Harrow Health(HROW) - 2023 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION This part presents Harrow Health, Inc.'s unaudited financial statements and management's discussion for the first quarter of 2023 Item 1. Financial Statements (unaudited) This section presents Harrow Health, Inc.'s unaudited condensed consolidated financial statements for the three months ended March 31, 2023 and 2022, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, recent acquisitions, debt, and related party transactions Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific dates | Metric | March 31, 2023 (Unaudited) | December 31, 2022 | | :--------------------------------- | :------------------------- | :------------------ | | Assets | | | | Cash and cash equivalents | $19,248,000 | $96,270,000 | | Total current assets | $51,687,000 | $118,260,000 | | Intangible assets, net | $151,992,000 | $23,725,000 | | TOTAL ASSETS | $217,498,000 | $157,378,000 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $17,708,000 | $18,632,000 | | Notes payable, net | $168,850,000 | $104,174,000 | | TOTAL LIABILITIES | $195,970,000 | $130,138,000 | | TOTAL STOCKHOLDERS' EQUITY | $21,528,000 | $27,240,000 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $217,498,000 | $157,378,000 | - Total assets increased significantly from $157.4 million at December 31, 2022, to $217.5 million at March 31, 2023, primarily driven by a substantial increase in net intangible assets from $23.7 million to $152.0 million[10] - Cash and cash equivalents decreased from $96.3 million at December 31, 2022, to $19.2 million at March 31, 2023[10] Unaudited Condensed Consolidated Statements of Operations This section outlines the company's financial performance, including revenues, expenses, and net loss for the reported periods | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | $26,103,000 | $22,120,000 | | Gross profit | $17,832,000 | $16,157,000 | | Income from operations | $1,210,000 | $2,101,000 | | Total other expense, net | $(8,141,000) | $(4,539,000) | | Net loss | $(6,643,000) | $(2,438,000) | | Basic and diluted net loss per share | $(0.22) | $(0.09) | - Total revenues increased by $3.98 million (18.0%) year-over-year, from $22.12 million in Q1 2022 to $26.10 million in Q1 2023[11] - Net loss increased from $(2.44) million in Q1 2022 to $(6.64) million in Q1 2023, primarily due to higher interest expense and a loss on extinguishment of debt[11] Unaudited Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity, including common stock, additional paid-in capital, and accumulated deficit | Metric | March 31, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :---------------- | | Common Stock Shares Outstanding | 30,056,370 | 29,901,530 | | Additional Paid-in Capital | $137,989,000 | $137,058,000 | | Accumulated Deficit | $(116,136,000) | $(109,493,000) | | Total Stockholders' Equity | $21,528,000 | $27,240,000 | - Total stockholders' equity decreased from $27.24 million at December 31, 2022, to $21.53 million at March 31, 2023, mainly due to the net loss incurred during the period[12] Unaudited Condensed Consolidated Statements of Cash Flows This section presents the cash inflows and outflows from operating, investing, and financing activities for the reported periods | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(8,214,000) | $967,000 | | Net cash used in investing activities | $(130,970,000) | $(410,000) | | 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, end of period | $19,248,000 | $41,948,000 | - Net cash used in operating activities significantly increased to $(8.21) million in Q1 2023 from cash provided of $0.97 million in Q1 2022[13] - Investing activities used a substantial $(130.97) million in Q1 2023, primarily due to the Fab 5 Acquisition, compared to $(0.41) million in Q1 2022[13] - Financing activities provided $62.16 million in Q1 2023, a significant increase from $(0.78) million used in Q1 2022, mainly from new debt issuances[13] Note 1. Description of Business and Basis of Presentation This note describes the company's core business as an eyecare pharmaceutical firm and the accounting principles used for financial statement preparation - Harrow Health, Inc. is an eyecare pharmaceutical company focused on discovering, developing, and commercializing innovative, accessible, and affordable ophthalmic therapies[14] - The Company holds non-controlling equity positions and royalty rights in Surface Ophthalmics, Inc. and Melt Pharmaceuticals, Inc., both of which originated as Harrow subsidiaries[15] - The financial statements are unaudited condensed consolidated statements prepared in accordance with GAAP for interim financial information and SEC rules, including accounts of wholly-owned and majority-owned subsidiaries[16][17][18] Note 2. Summary of Significant Accounting Policies This note outlines the key accounting policies, including those for credit