA on a quarterly basis, which then publishes those prices to 340B covered entities. In addition, legislation could be passed that would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in an inpatient setting. In order to be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by certain federal agencies and grantees, we participate in the U.S. Department of Veterans Affairs (“VA”) Federal Supply Schedule (“FSS”) pricing program. FSS participation is required for our products to be purchased by the VA, Department of Defense (“DoD”), Coast Guard, and Public Health Service (“PHS”). Prices for innovator drugs purchased by the VA, DoD, Coast Guard, and PHS are subject to a cap (known as the “Federal Ceiling Price”) equal to 76% of the annual non-federal average manufacturer price (“non-FAMP”) minus, if applicable, an additional discount. The additional discount applies if non- FAMP increases more than inflation (measured by reference to the Consumer Price Index - Urban). We also participate in the Tricare Retail Pharmacy Program, under which we pay quarterly rebates to DoD for prescriptions of our innovator drugs dispensed to Tricare beneficiaries through Tricare Retail network pharmacies. The governing statute provides for civil monetary penalties for failure to provide information timely or for knowingly submitting false information to the government. Medicare Part D provides coverage to enrolled Medicare patients for self-administered drugs (i.e., drugs that are not administered by a physician). Medicare Part D is administered by private prescription drug plans approved by the U.S. government and, subject to detailed program rules and government oversight, each drug plan establishes its own Medicare Part D formulary for prescription drug coverage and pricing, which the drug plan may modify from time to time. The prescription drug plans negotiate pricing with manufacturers and pharmacies, and may condition formulary placement on the availability of manufacturer discounts. In addition, manufacturers, including us, are required to provide to CMS a 70% discount on brand name prescription drugs utilized by Medicare Part D beneficiaries when those beneficiaries are in the coverage gap phase of the Part D benefit design. The IRA includes a sunset provision with respect to the coverage gap discount program starting in 2025 and replaces it with a new manufacturer discount program. In addition, as of October 2022, the IRA established a Medicare Part D inflation rebate scheme under which, manufacturers will generally owe additional rebates if the average manufacturer price of a Part D drug increases faster than the pace of inflation. Failure to timely pay a Part D inflation rebate is subject to a civil monetary penalty. Private payor healthcare and insurance providers, health maintenance organizations, and pharmacy benefit managers in the United States are adopting more aggressive utilization management techniques and are increasingly requiring significant discounts and rebates from manufacturers as a condition to including products on formulary with favorable coverage and copayment/coinsurance. These payors may not cover or adequately reimburse for use of our products or may do so at levels that disadvantage them relative to competitive products. 11 Our proprietary ophthalmic compounded formulations are primarily available on a cash-pay basis and generally are not subject to Medicare, Medicaid, or other payor-related initiatives. Intellectual Property Our success and ability to compete depends upon our ability to protect our intellectual property. We conduct a fulsome analysis of the intellectual property landscape prior to acquiring rights to formulations and filing patent applications. In addition, as of March 1, 2024, we owned and/or licensed more than 50 total issued and pending patent applications, which include U.S.-issued patents, international-issued patents, and U.S. and foreign/international patent pending applications. We expect to file additional patent applications in the U.S. and pursue patent protection for certain of our formulations in other important international jurisdictions in the future. As of March 1, 2024, we had, on a worldwide basis, more than 100 issued trademarks, pending trademark and copyright applications, or registered copyrights and/or trademarks. We also rely on unpatented trade secrets and know-how and continuing technological innovation in order to develop our products and formulations, which we seek to protect, in part, by confidentiality agreements with our employees, consultants, collaborators and others, including certain service providers. We also have invention or patent assignment agreements with our current employees and certain consultants. However, our employees and consultants may breach these agreements, and we may not have adequate remedies for any breach, or our trade secrets may otherwise become known or be independently discovered by competitors. In addition, inventions relevant to us could be developed by a person not bound by an invention assignment agreement with us, in which case we may have no rights to use the applicable invention. The following table lists our outstanding material patents in the U.S. for certain branded products, general subject matter and latest expiry date. One or more patents with the same or earlier expiry dates may fall under the same general subject matter and are not listed separately. Product IHEEZO VEVYE General Subject Matter Methods using topical formulations Formulation composition for treatment of dry eye syndrome Ophthalmic composition comprising cyclosporine Semiflourinated compounds for ophthalmic administration Topical administration method TRIESENCE Composition of injectable suspension ILEVRO TOBRADEX ST Methods for treating ophthalmic disorder Compositions containing a synergistic combination of polymers Composition comprising carbomer, galactomannan and borate Carboxyvinyle polymer-containing nanoparticle suspension Methods for treating inflammation where infection may occur Compositions containing tobramycin and dexamethasone VERKAZIA Methods for treating eye disease Compositions of oil-in-water cationic emulsion Compositions containing quaternary ammonium compounds ZERVIATE Methods for treating ophthalmic allergic conjunctivitis Ophthalmic topical compositions of cetirizine Governmental Regulation Expiration September 2038 December 2030 September 2037 November 2038 October 2039 December 2029 March 2029 June 2024 December 2030 March 2032 December 2027 August 2028 May 2027 November 2027 June 2029 March 2030 July 2032 Our business is subject to federal, state and local laws, regulations, and administrative practices, including, among others: federal, state and local licensure and registration requirements concerning the operation of pharmacies and the practice of pharmacy; the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”); the Health Care Reform Law; statutes and regulations of the FDA, the U.S. Federal Trade Commission (the “FTC”), the U.S. Drug Enforcement Administration and the U.S. Consumer Product Safety Commission, as well as regulations promulgated by comparable state agencies concerning the sale, advertisement and promotion of the products we sell. The regulatory and quality compliance environment for compounded drugs has become significantly more rigorous, complex and strict since the passage of The Drug Quality and Security Act of 2013 (the “DQSA”). The complexity of the current state and federal regulatory environment, as well as the expected continued evolution of state and federal laws governing pharmaceutical compounding, have presented, and will continue to present, potentially significant challenges to our business model and the fulfillment of our mission as a company. Below are descriptions of some of the various federal and state laws and regulations which may govern or impact our current and planned operations. 12 FDA New Drug Application Process As discussed in other sections of this Annual Report, we are pursuing, and may continue to pursue, alone or with project partners, FDA approval to market and sell one or more of our product candidates through the FDA’s NDA process. As a condition of approval, the FDA or other regulatory authorities may require further studies, including Phase 4 post-marketing studies, to provide additional data. Other post-marketing studies may be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested and approved. Also, the FDA or other regulatory authorities require post-marketing reporting to monitor the adverse effects of a drug. Results of post-marketing programs may limit or expand the further marketing of a product. The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising, fines and potential civil and criminal penalties. Section 505(b)(2) New Drug Applications As an alternate path for FDA approval of new indications or new formulations of previously-approved products, a company may file a Section 505(b)(2) NDA instead of a “stand-alone” or “full” NDA. Section 505(b)(2) of the FDCA was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Amendments. Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. Some examples of products that may be allowed to follow a Section 505(b)(2) path to approval are drugs that have a new dosage form, strength, route of administration, formulation or indication. The Hatch-Waxman Amendments permit the applicant to rely upon certain published nonclinical or clinical studies conducted for an approved product or the FDA’s conclusions from prior review of such studies. The FDA may require companies to perform additional studies or measurements to support any changes from the approved product. The FDA may then approve the new product for all or some of the labeled indications for which the reference product has been approved, as well as for any new indication supported by the Section 505(b)(2) application. While references to nonclinical and clinical data not generated by the applicant or for which the applicant does not have a right of reference are allowed, all development, process, stability, qualification and validation data related to the manufacturing and quality of the new product must be included in an NDA submitted under Section 505(b) (2). To the extent that the Section 505(b)(2) applicant is relying on the FDA’s conclusions regarding studies conducted for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, or Orange Book. Specifically, the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. The Section 505(b)(2) application also will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired. Thus, the Section 505(b)(2) applicant may invest a significant amount of time and expense in the development of its products only to be subject to significant delay and patent litigation before its products may be commercialized. 13 Pharmacy Regulation Our pharmacy operations are regulated by both individual states and the federal government. Every state has laws and regulations addressing pharmacy operations, including regulations relating specifically to compounding pharmacy operations. These regulations generally include licensing requirements for pharmacists, pharmacy technicians and pharmacies, as well as regulations related to compounding processes, safety protocols, purity, sterility, storage, controlled substances, recordkeeping and regular inspections, among other things. State rules and regulations are updated periodically, generally under the jurisdiction of individual state boards of pharmacy. Failure to comply with the state pharmacy regulations of a particular state could result in a pharmacy being prohibited from operating in that state, financial penalties and/or becoming subject to additional oversight from that state’s board of pharmacy. In addition, many states are considering imposing, or have already begun to impose, more stringent requirements on compounding pharmacies. If our pharmacy operations become subject to additional licensure requirements, are unable to maintain their required licenses or if states place burdensome restrictions or limitations on pharmacies, our ability to operate in some states could be limited. Federal law limits compounding pharmacies from engaging in the practice of anticipatory compounding, which involves preparing compounded medications before the actual receipt of a prescription or practitioner’s order, unless the compounding pharmacy has a history of filling certain prescriptions for a customer. In such cases, it is acceptable to engage in anticipatory compounding or the preparation of larger batches so that medications will be ready when they are needed. Anticipatory compounding also reduces the cost of compounded medications, as economies of scale can be realized by producing larger batches. Anticipatory compounding also leads to less wasted chemicals, dilutions, fillers, and other associated products that are produced, and greater accuracy and uniformity in finished medications, as larger batches decrease the variation caused by preparing multiple, smaller batches. Based on our history of meeting the needs of our customers, we are able to anticipatorily compound batches of our formulations for our customers, per the applicable regulations. Many of the states into which we deliver pharmaceuticals have laws and regulations that require out-of-state pharmacies to register with, or be licensed by, the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing pharmacy to follow the laws of the state within which the dispensing pharmacy is located. However, various state pharmacy boards have enacted laws and/or adopted rules or regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by, among other things, requiring compliance with all laws of the states into which the out-of-state pharmacy dispenses medications, whether or not those laws conflict with the laws of the state in which the pharmacy is located, or requiring the pharmacist-in-charge to be licensed in that state. To the extent that such laws or regulations are found to be applicable to our operations, we believe we comply with them. Further, under federal law, Section 503A of the FDCA previously had language that implied a limitation of the amount of compounded products that a pharmacy can distribute interstate. The interpretation and enforcement of this provision is dependent on the FDA entering into a standard Memorandum of Understanding (“MOU”) with each state setting forth limits on shipments of interstate compounding. In January of 2019, the FDA released the “2018 Compounding Policy Priorities Plan” (the “2018 Compounding Plan”) which provided an overview of the key priorities the FDA planned to focus on in 2018 in connection with compounding regulations. One of the priorities outlined in the 2018 Compounding Plan addressed the FDA’s plan to release a revised MOU (the “Revised MOU”). Pursuant to the statements in the 2018 Compounding Plan, the Revised MOU would consider amounts shipped interstate by a compounder to be inordinate amounts if the “number of prescriptions of compounded drugs distributed interstate during any calendar month is greater than 50 percent.” Importantly, instead of that number serving as a “hard limit, for state action,” the 50% target would trigger certain additional reporting requirements. On October 27, 2020, the FDA announced availability of a final MOU, Memorandum of Understanding Addressing Certain Distributions of Compounded Human Drug Products Between the State Board of Pharmacy or Other Appropriate State Agency and the U.S. Food and Drug Administration (the “Final MOU”). The Final MOU describes the responsibilities of a state board of pharmacy, or other appropriate state agency that chooses to sign the Final MOU, in investigating and responding to complaints related to drug products compounded in such state and distributed outside such state and in addressing the interstate distribution of inordinate amounts of compounded human drug products. Additionally, as part of the Final MOU, the FDA refined the definition of “inordinate amount,” a threshold for certain information identification and sharing which does not place a limit on the distribution of compounded human drug products interstate by a pharmacy located in a state that has entered into the Final MOU. Section 503A of the FDCA sets a 5% limit on compounded drugs distributed outside the state by a pharmacist, pharmacy or physician located in a state that has not entered into the Final MOU. In February 2022, the FDA said it would suspend implementation of the Final MOU and engage in a formal rulemaking process. During the rulemaking process, the agency will not enter into new agreements with states based on the Final MOU. The FDA does not expect states that have signed the Final MOU to carry out the activities described in the Final MOU. Thus, there is no reporting requirement for any pharmacy concerning interstate shipments pursuant to Section 503A and there will not be one until the Final MOU is finalized through the rulemaking process, which will include the engagement of a notice-and-comment and rulemaking period to implement certain provisions of Section 503A. The agency indicated that the process may take “several years” to complete. In the same announcement, the FDA stated it does not intend to enforce the statutory 5% limit on the distribution of compounded drugs out of the state in which they are compounded by compounders located in states that do not sign the Final MOU for the duration of the rulemaking process. 14 Certain provisions of the FDCA govern the preparation, handling, storage, marketing and distribution of pharmaceutical products. The DQSA clarifies and strengthens the federal regulatory framework governing compounding pharmacies. Title 1 of the DQSA, the Compounding Quality Act, modified provisions of the Section 503A of the FDCA that were found to be unconstitutional by the U.S. Supreme Court in 2002. In general, Section 503A provides that pharmacies are exempt from the provisions of the FDCA requiring compliance with cGMPs, labeling with adequate directions for use and FDA approval prior to marketing if the pharmacy complies with certain other requirements. Among other things, to comply with Section 503A, a compounded drug must be compounded by a licensed pharmacist for an identified individual patient on the basis of a valid prescription. Pharmacies may only compound in limited quantities before receipt of a prescription for an individual patient and are subject to limitations on anticipatory compounding for distribution, which generally permit anticipatory compounding only based on historical prescription volumes. The DQSA also contained new Section 503B of the FDCA, which established an outsourcing facility as a new form of entity that is permitted to compound larger quantities of drug formulations without a prescription, thus permitting the practice of anticipatory compounding, and distributing them out of state without limitation, if the drug formulations appear on the FDA’s drug shortage list or the bulk drug substances contained in the formulations appear on a “clinical need” list to be established by the FDA. In January 2017, the FDA issued Interim Policy on Compounding Using Bulk Drug Substances Under Section 503B of the FFDCA (“Interim Policy”) which informs stakeholders about how the FDA intends to exercise its enforcement discretion for compounding with those substances on a “Category 1 list” while the agency compiles and evaluates its clinical needs list, and in March 2019 the FDA issued Evaluation of Bulk Substances Nominated for Use in Compounding Under Section 503B of the Federal Food, Drug and Cosmetic Act which provides further guidance as to the FDA’s policy for evaluating bulk drug substances nominated for use in compounding by outsourcing facilities. Entities voluntarily registering as outsourcing facilities are subject to cGMP requirements and regular FDA inspection, among other requirements. As described above, our current pharmacy operations in New Jersey are governed by Section 503A of the FDCA, and our New Jersey based outsourcing facility is governed by Section 503B of the FDCA. On July 30, 2020, the FDA issued a notice for comments related to certain bulk drug substances to be removed from the 503B Bulk’s List (or Category 1 List). Included in this notice for comment were certain bulk drug substances which we currently use in some of our compounded products. In the event one or more of these bulk substances are ultimately removed from the Category 1 List, we intend to utilize commercially available versions of these substances or similar active pharmaceutical ingredients as replacements of the bulk powders contained in our sterile products. Nonetheless, if all or some of the bulk drug substances we use are removed from the 503B Bulk’s List, this may result in a disruption in our operations, revenues and cash flows. In addition, between September 2020 and January 2021, NJOF 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 of NJOF. In addition, during the 2020 Inspection, the FDA noted that we were compounding drugs that did not produce for an individual patient a clinical difference from comparable approved drugs, as determined by a prescribing practitioner. 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. 15 We prepare our compounded formulations in accordance with the standards provided by USP <795> and USP <797> and applicable state and federal law. In November 2023, USP made effective finalized revisions to USP <795> and USP <797>, which had been previously proposed for public comment in September 2021. The revisions include limitations on beyond use dating of sterile and preservative-free products and batch sizes, among other changes. Some regulatory bodies such as state boards of pharmacy adopted these changes at that time, and some have not or plan to on different dates, on a case-by-case basis. While USP has no role in enforcement, we believe the revisions to USP <797> in particular will likely cause two changes to our business, which in the aggregate should have a neutral to positive revenue impact on Harrow: (i) a reduction in revenues generated from sales of formulations compounded by our 503A pharmacy, and (ii) an increase in revenues from sales of formulations compounded in our 503B facility. Further, we believe the changes to USP chapter <797> will likely cause a reduction in the ability of local 503A pharmacies to produce compounded formulations to serve local markets, and that these changes in policy affecting sterile compounded formulations, if adopted by the various states, may increase demand for compounded formulations from larger vendors such as Harrow and cause further consolidation in the market for compounded formulations as smaller 503A pharmacies see a reduction in revenues from certain segments of their formularies affected by these changes. Confidentiality, Privacy and HIPAA Our pharmacy operations involve the receipt, use and disclosure of confidential medical, pharmacy and other health-related information. In addition, we use aggregated and blinded (anonymous) data for research and analysis purposes. The federal privacy regulations under HIPAA are designed to protect the medical information of a healthcare patient or health plan enrollee that could be used to identify the individual. Among other things, HIPAA limits certain uses and disclosures of protected health information and requires compliance with federal security regulations regarding the storage, utilization and transmission of and access to electronic protected health information. The requirements imposed by HIPAA are extensive. In addition, most states and certain other countries have enacted privacy and security laws that protect identifiable patient information that is not health-related. For example, California recently enacted the California Consumer Privacy Act (the “CCPA”) that creates new individual privacy rights for consumers and places increased privacy and security obligations on entities handling personal data of consumers or households. Effective January 1, 2020, the CCPA gives California residents expanded privacy rights and protections, and provides civil penalties for violations and a private right of action for data breaches. The CCPA exemplifies the vulnerability of our business to not only cyber threats but also the evolving regulatory environment related to personal data and protected health information. In addition, the California Invasion of Privacy Act prohibits the use of “any machine, instrument, or contrivance” to tap any telephonic communication and use of any “electronic amplifying or recording device” to eavesdrop upon a “confidential communication” without consent of all parties to the communication. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information, such as the General Data Protection Regulation (“GDPR”) in the European Union (the “EU”) that became effective in May 2018 and the Personal Information Protection and Electronic Documents Act that became effective in Canada in April 2000. Further, several states have enacted more protective and comprehensive pharmacy-related privacy legislation that not only applies to patient records but also prohibits the transfer or use for commercial purposes of pharmacy data that identifies prescribers. These regulations impose substantial requirements on covered entities and their business associates regarding the storage, utilization and transmission of and access to personal health and non-health information. Many of these laws apply to our business. International Regulation If we pursue commercialization of our branded products and proprietary formulations in countries other than the United States, then we may need to obtain the approvals required by the regulatory authorities of such foreign countries that are comparable to the FDA and state boards of pharmacy, and we would be subject to a variety of other foreign statutes and regulations comparable to those relating to our U.S. operations. Regulatory frameworks and requirements vary by country and could involve significant additional licensing requirements and product testing and review periods. We currently partner with companies to sell, market and distribute some of our products in certain foreign countries. Environmental and Other Matters We are or may become subject to environmental laws and regulations governing, among other things, any use and disposal by us of hazardous or potentially hazardous substances in connection with our research and preparation of our formulations. In addition, we are subject to work safety and labor laws that govern certain of our operations and our employee relations. In each of these areas, as described above, the FDA and other government agencies have broad regulatory and enforcement powers, including, among other things, the ability to levy fines and civil penalties, suspend or delay issuance of approvals, licenses or permits, seize or recall products, and withdraw approvals, any one or more of which could have a material adverse effect on our business. 16 Research and Development Expenses Our research and development (“R&D”) expenses incurred in 2023 and 2022 primarily included expenses related to development of intellectual property, researcher and investigator-initiated evaluations, and formulation development related primarily to our ophthalmic products, formulations and certain other assets, in addition to costs associated with our drug candidate development programs. During the year ended December 31, 2023, we incurred $6,652,000 in R&D expenses, compared to $3,050,000 during the year ended December 31, 2022. Financial Information About Segments and Geographic Areas The Company operates the business on the basis of a single reportable segment, which is the business of discovery, development, and commercialization of innovative ophthalmic therapies. The Company’s chief operating decision-maker is the Chief Executive Officer, who evaluates the Company as a single operating segment. The Company categorizes revenues by geographic area based on selling location. All operations are currently located in the United States; therefore, total revenues for 2023 and 2022 were attributed to the United States. All long-lived assets at December 31, 2023 and 2022 were located in the United States. Human Capital As of March 1, 2024, we employed 315 employees. Our employees are engaged in pharmacy operations, sales, marketing, research, development, and general and administrative functions. We expect to add additional employees in all departmental functions, with a focus on sales force additions and other commercial activities as we carry out our business plan in the next 12 months. We are not party to any collective bargaining agreements with any of our employees. We have never experienced a work stoppage, and we believe our employee relations are good. We hire independent contractors and consultants on an as-needed basis. Talent Acquisition and Retention We recognize that our employees largely contribute to our success. To this end, we support business growth by seeking to attract and retain best- in-class talent. Our talent acquisition team uses internal and external resources to recruit highly skilled candidates in the U.S. We believe that we continue to attract and retain superior talent as measured by our turnover rate and employee service tenure. Total Rewards Our total rewards philosophy has been to create investment in our workforce by offering competitive compensation and benefits packages. We provide employees with compensation packages that include base salary, annual incentive bonuses, and long-term equity awards. We also offer comprehensive employee benefits, which vary by country and region, such as life, disability, and health insurance, health savings and flexible spending accounts, paid time off, and a 401(k) plan. It is our expressed intent to be an employer of choice in our industry by providing market-competitive compensation and benefits packages. Health, Safety, and Wellness The health, safety, and wellness of our employees is a priority in which we have always invested and will continue to do so. We provide our employees and their families with access to a variety of innovative, flexible, and convenient health and wellness programs. Program benefits are intended to provide protection and security, so employees can have peace of mind concerning events that may require time away from work or that may impact their financial well-being. 17 Diversity, Equity, and Inclusion We believe a workforce with diverse life experiences is critical to our success. We appreciate differences in the members of our workforce such as, race, ethnicity, religion, nationality, gender, age, and sexual orientation, as well as education, skill sets and experience. Because we are always interested in hiring the most productive and committed talent, we are focused on inclusive hiring practices, fair and equitable treatment, organizational flexibility, and training and resources. Training and Development We believe in encouraging employees in becoming lifelong learners by providing ongoing learning, training and leadership opportunities. We provide our employees with a tuition reimbursement program, and in certain instances, onsite training programs. While we strive to provide real-time recognition of employee performance, we have a formal annual review process not only to determine pay and equity adjustments tied to individual contributions, but to identify areas where training and development may be needed. Corporate Transparency In 2022, we released and published on our corporate website (harrow.com) our Corporate Transparency Report, which describes and summarizes the initiatives the Company has undertaken and associated metrics related to certain issues including: ● Energy, Emissions, Waste and Water ● Embracing our Community ● Supply Chain Management ● Community Involvement ● Innovation/Sustainable Products ● Employee Health and Safety ● Employee Recruitment, Development and Retention ● Employee Diversity ● Governance ● Drug Safety ● Business Ethics, Compliance and Bribery ● Data Protection, Patient Data Privacy Company Information We were incorporated in Delaware in January 2006 as Bywater Resources, Inc. In September 2007, we closed a merger transaction with Transdel Pharmaceuticals Holdings, Inc. and changed our name to Transdel Pharmaceuticals, Inc. We changed our name to Imprimis Pharmaceuticals, Inc. in February 2012. We changed the name of our company to Harrow Health, Inc. in December 2018 and then to Harrow, Inc. in September 2023. Our corporate headquarters are located at 102 Woodmont Blvd., Suite 610, Nashville, Tennessee, 37205, and our telephone number at such office is (615) 733-4730. Our website address is www.harrow.com. Information contained on our website is not deemed part of this Annual Report. 18 ITEM 1A. RISK FACTORS Risk Factors Summary We are subject to a variety of risks and uncertainties, including financial risks, operational risks, human capital risks, legal proceedings and regulatory risks and certain general risks, that could have a material adverse effect on our business results of operations, financial condition and prospects. Risks that we deem material are described under “Risk Factors” below and include, but are not limited to, the following: Risks Related to Economic Conditions and Operations of Our Business. ● Our ability to achieve and maintain profitability for our business ● Our ability to successfully market, commercialize, and sell current, recently acquired and future products ● Our current indebtedness and ability to access additional capital ● Our ability to attract customers and increase sales of current and future products ● Our ability to obtain marketing approval and ongoing expense associated with it for any of our drug candidates, including those for which we own royalty rights ● Our reliance on third parties for manufacturing certain components, FDA approved drugs and to conduct clinical trials ● Our exposure to liabilities and reputation harm if our products give rise to defects, recalls, patient injury or death ● Our information technology systems exposure to cyberattack or information security breach could significantly compromise the confidentiality, integrity and availability of our information technology systems Risks Related to Government Regulations and Third-Party Policies ● Governmental regulations, including, but not limited to, potential changes to USP 797, 503B bulks list and others, that could or currently do burden operations or narrow the market for our products ● Our sales depend on coverage and reimbursement from government and commercial third-party payors, and pricing and reimbursement pressures have affected, and are likely to continue to affect, our profitability ● The adoption and interpretation of new tax legislation or exposure to additional tax liabilities could affect our profitability ● Our business may be affected by litigation and government investigations Risks Related to Competition ● Securing and maintaining patent or other intellectual property protection for our products and related improvements ● Market acceptance of our drug products, drug candidates, compounded drugs and pharmacies ● Our ability to successfully research, develop and timely manufacture our current and future products and drug candidates ● Our ability to enforce protect our intellectual property rights along with the potential of future legal proceedings filed against us claiming intellectual property infringement ● Retention, recruitment, and training of senior management and key personnel Risks Related to Product Development, Regulatory Approval, Manufacturing and Commercialization ● We may not be able to develop commercial products despite significant investments in R&D ● Our branded products and product candidates in development cannot be sold without regulatory approval ● Our drug candidates may face competition sooner than we expect ● We rely on third parties to manufacture and conduct clinical trials of our branded drug products and product candidates ● We may not be successful in obtaining market exclusivity for our product candidates Risks Related to the Notes ● Our ability to pay the interest and debt service payments associated with the Notes ● The Notes are unsecured, effectively subordinated to any secured indebtedness, with limited protection for holders of the Notes ● The Notes are subject to various market factors, including market interest rates, trading activity, third-party ratings and other factors 19 Risks Related to Our Common Stock ● Volatility of the price of our common stock ● Our stock price falling as a result of future offerings or sales You should carefully consider the following risk factors in addition to the other information contained in this Annual Report. Our business, financial condition, results of operations, and prices of our common stock and Notes could be materially adversely affected by any of these risks. Risks Related to Economic Conditions and Operations of Our Business. We may not be profitable in the future. As of December 31, 2023, our accumulated deficit was $(133,904,000). Our current projections indicate that we will have operating income and/or net income during 2024; however, these projections may not be correct and our plans could change. Also, we could incur increasing operating losses in the foreseeable future for our commercialization activities, research and development, and our pharmaceutical compounding business, which would impact net income. Recent changes to the accounting for equity investments require those investments to be measured at fair market value, which may cause our earnings (losses) to become volatile as the stock prices of those equity investments fluctuate. Although we have been generating revenue from our pharmaceutical operations, our ability to generate the revenues necessary to achieve profitability will depend on many factors, including those discussed in this “Risk Factors” section. Our business plan and strategies involve costly activities that are susceptible to failure, and, therefore, we may not be able to generate sufficient revenue to support and sustain our business or reach the level of sales and revenues necessary to achieve and sustain profitability. We may not receive sufficient revenue to fund our operations and recover our development costs. Our business plan involves the preparation and sale of our proprietary formulations through our compounding pharmacies and outsourcing facilities, along with the sale and marketing of FDA-approved products and drug candidates through third-party wholesaler and pharmacy channels. We have limited experience operating pharmacies and commercializing compounded formulations and selling FDA-approved products, and we may be unable to successfully manage this business or generate sufficient revenue to recover our development costs and operational expenses. We may have only limited success in marketing and selling our products and formulations. Although we have established and plan to grow our internal sales teams to market and sell our products and formulations and other non-proprietary products, we have limited experience with such activities and may not be able to generate sufficient physician and patient interest in our products and formulations to generate significant revenue from sales of these products. In addition, we are substantially dependent on our ImprimisRx compounding pharmacies and outsourcing facilities, along with any pharmacy partners with which we may contract to compound and sell our formulations and products using our quality standards and specifications, in a timely manner and sufficient volumes to accommodate the number of prescriptions they receive. Our pharmacies may be unable to compound our formulations successfully, and we may be unable to acquire, build or enter into arrangements with pharmacies or outsourcing facilities of sufficient size, reputation and quality to implement our business plan, which would cause our business to suffer. We may fail to realize the anticipated benefits of our recent and any future product acquisitions. The success of our product acquisitions will depend on, among other things, our ability to successfully integrate the products into our commercial platform, transfer the products NDAs, maintain payor reimbursement coverage, maintain an adequate supply of the products, market the products to our existing customers and re-introduce TRIESENCE to the ophthalmic market. If we experience difficulties with the implementation of plans with respect to our acquisitions, the anticipated benefits of recent or future acquisitions may not be realized fully or at all, or may take longer to realize than expected. Integration efforts will also divert management’s attention and resources. These matters could have an adverse effect during any transition period and for an undetermined period after completion of the acquisitions. 20 We may not be able to correctly estimate our future operating expenses, which could lead to cash shortfalls. The estimates of our future operating and capital expenditures are based upon our current business plan, our current operations and our current expectations regarding the commercialization of our proprietary formulations. Our projections have varied significantly in the past as a result of changes to our business model and strategy, our termination of efforts to pursue FDA approval of a drug candidate in November 2013, our acquisitions of compounding facilities and various product and corporate development opportunities since 2014, the expenses associated with developing our pharmacy facilities into outsourcing facilities and registering them as such with the FDA and our recent strategic shift to develop and commercialize FDA approved products. We may not accurately estimate the potential revenues and expenses of our operations. If we are unable to correctly estimate the amount of cash necessary to fund our business, we could spend our available financial resources much faster than we expect. If we do not have sufficient funds to continue to operate and develop our business, we could be required to seek additional financing earlier than we expect, which may not be available when needed or at all, or be forced to delay, scale back or eliminate some or all of our proposed operations. If we do not successfully identify and acquire rights to new products and drug candidates and successfully integrate them into our operations, our growth opportunities may be limited. We plan to pursue the development of new FDA approved products and drug candidates which may include continued activities to develop and commercialize current assets or, if and as opportunities arise, potential acquisitions of new intellectual property rights and assets. We have historically relied, and we expect to continue to rely, primarily upon third parties to provide us with additional development opportunities. We may seek to enter into acquisition agreements or licensing arrangements to obtain rights to develop new formulations and FDA approved products in the future, but only if we are able to identify attractive products and formulations and negotiate acquisition or license agreements on terms acceptable to us, which we may not be able to do. Moreover, we have limited resources to acquire additional potential product development assets and integrate them into our business. Acquisition opportunities may involve competition among several potential purchasers, which could include large multi-national pharmaceutical companies and other competitors that have access to greater financial resources than we do. If we are unable to obtain rights to development and commercial opportunities from third parties and we are unable to rely upon our compounding pharmacies and current and future relationships with pharmacists, physicians and other inventors to provide us with additional development opportunities, our growth and prospects could be limited. Our product development strategy is to focus on ophthalmology and eye care related products and formulations for which we believe there is broad market potential, large unmet needs and/or unique value to physicians and patients and to develop and offer formulations and products within these therapeutic areas that could afford us with gross and operating margins consistent with our current and historical figures. However, our expectations and assumptions about market potential and patient needs may prove to be wrong, and we may invest capital and other resources on products, drug candidates, and formulations that do not generate sufficient revenues for us to recoup our investment. We may be unable to successfully develop and commercialize our proprietary formulations or any other assets we may acquire. We have acquired assets related to compoundable formulations, drug products and drug candidates. We are currently pursuing development and commercialization opportunities with respect to a number of these products, drug candidates and formulations, and we are in the process of assessing certain of our other assets in order to determine whether to pursue their development or commercialization. In addition, we expect to consider the acquisition of additional intellectual property rights or other assets in the future. Once we decide to pursue a potential drug candidate, we develop a commercialization strategy for it, which may include marketing and selling the formulation in compounded form through compounding pharmacies or outsourcing facilities, or pursuing FDA approval of the drug candidate. We may incorrectly assess the risks and benefits of the commercialization options or we may not pursue a commercialization strategy that proves to be successful. If we are unable to successfully commercialize one or more of our proprietary formulations, drug products and drug candidates, our operating results would be adversely affected. Even if we are able to successfully sell one or more proprietary formulations, drug products and drug candidates, we may never recoup our investment in acquiring or developing the formulations, drug products and drug candidates. Our failure to identify and expend our resources and technologies with commercial potential and execute an effective commercialization strategy for each of our formulations, drug products and drug candidates would negatively impact the long-term profitability of our business. 21 We may need additional capital in order to continue operating our business, and such additional funds may not be available when needed, on acceptable terms, or at all. We only recently started generating cash from operations, but we do not currently earn sufficient revenues to support our operations. We may need significant additional capital to execute our business plan, execute on future acquisitions and fund our proposed business operations. Additionally, our plans may change or the estimates of our operating expenses and working capital requirements could be inaccurate, we may pursue acquisitions of FDA- approved products, drug candidates, pharmacies or other strategic transactions that involve large expenditures, or we may experience growth more quickly or on a larger scale than we expect, any of which may 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. We have raised over $285,000,000 in gross proceeds through equity and debt financings since 2021. We may seek to obtain additional capital through equity or debt financings, funding from corporate partnerships or licensing arrangements, sales of assets or other financing transactions. If we issue additional equity or convertible debt securities to raise 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 and licensing arrangements or sales of assets, we may have to relinquish potentially valuable rights to our drug candidates or proprietary technologies, 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 those loans 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 options, convertible notes and warrants, which would adversely impact our financial results. We have in the past participated and may in the future participate in strategic transactions that could impact our liquidity, increase our expenses and distract our management. From time to time, we consider engaging in strategic transactions, such as out-licensing or in-licensing of compounds, drug candidates, drug products or technologies, acquisitions of companies, and asset purchases. We may also consider a variety of different business arrangements in the future, including strategic partnerships, joint ventures, spin-offs, carve-outs, restructurings, divestitures, business combinations and investments. In addition, another entity may pursue us or certain of our assets or aspects of our operations as an acquisition target. Any such transactions may require us to incur expenses specific to the transaction and not incident to our operations, may increase our near- and long-term expenditures, may pose significant integration challenges, may require us to hire or otherwise engage personnel with additional expertise, or may result in our selling or licensing of our assets or technologies under terms that may not prove profitable, any of which could harm our operations and financial results. Such transactions may also entail numerous other operational and financial risks, including, among others, exposure to unknown liabilities, disruption of our business and diversion of our management’s time and attention in order to develop acquired products, drug candidates, technologies or businesses. As part of our efforts to complete any significant transaction, we would need to expend significant resources to conduct business, regulatory, legal and financial due diligence, with the goal of identifying and evaluating material risks involved in the transaction. We may be unsuccessful in ascertaining or evaluating all the risks and, as a result, we may not realize the expected benefits of the transaction, whether due to unidentified risks, integration difficulties, regulatory setbacks or other events. We may incur material liabilities for the past activities of any businesses we partner with or acquire. If any of these events occur, we could be subject to significant costs and damage to our reputation, business, results of operations and financial condition. 22 If we are unable to establish, train and maintain an effective sales and marketing infrastructure, we will not be able to commercialize our drug candidates successfully. We have built an internal sales and marketing infrastructure to implement our business plan by developing internal sales teams and education campaigns to market our proprietary formulations and FDA-approved drug products. We will need to expend significant resources to further establish and grow this internal infrastructure and properly train sales personnel with respect to regulatory compliance matters. We may also choose to engage or enter into other arrangements with third parties to provide sales and marketing services for us in place of or to supplement our internal commercialization infrastructure. We may not be able to secure sales personnel or relationships with third-party sales organizations that are adequate in number or expertise to successfully market and sell our proprietary formulations, drug products and pharmacy services. Further, any third-party organizations we may seek to partner with or engage may not be able to provide sales and marketing services in accordance with our expectations and standards, may be more expensive than we can afford or may not be available on otherwise acceptable terms or at all. If we are unable to establish and maintain compliant and adequate sales and marketing capabilities, through our own internal infrastructure or third-party services or other arrangements, we may be unable to sell our formulations, drug products or services or generate meaningful revenues. Our business and operations would suffer in the event of cybersecurity or other system failures. Despite the implementation of security measures, our internal computer systems and those of any third parties with which we partner are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any cybersecurity or system failure, accident or breach to date, if an event were to occur, it could result in a material disruption of our operations, substantial costs to rectify or correct the failure, if possible, and potentially violation of HIPAA and other privacy laws applicable to our operations. For example, the CCPA became effective on January 1, 2020 and gave California residents expanded rights to access and require deletion of their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation. Although the CCPA includes exemptions for certain clinical trials data, and HIPAA-protected health information, the law may increase our compliance costs and potential liability with respect to other personal information we collect about California residents. The CCPA has prompted a number of proposals for new federal and state privacy legislation. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information, such as the GDPR in the EU that became effective in May 2018 and the Personal Information Protection and Electronic Documents Act that became effective in Canada in April 2000. We anticipate that over time we may expand our business to include operations outside of the United States. With such expansion, we would be subject to increased governmental regulation in the EU countries in which we might operate, including the GDPR. These laws and similar laws adopted in the future could increase our potential liability, increase our compliance costs and adversely affect our business. If any disruption or security breach resulted in a loss of or damage to our data or applications or inappropriate disclosure of confidential or protected information, we could incur liability, further development of our proprietary formulations could be delayed, and our pharmacy operations could be disrupted, subject to restriction or forced to terminate their operations, any of which could severely harm our business and prospects. We depend upon consultants, outside contractors and other third-party service providers for key aspects of our business. We are substantially dependent on consultants and other outside contractors and service providers for key aspects of our business. For instance, we rely upon pharmacist, physician and research consultants and advisors to provide us with significant assistance in the evaluation of product development opportunities, and we have engaged or supported, and expect to continue to engage or support, consultants, advisors, contract manufacturers, clinical research organizations (“CROs”), and others to design, conduct, analyze and interpret the results of any clinical or non-clinical trials or other studies in connection with the research and development of our products. If any of our consultants or other service providers terminates its engagement with us, or if we are unable to engage highly qualified replacements as needed on commercially reasonable terms, we may be unable to successfully execute our business plan. We must effectively manage these third-party service providers to ensure that they successfully carry out their contractual obligations and meet expected deadlines. However, these third parties often engage in other business activities and may not devote sufficient time and attention to our activities, and we may have only limited contractual rights in connection with the conduct of the activities we have engaged the service providers to perform. If we are unable to effectively manage our outsourced activities or if the quality, timeliness or accuracy of the services provided by third-party service providers is compromised for any reason, our development activities may be extended, delayed or terminated, and we may not be able to commercialize our formulations or advance our business. 