UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐ 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 Health, Inc.

(Exact name of registrant as specified in its charter)

Delaware		45-0567010
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

102 Woodmont Blvd., Suite 610

Nashville, Tennessee

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	Trading Symbol(s)	Name on exchange on which registered
Common Stock, $0.001 par value per share	HROW	The Nasdaq Stock Market LLC
8.625% Senior Notes due 2026	HROWL	The Nasdaq Stock Market LLC
11.875% Senior Notes due 2027	HROWM	The Nasdaq Stock Market LLC

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 (§232.405 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.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth 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 a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 10, 2023, there were 30,121,997 shares of the registrant’s common stock, $0.001 par value, outstanding.

HARROW HEALTH, INC.

Table of Contents

		Page
Part I	FINANCIAL INFORMATION	3

Item 1.	Financial Statements (unaudited)	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

Part II	OTHER INFORMATION	35

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	35

	Signatures	36

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

HARROW HEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2023			2022
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	19,248,000		$	96,270,000
Investment in Eton Pharmaceuticals		7,631,000			5,589,000
Accounts receivable, net		12,111,000			6,249,000
Inventories		9,093,000			6,541,000
Prepaid expenses and other current assets		3,604,000			3,611,000
Total current assets		51,687,000			118,260,000
Property, plant and equipment, net		3,586,000			3,486,000
Capitalized software costs, net		2,277,000			2,112,000
Deferred financing costs		-			1,950,000
Deferred tax asset		288,000			-
Operating lease right-of-use assets, net		7,336,000			7,513,000
Intangible assets, net		151,992,000			23,725,000
Goodwill		332,000			332,000
TOTAL ASSETS	$	217,498,000		$	157,378,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	13,794,000		$	13,771,000
Accrued payroll and related liabilities		3,103,000			4,025,000
Deferred revenue and customer deposits		67,000			113,000
Current portion of operating lease obligations		744,000			723,000
Total current liabilities		17,708,000			18,632,000
Operating lease obligations, net of current portion		7,137,000			7,332,000
Accrued expenses, net of current portion		2,275,000			-
Notes payable, net of unamortized debt discount		168,850,000			104,174,000
TOTAL LIABILITIES		195,970,000			130,138,000
Commitments and contingencies		-			-
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value, 50,000,000 shares authorized, 30,056,370 and 29,901,530 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively		30,000			30,000
Additional paid-in capital		137,989,000			137,058,000
Accumulated deficit		(116,136,000	)		(109,493,000	)
TOTAL HARROW HEALTH STOCKHOLDERS’ EQUITY		21,883,000			27,595,000
Noncontrolling interests		(355,000	)		(355,000	)
TOTAL STOCKHOLDERS’ EQUITY		21,528,000			27,240,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	217,498,000		$	157,378,000

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

HARROW HEALTH, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the			For the
	Three Months Ended			Three Months Ended
	March 31,			March 31,
	2023			2022
Revenues:
Product sales, net	$	20,453,000		$	20,340,000
Other revenues		5,650,000			1,780,000
Total revenues		26,103,000			22,120,000
Cost of sales		(8,271,000	)		(5,963,000	)
Gross profit		17,832,000			16,157,000
Operating expenses:
Selling, general and administrative		15,888,000			13,398,000
Research and development		734,000			658,000
Total operating expenses		16,622,000			14,056,000
Income from operations		1,210,000			2,101,000
Other (expense) income:
Interest expense, net		(4,747,000	)		(1,792,000	)
Equity in losses of unconsolidated entities		-			(2,886,000	)
Investment gain from Eton Pharmaceuticals		2,042,000			139,000
Loss on extinguishment of debt		(5,465,000	)		-
Other income, net		29,000			-
Total other expense, net		(8,141,000	)		(4,539,000	)
Loss before income taxes		(6,931,000	)		(2,438,000	)
Income tax benefit		288,000			-
Net loss		(6,643,000	)		(2,438,000	)
Basic and diluted net loss per share of common stock	$	(0.22	)	$	(0.09	)
Weighted average number of shares of common stock outstanding, basic and diluted		30,289,730			27,226,819

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

HARROW HEALTH, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2023 and 2022

													Total			Total
	Common Stock						Additional						Harrow Health, Inc.			Noncontrolling			Total
				Par			Paid-in			Accumulated			Stockholders’			Interest			Stockholders’
	Shares			Value			Capital			Deficit			Equity			Equity			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 employee stock-based options		89,986			-			4,000			-			4,000			-			4,000
Vesting of RSUs		135,000			1,000			(1,000	)		-			-			-			-
Shares withheld related to net share settlement of equity awards		(96,622	)		(1,000	)		(776,000	)		-			(777,000	)		-			(777,000	)
Stock-based compensation expense		-			-			2,016,000			-			2,016,000			-			2,016,000
Net loss		-			-			-			(2,438,000	)		(2,438,000	)		-			(2,438,000	)
Balance at March 31, 2022		27,031,127		$	27,000		$	107,909,000		$	(97,845,000	)	$	10,091,000		$	(355,000	)	$	9,736,000

Balance at December 31, 2022		29,901,530		$	30,000		$	137,058,000		$	(109,493,000	)	$	27,595,000		$	(355,000	)	$	27,240,000