losses, fair value measurements, and investments in related parties Risks, Uncertainties and Liquidity This section discusses regulatory risks that could materially impact the company's financial condition and operations - The Company faces regulatory risks that could impact its ability to manufacture, dispense, and sell products, potentially having a material impact on its financial condition and operations[20] Credit Losses This section details the company's allowance for credit losses on accounts receivable and changes in expected credit losses - The allowance for credit losses for accounts receivable increased from $73,000 at January 1, 2023, to $82,000 at March 31, 2023, reflecting a $20,000 change in expected credit losses offset by $11,000 in write-offs[23] Fair Value Measurements This section provides fair value measurements for financial instruments, including 2026 Notes, 2027 Notes, and the Oaktree Loan | Instrument | Carrying Value (March 31, 2023) | Fair Value (March 31, 2023) | Carrying Value (December 31, 2022) | Fair Value (December 31, 2022) | | :--------- | :------------------------------ | :-------------------------- | :--------------------------------- | :----------------------------- | | 2026 Notes | $72,628,000 | $73,590,000 | $72,436,000 | $71,550,000 | | 2027 Notes | $36,900,000 | $40,250,000 | $31,738,000 | $35,112,000 | | Oaktree Loan | $59,322,000 | $65,000,000 | $- | $- | - The Company's 2026 Notes and 2027 Notes are classified as Level 1 instruments, with fair values determined by quoted market prices in active markets[29] Basic and Diluted Net Loss per Common Share This section presents the calculation of basic and diluted net loss per common share, considering weighted average shares outstanding | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(6,643,000) | $(2,438,000) | | Weighted average shares outstanding | 30,289,730 | 27,226,819 | | Net loss per share, basic and diluted | $(0.22) | $(0.09) | - Common equivalent shares from stock options, unvested RSUs, and warrants were anti-dilutive and excluded from diluted net loss per share calculation for both periods[32] Investment in Eton Pharmaceuticals, Inc. This section details the company's investment in Eton Pharmaceuticals and the recorded unrealized investment gain - The Company recorded an unrealized investment gain of $2.04 million in Q1 2023, up from $0.14 million in Q1 2022, due to the change in fair market value of its Eton common stock investment[37] Investment in Melt Pharmaceuticals, Inc. – Related Party This section describes the company's equity method investment in Melt Pharmaceuticals and its recognition of Melt's equity method losses - The Company owns approximately 46% of Melt's equity and voting interests and uses the equity method of accounting, recognizing 100% of Melt's equity method losses due to its ownership of Melt's total indebtedness[38] | Investment Type | Cost Basis | Share of Equity Method Losses | Paid-in-Kind Interest | In-substance Capital Contributions | Net Carrying Value | | :-------------- | :------------ | :---------------------------- | :-------------------- | :--------------------------------- | :----------------- | | Common stock | $5,810,000 | $(5,810,000) | $- | $- | $- | | Loan | $13,500,000 | $(13,500,000) | $3,001,000 | $(3,001,000) | $- | | Total | $19,310,000 | $(19,310,000) | $3,001,000 | $(3,001,000) | $- | Investment in Surface Ophthalmics, Inc. – Related Party This section outlines the company's equity method investment in Surface Ophthalmics and the impact of its share of equity losses - The Company owns approximately 20% of Surface's equity and voting interests and uses the equity method of accounting, with its common stock investment reduced to $0 due to recording its share of equity losses[41] - The Company adopted ASU 2016-13 on January 1, 2023, for credit losses, which did not materially impact its financial statements due to the composition of its receivables and current market conditions[43] - The Company's investment in Eton Pharmaceuticals is classified as Level 1 fair value, with its fair market value increasing from $5.59 million at December 31, 2022, to $7.63 million at March 31, 2023[28] - The Company's effective tax rate was 4.16% for Q1 2023, up from 0% in Q1 2022, differing from the U.S. federal statutory rate due to state taxes, permanent book-tax differences, and changes in valuation allowance[35] Note 3. Revenues This note details the company's revenue streams, including product sales, commission agreements, and intellectual property licenses - The Company's revenue streams include product sales (pharmacy, outsourcing, branded), commission agreements, and intellectual property licenses/asset purchase agreements[44] | Revenue Source | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------- | :-------------------------------- | :-------------------------------- | | Product sales, net | $20,453,000 | $20,340,000 | | Commission revenues | $- | $1,320,000 | | Transfer of profits | $5,650,000 | $460,000 | | Total revenues | $26,103,000 | $22,120,000 | - Total revenues increased by $3.98 million (18.0%) year-over-year, primarily driven by a significant increase in transfer of profits from $0.46 million to $5.65 million[50] Note 4. Recent Product Acquisitions, Licenses and Divestitures This note describes recent strategic transactions, including the Fab 5 Acquisition from Novartis and the divestiture of a non-ophthalmology product line - In January 2023, the Company completed the Fab 5 Acquisition from Novartis for $130 million upfront, acquiring exclusive U.S. commercial rights to five ophthalmic products (ILEVRO, NEVANAC, VIGAMOX, MAXIDEX, TRIESENCE)[51][52] - The Fab 5 Acquisition was recognized as an asset acquisition, with a total purchase price of $130.56 million, including acquisition costs[53][54] - In October 2022, the Company divested its non-ophthalmology compounding product line (RPC Assets) for $6 million cash upfront and up to $4.5 million in contingent revenue milestones[55] Note 5. Investment in, and Note Receivable from Melt Pharmaceuticals, Inc. - Related Party Transactions This note details the company's loan and security agreement with Melt Pharmaceuticals and the related principal and accrued interest - The Company has a loan and security agreement with Melt Pharmaceuticals for $13.5 million, bearing 12.50% interest, with a maturity date extended to June 1, 2023 (potentially September 1, 2026)[62] - As of March 31, 2023, aggregate principal and accrued interest payable to the Company from Melt amounted to $16.50 million, up from $15.98 million at December 31, 2022[65] - Melt's net loss for Q1 2023 was $(1.86) million, an improvement from $(3.34) million in Q1 2022[61] Note 6. Investment in Surface Ophthalmics, Inc. - Related Party Transactions This note describes the company's equity investment in Surface Ophthalmics and its reported net loss - The Company holds 3.5 million common shares of Surface Ophthalmics, representing approximately 20% equity, and accounts for it using the equity method[67] - Surface Ophthalmics reported a net loss of $(1.52) million for Q1 2023, an improvement from $(2.00) million in Q1 2022[67] Note 7. Inventories This note provides a breakdown of inventory components, including raw materials, work in progress, and finished goods | Inventory Component | March 31, 2023 | December 31, 2022 | | :------------------ | :------------- | :---------------- | | Raw materials | $5,023,000 | $3,707,000 | | Work in progress | $36,000 | $38,000 | | Finished goods | $4,034,000 | $2,796,000 | | Total inventories | $9,093,000 | $6,541,000 | - Total inventories increased by $2.55 million (39.0%) from $6.54 million at December 31, 2022, to $9.09 million at March 31, 2023, primarily due to increases in raw materials and finished goods[68] Note 8. Prepaid Expenses and Other Current Assets This note details the components of prepaid expenses and other current assets, such as insurance, software licenses, and amounts due from Melt | Component | March 31, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :---------------- | | Prepaid insurance | $527,000 | $858,000 | | Prepaid computer software licenses | $1,072,000 | $1,165,000 | | Due from Melt Pharmaceuticals | $198,000 | $139,000 | | Other prepaid expenses | $1,689,000 | $1,331,000 | | Deposits and other current assets | $118,000 | $118,000 | | Total prepaid expenses and other current assets | $3,604,000 | $3,611,000 | Note 9. Property, Plant and Equipment This note presents the gross and net values of property, plant, and equipment, along with accumulated depreciation | Component | March 31, 2023 | December 31, 2021 | | :--------------------------------- | :------------- | :---------------- | | Computer hardware | $1,060,000 | $979,000 | | Furniture and equipment | $922,000 | $860,000 | | Lab and pharmacy equipment | $4,335,000 | $4,259,000 | | Leasehold improvements | $6,555,000 | $6,449,000 | | Total gross | $12,872,000 | $12,547,000 | | Accumulated depreciation | $(9,286,000) | $(9,061,000) | | Property, plant and equipment, net | $3,586,000 | $3,486,000 | - Net property, plant and equipment increased slightly to $3.59 million at March 31, 2023, from $3.49 million at December 31, 2021[70] - Depreciation expense for Q1 2023 was $225,000, a decrease from $376,000 in Q1 2022[70] Note 10. Capitalized Software Development Costs This note details the company's capitalized software development costs, including internal-use software and amortization expenses | Component | March 31, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :---------------- | | Capitalized internal-use software development costs | $1,415,000 | $1,413,000 | | Acquired third-party software license for internal-use | $159,000 | $159,000 | | Total gross capitalized software for internal-use | $1,574,000 | $1,572,000 | | Accumulated amortization | $(860,000) | $(793,000) | | Capitalized internal-use software in process | $1,563,000 | $1,333,000 | | Total capitalized software costs, net | $2,277,000 | $2,112,000 | - Net capitalized software development costs increased to $2.28 million at March 31, 2023, from $2.11 million at December 31, 2022[71] - Amortization expense for capitalized software was $67,000 in Q1 2023, up from $43,000 in Q1 2022[71] Note 11. Intangible Assets and Goodwill This note provides a breakdown of intangible assets, including patents, licenses, trademarks, and acquired NDAs, along with amortization | Intangible Asset | Cost | Accumulated Amortization | Net Carrying Value | | :----------------- | :------------ | :----------------------- | :----------------- | | Patents | $981,000 | $(183,000) | $798,000 | | Licenses | $100,000 | $(25,000) | $75,000 | | Trademarks | $267,000 | $- | $267,000 | | Acquired NDAs | $154,193,000 | $(3,533,000) | $150,660,000 | | Customer relationships | $596,000 | $(475,000) | $121,000 | | Trade name | $75,000 | $(5,000) | $70,000 | | Non-competition clause | $50,000 | $(50,000) | $- | | State pharmacy licenses | $8,000 | $(7,000) | $1,000 | | Total | $156,270,000 | $(4,278,000) | $151,992,000 | - Net intangible assets significantly increased to $151.99 million at March 31, 2023, primarily due to $150.66 million in acquired NDAs[72] - Amortization expense for intangible assets was $2.21 million in Q1 2023, a substantial increase from $0.40 million in Q1 2022, mainly due to acquired NDAs[73] Note 12. Accounts Payable and Accrued Expenses This note details the components of accounts payable and accrued expenses, including insurance premiums, milestone payments, and interest | Component | March 31, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :---------------- | | Accounts payable | $6,237,000 | $6,440,000 | | Accrued insurance premium | $237,000 | $575,000 | | Accrued IHEEZO milestone payment | $5,000,000 | $5,000,000 | | Accrued RPC transition payments | $307,000 | $453,000 | | Accrued litigation settlements | $49,000 | $49,000 | | Accrued exit fee for note payable | $2,275,000 | $- | | Accrued interest | $1,964,000 | $1,254,000 | | Total accounts payable and accrued expenses | $16,069,000 | $13,771,000 | | Non-current total accrued expenses | $2,275,000 | $- | - Total accounts payable and accrued expenses increased to $16.07 million at March 31, 2023, from $13.77 million at December 31, 2022, primarily due to a new accrued exit fee for a note payable[74] Note 13. Debt This note outlines the company's debt obligations, including the Oaktree Loan, 2027 Senior Notes, and 2026 Senior Notes Oaktree Loan This section details the terms of the Oaktree Loan, including its security, financial covenants, and interest expense - The Oaktree Loan is secured by nearly all Company assets and includes financial covenants related to minimum liquidity and net revenues[76][78] - Interest expense related to the Oaktree Loan was $95,000 for Q1 2023, including $12,000 in amortization of debt issuance costs and discount[79] HROWM - 11.875% Senior Notes Due 2027 This section describes the 2027 Senior Notes, their unsecured nature, subordination, and associated interest expense - The 2027 Notes are senior unsecured obligations, effectively subordinated to secured debt and structurally subordinated to subsidiary debt[81] - Interest expense for the 2027 Notes totaled $1.40 million in Q1 2023, including $0.20 million in amortization of debt issuance costs and discount[83] HROWL - 8.625% Senior Notes Due 2026 This section outlines the 2026 Senior Notes, their principal amount, and the interest expense incurred - The Company has $75 million aggregate principal amount of 8.625% Senior Notes due April 2026 (2026 Notes), which are senior unsecured obligations[84] - Interest expense for the 2026 Notes was $1.81 million for both Q1 2023 and Q1 2022[87] B. Riley Loan and Security Agreement – Paid in Full This section details the repayment of the B. Riley Loan and the resulting loss on extinguishment of debt - The B. Riley Loan, a $100 million facility with a 10.875% interest rate, was fully repaid in March 2023, incurring a $5.47 million loss on extinguishment of debt[88][91] - The Company entered into a $100 million Oaktree Loan in March 2023, drawing $65 million to repay the B. Riley Loan. The Oaktree Loan matures in January 2026 and bears interest at SOFR + 6.5% per annum[75][76] - The Company issued $40.25 million in 11.875% Senior Notes due 2027 (HROWM) in December 2022 and January 2023, with interest payable quarterly[80][81] - The B. Riley Loan, used to finance the Fab 5 Acquisition, was fully repaid in March 2023 using proceeds from the Oaktree Loan, resulting in a $5.47 million loss on extinguishment of debt[90][91] Note 14. Leases This note describes the company's operating lease commitments for office and laboratory space, including