23 If a compounded drug formulation provided through our compounding services leads to patient injury or death or results in a product recall, we may be exposed to significant liabilities and reputational harm. The success of our business, including our proprietary formulations and pharmacy operations, is highly dependent upon medical and patient perceptions of us and the actual safety and quality of our products. We could be adversely affected if we, any other compounding pharmacies or our formulations and technologies are subject to negative publicity. We could also be adversely affected if any of our formulations or other products we sell, any similar products sold by other companies, or any products sold by other compounding pharmacies prove to be, or are asserted to be, harmful to patients. For instance, if any of the components of approved drugs or other ingredients used to produce our compounded formulations have quality or other problems that adversely affect the finished compounded preparations, our sales could be adversely affected. Because of our dependence upon medical and patient perceptions, adverse publicity associated with illness or other adverse effects resulting from the use or misuse of our products, any similar products sold by other companies, or any other compounded formulations could have a material adverse impact on our business. To assure compliance with USP guidelines, we have a policy whereby 100% of all sterile compound batches produced by our ImprimisRx compounding pharmacies are tested prior to their delivery to patients and physicians both in-house and externally by an independent, FDA-registered laboratory that has represented to us that it operates in compliance with current good laboratory practices. However, we could still become subject to product recalls and termination or suspension of our state pharmacy licenses if we fail to fully implement this policy, if the laboratory testing does not identify all contaminated products, or if our products otherwise cause or appear to have caused injury or harm to patients. In addition, laboratory testing may produce false positives, which could harm our business and impact our pharmacy operations and licensure even if the impacted formulations are ultimately found to be sterile and no patients are harmed by them. If adverse events or deaths or a product recall, either voluntarily or as required by the FDA or a state board of pharmacy, were associated with one of our proprietary formulations or any compounds prepared by our ImprimisRx compounding pharmacies or any pharmacy partner, our reputation could suffer, physicians may be unwilling to prescribe our proprietary formulations or order any prescriptions from such pharmacies, we could become subject to product and professional liability lawsuits, and our state pharmacy licenses could be terminated or restricted. If any of these events were to occur, we may be subject to significant litigation or other costs and loss of revenue, and we may be unable to continue our pharmacy operations and further develop and commercialize our proprietary formulations. We carry product and professional liability insurance, which may be inadequate. Although we have secured product and professional liability insurance for our pharmacy operations and the marketing and sale of our formulations, our current or future insurance coverage may prove insufficient to cover any liability claims brought against us. Because of the increasing costs of insurance coverage, we may not be able to maintain insurance coverage at a reasonable cost or at a level adequate to satisfy liabilities that may arise. Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses. Our operations, and those of CROs, contractors and consultants, could be subject to power shortages, telecommunications failures, wildfires, water shortages, floods, earthquakes, hurricanes, typhoons, fires, extreme weather conditions, public health crises, and other natural or man-made disasters or business interruptions for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of our contract manufacturers or the contract manufacturers of our development partners are affected by a man-made or natural disaster or other business interruption. 24 We sell our proprietary formulations primarily through pharmaceutical compounding facilities we own, but we may not be successful in our efforts to integrate these businesses into our operations. We currently have two compounding facilities in New Jersey. We may expand our pharmacy operations and personnel. We have developed “ImprimisRx” as a uniform brand for our compounding facilities and ophthalmology focused pharmaceutical business. We have limited experience acquiring, building or operating compounding pharmacies or other prescription dispensing facilities or commercializing our formulations through ownership of or licensing arrangements with pharmacies. In addition, 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 and state 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. 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. We are dependent on market acceptance of compounding pharmacies and compounded formulations, and physicians may be unwilling to prescribe, and patients may be unwilling to use, our proprietary customizable compounded formulations. We currently distribute our proprietary formulations through compounding pharmacies and an outsourcing facility. Formulations prepared and dispensed by compounding pharmacies contain FDA-approved ingredients, but are not themselves approved by the FDA. Thus, our compounded formulations have not undergone the FDA approval process and only limited data, if any, may be available about the safety and efficacy of our formulations for any particular indication. Certain compounding pharmacies have been subject to widespread negative media coverage in recent years, and the actions of these pharmacies have resulted in increased scrutiny of compounding pharmacy activities from the FDA and state governmental agencies. For example, the FDA has issued formal requests to compounding pharmacies and outsourcing facilities to conduct a recall of all non-expired, purportedly sterile drug products and to cease sterile compounding operations due to lack of sterility assurance. As a result, some health care providers may be reluctant to purchase and use compounded drugs. Our growth and future sales depend not only on our ability to demonstrate in the face of increased scrutiny the quality and safety of our pharmacies and outsourcing facilities and our compliance with more stringent regulatory standards at the federal and state levels, but also on the continued acceptance of compounded drugs and formulations, particularly outsourced compounded drugs and formulations, in the marketplace. An incident similar to the fungal meningitis outbreak in 2012, which was caused by a compounding pharmacy employing a non-sterile-to-sterile business model, could cause our customers to reduce their use of compounded formulations significantly or even stop using compounded drugs altogether. States have in the past, and could in the future, enact regulations prohibiting or restricting the use of compounding pharmacies and outsourcing facilities in response to such incidents. Such prohibitions or restrictions by states or reduced customer demand as a result of an incident with compounded drugs and formulations could have a material adverse effect on our business, results of operations and financial condition. 25 In August 2017, the FDA issued a MedWatch notification regarding our 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 were 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 outsourcing facility 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 for an individual patient a clinical difference, 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. We have worked and communicated, and will continue to work and communicate, with the FDA to assure that all allegations in the warning letters and Form 483s have been addressed. We believe, to date, we have addressed all of the material items of concern in the FDA’s Form 483, warning letters and those related to the MedWatch notification (and any other requirements observed by the FDA and noted to us), and we do not believe there will be any further action taken by the FDA in these matters. We believe this is evidenced by the FDA registration for our outsourcing facility which was most recently renewed in November 2022. Nonetheless, these items increased further scrutiny and 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. As a result of the MedWatch notice, warning letters and other regulatory notifications, some physicians may be hesitant to prescribe and some patients may be hesitant to purchase and use non-FDA-approved compounded formulations, particularly when an FDA-approved potential alternative is available. For other reasons, physicians may be unwilling to prescribe or patients may be unwilling to use our proprietary compounded formulations, including, but not limited to, the following: 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. Any failure by physicians, patients and/or third-party payors to accept and embrace compounded formulations could substantially limit our market and cause our operations to suffer. 26 A breakdown of our information technology systems, or a cyberattack or information security breach could significantly compromise the confidentiality, integrity and availability of our information technology systems, network-connected control systems and/or our data, interrupt the operation of our business and/or affect our reputation. To achieve our business objectives, we rely on sophisticated information technology systems, including hardware, software, technology infrastructure, online sites and networks for both internal and external operations, mobile applications, cloud services and network-connected control systems, some of which are managed, hosted, provided or serviced by third parties. Internal or external events that compromise the confidentiality, integrity and availability of our systems and data may significantly interrupt the operation of our business, result in significant costs and/or adversely affect our reputation. Our information technology systems are highly integrated into our business, including our customer service infrastructure, R&D efforts, clinical and commercial manufacturing processes and product sales and distribution processes. Further, as the large part of our employees work remotely for some portion of their jobs, our reliance on our third-party information technology systems has increased substantially and is expected to continue to increase. Remote and hybrid working arrangements can increase cybersecurity risks due to the challenges associated with managing remote computing assets and security vulnerabilities that are present in many non-corporate and home networks. The complexity and interconnected nature of software, hardware and our systems make them vulnerable to breakdown or other service interruptions, and to software errors or defects, misconfiguration and other security vulnerabilities. Upgrades or changes to our systems or the software that we use have resulted and we expect, in the future, will result in the introduction of new cybersecurity vulnerabilities and risks. Our systems are also subject to frequent perimeter network reconnaissance and scanning, phishing and other cyberattacks. As the cyber-threat landscape evolves, these attacks are growing in frequency, sophistication, and intensity, and are becoming increasingly difficult to detect and increasingly sophisticated in using techniques and tools—including artificial intelligence—that circumvent security controls, evade detection and remove forensic evidence. Such attacks could include the use of harmful and virulent malware, including ransomware or other denials of service, which can be deployed through various means, including the software supply chain, e-mail, malicious websites and/or the use of social engineering/phishing. We have experienced attacks against our network, although none that have had a material adverse impact to our business. There can be no assurance that our efforts to guard against the wide and growing variety of potential attack techniques will be successful. Attacks such as those experienced by government entities (including those that approve and/or regulate our products) and other multi-national companies, including some of our peers, could leave us unable to utilize key business systems or access or protect important data, and could have a material adverse effect on our ability to operate our business, including developing, gaining regulatory approval for, manufacturing, selling and/or distributing our products. For example, in 2017, a pharmaceutical company experienced a cyberattack involving virulent malware that significantly disrupted its operations, including its research and sales operations and the production of some of its medicines and vaccines. As a result of the cyberattack, its orders and sales for certain products were negatively affected. In late 2020, SolarWinds Corporation, a leading provider of software for monitoring and managing information technology infrastructure, disclosed that it had suffered a cybersecurity incident whereby attackers had inserted malicious code into legitimate software updates for its products that were installed by myriad private and government customers, enabling the attackers to access a backdoor to such systems. In 2022, Okta, Inc., a provider of software that helps companies manage user authentication, disclosed that several hundred of its corporate customers were vulnerable to a security breach that allowed attackers to access Okta’s internal network. Although this breach did not have a significant effect on our business, there can be no assurance that a similar future breach would not result in a material adverse effect on our business or results of operations. 27 Our systems contain and use a high volume of sensitive data, including intellectual property, trade secrets and other proprietary business information, financial information, regulatory information, strategic plans, sales trends and forecasts, litigation materials and/or personal identifiable information belonging to us, our staff, our patients, customers and/or other parties. In some cases, we utilize third-party service providers to collect, process, store, manage or transmit such data, which have increased our risk. Intentional or inadvertent data privacy or security breaches (including cyberattacks) resulting from attacks or lapses by employees, service providers (including providers of information technology-specific services), business partners, nation states (including groups associated with or supported by foreign intelligence agencies), organized crime organizations, “hacktivists” or others, create risks that our sensitive data may be exposed to unauthorized persons, our competitors or the public. System vulnerabilities and/or cybersecurity breaches experienced by our third-party service providers constitute a substantial share of the information security risks to our business. There can be no assurance that a cybersecurity incident would not result in a material adverse effect on our business or results of operations. Further, the timeliness of our awareness of a cybersecurity incident affects our ability to respond to and work to mitigate the severity of such events. Cyberattackers are also increasingly exploiting vulnerabilities in commercially available software from shared or open-source code. We rely on third party commercial software that have had and may have such vulnerabilities, but as use of open-source code is frequently not disclosed, our ability to fully assess this risk to our systems is limited. There can be no assurances that a vulnerability in the software and services that we use would not result in a material adverse effect on our business or results of operations. Domestic and global government regulators, our business partners, suppliers with whom we do business, companies that provide us or our partners with business services and companies we have acquired or may acquire face similar risks. Security breaches of their systems or service outages have adversely affected systems and could, in the future, affect our systems and security, leave us without access to important systems, products, raw materials, components, services or information, or expose our confidential data or sensitive personal information. An extended service outage affecting these or other vendors, particularly where such vendor is the single source from which we obtain the services, could have a material adverse effect on our business or results of operations. For example, in February 2024, UnitedHealth Group announced that a suspected nation-state associated cyber security threat actor had gained access to some of the Change Healthcare (“Change”) information technology systems. Change is the largest clearinghouse for medical claims in the U.S. While Harrow was not directly impacted by this cybersecurity incident, it was reported that as a reaction to the cybersecurity incident, Change temporarily disconnected over 100 related payment systems and Change was unable to process medical claims through its primary platforms. This resulted in the delays to the revenue and cash collection cycle for several ASCs and physician offices, putting a strain on their cash resources. While temporary, the cash constraints for these ASCs and physician offices, we believe, impacted sales of some of our products, such as IHEEZO, during this disrupted period of time. In addition, we distribute our products in the United States primarily through three pharmaceutical wholesalers, and a security breach that impairs the distribution operations of our wholesalers could significantly impair our ability to deliver our products to healthcare providers and patients. There can be no assurance that our cybersecurity risk management program and processes, including our policies, controls, or procedures, will be effective in protecting our information technology systems and sensitive data. We will continue to experience varying degrees of cyberattacks and other incidents in the future. Even though we continue to invest in the monitoring, protection and resilience of our critical and/or sensitive data and systems, there can be no assurances that our efforts will detect, prevent or fully recover systems or data from all breakdowns, service interruptions, attacks and/or breaches of our systems that could adversely affect our business and operations and/or result in the loss or exposure of critical, proprietary, private, confidential or otherwise sensitive data, which could result in material financial, legal business or reputational harm to us or negatively affect our stock price. While we maintain cyber-liability insurance, our insurance is not sufficient to cover us against all losses that could potentially result from a service interruption, breach of our systems or loss of our critical or sensitive data. We are also subject to various laws and regulations globally regarding privacy and data protection, including laws and regulations relating to the collection, storage, handling, use, disclosure, transfer and security of personal data. The legislative and regulatory environment regarding privacy and data protection is continuously evolving and developing and the subject of significant attention globally. For example, we are subject to the CCPA, which became effective in January 2020, which can result in substantial penalties for noncompliance. The CCPA was amended in late 2020, to create the California Privacy Rights Act to create opt in requirements for the use of sensitive personal data and the formation of a new dedicated agency for the enforcement of the law, the California Privacy Protection Agency. Similar consumer privacy laws went into effect in Virginia, Colorado, Utah, Connecticut and Florida in 2023. Consumer privacy laws were also passed in 11 other states, with the earliest effective dates later this year, and proposed in three additional states. Failure to comply with these current and future laws could result in significant penalties and reputational harm and could have a material adverse effect on our business and results of operations. 28 Risks Related to Government Regulations and Third-Party Policies Our business is significantly impacted by state and federal statutes and regulations. Our proprietary compounded formulations are comprised of active pharmaceutical ingredients that are components of drugs that have received marketing approval from the FDA, although our proprietary compounded formulations have not themselves received FDA approval. FDA approval is not required in order to market and sell our compounded formulations. We are pursuing FDA approval to market and sell drug candidates. The marketing and sale of those drug candidates, FDA-approved drugs and compounded formulations are subject to and must comply with extensive state and federal statutes and regulations governing those products and compounding pharmacies. These compounding statutes and regulations include, among other things, restrictions on compounding for office use or in advance of receiving a patient-specific prescription or, for outsourcing facilities, requirements regarding preparation, such as regular FDA inspections and cGMP requirements, prohibitions on compounding drugs that are essentially copies of FDA-approved drugs, limitations on the volume of compounded formulations that may be sold across state lines, and prohibitions on wholesaling or reselling. These and other restrictions on the activities of compounding pharmacies and outsourcing facilities may significantly limit the market available for compounded formulations, compared to the market available for FDA-approved drugs. Our pharmacy business is impacted by federal and state laws and regulations governing the following: the purchase, distribution, management, compounding, dispensing, reimbursement, marketing and labeling of prescription drugs and related services including: FDA and/or state regulation affecting the pharmacy and pharmaceutical industries, including state pharmacy licensure and registration or permit standards; rules and regulations issued pursuant to HIPAA and other state and federal laws related to the use, disclosure and transmission of health information; and state and federal controlled substance laws. Our failure to comply with any of these laws and regulations could severely limit or curtail our pharmacy operations, which would materially harm our business and prospects. Further, our business could be adversely affected by changes in these or any newly enacted laws and regulations, and federal and state agency interpretations of the statutes and regulations. Statutory or regulatory changes could require us to make changes to our business model and operations and/or could require us to incur significantly increased costs to comply with such regulations. On July 30, 2020, the FDA issued a notice for comments related to certain bulk drug substances to be removed from the 503B Bulk’s List (or Category 1 List). Included in this notice for comment were certain bulk drug substances which we currently use in some of our compounded products. In the event one or more of these bulk substances are ultimately removed from the Category 1 List, we intend to utilize commercially available versions of these substances or similar active pharmaceutical ingredients as replacements of the bulk powders contained in our sterile products. In addition, nothing in the FDA’s notice affects the dispensing of bulk powder-containing products from our 503A pharmacy. Nonetheless, if all or some of the bulk drug substances we use are removed from the 503B Bulk’s List, this may result in a disruption in our operations, revenues and cash flows. On October 27, 2020, the FDA announced availability of a final Memorandum of Understanding, Addressing Certain Distributions of Compounded Human Drug Products Between the State Board of Pharmacy or Other Appropriate State Agency and the Food and Drug Administration (the “Final MOU”). The Final MOU describes the responsibilities of a state board of pharmacy, or other appropriate state agency that chooses to sign the Final MOU, in investigating and responding to complaints related to drug products compounded in such state and distributed outside such state and in addressing the interstate distribution of inordinate amounts of compounded human drug products. Additionally, as part of the Final MOU, the FDA refined the definition of “inordinate amount,” a threshold for certain information identification and sharing which does not place a limit on the distribution of compounded human drug products interstate by a pharmacy located in a state that has entered into the Final MOU. Section 503A of the FDCA sets a 5% limit on compounded drugs distributed outside the state by a pharmacist, pharmacy or physician located in a state that has not entered into the Final MOU. In February 2022, the FDA said it would suspend implementation of the Final MOU and engage in a formal rulemaking process. During the rulemaking process, the agency will not enter into new agreements with states based on the Final MOU. The FDA does not expect states that have signed the Final MOU to carry out the activities described in the Final MOU. Thus, there is no reporting requirement for any pharmacy concerning interstate shipments pursuant to Section 503A and will not be until the Final MOU is finalized through the rulemaking process, which will include the engagement of a notice-and-comment and rulemaking period to implement certain provisions of Section 503A. The agency indicated that the process may take “several years” to complete. In the same announcement, the FDA stated it does not intend to enforce the statutory 5% limit on the distribution of compounded drugs out of the state in which they are compounded by compounders located in states that do not sign the Final MOU for the duration of the rulemaking process. 29 If we or our partner facilities fail to comply with the Controlled Substances Act, FDCA, or similar state statutes and regulations, the pharmacy facilities could be required to cease operations or become subject to restrictions that could adversely affect our business. State pharmacy laws require pharmacy locations in those states to be licensed as an in-state pharmacy to dispense pharmaceuticals. In addition, state controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit standards promulgated by the state’s pharmacy licensing authority. Pharmacy and controlled substance laws often address the qualification of an applicant’s personnel, the adequacy of its prescription fulfillment and inventory control practices and the adequacy of its facilities. These laws also subject pharmacies to oversight by state boards of pharmacy and other regulators that could impose burdensome requirements or restrictions on operations if a pharmacy is found not in compliance with these laws. We believe that our compounding pharmacies are in material compliance with applicable regulatory requirements. Further, if any of our compounding pharmacies fail to comply with regulatory requirements, they could be forced to permanently or temporarily cease or limit their compounding operations, which would severely limit our ability to market and sell our proprietary formulations and would materially harm our operations and prospects. Any noncompliance could also result in complaints or adverse actions by other state boards of pharmacy. FDA inspection of a facility to determine compliance with the FDCA, if not successful, may result in the loss of FDCA exemptions provided under Sections 503A and 503B, warning letters, injunctions, prosecution, fines and loss of required government licenses, certifications and approvals, any of which could involve significant costs and could cause us to be unable to realize the expected benefits of these pharmacies’ operations. Additionally, the permanent injunction entered on July 22, 2019, by the United States District Court of the Central District of California (the “Court”) in the Allergan litigation (also referenced in Item. 3 Legal Proceedings), enjoins the Company from engaging in activities that are inconsistent with current FDA guidelines for 503A and 503B operations. While the Company believes its operations fully comply with the injunction, if the Court were to find the Company to be in violation of the injunction, further sanctions, including fines and limitations on the pharmacies’ operations, could occur. If we market any of our drug candidates in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting laws, we may be subject to civil or criminal penalties. The FDA enforces laws and regulations which require that the promotion of pharmaceutical products be consistent with the approved prescribing information. While physicians may prescribe an approved product for a so-called “off label” use, it is unlawful for a pharmaceutical company to promote its products in a manner that is inconsistent with its approved label, and any company which engages in such conduct can subject that company to significant liability. Similarly, industry codes in the EU and other foreign jurisdictions prohibit companies from engaging in off-label promotion, and regulatory agencies in various countries enforce violations of the code with civil penalties. While we intend to ensure that our promotional materials are consistent with our label, regulatory agencies may disagree with our assessment and may issue untitled letters, warning letters or may institute other civil or criminal enforcement proceedings. In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include the U.S. Anti-Kickback Statute, U.S. False Claims Act and similar state laws. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws. Our sales depend on coverage and reimbursement from government and commercial third-party payors, and pricing and reimbursement pressures have affected, and are likely to continue to affect, our profitability. Sales of our branded products depend on the availability and extent of coverage and reimbursement from third-party payors, including government healthcare programs and private insurance plans. Governments and private payors continue to pursue initiatives to manage drug utilization and contain costs. Further, pressures on healthcare budgets from the pandemic, the economic downturn and inflation continue and are likely to increase across the markets we serve. Payors are increasingly focused on costs, which have resulted, and are expected to continue to result, in lower reimbursement rates for our branded products or narrower populations for which payors will reimburse. Continued intense public scrutiny of the price of drugs and other healthcare costs, together with payor 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 that attempt to lower drug prices. These include legislation promulgated by the IRA that enables the U.S. government to set prices for certain drugs in Medicare, redesigns Medicare Part D benefits to shift a greater portion of the costs to manufacturers and enables the U.S. government to impose penalties if drug prices are increased at a rate faster than inflation in addition to rebates imposed on manufacturers associated with drug waste (which could potentially impact sales of TRIESENCE). Additional proposals focused on drug pricing continue to be debated, and additional executive orders focused on drug pricing and competition are likely to be adopted and implemented in some form. Government actions or ballot initiatives at the state level also represent a highly active area of policymaking and experimentation, including pursuit of proposals that limit drug reimbursement under state run Medicaid programs based on reference prices or permitting importation of drugs from Canada. Such state policies may also eventually be adopted at the federal level. 30 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 payor 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. Changing U.S. federal coverage and reimbursement policies and practices have affected and are likely to continue to affect access to, pricing of and sales of our products. A substantial portion of our branded product portfolio relies on reimbursement from federal government healthcare programs and commercial insurance plans regulated by federal and state governments. Our business has been and will continue to be affected by legislative actions changing U.S. federal reimbursement policy. The IRA’s drug pricing controls and Medicare redesign is likely to have a material adverse effect on our sales (particularly for our branded products that are more substantially reliant on Medicare reimbursement), our business and our results of operations. However, as the degree of impact from this legislation on our business depends on a number of implementation decisions, the extent of the IRA’s impact on our sales and, in turn, our business remains unclear. Changing reimbursement and pricing actions in various states have negatively affected and may continue to negatively affect access to and have affected and may continue to affect sales of our products. At the state level, government actions or ballot initiatives can also affect how our branded products are covered and reimbursed and/or create additional pressure on our pricing decisions. Existing and proposed state pricing laws have added complexity to the pricing of drugs and may already be affecting industry pricing decisions. A number of states have adopted, and many other states are considering, drug importation programs or other pricing actions, including proposals designed to require biopharmaceutical manufacturers to report to the state proprietary pricing information or provide advance notice of certain price increases. For example, a California law requires biopharmaceutical manufacturers to notify health insurers and government health plans at least 60 days before scheduled prescription drug price increases that exceed certain thresholds. Similar laws exist in Oregon and Washington. Additional proposals directed at Medicaid seek to penalize manufacturers for pricing drugs above a certain threshold or limit spending on biopharmaceutical products. States are also seeking to change the way they pay for drugs for patients covered by state programs. New York has established a Medicaid drug spending cap, and Massachusetts implemented a new review and supplemental rebate negotiation process. Six states (Colorado, Maine, New Hampshire, Maryland, Oregon and Washington) have enacted laws that establish Prescription Drug Affordability Boards (“PDABs”) to study drug prices and identify drugs that pose affordability challenges, and in three states (Colorado, Maryland and Washington) include authority for the state PDABs to set upper payment limits on certain drugs in state regulated plans. Other states may consider implementing similar policies and laws. Additionally, Colorado, Florida, Maine, New Hampshire, New Mexico and Vermont have enacted laws, and several other states have proposed bills, to implement importation of drugs from Canada. The FDA has met with representatives from Colorado, Florida, Maine and New Mexico to discuss those states’ proposed importation programs, and the FDA may be working towards approving such plans. Other states could adopt similar approaches or could pursue different policy changes in a continuing effort to reduce their costs. Ultimately, as with U.S. federal government actions, existing or future state government actions or ballot initiatives may also have a material adverse effect on our product sales, business and results of operations. 31 U.S. commercial payor actions have affected and may continue to affect access to and sales of our products Payors, including healthcare insurers, pharmacy benefit managers (“PBMs”), integrated healthcare delivery systems (vertically-integrated organizations built from consolidations of healthcare insurers and PBMs) and group purchasing organizations, increasingly seek ways to reduce their costs. With increasing frequency, payors are adopting benefit plan changes that shift a greater proportion of drug costs to patients. Such measures include more limited benefit plan designs, high deductible plans, higher patient co-pay or coinsurance obligations and more significant limitations on patients’ use of manufacturer commercial co-pay assistance programs. Further, government regulation of payors may affect these trends. For example, CMS finalized a policy for plan years starting on or after January 1, 2021 that has caused commercial payors to more widely adopt co-pay accumulator adjustment programs. Payors, including PBMs, have sought, and continue to seek, price discounts or rebates in connection with the placement of our branded products on their formularies or those they manage, and to also impose restrictions on access to or usage of our branded products (such as step therapy), require that patients receive the payor’s prior authorization before covering the product, and/or chosen to exclude certain indications for which our products are approved. In an effort to reduce barriers to access, we may reduce the net price of some of our branded products by providing greater discounts and rebates to payors (including PBMs that administer Medicare Part D prescription drug plans), and we may introduce a set of new National Drug Codes to make our branded products available at a lower list price. However, affordability of patient out-of-pocket co-pay cost has limited and may continue to limit patient use. Further, despite these net and list price reductions, some payors may restrict, patient access and may seek further discounts or rebates or take other actions, such as changing formulary coverage for some or all of our branded products. These factors have limited, and may continue to limit, patient affordability and use, negatively affecting sales of our branded products. Further, significant consolidation in the health insurance industry has resulted in a few large insurers and PBMs, which places greater pressure on pricing and usage negotiations with biopharmaceutical manufacturers, significantly increasing discount and rebate requirements and limiting patient access and usage. For example, in the United States, as of the beginning of 2024, we believe the top five integrated health plans and PBMs controlled approximately 92% of all pharmacy prescriptions. This high degree of consolidation among insurers and PBMs and other payors, including through integrated healthcare delivery systems and/or with specialty or mail-order pharmacies and pharmacy retailers, has increased the negotiating leverage such entities have over us and other biopharmaceutical manufacturers and has resulted in greater price discounts, rebates and service fees realized by those payors from our business. CVS, Express Scripts and United Health Group (among the top five integrated health plans and PBMs), each have Rebate Management Organizations that further increase their leverage to negotiate deeper discounts. Ultimately, additional discounts, rebates, fees, coverage changes, plan changes, restrictions or exclusions imposed by these commercial payors could have a material adverse effect on our product sales, business and results of operations. Policy reforms advanced by Congress or the Biden administration that refine the role of PBMs in the U.S. marketplace could have downstream implications or consequences for our business and how we interact with these entities. Guidelines and recommendations published by various organizations can reduce the use of our branded products. Government agencies promulgate regulations and guidelines directly applicable to us and to our products. Professional societies, practice management groups, insurance carriers, physicians’ groups, private health and science foundations and organizations involved in various diseases also publish guidelines and recommendations to healthcare providers, administrators and payors, as well as patient communities. Recommendations by government agencies or other groups and organizations may relate to such matters as usage, dosage, route of administration and use of related therapies. In addition, a growing number of organizations are providing assessments of the value and pricing of biopharmaceutical products, and even organizations whose guidelines have historically been focused on clinical matters have begun to incorporate analyses of the cost effectiveness of various treatments into their treatment guidelines and recommendations. Value assessments may come from private organizations that publish their findings and offer recommendations relating to the products’ reimbursement by government and private payors. Some companies and payors have announced pricing and payment decisions based in part on the assessments of private organizations. In addition, government health technology assessment organizations in many countries make reimbursement recommendations to payors in their jurisdictions based on the clinical effectiveness, cost-effectiveness and service effects of new, emerging and existing medicines and treatments. Such health technology assessment organizations have recommended, and may in the future recommend, reimbursement for certain of our products for a narrower indication than was approved by applicable regulatory agencies or may recommend against reimbursement entirely. See “- Our sales depend on coverage and reimbursement from government and commercial third-party payors, and pricing and reimbursement pressures have affected, and are likely to continue to affect, our profitability.” Such recommendations or guidelines may affect our reputation, and any recommendations or guidelines that result in decreased use, dosage or reimbursement of our products could have a material adverse effect on our product sales, business and results of operations. In addition, the perception by the investment community or stockholders that such recommendations or guidelines will result in decreased use and dosage of our products could adversely affect the market price of our common stock. 32 Risks Related to Competition There are many competitive risks related to marketing and selling our proprietary formulations and operating our compounding pharmacy business. The pharmaceutical and pharmacy industries are highly competitive. We compete against branded drug companies, generic drug companies, outsourcing facilities and other compounding pharmacies. We are significantly smaller than some of our competitors. Currently we lack some of the financial and other resources needed to develop, produce, distribute and market our proprietary formulations at a level to capture a significant market share in these sectors. The drug products available through branded and generic drug companies with which our formulations compete have been approved for marketing and sale by the FDA and are required to be manufactured in facilities compliant with cGMP standards. Although we prepare our compounded formulations in accordance with the standards provided by USP <795> and USP <797> and applicable state and federal law, our proprietary compounded formulations are not required to be, and have not been, approved for marketing and sale by the FDA. As a result, some physicians may be unwilling to prescribe, and some patients may be unwilling to use, our formulations. Additionally, under federal and state laws applicable to our current compounding pharmacy operations, we are not permitted to prepare significant amounts of a specific formulation in advance of a prescription, compound quantities for office use or utilize a wholesaler for distribution of our formulations; instead, our compounded formulations must be prepared and dispensed in connection with a physician prescription for an individually identified patient. Pharmaceutical companies, on the other hand, are able to sell their FDA-approved products to large pharmaceutical wholesalers, which can in turn sell to and supply hospitals and retail pharmacies. Even if we are successful in registering certain of our facilities as outsourcing facilities, our business may not be scalable on the scope available to our competitors that produce FDA-approved drugs, which may limit our potential for profitable operations. These facets of our operations may subject our business to limitations our competitors with FDA-approved drugs may not face. In November 2022, USP published finalized revisions to USP <795> and USP <797>, which had been previously proposed for public comment in September 2021. The revisions include limitations on beyond use dating of sterile and preservative-free products and batch sizes, among other changes. USP expects the published revisions to become effective November 1, 2023, however, regulatory bodies such as state boards of pharmacy may adopt these changes at that time, or on different dates, on a case-by-case basis. While USP has no role in enforcement, we believe the revisions to USP <797> in particular will likely cause two changes to our business, which in the aggregate should have a neutral to positive revenue impact on Harrow: (i) a reduction in revenues generated from sales of formulations compounded by our 503A pharmacy, and (ii) an increase in revenues from sales of formulations compounded in our 503B facility. Further, we believe the changes to USP <797> will likely cause a reduction in the ability of local 503A pharmacies to produce compounded formulations to serve local markets, and that these changes in policy affecting sterile compounded formulations, if adopted by the various states, may increase demand for compounded formulations from larger vendors such as Harrow and cause further consolidation in the market for compounded formulations as smaller 503A pharmacies see a reduction in revenues from certain segments of their formularies affected by these changes. Our future success depends in large part on our ability to maintain a competitive position with respect to biotechnology and related pharmaceutical technologies. Biotechnology and related pharmaceutical technologies have undergone and continue to be subject to rapid and significant change. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies. Products developed by our competitors, including FDA-approved drugs and compounded formulations created by other pharmacies, could render our products and technologies obsolete or unable to compete. Any products that we develop may become obsolete before we recover expenses incurred in their development, which may require us to raise additional funds that may or may not be available. The competitive environment requires an ongoing, extensive search for medical and technological innovations and the ability to develop and market these innovations effectively, and we may not be competitive with respect to these factors. Other competitive factors include the safety and efficacy of a product, the size of the market for a product, the timing of market entry relative to competitive products, the availability of alternative compounded formulations or approved drugs, the price of a product relative to alternative products, the availability of third-party reimbursement, the success of sales and marketing efforts, brand recognition and the availability of scientific and technical information about a product. Although we believe we are positioned to compete favorably with respect to many of these factors, if our proprietary formulations are unable to compete with the products of our competitors, we may never gain market share or achieve sustained profitability. 33 Concentration of sales at certain of our wholesaler distributors and consolidation of private payors may negatively affect our business. Certain of our distributors, customers and payors have substantial purchasing leverage, due to the volume of our products they purchase or the number of patient lives for which they provide coverage. The substantial majority of our U.S. branded product sales are made through three pharmaceutical product wholesaler distributors: McKesson Corporation, AmerisourceBergen Corporation and Cardinal Health, Inc. These distributors, in turn, sell our products to their customers, which include physicians or their clinics, ambulatory surgical centers, hospitals and pharmacies. Similarly, as discussed above, there has been significant consolidation in the health insurance industry, including that a small number of PBMs now oversee a substantial percentage of total covered lives in the United States. See “ – Our sales depend on coverage and reimbursement from government and commercial third-party payors, and pricing and reimbursement pressures have affected, and are likely to continue to affect, our profitability.” The three largest PBMs in the United States are now part of major health insurance providers. The growing concentration of purchasing and negotiating power by these entities has, and may continue to, put pressure on our pricing due to their ability to extract price discounts on our branded products, fees for other services or rebates, negatively affecting our bargaining position, sales and/or profit margins. In addition, decisions by these entities to purchase or cover less or none of our branded products in favor of competing products could have a material adverse effect on our branded product sales, business and results of operations due to their purchasing volume. Further, if one of our significant wholesale distributors encounters financial or other difficulties and becomes unable or unwilling to pay us all amounts that such distributor owes us on a timely basis, or at all, it could negatively affect our business and results of operations. In addition, if one of our significant wholesale distributors becomes insolvent or otherwise unable to continue its commercial relationship with us in its present form, it could significantly disrupt our business and adversely affect our product sales, our business and results of operations unless suitable alternatives are timely found or lost sales are absorbed by another distributor. If we are unable to protect our proprietary rights, we may not be able to prevent others from using our intellectual property, which may reduce the competitiveness and value of the related assets. Our success will depend in part on our ability to obtain and maintain patent protection for our formulations and technologies and to prevent third parties from infringing upon our proprietary rights. We must also operate without infringing upon patents and proprietary rights of others, including by obtaining appropriate licenses to patents or other proprietary rights held by third parties, if necessary. The primary means by which we will be able to protect our formulations and technologies from unauthorized use by third parties is to obtain valid and enforceable patents that cover them. However, the applications we have filed or may file in the future may never yield patents that protect our inventions and intellectual property assets. Failure to obtain patents that sufficiently cover our formulations and technologies would limit our protection against other compounding pharmacies and outsourcing facilities, generic drug manufacturers, pharmaceutical companies and other parties who may seek to copy our products, produce products substantially similar to ours or use technologies substantially similar to those we own. We have made, and expect to continue to make, significant investments in certain of our proprietary formulations prior to the grant of any patents covering these formulations, and we may not receive a sufficient return on these investments if patent coverage or other appropriate intellectual property protection is not obtained and their competitiveness and value decreases. 34 The patent and intellectual property positions of pharmacies and pharmaceutical companies, including ours, are uncertain and involve complex legal and factual questions. There is no guarantee that we have developed or obtained or will in the future develop or obtain the rights to products or processes that are patentable, that patents will issue from any pending applications or that claims allowed will be sufficient to protect the technology we have developed or may in the future develop or to which we have acquired or may in the future acquire development rights. In addition, we cannot be certain that patents issued to us will not be challenged, invalidated, infringed or circumvented, including by our competitors, or that the rights granted thereunder will provide competitive advantages to us. In certain instances, we have acquired products that are patented and have been subject to prior litigation challenging the validity of certain patents related to those products. In some situations, the litigation resulted in settlement agreements that have allowed generic manufacturers to license the patent rights related to certain products and allowing the generic manufacturer to enter the market prior to patent expiration associated with the branded product. We also rely on unpatented trade secrets and know-how and continuing technological innovation in order to develop our products, formulations, which we seek to protect, in part, by confidentiality agreements with our employees, consultants, collaborators and others, including certain service providers. We also have invention or patent assignment agreements with our current employees and certain consultants. Nonetheless, our employees and consultants may breach these agreements, and we may not have adequate remedies for the breach. Our trade secrets may otherwise become known or be independently discovered by competitors or could be developed by a person not bound by an invention assignment agreement with us, in which case we may have no rights to use the applicable invention. We may face additional competition outside of the U.S. as a result of a lack of patent coverage in some territories and differences in patent prosecution and enforcement laws in foreign counties. Filing, prosecuting, defending and enforcing patents on our proprietary formulations throughout the world is extremely expensive. We do not currently have patent protection outside of the U.S. that covers any of our proprietary formulations or other assets that we are currently pursuing. Competitors may use our technologies to develop their own products in jurisdictions where we have not obtained patent protection. Even if the international patent applications we have filed or may in the future file are issued or approved, it is likely that the scope of protection provided by such patents would be different from, and possibly less than, the scope provided by corresponding U.S. patents. As a result, patent rights we are able to obtain may not be sufficient to prevent generic competition. Further, the extent of our international market opportunity may be dependent upon the enforcement of patent rights in various other countries. A number of countries in which we could file patent applications have a history of weak enforcement and/or compulsory licensing of intellectual property rights. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patents and other intellectual property protection, particularly those relating to biotechnology and/or pharmaceuticals, which would make it difficult for us to stop a third party from infringing any of our intellectual property rights. Moreover, attempting to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Our products, drug candidates and compounded formulations and technologies could potentially conflict with the rights of others. The preparation or sale of our products, drug candidates and compounded formulations and use of our technologies may infringe on the patent or other intellectual property rights of others. If our products infringe or conflict with the patent or other intellectual property rights of others, third parties could bring legal actions against us claiming damages and seeking to enjoin our manufacturing and marketing of our affected products. Patent litigation is costly and time consuming and may divert management’s attention and our resources. We may not have sufficient resources to bring any actions to a successful conclusion. If we are not successful in defending against these legal actions should they arise, we may be subject to monetary liability or be forced to alter our products, cease some or all of our operations relating to the affected products, or seek to obtain a license in order to continue manufacturing and marketing the affected products, which may not be available on acceptable terms or at all. We are dependent on our Chief Executive Officer, Mark L. Baum, and other key persons for the continued growth and development of our Company. Our Chief Executive Officer, Mark L. Baum, along with other key persons, including, but not limited to, our Chief Financial Officer, Andrew R. Boll, and Chief Executive Officer of ImprimisRx and Chief Commercial Officer, John P. Saharek, have played a primary role in creating and developing our current business model. We are highly dependent on these executives for the implementation of our business plan and the future development of our assets and our business, and the loss of their services and leadership could materially adversely impact our Company. 35 If we are unable to attract and retain key personnel and consultants, we may be unable to maintain or expand our business. We have been focusing on building our management, pharmacy, research and development, sales and marketing and other personnel to pursue our current business model. To achieve our planned growth, we may have significant difficulty attracting and retaining necessary employees. Because of the specialized nature of our business, the ability to develop products and to compete will remain highly dependent upon our ability to attract and retain qualified pharmacy, scientific, technical and commercial employees and consultants. There is intense competition to hire qualified personnel in our industry, and we may be unable to continue to attract and retain the qualified personnel necessary for the development of our business. The loss of key employees or consultants or the failure to recruit or engage new employees and consultants could have a material adverse effect on our business. In addition, any staffing interruptions resulting from geopolitical actions, including war and terrorism, adverse public health developments, or natural disasters including earthquakes, typhoons, floods and fires, could have a material adverse effect on our business. Risks Related to Product Development, Regulatory Approval, Manufacturing and Commercialization If we seek FDA approval to market and sell any of our drug candidates we may be unable to demonstrate the necessary safety and efficacy to obtain such FDA approval. In recent years, we have sought, and in the future, we, alone or with project partners, intend to seek, FDA regulatory approval to market and sell one or more of our assets as an FDA-approved drug. Obtaining FDA approval to market and sell pharmaceutical products is costly, time-consuming, uncertain and subject to unanticipated delays. The FDA or other regulatory agencies may not approve a drug candidate on a timely basis or at all. Before we obtain FDA approval for the sale of any potential drug candidates, we will be required to demonstrate through pre-clinical studies and clinical trials that it is safe and effective for each intended use, which we may not be able to do. A failure to demonstrate safety and efficacy of a drug candidate to the FDA’s satisfaction would result in our failure to obtain FDA approval. Moreover, even if the FDA were to grant regulatory approval of a drug candidate, the approval may be limited to specific therapeutic areas or limited as to its distribution, which could reduce revenue potential, and we will be subject to extensive and costly post-approval requirements and oversight with respect to commercialization of the drug candidate. Even if we receive regulatory approval for any of our drug candidates, we may not be able to successfully commercialize the product and the revenue that we generate from its sales, if any, may be limited. If approved for marketing, the commercial success of our drug candidates will depend upon each product’s acceptance by the medical community, including physicians, patients and health care payors. The degree of market acceptance for any of our drug candidates will depend on a number of factors, including: ● demonstration of clinical safety and efficacy; ● relative convenience, dosing burden and ease of administration; ● the prevalence and severity of any adverse effects; ● the willingness of physicians to prescribe our drug candidates, and the target patient population to try new therapies; ● efficacy of our drug candidates compared to competing products; ● the introduction of any new products that may in the future become available targeting indications for which our drug candidates may be approved; 36 ● new procedures or therapies that may reduce the incidences of any of the indications in which our drug candidates may show utility; ● pricing and cost-effectiveness; ● the inclusion or omission of our drug candidates in applicable therapeutic and vaccine guidelines; ● the effectiveness of our own or any future collaborators’ sales and marketing strategies; ● limitations or warnings contained in approved labeling from regulatory authorities; ● our ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payors or to receive the necessary pricing approvals from government bodies regulating the pricing and usage of therapeutics; and ● the willingness of patients to pay out-of-pocket in the absence of third-party coverage or reimbursement or government pricing approvals. If any of our drug candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors, and patients, we may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and third- party payors on the benefits of our drug candidates may require significant resources and may never be successful. In addition, even if we obtain regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize our drug candidates successfully. For example, if the approval process takes too long, we may miss market opportunities and give other companies the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post- approval commitments that render our drug candidates not commercially viable. For example, regulatory authorities may approve any of our drug candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for any of our drug candidates, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve any of our drug candidates with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that indication. Further, the FDA or comparable foreign regulatory authorities may place conditions on approvals or require risk management plans or a Risk Evaluation and Mitigation Strategy (“REMS”) to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS; the FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA may also require a REMS for an approved product when new safety information emerges. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of our drug candidates. Moreover, product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following the initial marketing of the product. Any of the foregoing scenarios could materially harm the commercial success of our drug candidates. Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results. Clinical testing of drug candidates is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of pre-clinical studies and early clinical trials may not be predictive of the results of later-stage clinical trials. We cannot assure you that the FDA or comparable foreign regulatory authorities will view the results as we do or that any future trials of any of our drug candidates will achieve positive results. Drug candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through pre-clinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Any future clinical trial results for our drug candidates may not be successful. 37 In addition, a number of factors could contribute to a lack of favorable safety and efficacy results for any of our drug candidates. For example, such trials could result in increased variability due to varying site characteristics, such as local standards of care, differences in evaluation period and surgical technique, and due to varying patient characteristics including demographic factors and health status. Even if we obtain marketing approval for any of our drug candidates, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, our drug candidates could be subject to labeling and other restrictions and withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our drug candidates. Even if we obtain regulatory approval for any of our drug candidates for an indication, the FDA or foreign equivalent may still impose significant restrictions on their indicated uses or marketing or the conditions of approval, or impose ongoing requirements for potentially costly and time-consuming post-approval studies, including Phase 4 clinical trials, and post-market surveillance to monitor safety and efficacy. Our drug candidates will also be subject to ongoing regulatory requirements governing the manufacturing, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of adverse events and other post-market information. These requirements include registration with the FDA, as well as continued compliance with current Good Clinical Practices regulations (“cGCPs”) for any clinical trials that we conduct post-approval. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current cGMPs, requirements relating to quality control, quality assurance and corresponding maintenance of records and documents. The FDA has the authority to require a REMS as part of an NDA or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria or requiring patient testing, monitoring and/or enrollment in a registry. With respect to sales and marketing activities by us or any future partner, advertising and promotional materials must comply with FDA rules in addition to other applicable federal, state and local laws in the United States and similar legal requirements in other countries. In the United States, the distribution of product samples to physicians must comply with the requirements of the U.S. Prescription Drug Marketing Act. Application holders must obtain FDA approval for product and manufacturing changes, depending on the nature of the change. We may also be subject, directly or indirectly through our customers and partners, to various fraud and abuse laws, including, without limitation, the U.S. Anti-Kickback Statute, U.S. False Claims Act, and similar state laws, which impact, among other things, our proposed sales, marketing, and scientific/educational grant programs. If we participate in the U.S. Medicaid Drug Rebate Program, the Federal Supply Schedule of the VA, or other government drug programs, we will be subject to complex laws and regulations regarding reporting and payment obligations. All of these activities are also potentially subject to U.S. federal and state consumer protection and unfair competition laws. Similar requirements exist in many of these areas in other countries. In addition, if any of our drug candidates are approved for a particular indication, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. If we receive marketing approval for our drug candidates, physicians may nevertheless legally prescribe our products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability and government fines. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed or curtailed. 38 If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, problems with the facility where the product is manufactured, or we or our manufacturers fail to comply with applicable regulatory requirements, we may be subject to the following administrative or judicial sanctions: ● restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls; ● issuance of warning letters or untitled letters; ● clinical holds; ● injunctions or the imposition of civil or criminal penalties or monetary fines; ● suspension or withdrawal of regulatory approval; ● suspension of any ongoing clinical trials; ● refusal to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product license approvals; ● suspension or imposition of restrictions on operations, including costly new manufacturing requirements; or ● product seizure or detention or refusal to permit the import or export of product. The occurrence of any event or penalty described above may inhibit our ability to commercialize our drug candidates and generate revenue. Adverse regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase our product liability exposure. Delays in the completion of, or the termination of, any clinical or non-clinical trials for any drug candidates for which we may seek FDA approval could adversely affect our business. Clinical trials are very expensive, time consuming, unpredictable and difficult to design and implement. The results of clinical trials may be unfavorable, they may continue for several years, and they may take significantly longer to complete and involve significantly more costs than expected. Delays in the commencement or completion of clinical testing could significantly affect product development costs and plans with respect to any drug candidate for which we seek FDA approval. The commencement and completion of clinical trials can be delayed and experience difficulties for a number of reasons, including delays and difficulties caused by circumstances over which we may have no control. For instance, approvals of the scope, design or trial site may not be obtained from the FDA and other required bodies in a timely manner or at all, agreements with acceptable terms may not be reached in a timely manner or at all with CROs to conduct the trials, a sufficient number of subjects may not be recruited and enrolled in the trials, and third-party manufacturers of the materials for use in the trials may encounter delays and problems in the manufacturing process, including failure to produce materials in sufficient quantities or of an acceptable quality to complete the trials. If we were to experience delays in the commencement or completion of, or if we were to terminate, any clinical or non-clinical trials we pursue in the future, the commercial prospects for the applicable drug candidates may be limited or eliminated, which may prevent us from recouping our investment in research and development efforts for the drug candidate and would have a material adverse effect on our business, results of operations, financial condition and prospects. We may depend on the success of our drug candidates, and those we have royalty rights to, which have not yet demonstrated efficacy for their target or any other indications. If we are unable to generate revenues from our drug candidates, our ability to create stockholder value may be limited. Our drug candidates are in various stages of clinical development. There is no guarantee that our clinical trials will be successful or that we will continue clinical development in support of an approval from the FDA or comparable foreign regulatory authorities for any indication. We note that most drug candidates never reach the clinical development stage and even those that do commence clinical development have only a small chance of successfully completing clinical development and gaining regulatory approval. Therefore, aspects of our business depend on the successful development, regulatory approval and commercialization of our drug candidates, which may never occur. 39 If we are not able to obtain required regulatory approvals for a drug candidate, we will not be able to commercialize such drug candidate and our ability to generate revenues will be limited. We must successfully complete clinical trials for our drug candidates before we can apply for marketing approval. Even if we complete our clinical trials, it does not assure marketing approval. Our clinical trials may be unsuccessful, which would materially harm our business. Even if our initial clinical trials are successful, we are required to conduct additional clinical trials to establish our drug candidates’ safety and efficacy, before an NDA or Biologics License Application (“BLA”), or their foreign equivalents can be filed with the FDA or comparable foreign regulatory authorities for marketing approval of our drug candidates. Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in early phases of pre-clinical and clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our drug candidates. The research, testing, manufacturing, labeling, packaging, storage, approval, sale, marketing, advertising and promotion, pricing, export, import and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. We are not permitted to market our drug candidates as prescription pharmaceutical products in the United States until we receive approval of an NDA from the FDA, or in any foreign countries until we receive the requisite approval from such countries. In the United States, the FDA generally requires the completion of clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical development to ensure its quality before an NDA is approved. Regulatory authorities in other jurisdictions impose similar requirements. Of the large number of drugs in development, only a small percentage result in the submission of an NDA to the FDA and even fewer are eventually approved for commercialization. If our development efforts for our drug candidates, including regulatory approval, are not successful for their planned indications, or if adequate demand for our drug candidates is not generated, our business will be materially adversely affected. Our success depends on the receipt of regulatory approval and the issuance of such regulatory approvals is uncertain and subject to a number of risks, including the following: ● the results of toxicology studies may not support the filing of an investigational new drug application for our drug candidates; ● the FDA or comparable foreign regulatory authorities or Institutional Review Boards (“IRBs”) may disagree with the design or implementation of our clinical trials; ● we may not be able to provide acceptable evidence of our drug candidates’ safety and efficacy; ● the results of our clinical trials may not be satisfactory or may not meet the level of statistical or clinical significance required by the FDA, the European Medicines Agency (the “EMA”), or other regulatory agencies for marketing approval; ● the dosing of our drug candidates in a particular clinical trial may not be at an optimal level; ● patients in our clinical trials may suffer adverse effects for reasons that may or may not be related to our drug candidates; ● the data collected from clinical trials may not be sufficient to support the submission of an NDA, BLA or other submission or to obtain regulatory approval in the United States or elsewhere; 40 ● the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and ● the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval. Failure to obtain regulatory approval for our drug candidates for the foregoing, or any other reasons, will prevent us from commercializing our drug candidates, and our ability to generate revenue will be materially impaired. We cannot guarantee that regulators will agree with our assessment of the results of the clinical trials we intend to conduct in the future or that such trials will be successful. The FDA, EMA and other regulators have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional clinical trials, or pre-clinical or other studies. In addition, varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of our drug candidates. Excluding any activities through our ownership interest in Eton, we have not received regulatory approval to market our drug candidates in any jurisdiction. We have only limited experience in filing the applications necessary to gain regulatory approvals and expect to rely on consultants and CROs, with expertise in this area to assist us in this process. Securing regulatory approvals to market a product requires the submission of pre-clinical, clinical, and/or pharmacokinetic data, information about product manufacturing processes and inspection of facilities and supporting information to the appropriate regulatory authorities for each therapeutic indication to establish a drug candidate’s safety and efficacy for each indication. Our drug candidates may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining regulatory approval or prevent or limit commercial use with respect to one or all intended indications. The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon, among other things, the type, complexity and novelty of the drug candidates involved, the jurisdiction in which regulatory approval is sought and the substantial discretion of the regulatory authorities. Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for a submitted product application may cause delays in the approval or rejection of an application. Regulatory approval obtained in one jurisdiction does not necessarily mean that a drug candidate will receive regulatory approval in all jurisdictions in which we may seek approval, but the failure to obtain approval in one jurisdiction may negatively impact our ability to seek approval in a different jurisdiction. Failure to obtain regulatory marketing approval for our drug candidates in any indication will prevent us from commercializing the drug candidate, and our ability to generate revenue will be materially impaired. Obtaining and maintaining regulatory approval of our products and drug candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of our products or drug candidates in other jurisdictions. Obtaining and maintaining regulatory approval of our drug candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a drug candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the drug candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States, including additional pre-clinical studies or clinical trials, as clinical studies conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a drug candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international markets and/ or to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our drug candidates will be harmed. 41 Current and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our drug candidates and affect the prices we may obtain. In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for our drug candidates, restrict or regulate post-approval activities and affect our ability to profitably sell our drug candidates. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We do not know whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our drug candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements. In the United States, the Medicare Modernization Act (the “MMA”) changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for drugs. In addition, this legislation authorized Medicare Part D prescription drug plans to use formularies where they can limit the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for our drug candidates and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors. The Health Care Reform Law is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The Health Care Reform Law revised the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, the law imposed a significant annual fee on companies that manufacture or import branded prescription drug products. The Health Care Reform Law remains subject to legislative efforts to repeal, modify or delay the implementation of the law. Efforts to date have generally been unsuccessful. If the Health Care Reform Law is repealed or modified, or if implementation of certain aspects of the Health Care Reform Law are delayed, such repeal, modification or delay may materially adversely impact our business, strategies, prospects, operating results or financial condition. We are unable to predict the full impact of any repeal or modification in the implementation of the Health Care Reform Law on us at this time. In addition, other legislative changes have been proposed and adopted in the United States since the Health Care Reform Law was enacted. We expect that additional federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, and in turn could significantly reduce the projected value of certain development projects and reduce or eliminate our profitability. Our drug candidates may face competition sooner than expected. Our success will depend in part on our ability to obtain and maintain patent protection for certain of our drug candidates and technologies and to prevent third parties from infringing upon our proprietary rights. We must also operate without infringing upon patents and proprietary rights of others, including by obtaining appropriate licenses to patents or other proprietary rights held by third parties, if necessary. However, the applications we have filed or may file in the future may never yield patents that protect our inventions and intellectual property assets. Failure to obtain patents that sufficiently cover our formulations and technologies would limit our protection against compounding pharmacies, outsourcing facilities, generic drug manufacturers, pharmaceutical companies and other parties who may seek to copy our products, produce products substantially similar to ours or use technologies substantially similar to those we own. 42 We also intend to seek data exclusivity or market exclusivity for our drug candidates provided under the FDCA and similar laws in other countries. The FDCA provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages, or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving NDAs for drugs containing the original active agent. Even if our drug candidates are considered to be reference products eligible for three years of exclusivity under the FDCA, another company could market competing products if the FDA approves a full NDA for such product containing the sponsor’s own pre-clinical data and data from adequate and well- controlled clinical trials to demonstrate the safety, purity and potency of the products. Moreover, an amendment or repeal of the FDCA could result in a shorter exclusivity period for our drug candidates, which would have a material adverse effect on our business. We are and will be completely dependent on third parties to manufacture our branded drug products and drug candidates, and our commercialization of our drug candidates could be halted, delayed or made less profitable if those third parties fail to obtain manufacturing approval from the FDA or comparable foreign regulatory authorities, fail to provide us with sufficient quantities of our drug candidates or fail to do so at acceptable quality levels or prices. We do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture the active pharmaceutical ingredient (“API”) in our drug candidates for use in our clinical trials or for commercial product. In addition, we do not have the capability to manufacture any of our branded drug products and candidates as a finished drug product for commercial distribution. As a result, we are and will be obligated to rely on contract manufacturers. Other than through our agreements with Novartis, we have not entered into an agreement with any contract manufacturers for commercial supply and may not be able to engage a contract manufacturer for commercial supply of any of our drug products and candidates on favorable terms to us, or at all. The facilities used by our contract manufacturers to manufacture our drug products and candidates must be approved by the FDA or comparable foreign regulatory authorities pursuant to inspections that will be conducted after we submit an NDA or BLA to the FDA or their equivalents to other relevant regulatory authorities. We will not control the manufacturing process of, and will be completely dependent on, our contract manufacturing partners for compliance with cGMPs for manufacture of both active drug substances and finished drug products. These cGMP regulations cover all aspects of the manufacturing, testing, quality control and record keeping relating to our drug candidates. If our contract manufacturers do not successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our drug candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our drug candidates, if approved. Our contract manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. We will not have control over our contract manufacturers’ compliance with these regulations and standards. Failure by any of our contract manufacturers to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to grant approval to market any of our drug candidates, delays, suspensions or withdrawals of approvals, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business. In addition, we will not have control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Failure by our contract manufacturers to comply with or maintain any of these standards could adversely affect our ability to develop, obtain regulatory approval for or market any of our drug candidates. 43 If, for any reason, these third parties are unable or unwilling to perform, we may not be able to terminate our agreements with them, and we may not be able to locate alternative manufacturers or formulators or enter into favorable agreements with them, and we cannot be certain that any such third parties will have the manufacturing capacity to meet future requirements. If these manufacturers or any alternate manufacturer of finished drug product experiences any significant difficulties in its respective manufacturing processes for our API or finished products or should cease doing business with us, we could experience significant interruptions in the supply of any of our drug candidates or may not be able to create a supply of our drug candidates at all. Were we to encounter manufacturing issues, our ability to produce a sufficient supply of any of our drug candidates might be negatively affected. Our inability to coordinate the efforts of our third-party manufacturing partners, or the lack of capacity available at our third-party manufacturing partners, could impair our ability to supply any of our drug candidates at required levels. Because of the significant regulatory requirements that we would need to satisfy in order to qualify a new bulk or finished product manufacturer, if we face these or other difficulties with our current manufacturing partners, we could experience significant interruptions in the supply of any of our drug candidates if we decided to transfer the manufacture of any of our drug candidates to one or more alternative manufacturers in an effort to deal with the difficulties. Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales. Additionally, we rely on third parties to supply the raw materials needed to manufacture our existing and potential products. Any business interruptions resulting from geopolitical actions, including war and terrorism, adverse public health developments, or natural disasters including earthquakes, typhoons, floods and fires, could affect our supply chain. Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any unanticipated disruption to a future contract manufacturer caused by problems at suppliers could delay shipment of any of our drug candidates, increase our cost of goods sold and result in lost sales. We cannot guarantee that our future manufacturing and supply partners will be able to reduce the costs of commercial scale manufacturing of any of our drug candidates over time. If the commercial-scale manufacturing costs of any of our drug candidates are higher than expected, these costs may significantly impact our operating results. In order to reduce costs, we may need to develop and implement process improvements. However, in order to do so, we will need, from time to time, to notify or make submissions with regulatory authorities, and the improvements may be subject to approval by such regulatory authorities. We cannot be sure that we will receive these necessary approvals or that these approvals will be granted in a timely fashion. We also cannot guarantee that we will be able to enhance and optimize output in our commercial manufacturing process. If we cannot enhance and optimize output, we may not be able to reduce our costs over time. We expect to rely on third parties to conduct clinical trials for our drug candidates. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize any of our drug candidates, and our business would be substantially harmed. We expect to enter into agreements with third-party CROs to conduct and manage our clinical programs, including contracting with clinical sites to perform our clinical studies. We plan to rely heavily on these parties for execution of clinical studies for our drug candidates and will control only certain aspects of their activities. Nevertheless, we will be responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on CROs and clinical sites will not relieve us of our regulatory responsibilities. We and our CROs will be required to comply with cGCPs, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA and its foreign equivalents enforce these cGCP regulations through periodic inspections of trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA or other regulatory authorities will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with products produced under cGMP regulations and will require a large number of test subjects. Our failure or the failure of our CROs or clinical sites to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties. 44 Although we intend to design the clinical trials for our drug candidates in consultation with CROs, we expect that the CROs will manage all of the clinical trials conducted at contracted clinical sites. As a result, many important aspects of our drug development programs would be outside of our direct control. In addition, the CROs and clinical sites may not perform all of their obligations under arrangements with us or in compliance with regulatory requirements. If the CROs or clinical sites do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization of any of our drug candidates for the subject indication may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs and clinical sites will devote to our program or any of our drug candidates. If we are unable to rely on clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of our clinical trials, which could significantly delay commercialization and require significantly greater expenditures. If any of our relationships with these third-party CROs or clinical sites terminate, we may not be able to enter into arrangements with alternative CROs or clinical sites. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any such clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our drug candidates. As a result, our financial results and the commercial prospects for any of our drug candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed. Any termination or suspension of, or delays in the commencement or completion of, any necessary studies of any of our drug candidates for any indications could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects. The commencement and completion of clinical studies can be delayed for a number of reasons, including delays related to: ● the FDA or a comparable foreign regulatory authority failing to grant permission to proceed and placing the clinical study on hold; ● subjects for clinical testing failing to enroll or remain in our trials at the rate we expect; ● a facility manufacturing any of our drug candidates being ordered by the FDA or other government or regulatory authorities to temporarily or permanently shut down due to violations of cGMP requirements or other applicable requirements, or cross-contaminations of drug candidates in the manufacturing process; ● any changes to our manufacturing process that may be necessary or desired; ● subjects choosing an alternative treatment for the indications for which we are developing our drug candidates, or participating in competing clinical studies; ● subjects experiencing severe or unexpected drug-related adverse effects; ● reports from clinical testing on similar technologies and products raising safety and/or efficacy concerns; ● third-party clinical investigators losing their license or permits necessary to perform our clinical trials, not performing our clinical trials on our anticipated schedule or employing methods consistent with the clinical trial protocol, cGMP requirements, or other third parties not performing data collection and analysis in a timely or accurate manner; ● inspections of clinical study sites by the FDA, comparable foreign regulatory authorities, or IRBs finding regulatory violations that require us to undertake corrective action, result in suspension or termination of one or more sites or the imposition of a clinical hold on the entire study, or that prohibit us from using some or all of the data in support of our marketing applications; 45 ● third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or any of the data produced by such contractors in support of our marketing applications; ● one or more IRBs refusing to approve, suspending or terminating the study at an investigational site, precluding enrollment of additional subjects, or withdrawing its approval of the trial; reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; ● deviations of the clinical sites from trial protocols or dropping out of a trial; ● adding new clinical trial sites; ● the inability of the CRO to execute any clinical trials for any reason; and ● government or regulatory delays or “clinical holds” requiring suspension or termination of a trial. Product development costs for any of our drug candidates will increase if we have delays in testing or approval or if we need to perform more or larger clinical studies than planned. Additionally, changes in regulatory requirements and policies may occur and we may need to amend study protocols to reflect these changes. Amendments may require us to resubmit our study protocols to the FDA, comparable foreign regulatory authorities, and IRBs for reexamination, which may impact the costs, timing or successful completion of that study. If we experience delays in completion of, or if we, the FDA or other regulatory authorities, the IRB, or other reviewing entities, or any of our clinical study sites suspend or terminate any of our clinical studies of any of our drug candidates, its commercial prospects may be materially harmed and our ability to generate product revenues will be delayed. Any delays in completing our clinical trials will increase our costs, slow down our development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical studies may also ultimately lead to the denial of regulatory approval of our drug candidates. In addition, if one or more clinical studies are delayed, our competitors may be able to bring products to market before we do, and the commercial viability of any of our drug candidates could be significantly reduced. Even though we may apply for orphan drug designation for a drug candidate, we may not be able to obtain orphan drug marketing exclusivity. There is no guarantee that the FDA, EMA or their foreign equivalents will grant any future application for orphan drug designation for any of our drug candidates, which would make us ineligible for the additional exclusivity and other benefits of orphan drug designation. Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making a drug available in the Unites States for this type of disease or condition will be recovered from sales of the product. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of regulatory review and approval process. In addition to the potential period of exclusivity, orphan designation makes a company eligible for grant funding of up to $400,000 per year for four years to defray costs of clinical trial expenses, tax credits for clinical research expenses and potential exemption from the FDA application user fee. 46 If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other applications to market the same drug for the same indication for seven years, except in limited circumstances, such as (i) the drug’s orphan designation is revoked; (ii) its marketing approval is withdrawn; (iii) the orphan exclusivity holder consents to the approval of another applicant’s product; (iv) the orphan exclusivity holder is unable to assure the availability of a sufficient quantity of drug; or (v) a showing of clinical superiority to the product with orphan exclusivity by a competitor product. If a drug designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan drug exclusivity. There can be no assurance that we will receive orphan drug designation for any of our drug candidates in the indications for which we think they might qualify, if we elect to seek such applications. Although we may pursue expedited regulatory approval pathways for a drug candidate, it may not qualify for expedited development or, if it does qualify for expedited development, it may not actually lead to a faster development or regulatory review or approval process. Although we believe there may be an opportunity to accelerate the development of certain of our drug candidates through one or more of the FDA’s expedited programs, such as fast track, breakthrough therapy, accelerated approval or priority review, we cannot be assured that any of our drug candidates will qualify for such programs. For example, a drug may be eligible for designation as a breakthrough therapy if the drug is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Although breakthrough designation or access to any other expedited program may expedite the development or approval process, it does not change the standards for approval. If we apply for breakthrough therapy designation or any other expedited program for our drug candidates, the FDA may determine that our proposed target indication or other aspects of our clinical development plans do not qualify for such expedited program. Even if we are successful in obtaining a breakthrough therapy designation or access to any other expedited program, we may not experience faster development timelines or achieve faster review or approval compared to conventional FDA procedures. Access to an expedited program may also be withdrawn by the FDA if it believes that the designation is no longer supported by data from our clinical development program. Additionally, qualification for any expedited review procedure does not ensure that we will ultimately obtain regulatory approval for such drug candidate. Risks Related to the Notes We have incurred significant indebtedness, which will require substantial cash to service and which subjects us to certain financial requirements and business restrictions. Since 2021, we issued $115,250,000 aggregate principal amount of senior notes due in part in 2026 and in 2027 (the “Notes”). We may incur additional indebtedness in the future. Our ability to make scheduled payments on our indebtedness depends on our future performance and ability to raise additional capital, which is subject to economic, financial, competitive and other factors, some of which are beyond our control. If we are unable to generate sufficient cash to service our debt, we may be required to adopt one or more alternatives, such as selling assets, restructuring our debt or obtaining additional capital through equity sales or incurrence of additional debt on terms that may be onerous or highly dilutive to our stockholders. Our ability to engage in any of these activities would depend on the capital markets and our financial condition at such time, and we may not be able to do so when needed, on desirable terms or at all, which could result in a default on our debt obligations. Additionally, our debt instruments contain, or from time to time may contain, various restrictive covenants, including, among others, our obligation to deliver certain financial and other information, our obligation to comply with certain notice and insurance requirements, and our inability, without prior consent, to dispose of certain of our assets, incur certain additional indebtedness, enter into certain merger, acquisition or change of control transactions, pay certain dividends or distributions on or repurchase any of our capital stock or incur any lien or other encumbrance on our assets, subject to certain permitted exceptions. Any failure by us to comply with any of these covenants, subject to certain cure periods, or to make all payments under the debt instruments when due, would cause us to be in default under the applicable debt instrument. In the event of any such default, lenders may be able to foreclose on our assets that secure the debt or declare all borrowed funds, together with accrued and unpaid interest, immediately due and payable, thereby potentially causing all of our available cash to be used to pay our indebtedness or forcing us into bankruptcy or liquidation if we do not then have sufficient cash available. Any such event or occurrence could severely and negatively impact our operations and prospects. 47 The indenture under which the Notes were issued contains limited protection for holders of the Notes. The indenture under which the Notes were issued offers limited protection to holders of the Notes. The terms of the indenture and the Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on the holders of the Notes. In particular, the terms of the indenture and the Notes do not place any restrictions on our or our subsidiaries’ ability to: ● issue debt securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries; ● pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities subordinated in right of payment to the Notes; ● sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); ● enter into transactions with affiliates; ● create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; ● make investments; or ● create restrictions on the payment of dividends or other amounts to us from our subsidiaries. In addition, the indenture does not include any protection against certain events, such as a change of control, leveraged recapitalization, “going private” transaction (which may result in a significant increase of our indebtedness), restructuring or similar transactions. Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity. Also, an event of default or acceleration under our other indebtedness would not necessarily result in an event of default under the Notes. Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the Notes may have important consequences for the holders of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes. Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Notes. An increase in market interest rates could result in a decrease in the value of the Notes. In general, as market interest rates rise, notes bearing interest at a fixed rate decline in value. Consequently, if the market interest rates increase, the market value of the Notes may decline. We cannot predict the future level of market interest rates. 48 A lack of an active trading market for the Notes could adversely affect the market price of the Notes or limit a holder’s ability to sell them. The Notes are listed on Nasdaq under the symbols “HROWL” and “HROWM”. Although the Notes are listed, we cannot provide any assurances that an active trading market will be maintained for the Notes or that a holder will be able to sell the Notes. If the Notes are traded, they may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, general economic conditions, our financial condition, performance and prospects and other factors. The underwriters of the Notes may make a market in the Notes, but they are not obligated to do so. The underwriters may discontinue any market-making in the Notes at any time at their sole discretion. Accordingly, we cannot assure a holder that a liquid trading market will develop for the Notes, that a holder will be able to sell the Notes at a particular time or that the price received will be favorable. To the extent an active trading market is not maintained, the liquidity and trading price for the Notes may be harmed. Accordingly, a holder may be required to bear the financial risk of an investment in the Notes for an indefinite period of time. The rating for the Notes could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency. We have obtained a rating for the Notes. Ratings only reflect the views of the issuing rating agency or agencies and such ratings could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency. A rating is not a recommendation to purchase, sell or hold the Notes. Ratings do not reflect market prices or suitability of a security for a particular investor and the rating of the Notes may not reflect all risks related to us and our business, or the structure or market value of the Notes. We may elect to issue other securities for which we may seek to obtain a rating in the future. If we issue other securities with ratings lower than market expectations or that are subsequently lowered or withdrawn, the market for or the market value of the Notes could be adversely affected. We could enter into various transactions that could increase the amount of our outstanding debt or adversely affect our capital structure or credit rating. Subject to certain limited exceptions, the terms of the Notes do not prevent us from entering into a variety of acquisition, divestiture, refinancing, recapitalization or other highly leveraged transactions. As a result, we could enter into any such transaction even though the transaction could increase the total amount of our outstanding indebtedness, adversely affect our capital structure or credit rating or otherwise adversely affect the holders of the Notes. Risks Related to Our Common Stock If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, which could cause our stock price to fall. Effective internal controls are necessary for us to provide reliable financial results. If we cannot provide reliable financial results, our consolidated financial statements could be misstated, our reputation may be harmed and the trading price of our common stock could decline. As we discuss in Item 9A of this Annual Report, our management concluded that our internal controls over financial reporting were effective as of December 31, 2023. However, our controls over financial processes and reporting may not continue to be effective or we may identify material weaknesses or significant deficiencies in our internal controls in the future. Any failure to remediate any future material weaknesses or successfully implement required new or improved controls, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our consolidated financial statements or other public disclosures. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. 49 A consistently active trading market for shares of our common stock may not be sustained. Historically, trading in our common stock has been sporadic and volatile and our common stock has been “thinly-traded.” There have been, and may in the future be, extended periods when trading activity in our shares is minimal, compared to a seasoned issuer with a large and steady volume of trading activity. The market for our common stock is also characterized by significant price volatility compared to seasoned issuers, and we expect that such volatility may continue. As a result, the trading of relatively small quantities of shares may disproportionately influence the market price of our common stock. A consistently active and liquid trading market in our common stock may never develop or be sustained. Our stock price may be volatile. The market price of our common stock is likely to be highly volatile and could fluctuate widely in response to various factors, many of which are beyond our control, including our ability to execute our business plan; operating results that fall below expectations; industry or regulatory developments; investor perception of our industry or our prospects; economic and other external factors; and the other risk factors discussed in this “Risk Factors” section. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. We have the right to issue shares of preferred stock without obtaining stockholder approval. If we were to issue preferred stock, it may have rights, preferences and privileges superior to those of our common stock. We are authorized to issue 5,000,000 shares of “blank check” preferred stock, with such rights, preferences and privileges as may be determined from time to time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue preferred stock at any time in one or more series and to fix the dividend rights, dissolution or liquidation preferences, redemption prices, conversion rights, voting rights and other rights, preferences and privileges for any series of our preferred stock that may be issued. The issuance of shares of preferred stock, depending on the rights, preferences and privileges attributable to the preferred stock, could reduce the voting rights and powers of our common stockholders and the portion of our assets allocated for distribution to our common stockholders in a liquidation event, and could also result in dilution to the book value per share of our common stock. The preferred stock could also be utilized, under certain circumstances, as a method for raising additional capital or discouraging, delaying or preventing a change in control of our Company. We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on an investment will be limited to any appreciation in the value of our common stock. We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Any payment of dividends on our common stock would depend on contractual restrictions, as well as our earnings, financial condition and other business and economic factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates. Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline. The sale of substantial amounts of our common stock in the public market, or the perception that sales could occur, may cause the market price of our common stock to fall. Sales could occur upon the expiration of any statutory holding period, such as under Rule 144 under the Securities Act of 1933, as amended, applicable to outstanding shares, upon expiration of any lock-up periods applicable to outstanding shares, upon our issuance of shares upon the exercise of outstanding options or warrants, or upon our issuance of shares pursuant offerings of our equity securities. The availability for sale of a substantial number of shares of our common stock, whether or not sales have occurred or are occurring, also could make it more difficult for us to raise additional financing through the sale of equity or equity-related securities in the future, when needed, on acceptable terms or at all. 50 Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price. From time to time, global credit and financial markets have experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment and continued unpredictable and unstable market conditions. If the equity and credit markets deteriorate, it may make any debt or equity financing more difficult to complete, more costly, and more dilutive. In the event the Company or one of its subsidiaries needed to access additional capital, failure to secure financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive an economic downturn, which could directly affect our ability to attain our operating goals on schedule and on budget. ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 1C. CYBERSECURITY We are subject to cybersecurity threats that could have a material adverse impact on our results of operations, financial condition and cash flows, as well as our operations—including our manufacturing and marketing capabilities. We operate a risk-based cybersecurity program which is designed to: (i) ensure the security, confidentiality, integrity and availability of our information and systems; (ii) protect against anticipated or actual cyber threats to our information and systems; and (iii) protect against unauthorized access and/or use of our information and systems. Overall cybersecurity risk reporting is integrated with our enterprise risk management program, is included in discussions with the Audit Committee of our board of directors and disclosed where appropriate. Our information technology and cybersecurity function is headed by our Chief Executive Officer (“CEO”), and Director of Information Technology, who are responsible for managerial oversight of our cybersecurity program. Our Director of Information Technology reports directly to the Chief Executive Officer of ImprimisRx and Chief Commercial Officer, who reports directly to our CEO. We utilize a layered approach in assessing, identifying, evaluating and managing material risks from cybersecurity threats, and leverage outside partners to gain intelligence on threats. We take input from industry activities, third party assessments and internal simulations and continuously adjust our protection mechanisms to be effective. We also assess operational and data security risks associated with our use of third-party service providers, understanding where failure points may exist within our supply chain operations and data protections. If we learn of a cybersecurity incident at a third-party service provider, our information technology department will maintain communication with that third-party service provider and communicate any cybersecurity incidents to the Director of Information Technology and CEO. All Harrow employees receive information security training (including data protection and fraud awareness) on an annual basis, and we use industry standard technology to monitor systems for anomalous behavior. We also require employees in certain roles to complete additional role-based, specialized cybersecurity trainings. In the event an incident were to occur, a Security Incident Response Team would be convened that consists of members from many functions, including legal counsel, the Director of Information Technology and the CEO. Our Board of Directors has the ultimate oversight of the Company’s risks—including cybersecurity risks—with our Audit Committee assisting the Board of Directors in its oversight of cyber and information security risks. Members of management that possess information security certifications and many years of experience work with our legal, finance and corporate governance functions to identify, define and report cybersecurity risks, policies and procedures and incident response plans. The Audit Committee receives updates on our cybersecurity program from management on a regular basis and more frequently as determined to be necessary or advisable. Updates to the Audit Committee include policies, processes, procedures and any significant developments related to the identification, mitigation and remediation of cybersecurity risks, as well as effectiveness and changes in our ability to monitor, protect, detect and respond to incidents, risk reviews and industry news briefings. The Audit Committee also ensures that management provides a cyber and information security update to the Board of Directors at least annually. Finally, in the event a material cybersecurity incident were to occur, the CEO and Director of Information Technology would brief the Audit Committee which would then be responsible for assessing the materiality of the incident and making the determination of materiality and any related disclosure. 51 We face a number of cybersecurity risks in connection with our business. Although we have numerous controls to protect against common attacks, some attacks may still be effective. Our controls are designed to detect, triage and eradicate these attacks. While we carry a cyber insurance policy to help cover investigation and mitigation expenses, it may be subject to limitations and be insufficient to cover all expenses that may result from a cybersecurity incident. Although the risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have not materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations or financial condition, such incidents could have a material adverse effect in the future as cyberattacks continue to increase in frequency and sophistication. For more information about the cybersecurity risks and other information technology and data privacy risks we face, see Item 1A. Risk Factors and the subsection titled A breakdown of our information technology systems, or a cyberattack or information security breach could significantly compromise the confidentiality, integrity and availability of our information technology systems, network-connected control systems and/or our data, interrupt the operation of our business and/or affect our reputation. ITEM 2. PROPERTIES We lease approximately 38,200 square feet of lab, warehouse, and office space in Ledgewood, New Jersey, in three separate suites. The current lease term expires on July 31, 2027 and includes options to extend the lease term through 2037. This space serves as an outsourcing facility and pharmacy for ImprimisRx. We lease approximately 5,500 square feet of office space in Nashville, Tennessee. The current lease term expires on December 31, 2024. This office serves as our corporate headquarters. We lease approximately 5,800 square feet of office space in Carlsbad, California. The current lease term began January 1, 2022 and expires on March 31, 2025 and includes an option to extend the lease term through March 2028. This office generally supports the certain marketing and administrative functions. We lease approximately 11,600 square feet of lab and office space in Nashville, Tennessee. The current lease term commenced in June 2022 and expires in June 2027. This office generally serves as our customer service center and analytical laboratory. ITEM 3. LEGAL PROCEEDINGS See Note 18 to our consolidated financial statements included in this Annual Report for information on various legal proceedings, which is incorporated into this Item by reference. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is listed on The Nasdaq Stock Market LLC under the symbol “HROW” and the Notes are listed on The Nasdaq Stock Market LLC under the symbols “HROWL” and “HROWM.” Holders As of March 18, 2024, there were approximately 67 stockholders of record (excluding an indeterminable number of stockholders whose shares are held in street or “nominee” name) of our common stock. Dividends We have not paid any dividends on our common stock since our inception and do not expect to pay dividends on our common stock in the foreseeable future. Purchase of Equity Securities We did not purchase any of our equity securities during the fourth quarter of 2023. Recent Sales of Unregistered Securities None. ITEM 6. [RESERVED] 52 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes contained in this Annual Report on Form 10-K (this “Annual Report”). Our consolidated financial statements have been prepared and, unless otherwise stated, the information derived therefrom as presented in this discussion and analysis is presented, in accordance with accounting principles generally accepted in the United States (GAAP). In addition to historical information, the following discussion contains forward-looking statements based upon our current views, expectations and assumptions that are subject to risks and uncertainties. Actual results may differ substantially from those expressed or implied by any forward-looking statements due to a number of factors, including, among others, the risks described in the “Risk Factors” section and elsewhere in this Annual Report. As used in this discussion and analysis, unless the context indicates otherwise, the terms the “Company,” “Harrow” “we,” “us” and “our” refer to Harrow, Inc. and its consolidated subsidiaries, including Imprimis RxNJ, LLC, Imprimis NJOF, LLC, ImprimisRx, LLC, Harrow IP, LLC and Harrow Eye, LLC. Overview We are a leading eyecare pharmaceutical company engaged in the discovery, development, and commercialization of innovative ophthalmic pharmaceutical products for the U.S. market. Harrow helps U.S. eyecare professionals preserve the gift of sight by making its comprehensive portfolio of prescription and non-prescription pharmaceutical products accessible and affordable to millions of Americans each year. We own commercial rights to one of the largest portfolios of branded ophthalmic pharmaceutical products in North America, all of which are marketed under the Harrow name. We also own and operate ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding businesses. In addition, we have a non- controlling equity interest in Melt Pharmaceuticals, Inc. (“Melt”), and two other companies that began as subsidiaries of Harrow and were subsequently carved-out of our corporate structure and deconsolidated from our financial statements. Factors Affecting Our Performance We believe the primary factors affecting our performance are our ability to increase revenues of our branded pharmaceutical products, proprietary compounded formulations and certain non-proprietary products, grow and gain operating efficiencies in our operations, potential regulatory-related restrictions, optimize pricing and obtain reimbursement options for our drug products, and continue to pursue development and commercialization opportunities for certain of our ophthalmology and other assets that we have not yet made commercially available. We believe we have built a tangible and intangible infrastructure that will allow us to scale revenues efficiently in the near and long-term. All of these activities will require significant costs and other resources, which we may not have or be able to obtain from operations or other sources. See “Liquidity and Capital Resources” below. Recent Developments The following describes certain developments in 2023 and 2024 to date that are important to understand our financial condition and results of operations. See the notes to our consolidated financial statements included in this Annual Report for additional information about each of these developments. Apotex - Canadian Out-License In February 2024, we entered into a license and supply agreement with Apotex Inc. (“Apotex”). Under the terms of the agreement, Apotex licensed exclusive rights and marketing authorizations of the following products in the Canadian market from Harrow: VERKAZIA (cyclosporine ophthalmic emulsion) 0.1% and Cationorm PLUS. Apotex was also granted a license for products Apotex will pursue approval for in Canada: VEVYE (cyclosporine ophthalmic solution) 0.1%, IHEEZO (chloroprocaine hydrochloride ophthalmic gel) 3%, and ZERVIATE (cetirizine ophthalmic solution) 0.24% (with VERKAZIA and Cationorm Plus, collectively, the “Apotex Products”). In exchange, Apotex will make payments to Harrow for milestones related to manufacturing arrangements, regulatory and commercial achievements, in addition to royalties on net sales of the Apotex Products. 53 VEVYE U.S. Launch In January 2024, we launched VEVYE (cyclosporine ophthalmic solution) 0.1%, the first and only water-free cyclosporine dissolved in a semifluorinated alkane approved to treat both the signs and symptoms of dry eye disease, in the U.S. We partnered with various entities including PhilRx, Apollo Care and PARx Solutions to enhance our market and patient access program for VEVYE. Melt Loan Settlement In December 2023, we terminated the Loan and Security Agreement (the “Loan Agreement”), dated as of September 1, 2021, as amended, by and between us, as lender, and Melt, as borrower, which provided for a senior secured term loan with an initial aggregate principal amount of $13,500,000 bearing interest at 12.50% per annum. As of the date of termination, approximately $18,400,000 remained outstanding under the Loan Agreement. Pursuant to the terms of a Settlement and Payoff Agreement, dated as of December 28, 2023, by and between us and Melt (the “Settlement Agreement”), we received 2,260,000 shares of Melt’s Series B-1 Preferred Stock and 74,256 shares of Melt’s Series B Preferred Stock in consideration for the full payment of all amounts outstanding under the Loan Agreement. The Settlement Agreement contains customary representations, warranties and releases of the parties and requires the parties to enter into a registration rights agreement providing us with rights consistent with other holders of preferred stock of Melt. IHEEZO Reimbursement, Launch and Studies In February 2023, we announced that the Centers for Medicare & Medicaid Services (“CMS”) had issued a permanent, product specific J-code for IHEEZO (J2403) which became effective under the Healthcare Procedure Coding System (HCPCS) on April 1, 2023, which physicians can use for reimbursement purposes of that product. New drugs approved by the U.S. Food and Drug Administration (“FDA”) that are used in surgeries performed in hospital outpatient departments or ambulatory surgical centers may receive a transitional pass-through reimbursement under Medicare, provided they meet certain criteria, including a “not insignificant” cost criterion. Pass-through status allows for separate payment (i.e., outside the packaged payment rate for the surgical procedure) under Medicare Part B, which consists of Medicare reimbursement for a drug based on a defined formula for calculating the minimum fee that a manufacturer may charge for the drug. Under current regulations of CMS, pass-through status applies for a period of three years; which is measured from the date Medicare makes its first pass-through payment for the product. Following the three-year period, the product would be incorporated into the cataract bundled payment system, which could significantly reduce the pricing for that product. Temporary pass-through reimbursement for IHEEZO was awarded by CMS and made effective in April 2023. We are also working to ensure our continued access to the Medicare market for the ambulatory surgery center (ASC), hospital and outpatient department (HOPD), and in-office use market for IHEEZO. In this regard, we are designing and intend to execute, during 2024, clinical studies to build data sets that could be presented to Centers for Medicare & Medicaid Services (CMS) to extend our temporary pass-through period for IHEEZO in ASCs and HOPDs. We also met with CMS in January 2024 to request clarification related to its anesthesia billing policy which has historically not allowed for the separate billing of anesthesia services in the physician’s office. During the meeting we requested that CMS clarify that J-Code 2403, IHEEZO’s permanent J-Code, is appropriate to be billed for the anesthesia product itself (i.e., IHEEZO in our case) in the physician office setting. As of the date of this Annual Report, we had not received feedback from CMS following our meeting in January 2024. At the beginning of April 2023, we initiated a regional and targeted launch of IHEEZO (chloroprocaine HCL ophthalmic gel) 3%. In early May 2023, our full commercial launch of IHEEZO occurred, with the product being highlighted by our commercial team at the ASCRS (American Society of Cataract and Refractive Surgery) Annual Meeting. Recently we invested in an in-vivo (in human) study to compare the effects of IHEEZO with povidone-iodine (PVI) compared to a low-viscosity tetracaine ophthalmic solution with PVI. The primary intent of the study is to show that IHEEZO does not act as a “barrier” to PVI, which had otherwise been shown with other ocular anesthetic gels. Findings from the study are positive and showed that IHEEZO demonstrated a similar barrier risk to tetracaine (e.g., a non-gel anesthetic). 54 Acquisition of VEVYETM U.S. and Canadian Commercial Rights In July 2023, we acquired commercial rights of VEVYE for the U.S. and Canadian markets (the “VEVYE Acquisition”). VEVYE, which is dispensed topically in a unique ten microliter per one drop and is labeled for twice-daily (BID) dosing, is the first and only cyclosporine-based product indicated for the treatment of both signs and symptoms of dry eye disease (DED). VEVYE was approved on May 30, 2023 by the FDA. We acquired the commercial rights to VEVYE by entering into a license agreement with Novaliq GmbH (“Novaliq”). As consideration, we made initial payments to Novaliq totaling $8,000,000 and will pay low double-digit royalties on net sales of VEVYE along with potential commercial milestone payments. In February 2024, we agreed to license rights for VEVYE in Canada to Apotex. Acquisition of Certain U.S. and Canadian Commercial Rights to Santen and Eyevance Products In July 2023, we entered into an Asset Purchase Agreement with Eyevance Pharmaceuticals, LLC and a License Agreement with Santen S.A.S. (collectively, the “Santen Agreements”), each a subsidiary of Santen Pharmaceuticals Co., Ltd. (collectively, “Santen”). Pursuant to the Santen Agreements, we acquired the exclusive commercial rights to assets associated with the following ophthalmic products (collectively, the “Santen Products”), in the U.S.: FLAREX® (fluorometholone acetate ophthalmic suspension) 0.1%, NATACYN® (natamycin ophthalmic suspension) 5%, TOBRADEX® ST (tobramycin and dexamethasone ophthalmic suspension) 0.3%/0.05%, ZERVIATE® (cetirizine ophthalmic solution) 0.24%, and FRESHKOTE®. In the U.S. and Canada: VERKAZIA ® (cyclosporine ophthalmic emulsion) 0.1%, and in Canada: Cationorm PLUS. The transactions pursuant to the Santen Agreements are referred to in this Annual Report as the “Santen Products Acquisition.” Under the terms of the Santen Agreements, we made an initial one-time payment of $8,000,000. In addition, the Santen Agreements provide for various one-time milestone payments associated with certain manufacturing-related events as well as low-double digit royalty payments on net sales of VERKAZIA and high-single digit royalty payments on net sales of Cationorm PLUS. Under the Santen Agreements, we also assumed certain obligations associated with other third parties that require royalties on sales of FRESHKOTE and ZERVIATE. Immediately following the closing and subject to certain conditions, prior to the transfer of the Santen Product NDAs and other marketing authorizations to us, Santen continued to sell the Santen Products on our behalf and transfer the net profit from the sale of the Santen Products to us. In October 2023, we completed the transfer of the U.S. NDAs and rights of the Santen Products. The Canadian marketing authorizations of VERKAZIA and Cationorm PLUS will be transferred to Apotex during 2024. Common Stock Offering In July 2023, we closed a public offering of shares of our common stock at an offering price of $17.75 per share (the “Offering”). We sold 3,887,324 shares of our common stock in the Offering, resulting in us receiving aggregate net proceeds of $64,520,000, after deducting underwriting discounts and commissions and other offering expenses of $4,480,000. Oaktree Credit and Guaranty Agreement On March 27, 2023, we entered into a Credit Agreement and Guaranty (the “Oaktree Loan”) with Oaktree Fund Administration, LLC, as administrative agent for the lenders (together, “Oaktree”), providing for a loan to us with a principal amount of up to $100,000,000. Upon entering into the Oaktree Loan, we drew a principal amount of $65,000,000 from the Oaktree Loan and used the net proceeds to repay all amounts owed by us pursuant to the BR Loan (as defined below). No remaining amounts are due under the BR Loan, and no exit or prepayment fees were paid as a result of the payoff of the BR Loan. The additional principal loan amount of up to $35,000,000 available under the Oaktree Loan (the “Tranche B”) will be made available to the Company upon the commercialization of TRIESENCE. 55 On July 18, 2023, we entered into the First Amendment to the Oaktree Loan (the “Oaktree Amendment”). Under the Oaktree Amendment, the overall credit facility size was increased from $100,000,000 to $112,500,000, and we made other changes related to the Santen Products Acquisition. Upon satisfaction of certain conditions to funding, we drew down a principal amount of $12,500,000 (the “Loan Increase”) on August 1, 2023 to fund the initial one-time payment associated with the Santen Products Acquisition and for other working capital and general corporate purposes. No other material changes to the Oaktree Loan were provided in the Oaktree Amendment. Following entry into the Oaktree Amendment and the funding of the Loan Increase upon closing of the Santen Products Acquisition, we have drawn down a total principal loan amount of $77,500,000 under the Oaktree Loan and an additional Tranche B loan amount of up to $35,000,000 remains available to us upon the commercialization of TRIESENCE, provided, that if Tranche B is not drawn by the Company on or before March 27, 2024, the amount available under Tranche B will decrease to $30,000,000. The Oaktree Loan is secured by nearly all of the assets, including intellectual property, of the Company and its material subsidiaries. The Oaktree Loan has a maturity date of January 19, 2026 and carries an interest rate equal to the Secured Overnight Financing Rate plus 6.5% per annum. The Oaktree Loan requires interest-only payments through its term (there is no amortization of the principal amount or excess cash flow sweeps during the term of the Oaktree Loan). Acquisition of ILEVRO, NEVANAC, VIGAMOX, MAXIDEX and TRIESENCE In December 2022, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Novartis Technology, LLC and Novartis Innovative Therapies AG (together, “Novartis”), pursuant to which the Company agreed to purchase from Novartis the exclusive commercial rights to assets associated with the following ophthalmic products (collectively the “NVS 5 Products”) in the U.S. (the “NVS 5 Acquisition”): ● ILEVRO (nepafenac ophthalmic suspension) 0.3%, a non-steroidal, anti-inflammatory eye drop indicated for pain and inflammation associated with cataract surgery. ● NEVANAC (nepafenac ophthalmic suspension) 0.1%, a non-steroidal, anti-inflammatory eye drop indicated for pain and inflammation associated with cataract surgery. ● VIGAMOX (moxifloxacin hydrochloride ophthalmic solution) 0.5%, a fluoroquinolone antibiotic eye drop for the treatment of bacterial conjunctivitis caused by susceptible strains of organisms. ● MAXIDEX (dexamethasone ophthalmic suspension) 0.1%, a steroid eye drop for steroid-responsive inflammatory conditions of the palpebral and bulbar conjunctiva, cornea, and anterior segment of the globe. ● TRIESENCE (triamcinolone acetonide injectable suspension) 40 mg/ml, a steroid injection for the treatment of certain ophthalmic diseases and for visualization during vitrectomy. We closed the NVS 5 Acquisition on January 20, 2023. Under the terms of the Purchase Agreement, we made a one-time payment of $130,000,000 at closing, with up to another $45,000,000 due in a milestone payment related to the timing of the commercial availability of TRIESENCE. Pursuant to the Purchase Agreement and various ancillary agreements, immediately following the closing and subject to certain conditions, for a period that lasted approximately nine months, and prior to the transfer of the NVS 5 Products new drug applications (the “NDAs”) to us, Novartis continued to sell the NVS 5 Products on our behalf and transferred the net profit from the sale of the NVS 5 Products to us. Novartis has agreed to supply certain NVS 5 Products to the Company for a period of time after the NDAs are transferred to us and to assist with technology transfer of the NVS 5 Products manufacturing to other third-party manufacturers, if needed. On April 28, 2023, we transferred the NDAs for ILEVRO, NEVANAC and MAXIDEX. In July 2023, we transferred the NDA for VIGAMOX, and the NDA for TRIESENCE was transferred in November 2023. The milestone payment due upon commercial availability for TRIESENCE decreased from $45,000,000 to $37,000,000 on January 20, 2024. We expect Novartis to produce a performance process qualification (“PPQ”) batch during April 2024. If this PPQ batch is successful, our manufacturing partners will need to complete two additional, consecutive and successful PPQ batches (an aggregate of three PPQ batches) of TRIESENCE before the product can be released for commercial use. We believe it is possible TRIESENCE could be re- launched before the end of 2024 if these PPQ batches are successful, at which point the $37,000,000 milestone payment will become due to Novartis. 56 HROWM – Senior Notes Offering In December 2022, the Company entered into an underwriting agreement with B. Riley Securities, Inc., as representative of the several underwriters named therein, pursuant to which we agreed to sell $35,000,000 aggregate principal amount of 11.875% Senior Notes due 2027 (the “2027 Notes”) plus up to an additional $5,250,000 aggregate principal amount of 2027 Notes pursuant to an option granted to the underwriters to purchase additional 2027 Notes. In January 2023, the underwriters exercised their option to purchase the additional $5,250,000 aggregate principal amount of 2027 Notes. B. Riley Loan and Security Agreement – Paid On December 14, 2022, we entered into a Loan and Security Agreement (the “BR Loan”) with B. Riley Commercial Capital, LLC, as administrative agent for the lenders from time to time party thereto. The proceeds of the BR Loan were used to finance the NVS 5 Acquisition. The BR Loan provided for a loan facility of up to $100,000,000 to the Company with a maturity date of December 14, 2025, at an interest rate of 10.875% per annum. The BR Loan was secured by an intellectual property security agreement and by all assets of the Company and its material subsidiaries. In January 2023, the Company drew $59,750,000 of the BR Loan simultaneously with the consummation of the NVS 5 Acquisition, and subsequently paid back the BR Loan in March 2023 at the time of closing the Oaktree Loan. No remaining amounts are due under the BR Loan, and no exit or prepayment fees were paid as a result of the payoff of the BR Loan. Results of Operations The following period-to-period comparisons of our financial results are not necessarily indicative of results for any future period. Comparison of Years Ended December 31, 2023 and 2022 Revenues Our revenues include amounts recorded from sales of proprietary compounded formulations, sales of branded products to wholesalers through a third-party logistics facility, commissions from third parties and revenues received from royalty payments owed to us pursuant to out-license arrangements. The following presents our revenues for the years ended December 31, 2023 and 2022: Product sales, net Commission revenues Transfer of acquired product sales/profit Total revenues $ $ For the Years Ended December 31, 2023 117,447,000 $ - 12,746,000 130,193,000 $ 2022 83,524,000 $ 3,866,000 1,205,000 88,595,000 $ $ Variance 33,923,000 (3,866,000) 11,541,000 41,598,000 The increase in revenues between periods was related to an increase in sales of our branded ophthalmology products, as well as an increase in the transfer of acquired products sales and profits related to the NVS 5 Acquisition and Santen Products Acquisition. This increase in 2023 was offset slightly by a decrease in commissions attributable to sales of DEXYCU® (which agreement terminated January 1, 2023) and a decrease in sales from our non- ophthalmology compounded products as a result of our sale of those assets in the fourth quarter of 2022. During the year ended December 31, 2023, revenues, including transfer of acquired product sales and profits, from branded products totaled $50,258,000, as compared to $2,716,000 in the prior year. 57 Cost of Sales Our cost of sales includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant improvements depreciation, the write-off of obsolete inventory, amortization of acquired product NDAs, and other related expenses. The following presents our cost of sales for the years ended December 31, 2023 and 2022: Cost of sales $ 39,640,000 $ 25,383,000 $ 14,257,000 For the Years Ended December 31, 2023 2022 $ Variance The increase in our cost of sales was largely attributable to the amortization of acquired product NDAs which totaled $9,314,000 for the year ended December 31, 2023, compared to $1,364,000 during the prior year, offset by lesser increases in expenses associated with unit volumes sold and increased direct and indirect costs associated with production of our products. Gross Profit and Margin Gross profit Gross margin For the Years Ended December 31, 2023 2022 $ Variance $ 90,553,000 $ 63,212,000 $ 27,341,000 69.6% 71.3% (1.7)% The decrease in gross margin between the years ended December 31, 2023 and 2022 was primarily attributable to amortization of acquired NDAs from the NVS 5 Acquisition, beginning in January 2023. Selling, General and Administrative Expenses Our selling, general and administrative expenses include personnel costs, including wages and stock-based compensation, corporate facility expenses, and investor relations, consulting, insurance, filing, legal and accounting fees and expenses as well as costs associated with our marketing activities and sales of our proprietary compounded formulations and other non-proprietary pharmacy products and formulations. The following presents our selling, general and administrative expenses for the years ended December 31, 2023 and 2022: Selling, general and administrative $ 83,090,000 $ 58,243,000 $ 24,847,000 For the Years Ended December 31, 2023 2022 $ Variance The increase in selling, general and administrative expenses between periods was primarily attributable to an increase in stock-based compensation expense, including new expenses associated with performance stock units (“PSUs”) granted in April 2023 of $7,722,000 for the year ended December 31, 2023, compared to the prior year. Other areas of increased expenses included $3,257,000 related to new regulatory costs and enhancements and a $6,844,000 increase in expenses related to the addition of new employees in sales, marketing and other departments to support current and expected growth, including the transition of the Santen Products, and the commercial launch of IHEEZO in April 2023 and VEVYE in December 2023. 58 Research and Development Expenses Our research and development (“R&D”) expenses primarily included personnel costs, including wages and stock-based compensation, expenses related to the development of intellectual property, investigator-initiated research and evaluations, formulation development, acquired in-process R&D and other costs related to the clinical development of our assets. The following presents our R&D expenses for the years ended December 31, 2023 and 2022: Research and development $ 6,652,000 $ 3,050,000 $ 3,602,000 For the Years Ended December 31, 2023 2022 $ Variance The increase in R&D expenses between periods was primarily attributable to increased activity related to product acquisitions, product launches, clinical and medical support. Impairment and Disposal of Long-Lived Assets During the year ended December 31, 2023, we recorded a charge of $548,000, of which, $380,000 was related to the impairment of licenses, trademarks, patents and patent applications and $168,000 was related to equipment that was no longer in service. Interest Expense, net Interest expense, net was $21,324,000 during the year ended December 31, 2023, compared to $7,244,000 during the year ended December 31, 2022. The increase was primarily due to an increase in the principal balance of our loans throughout the two periods presented. Equity in Losses of Unconsolidated Entities During the years ended December 31, 2023 and 2022, we recorded a loss of $0 and $11,133,000, respectively, for our share of losses based on our ownership of Melt and Surface. Investment Gain (Loss) from Eton We recorded a gain of $3,092,000 related to the change in fair market value of our investment in Eton’s common stock for the year ended December 31, 2023. We recorded a loss of $2,914,000 related to our investment in Eton’s common stock for the year ended December 31, 2022. Gain on Sale of Non-Ophthalmology Assets During the year ended December 31, 2022, we recorded a gain on the sale of our non-ophthalmology assets to Innovation Compounding Pharmacy, LLC of $5,259,000. Loss on Early Extinguishment of Debt During the year ended December 31, 2023, we recorded a loss on extinguishment of debt of $5,465,000, related to the payoff of the BR Loan. Other Income (Expense), net During the year ended December 31, 2023 we recorded other expense, net of $444,000 related primarily to transition services and write-off of inventories associated with the divestment of our non-ophthalmology business, and a charge related to equipment that was no longer in service. During the year ended December 31, 2022, we recorded other income, net of $102,000 related to the transition services provided as part of our non-ophthalmology related compounding product line. Tax Expense During the years ended December 31, 2023 and 2022, we recorded income tax expense of $701,000 and $75,000, respectively. 59 The following table presents our net loss for the years ended December 31, 2023 and 2022: Net loss Net loss per share, basic and diluted Liquidity and Capital Resources Liquidity For the Years Ended December 31, 2023 (24,411,000) $ (0.75) $ 2022 (14,086,000) (0.51) $ $ Our cash on hand at December 31, 2023 was $74,085,000, compared to $96,270,000 at December 31, 2022. As of the date of this Annual Report, we believe that cash and cash equivalents of $74,085,000 at December 31, 2023 will be sufficient to sustain our planned level of operations and capital expenditures for at least the next 12 months. In addition, we may consider the sale of certain assets including, but not limited to, part of, or all of, our investments in Eton, Surface, and Melt. However, we may pursue acquisitions of products, drug candidates or other strategic transactions that involve large expenditures or we may experience growth more rapidly or on a larger scale than we expect, any of which could result in the depletion of capital resources more rapidly than anticipated and could require us to seek additional financing to support our operations. We expect to use our current cash position and funds generated from our operations and any financing to pursue our business plan, which includes developing and commercializing products, drug candidates, compounded formulations and technologies, integrating and developing our operations, pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of additional drug products, drug candidates, and/or assets or technologies, pharmacies, outsourcing facilities, drug company and manufacturers, and otherwise fund our operations. We may also use our resources to conduct clinical trials or other studies in support of our formulations or any drug candidate for which we pursue FDA approval, to pursue additional development programs or to explore other development opportunities. Net Cash Flows The following provides detailed information about our net cash flows for the years ended December 31, 2023 and 2022: Net cash provided by (used in): Operating activities Investing activities Financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year Operating Activities For the Years Ended December 31, 2023 2022 $ $ 3,840,000 $ (152,553,000) 126,528,000 (22,185,000) 96,270,000 74,085,000 $ 1,705,000 (1,743,000) 54,141,000 54,103,000 42,167,000 96,270,000 Net cash provided by operating activities was $3,840,000 in 2023, compared to $1,705,000 in the prior year. Operating cash flow improved despite the increased net loss due to increased non-cash charges in 2023 compared to the prior year. Notably an increase in amortization expense of intangible assets to $10,082,000 for the year ended December 31, 2023 compared to $1,578,000 in 2022, an increase in amortization of debt issuance costs and debt discounts to $4,097,000 for the year ended December 31, 2023 compared to $782,000 in 2022, an increase in expense related to stock-based compensation to $15,696,000 for the year ended December 31, 2023 compared to $7,974,000 in 2022, as well as $5,465,000 related to loss on extinguishment of our B. Riley senior debt. 60 Investing Activities Net cash used in investing activities in 2023 and 2022 was $(152,553,000) and $(1,743,000), respectively. Cash used in investing activities in 2023 was primarily associated with the NVS 5 Acquisition, Santen Products Acquisition and VEVYE Acquisition. Cash used in investing activities during the 2022 period was primarily associated with equipment and software purchases and upgrades along with investments in our intellectual property portfolio, offset by cash received on the sale of our non-ophthalmic assets. Financing Activities Net cash provided by financing activities in 2023 and 2022 was $126,528,000 and $54,141,000, respectively. Cash provided by financing activities during the year ended December 31, 2023 was primarily related to proceeds received from the sale of the 2027 Notes, the Oaktree Loan and Oaktree Amendment, and the Offering, offset by payment of payroll taxes upon vesting of PSUs in exchange for shares withheld from employees. Net cash provided by financing activities during the year ended December 31, 2022 was primarily related to net proceeds from the sale of the 2027 Notes and sale of common stock. Sources of Capital Our principal sources of cash consist of cash provided by operating activities, and in 2023 and 2022, proceeds from the sale of the 2027 Notes, the Offering and the Oaktree Loan and Oaktree Amendment. We may also sell some or all of our ownership interests in Surface, Melt or our other subsidiaries, along with some or all of the remaining portion of our Eton common stock. We may acquire new products, product candidates and/or businesses and, as a result, we may need significant additional capital to support our business plan and fund our proposed business operations. We may receive additional proceeds from the exercise of stock purchase warrants that are currently outstanding. We may also seek additional financing from a variety of sources, including other equity or debt financings, funding from corporate partnerships or licensing arrangements, sales of assets or any other financing transaction. If we issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms or rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration or licensing arrangements or sales of assets, we may be required to relinquish potentially valuable rights to our product candidates or proprietary technologies or formulations, or grant licenses on terms that are not favorable to us. If we raise funds by incurring additional debt, we may be required to pay significant interest expenses and our leverage relative to our earnings or to our equity capitalization may increase. Obtaining commercial loans, assuming they would be available, would increase our liabilities and future cash commitments and may impose restrictions on our activities, such as the financial and operating covenants. Further, we may incur substantial costs in pursuing future capital and/or financing transactions, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which would adversely impact our financial results. We may be unable to obtain financing when necessary as a result of, among other things, our performance, general economic conditions, conditions in the pharmaceuticals and pharmacy industries, or our operating history,. In addition, the fact that we have a limited history of profitability could further impact the availability or cost to us of future financings. As a result, sufficient funds may not be available when needed from any source or, if available, such funds may not be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital needs when needed, then we may need to forego pursuit of potentially valuable development or acquisition opportunities, we may not be able to continue to operate our business pursuant to our business plan, which would require us to modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing and other activities, or we may be forced to discontinue our operations entirely. 61 Critical Accounting Policies We rely on the use of estimates and make assumptions that impact our financial condition and results. These estimates and assumptions are based on historical results and trends as well as our forecasts of how results and trends might change in the future. Although we believe that the estimates we use are reasonable, actual results could differ materially from these estimates. We believe that the accounting policies described below are critical to understanding our business, results of operations and financial condition because they involve the use of more significant judgments and estimates in the preparation of our consolidated financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and any changes in the assumptions used in making the accounting estimates that are reasonably likely to occur could materially impact our consolidated financial statements. Revenue Recognition and Deferred Revenue We account for contracts with customers in accordance with ASC 606, Revenues from Contracts with Customers. We have three primary streams of revenue (four in 2022): (1) product revenues, including revenue recognized from sales of products through its pharmacy and outsourcing facility and sales of branded products to wholesalers through a third-party logistics (“3PL”) partner, (2) revenue recognized from a commission agreement with a third party in 2022, (3) revenue recognized from transfer of acquired product sales and profits, and (4) revenue recognized from intellectual property licenses. Product Revenues We sell prescription medications directly through our pharmacy, outsourcing facility and 3PL partner. Revenue from our pharmacy services includes: (i) the portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the client, (ii) the price paid to us by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are not included in revenue. Following the core principles of ASC 606, the Company has identified the following: 1. 2. Identify the contract(s) with a customer: A contract is deemed to exist when the customer places an order through receipt of a prescription, via an online order or via receipt of a purchase order from a customer. For branded products, orders are received through the Company’s 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. For shipping and handling activities under ASC 606, if the customer takes control of the goods after shipment, shipping and handling activities would always be considered a fulfillment activity and not treated as a separate performance obligation. If the customer takes control of the goods before shipment, entities must make an accounting policy election to treat shipping and handling activities as either a fulfillment cost or as a separate performance obligation. We have elected to treat its shipping and handling activities as a fulfillment cost. 3. Determine the transaction price: The transaction price is based on an amount that reflects the consideration to which we expect to be entitled, net of accruals for estimated rebates, wholesaler chargebacks, discounts, copay assistance and other deductions (collectively, sales deductions) and an estimate for returns and replacements established at the time of sale. We utilize the services of a third-party professional services firm to estimate rebates and chargebacks associated with sales of our branded products. The transfer of promised goods is satisfied within a year, and therefore there are no significant financing components. There is no non-cash consideration related to product sales. 4. Allocate the transaction price to the performance obligations in the contract: Because there is only one performance obligation for product sales, no allocation is necessary. 5. Recognize revenue when (or as) the entity satisfies a performance obligation: Revenue from products is recognized upon transfer of control of a product to a customer. This generally occurs upon shipment unless contractual terms with a customer state that transfer of control occurs at delivery. 62 Commission Revenues We have entered into an agreement whereby it is paid a fee calculated based on sales we generate from a pharmaceutical product that is owned by a third party. The revenue earned from this arrangement is recognized, at which point there is no future performance obligation required by us and no consequential continuing involvement on our part to recognize the associated revenue. Revenues From Transfer of Acquired Product Sales and Profits We entered into agreements whereby we purchased the exclusive commercial rights to assets associated with certain ophthalmic products from other pharmaceutical companies (the “Sellers”). During a temporary, transition period, the Sellers continue to manufacture and market these products and transfer the net profit from the sale of the products to us. The revenue we recognized from the transfer of net profit was recognized at the time profit from the product sales were calculated by the Sellers and confirmed by us, typically on a monthly basis, at which point there is no future performance obligation required and no consequential continuing involvement on our part to recognize the associated revenue. On a quarterly basis, the Sellers invoiced us for all credits and reimbursements (“Chargebacks”) made to customers related to the products. We used historical actual experience to estimate Chargebacks associated with the net sales and profit transferred. The estimated Chargebacks are recorded as a reduction in revenues from transfer of acquired product sales and profits in our consolidated statements of operations, and recorded as a reduction to accounts receivable in the consolidated balance sheets, at the time the revenue is recognized. Intellectual Property License Revenues We currently hold five intellectual property licenses and related agreements pursuant to which we have agreed to license or sell to a customer with the right to access our intellectual property. License arrangements may consist of non-refundable upfront license fees, data transfer fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and various performance or sales milestones. These arrangements can be multiple-element arrangements, the revenue of which is recognized at the point in time that the performance obligation is met. Non-refundable fees that are not contingent on any future performance and require no consequential continuing involvement on our part are recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverables are delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations and structure- activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications for such compounded drug preparations. We defer recognition of non-refundable fees if it has continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and that are separate and independent of our performance under the other elements of the arrangement. In addition, if our continued involvement is required, through research and development services that are related to its proprietary know-how and expertise of the delivered technology or can only be performed by us, then such non-refundable fees are deferred and recognized over the period of continuing involvement. Guaranteed minimum annual royalties are recognized on a straight-line basis over the applicable term. Debt Issuance Costs and Debt Discount Debt issuance costs and the debt discount are recorded net of notes payable in the consolidated balance sheets. Amortization of debt issuance costs and the debt discount is calculated using the effective interest method over the term of the related debt and is recorded in interest expense in the accompanying consolidated statements of operations. At December 31, 2022, we recorded deferred financing costs of $1,950,000 related to the B. Riley Loan and Security Agreement (the “BR Loan”), which was recorded as a debt issuance cost and net of the related BR Loan when it funded in January 2023 (see the accompany Note 13 to our consolidated financial statements). 63 Intellectual Property The costs of acquiring intellectual property rights to be used in the research and development process, including licensing fees and milestone payments, are charged to research and development expense as incurred in situations where we have not identified an alternative future use for the acquired rights, and are capitalized in situations where we have identified an alternative future use for the acquired rights. Patents and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks become more certain (see subheading “Goodwill and Intangible Assets” below). If costs are not capitalized they are expensed as incurred. Income Taxes As part of the process of preparing our consolidated financial statements, we must estimate the actual current tax assets and liabilities and assess permanent and temporary differences that result from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. We must assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not more likely than not, a valuation allowance must be established which reduces the amount of deferred tax assets recorded on the consolidated balance sheets. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, the impact will be included in income tax expense in the consolidated statements of operations. We account for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes. As of December 31, 2023 and 2022, there was $2,853,000 and $0, respectively, of unrecognized tax benefits included in the consolidated balance sheets that would, if recognized, affect the effective tax rate. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We had an accrual for interest or penalties of $40,000 and $0 in the consolidated balance sheets at December 31, 2023 and 2022, respectively, and have recognized interest and/or penalties in the consolidated statements of operations for the years ended December 31, 2023 and 2022 of $40,000 and $0, respectively. We are subject to taxation in the United States, California, New Jersey, Tennessee and various other states. Our tax years since 2000 may be subject to examination by the federal and state tax authorities due to the carryforward of unutilized net operating losses. Investment in Melt Pharmaceuticals, Inc. – Related Party We own 3,500,000 shares of common stock and 2,334,256 shares of preferred stock of Melt (representing in aggregate approximately 47% of the equity interests as of December 31, 2023). We analyze our investment in Melt and related agreements on a regular basis to evaluate its position of variable interests in Melt. We have determined that we do not have the ability to control Melt, however we have the ability to exercise significant influence over the operating and financial decisions of Melt and uses the equity method of accounting for this investment. Under this method, we recognize earnings and losses in Melt in its consolidated financial statements and adjusts the carrying amount of its investment in Melt accordingly. Any intra-entity profits and losses are eliminated. During the year ended December 31, 2021, we reduced the carrying value of our investment in Melt to $0 as a result of recording our share of equity losses in Melt since its deconsolidation in 2019. As of December 31, 2022, and at the time of entering into the Melt Loan Agreement (see Note 5 to our consolidated financials statements), we owned 100% of Melt’s indebtedness. Following the reduction of the carrying value of our common stock investment in Melt to $0, we began recording 100% of the equity method losses of Melt, based on its ownership of Melt’s total indebtedness. In addition, we treated interest paid in kind on the Melt Loan Agreement as an in-substance capital contribution and reduced our investment in Melt accordingly, rather than recording interest income. On a quarterly basis, we assess whether there are any indicators that the carrying value of our equity method investments may be other than temporarily impaired. Indicators include financial condition, operating performance, and near-term prospects of the investee. To the extent indicators suggest that a loss in value may have occurred, we will evaluate both quantitative and qualitative factors to determine if the loss in value is other than temporary. If a potential loss in value is determined to be other than temporary, we will recognize an impairment loss based on the estimated fair value of the equity method investments. During the year ended December 31, 2023, the Melt Loan Agreement (as defined in Note 5 to our consolidated financial statements) was settled in exchange for Melt preferred stock (see the Note 5 to our consolidated financial statements for loan settlement disclosure). We reduced the Melt Loan Agreement and subsequent preferred stock investment in Melt to $0 as a result of recording our share of equity losses of Melt. We have no other investments in Melt and no other requirements to advance funds to Melt. 64 The following table summarizes our investments in Melt as of December 31, 2023: Common stock Preferred stock Cost Basis Share of Equity Method Losses Net Carrying value $ $ 5,810,000 $ 18,397,000 24,207,000 $ (5,810,000) $ (18,397,000) (24,207,000) $ - - - The following table summarizes our investments in Melt as of December 31, 2022: Common stock Loan Share of Equity Method Losses Cost Basis 5,810,000 $ (5,810,000) $ Paid-in-Kind Interest $ 13,500,000 (13,500,000) $ 19,310,000 $ (19,310,000) $ - $ - $ 2,484,000 2,484,000 $ (2,484,000) $ (2,484,000) - - - In-substance Capital Contributions Net Carrying value At December 31, 2023 and 2022, we recorded $89,000 and $139,000, respectively, due from Melt for reimbursable expenses and amounts due under a Management Services Agreement, which are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. See the Note 5 to our consolidated financial statements for more information and related party disclosure regarding Melt. Goodwill and Intangible Assets Patents and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks become more certain. At that time, we capitalize third-party legal costs and filing fees associated with obtaining and prosecuting claims related to its patents and trademarks. Once the patents have been issued, we amortize these costs over the shorter of the legal life of the patent or its estimated economic life, generally 20 years, using the straight-line method. Acquired product rights, including new drug applications (“NDAs”), are amortized over their estimated useful lives, generally 4-15 years, based on a straight-line method. Trademarks are an indefinite-lived intangible asset and are assessed for impairment based on future projected cash flows as further described below. We review our goodwill and indefinite-lived intangible assets for impairment as of January 1 of each year and when an event or a change in circumstances indicates the fair value of a reporting unit may be below its carrying amount. Events or changes in circumstances considered as impairment indicators include but are not limited to the following: ● significant underperformance of the Company’s business relative to expected operating results; ● significant adverse economic and industry trends; ● significant decline in the Company’s market capitalization for an extended period of time relative to net book value; and ● expectations that a reporting unit will be sold or otherwise disposed. 