Issuance of common stock in connection with:
Exercise of employee stock-based options		97,542			-			148,000			-			148,000			-			148,000
Vesting of RSUs		111,000			-			-			-			-			-			-
Shares withheld related to net share settlement of equity awards		(53,702	)		-			(850,000	)		-			(850,000	)		-			(850,000	)
Stock-based compensation expense		-			-			1,633,000			-			1,633,000			-			1,633,000
Net loss		-			-			-			(6,643,000	)		(6,643,000	)		-			(6,643,000	)
Balance at March 31, 2023		30,056,370		$	30,000		$	137,989,000		$	(116,136,000	)	$	21,883,000		$	(355,000	)	$	21,528,000

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

HARROW HEALTH, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	2023			2022
	For the Three Months Ended
	March 31,
	2023			2022

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(6,643,000	)	$	(2,438,000	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization of property, plant and equipment		292,000			419,000
Amortization of intangible assets		2,207,000			404,000
Amortization of operating lease right-of-use assets		177,000			124,000
Provision for bad debt expense		20,000			10,000
Amortization of debt issuance costs and debt discount		761,000			193,000
Investment gain from investment in Eton		(2,042,000	)		(139,000	)
Equity in losses of unconsolidated entities		-			2,886,000
Loss on extinguishment of debt		5,465,000			-
Stock-based compensation		1,633,000			2,016,000
Deferred taxes		(288,000	)		-
Changes in assets and liabilities:
Accounts receivable		(5,882,000	)		(1,535,000	)
Inventories		(2,552,000	)		(179,000	)
Prepaid expenses and other current assets		7,000			(29,000	)
Accounts payable and accrued expenses		(212,000	)		369,000
Accrued payroll and related liabilities		(1,111,000	)		(1,141,000	)
Deferred revenue and customer deposits		(46,000	)		7,000
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES		(8,214,000	)		967,000
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patent and trademark assets		-			(6,000	)
Purchase of product NDAs and patents		(130,474,000	)		-
Purchases of property, plant and equipment		(496,000	)		(404,000	)
NET CASH USED IN INVESTING ACTIVITIES		(130,970,000	)		(410,000	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on finance lease obligations		-			(3,000	)
Net proceeds from 11.875% notes payable, net of costs		4,961,000			-
Net proceeds from Oaktree loan, net of costs		61,585,000			-
Payment of taxes upon vesting of RSUs and exercise of stock options		(661,000	)		(777,000	)
Proceeds from exercise of stock options		148,000			4,000
Net proceeds from B Riley senior secured note, net of costs		55,879,000			-
Repayment of B. Riley senior secured note		(59,750,000	)		-
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		62,162,000			(776,000	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(77,022,000	)		(219,000	)
CASH AND CASH EQUIVALENTS, beginning of period		96,270,000			42,167,000
CASH AND CASH EQUIVALENTS, end of period	$	19,248,000		$	41,948,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	3,371,000		$	1,617,000
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property, plant and equipment included in accounts payable and accrued expenses	$	61,000		$	-
Right-of-use assets obtained in exchange for new operating lease obligations	$	-		$	1,036,000
Accrual of exit fee related to Oaktree Loan	$	2,275,000			-
Reclassification of derferred financing costs	$	1,950,000			-
Income taxes owed for exercise of stock options	$	189,000		$	-

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

HARROW HEALTH, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2023 and 2022

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Company and Background

Harrow Health, Inc. (together with its subsidiaries, partially owned companies and royalty arrangements unless the context indicates or otherwise requires, the “Company” or “Harrow”) is an eyecare pharmaceutical company exclusively focused on the discovery, development, and commercialization of innovative ophthalmic therapies that are accessible and affordable.

The Company owns non-controlling equity positions 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.

Basis of Presentation

The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or for any other period. For further information, refer to the Company’s audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

The accompanying unaudited condensed 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’s operations. The Company consolidates (i) entities in which it holds and/or controls, directly or indirectly, more than 50% of the voting rights, and (ii) entities that the Company deems to be a VIE. All intercompany accounts and transactions have been eliminated in consolidation.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following represents an update for the three months ended March 31, 2023 to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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.

Credit Losses

The Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables. The Company considers historical collection rates, the current financial status of its customers, macroeconomic factors, and other industry-specific factors when evaluating for 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, the Company 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 the Company determined that the risk profile of its customers is consistent based on the type and industry in which they operate, mainly in the life sciences 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 life sciences 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.

The accounts receivable balance on the Company’s condensed consolidated balance sheet as of March 31, 2023 was $12,111,000, net of $82,000 of allowances. 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 March 31, 2023:

Balance at January 1, 2023	$	73,000
Change in expected credit losses		20,000
Write-offs, net of recoveries		(11,000	)
Balance at March 31, 2023	$	82,000

Business Combinations and Asset Acquisitions

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 Account Standards Board (“FASB”). Accounting Standards Codification (“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. In accordance with ASC 805 – Business Combinations, 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 condensed consolidated statement of operations.

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 of the acquired assets on 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 reliably measurable. 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.

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.
●	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.
●	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 March 31, 2023 and December 31, 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 March 31, 2023 and December 31, 2022, the fair market value of the Company’s investment in Eton was $7,631,000 and $5,589,000, respectively.

The Company carries the 2026 Notes at face value, including the unamortized premium, less unamortized debt issuance costs, the 2027 Notes are carried at face value less unamortized debt issuance costs, and the Oaktree Loan is carried at face value less the original issue discount and unamortized debt issuance costs on the condensed consolidated balance sheets and 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 following table presents the estimated fair values and the carrying values:

SCHEDULE OF ESTIMATED FAIR VALUE

March 31, 2023

December 31, 2022

SEC Form 10-Q filed by Harrow Health Inc.