65 The goodwill impairment test consists of a two-step process as follows: Step 1. We compare the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting unit is determined using a discounted cash flow valuation analysis. The carrying amount of each reporting unit is determined by specifically identifying and allocating the assets and liabilities to each reporting unit based on headcount, relative revenues or other methods as deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired, and we then perform the second step of the impairment test to measure the impairment loss. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required. Step 2. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. As a result of its assessment in 2023, we concluded that goodwill is not impaired as of December 31, 2023. Impairment of Other Long-Lived Assets Other long-lived assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value of the asset is based on the discounted value of its estimated future cash flows. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material. As a result of its assessment in 2023, we recorded an impairment charge of $380,000 related to the impairment of certain licenses, trademarks, patents and patent applications (see the Note 11 to our consolidated financial statements). Stock-Based Compensation All stock-based payments to employees, directors and consultants, including grants of stock options, warrants, restricted stock units (“RSUs”), performance stock units (“PSUs) and restricted stock, are recognized in the consolidated financial statements based upon their estimated fair values. We use the Black-Scholes-Merton option pricing model and Monte Carlo simulation model to estimate the fair value of stock-based awards. The estimated fair value is determined at the date of grant. The financial statement effect of forfeitures is estimated at the time of grant and revised, if necessary, if the actual effect differs from those estimates. Off-Balance Sheet Arrangements Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 66 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this item are included in this Annual Report beginning on page F-1 immediately following the signature page hereto and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”), our principal executive officer, and our Chief Financial Officer (“CFO”), our principal financial and accounting officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2023, the end of the period covered by this Annual Report, pursuant to Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In connection with that evaluation, our CEO and CFO concluded that, as of December 31, 2023, our disclosure controls and procedures were effective. For the purpose of this review, disclosure controls and procedures means controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer, principal financial officer and principal accounting officer, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management, under the supervision and with the participation of our CEO and CFO, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations. Based on such evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2023. This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting, in accordance with applicable SEC rules that permit us to provide only management’s report in the annual report. Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the year ended December 31, 2023, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting. 67 Inherent Limitations on Effectiveness of Controls Our management, including our CEO and CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. ITEM 9B. OTHER INFORMATION None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item is incorporated by reference to the information set forth under the captions “Election of Directors,” “Executive Officers,” “Corporate Governance,” “Corporate Governance — Delinquent Section 16(a) Reports,” and “Corporate Governance — Code of Business Conduct and Ethics” in the Company’s Proxy Statement for the 2024 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information set forth under the captions “Executive Compensation” and “Director Compensation” in the Company’s Proxy Statement for the 2024 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to the information set forth under the captions “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and “Executive Compensation — Securities Authorized for Issuance Under Equity Compensation Plans” in the Company’s Proxy Statement for the 2024 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item is incorporated by reference to the information set forth under the captions “Corporate Governance — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the Company’s Proxy Statement for the 2024 Annual Meeting of Stockholders. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference to the information set forth under the caption “Ratification of Selection of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for the 2024 Annual Meeting of Stockholders. 68 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) List of the following documents filed as part of the report: PART IV (1) See the index to our consolidated financial statements on page F-1 for a list of the financial statements being filed in this Annual Report. (2) All financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto. (3) See Item 15(b) below for all exhibits being filed or incorporated by reference herein. (b) Exhibits: Exhibit No. Description EXHIBIT INDEX 2.1 3.1 3.2 4.1* 4.2 4.3 4.4 4.5 4.6 10.1 10.2# Agreement and Plan of Merger, dated as of September 17, 2007, by and among Imprimis Pharmaceuticals, Inc., Transdel Pharmaceuticals Holdings, Inc. and Trans-Pharma Acquisition Corp. Incorporation (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on September 21, 2007). Amended and Restated Certificate of Incorporation, as amended (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K of Harrow, Inc. filed with the Securities and Exchange Commission on September 29, 2023). Amended and Restated Bylaws of Harrow, Inc. (incorporated herein by reference to Exhibit 3.2 to the Current Report on Form 8-K of Harrow, Inc. filed with the Securities and Exchange Commission on September 29, 2023). Description of the Company’s Securities Indenture dated April 20, 2021, between Harrow, Inc. and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K of Harrow, Inc. filed with the Securities and Exchange Commission on April 20, 2021). First Supplemental Indenture dated April 20, 2021 between Harrow, Inc. and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Current Report on Form 8-K of Harrow, Inc. filed with the Securities and Exchange Commission on April 20, 2021). Form of 8.625% Senior Note due 2026 (incorporated herein by reference to Exhibit 4.3 to the Current Report on Form 8-K of Harrow, Inc. filed with the Securities and Exchange Commission on April 20, 2021). Second Supplemental Indenture dated December 20, 2022 between Harrow, Inc. and U.S. Bank Trust Company, National Association (incorporated herein by reference to Exhibit 4.2 to the Current Report on Form 8-K of Harrow, Inc. filed with the Securities and Exchange Commission on December 20, 2022). Form of 11.875% Senior Note due 2027 (incorporated herein by reference to Exhibit 4.3 to the Current Report on Form 8-K of Harrow, Inc. filed with the Securities and Exchange Commission on December 20, 2022). Form of Directors and Officers Indemnification Agreement (incorporated herein by reference to Exhibit 10.8 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on September 21, 2007) Imprimis Pharmaceuticals, Inc. Amended and Restated 2007 Stock Incentive and Awards Plan (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on May 8, 2013) 69 10.3# 10.4# 10.5# 10.6# 10.7# 10.8# 10.9# 10.10 10.11# 10.12# 10.13# 10.14# 10.15# 10.16# Amendment No. 1 to Imprimis Pharmaceuticals, Inc. Amended and Restated 2007 Incentive Stock and Awards Plan (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on November 6, 2013) Form of Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.12 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on September 21, 2007) Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.13 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on September 21, 2007) Form of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on May 8, 2013) Employment Agreement, dated as of April 25, 2016, by and between Imprimis Pharmaceuticals, Inc. and Mark L. Baum (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2016) Employment Agreement, dated as of April 25, 2016, by and between Imprimis Pharmaceuticals, Inc. and Andrew R. Boll (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2016) Employment Agreement, dated as of April 25, 2016, by and between Imprimis Pharmaceuticals, Inc. and John P. Saharek (incorporated herein by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2016) License Agreement dated April 1, 2017 between Imprimis Pharmaceuticals, Inc. and Richard L. Lindstrom, M.D. (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on April 6, 2017) Consulting Agreement dated May 1, 2017 between Eton Pharmaceuticals, Inc. and Mark L. Baum (incorporated herein by reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on August 10, 2017) Consulting Agreement dated May 1, 2017 between Eton Pharmaceuticals, Inc. and Andrew R. Boll (incorporated herein by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on August 10, 2017) Consulting Agreement dated May 1, 2017 between Eton Pharmaceuticals, Inc. and John P. Saharek (incorporated herein by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on August 10, 2017) Consulting Agreement dated October 27, 2017 between Surface Pharmaceuticals, Inc. and Mark L. Baum (incorporated herein by reference to Exhibit 10.53 to the Annual Report on Form 10-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on March 8, 2017) Consulting Agreement dated October 27, 2017 between Surface Pharmaceuticals, Inc. and Andrew R. Boll (incorporated herein by reference to Exhibit 10.54 to the Annual Report on Form 10-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on March 8, 2017) Consulting Agreement dated October 27, 2017 between Surface Pharmaceuticals, Inc. and John P. Saharek (incorporated herein by reference to Exhibit 10.55 to the Annual Report on Form 10-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on March 8, 2017) 70 10.17 10.18 10.19 10.20 10.21# 10.22# 10.23# 10.24 10.25# 10.26# 10.27# 10.28# 10.29# 10.30# 10.31 10.32 Asset Purchase and License Agreement dated September 28, 2017 between Imprimis Pharmaceuticals, Inc. and Surface Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on May 15, 2018) Amended and Restated Asset Purchase and License Agreement dated April 10, 2018 between Imprimis Pharmaceuticals, Inc. and Surface Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on May 15, 2018) Amended and Restated License Agreement dated April 10, 2018 between Imprimis Pharmaceuticals, Inc. and Richard L. Lindstrom, M.D. (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on August 6, 2018) Consulting Agreement dated March 1, 2018 between Surface Pharmaceuticals, Inc. and Richard L. Lindstrom, M.D. (incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on August 6, 2018) Consulting Agreement dated May 1, 2018 between Melt Pharmaceuticals, Inc. and Mark L. Baum (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on November 13, 2018) Consulting Agreement dated May 1, 2018 between Melt Pharmaceuticals, Inc. and Andrew R. Boll (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on November 13, 2018) Consulting Agreement dated May 1, 2018 between Melt Pharmaceuticals, Inc. and John P. Saharek (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on November 13, 2018) Asset Purchase Agreement dated December 11, 2018 between Harrow, Inc. (fka Imprimis Pharmaceuticals, Inc.) and Melt Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Harrow, Inc. filed with the Securities and Exchange Commission on February 5, 2019) Consulting Agreement dated June 3, 2019 between Mayfield Pharmaceuticals, Inc. and Mark L. Baum (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on August 14, 2019) Consulting Agreement dated June 3, 2019 between Mayfield Pharmaceuticals, Inc. and Andrew R. Boll (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on August 14, 2019) Consulting Agreement dated June 3, 2019 between Mayfield Pharmaceuticals, Inc. and John P. Saharek (incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on August 14, 2019) Consulting Agreement dated February 13, 2020 between Stowe Pharmaceuticals, Inc. and Mark L. Baum (incorporated herein by reference to Exhibit 10.64#* to the Annual Report on Form 10-K of Harrow, Inc. filed with the Securities and Exchange Commission on March 13, 2020). Consulting Agreement dated February 13, 2020 between Stowe Pharmaceuticals, Inc. and Andrew R. Boll (incorporated herein by reference to Exhibit 10.65#* to the Annual Report on Form 10-K of Harrow, Inc. filed with the Securities and Exchange Commission on March 13, 2020). Consulting Agreement dated February 13, 2020 between Stowe Pharmaceuticals, Inc. and John P. Saharek (incorporated herein by reference to Exhibit 10.66#* to the Annual Report on Form 10-K of Harrow, Inc. filed with the Securities and Exchange Commission on March 13, 2020). Commercial Alliance Agreement between Eyepoint Pharmaceuticals, Inc. and ImprimisRx, LLC dated August 1, 2020 (incorporated herein by reference to Exhibit 10.1*# to the Quarterly Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on November 9, 2020). Expansion Term Letter Agreement dated December 6, 2021 between Eyepoint Pharmaceuticals, Inc. and ImprimisRx, LLC (incorporated herein by reference to Exhibit 10.50 to the Annual Report on Form 10-K of Harrow, Inc. filed with the Securities and Exchange Commission on March 10, 2022) 71 10.33 Mutual Termination Agreement dated October 7, 2022 between ImprimisRx and EyePoint Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on November 14, 2022) 10.34 License and Supply Agreement dated July 25, 2021 between Harrow, Inc. and Sintetica, S.A. (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on August 10, 2021) 10.35# Harrow, Inc. 2017 Incentive Stock and Awards Plan (incorporated herein by reference to Exhibit 10.1 to the Registration Statement on Form S-8 of Imprimis Pharmaceuticals, Inc. filed with the Securities and Exchange Commission on August 25, 2017) 10.36# First Amendment to the Harrow, Inc. 2017 Incentive Stock and Awards Plan (incorporated herein by reference to Appendix A to Harrow, 10.37 10.38 10.39 10.40 10.41 10.42 10.43 10.44 10.45 Inc.’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 23, 2021) Loan and Security Agreement dated September 1, 2021 among Harrow, Inc. and Melt Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Harrow, Inc. filed with the Securities and Exchange Commission on September 2, 2021) First Amendment to Loan and Security Agreement dated April 8, 2022 between Harrow, Inc. and Melt Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on November 14, 2022) Second Amendment to Loan and Security Agreement dated September 21, 2022 between Harrow, Inc. and Melt Pharmaceuticals, Inc. (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on November 14, 2022) Asset Purchase Agreement dated December 17, 2021 between Harrow, Inc. and Novartis Technology, LLC and Novartis Ophthalmics AG (incorporated herein by reference to Exhibit 10.51 to the Annual Report on Form 10-K of Harrow, Inc. filed with the Securities and Exchange Commission on March 10, 2022). Asset Purchase Agreement dated December 13, 2022 between Harrow, Inc. and Novartis Technology, LLC and Novartis Innovative Therapies AG (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Harrow, Inc. filed with the Securities and Exchange Commission on December 14, 2022). Loan and Security Agreement dated December 14, 2022 between Harrow, Inc. and B. Riley Commercial Capital LLC (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on May 11, 2023). Credit and Guaranty Agreement dated March 27, 2023 between Harrow, Inc. and Oaktree Fund Administration, LLC (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on May 11, 2023). First Amendment to Credit Agreement and Guaranty dated July 18, 2023 to the Credit Agreement and Guaranty dated March 27, 2023 between Harrow, Inc. and Oaktree Fund Administration, LLC (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on August 9, 2023). Second Amendment to License and Supply Agreement dated August 4, 2023 between Harrow IP, LLC and Sintetica S.A (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Harrow, Inc. filed with the Securities and Exchange Commission on November 13, 2023). 72 10.46* 21.1* 23.1* 24.1* 31.1* Third Amendment to License and Supply Agreement dated February 6, 2024 between Harrow IP, LLC and Sintetica S.A List of Subsidiaries Consent of Independent Registered Public Accounting Firm Power of Attorney (included on the signature page to this Annual Report) Certification of Mark L. Baum, Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Andrew R. Boll, Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Mark L. Baum, Chief Executive Officer. 32.2** Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Andrew R. Boll, Chief Financial Officer. 97* 101.INS* Harrow, Inc. Policy Regarding the Mandatory Recovery of Compensation. XBRL Instant Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH* 101.CAL* 101.DEF* 101.LAB* 101.PRE* 104 Inline XBRL Taxonomy Extension Schema Document Inline XBRL Taxonomy Extension Calculation Linkbase Document Inline XBRL Taxonomy Extension Definition Linkbase Document Inline XBRL Taxonomy Extension Label Linkbase Document Inline XBRL Taxonomy Extension Presentation Linkbase Document The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 has been formatted in Inline XBRL # Management contract or compensatory plan or arrangement. * Filed herewith. ** Furnished herewith. + Confidential treatment has been granted with respect to portions of this exhibit pursuant to Rule 24b-2 of the Exchange Act and these confidential portions have been redacted from the filing that is incorporated herein by reference. A complete copy of this exhibit, including the redacted terms, has been separately filed with the Securities and Exchange Commission. ITEM 16. FORM 10-K SUMMARY None. 73 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES HARROW, INC. By: /s/ Mark L. Baum Mark L. Baum Chief Executive Officer (Principal Executive Officer) Date: March 19, 2024 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark L. Baum and Andrew R. Boll, and each of them individually, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to any or all amendments to this Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents or any of them the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as full to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title /s/ Mark L. Baum Mark L. Baum /s/ Andrew R. Boll Andrew R. Boll /s/ Adrienne L. Graves Adrienne L. Graves /s/ Teresa F. Sparks Teresa F. Sparks /s/ Lauren P. Silvernail Lauren P. Silvernail /s/ Perry J. Sternberg Perry J. Sternberg /s/ Martin Makary Martin Makary Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Chief Financial Officer and Corporate Secretary (Principal Accounting and Financial Officer) Director Director Director Director Director 74 Date March 19, 2024 March 19, 2024 March 19, 2024 March 19, 2024 March 19, 2024 March 19, 2024 March 19, 2024 FINANCIAL STATEMENTS Harrow, Inc. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID No. 170) Consolidated Balance Sheets at December 31, 2023 and 2022 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2023 and 2022 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 Notes to the Consolidated Financial Statements F-1 F-2 F-4 F-5 F-6 F-7 F-8 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Harrow, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Harrow, Inc. and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. F-2 Product Sales Deductions – Branded Products Critical Audit Matter Description As described in Note 3 to the consolidated financial statements, revenues from branded product sales are recognized net of accruals for estimated rebates, wholesaler chargebacks, discounts, copay assistance and other deductions (collectively, “sales deductions”), which are established at the time of sale. Management’s estimate of sales deductions for branded products is based on the inventory levels in the distribution channel as provided by wholesalers, as well as the actual average selling price for each product which is impacted by changes in customer mix, changes in negotiated terms with customers, and changes in the volume of purchases. In addition, management utilizes the services of a third-party professional services firm to estimate rebates and chargebacks associated with sales of its branded products. We identified the estimates of accruals for sales deductions as a critical audit matter given the limited sales history of the Company’s branded products and the significant judgment required by management with respect to the measurement uncertainty, as the calculation of the sales deductions includes assumptions such as average selling price, purchasing trends of wholesalers and historical branded product sales used to predict future sales. This required a high degree of auditor judgment and an increased extent of audit effort in applying the procedures related to management’s assumptions. How the Critical Audit Matter Was Addressed in the Audit To test management’s estimated branded product sales deductions, we obtained management’s calculations for the respective estimates and performed the following procedures, among others. We tested management’s estimation process for determining accruals for product sales deductions by developing an independent expectation of the estimated accrual rates, including comparison of rates used in management’s analysis to external industry data, historical actual information, and executed third-party contracts. We evaluated management’s historic ability to accurately estimate the sales deduction accruals by retrospectively comparing historically recorded accruals to the actual amounts that were ultimately claimed by the wholesalers. In addition, we assessed subsequent events to determine whether there was any new information that would require adjustment to the accruals. /s/ KMJ Corbin & Company LLP We have served as the Company’s auditor since 2007. Irvine, California March 19, 2024 F-3 HARROW, INC. CONSOLIDATED BALANCE SHEETS December 31, 2023 December 31, 2022 ASSETS Current assets Cash and cash equivalents Investment in Eton Pharmaceuticals Accounts receivable, net Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Capitalized software costs, net Deferred financing costs Operating lease right-of-use assets, net Intangible assets, net Goodwill TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued expenses Accrued rebates and copay assistance Accrued payroll and related liabilities Deferred revenue and customer deposits Current portion of operating lease obligations Total current liabilities Operating lease obligations, net of current portion Accrued expenses, net of current portion Notes payable, net of unamortized debt discount and issuance costs TOTAL LIABILITIES Commitments and contingencies STOCKHOLDERS’ EQUITY Common stock, $0.001 par value, 50,000,000 shares authorized, 35,168,260 and 29,901,530 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively Additional paid-in capital Accumulated deficit TOTAL HARROW, INC. STOCKHOLDERS’ EQUITY Noncontrolling interests TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ $ $ $ 74,085,000 $ 8,681,000 36,261,000 10,867,000 9,588,000 139,482,000 3,521,000 2,138,000 - 6,785,000 159,906,000 332,000 312,164,000 $ 24,581,000 $ 18,432,000 5,450,000 75,000 806,000 49,344,000 6,524,000 2,713,000 183,172,000 241,753,000 96,270,000 5,589,000 6,249,000 6,541,000 3,611,000 118,260,000 3,486,000 2,112,000 1,950,000 7,513,000 23,725,000 332,000 157,378,000 13,771,000 - 4,025,000 113,000 723,000 18,632,000 7,332,000 - 104,174,000 130,138,000 35,000 204,635,000 (133,904,000) 70,766,000 (355,000) 70,411,000 312,164,000 $ 30,000 137,058,000 (109,493,000) 27,595,000 (355,000) 27,240,000 157,378,000 The accompanying notes are an integral part of these consolidated financial statements F-4 HARROW, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Revenues: Product sales, net Other revenues Total revenues Cost of sales Gross profit Operating expenses: Selling, general and administrative Research and development Impairment of intangible assets Total operating expenses Income from operations Other (expense) income: Interest expense, net Equity in losses of unconsolidated entities Investment gain (loss) from Eton Pharmaceuticals Loss on extinguishment of debt Gain on sale of non-ophthalmology assets Other (expense) income, net Total other expense, net Loss before income tax provision Income tax provision Net loss attributable to Harrow, Inc. Basic and diluted net loss per share of common stock Weighted average number of shares of common stock outstanding, basic and diluted For the Years Ended December 31, 2023 2022 117,447,000 $ 12,746,000 130,193,000 (39,640,000) 90,553,000 83,090,000 6,652,000 380,000 90,122,000 431,000 (21,324,000) - 3,092,000 (5,465,000) - (444,000) (24,141,000) (23,710,000) (701,000) (24,411,000) $ (0.75) $ 32,616,777 83,524,000 5,071,000 88,595,000 (25,383,000) 63,212,000 58,243,000 3,050,000 - 61,293,000 1,919,000 (7,244,000) (11,133,000) (2,914,000) - 5,259,000 102,000 (15,930,000) (14,011,000) (75,000) (14,086,000) (0.51) 27,460,968 $ $ $ The accompanying notes are an integral part of these consolidated financial statements F-5 HARROW, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Years Ended December 31, 2023 and 2022 Common Stock Additional Shares Par Value Paid-in Capital Total Total Harrow, Inc. Noncontrolling Total Accumulated Stockholders’ Deficit Equity Interest Equity Stockholders’ Equity Balance at December 31, 2021 26,902,763 $ 27,000 $ 106,666,000 $ (95,407,000) $ 11,286,000 $ (355,000) $ 10,931,000 Issuance of common stock in connection with: Exercise of consultant stock-based options Exercise of employee stock-based options Exercise of warrants Vesting of RSUs Shares withheld related to net share settlement of equity awards Issuance of common shares from public offering, net of offering costs Stock-based compensation expense Net loss Balance at December 31, 2022 Issuance of common stock in connection with: Public offering, net of offering costs Exercise of consultant stock-based options Exercise of employee stock-based options Vesting of RSUs and PSUs Shares withheld related to net share settlement of equity awards Stock-based compensation expense Net loss Balance at December 31, 2023 19,679 - 55,000 221,086 306,347 185,000 1,000 - 1,000 586,000 - (1,000) (109,771) (1,000) (875,000) - - - - - 55,000 587,000 - - (876,000) 2,376,426 - - 22,653,000 7,974,000 - 29,901,530 $ 30,000 $ 137,058,000 $ (109,493,000) $ 27,595,000 $ - - (14,086,000) 22,655,000 7,974,000 (14,086,000) 2,000 - - 3,887,324 4,000 64,516,000 10,000 - 85,000 235,975 1,847,876 - 2,000 294,000 (2,000) - - - - 64,520,000 85,000 294,000 - (714,445) - - (13,012,000) 15,696,000 - 35,168,260 $ 35,000 $ 204,635,000 $ (133,904,000) $ 70,766,000 $ (13,013,000) 15,696,000 (24,411,000) - - (24,411,000) (1,000) - - - - - - - 55,000 587,000 - - (876,000) - - - 22,655,000 7,974,000 (14,086,000) (355,000) $ 27,240,000 - - - - 64,520,000 85,000 294,000 - - - - (13,013,000) 15,696,000 (24,411,000) (355,000) $ 70,411,000 The accompanying notes are an integral part of these consolidated financial statements F-6 HARROW, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES Net loss Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment and software development costs Amortization of intangible assets Amortization of operating lease right-of-use assets Provision for credit losses Amortization of debt issuance costs and debt discount Investment (gain) loss from investment in Eton Equity in losses of unconsolidated entities Loss on disposal of equipment Impairment of intangible assets Loss on extinguishment of debt Stock-based compensation Gain on sale of non-ophthalmology assets Changes in assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable, accrued expenses, accrued rebates and copay assistance Accrued payroll and related liabilities Deferred revenue and customer deposits NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of non-ophthalmology assets Investment in patent and trademark assets Proceeds from sale of property, plant and equipment Purchase of product NDAs, marketing authorizations and patents Purchases of property, plant and equipment NET CASH USED IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from 11.875% notes payable, net of costs Proceeds from Oaktree Loan, net of costs Payment of payroll taxes upon vesting of PSUs, RSUs and exercise of stock options Proceeds from exercise of stock options Proceeds from B Riley senior secured note, net of costs Repayment of B. Riley senior secured note Proceeds from public offering of common stock, net of offering costs Payments on finance lease obligations NET CASH PROVIDED BY FINANCING ACTIVITIES NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of year CASH AND CASH EQUIVALENTS, end of year SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes Cash paid for interest SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Reclassification of deferred financing costs Accrual of exit fee related to Oaktree Loan Insurance premium financed Purchase of intangible asset included in accounts payable and accrued expenses Purchase of property, plant and equipment included in accounts payable and accrued expenses Right-of-use assets obtained in exchange for new operating lease obligations For the Years Ended December 31, 2023 2022 $ (24,411,000) $ (14,086,000) 1,530,000 10,082,000 728,000 332,000 4,097,000 (3,092,000) - 168,000 380,000 5,465,000 15,696,000 - (30,344,000) (4,326,000) (5,647,000) 31,795,000 1,425,000 (38,000) 3,840,000 - (18,000) - (151,075,000) (1,460,000) (152,553,000) 4,961,000 73,552,000 (13,013,000) 379,000 55,879,000 (59,750,000) 64,520,000 - 126,528,000 (22,185,000) 96,270,000 74,085,000 $ 1,477,000 1,578,000 610,000 81,000 782,000 2,914,000 11,133,000 69,000 - - 7,974,000 (5,259,000) (1,860,000) (2,324,000) (3,350,000) 933,000 936,000 97,000 1,705,000 6,000,000 (176,000) 30,000 (5,000,000) (2,597,000) (1,743,000) 31,738,000 - (876,000) 642,000 - - 22,655,000 (18,000) 54,141,000 54,103,000 42,167,000 96,270,000 - $ 18,887,000 $ 75,000 6,480,000 1,950,000 $ 2,713,000 $ 873,000 $ - $ 299,000 $ - $ - - 906,000 5,000,000 123,000 2,188,000 $ $ $ $ $ $ $ $ $ The accompanying notes are an integral part of these consolidated financial statements F-7 HARROW, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2023 and 2022 NOTE 1. ORGANIZATION Harrow, Inc. (together with its consolidated subsidiaries, unless the context indicates or otherwise requires, the “Company” or “Harrow”) is 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. The Company owns commercial rights to one of the largest portfolios of branded ophthalmic pharmaceutical products in the U.S. that are marketed under its Harrow name. The Company also owns and operates ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding businesses. The Company owns non-controlling equity interests in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”), both companies that began as subsidiaries of Harrow. Harrow also owns royalty rights in various drug candidates being developed by Surface and Melt. Effective September 29, 2023, the Company changed its corporate name from Harrow Health, Inc. to Harrow, Inc. pursuant to a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Harrow has prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements include the accounts of the Company and its wholly owned and majority- owned subsidiaries. Harrow consolidates entities in which it has a controlling financial interest. The Company assesses control under the variable interest entity (“VIE”) model to determine whether the Company is the primary beneficiary of that entity. The Company consolidates (i) entities in which it holds and/or controls, directly or indirectly, more than 50% of the voting rights, and (ii) VIEs for which the Company is deemed to be the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management are, among others, allowance for credit losses, variable consideration determined based on accruals for chargebacks, administrative fees and rebates, government rebates, returns and other allowances, renewal periods and discount rates for leases, realizability of inventories, recoverability of investments, realizability of deferred tax assets, recoverability of long-lived assets and goodwill, valuations and purchase price allocations related to business combinations and asset acquisitions, fair value of loans payable, and valuation of stock-based transactions with employees and non-employees. Actual results could differ from those estimates. Risks, Uncertainties and Liquidity The Company is subject to certain regulatory standards, approvals, guidelines and inspections which could impact the Company’s ability to make, dispense, and sell certain products. If the Company was required to cease compounding and selling certain products as a result of regulatory guidelines or inspections, this may have a material impact on the Company’s financial condition, liquidity and results of operations. F-8 Credit Losses The Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables. Management considers historical collection rates, the current financial status of the Company’s customers, macroeconomic factors, and other industry- specific factors when evaluating current expected credit losses. Forward-looking information is also considered in the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable, management believes that the carrying value, net of expected losses, approximates fair value and therefore, relies more on historical and current analysis of such financial instruments, including its trade receivables. To determine the provision for credit losses for accounts receivable, the Company has disaggregated its accounts receivable by class of customer at the business component level, as management determined that risk profile of the Company’s customers is consistent based on the type and industry in which they operate, mainly in the pharmaceuticals industry. Each business component is analyzed for estimated credit losses individually. In doing so, the Company establishes a historical loss matrix, based on the previous collections of accounts receivable by the age of such receivables, and evaluates the current and forecasted financial position of its customers, as available. Further, the Company considers macroeconomic factors and the status of the pharmaceuticals industry to estimate if there are current expected credit losses within its trade receivables based on the trends of the Company’s expectation of the future status of such economic and industry-specific factors. Also, specific allowance amounts are established based on review of outstanding invoices to record the appropriate provision for customers that have a higher probability of default. Accounts receivable at December 31, 2023 and 2022 are net of allowances for credit losses of $371,000 and $73,000, respectively. The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected at December 31, 2023 and 2022: Balance at January 1, 2023 Change in expected credit losses Write-offs, net of recoveries Balance at December 31, 2023 Business Combinations and Asset Acquisitions $ $ 73,000 332,000 (34,000) 371,000 The Company evaluates acquisitions of assets and other similar transactions to assess whether the transaction should be accounted for as a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether the Company has acquired inputs, process, and output, which would meet the requirements of a business. If determined to be a business combination, the Company accounts for the transaction under the acquisition method of accounting as indicated in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). ASC 805, Business Combinations, requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and any non-controlling interest in the acquiree and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including any contingent assets and liabilities, and any non- controlling interest in the acquiree based on the fair value estimates as of the date of acquisition. The Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired. The consideration for the Company’s business acquisitions may include future payments that are contingent upon the occurrence of a particular event or events. The obligation for such contingent consideration payments are recorded at fair value on the acquisition date. The contingent consideration obligations are then evaluated each reporting period. Changes in the fair value of contingent consideration, other than changes due to payments, would be recognized as a gain or loss and recorded in the consolidated statement of operations. F-9 If determined to be an asset acquisition, the Company accounts for the transaction under ASC 805-50, Business Combinations – Related Issues, which requires the acquiring entity in an asset acquisition to recognize assets acquired and liabilities assumed based on the cost to the acquiring entity or a relative fair value basis, which includes transaction costs in addition to consideration given. No gain or loss is recognized as of the date of acquisition unless the fair value of non-cash assets given as consideration differs from the assets’ carrying amounts on the acquiring entity’s financial statements. Consideration transferred that is non-cash will be measured based on either the cost (which shall be measured based on the fair value of the consideration given) or the fair value of the assets acquired, and liabilities assumed, whichever is more clearly evident and more reliably measurable. The obligation for contingent consideration payments is recorded when probable and reasonably estimable. Contingent consideration recognized is included in the initial cost of the assets acquired and any subsequent changes in the recorded amount of contingent consideration are recognized as an adjustment to the cost basis of the acquired assets and allocated to the acquired assets based on the relative fair value at the date of acquisition. Goodwill is not recognized in an asset acquisition and any excess consideration transferred over the fair value of the net assets acquired is allocated to the identifiable assets based on relative fair values. Noncontrolling Interests The Company recognizes any noncontrolling interest as a separate line item in equity in the consolidated financial statements. A noncontrolling interest represents the portion of equity ownership in a less-than-wholly-owned subsidiary not attributable to the Company. Generally, any interest that holds less than 50% of the outstanding voting shares is deemed to be a noncontrolling interest; however, there are other factors that are considered as well, such as decision-making rights. When applicable, and in prior periods, the Company includes the amount of net loss attributable to noncontrolling interests in consolidated net loss on the face of the consolidated statements of operations. The Company provides in the consolidated statements of stockholders’ equity a reconciliation at the beginning and the end of the period of the carrying amount of total equity, equity attributable to the parent, and equity attributable to the noncontrolling interests that separately discloses: 1. 2. 3. net income or loss; transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and each component of other income or loss. The noncontrolling interests in the consolidated balance sheets as of December 31, 2023 and 2022, relate to consolidated subsidiaries that the Company owns a controlling interest in, but not 100% of the equity interests, and that no longer have active operations, assets and related financial activity. Revenue Recognition and Deferred Revenue The Company recognizes revenue at the time of transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services (see Note 3). Cost of Sales Cost of sales includes direct and indirect costs to manufacture formulations and other products sold, including active pharmaceutical ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, depreciation and amortization of certain intangible assets and the write-off of obsolete inventory. Research and Development Research and development (“R&D”) 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. F-10 Upfront 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. Debt Issuance Costs and Debt Discount Debt issuance costs and the debt discount are recorded net of notes payable in the consolidated balance sheets. Amortization of debt issuance costs and the debt discount is calculated using the effective interest method over the term of the related debt and is recorded in interest expense in the accompanying consolidated statements of operations. At December 31, 2022, the Company 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 Note 13). Intellectual Property The costs of acquiring intellectual property rights to be used in the research and development process, including licensing fees and milestone payments, are charged to research and development expense as incurred in situations where the Company has 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). If costs are not capitalized they are expensed as incurred. Income Taxes As part of the process of preparing the Company’s consolidated financial statements, the Company must estimate the actual current tax assets and liabilities and assess permanent and temporary differences that result from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. The Company must assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent the Company believes that recovery is not more likely than not, a valuation allowance must be established which reduces the amount of deferred tax assets recorded on the consolidated balance sheets. To the extent the Company establishes a valuation allowance or increase or decrease this allowance in a period, the impact will be included in income tax expense in the consolidated statements of operations. The Company accounts for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes. As of December 31, 2023 and 2022, there was $2,853,000 and $0, respectively, of unrecognized tax benefits included in the consolidated balance sheets that would, if recognized, affect the effective tax rate. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties in its consolidated balance sheets at December 31, 2023 and 2022, and has not recognized interest and/or penalties in the consolidated statements of operations for the years ended December 31, 2023 and 2022. The Company is subject to taxation in the United States, California, New Jersey, Tennessee, and various other states. The Company’s 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. Cash and Cash Equivalents Cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition. F-11 Concentrations of Credit Risk The Company places its cash with financial institutions deemed by management to be of high credit quality. The Federal Deposit Insurance Corporation (“FDIC”) provides basic deposit coverage with limits up to $250,000 per owner. The Company believes the majority of its cash deposits are covered under FDIC limits, however there are various accounts in which the Company has deposits in excess of FDIC limits. Investment in Eton Pharmaceuticals, Inc. The Company’s investment in Eton Pharmaceuticals, Inc. (“Eton”) consists of common stock with a readily determinable fair value which is carried at fair value with changes in fair value recognized in earnings. In accordance with ASC 321, Investments — Equity Securities, the Company recorded an unrealized holding gain/(loss) from its Eton common stock position of $3,092,000 and $(2,914,000), during the years ended December 31, 2023 and 2022, respectively, related to the change in fair market value of its investment in Eton during the measurement period. As of December 31, 2023 and 2022, the Company owned 1,982,000 shares of Eton common stock, which represents less than 10% of the equity interests of Eton. At December 31, 2023 and 2022, the fair market value of Eton’s common stock was $4.38 and $2.82 per share, respectively. As of December 31, 2023 and 2022, the fair market value of the Company’s investment in Eton was $8,681,000 and $5,589,000, respectively. Accounts Receivable Accounts receivable are stated net of allowances for credit losses and contractual adjustments. The accounts receivable balance primarily includes amounts due from customers the Company has invoiced or from third-party providers (e.g., insurance companies and governmental agencies), but for which payment has not been received. Our gross product revenues are subject to a variety of contractual deductions, which generally are estimated and recorded in the same period that the revenues are recognized. These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on gross sales for a reporting period. Accounts receivable at December 31, 2023 are presented net of allowances for credit losses of $371,000 and $14,875,000 for contractual adjustments (in aggregate $15,146,000) and at December 31, 2022, net of allowances for credit losses of $73,000 and $706,000 for contractual adjustments (in aggregate $779,000). Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The Company evaluates the carrying value of inventories on a regular basis, based on the price expected to be obtained for products in their respective markets compared with historical cost. Write- downs of inventories are considered to be permanent reductions in the cost basis of inventories. The Company also regularly evaluates its inventories for excess quantities and obsolescence (expiration), taking into account such factors as historical and anticipated future sales or use in production compared to quantities on hand and the remaining shelf life of products and active pharmaceutical ingredients on hand. The Company establishes reserves for excess and obsolete inventories as required based on its analyses. Investment in Melt Pharmaceuticals, Inc. – Related Party The Company owns 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). The Company analyzes its investment in Melt and related agreements on a regular basis to evaluate its position of variable interests in Melt. The Company has determined that it does not have the ability to control Melt, however it has the ability to exercise significant influence over the operating and financial decisions of Melt and uses the equity method of accounting for this investment. Under this method, the Company recognizes 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, the Company reduced the carrying value of its investment in Melt to $0 as a result of the Company recording its 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), the Company owned 100% of Melt’s indebtedness. Following the reduction of the carrying value of the Company’s common stock investment in Melt to $0, the Company began recording 100% of the equity method losses of Melt, based on its ownership of Melt’s total indebtedness. In addition, the Company treated interest paid in kind on the Melt Loan Agreement as an in-substance capital contribution and reduced its investment in Melt accordingly, rather than recording interest income. F-12 On a quarterly basis, management assesses whether there are any indicators that the carrying value of the Company’s equity method investments may be other than temporarily impaired. Indicators include financial condition, operating performance, and near-term prospects of the investee. To the extent indicators suggest that a loss in value may have occurred, the Company 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, the Company 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) was settled in exchange for Melt preferred stock (see Note 5 for loan settlement disclosure). The Company reduced the Melt Loan Agreement and subsequent preferred stock investment in Melt to $0 as a result of the Company recording its share of equity losses of Melt. The Company has no other investments in Melt and no other requirements to advance funds to Melt. The following table summarizes the Company’s investments in Melt as of December 31, 2023: Common stock Preferred stock Cost Basis Share of Equity Method Losses $ $ 5,810,000 18,397,000 24,207,000 $ $ (5,810,000) $ (18,397,000) (24,207,000) $ Net Carrying value - - - The following table summarizes the Company’s investments in Melt as of December 31, 2022: Common stock Loan $ $ Cost Basis 5,810,000 $ 13,500,000 19,310,000 $ Share of Equity Method Losses Paid-in-Kind Interest In-substance Capital Contributions (5,810,000) $ (13,500,000) (19,310,000) $ - $ 2,484,000 2,484,000 $ - $ (2,484,000) (2,484,000) $ Net Carrying value - - - At December 31, 2023 and 2022, the Company recorded $89,000 and $139,000, respectively, due from Melt for reimbursable expenses and amounts due under a Management Services Agreement between the Company and Melt (the “Melt MSA”), which are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. See Note 5 for more information and related party disclosure regarding Melt. Investment in Surface Ophthalmics, Inc. – Related Party The Company owns 3,500,000 common shares of Surface (representing approximately 20% of Surface’s equity interests following the closing of a round of financing completed by Surface in July 2021) and uses the equity method of accounting for this investment, as management has determined that the Company has the ability to exercise significant influence over the operating and financial decisions of Surface. Under this method, the Company recognizes earnings and losses in Surface in its consolidated financial statements and adjusts the carrying amount of its investment in Surface accordingly. The Company’s share of earnings and losses are based on the Company’s ownership interest of Surface. Any intra-entity profits and losses are eliminated. During the year ended December 31, 2021, the Company reduced its common stock investment in Surface to $0 as a result of the Company recording its share of equity losses of Surface. The Company has no other investments in Surface and no other requirements to advance funds to Surface. F-13 The following table summarizes the Company’s investment in Surface as of December 31, 2023 and 2022: Common stock $ Cost Basis 5,320,000 $ Share of Equity Method Losses (5,320,000) $ Net Carrying value - See Note 6 for more information and related party disclosure regarding Surface. Property, Plant and Equipment Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful life of the asset. Leasehold improvements and finance lease equipment are amortized over the estimated useful life or remaining lease term, whichever is shorter. Computer hardware and furniture and equipment are depreciated over three to five years. Capitalized Software Costs The Company capitalizes certain costs related to the development of internal-use software. Costs incurred during the application development phase are capitalized only when the Company believes it is probable the development will result in new or additional functionality. The types of costs capitalized during the application development phase include consulting fees for third-party developers working on these projects. Costs related to the preliminary project stage and post-implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over the estimated useful life of the asset, which ranges from two to five years. When internal-use software that was previously capitalized is abandoned, the cost less the accumulated amortization, if any, is recorded as amortization expense. Fully amortized capitalized internal-use software costs are removed from their respective accounts. Goodwill and Intangible Assets Patents and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks become more certain. At that time, the Company capitalizes third-party legal costs and filing fees associated with obtaining and prosecuting claims related to its patents and trademarks. Once the patents have been issued, the Company amortizes these costs over the shorter of the legal life of the patent or its estimated economic life, generally 20 years, using the straight-line method. Acquired product rights, including new drug applications (“NDAs”), are amortized over their estimated useful lives, generally 4-15 years, based on a straight-line method. Trademarks are an indefinite-lived intangible asset and are assessed for impairment based on future projected cash flows as further described below. The Company reviews its goodwill and indefinite-lived intangible assets for impairment as of January 1 of each year and when an event or a change in circumstances indicates the fair value of a reporting unit may be below its carrying amount. Events or changes in circumstances considered as impairment indicators include but are not limited to the following: ● significant underperformance of the Company’s business relative to expected operating results; ● significant adverse economic and industry trends; ● significant decline in the Company’s market capitalization for an extended period of time relative to net book value; and ● expectations that a reporting unit will be sold or otherwise disposed. F-14 The goodwill impairment test consists of a two-step process as follows: Step 1. The Company compares the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting unit is determined using a discounted cash flow valuation analysis. The carrying amount of each reporting unit is determined by specifically identifying and allocating the assets and liabilities to each reporting unit based on headcount, relative revenues or other methods as deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired and the Company then performs the second step of the impairment test to measure the impairment loss. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required. Step 2. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. As a result of its assessment in 2023, the Company concluded that goodwill is not impaired as of December 31, 2023. Impairment of Other Long-Lived Assets Other long-lived assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value of the asset is based on the discounted value of its estimated future cash flows. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material. As a result of its assessment in 2023, the Company recorded an impairment charge of $380,000 related to the impairment of certain licenses, trademarks, patents and patent applications (see Note 11). Leases At the inception of a contract the Company determines if the arrangement is, or contains, a lease. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. The Company has made certain accounting policy elections whereby it (i) does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12-months of less) and (ii) combines lease and non-lease elements of its operating leases as a single lease component. As of December 31, 2023 and 2022, the Company did not have any finance leases. Fair Value Measurements Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The established fair value hierarchy prioritizes the use of inputs used in valuation methodologies into the following three levels: ● Level 1: Applies to assets or liabilities for which there are quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available. F-15 ● Level 2: Applies to assets or liabilities for which there are significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. ● Level 3: Applies to assets or liabilities for which there are significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, Level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method. At December 31, 2023 and 2022, the Company measured its investment in Eton on a recurring basis. The Company’s investment in Eton is classified as Level 1 as the fair value is determined using quoted market prices in active markets for the same securities. As of December 31, 2023 and 2022, the fair market value of the Company’s investment in Eton was $8,681,000 and $5,589,000, respectively. The Company’s 2026 Notes (as defined in Note 13) are carried at face value, including the unamortized premium, less unamortized debt issuance costs, the 2027 Notes (as described in Note 13) are carried at face value less unamortized debt issuance costs, and the Oaktree Loan (as defined in Note 13) is carried at face value less the original issue discount and unamortized debt issuance costs on the consolidated balance sheets and the Company presents fair value for disclosure purposes only. The 2026 Notes and 2027 Notes are classified as Level 1 instruments as the fair value is determined using quoted market prices in active markets for the same securities. The Oaktree Loan is classified as a Level 2 instrument and its fair value is determined through an income approach that considers collateral coverage, yield calibration, yield analysis and any adjustments to implied yield associated with the Company’s fundamental measures. The following table presents the estimated fair values and the carrying values: December 31, 2023 2022 2026 Notes 2027 Notes Oaktree Loan Carrying Value Fair Value Carrying Value Fair Value $ $ $ 73,218,000 $ 37,413,000 $ 72,541,000 $ 70,260,000 $ 40,363,000 $ 76,627,000 $ 72,436,000 $ 31,738,000 $ - $ 71,550,000 35,112,000 - The Company’s other financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, accrued payroll and related liabilities, deferred revenue and customer deposits and operating lease liabilities. The carrying amount of these financial instruments, except for operating lease liabilities, approximates fair value due to the short-term maturities of these instruments. Based on borrowing rates currently available to the Company, the carrying values of the operating lease liabilities approximate their respective fair values. Stock-Based Compensation All stock-based payments to employees, directors and consultants, including grants of stock options, warrants, restricted stock units (“RSUs”), performance stock units (“PSUs) and restricted stock, are recognized in the consolidated financial statements based upon their estimated fair values. The Company uses 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. Basic and Diluted Net Loss per Common Share Basic net loss per common share is computed by dividing net loss attributable to Harrow, Inc. for the year by the weighted average number of common shares outstanding during the year. Diluted net loss per share is computed by dividing the net loss attributable to Harrow, Inc. for the year by the weighted average number of common and common equivalent shares, such as stock options, RSUs, PSUs, and warrants, outstanding during the year. F-16 Common stock equivalents (using the treasury stock or “if converted” method) from stock options, unvested RSUs, and unvested PSUs were 4,642,259 and 5,089,420 at December 31, 2023 and 2022, respectively, and are excluded in the calculation of diluted net loss per share for the periods presented, because the effect is anti-dilutive for that time period. Included in the basic and diluted net loss per share calculation were RSUs awarded to directors that had vested, but the issuance and delivery of the shares are deferred until the director resigns. The number of shares underlying vested RSUs at December 31, 2023 and 2022 was 215,539 and 319,859, respectively. The following table shows the computation of basic and diluted net loss per share of common stock for the years ended December 31, 2023 and 2022: For the Years Ended December 31, 2023 2022 Numerator – net loss attributable to Harrow, Inc. Denominator – weighted average number of shares outstanding, basic and diluted Net loss per share, basic and diluted $ $ (24,411,000) $ 32,616,777 (0.75) $ (14,086,000) 27,460,968 (0.51) Recently Adopted Accounting Pronouncements In September 2016, FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates on certain types of financial instruments, including trade receivables. In addition, new disclosures are required. The ASU, as subsequently amended, is effective for the Company for the fiscal years beginning after December 15, 2022. The Company adopted ASU 2016-13 on January 1, 2023. Based on the composition of the Company’s accounts receivable, investment portfolio, and other financial assets, including current market conditions and historical credit loss activity, the adoption of this standard did not have a material impact on the Company’s consolidated financial statements or disclosures. Specifically, the Company’s estimate of expected credit losses as of January 1, 2023, using its expected credit loss evaluation process described above, resulted in no adjustments to the provision for credit losses and no cumulative-effect adjustment to accumulated deficit on the adoption date of the standard. Accounting Guidance Issued but Not Adopted at December 31, 2023 In August 2023, FASB issued ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement, which applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) and requires joint ventures to initially measure all contributions received upon formation at fair value. The new guidance does not impact accounting by the venturers. The new guidance is applicable to joint venture entities with a formation date on or after January 1, 2025 on a prospective basis. Joint ventures formed prior to the effective date may elect to apply the new guidance retrospectively back to their original formation date. The Company will apply the guidance in ASU 2023-05 prospectively to any future arrangements meeting the definition of a joint venture. In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements—Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU modifies the disclosure or presentation requirements of a variety of topics in the codification by aligning them with the SEC’s regulations. The amendments to the various topics should be applied prospectively, and the effective date for the Company for each amendment will be determined based on the effective date of the SEC’s removal of the related disclosure from Regulation S-X or Regulation S-K. If the SEC has not removed the applicable requirement by June 30, 2027, then the related amendment in ASU 2023-06 will be removed from the codification and will not become effective. Early adoption of this ASU is prohibited. The Company does not expect the amendments in this ASU to have a material impact on the disclosures or presentation in its consolidated financial statements. F-17 In November 2023, FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures, which enhances the disclosures required for operating segments in the Company’s annual and interim consolidated financial statements. ASU 2023-07 is effective for the Company in our annual reporting for fiscal 2024 and for interim period reporting beginning in fiscal 2025 on a retrospective basis, with all required disclosures to be made for all prior periods presented in the consolidated financial statements. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2023-07 on its consolidated financial statements. In December 2023, FASB issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures, which enhances the disclosures required for income taxes in the Company’s annual consolidated financial statements. Notably, this ASU requires entities to disclose specific categories in the effective tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 is effective for the Company in its annual reporting for fiscal 2025 on a prospective basis. Early adoption and retrospective reporting are permitted. The Company is currently evaluating the impact of ASU 2023-09 on its consolidated financial statements. Reclassifications Certain prior period items and amounts have been reclassified to conform to the classifications used to prepare the consolidated financial statements for the current period. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations, or cash flows as previously reported. NOTE 3. REVENUES The Company accounts for contracts with customers in accordance with ASC 606, Revenues from Contracts with Customers. The Company has three primary streams of revenue (four in 2022): (1) product revenues, including revenue recognized from sales of products through its pharmacy and outsourcing facility and sales of branded products to wholesalers through a third-party logistics (“3PL”) partner, (2) revenue recognized from a commission agreement with a third party in 2022, (3) revenue recognized from transfer of acquired product sales and profits, and (4) revenue recognized from intellectual property licenses. Product Revenues The Company sells prescription medications directly through its pharmacy, outsourcing facility and 3PL partner. Revenue from the Company’s pharmacy services includes: (i) the portion of the price the client pays directly to the Company, net of any volume-related or other discounts paid back to the client, (ii) the price paid to the Company 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: 1. 2. Identify the contract(s) with a customer: A contract is deemed to exist when the customer places an order through receipt of a prescription, via an online order or via receipt of a purchase order from a customer. For branded products, orders are received through the Company’s 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 the Company’s 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. The Company has elected to treat its shipping and handling activities as a fulfillment cost. 3. Determine the transaction price: The transaction price is based on an amount that reflects the consideration to which the Company expects 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. The Company utilizes 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. F-18 4. Allocate the transaction price to the performance obligations in the contract: Because there is only one performance obligation for product sales, no allocation is necessary. 5. Recognize revenue when (or as) the entity satisfies a performance obligation: Revenue from products is recognized upon transfer of control of a product to a customer. This generally occurs upon shipment unless contractual terms with a customer state that transfer of control occurs at delivery. Commission Revenues The Company has entered into an agreement whereby it is paid a fee calculated based on sales the Company generates 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 the Company and no consequential continuing involvement on the Company’s part to recognize the associated revenue. Revenues From Transfer of Acquired Product Sales and Profits The Company has entered into agreements whereby it 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 the Company. The revenue recognized by the Company from the transfer of net profit was recognized at the time profit from the product sales were calculated by the Sellers and confirmed by the Company, typically on a monthly basis, at which point there is no future performance obligation required by the Company and no consequential continuing involvement on the Company’s part to recognize the associated revenue. On a quarterly basis, the Sellers invoice the Company for all credits and reimbursements (“Chargebacks”) made to customers related to the products. The Company uses 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 the Company’s consolidated statements of operations, and recorded as a reduction to accounts receivable in the consolidated balance sheets, at the time the revenue is recognized. Intellectual Property License Revenues The Company currently holds five intellectual property licenses and related agreements pursuant to which the Company has agreed to license or sell to a customer with the right to access the Company’s 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 by the Company and require no consequential continuing involvement on the part of the Company are recognized as revenue when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverables are delivered. Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications for such compounded drug preparations. The Company defers 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 the Company’s performance under the other elements of the arrangement. In addition, if the Company’s 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 the Company, 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. F-19 Revenue disaggregated by revenue source for the years ended December 31, 2023 and 2022, consists of the following: Product sales, net Commissions Transfer of acquired product sales/profits Total revenues For the Years Ended December 31, 2023 117,447,000 $ - 12,746,000 130,193,000 $ 2022 83,524,000 3,866,000 1,205,000 88,595,000 $ $ Deferred revenue and customer deposits at December 31, 2023 and 2022, were $75,000 and $113,000, respectively. All deferred revenue and customer deposit amounts at December 31, 2022 were recognized as revenue during the year ended December 31, 2023. NOTE 4. RECENT PRODUCT ACQUISITIONS, LICENSES AND DIVESTITURES Acquisition of VEVYETM U.S. and Canadian Commercial Rights In July 2023, the Company acquired commercial rights of VEVYE (cyclosporine ophthalmic solution) 0.1%, an ophthalmic drug product, for the U.S. and Canadian markets (the “VEVYE Acquisition”). The Company acquired the commercial rights to VEVYE by entering into a license agreement with Novaliq GmbH (“Novaliq”). As consideration, the Company 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. The Company accounted for the VEVYE Acquisition as an acquisition of assets and capitalized the initial payments of $8,000,000 and costs of $70,000 associated with the transaction. Acquisition of Certain U.S. and Canadian Commercial Rights to Santen and Eyevance Products In July 2023, the Company 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, the Company acquired the exclusive commercial rights to assets associated with the following ophthalmic products (collectively, the “Santen Products”): FLAREX, NATACYN, ZERVIATE, VERKAZIA and FRESHKOTE in the U.S., and VERKAZIA and CATIONORM PLUS in Canada. The transactions pursuant to the Santen Agreements are referred to in these notes as the “Santen Products Acquisition.” Under the terms of the Santen Agreements, the Company made an initial one-time payment of $8,000,000. In addition, the Santen Agreements provide for various one-time contingent 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, the Company also assumed certain obligations associated with other third parties that require mid-single digit royalties on sales of FRESHKOTE and ZERVIATE. Immediately following the closing and subject to certain conditions, prior to the transfer of the Santen Products NDAs and other marketing authorizations to the Company, Santen continued to sell the Santen Products on the Company’s behalf and transfer the net profit from the sale of the Santen Products to the Company. In October 2023, we completed the transfer of the U.S. NDAs and rights of the Santen Products. The assets acquired in the Santen Products Acquisition are identifiable intangible asset groups in similar asset classes and all directly related to the product NDAs and marketing authorizations acquired. The developed technology is within one major intangible asset class. No workforce/employees were included in the Santen Products Acquisition and the Company is required to utilize its own business inputs/processes to transfer and commercialize the Santen Products. F-20 The Company incurred $139,000 in costs associated with the Santen Products Acquisition, and including such acquisition costs, the payment of $8,000,000 at closing and a near term milestone of $500,000. The total purchase price of the Santen Products Acquisition was $8,639,000 and was accounted for as an asset acquisition. At the time of the Santen Products Acquisition and as of December 31, 2023, the remaining contingent consideration due was not considered probable and reasonably estimable and therefore, no amount was included in the purchase price of the Santen Products Acquisition. At the time the contingent consideration due becomes probable and reasonably estimable the additional consideration, if any, paid will be allocated to all of the assets on a pro rata basis based on their initial estimated fair values as a percent of the total purchase price. Acquisition of ILEVRO, NEVANAC, VIGAMOX, MAXIDEX, and TRIESENCE In December 2022, the Company entered into an Asset Purchase Agreement (the “NVS 5 APA”) with Novartis Technology, LLC and Novartis Innovative Therapies AG (together, “Novartis”), pursuant to which the Company agreed to purchase from Novartis the exclusive commercial rights to assets associated with the following ophthalmic products (collectively the “NVS 5 Products”) in the U.S. (the “NVS 5 Acquisition”): ILEVRO, NEVANAC, VIGAMOX, MAXIDEX, and TRIESENCE. Under the terms of the NVS 5 APA, the Company made a one-time payment of $130,000,000 at closing in January 2023, with up to another $45,000,000 due in a milestone payment related to the timing of the commercial availability of TRIESENCE. The milestone payment due upon commercial availability for TRIESENCE decreased from $45,000,000 to $37,000,000 on January 20, 2024. Pursuant to the NVS 5 APA and various ancillary agreements, immediately following the closing and subject to certain conditions and prior to the transfer of the NVS 5 Products NDAs to the Company, Novartis continued to sell the NVS 5 Products on the Company’s behalf and transfer the net profit from the sale of the NVS 5 Products to the Company. Novartis has agreed to supply certain NVS 5 Products to the Company for a period of time after the NDAs are transferred and to assist with technology transfer of the NVS 5 Products manufacturing to other third-party manufacturers, if needed. The assets acquired in the NVS 5 Acquisition are identifiable intangible asset groups in similar asset classes and all directly related to the five product NDAs acquired. The developed technology is within one major intangible asset class. No workforce/employees were included in the NVS 5 Acquisition and the Company is required to utilize its own business inputs/processes to transfer and commercialize the NVS 5 Products and NDAs. The Company incurred $558,000 in costs associated with the NVS 5 Acquisition and including such acquisition costs and the payment of $130,000,000 at closing. The total purchase price of the NVS 5 Acquisition was $130,558,000 and was accounted for as an asset acquisition. At the time of the NVS 5 Acquisition and as of December 31, 2023, the contingent consideration due related to the commercial availability of TRIESENCE was not considered probable and reasonably estimable and, therefore, no amount was included in the purchase price of the NVS 5 Acquisition. At the time the contingent consideration due related to the commercial availability of TRIESENCE becomes probable and reasonably estimable the additional consideration, if any, paid will be allocated to all of the assets on a pro rata basis based on their initial estimated fair values as a percent of the total purchase price. The Company does not consider any amounts related to TRIESENCE to be in-process research and development (IPR&D) as considered within the scope of ASC 730, Research and Development. Divestiture of Non-Ophthalmic Assets In October 2022, wholly-owned subsidiaries of the Company (collectively, “Imprimis”) entered into an Asset Purchase Agreement (the “RPC Agreement”) with Innovation Compounding Pharmacy, LLC (the “Buyer”). Under the terms of the RPC Agreement, Imprimis agreed to sell substantially all of its assets associated with its non-ophthalmology related compounding product line, 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 nine of the Company’s employees that were responsible for the sales activities associated with the RPC Assets. Under the terms of the RPC Agreement, the Buyer paid Imprimis an aggregate cash amount of $6,000,000 in October 2022. In addition, the Buyer is obligated to pay up to $4,500,000 to Imprimis based on mutually agreed upon revenue milestones during the calendar year 2023 (the “Contingent Amount”). During the year ended December 31, 2022, no amount related to the Contingent Amount was recognized by the Company. The Company will recognize a gain related to the Contingent Amount if/when the contingency (in this case, revenue thresholds for 2023) become likely and reasonably estimable. The Company is currently engaged in discussions with RPC related to the contingent payment amount, if any. F-21 In connection with the RPC Agreement, Imprimis entered into a separate transition services agreement (the “RPC TSA”) with the Buyer related to providing ongoing services associated with the RPC Assets, such as procuring and dispensing prescription orders, providing accounting and billing services and collecting accounts receivable. Imprimis provided transition services to the Buyer for approximately nine months following the effective date of the RPC Agreement and expects to wind down transition services in subsequent periods. The Company collected and will continue to collect cash on behalf of the Buyer for revenue generated by sales of RPC Assets from October 2022 through the transition period and the Company is obligated to transfer cash generated by such sales to the Buyer. The Company’s consolidated balance sheet as of December 31, 2023 includes accounts receivable of $49,000 for cash to be collected on behalf of the Buyer for sales of RPC Assets through December 31, 2023. There were no amounts due from the Buyer for reimbursement of services performed under the RPC TSA as of December 31, 2023. The receivable amount of $49,000 along with $8,000 of payments received from accounts receivable but not yet paid were recorded within accounts payable and accrued expenses on the consolidated balance sheet as of December 31, 2023, and represents a payable to the Buyer of $57,000. The Company recorded a loss from the RPC TSA and disposition and sale of certain related assets and unusable inventory of $330,000 during the year ended December 31, 2023, which is presented in other expense, net on the consolidated statements of operations. The Company determined that the disposal of the related net assets does not qualify for reporting as discontinued operations because it does not represent a strategic shift that has or will have a major effect on the Company’s operations and financial results. During the year ended December 31, 2022, the Company recognized a net gain on the sale of the non-ophthalmology related compounding assets as follows: Gross consideration Closing and transaction costs Net proceeds Book value of assets transferred: Customer relations intangible asset Gain on sale of non-ophthalmology assets License and Supply Agreement for IHEEZO $ $ 6,000,000 55,000 5,945,000 686,000 5,259,000 In July 2021, the Company entered into a License and Supply Agreement (the “Sintetica Agreement”) with Sintetica S.A. (“Sintetica”), pursuant to which Sintetica granted the Company the exclusive license and marketing rights to its patented ophthalmic drug candidate (“IHEEZO”) in the U.S. and Canada. Pursuant to the Sintetica Agreement, the Company agreed to pay Sintetica a per unit transfer price to supply IHEEZO, along with a per unit royalty for units sold. The Company is required to pay Sintetica up to $18,000,000 in one-time milestone payments including a $5,000,000 payment (the “Upfront Payment”) due within 30 days of signing the Sintetica Agreement and the balance of payments due upon achievement of certain regulatory and commercial milestones. Under the terms of the Sintetica Agreement, Sintetica is responsible for regulatory filings for IHEEZO in the U.S. The Upfront Payment along with an additional milestone payment of $3,117,000 was paid and recorded as R&D expenses during the year ended December 31, 2021. During the year ended December 31, 2022, $10,000,000 was paid or accrued under the Sintetica Agreement following the FDA approval of the United States NDA for IHEEZO, and was capitalized as an intangible asset. In August 2023, the Company amended the Sintetica Agreement to allow for early payment of commercial related milestones associated with sales of IHEEZO in exchange for a $550,000 reduction in all of the remaining milestone amounts due. The Company then paid Sintetica $4,450,000. As of December 31, 2023, no milestone amounts are due under the Sintetica Agreement. Subject to certain limitations, the Sintetica Agreement has a ten-year term, and allows for a ten-year extension if certain sales thresholds are met. F-22 NOTE 5. INVESTMENT IN MELT PHARMACEUTICALS, INC. AND AGREEMENTS – RELATED PARTY TRANSACTIONS In December 2018, the Company entered into an asset purchase agreement with Melt (the “Melt APA”). Pursuant to the terms of the Melt APA, Melt was assigned certain intellectual property and related rights from the Company to develop, formulate, make, sell, and sub-license certain Company conscious sedation and analgesia related formulations (collectively, the “Melt Products”). Under the terms of the Melt APA, Melt is required to make mid-single digit royalty payments to the Company on net sales of the Melt Products while any patent rights remain outstanding, as well as other conditions. In February 2019, the Company entered into the Melt MSA, whereby the Company provided to Melt certain administrative services and support, including bookkeeping, web services and human resources related activities, and Melt was required to pay the Company a monthly amount of $10,000. The Melt MSA was terminated effective July 1, 2023. During the year ended December 31, 2023, and 2022, the Company recorded $89,000 and $91,000, respectively, due from Melt for reimbursable expenses and amounts payable pursuant to the Melt MSA, which are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. As of December 31, 2023 and 2022, the Company was due $228,000 and $139,000, respectively, from Melt for reimbursable expenses and amounts due under the Melt MSA. Melt did not make any payments to the Company during the year ended December 31, 2022. The Company made a cash advance to Melt of $500,000 and Melt repaid the $500,000 cash advance during the year ended December 31, 2023. During the year ended December 31, 2023, Melt sold 2,421,904 shares of its Series B Preferred Stock and raised over $20,586,000 in gross proceeds from third party investors. The Company’s Chief Executive Officer, Mark L. Baum, was previously a member of the Melt board of directors until his resignation during the year ended December 31, 2021. Mr. Baum re-joined the Melt board of directors in January 2023. At the time Mr. Baum re-joined, the Melt board of directors consisted of five members, including Mr. Baum, who is the only representative of the Company on Melt’s board of directors. Melt Note Receivable – Settled and Terminated in 2023 On September 1, 2021, the Company entered into a loan and security agreement in the principal amount of $13,500,000 (the “Melt Loan Agreement”), as lender, with Melt, as borrower. Amounts borrowed under the Melt Loan Agreement bore interest at 12.50% per annum, which interest could have been paid in-kind at the option of Melt until the maturity date. The Melt Loan Agreement permitted Melt to pay interest only on the principal amount loaned thereunder through the term and all amounts owed were previously due and payable on September 1, 2022. In April 2022, the Company entered into a First Amendment and in September 2022, a Second Amendment (together, the “Amendments”) to the Melt Loan Agreement. The Amendments (i) extended the maturity date of the Melt Loan Agreement to September 1, 2023, which could have been extended further to September 1, 2026 upon Melt completing a qualifying financing of a minimum amount of $10,000,000 from third-party investors, (ii) added conditions related to minimum cash amounts following a qualifying financing, and (iii) clarified the definition of material adverse effects. Melt could have elected to prepay all, but not less than all, of the amounts owed prior to the maturity date at any time without penalty. The net funds received by Melt excluded $908,000 owed to the Company for reimbursable expenses and amounts due under the Melt MSA prior to the effective date of the note receivable. In connection with the Melt Loan Agreement, the Company and Melt entered into a Right of First Refusal Agreement providing the Company with the right, but not the obligation, to match any offer received by Melt associated with the commercial rights to any of Melt’s drug candidates for a period of five years following the effective date of the Melt Loan Agreement. On December 28, 2023, the Company terminated the Melt Loan Agreement. As of the date of termination, approximately $18,395,000 remained outstanding under the Melt Loan Agreement. Pursuant to the terms of a Settlement and Payoff Agreement, dated as of December 28, 2023, by and between the Company and Melt (the “Settlement Agreement”), the Company received 2,260,000 shares of Melt’s Series B-1 Preferred Stock and 74,256 shares of Melt’s Series B Preferred Stock (which both series have similar rights and preferences) in consideration for the full payment of all amounts outstanding under the Melt 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 the Company with rights consistent with other holders of preferred stock of Melt. The Company concluded the Settlement Agreement is in substance a funding of the Company’s share of prior unrecorded losses and, therefore, those suspended losses must be recognized first against the value of the new preferred stock investments. This resulted in reducing the carrying value of the Company’s investment in Melt, including the carrying value of the Preferred Stock received, to zero (the consideration received in the form of an equivalent fair value of Melt’s Preferred Stock to settle the full outstanding note receivable balance of $18,400,000 is essentially offset by an equal amount of the funding of prior unrecorded losses). Accordingly, this settlement transaction had no quantitative effect on either the Company’s consolidated balance sheet or consolidated statement of operations for the year ended December 31, 2023. F-23 In accordance with ASC 323, Investments – Equity Method and Joint Ventures, the carrying amount of the note receivable and other investments in Melt have been reduced by the Company’s allocated share of Melt’s losses based on its ownership of Melt and its total indebtedness (see Note 2). The unaudited condensed results of operations information of Melt is summarized below: Revenues, net Loss from operations Net loss For the Years Ended December 31, 2023 - $ (7,581,000) $ (11,271,000) $ 2022 - (12,443,000) (14,446,000) $ $ $ The unaudited condensed balance sheet information of Melt is summarized below: Current assets Non-current assets Total assets Total liabilities Total preferred stock and stockholders’ equity (deficit) Total liabilities and stockholders’ equity December 31, 2023 13,404,000 $ - 13,404,000 $ 2022 655,000 107,000 762,000 3,922,000 $ 9,482,000 13,404,000 $ 19,056,000 (18,294,000) 762,000 $ $ $ $ NOTE 6. INVESTMENT IN SURFACE OPHTHALMICS, INC. AND AGREEMENTS - RELATED PARTY TRANSACTIONS The Company entered into an asset purchase and license agreement with Surface in 2017 and amended it in April 2018 (the “Surface License Agreements”). Pursuant to the terms of the Surface License Agreements, the Company assigned and licensed to Surface certain intellectual property and related rights associated with Surface’s drug candidates (collectively, the “Surface Products”). Surface is required to make mid-single digit royalty payments to the Company on net sales of the Surface Products while any patent rights remain outstanding. As of December 31, 2023, the Company owned 3,500,000 shares of Surface common stock. Adrienne Graves and Perry J. Sternberg, directors of the Company, also are directors of Surface. Mark L. Baum, who is the Company’s Chief Executive Officer, was previously a member of the Surface board of directors and resigned from his position as a director of Surface on March 31, 2023. During the year ended December 31, 2021, the Company reduced its common stock investment in Surface to $0 as a result of the Company recording its share of equity losses of Surface. The Company has no requirements to advance funds to Surface and no obligations to fund its future operating losses, if any. Therefore, the Company’s future financial results will not be negatively affected by Surface’s ongoing operations. F-24 NOTE 7. INVENTORIES Inventories are comprised of finished compounded formulations, over-the-counter and prescription retail pharmacy products, branded pharmaceutical products, including those held at the Company’s 3PL partner, related laboratory supplies and active pharmaceutical ingredients. The composition of inventories as of December 31, 2023 and 2022 was as follows: Raw materials Work in progress Finished goods Total inventories December 31, 2023 2022 $ $ 5,477,000 $ 54,000 5,336,000 10,867,000 $ 3,707,000 38,000 2,796,000 6,541,000 NOTE 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets at December 31, 2023 and 2022 consisted of the following: Prepaid insurance Prepaid computer software related expenses Other prepaid expenses Receivable due from Melt Prepaid PDUFA fees Deferred Oaktree commitment fee (see Note 13) Deposits and other current assets Total prepaid expenses and other current assets NOTE 9. PROPERTY, PLANT AND EQUIPMENT December 31, 2023 2022 1,241,000 $ 1,613,000 906,000 228,000 3,438,000 409,000 1,753,000 9,588,000 $ 858,000 1,165,000 937,000 139,000 394,000 - 118,000 3,611,000 $ $ Property, plant and equipment, net at December 31, 2023 and 2022 consisted of the following: Property, plant and equipment, net: Computer hardware Furniture and equipment Lab and pharmacy equipment Leasehold improvements Accumulated depreciation and amortization December 31, 2023 2022 $ $ 1,322,000 $ 936,000 4,564,000 6,771,000 13,593,000 (10,072,000) 3,521,000 $ 979,000 860,000 4,259,000 6,449,000 12,547,000 (9,061,000) 3,486,000 During the years ended December 31, 2023 and 2022, the Company disposed of property, plant and equipment with a net book value of $168,000 and $69,000, respectively, related to the discontinued use of certain lab equipment, which is included in other expense, net in the consolidated statements of operations. The Company recorded depreciation and amortization expense of $1,055,000 and $1,253,000 during the years ended December 31, 2023 and 2022, respectively. F-25 NOTE 10. CAPITALIZED SOFTWARE COSTS Capitalized software costs at December 31, 2023 and 2022 consisted of the following: Capitalized software costs Capitalized internal-use software development costs Acquired third-party software license for internal-use Total gross capitalized software for internal-use Accumulated amortization Capitalized internal-use software in process December 31, 2023 2022 $ $ 2,780,000 $ 159,000 2,939,000 (1,268,000) 467,000 2,138,000 $ 1,413,000 159,000 1,572,000 (793,000) 1,333,000 2,112,000 The Company recorded amortization expense of $475,000 and $224,000 during the years ended December 31, 2023 and 2022, respectively. NOTE 11. INTANGIBLE ASSETS AND GOODWILL The Company’s intangible assets at December 31, 2023 consisted of the following: Patents Licenses Trademarks Acquired NDAs Customer relationships Trade name Non-competition clause State pharmacy licenses Amortization periods (in years) Cost Accumulated amortization Impairment Net Carrying value 7-19 years 7 - 20 years Indefinite 4 - 15 years 3-15 years 5 years 3-4 years 25 years $ 984,000 $ 100,000 281,000 170,353,000 596,000 75,000 50,000 8,000 (253,000) $ (30,000) - (11,300,000) (516,000) (5,000) (50,000) (7,000) $ 172,447,000 $ (12,161,000) $ (276,000) $ (22,000) (82,000) - - - - - 455,000 48,000 199,000 159,053,000 80,000 70,000 - 1,000 (380,000) $ 159,906,000 During the year ended December 31, 2023, the Company recorded a charge of $380,000 related to the impairment of certain licenses, trademarks, patents and patent applications. The Company determined that the sum of the expected undiscounted cash flows attributable to these intangible assets was less than their carrying value and that an impairment charge was required. Accordingly, the Company calculated the estimated fair value of the intangible assets based on the present value of the expected cash flows over their estimated lives. The impairment amount was calculated by deducting the present value of the expected cash flows from the carrying value. Significant estimates and assumptions used by the Company included sales and expense growth rates, and discounted projected cash flows. The estimates and assumptions used in our assessment represent a Level 3 measurement because they are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value. The assumptions used in the impairment analysis are inherently subject to uncertainty and, therefore, changes in these assumptions could have a significant impact on the concluded fair value. F-26 The Company’s intangible assets at December 31, 2022 consisted of the following: Patents Licenses Trademarks Acquired NDAs Customer relationships Trade name Non-competition clause State pharmacy licenses Amortization periods (in years) Cost Accumulated amortization Sold 7-19 years 20 years Indefinite 10 years 3-15 years 5 years 3-4 years 25 years $ $ 980,000 $ 100,000 267,000 23,720,000 1,519,000 75,000 50,000 8,000 26,719,000 $ (161,000) $ (23,000) - (1,363,000) (759,000) (5,000) (50,000) (7,000) (2,368,000) $ - $ - - - (626,000) - - - (626,000) $ Net Carrying value 819,000 77,000 267,000 22,357,000 134,000 70,000 - 1,000 23,725,000 During the year ended December 31, 2022, the Company recorded a net reduction to customer relationships intangible assets of $626,000 related to customer relationships that were associated with the non-ophthalmology assets sold by the Company. The amount was reflected net of the gross proceeds received related to the sale of the Company’s non-ophthalmology assets (see Note 4). See Note 4 related to other intangible assets acquired and divested during the years ended December 31, 2023 and 2022. Amortization expense for intangible assets for the years ended December 31, 2023 and 2022 were as follows: Patents Licenses Acquired NDAs Customer relationships For the Years Ended December 31, 2023 2022 $ $ 84,000 $ 7,000 9,937,000 54,000 10,082,000 $ 86,000 16,000 1,363,000 113,000 1,578,000 Estimated future amortization expense for the Company’s intangible assets at December 31, 2023 is as follows: Years ending December 31, 2024 2025 2026 2027 2028 Thereafter $ $ 13,658,000 13,658,000 13,658,000 13,309,000 12,961,000 92,463,000 159,707,000 There were no changes in the carrying value of the Company’s goodwill during the years ended December 31, 2023 and 2022. NOTE 12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31, 2023 and 2022 consisted of the following: Accounts payable Accrued insurance premium Accrued IHEEZO milestone payments (see Note 4) Accrued RPC transition payments (see Note 4) Accrued exit fee for note payable (see Note 13) Accrued litigation settlements Accrued interest (see Note 13) Total accounts payable and accrued expenses Less: current portion Non-current total accrued expenses December 31, 2023 2022 21,424,000 $ 873,000 - 57,000 2,713,000 249,000 1,978,000 27,294,000 $ (24,581,000) 2,713,000 $ 6,440,000 575,000 5,000,000 453,000 - 49,000 1,254,000 13,771,000 (13,771,000) - $ $ $ F-27 The Company financed all insurance policies for the policy terms of August 17, 2023 through August 16, 2024 and August 17, 2022 through August 16, 2023. The financing agreements have an interest rate of 7.48% and 4.13% per annum, respectively, and require nine monthly payments of $169,000 and eight monthly payments of $114,000, respectively. NOTE 13. DEBT Oaktree Loan Due 2026 In March 2023, the Company 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 senior secured term loan facility to the Company with a principal amount of up to $100,000,000. Upon entering into the Oaktree Loan, the Company drew a principal amount of $65,000,000 (“Tranche A”) from the Oaktree Loan and used the net proceeds to repay all amounts owed by the Company pursuant to the Loan and Security Agreement the Company previously entered into with B. Riley Commercial Capital, LLC on December 14, 2022 (the “B. Riley Loan”) – see subheading B. Riley Loan and Security Agreement – Paid in Full within this Note 13. The additional principal loan amount of up to $35,000,000 available under the Oaktree Loan (“Tranche B”) will be made available to the Company upon the commercialization of TRIESENCE. If Tranche B is not drawn by the Company on or before March 27, 2024, the amount available under Tranche B will be decreased to $30,000,000. While undrawn, the Company is required to pay a commitment fee related to Tranche B amount equal to 2% per annum, payable quarterly. This fee is recorded within prepaid expenses and other current assets and is being amortized on a straight-line basis over the access period. The Oaktree Loan is secured by nearly all of the assets, including intellectual property, of the Company and its material subsidiaries. The Oaktree Loan has a maturity date of January 19, 2026 and carries an interest rate equal to the Secured Overnight Financing Rate plus 6.5% per annum (totaling 11.83% at December 31, 2023). From proceeds, the Company paid fees, offering expenses, and the Oaktree Loan was issued at an original issue discount, resulting in an aggregate discount of $3,415,000. The Oaktree Loan also carries an exit fee equal to 3.5% of the aggregate principal amount owed, payable at maturity, and the Company accrued $2,275,000 related to the exit fee. The original issue discount, fees and expenses (including the exit fee) are being amortized over the term of the Oaktree Loan using the effective interest rate method. The Oaktree Loan requires quarterly interest-only payments with all of the unpaid principal, interest and fees due on the maturity date, January 19, 2026. In July 2023, the Company 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 the Company made other changes related to the Santen Products Acquisition (see Note 4). Upon satisfaction of certain conditions to funding, the Company drew down a principal amount of $12,500,000 (the “Loan Increase”) 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 made pursuant to the Oaktree Amendment. Following entry into the Oaktree Amendment and the funding of the Loan Increase upon closing of the Santen Products Acquisition, the Company has drawn down a total principal loan amount of $77,500,000 under the Oaktree Loan. The Oaktree Loan exit fee was increased from $2,275,000 to $2,713,000 pursuant to the Oaktree Amendment. As of December 31, 2023, the Company has recorded in accrued expenses the total exit fee liability of $2,713,000. The Oaktree Loan contains customary guarantees and covenants, including financial covenants related to minimum liquidity and minimum net revenues. As of December 31, 2023, the Company was in compliance with the financial covenants. As of the end of the fiscal quarter ending December 31, 2024, if the Company’s Total Leverage Ratio (as defined in the Oaktree Loan) is greater than or equal to five times, but less than seven times, the Company will be required to issue to Oaktree warrants to purchase 375,000 shares of the Company’s common stock, and if the Total Leverage Ratio is greater than or equal to seven times, the Company will be required to issue to Oaktree warrants to purchase an additional 375,000 shares of the Company’s common stock (equaling 750,000 shares in aggregate). If the Total Leverage Ratio as of the end of the fiscal quarter ending December 31, 2024 is less than five times, no warrants will be issued to Oaktree. Based on current projections, the Company does not expect to issue any warrants related to the Oaktree Loan. F-28 Interest expense related to the Oaktree Loan totaled $8,804,000 for the year ended December 31, 2023, and included the amortization of debt issuance costs and discount of $1,680,000 and amortization of deferred commitment fees of $543,000. HROWM - 11.875% Senior Notes Due 2027 In December 2022 and in January 2023, the Company closed an offering of $35,000,000 and $5,250,000, respectively, aggregate principal amount of 11.875% senior notes due in December 2027 (the “2027 Notes”). The 2027 Notes were sold to investors at a par value of $25.00 per 2027 Note, and the offering resulted in net proceeds to the Company of approximately $36,699,000 after deducting underwriting discounts and commissions and other offering expenses of $3,551,000. The 2027 Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other existing and future senior unsecured and unsubordinated indebtedness. The 2027 Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The 2027 Notes bear interest at the rate of 11.875% per annum. Interest on the 2027 Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on January 31, 2023. The 2027 Notes will mature on December 31, 2027. The issuance costs were recorded as a debt discount and are being amortized as interest expense over the term of the 2027 Notes using the effective interest rate method. At any time prior to December 31, 2024, the Company may, at its option, redeem the 2027 Notes, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed, plus a make-whole amount, if any, plus accrued and unpaid interest to, but excluding, the date of redemption. The Company may redeem the 2027 Notes for cash in whole or in part at any time at its option (i) on or after December 31, 2024 and prior to December 31, 2025, at a price equal to $25.50 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after December 31, 2025 and prior to December 31, 2026, at a price equal to $25.25 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iii) on or after December 31, 2026 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, the Company is required to redeem the 2027 Notes, for cash, in whole but not in part, at the price of $25.50 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, upon occurrence of certain events including the occurrence of a Material Change, as defined in the Second Supplemental Indenture. The 2027 Notes trade on the Nasdaq Stock Market LLC under the symbol “HROWM.” Interest expense related to the 2027 Notes totaled $5,516,000 and $140,000 for the years ended December 31, 2023 and 2022, respectively, and included the amortization of debt issuance costs and discount of $736,000 and $0, respectively. Our Chief Executive Officer, Mark L. Baum, Chief Financial Officer, Andrew R. Boll, and former directors R. Lawrence Van Horn and Dr. Richard Lindstrom, in the aggregate, purchased $950,000 in principal amount of the 2027 Notes at the time of their offering. F-29 HROWL – 8.625% Senior Notes Due 2026 In April 2021, the Company closed an offering of $50,000,000 aggregate principal amount of 8.625% senior notes due April 2026, and in May 2021 issued an additional $5,000,000 of such notes pursuant to the full exercise of the underwriters’ option to purchase additional notes (collectively, the “April Notes”). The April Notes were sold to investors at a par value of $25.00 per April Note and the offering resulted in net proceeds to the Company of approximately $51,909,000 after deducting underwriting discounts and commissions and other offering expenses of $3,091,000. In September 2021, in a further issuance of the April Notes, the Company sold an additional $20,000,000 aggregate principal amount of such notes (the “September Notes,” and together with the April Notes, the “2026 Notes”), at a price of $25.75 per September Note, with interest of $278,000 on the September Notes being accrued from April 20, 2021, the date of issuance of the April Notes. The September offering resulted in net proceeds to the Company of approximately $19,164,000 after deducting underwriting discounts and commissions and other offering expenses of $1,158,000 and a premium on note issuance of $322,000. The September Notes are treated as a single series with the April Notes under the indenture governing the April Notes, dated as of April 20, 2021, and have the same terms as the April Notes (other than the initial offering price and issue date). The 2026 Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of our other existing and future senior unsecured and unsubordinated indebtedness. The 2026 Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The 2026 Notes bear interest at a rate of 8.625% per annum. Interest on the 2026 Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on July 31, 2021. The 2026 Notes will mature on April 30, 2026. The issuance costs were recorded as a debt discount and are being amortized as interest expense, net of the amortization of the premium on note issuance, over the term of the 2026 Notes using the effective interest rate method. Prior to February 1, 2026, the Company may, at its option, redeem the 2026 Notes, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus a make-whole amount, if any, plus accrued and unpaid interest to, but excluding, the date of redemption. The Company may redeem the 2026 Notes for cash in whole or in part at any time at our option on or after February 1, 2026 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes. The 2026 Notes trade on the Nasdaq Stock Market LLC under the symbol “HROWL”. Interest expense related to the 2026 Notes totaled $7,251,000 and $7,238,000 for the years ended December 31, 2023 and 2022, respectively, and included amortization of debt issuance costs and discount of $782,000, and $782,000 for the years ended December 31, 2023 and 2022, respectively. B. Riley Loan and Security Agreement – Paid in Full On December 14, 2022 (the “Effective Date”), the Company entered into a Loan and Security Agreement (the “BR Loan”) with B. Riley Commercial Capital, LLC, as administrative agent for the lenders. The BR Loan provided for a loan facility of up to $100,000,000 to the Company with a maturity date of December 14, 2025 (the “Maturity Date”), at an interest rate of 10.875% per annum. In January 2023, $59,750,000 of principal amount was funded pursuant to the BR Loan simultaneously with the consummation of the NVS 5 Acquisition (see Note 4). In March 2023, the Company repaid all amounts owed under the BR Loan, in connection with the Oaktree Loan, and no exit or prepayment fees were paid as a result of the payoff of the BR Loan pursuant to a side letter agreement among the parties. Interest expense related to the BR Loan totaled $1,565,000 for the year ended December 31, 2023, and included amortization of debt issuance costs and debt discount of $356,000. The Company recorded a loss of $5,465,000 related to the early extinguishment of debt associated with the BR Loan. A summary of the Company’s debt at December 31, 2023 and 2022 is described as follows: 8.625% Senior Notes due April 2026 11.875% Senior Notes due December 2027 Oaktree Loan due January 2026 Less: Unamortized debt discount and issuance costs December 31, 2023 December 31, 2022 75,000,000 $ 40,250,000 77,500,000 192,750,000 (9,578,000) 183,172,000 $ 75,000,000 35,000,000 - 110,000,000 (5,826,000) 104,174,000 $ $ F-30 For the years ended December 31, 2023 and 2022, the total effective interest rate of the Company’s debt was 10.93%, and 8.97%, respectively. At December 31, 2023, future minimum payments under the Company’s debt were as follows: 2024 2025 2026 2027 Total minimum payments Less: amount representing interest payments Notes payable, gross Less: unamortized discount, net of premium Notes payable, net of unamortized discount NOTE 14. LEASES Amount 21,201,000 20,590,000 159,896,000 45,030,000 246,717,000 (53,967,000) 192,750,000 (9,578,000) 183,172,000 $ $ The Company leases office and laboratory space under the non-cancelable operating leases listed below. These lease agreements have remaining terms between one to five years and contain various clauses for renewal at the Company’s option. ● An operating lease for 5,789 square feet of office space in Carlsbad, California, which commenced in January 2022 that expires in March 2025. ● An operating lease for 38,153 square feet of lab, warehouse and office space in Ledgewood, New Jersey that expires in July 2027, with an option to extend the term for two additional five-year periods. This lease was amended, effective July 2020, to extend the term of the original lease and add 1,400 of additional square footage to the lease, amended again in May 2021 to extend the term of the lease to July 2027 and add 8,900 square feet of space, and amended in May 2023 to add another 2,861 square feet of space to the existing lease, which the Company took possession of in January 2024. ● An operating lease for 5,500 square feet of office space in Nashville, Tennessee that expires in December 2024. ● An operating lease for 11,552 square feet of lab and office space in Nashville, Tennessee which commenced in September 2022 and expires in September 2027. At December 31, 2023 and 2022, the weighted-average discount rate and the weighted-average remaining lease term for the operating leases held by the Company were 6.6% and 6.6% and 10.4 years and 10.9 years, respectively. During the years ended December 31, 2023 and 2022, cash paid for amounts included for the operating lease liabilities was $1,231,000 and $925,000, respectively, and the Company recorded operating lease expense of $1,232,000 and $1,117,000, respectively, included in selling, general and administrative expenses. Future lease payments under operating leases as of December 31, 2023 were as follows (excluding lease transactions entered into in 2024): 2024 2025 2026 2027 2028 Thereafter Total minimum lease payments Less: amount representing imputed interest payments Total operating lease liabilities Less: current portion, operating lease liabilities Operating lease obligations, net of current portion Operating Leases 1,261,000 1,093,000 1,114,000 972,000 657,000 5,173,000 10,270,000 (2,940,000) 7,330,000 (806,000) 6,524,000 $ $ F-31 NOTE 15. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION Preferred Stock At December 31, 2023 and 2022, the Company had 5,000,000 shares of preferred stock, $0.001 par value, authorized and no shares of preferred stock issued and outstanding. Common Stock At each of December 31, 2023 and 2022, the Company had 50,000,000 shares of common stock, $0.001 par value, authorized. Issuances During the Year Ended December 31, 2023 During the year ended December 31, 2023: ● the Company closed a public offering of shares of its common stock at an offering price of $17.75 per share (the “Offering”). The Company sold 3,887,324 shares of its common stock in the Offering, resulting in the Company receiving aggregate net proceeds of $64,520,000, after deducting underwriting discounts and commissions and other offering expenses of $4,480,000; ● the Company settled 1,567,913 outstanding PSUs as a result of the achievement of the total stockholder returns (“TSR”) targets set forth in equity incentive awards (the “PSU Agreements”) previously issued to members of the Company’s management team in 2021 (the “2021 Awards”). The 2021 Awards were separated into four tranches and required that the Company achieve and maintain certain levels of TSR ranging from 50% to 175% per share during the five-year period following the grant date. TSR was based on the aggregate of: (i) the percent increase of the closing price of the Company’s common stock from July 22, 2021; and (ii) any dividends or like stockholder distributions as specified in the PSU Agreements. In connection with the settlement of the 2021 Awards, an aggregate of 616,984 shares of the Company’s common stock was withheld by Harrow for payroll tax obligations totaling $11,273,000; ● the Company issued 168,963 shares of its common stock underlying RSUs held by directors that ceased providing services to the Company. The RSUs had previously vested, including 21,620 RSUs during the year ended December 31, 2023, but the issuance and delivery of the shares were deferred until the director ceased providing services to the Company; ● the Company issued 65,148 shares of common stock and received proceeds of $379,000 upon the exercise of options to purchase 65,148 shares of common stock with exercise prices ranging from $1.70 to $8.50 per share; ● the Company issued 62,367 shares of common stock to Mark L. Baum, the Company’s Chief Executive Officer, upon the cashless exercise of options to purchase 180,000 shares at an exercise price of $8.99 per share. The Company withheld from Mr. Baum 77,167 shares as consideration for the cashless exercise and an additional 40,466 shares for payroll tax obligations totaling $849,000; F-32 ● the Company issued 55,558 shares of common stock to Andrew R. Boll, the Company’s Chief Financial Officer, upon the cashless exercise of options to purchase 90,000 shares at an exercise price of $6.00 per share. The Company withheld from Mr. Boll 25,521 shares as consideration for the cashless exercise and an additional 8,921 shares for payroll tax obligations totaling $189,000; ● the Company issued 10,222 shares of common stock to John Saharek, the Company’s Chief Commercial Officer, upon the cashless exercise of options to purchase 20,000 shares at an exercise price of $4.16 per share. The Company withheld from Mr. Saharek 6,485 shares as consideration for the cashless exercise and an additional 3,293 shares for payroll tax obligations totaling $41,000; ● upon vesting of 23,000 RSUs granted in January 2020 to Andrew R. Boll, the Company’s Chief Financial Officer, the Company issued 13,398 shares of common stock to Mr. Boll, net of 9,602 shares of common stock withheld for payroll tax withholdings totaling $142,000; ● upon vesting of 88,000 RSUs granted in January 2020 to Mark L. Baum, the Company’s Chief Executive Officer, the Company issued 52,821 shares of common stock to Mr. Baum, net of 35,179 shares of common stock withheld for payroll tax withholdings totaling $519,000; and ● 43,023 shares of the Company’s common stock underlying RSUs issued to directors vested, but the issuance and delivery of these shares were deferred until the applicable director ceased providing services to the Company. Issuances During the Year Ended December 31, 2022 During the year ended December 31, 2022: ● the Company issued 53,594 shares of common stock to Mark L. Baum, the Company’s Chief Executive Officer, upon the cashless exercise of options to purchase 125,000 shares at an exercise price of $2.40 per share. The Company withheld from Mr. Baum 36,014 shares as consideration for the cashless exercise and an additional 35,392 shares for payroll tax obligations totaling $295,000; ● the Company issued 306,347 shares of its common stock upon the cashless exercise of warrants to purchase 373,847 shares of common stock with an exercise price of $2.08 per share; ● the Company issued 4,054 shares of common stock to a consultant upon the cashless exercise of options to purchase 15,995 shares at an exercise price of $7.07 per share. The Company withheld 11,941 shares as consideration for the cashless exercise; ● the Company issued 15,625 shares of common stock to a consultant and received net proceeds of $55,000 upon the exercise of options to purchase 15,625 shares of common stock at an exercise price of $3.50 per share; ● the Company issued 132,100 shares of common stock and received net proceeds of $587,000 upon the exercise of options to purchase 132,100 shares of common stock with exercise prices between $1.70 to $8.40 per share; ● 185,000 RSUs granted at various dates to employees of the Company vested, and the Company issued 110,621 shares of common stock to the employees, net of 74,379 shares of common stock withheld for payroll tax withholdings totaling $581,000; and ● 35,693 shares of the Company’s common stock underlying RSUs issued to directors vested, but the issuance and delivery of these shares are deferred until the applicable director resigns. F-33 Stock Option Plan On September 17, 2007, the Company’s Board of Directors and stockholders adopted the Company’s 2007 Incentive Stock and Awards Plan, which was subsequently amended on November 5, 2008, February 26, 2012, July 18, 2012, May 2, 2013 and September 27, 2013 (as amended, the “2007 Plan”). The 2007 Plan reached its term in September 2017, and we can no longer issue additional awards under this plan, however, options previously issued under the 2007 Plan will remain outstanding until they are exercised, reach their maturity or are otherwise cancelled/forfeited. On June 13, 2017, the Company’s Board of Directors and stockholders adopted the Company’s 2017 Incentive Stock and Awards Plan which was subsequently amended on June 3, 2021 (as amended, the “2017 Plan” together with the 2007 Plan, the “Plans”). As of December 31, 2023, the 2017 Plan provides for the issuance of a maximum of 6,000,000 shares of the Company’s common stock. The purpose of the Plans are to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in the Company’s development and financial success. Under the Plans, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, restricted stock units and restricted stock. The Plans are administered by the Compensation Committee of the Company’s Board of Directors. The Company had 405,612 shares available for future issuances under the 2017 Plan at December 31, 2023. Stock Options A summary of stock option activity under the Plan for the year ended December 31, 2023 is as follows: Options outstanding – January 1, 2023 Options granted Options exercised Options cancelled/forfeited Options outstanding – December 31, 2023 Options exercisable Options vested and expected to vest Number of shares 3,027,701 135,500 (355,148) (96,736) 2,711,317 2,432,826 2,673,670 Weighted Avg. Exercise Price 5.90 17.81 7.36 7.49 6.25 5.55 6.15 $ $ $ $ $ $ $ A summary of stock option activity under the Plan for the year ended December 31, 2022 is as follows: Options outstanding – January 1, 2022 Options granted Options exercised Options cancelled/forfeited Options outstanding – December 31, 2022 Options exercisable Options vested and expected to vest Number of shares 3,039,546 351,250 (288,720) (74,375) 3,027,701 2,457,769 3,026,942 Weighted Avg. Exercise Price 5.52 7.71 3.65 7.46 5.90 5.51 5.90 $ $ $ $ $ $ $ Weighted Avg. Remaining Contractual Life Aggregate Intrinsic Value 4.00 $ 3.45 $ 3.93 $ 14,303,000 13,760,000 14,243,000 Weighted Avg. Remaining Contractual Life Aggregate Intrinsic Value 4.48 $ 3.97 $ 4.48 $ 26,822,000 22,731,000 26,817,000 The aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would have been received by option holders if all option holders had exercised and immediately sold all options with an exercise price lower than the market price on December 31, 2023 and 2022, based on the closing price of the Company’s common stock of $11.20 and $14.76, respectively, on that date. The intrinsic value of the options exercised in 2023 and 2022 was $4,580,000 and $2,008,000, respectively. F-34 During the year ended December 31, 2023, the Company granted stock options to certain employees. The stock options were granted with an exercise price equal to the current market price of the Company’s common stock, as reported by the securities exchange on which the common stock was then listed, at the grant date and have contractual terms of 10 years. Vesting terms for options granted to employees during the year ended December 31, 2023 generally included one of the following vesting schedules: 25% of the shares subject to the option vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the shares subject to the option vest and become exercisable quarterly in equal installments thereafter over three years; and 100% of the shares subject to the option vest on a quarterly basis in equal installments over three years. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans) and in the event of certain modifications to the option award agreement. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The Company calculates expected volatility based solely on the historical volatilities of the common stock of the Company. The expected term of options granted was determined in accordance with the “simplified approach,” as the Company has limited, relevant, historical data on employee exercises and post-vesting employment termination behavior. The expected risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the 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. For option grants to employees and directors, the Company assigns a forfeiture factor of 10%. These factors could change in the future, which would affect the determination of stock-based compensation expense in future periods. Utilizing these assumptions, the fair value is determined at the date of grant. The table below illustrates the fair value per share determined using the Black-Scholes-Merton option pricing model with the following assumptions used for valuing options granted to employees: Weighted-average fair value of options granted Expected terms (in years) Expected volatility Risk-free interest rate Dividend yield $ 2023 $ 11.49 6.11 68 – 70% 3.59 – 4.80% - 2022 4.72 6.11 68 – 72% 1.54 – 3.70% - The following table summarizes information about stock options outstanding and exercisable at December 31, 2023: Range of Exercise Prices Number Outstanding 1.47 - $1.73 2.23 2.40 - $2.60 3.95 4.49 - $5.72 6.30 6.75 - $7.26 7.30 7.37 - $7.79 7.87 - $25.86 1.47 - $25.86 295,852 285,000 24,068 310,000 100,225 285,000 103,312 274,500 229,187 804,173 2,711,317 $ $ $ $ $ $ $ $ $ $ $ Options Outstanding Weighted Average Remaining Contractual Life in Years Weighted Average Exercise Price Options Exercisable Number Exercisable Weighted Average Exercise Price 3.95 $ 3.09 $ 3.02 $ 2.25 $ 5.47 $ 5.14 $ 8.04 $ 6.01 $ 3.99 $ 3.27 $ 4.00 $ F-35 1.72 2.23 2.58 3.95 5.54 6.30 6.96 7.30 7.52 9.59 6.25 295,852 $ 285,000 $ 24,068 $ 310,000 $ 94,416 $ 285,000 $ 39,625 $ 274,500 $ 172,818 $ 651,547 $ 2,432,826 $ 1.72 2.23 2.58 3.95 5.53 6.30 6.96 7.30 7.50 7.93 5.55 As of December 31, 2023, there was approximately $1,966,000 of total unrecognized compensation expense related to unvested stock options granted under the Plan. That expense is expected to be recognized over the weighted-average remaining vesting period of 2.77 years. The stock-based compensation for all stock options was $782,000 and $1,130,000 during the years ended December 31, 2023 and 2022, respectively. Performance Stock Units Grants During the Year Ended December 31, 2023 In April 2023, the Company granted an aggregate of 1,567,913 PSUs to members of its senior management including Mark Baum, Chief Executive Officer, Andrew Boll, Chief Financial Officer, and John Saharek, Chief Commercial Officer, which are subject to the satisfaction of certain market-based and continued service conditions (the “2023 PSUs”). The vesting of the 2023 PSUs require (i) a minimum of a two-year service period, and (ii) during a five- year term, the achievement and maintenance of Company common stock price targets for ten consecutive trading days ranging between $25.00 to $50.00 per share, separated into four separate tranches as described further in the table below. Tranche Tranche 1 Tranche 2 Tranche 3 Tranche 4 Number of Shares Target Share Price* 223,988 $ 335,981 $ 447,975 $ 559,969 $ 25.00 35.00 45.00 50.00 * Target Share Price assumes that no dividends or like distributions are made to stockholders of the Company. If such distributions are made, the Target Share Price would decrease accordingly, to the benefit of the employee, to account for the dividend/distribution as a part of the Target Share Price. The aggregate fair value of the 2023 PSUs was $29,106,000 using a Monte Carlo Simulation with a five-year life, 65% volatility and a risk free interest rate of 10.34%. This amount is being amortized over a two-year derived service period. A summary of the Company’s PSU activity and related information for the year ended December 31, 2023 is as follows: PSUs unvested – January 1, 2023 PSUs granted PSUs vested PSUs cancelled/forfeited PSUs unvested – December 31, 2023 Grants During the Year Ended December 31, 2022 Number of PSUs Weighted Average Grant Date Fair Value 1,567,913 $ 1,567,913 $ (1,567,913) $ - $ 1,567,913 $ 6.45 18.56 6.45 - 18.56 No PSUs were issued during the year ended December 31, 2022. A summary of the Company’s PSU activity and related information for the year ended December 31, 2022 is as follows: PSUs unvested – January 1, 2022 PSUs granted PSUs vested PSUs cancelled/forfeited PSUs unvested – December 31, 2022 Number of PSUs 1,567,913 $ Weighted Average Grant Date Fair Value 6.45 - - - 1,567,913 $ 6.45 F-36 As of December 31, 2023, the total unrecognized compensation expense related to unvested PSUs was approximately $18,191,000 which is expected to be recognized over a weighted-average period of 1.26 years, based on estimated vesting schedules. The stock-based compensation for PSUs was $13,753,000 and $5,056,000 during the years ended December 31, 2023 and 2022, respectively. Restricted Stock Units RSU awards are granted subject to certain vesting requirements and other restrictions, including performance and market-based vesting criteria. The grant date fair value of the RSUs, which has been determined based upon the market value of the Company’s common stock on the grant date, is expensed over the vesting period of the RSUs. Grants During the Year Ended December 31, 2023 During the year ended December 31, 2023, the Company’s board of directors were granted 41,301 time-based vesting RSUs with a fair market value of $800,000, which vest in equal quarterly installments over one year. The Company also granted 86,873 time-based vesting RSUs with a fair market value of $697,000 to certain employees, which vest in full on the third anniversary of the grant date. A summary of the Company’s RSU activity and related information for the year ended December 31, 2023 is as follows: RSUs unvested – January 1, 2023 RSUs granted RSUs vested RSUs cancelled/forfeited RSUs unvested at December 31, 2023 Grants During the Year Ended December 31, 2022 Number of RSUs Weighted Average Grant Date Fair Value 493,806 $ 128,174 $ (175,643) $ (83,308) $ 363,029 $ 7.99 11.68 8.67 6.84 9.23 During the year ended December 31, 2022, the Company’s board of directors were granted 65,615 RSUs with a fair market value of $500,000, which vest in equal quarterly installments over one year. A summary of the Company’s RSU activity and related information for the year ended December 31, 2022 is as follows: RSUs unvested – January 1, 2022 RSUs granted RSUs vested RSUs cancelled/forfeited RSUs unvested at December 31, 2022 Number of RSUs Weighted Average Grant Date Fair Value 665,288 $ 65,615 $ (237,098) $ - $ 493,806 $ 7.57 7.62 6.67 - 7.99 As of December 31, 2023, the total unrecognized compensation expense related to unvested RSUs was approximately $1,234,000 which is expected to be recognized over a weighted-average period of 0.68 years, based on estimated vesting schedules. The stock-based compensation for RSUs was $1,161,000 and $1,788,000 during the years ended December 31, 2023 and 2022, respectively. F-37 The Company recorded total stock-based compensation (including issuance of common stock for services and accrual for stock-based compensation) related to equity instruments granted to employees, directors and consultants as follows: Employees – selling, general and administrative Employees – R&D Directors – selling, general and administrative Consultants – selling, general and administrative Total NOTE 16. INCOME TAXES For the Year Ended December 31, 2023 13,279,000 $ 1,662,000 688,000 67,000 15,696,000 $ 2022 6,669,000 689,000 462,000 154,000 7,974,000 $ $ The Company is subject to taxation in the United States, California, New Jersey, Tennessee and various other states. The Company’s income tax provision consists of the following for the years ended December 31, 2023 and 2022 are summarized below: Current: Federal State Total current Deferred: Federal State Total deferred Income tax provision December 31, 2023 2022 $ - $ 701,000 701,000 - - - $ 701,000 $ - 75,000 75,000 - - - 75,000 A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income tax provision to the income tax provision is as follows: U.S. federal statutory tax rate State tax benefit, net Rate change Employee stock-based compensation Excess employee remuneration Melt loan settlement Other Uncertain tax positions Research and development tax credit Provision-to-return true-ups Other true-ups Change in valuation allowance Effective income tax rate December 31, 2023 2022 21.00% 0.77% (8.02)% 19.93% (30.83)% (4.52)% (0.43)% (11.71)% 0.53% 1.72% 2.97% 5.71% (2.88)% F-38 21.00% (2.82)% -% 1.34% (28.15)% -% (0.18)% -% -% 2.06% -% 6.22% (0.53)% Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows: Deferred tax assets (liabilities): NOL Depreciation and amortization Other Research and development credits Deferred stock compensation Basis difference in Eton Basis difference in Melt investments Federal benefit of state ASC740-10 reserves Limitation Under 163(j) Section 174 capitalized expenses ASC 842 lease liability ASC 842 ROU asset Total deferred tax assets, net Valuation allowance Net deferred tax assets December 31, 2023 2022 $ $ 4,669,000 1,637,000 854,000 220,000 1,059,000 (583,000) 3.405,000 88,000 2,893,000 1,261,000 1,710,000 (1,582,000) 15,631,000 (15,631,000) $ - $ 9,401,000 2,387,000 349,000 90,000 945,000 (1,684,000) 4,240,000 - 536,000 594,000 2,427,000 (2,263,000) 17,022,000 (17,022,000) - Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by approximately $1,391,000 and $1,182,000 during 2023 and 2022, respectively. As of December 31, 2023, the Company had federal and state net operating loss carryforwards of approximately $8,596,000 and $26,134,000, respectively, which will begin to expire in 2036, unless previously utilized, and will begin to expire for state purposes in 2028. In addition, the Company has federal net operating loss carryforward of $4,936,000 generated after 2017 that can be carried over indefinitely and may be used to offset up to 80% of federal taxable income. As of December 31, 2023 the Company had federal and state research and development credit carryforwards of approximately $177,000 and $54,000, respectively, which will begin to expire in 2031, unless previously utilized. For state purposes, the state research and development credit carryforwards can be carried over indefinitely. Utilization of the net operating losses and research and development carryforwards may be subject to a substantial annual limitation due to ownership change limitations that might have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit carryforward that can be utilized annually to offset future taxable income and tax. Respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. Since the Company’s formation, the Company has raised capital through the issuance of capital stock on several occasions which, combined with the purchasing stockholders’ subsequent disposition of those shares, may have resulted in such an ownership change, or could result in an ownership change in the future upon subsequent disposition. As of December 31, 2023, the Company determined that it had net operating loss carryforwards of approximately $12,500,000 and state net operating loss carryforwards of approximately $9,400,000 restricted under IRC Section 382 of the Internal Revenue Code related to a 2011 change in ownership. Section 382 of the Internal Revenue Code limits the utilization of net operating losses when ownership changes, as defined by that section, occur. Due to the Section 382 limitation, and the length of time available to fully utilize the net operating loss carryforwards, the Company removed these NOLs from deferred tax assets with a corresponding reduction of the valuation allowance. Similarly, under IRC Section 383 which limits the utilization of credits when ownership changes occur, the Company removed approximately $300,000 of federal credit and $300,000 of state credits from deferred tax assets with a corresponding reduction of the valuation allowance. F-39 As of December 31, 2023, the Company had approximately $2,853,000 of unrecognized tax benefits of which $2,853,000 if fully recognized, would decrease its effective tax rate. There were interest or penalties accrued of $40,000 relating to unrecognized tax benefits as of December 31, 2023. A reconciliation of the change in the unrecognized tax benefits balance from January 1, 2023 to December 31, 2023 is as follows: Balance at January 1, 2023 Additions for tax positions related to current year Additions for tax positions related to prior years Balance at December 31, 2023 NOTE 17. EMPLOYEE SAVINGS PLAN Federal & State Tax - $ 36,000 2,817,000 $ 2,853,000 The Company has established an employee savings plan pursuant to Section 401(k) of the Internal Revenue Code, effective January 1, 2014. The plan allows participating employees to deposit into tax deferred investment accounts up to 100% of their salary, subject to annual limits. The Company makes certain matching contributions to the plan in amounts up to 4% of the participants’ annual cash compensation, subject to annual limits. The Company contributed approximately $594,000 and $397,000 to the plan during the years ended December 31, 2023 and 2022, respectively. NOTE 18. COMMITMENTS AND CONTINGENCIES Legal General and Other In the ordinary course of business, the Company is involved in various legal proceedings, government investigations and other matters that are complex in nature and have outcomes that are difficult to predict. See also Part I, Item 1A. Risk Factors. The Company describes legal proceedings and other matters that are/were significant or that it believes could become significant in this footnote. The Company records accruals for loss contingencies to the extent that it concludes it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of a liability that has been accrued previously. The Company’s legal proceedings involve various aspects of its business and a variety of claims, some of which present novel factual allegations and/or unique legal theories. Typically, a number of the matters pending against the Company are at early stages of the legal process, which in complex proceedings of the sort the Company face often extend for several years. While it is not possible to accurately predict or determine the eventual outcomes of matters that have not concluded, an adverse determination in one or more of matter (whether discussed in this footnote or not) currently pending may have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows. F-40 Certain recent developments concerning the Company’s legal proceedings it believes are or were material to its business and other matters are discussed below: Ocular Science, Inc. et. al In July 2021, ImprimisRx, LLC, a subsidiary of the Company, filed a lawsuit against Ocular Science, Inc. and OSRX, Inc. (together, “OSRX”) in the U.S. District Court for the Southern District of California, asserting claims for copyright infringement, trademark infringement, unfair competition and false advertising (Lanham Act). Since July 2021, the complaint has been amended and OSRX added counterclaims alleging ImprimisRx, LLC is violating the Lanham Act with false advertising. The Court granted cross motions for summary judgement on each party’s Lanham Act claims thus leaving only ImprimisRx, LLC’s copyright infringement, trademark infringement and unfair competition claims for trial. ImprimisRx, LLC is seeking damages from OSRX. The Company expects the trial to take place in August 2024. Product and Professional Liability Product and professional liability litigation represents an inherent risk to all firms in the pharmaceutical and pharmacy industry. We utilize traditional third- party insurance policies with regard to our product and professional liability claims. Such insurance coverage at any given time reflects current market conditions, including cost and availability, when the policy is written. Indemnities In addition to the indemnification provisions contained in the Company’s charter documents, the Company generally enters into separate indemnification agreements with each of the Company’s directors and officers. These agreements require the Company, among other things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys’ fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or proceeding arising out of the individual’s status or service as the Company’s director or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to indemnification by the Company. Several of the Company’s asset purchase and license agreements contain customary representations, warranties, covenants and confidentiality provisions, and also contain mutual indemnification obligations related primarily to performance under the respective agreements. The Company also indemnifies its lessors in connection with its facility leases for certain claims arising from the use of the facilities. These indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities in the accompanying consolidated balance sheets. Sales and Marketing Agreements The Company has entered various sales and marketing agreements with certain organizations, to provide sales and marketing representation services to ImprimisRx in select geographies in the U.S., in connection with the Company’s ophthalmic compounded formulations. Under the terms of the sales and marketing agreements, the Company is required to make commission payments generally equal to 10% to 14% of net sales for products above and beyond the initial existing sales amounts. In addition, the Company is required to make periodic milestone payments to certain organizations in shares of the Company’s restricted common stock if net sales in the assigned territory reach certain future levels by the end of their terms, as applicable. The Company incurred $196,000 and $4,274,000 under these agreements for commission expenses during the years ended December 31, 2023 and 2022, respectively, which are included in selling, general and administrative expenses. F-41 Other Asset Purchase, License and Related Agreements The Company has acquired and sourced intellectual property rights related to certain proprietary innovations from certain inventors and related parties (the “Inventors”) through multiple asset purchase agreements, license agreements, strategic agreements and commission agreements. In general, these agreements provide that the Inventors will cooperate with the Company in obtaining patent protection for the acquired intellectual property and that the Company will use commercially reasonable efforts to research, develop and commercialize a product based on the acquired intellectual property. In addition, the Company has acquired a right of first refusal on additional intellectual property and drug development opportunities presented by these Inventors. In consideration for the acquisition of the intellectual property rights, the Company is obligated to make payments to the Inventors based on the completion of certain milestones, generally consisting of: (1) a payment payable within 30 days after the issuance of the first patent in the United States arising from the acquired intellectual property (if any); (2) a payment payable within 30 days after the Company files the first investigational new drug application (“IND”) with the U.S. Food and Drug Administration (“FDA”) for the first product arising from the acquired intellectual property (if any); (3) for certain of the Inventors, a payment payable within 30 days after the Company files the first new drug application with the FDA for the first product arising from the acquired intellectual property (if any); and (4) certain royalty payments based on the net receipts received by the Company in connection with the sale or licensing of any product based on the acquired intellectual property (if any), after deducting (among other things) the Company’s development costs associated with such product. If, following five years after the date of the applicable asset purchase agreement, the Company either (a) for certain of the Inventors, has not filed an IND or, for the remaining Inventors, has not initiated a study where data is derived, or (b) has failed to generate royalty payments to the Inventors for any product based on the acquired intellectual property, the Inventors may terminate the applicable asset purchase agreement and request that the Company re-assign the acquired technology to the Inventors. At December 31, 2023 and 2022, $106,000 and $228,000 were accrued in accounts payable and accrued expenses related to these agreements. During the years ended December 31, 2023 and 2022, $811,000 and $910,000, respectively, were incurred under these agreements as royalty expenses, which are included in selling, general and administrative expenses. Klarity License Agreement – Related Party In April 2017, the Company entered into a license agreement (the “Klarity License Agreement”) with Richard L. Lindstrom, M.D., a former member of its Board of Directors. Pursuant to the terms of the Klarity License Agreement, the Company licensed certain intellectual property and related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license the topical ophthalmic solution Klarity designed to protect and rehabilitate the ocular surface (the “Klarity Product”). Under the terms of the Klarity License Agreement, the Company is required to make royalty payments to Dr. Lindstrom ranging from 3% to 6% of net sales, dependent upon the final formulation of the Klarity Product sold. In addition, the Company is required to make certain milestone payments to Dr. Lindstrom including: (i) an initial payment of $50,000 upon execution of the Klarity License Agreement, (ii) a second payment of $50,000 following the first $50,000 in net sales of the Klarity Product; and (iii) a final payment of $50,000 following the first $100,000 in net sales of the Klarity Product. All of the above referenced milestone payments were payable at the Company’s election in cash or shares of the Company’s restricted common stock. Dr. Lindstrom was paid $292,000 and $274,000 in cash during the years ended December 31, 2023 and 2022, respectively, and was due an additional $67,000 and $71,000 at December 31, 2023 and 2022, respectively. The Company incurred $287,000 and $315,000 for royalty expenses related to the Klarity License Agreement during the years ended December 31, 2023 and 2022, respectively, which are included in selling, general and administrative expenses. Injectable Asset Purchase Agreement – Related Party In December 2019, the Company entered into an asset purchase agreement (the “Lindstrom APA”) with Dr. Lindstrom, a former member of its Board of Directors. Pursuant to the terms of the Lindstrom APA, the Company acquired certain intellectual property and related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license an ophthalmic injectable product (the “Lindstrom Product”). Under the terms of the Lindstrom APA, the Company is required to make royalty payments to Dr. Lindstrom ranging from 2% to 3% of net sales, dependent upon the final formulation and patent protection of the Lindstrom Product sold. In addition, the Company is required to make certain milestone payments to Dr. Lindstrom including an initial payment of $33,000 upon execution of the Lindstrom APA. Dr. Lindstrom was paid $35,000 and $32,000 in cash during the years ended December 31, 2023 and 2022, respectively, and was due $6,000 and $9,000 at December 31, 2023 and 2022, respectively. The Company incurred $32,000 and $33,000 for royalty expenses related to the Lindstrom APA during the years ended December 31, 2023 and 2022, respectively, which are included in selling, general and administrative expenses. F-42 Presbyopia Asset Purchase Agreement – Related Party In December 2019, the Company entered into an asset purchase agreement (the “Presbyopia APA”) with Richard L. Lindstrom, M.D., a former member of its Board of Directors. Pursuant to the terms of the Presbyopia APA, the Company acquired certain intellectual property and related rights from Dr. Lindstrom to develop, formulate, make, sell, and sub-license an ophthalmic topical product to treat presbyopia (the “Presbyopia Product”). Under the terms of the Presbyopia Product, the Company is required to make royalty payments to Dr. Lindstrom ranging from 2% to 4% of net sales, dependent upon the final formulation and patent protection of the Presbyopia Product sold. Dr. Lindstrom was paid $0 in cash during the years ended December 31, 2023 and 2022, and was due $0 at December 31, 2023 and 2022. The Company incurred $0 for royalty expenses related to the Presbyopia APA during the years ended December 31, 2023 and 2022. Eyepoint Commercial Alliance Agreement - Terminated In August 2020, the Company, through its wholly owned subsidiary ImprimisRx, LLC, entered into a Commercial Alliance Agreement (the “Dexycu Agreement”) with Eyepoint Pharmaceuticals, Inc. (“Eyepoint”), pursuant to which Eyepoint granted the Company the non-exclusive right to co-promote DEXYCU® (dexamethasone intraocular suspension) 9% for the treatment of post-operative inflammation following ocular surgery in the U.S. Pursuant to the Dexycu Agreement, Eyepoint paid the Company a fee calculated based on the quarterly sales of DEXYCU in excess of predefined volumes to specific customers of the Company in the U.S. Under the terms of the Dexycu Agreement, the Company agreed to use commercially reasonable efforts to promote and market DEXYCU in the U.S. Pursuant to a mutual termination agreement entered into on October 7, 2022 the Dexycu Agreement terminated on January 1, 2023. During the years ended December 31, 2023 and 2022, the Company recorded $0 and $3,866,000, respectively, in commission revenues related to the Dexycu Agreement. NOTE 19. SEGMENTS AND CONCENTRATIONS The Company operates its business on the basis of a single reportable segment, which is the business of discovery, development, and commercialization of innovative ophthalmic therapies. The Company’s chief operating decision-maker is the Chief Executive Officer, who evaluates the Company as a single operating segment. Concentrations The Company has three and two products that each comprised more than 10% of total revenues during the years ended December 31, 2023 and 2022, respectively. These products collectively accounted for 38% and 34% of revenues, respectively. As of December 31, 2023 and 2022, accounts receivable from a single customer accounted for 80% and 0% of total accounts receivable, respectively. For the years ended December 31, 2023 and 2022, revenues from a single customer accounted for 29% and 0% of total revenues, respectively. The Company receives its active pharmaceutical ingredients from three main suppliers. These suppliers collectively accounted for 64% of active pharmaceutical ingredient purchases during the year ended December 31, 2023, and 61% during the year ended December 31, 2022. NOTE 20. SUBSEQUENT EVENTS In February 2024, 45,000 RSUs granted in February 2021 to Andrew R. Boll, the Company’s Chief Financial Officer, vested, and 26,520 shares the Company’s common stock were issued to Mr. Boll, net of 18,480 shares of common stock withheld for payroll tax withholdings totaling $197,000. In February 2024, 150,000 RSUs granted in February 2021 to Mark L. Baum, the Company’s Chief Executive Officer, vested, and 90,164 shares the Company’s common stock were issued to Mr. Baum, net of 59,836 shares of common stock withheld for payroll tax withholdings totaling $638,000. In February 2024, 30,000 RSUs granted in February 2021 to John Saharek, the Company’s Chief Commercial Officer, vested, and 17,384 shares the Company’s common stock were issued to Mr. Saharek, net of 12,616 shares of common stock withheld for payroll tax withholdings totaling $135,000. In February 2024, 50,000 RSUs granted in February 2021 to employees, vested, and 32,452 shares the Company’s common stock were issued, net of 17,548 shares of common stock withheld for payroll tax withholdings totaling $187,000. In February and March 2024, the Company issued 27,862 shares of common stock and received proceeds of $220,000 upon the exercise of options to purchase 27,862 shares of common stock with exercise prices between $6.75 to $8.75 per share. F-43 DESCRIPTION OF THE COMPANY’S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 EXHIBIT 4.1 Harrow, Inc. has two classes of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended: (i) our common stock, par value $0.001 per share, and (ii) our 8.625% Senior Notes due 2026 (the “2026 Notes”) and 11.875% Senior Notes due 2027 (the “2027 Notes”) (collectively, the “Senior Notes” or “Notes”). In this exhibit, when we refer to “Company”, “Harrow”, “we”, “us” and “our” or when we otherwise refer to ourselves, we mean Harrow, Inc., excluding, unless otherwise expressly stated or the context requires, our subsidiaries. The following is a summary of the rights of our common and preferred stock and of certain provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws. For more detailed information, please see our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, which are incorporated by reference as exhibits to the Annual Report on Form 10-K to which this description is an exhibit. Description of Capital Stock Authorized Capital Stock Our authorized capital stock consists of 55,000,000 shares, 50,000,000 of which are designated as common stock, par value $0.001 per share, and 5,000,000 of which are designated as preferred stock, par value $0.001 per share. As of March 18, 2024, there were 35,362,642 shares of our common stock and no shares of our preferred stock issued and outstanding. Capital Stock Issued and Outstanding As of March 18, 2024, there were approximately 67 stockholders of record (excluding an indeterminable number of stockholders whose shares are held in street or “nominee” name) of our common stock. In addition, as of December 31, 2023, there are outstanding (i) options to acquire 2,711,317 shares of our common stock with a weighted average exercise price of $6.25 per share, (ii) 1,930,942 unvested restricted and performance-based stock units and (iv) 215,539 restricted stock units award to directors that had vested, but issuance and delivery of the shares are deferred until the director resigns or otherwise leaves the Board of Directors. Description of Common Stock We are authorized to issue 50,000,000 shares of common stock, par value $0.001 per share. The holders of our common stock are entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Our Amended and Restated Certificate of Incorporation does not provide for cumulative voting in the election of directors. Subject to any preferential rights of any outstanding series of preferred stock created by our Board of Directors from time to time the holders of our common stock will be entitled to cash dividends as may be declared, if any, by our Board of Directors from funds available. Subject to any preferential rights of any outstanding series of preferred stock that we may issue, upon liquidation, dissolution or winding up of our company, the holders of our common stock will be entitled to receive pro rata all assets available for distribution to the holders. 1 Description of Preferred Stock Our Board of Directors has the authority, without further action by our stockholders, to issue up to 5,000,000 shares of preferred stock, par value $0.001 per share, in one or more series. Our Board of Directors may designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, sinking fund terms, and number of shares constituting any series and the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on our common stock, diluting the voting power of our common stock, impairing the liquidation rights of our common stock, or delaying or preventing a change in control. The ability to issue preferred stock could delay or impede a change in control. Anti-Takeover Provisions We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination’’ with an “interested stockholder’’ for a period of three years after the date of the transaction in which such stockholder became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination’’ includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder’’ is a stockholder who, together with affiliates and associates, owns, or within three years prior, did own, 15% or more of the voting stock. Liability and Indemnification of Directors and Officers Section 145 of the DGCL provides, in general, that a corporation incorporated under the laws of the State of Delaware, such as us, may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than a derivative action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. In the case of a derivative action, a Delaware corporation may indemnify any such person against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification will be made in respect of any claim, issue or matter as to which such person will have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware or any other court in which such action was brought determines such person is fairly and reasonably entitled to indemnity for such expenses. Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws provide that we will indemnify our directors, officers, employees and agents to the extent and in the manner permitted by the provisions of the DGCL, as amended from time to time, subject to any permissible expansion or limitation of such indemnification, as may be set forth in any stockholders’ or directors’ resolution or by contract. We also have director and officer indemnification agreements with each of our executive officers and directors that provide, among other things, for the indemnification to the fullest extent permitted or required by Delaware law, provided that such indemnitee shall not be entitled to indemnification in connection with any proceedings or claims initiated or brought voluntarily by the indemnitee and not by way of defense, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by our Board of Directors, (iii) indemnification is provided by us, in our sole discretion, pursuant to powers vested in us under the DGCL, or (iv) the proceeding is brought to establish or enforce a right to indemnification under the indemnification agreement or any other statute or law or otherwise as required under Section 145 of the DGCL. We are not required to indemnify the indemnitee for any amounts paid in settlement of a proceeding unless we consent to such settlement. 2 Any repeal or modification of these provisions approved by our stockholders shall be prospective only, and shall not adversely affect any limitation on the liability of a director or officer existing as of the time of such repeal or modification. We have purchased and intend to maintain insurance on our behalf and on behalf of any person who is or was a director or officer against any loss arising from any claim asserted against him or her and incurred by him or her in that capacity, subject to certain exclusions and limits of the amount of coverage. Listing; Transfer Agent Our common stock is listed on The NASDAQ Global Market under the symbol “HROW”. The transfer agent and registrar for our common stock is Securities Transfer Corporation, 2901 N. Dallas Parkway, Suite 380, Plano, Texas 75093. Description of the Senior Notes The Company issued the Notes under an Indenture dated as of April 20, 2021, as supplemented by the First Supplemental Indenture dated as of April 20, 2021 and the Second Supplement Indenture, dated as of December 20, 2022 (the “Indenture”), between the Company and U.S. Bank National Association (the “Trustee”). The terms of the Notes include those expressly set forth in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”). Certain defined terms used in this description but not defined herein have the meanings assigned to them in the Indenture. General The 2026 Notes: ● are general unsecured, senior obligations of the Company; ● are limited to an aggregate principal amount of $75.0 million, subject to the Company’s ability to issue additional Notes; ● mature on April 30, 2026 unless earlier redeemed or repurchased, and 100% of the aggregate principal amount will be paid at maturity; ● bear cash interest from April 30, 2021 at an annual rate of 8.625%, payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, beginning on July 31, 2021, and at maturity; ● are redeemable at the Company’s option, in whole or in part, prior to February 1, 2026, at the prices and on the terms described under “— Optional Redemption” below; ● were issued in denominations of $25 and integral multiples of $25 in excess thereof; ● do not have a sinking fund; ● are listed on NASDAQ under the symbol “HROWL”; and ● are represented by one or more registered notes in global form, but in certain limited circumstances may be represented by notes in definitive form. The 2027 Notes: ● are general unsecured, senior obligations; ● are limited to an aggregate principal amount of $40.25 million, subject to the Company’s ability to issue additional 2027 Notes; ● mature on December 31, 2027 unless earlier redeemed or repurchased, and 100% of the aggregate principal amount will be paid at maturity; ● bear cash interest from December 20, 2022 at an annual rate of 11.875%, payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, beginning on January 31, 2023, and at maturity; ● are redeemable at our option, in whole or in part, at the prices and on the terms described under “— Optional Redemption” below; ● are subject to mandatory redemption, in whole, if we do not complete the Acquisition within 180 calendar days after the original issue date of the Notes, at a price of $25.50, or in certain circumstances, if there is a Material Change, in each case as described under “— Mandatory Redemption” below ● issued in denominations of $25 and integral multiples of $25 in excess thereof; ● do not have a sinking fund; ● are listed on Nasdaq under the symbol “HROWM”; and ● Are represented by one or more registered notes in global form, but in certain limited circumstances may be represented by notes in definitive form. 3 The Indenture does not limit the amount of indebtedness that we or our subsidiaries may issue. The Indenture does not contain any financial covenants and does not restrict us from paying dividends or issuing or repurchasing our other securities. Other than restrictions described under “— Covenants — Merger, Consolidation or Sale of Assets” below, the Indenture does not contain any covenants or other provisions designed to afford holders of the Notes protection in the event of a highly leveraged transaction involving us or in the event of a decline in our credit rating as the result of a takeover, recapitalization, highly leveraged transaction or similar restructuring involving us that could adversely affect such holders. We may from time to time, without the consent of the existing holders, issue additional Notes having the same terms as to status, redemption or otherwise (except the price to public, the issue date and, if applicable, the initial interest accrual date and the initial interest payment date) that may constitute a single fungible series with the Notes offered by this prospectus supplement; provided that if any such additional Notes are not fungible with the Notes initially offered hereby for U.S. federal income tax purposes, such additional Notes will have one or more separate CUSIP numbers. Ranking The Notes are senior unsecured obligations of the Company, and, upon our liquidation, dissolution or winding up, will rank (i) senior to the outstanding shares of our common stock, (ii) senior to any of our future subordinated debt, (iii) pari passu (or equally) with our existing and future unsecured and unsubordinated indebtedness, (iv) effectively subordinated to any existing or future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness and (v) structurally subordinated to all existing and future indebtedness of our subsidiaries, financing vehicles or similar facilities. Interest 2026 Notes Interest on the 2026 Notes accrues at an annual rate equal to 8.625% from and including April 30, 2021 to, but excluding, the maturity date or earlier acceleration or redemption and is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, beginning on July 31, 2021 and at maturity, to the record holders at the close of business on the immediately preceding January 15, April 15, July 15 and October 15, as applicable (whether or not a business day). The initial interest period for the 2026 Notes is the period from and including April 30, 2021, to, but excluding, July 31, 2021, and subsequent interest periods are the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be. The amount of interest payable for any interest period, including interest payable for any partial interest period, is computed on the basis of a 360-day year comprised of twelve 30-day months. If an interest payment date falls on a non-business day, the applicable interest payment is made on the next business day and no additional interest will accrue as a result of such delayed payment. 2027 Notes Interest on the 2027 Notes accrue at an annual rate equal to 11.875% from and including December 20, 2022 to, but excluding, the maturity date or earlier acceleration or redemption and are payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, beginning on January 31, 2023 and at maturity, to the record holders at the close of business on the immediately preceding January 15, April 15, July 15 and October 15, as applicable (whether or not a business day). The initial interest period for the 2027 Notes is the period from and including December 20, 2022, to, but excluding, January 31, 2023, and subsequent interest periods are the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be. The amount of interest payable for any interest period, including interest payable for any partial interest period, will be computed on the basis of a 360-day year comprised of twelve 30-day months. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment. “Business day” means, for any place where the principal and interest on the Notes is payable, each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day in which banking institutions in such place of payment are authorized or obligated by law or executive order to close. 4 Optional Redemption 2026 Notes Prior to February 1, 2026 (the “2026 Notes Par Call Date”), we may, at our option, redeem the 2026 Notes, in whole at any time or in part from time to time, at a redemption price equal to the sum of (i) 100% of the principal amount of the 2026 Notes being redeemed plus accrued and unpaid interest to, but excluding, the date of redemption and (ii) the Make-Whole Amount, if any. The 2026 Notes may be redeemed for cash in whole or in part at any time at our option on or after February 1, 2026 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. In each case, redemption shall be upon notice not fewer than 30 days and not more than 60 days prior to the date fixed for redemption. If less than all of the 2026 Notes are to be redeemed, the particular 2026 Notes to be redeemed will be selected not more than 45 days prior to the redemption date by the Trustee from the outstanding 2026 Notes not previously called for redemption, by lot, or in the Trustee’s discretion, on a pro-rata basis, provided that the unredeemed portion of the principal amount of any 2026 Notes will be in an authorized denomination (which will not be less than the minimum authorized denomination) for such 2026 Notes. The Trustee will promptly notify us in writing of the 2026 Notes selected for redemption and, in the case of any 2026 Notes selected for partial redemption, the principal amount thereof to be redeemed. Beneficial interests in any of the 2026 Notes or portions thereof called for redemption that are registered in the name of DTC or its nominee will be selected by DTC in accordance with DTC’s applicable procedures. 2027 Notes Prior to December 31, 2024 (the “2027 Notes Make-Whole Call Date”), we may, at our option, redeem the 2027 Notes, in whole at any time or in part from time to time, at a redemption price equal to the sum of (i) 100% of the principal amount of the 2027 Notes being redeemed plus accrued and unpaid interest to, but excluding, the date of redemption and (ii) the Make-Whole Amount, if any. We may redeem the 2027 Notes for cash in whole or in part at any time at our option (i) on or after December 31, 2024 and prior to December 31, 2025, at a price equal to $25.50 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after December 31, 2025 and prior to December 31, 2026, at a price equal to $25.25 per note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iii) on or after December 31, 2026 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. In each case, redemption shall be upon notice not fewer than 30 days and not more than 60 days prior to the date fixed for redemption. If less than all of the 2027 Notes are to be redeemed, the particular 2027 Notes to be redeemed will be selected not more than 45 days prior to the redemption date by the trustee from the outstanding 2027 Notes not previously called for redemption, by lot, or in the trustee’s discretion, on a pro-rata basis, provided that the unredeemed portion of the principal amount of any 2027 Notes will be in an authorized denomination (which will not be less than the minimum authorized denomination) for such 2027 Notes. The trustee will promptly notify us in writing of the 2027 Notes selected for redemption and, in the case of any 2027 Notes selected for partial redemption, the principal amount thereof to be redeemed. Beneficial interests in any of the 2027 Notes or portions thereof called for redemption that are registered in the name of DTC or its nominee will be selected by DTC in accordance with DTC’s applicable procedures. 5 The Trustee shall have no obligation to calculate any redemption price, including any Make-Whole Amount, or any component thereof, and the Trustee shall be entitled to receive and conclusively rely upon an officer’s certificate delivered by the Company that specifies any redemption price. Unless we default on the payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the 2027 Notes called for redemption. We may at any time, and from time to time, purchase notes at any price or prices in the open market or otherwise. “Make-Whole Amount” means, in connection with any optional redemption of any Note, the excess, if any, of (i) the sum of the present values, as of the date of such redemption, of the remaining scheduled payments of principal of, and interest (exclusive of interest accrued to, but excluding, the date of redemption) on, such Note, assuming such Note matured on, and that accrued and unpaid interest on such Note was payable through, the Notes Par Call Date, determined by discounting, on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months), such principal and interest at the Reinvestment Rate (as defined below) (determined on the third business day preceding the date of redemption) over (ii) the aggregate principal amount of such Notes being redeemed. “Reinvestment Rate” means, 0.500%, or 50 basis points, plus the arithmetic mean (rounded to the nearest one-hundredth of one percent) of the yields displayed for each day in the preceding calendar week published in the most recent Statistical Release under the caption “Treasury constant maturities” for the maturity (rounded to the nearest month) corresponding to the remaining life to maturity of the Notes (assuming that the Notes matured on the Notes Par Call Date) as of the date of redemption. If no maturity exactly corresponds to such remaining life to maturity, yields for the two published maturities most closely corresponding to such remaining life to maturity shall be calculated pursuant to the immediately preceding sentence and the Reinvestment Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding in each of such relevant periods to the nearest month. For the purpose of calculating the Reinvestment Rate, the most recent Statistical Release published prior to the date of determination of the Reinvestment Rate shall be used. “Statistical Release” means that statistical release designated “H.15” or any successor publication that is published daily by the Federal Reserve System and that establishes yields on actively traded United States Treasury securities adjusted to constant maturities, or, if such statistical release (or a successor publication) is not published at the time of any determination under the Indenture, then such other reasonably comparable index that shall be designated by us. Events of Default Holders of our Notes will have rights if an Event of Default occurs in respect of the Notes and is not cured, as described later in this subsection. The term “Event of Default” in respect of the Notes means any of the following: ● we do not pay interest on any Note when due, and such default is not cured within 30 days; ● we do not pay the principal of the Notes when due and payable; ● we breach any covenant or warranty in the Indenture with respect to the Notes and such breach continues for 60 days after we receive a written notice of such breach from the Trustee or the holders of at least 25% of the principal amount of the Notes; and ● certain specified events of bankruptcy, insolvency or reorganization occur and remain undischarged or unstayed for a period of 90 days. The Trustee may withhold notice to the holders of the Notes of any default, except in the payment of principal or interest, if the Trustee in good faith determines the withholding of notice to be in the interest of the holders of the Notes. Each year, we will furnish to the Trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the Indenture and the Notes, or else specifying any default. 6 Remedies if an Event of Default Occurs If an Event of Default has occurred and is continuing, the Trustee or the holders of not less than 25% of the outstanding principal amount of the Notes may declare the entire principal amount of the Notes, together with accrued and unpaid interest, if any, to be due and payable immediately by a notice in writing to us and, if notice is given by the holders of the Notes, the Trustee. This is called an “acceleration of maturity.” If the Event of Default occurs in relation to our filing for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur, the principal amount of the Notes, together with accrued and unpaid interest, if any, will automatically, and without any declaration or other action on the part of the Trustee or the holders, become immediately due and payable. At any time after a declaration of acceleration of the Notes has been made by the Trustee or the holders of the Notes and before any judgment or decree for payment of money due has been obtained by the Trustee, the holders of a majority of the outstanding principal of the Notes, by written notice to us and the Trustee, may rescind and annul such declaration and its consequences if (i) we have paid or deposited with the Trustee all amounts due and owed with respect to the Notes (other than principal that has become due solely by reason of such acceleration) and certain other amounts, and (ii) any other Events of Default have been cured or waived. At our election, the sole remedy with respect to an Event of Default due to our failure to comply with certain reporting requirements under the Trust Indenture Act or under “— Covenants — Reporting” below, for the first 180 calendar days after the occurrence of such Event of Default, consists exclusively of the right to receive additional interest on the Notes at an annual rate equal to (1) 0.25% for the first 90 calendar days after such default and (2) 0.50% for calendar days 91 through 180 after such default. On the 181st day after such Event of Default, if such violation is not cured or waived, the Trustee or the holders of not less than 25% of the outstanding principal amount of the Notes may declare the principal, together with accrued and unpaid interest, if any, on the Notes to be due and payable immediately. If we choose to pay such additional interest, we must notify the Trustee and the holders of the Notes by certificate of our election at any time on or before the close of business on the first business day following the Event of Default. Before a holder of the Notes is allowed to bypass the Trustee and bring a lawsuit or other formal legal action or take other steps to enforce such holder’s rights relating to the Notes, the following must occur: ● such holder must give the Trustee written notice that the Event of Default has occurred and remains uncured; ● the holders of at least 25% of the outstanding principal of the Notes must have made a written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as trustee; ● such holder or holders must have offered to the Trustee indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; ● the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and ● no direction inconsistent with such written request has been given to the Trustee during such 60-day period by holders of a majority of the outstanding principal of the Notes. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default. 7 Book-entry and other indirect holders of the Notes should consult their banks or brokers for information on how to give notice or direction to or make a request of the Trustee and how to declare or cancel an acceleration of maturity. Waiver of Defaults The holders of not less than a majority of the outstanding principal amount of the Notes may on behalf of the holders of all Notes waive any past default with respect to the Notes other than (i) a default in the payment of principal or interest on the Notes when such payments are due and payable (other than by acceleration as described above), or (ii) in respect of a covenant that cannot be modified or amended without the consent of each holder of Notes. Covenants In addition to any other covenants described in the accompanying prospectus, as well as standard covenants relating to payment of principal and interest, maintaining an office where payments may be made or securities can be surrendered for payment, payment of taxes by us and related matters, the following covenants will apply to the Notes. To the extent of any conflict or inconsistency between the base indenture and the following covenants, the following covenants will govern. Merger, Consolidation or Sale of Assets The Indenture provides that we will not merge or consolidate with or into any other person (other than a merger of a wholly owned subsidiary into us), or sell, transfer, lease, convey or otherwise dispose of all or substantially all our property in any one transaction or series of related transactions unless: ● we are the surviving entity or the entity (if other than us) formed by such merger or consolidation or to which such sale, transfer, lease, conveyance or disposition is made will be a corporation or limited liability company organized and existing under the laws of the United States of America, any state thereof or the District of Columbia; ● the surviving entity (if other than us) expressly assumes, by supplemental indenture in form reasonably satisfactory to the Trustee, executed and delivered to the Trustee by such surviving entity, the due and punctual payment of the principal of, and premium, if any, and interest on, all the Notes outstanding, and the due and punctual performance and observance of all the covenants and conditions of the Indenture to be performed by us; ● immediately before and immediately after giving effect to such transaction or series of related transactions, no default or Event of Default has occurred and is continuing; and ● in the case of a merger where the surviving entity is other than us, we or such surviving entity will deliver, or cause to be delivered, to the Trustee, an officers’ certificate and an opinion of counsel, each stating that such transaction and the supplemental indenture, if any, in respect thereto, comply with this covenant and that all conditions precedent in the Indenture relating to such transaction have been complied with. Reporting If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the SEC, we agree to furnish to holders of the Notes and the Trustee, for the period of time during which the Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 60 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with GAAP, as applicable. Modification or Waiver There are three types of changes we can make to the Indenture and the Notes: 8 Changes Not Requiring Approval First, there are changes that we can make to the Notes without the specific approval of the holders of the Notes. This type is limited to clarifications and certain other changes that would not adversely affect holders of the Notes in any material respect and include changes: ● to evidence the succession of another corporation, and the assumption by the successor corporation of our covenants, agreements and obligations under the Indenture and the Notes; ● to add to our covenants for the benefit of the holders of the Notes, or to surrender any right or power herein conferred upon the Company and to make the occurrence; ● to add any additional Events of Default for the benefit of the holders of the Notes; ● to add to or change any of the provisions of the Indenture to such extent as necessary to permit or facilitate the issuance of the Notes in bearer form, registrable or not registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of the Notes in uncertificated form; ● to add or provide for a guaranty of the Notes or additional obligors on the Notes; ● to establish the form or terms of the Notes; ● to cure any ambiguity or to correct or supplement any provision contained in the Indenture or in any supplemental indenture which may be defective or inconsistent with other provisions, or to make any other provisions with respect to matters or questions arising under the Indenture, provided that such action pursuant to this clause shall not adversely affect the interests of the holders of the Notes in any material respect; ● to secure the Notes, including provisions regarding the circumstances under which collateral may be released or substituted; ● to evidence and provide for the acceptance and appointment of a successor trustee and to add or change any provisions of the Indenture as necessary to provide for or facilitate the administration of the trust by more than one trustee; and ● to supplement any of the provisions of the Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge the Notes, provided that any such action shall not adversely affect the interests of the holders of the Notes in any material respect. Changes Requiring Approval of Each Holder We cannot make certain changes to the Notes without the specific approval of each holder of the Notes. The following is a list of those types of changes: ● changing the stated maturity of the principal of, or any installment of interest on, any Note; ● reducing the principal amount or rate of interest of any Note; ● changing the place of payment where any Note or any interest is payable; ● impairing the right to institute suit for the enforcement of any payment on or after the date on which it is due and payable; ● reducing the percentage in principal amount of holders of the Notes whose consent is needed to modify or amend the Indenture; and ● reducing the percentage in principal amount of holders of the Notes whose consent is needed to waive compliance with certain provisions of the Indenture or to waive certain defaults. 9 Changes Requiring Majority Approval Any other change to the Indenture and the Notes would require the following approval: ● if the change only affects the Notes, it must be approved by holders of not less than a majority in aggregate principal amount of the outstanding Notes; and ● if the change affects more than one series of debt securities issued under the Indenture, it must be approved by the holders of not less than a majority in aggregate principal amount of each of the series of debt securities affected by the change. Consent from holders to any change to the Indenture or the Notes must be given in writing. Further Details Concerning Voting The amount of Notes deemed to be outstanding for the purpose of voting will include all Notes authenticated and delivered under the Indenture as of the date of determination except: ● Notes cancelled by the Trustee or delivered to the Trustee for cancellation; ● Notes for which we have deposited with the Trustee or paying agent or set aside in trust money for their payment or redemption and, if money has been set aside for the redemption of the Notes, notice of such redemption has been duly given pursuant to the Indenture to the satisfaction of the Trustee; ● Notes held by the Company, its subsidiaries or any other entity which is an obligor under the Notes, unless such Notes have been pledged in good faith and the pledgee is not the Company, an affiliate of the Company or an obligor under the Notes; ● Notes for which have undergone full defeasance, as described below; and ● Notes which have been paid or exchanged for other Notes due to such Notes loss, destruction or mutilation, with the exception of any such Notes held by bona fide purchasers who have presented proof to the Trustee that such Notes are valid obligations of the Company. We will generally be entitled to set any day as a record date for the purpose of determining the holders of the Notes that are entitled to vote or take other action under the Indenture, and the Trustee will generally be entitled to set any day as a record date for the purpose of determining the holders of the Notes that are entitled to join in the giving or making of any Notice of Default, any declaration of acceleration of maturity of the Notes, any request to institute proceedings or the reversal of such declaration. If we or the Trustee set a record date for a vote or other action to be taken by the holders of the Notes, that vote or action can only be taken by persons who are holders of the Notes on the record date and, unless otherwise specified, such vote or action must take place on or prior to the 180th day after the record date. We may change the record date at our option, and we will provide written notice to the Trustee and to each holder of the Notes of any such change of record date. Defeasance The following defeasance provisions are applicable to the Notes. “Defeasance” means that, by irrevocably depositing with the Trustee an amount of cash denominated in U.S. dollars and/or U.S. government obligations sufficient to pay all principal and interest, if any, on the Notes when due and satisfying any additional conditions noted below, we will be deemed to have been discharged from our obligations under the Notes. In the event of a “covenant defeasance,” upon depositing such funds and satisfying similar conditions discussed below we would be released from certain covenants under the Indenture relating to the Notes. The consequences to the holders of the Notes would be that, while they would no longer benefit from certain covenants under the Indenture, and while the Notes could not be accelerated for any reason, the holders of the Notes nonetheless would be guaranteed to receive the principal and interest owed to them. 10 Covenant Defeasance Under the Indenture, we have the option to take the actions described below and be released from some of the restrictive covenants under the Indenture under which the Notes were issued. This is called “covenant defeasance.” In that event, holders of the Notes would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay the Notes. In order to achieve covenant defeasance, the following must occur: ● we must irrevocably deposit or cause to be deposited with the Trustee as trust funds for the benefit of all holders of the Notes cash, U.S. government obligations or a combination of cash and U.S. government obligations sufficient, without reinvestment, in the opinion of a nationally recognized firm of independent public accountants, investment bank or appraisal firm, to generate enough cash to make interest, principal and any other applicable payments on the Notes on their various due dates; ● we must deliver to the Trustee a legal opinion of our counsel stating that under U.S. federal income tax law, we may make the above deposit and covenant defeasance without causing holders to be taxed on the Notes differently than if we did not make the deposit and we just repaid the debt securities ourselves at maturity; ● we must deliver to the Trustee an officers’ certificate stating that the Notes, if then listed on any securities exchange, will not be delisted as a result of the deposit; ● no default or Event of Default with respect to the Notes has occurred and is continuing, and no defaults or Events of Defaults related to bankruptcy, insolvency or organization occurs during the 90 days following the deposit; ● the covenant defeasance must not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act; ● the covenant defeasance must not result in a breach or violation of, or constitute a default under, the Indenture or any other material agreements or instruments to which we are a party; ● the covenant defeasance must not result in the trust arising from the deposit constituting an investment company within the meaning of the Investment Company Act unless such trust will be registered under the Investment Company Act or exempt from registration thereunder; and ● we must deliver to the Trustee an officers’ certificate and a legal opinion from our counsel stating that all conditions precedent with respect to the covenant defeasance have been complied with. Full Defeasance If there is a change in U.S. federal income tax law, we can legally release ourselves from all payment and other obligations on the Notes if we take the following actions below: ● we must irrevocably deposit or cause to be deposited with the Trustee as trust funds for the benefit of all holders of the Notes cash, U.S. government obligations or a combination of cash and U.S. government obligations sufficient, without reinvestment, in the opinion of a nationally recognized firm, of independent public accountants, investment bank or appraisal firm, to generate enough cash to make interest, principal and any other applicable payments on the Notes on their various due dates; ● we must deliver to the Trustee a legal opinion confirming that there has been a change to the current U.S. federal income tax law or an Internal Revenue Service ruling that allows us to make the above deposit without causing holders to be taxed on the Notes any differently than if we did not make the deposit and we just repaid the debt securities ourselves at maturity; ● we must deliver to the Trustee an officers’ certificate stating that the Notes, if then listed on any securities exchange, will not be delisted as a result of the deposit; ● no default or Event of Default with respect to the Notes has occurred and is continuing and no defaults or Events of Defaults related to bankruptcy, insolvency or organization occurs during the 90 days following the deposit; ● the full defeasance must not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act; ● the full defeasance must not result in a breach or violation of, or constitute a default under, the Indenture or any other material agreements or instruments to which we are a party; ● the full defeasance must not result in the trust arising from the deposit constituting an investment company within the meaning of the Investment Company Act unless such trust will be registered under the Investment Company Act or exempt from registration thereunder; and ● we must deliver to the Trustee an officers’ certificate and a legal opinion from our counsel stating that all conditions precedent with respect to the full defeasance have been complied with. 11 In the event that the Trustee is unable to apply the funds held in trust to the payment of obligations under the Notes by reason of a court order or governmental injunction or prohibition, then those of our obligations discharged under the full defeasance or covenant defeasance will be revived and reinstated as though no deposit of funds had occurred, until such time as the Trustee is permitted to apply all funds held in trust under the procedure described above may be applied to the payment of obligations under the Notes. However, if we make any payment of principal or interest on the Notes to the holders, we will be subrogated to the rights of the holders to receive such payment from the money so held in trust. Listing The Notes are listed on the Nasdaq Stock Market LLC under the symbols “HROWL” and “HROWM”. The Notes trade “flat,” meaning that purchasers do not pay and sellers do not receive any accrued and unpaid interest on the Notes that is not included in the trading price. Governing Law The Indenture and the Notes are governed by and construed in accordance with the laws of the State of New York. Global Notes; Book-Entry Issuance The Notes are issued in the form of one or more global certificates, or Global Notes, registered in the name of The Depository Trust Company, or DTC. DTC has informed us that its nominee is Cede & Co. Accordingly, we expect Cede & Co. to be the initial registered holder of the Notes. No person that acquires a beneficial interest in the Notes will be entitled to receive a certificate representing that person’s interest in the Notes except as described herein. Unless and until definitive securities are issued under the limited circumstances described below, all references to actions by holders of the Notes will refer to actions taken by DTC upon instructions from its participants, and all references to payments and notices to holders will refer to payments and notices to DTC or Cede & Co., as the registered holder of these securities. DTC has informed us that it is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants, or Direct Participants, deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation, or DTCC. DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly, or Indirect Participants. DTC has an S&P rating of AA+. The DTC Rules applicable to its participants are on file with the SEC. More information about DTC can be found at www.dtcc.com. 12 Purchases of the Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC’s records. The ownership interest of each actual purchaser of each Note, or the Beneficial Owner, is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Notes, except in the event that use of the book-entry system for the Notes is discontinued. To facilitate subsequent transfers, all Notes deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of the Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC’s records reflect only the identity of the Direct Participants to whose accounts the Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices will be sent to DTC. If less than all of the Notes are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in the Notes to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Notes unless authorized by a Direct Participant in accordance with DTC’s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to us as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Notes are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions and interest payments on the Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from us or the applicable trustee or depositary on the payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with the Notes held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the applicable trustee or depositary, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of us or the applicable trustee or depositary. Disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof. None of the Company, the Trustee, any depositary, or any agent of any of them will have any responsibility or liability for any aspect of DTC’s or any participant’s records relating to, or for payments made on account of, beneficial interests in a Global Note, or for maintaining, supervising or reviewing any records relating to such beneficial interests. Termination of a Global Note If a Global Note is terminated for any reason, interest in it will be exchanged for certificates in non-book-entry form as certificated securities. After such exchange, the choice of whether to hold the certificated Notes directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a Global Note transferred on termination to their own names, so that they will be holders of the Notes. See “— Form, Exchange and Transfer of Certificated Registered Securities.” 13 Payment and Paying Agents We will pay interest to the person listed in the Trustee’s records as the owner of the Notes at the close of business on the record date for the applicable interest payment date, even if that person no longer owns the Note on the interest payment date. Because we pay all the interest for an interest period to the holders on the record date, holders buying and selling the Notes must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the Notes to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. Payments on Global Notes We will make payments on the Notes so long as they are represented by Global Notes in accordance with the applicable policies of the depositary in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interest in the Global Notes. An indirect holder’s right to those payments will be governed by the rules and practices of the depositary and its participants. Payments on Certificated Securities In the event the Notes become represented by certificates, we will make payments on the Notes as follows. We will pay interest that is due on an interest payment date by check mailed on the interest payment date to the holder of the Note at his or her address shown on the Trustee’s records as of the close of business on the record date. We will make all payments of principal by check at the office of the Trustee in the contiguous United States and/or at other offices that may be specified in the Indenture or a notice to holders against surrender of the Note. Payment When Offices Are Closed If any payment is due on the Notes on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the Indenture as if they were made on the original due date. Such payment will not result in a default under the Notes or the Indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day. Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on the Notes. Form, Exchange and Transfer of Certificated Registered Securities Notes in physical, certificated form will be issued and delivered to each person that DTC identifies as a beneficial owner of the related Notes only if: ● DTC notified us at any time that it is unwilling or unable to continue as depositary for the Global Notes; ● DTC ceases to be registered as a clearing agency under the Exchange Act; or ● an Event of Default with respect to such Global Note has occurred and is continuing. 14 Holders may exchange their certificated securities for Notes of smaller denominations or combined into fewer Notes of larger denominations, as long as the total principal amount is not changed and as long as the denomination is equal to or greater than $25. Holders may exchange or transfer their certificated securities at the office of the Trustee. We have appointed the Trustee to act as our agent for registering the Notes in the name of holders transferring Notes. We may at any time designate additional transfer agents or rescind the designation of any transfer agent or approve a change in the office through which any transfer agent acts. Holders will not be required to pay a service charge for any registration of transfer or exchange of their certificated securities, but they may be required to pay any tax or other governmental charge associated with the registration of transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holder’s proof of legal ownership. If we redeem any of the Notes, we may block the transfer or exchange of those Notes selected for redemption during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to determine or fix the list of holders to prepare the mailing. We may also refuse to register transfer or exchanges of any certificated Notes selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any Note that will be partially redeemed. About the Trustee U.S. Bank National Association is the Trustee under the Indenture and is the principal paying agent and registrar for the Notes. The Trustee may resign or be removed with respect to the Notes provided that a successor trustee is appointed to act with respect to the Notes. 15 EXHIBIT 10.46 EXECUTION VERSION THIRD AMENDMENT TO LICENSE AND SUPPLY AGREEMENT This Third Amendment (the “Third Amendment”) is made and entered into as of the ___th day of January, 2024 (the “Third Amendment Effective Date”) by and between Sintetica S.A., a Swiss corporation having its principal place of business at Via Penate 5, 6850 Mendrisio, Switzerland, (“Sintetica”), and HARROW, INC. (Formerly known as HARROW HEALTH, INC.), a corporation organized and existing under the laws of Delaware, HARROW EYE, LLC, a limited liability company organized and existing under the laws of Delaware, and HARROW IP, LLC, a limited liability company organized and existing under the laws of Delaware, each having its principal place of business at 102 Woodmont Blvd., Suite 610, Nashville, TN 37205 USA (collectively “Harrow”). Sintetica and Harrow are sometimes referred to herein individually as a “Party” and collectively as the “Parties.” WHEREAS Sintetica and Harrow previously entered into a License and Supply Agreement with a Signing Date of July 25, 2021, as amended on November 15, 2022, and on August 4th, 2023 (the “Agreement”); WHEREAS Harrow Health, Inc. has changed its name to Harrow, Inc.; WHEREAS the Parties wish for Harrow, Inc., Harrow Eye, LLC and Harrow IP, LLC to be parties to this Agreement; WHEREAS Harrow and Sintetica wish to modify certain pricing terms for the Product; WHEREAS Harrow anticipates that registration and approval of a Canadian NDS is likely to take place during calendar year 2024, requiring modification of certain other terms of the Agreement in relation to the registration, purchasing and supply of Product for that country; WHEREAS Harrow anticipates that sales of Product in Canada will be conducted by a sublicensee in Canada, with the registration filing made in such sublicensee’s name; and WHEREAS, as a consequence Sintetica and Harrow desire to amend the Agreement as set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and with the specific intent to be bound hereby, the parties hereby agree as follows: 1. 2. All capitalized terms used in this Third Amendment but not defined shall have the meanings ascribed to them under the terms of the Agreement. The following entities are included as parts of the Party “Harrow” to this Agreement: HARROW, INC., a corporation organized and existing under the laws of Delaware, HARROW EYE, LLC, a limited liability company organized and existing under the laws of Delaware, and HARROW IP, LLC, a limited liability company organized and existing under the laws of Delaware, each having its principal place of business at 102 Woodmont Blvd., Suite 610, Nashville, TN 37205 USA. These three entities shall be jointly and severally liable for Harrow performance and obligations under the Agreement. Where any performance by Sintetica is required to or for any specific, single Harrow entity, and unless a single entity has been specified by Harrow, Sintetica shall be deemed to have fully and correctly fulfilled its obligation(s) under the Agreement by performance to or for any of the Harrow entities at Sintetica’s sole discretion. Page 1 of 5 3. Replace Section 1.93 in its entirety with the following: 1.93 “Selling Price” shall be the invoice price at which Harrow (for Product to be marketed in the United States) or its sublicensee (for Product to be marketed in Canada), sells the Product to any Third Party. 4. Replace Sections 4.1, 4.2, and 4.3 in their entirety with the following: 4.1 NDA Preparation. Sintetica will be responsible for the activities required for the preparation and compilation of the NDA for the Product for submission to the FDA and Health Canada, respectively, at its own expense. As time is of the essence for submission of the NDA in the USA, and in Canada subsequently thereafter, subject to Section 3.2, Sintetica shall promptly complete the compilation and submission under Section 4.2 below for the US submission and Harrow shall provide oversight and collaborate in a timely manner for said submission. For Canada, Sintetica will provide the required dossier (whether it is called a New Drug Submission (NDS), an Abbreviated New Drug Submission (ANDS) or otherwise) to Harrow upon Harrow notice of its intention to proceed with such registration, and the submission to Health Canada will be managed by Harrow or its sublicensee. Except for dossier preparation by Sintetica, all other Regulatory Activities for the Canadian NDA shall be the responsibility of Harrow. 4.2 NDA Submission and Transfer of Ownership. For the USA Sintetica will transfer ownership of the NDA for the Product to Harrow upon its approval by the FDA , with Harrow owning registration rights to the NDA. Sintetica will be responsible for payment of the NDA filing fees (i.e., the PDUFA fee for FDA). For Canada, Harrow or its sublicensee will be owner of registration rights to the NDA, and Harrow shall be responsible for payment of any comparable and necessary filing fees for the NDA submitted to Health Canada (whether it is called a New Drug Submission (NDS), an Abbreviated New Drug Submission (ANDS) or otherwise) and including fees for establishment licensing. 4.3 NDA Review and Approval Process. USA: Sintetica, or Sintetica’s designee, shall oversee and manage the NDA approval process at FDA and shall be responsible for managing all communications with FDA during the NDA approval process. Notwithstanding the above, Sintetica, or its NDA agent designee, shall actively and reasonably keep Harrow informed of any regulatory filings and communications from FDA that would put the NDA at risk or otherwise delay approval of the NDA, and shall consult with Harrow prior to submission of any responses to such communications, who shall provide feedback to Sintetica in a timely manner to avoid any delay in the Regulatory Authority review process. Should any additional fees in addition to those in Section 4.2 be assessed as part of the NDA review and approval process, Sintetica will inform Harrow and shall be responsible for payment of all such fees, with Harrow promptly reimbursing Sintetica for all mutually agreed upon amounts relative thereto. After transfer of Regulatory Approval of the NDA for the USA, Harrow shall be responsible for all communications with FDA and for all fees and costs relative to the NDA and its maintenance, including but not limited to yearly PDUFA Program fee costs, and relative to any post-approval changes (including but not limited to cost and fees regarding Annual Reports, CBE-0, CBE-30, PAS, and addition of foreign sites) submitted to the FDA. Canada: Harrow, or Harrow’s designee, shall oversee and manage the approval process at Health Canada and shall be responsible for managing all communications with Health Canada during the approval process. Notwithstanding the above, Sintetica, shall actively and reasonably support Harrow in providing any required information and of any communications from Health Canada that would put the filing at risk or otherwise delay approval, and shall consult with Harrow prior to submission of any responses to such communications, who shall provide feedback to Sintetica in a timely manner to avoid any delay in Health Canada review process. Harrow shall promptly provide to Sintetica any information or any communications from Health Canada which might relate to, involve or require possible changes to Sintetica’s Canadian Product registration dossier. Should any additional fees in addition to those in Section 4.2 be assessed as part of the review and approval process, Harrow or its sublicensee shall be responsible for payment of all such fees. Harrow shall be responsible for all communications with Health Canada and for all fees and costs relative to maintenance of the approval, including but not limited to annual fees to Health Canada. Page 2 of 5 5. Replace Section 6.6 (f) in its entirety with the following: (f) The minimum quantity per order (“MOQ”) shall be one batch of Product, as described in Section 6.14. MOQ may be changed at any time in writing under mutually agreeable terms. Harrow can combine purchase orders for USA and Canada provided no separate production or filling is required as per approvals received from FDA and Health Canada. All orders shall be of minimum one batch or multiples of batches of Product. 6. Replace Section 6.13(a) in its entirety with the following: (a) The supply price of the Product (“Transfer Price”) shall, starting from the purchase order of Product for first supply in 2024 be equal to one US dollar sixty-five cents (US$1.65) per unit of Product with delivery as described in Section 6.8(a). For clarification, where this Agreement refers to a “unit of Product”, it shall mean, a single dose of Product unless specified otherwise, with the understanding that each such single dose will then be (pouched and) packaged as part of a multidose box (stock-keeping unit) containing 10 or more ampoules in each such box. 7. Replace Section 6.13(d) in its entirety with the following: (d) Notwithstanding any of the foregoing, starting from the Third Amendment Effective Date, for purposes of determining Royalties for USA due under this Agreement, the sum of the Applicable Transfer Price of Product and the Royalty for USA under Section 7.4(a) shall not exceed US$4.65 per unit of Product. Solely for purposes of such calculations, no matter what the actual Transfer Price is, the “Applicable Transfer Price” shall be deemed to be the then current Transfer Price, but in any event no greater than US$1.65 per unit of Product. 8. Replace Section 7.4 in its entirety with the following: 7.4(a) Royalty for United States Sales. For sales of Product in the United States, sixty (60) days after the end of each calendar quarter, Harrow shall pay to Sintetica an amount equal to US$3.00 per unit of Product for each unit of Product sold in the United States for the immediately preceding quarter. Notwithstanding the above, in the event that Harrow’s Gross Margin for Product sales in the United States falls below 80%, the amount of the Royalty payable to Sintetica can be reduced to enable Harrow to achieve a Gross Margin of 80%, but under no circumstances shall the Royalty ever be less than US$2.00 per unit of Product. The following non-limiting examples demonstrate the royalty adjustment mechanism: a. If Harrow’s Selling Price is US$30 per unit, the Gross Margin calculated is ((30-3-1.65)/30) * 100% = 84.5%, and no adjustment to the Royalty is to be made as it would remain US$3.00 per unit; Page 3 of 5 b. c. If Harrow’s Selling Price is US$20/unit, the Gross Margin calculated is ((20-3-1.65)/20) * 100% = 76.75%. To achieve a Gross Margin of 80%, the Royalty is reduced to US$2.35 per unit ((20-2.35-1.65)/20) *100%=80%. If Harrow’s Selling Price is US$15/unit, the Gross Margin calculated is ((15-3-1.65)/15) * 100% = 71.67%. To achieve a Gross Margin of 80%, the Royalty would need to be is reduced to US$1.35 per unit ((15-1.35-1.65)/15) *100%=80%. However, since $1.35 is less than US$2.00, the Royalty would only be reduced to US$2.00 per unit. 7.4(b) Royalty for Canada Sales. Harrow anticipates that all Product sales in Canada will be made through one or more sublicensees. For such sales made by the sublicensee in Canada, Harrow agrees to remit to Sintetica fifty percent (50%) of the royalty amounts which would be due to it from the Canadian sublicensee(s) in that calendar quarter. Harrow shall pay Sintetica, within sixty (60) days of the end of each calendar quarter in which such sales have been made by its sublicensee(s) in Canada. Should Harrow ever market Product itself directly in Canada during the Term of this Agreement, it shall provide sufficiently timely notice to Sintetica when Harrow knows of such an even so as to allow the calculation of the Royalty due for such Canadian sales of Product and, if appropriate, both Parties will discuss in good faith any required changes in the Transfer Price and Royalty for Canada. 9. 10. In Schedule 1.97, shall add the following: U.S. Patent Publication No. US20230110216 and Canadian Patent Application 3,174,913. In all other respects, the terms and conditions of the Agreement will remain in full force and effect as written; provided, however, that the terms and conditions of this Third Amendment will control over the terms and conditions of the Agreement to the extent there are any inconsistencies between this Third Amendment and the Agreement. Page 4 of 5 IN WITNESS WHEREOF, the Parties have executed this Third Amendment as of the Third Amendment Effective Date. SINTETICA S.A. By: /s/ Sameer Agarwal Name: Sameer Agarwal Title: Board Member & CCO HARROW, INC By: /s/ Andrew Boll Name: Andrew Boll Title: CFO HARROW IP LLC By: /s/ Andrew Boll Name: Andrew Boll Title: CFO By: /s/ Luca Casella Name: Luca Casella Title: Corporate CFO HARROW EYE, LLC By: /s/ Andrew Boll Name: Andrew Boll Title: VP page 5 of 5 HARROW, INC. SUBSIDIARIES as of December 31, 2023 EXHIBIT 21.1 Name of Subsidiary ImprimisRx, LLC Imprimis NJOF, LLC ImprimisRx NJ, LLC Harrow Eye, LLC Harrow IP, LLC ImprimisRx Nashville, LLC Harrow Analytical Services, LLC State of Incorporation or Organization Delaware New Jersey New Jersey Delaware Delaware Delaware Delaware CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-159159, 333-183488, 333-198674, 333-220186 and 333-257413 on Form S-8 and Registration Statement Nos. 333-215672 and 333-265244 on Form S-3 of our report dated March 19, 2024, relating to the consolidated financial statements of Harrow, Inc. and subsidiaries, appearing in this Annual Report on Form 10-K of Harrow, Inc. for the year ended December 31, 2023. EXHIBIT 23.1 /s/ KMJ Corbin & Company LLP Irvine, California March 19, 2024 Exhibit 31.1 CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT I, Mark L. Baum, certify that: (1) I have reviewed this Form 10-K for the fiscal year ended December 31, 2023 of Harrow, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in the report any change in this registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and (5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 19, 2024 /s/ Mark L. Baum Mark L. Baum Chief Executive Officer CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT I, Andrew R. Boll, certify that: (1) I have reviewed this Form 10-K for the fiscal year ended December 31, 2023 of Harrow, Inc.; EXHIBIT 31.2 (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) b) c) d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in the report any change in this registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and (5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 19, 2024 /s/ Andrew R. Boll Andrew R. Boll Chief Financial Officer HARROW, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.1 I, Mark L. Baum, Chief Executive Officer of Harrow Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) the Annual Report on Form 10-K of the Company for the annual period ended December 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 19, 2024 /s/ Mark L. Baum Mark L. Baum Chief Executive Officer The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 1350 of Title 18 of the United States Code and, accordingly, is not being filed with the U.S. Securities and Exchange Commission as part of the Report and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Report, irrespective of any general incorporation language contained in such filing). HARROW, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.2 I, Andrew R. Boll, Chief Financial Officer of Harrow Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) the Annual Report on Form 10-K of the Company for the annual period ended December 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 19, 2024 /s/ Andrew R. Boll Andrew R. Boll Chief Financial Officer The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 1350 of Title 18 of the United States Code and, accordingly, is not being filed with the U.S. Securities and Exchange Commission as part of the Report and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Report, irrespective of any general incorporation language contained in such filing). HARROW HEALTH, INC. Policy Regarding the Mandatory Recovery of Compensation Effective September 7, 2023 EXHIBIT 97 I. Applicability. This Policy Regarding the Mandatory Recovery of Compensation (this “Policy”) applies to any Incentive Compensation paid to Executive Officers of Harrow Health, Inc. (the “Company”). This Policy is intended to comply with and be interpreted in accordance with the requirements of Listing Rule 5608 (“Listing Rule 5608”) of The Nasdaq Stock Market LLC (“Nasdaq”). The provisions of Listing Rule 5608 shall prevail in the event of any conflict between the text of this Policy and such listing rule. Certain capitalized terms are defined in Section IV hereof. II. Recovery. a. Triggering Event. Except as provided herein and subject to Section II(b) below, in the event that the Company is required to prepare a Financial Restatement, the Company shall recover any Recoverable Amount of any Incentive Compensation received by a current or former Executive Officer during the Look-Back Period. The Recoverable Amount shall be repaid to the Company within a reasonably prompt time after the current or former Executive Officer is notified in writing of the Recoverable Amount as set forth in Section II(c) below, accompanied by a reasonably detailed computation thereof. For the sake of clarity, the recovery rule in this Section II(a) shall apply regardless of any misconduct, fault, or illegal activity of the Company, any Executive Officer, the Company’s Board of Directors (the “Board”) or any committee thereof. b. Compensation Subject to Recovery. i. Incentive Compensation subject to mandatory recovery under Section II(a) includes any Incentive Compensation received by an Executive Officer: a. After beginning service as an Executive Officer; b. Who served as an Executive Officer at any time during the performance period for that Incentive Compensation; c. While the Company has a class of securities listed on a national securities exchange or a national securities association; and d. During the Look-Back Period. ii. As used in this Section II(b), Incentive Compensation is deemed “received” in the fiscal period that the Financial Reporting Measure specified in the applicable Incentive Compensation award is attained, even if the payment or grant of the Incentive Compensation occurs after the end of that period. This Section II(b) will only apply to Incentive Compensation received in any fiscal period ending on or after the effective date of Listing Rule 5608. 1 c. Recoupment. i. The Compensation Committee of the Board (the “Compensation Committee”) shall determine, at its sole discretion, the method for recouping Incentive Compensation, which may include (A) requiring reimbursement of Incentive Compensation previously paid; (B) seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based awards; (C) deducting the amount to be recouped from any compensation otherwise owed by the Company to the Executive Officer; and/or (D) taking any other remedial and recovery action permitted by law, as determined by the Compensation Committee. d. Recoverable Amount. i. The “Recoverable Amount” is equal to the amount of Incentive Compensation received in excess of the amount of Incentive Compensation that would have been received had it been determined based on the restated amounts in the Financial Restatement, without regard to taxes paid by the Company or the Executive Officer. ii. For Incentive Compensation based on stock price or total shareholder return, where the amount of erroneously awarded Incentive Compensation is not subject to mathematical recalculation directly from the information in the Financial Restatement, the Recoverable Amount must be based on a reasonable estimate of the effect of the Financial Restatement on the stock price or total shareholder return upon which the Incentive Compensation was received, as determined by the Compensation Committee, which shall be set forth in writing. e. Exceptions to Applicability. The Company must recover the Recoverable Amount of Incentive Compensation as stated above in Section II(a), unless the Compensation Committee, or in the absence of such committee, a majority of the independent directors serving on the Board, makes a determination that recovery would be impracticable, and at least one of the following applies: i. ii. The direct expense paid to a third party to assist in enforcing recovery would exceed the Recoverable Amount, and a reasonable attempt to recover the Recoverable Amount has already been made and documented; Recovery of the Recoverable Amount would violate home country law (provided such law was adopted prior to November 28, 2022 and that an opinion of counsel in such country is obtained stating that recoupment would result in such violation); or 2 iii. Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company and its subsidiaries, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder. III. Miscellaneous. a. The Board or Compensation Committee may require that any incentive plan, employment agreement, equity award agreement, or similar agreement entered into on or after the date hereof shall, as a condition to the grant of any benefit thereunder, require an Executive Officer to agree to abide by the terms of this Policy, including the repayment of the Recoverable Amount of erroneously awarded Incentive Compensation. b. The Company shall not indemnify any Executive Officer or other individual against the loss of any incorrectly awarded or otherwise recouped Incentive Compensation. c. The Company shall comply with applicable compensation recovery policy disclosure rules of the Securities and Exchange Commission (the “Commission”). IV. Definitions. a. Incentive Compensation. “Incentive Compensation” means any compensation that is granted, earned, or vests based wholly or in part upon the attainment of a Financial Reporting Measure. b. Financial Reporting Measure. “Financial Reporting Measure” means any measure that is determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and any measures that are derived wholly or in part from such measures. Stock price and total shareholder return are considered to be Financial Reporting Measures for purposes of this Policy. A Financial Reporting Measure need not be presented within the financial statements or included in a filing with the Commission. c. Financial Restatement. A “Financial Restatement” means any accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under applicable securities laws, including any required accounting restatement to correct an error in previously issued financial statements that (i) is material to the previously issued financial statements (commonly referred to as a “Big R” restatement), or (ii) is not material to previously issued financial statements, but would result in a material misstatement if the error were left uncorrected in the current period or the error correction were recognized in the current period (commonly referred to as a “little r” restatement). For purposes of this Policy, the date of a Financial Restatement will be deemed to be the earlier of (i) the date the Board, a committee of the Board, or officers authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare an accounting restatement, and (ii) the date a court, regulator, or other legally authorized body directs the Company to prepare an accounting restatement. d. Executive Officer. “Executive Officer” shall mean the Company’s Chief Executive Officer, President, Chief Financial Officer, or principal accounting officer (or, if there is no such accounting officer, the Controller), any vice-president of the Company in charge of a principal business unit, division or function (such as sales, administration or finance), and any other officer or person who performs a significant policy-making function for the Company, whether such person is employed by the Company or a subsidiary thereof. For the sake of clarity, “Executive Officer” includes at a minimum executive officers identified by the Board pursuant to 17 CFR 229.401(b). e. Look-Back Period. The “Look-Back Period” means the three completed fiscal years immediately preceding the date of a Financial Restatement and any transition period as set forth in Listing Rule 5608. 3 

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