future minimum payments - The Company leases office and laboratory space under non-cancelable operating leases with remaining terms of one to five years[93] - Cash paid for operating lease liabilities was $306,000 in Q1 2023, up from $166,000 in Q1 2022[95] | Period | Operating Leases (Minimum Payments) | | :----------------- | :-------------------------------- | | Remainder of 2023 | $925,000 | | 2024 | $1,262,000 | | 2025 | $1,093,000 | | 2026 | $1,114,000 | | 2027 | $972,000 | | Thereafter | $5,829,000 | | Total minimum lease payments | $11,195,000 | | Total operating lease liabilities | $7,881,000 | Note 15. Stockholders' Equity and Stock-Based Compensation This note details changes in common stock, stock options, and restricted stock units, along with related compensation expenses Common Stock This section reports on common stock issuances from option exercises and RSU vesting, including shares withheld for taxes - During Q1 2023, the Company issued 33,063 shares of common stock from option exercises for $148,000[96] - The CEO and CFO received common stock upon RSU vesting and cashless option exercises, with shares withheld for payroll tax obligations[97][98][99] Stock Options This section provides details on outstanding stock options, their weighted average exercise price, and aggregate intrinsic value | Metric | March 31, 2023 | | :--------------------------------- | :------------- | | Options outstanding | 2,891,026 | | Weighted Average Exercise Price | $6.03 | | Weighted Average Remaining Contractual Life | 4.30 years | | Aggregate Intrinsic Value | $43,730,000 | - The weighted-average fair value of options granted in 2023 was $10.58, using a Black-Scholes-Merton model with expected volatility of 69-70% and risk-free interest rates of 3.64-3.76%[105] Restricted Stock Units/Performance Stock Units This section outlines the activity of restricted stock units, including unvested units, vested units, and compensation expense | Metric | March 31, 2023 | | :--------------------------------- | :------------- | | RSUs unvested - January 1, 2023 | 2,061,719 | | RSUs vested | (127,405) | | RSUs cancelled/forfeited | (75,000) | | RSUs unvested - March 31, 2023 | 1,859,314 | | Weighted-Average Grant Date Fair Value | $6.82 | - Stock-based compensation for RSUs was $1.29 million in Q1 2023, down from $1.74 million in Q1 2022[108] - Total stock-based compensation expense was $1.63 million in Q1 2023, down from $2.02 million in Q1 2022[109] - As of March 31, 2023, there was $1.44 million of unrecognized compensation expense for unvested stock options and $2.48 million for unvested RSUs[105][108] Note 16. Commitments and Contingencies This note describes the company's legal proceedings, related-party agreements, and licensing commitments for ophthalmic drug candidates Sintetica Agreement (IHEEZO) This section details the exclusive U.S. and Canada license for IHEEZO and the associated milestone payment - The Company holds exclusive U.S. and Canada license and marketing rights for IHEEZO, a patented ophthalmic drug candidate, from Sintetica S.A.[122] - A $5 million milestone payment for IHEEZO was accrued as of March 31, 2023, and capitalized as an intangible asset[123] Wakamoto Agreement (MAQ-100) This section outlines the exclusive license for MAQ-100 in the U.S. and Canada, including potential milestone payments - The Company has exclusive license and marketing rights for MAQ-100 in the U.S. and Canada from Wakamoto Pharmaceutical Co., Ltd., with potential milestone payments up to $8.2 million[125][126] - The Company is involved in various legal proceedings, including a lawsuit against Ocular Science, Inc. and OSRX, Inc. for copyright and trademark infringement, with trial set for Q4 2023[110][113] - The Company has several related-party license and asset purchase agreements, including with Dr. Richard L. Lindstrom for Klarity and an injectable product, incurring royalty and milestone payments[116][117][118][119] - The Eyepoint Commercial Alliance Agreement for DEXYCU was terminated effective January 1, 2023, following a proposed CMS rule change impacting reimbursement[129] Note 17. Segments and Concentrations This note clarifies the company's single reportable segment and highlights concentrations in product revenues and supplier relationships - The Company operates as a single reportable segment focused on the discovery, development, and commercialization of innovative ophthalmic therapies[133] - Two products collectively accounted for 36% of total revenues in Q1 2023 (up from 32% in Q1 2022), and three main suppliers provided 90% of active pharmaceutical ingredients in Q1 2023 (up from 74% in Q1 2022)[134][135] Note 18. Subsequent Events This note reports on events occurring after the balance sheet date, including common stock issuances and performance stock unit grants - In April 2023, the Company issued 62,367 shares of common stock to the CEO upon cashless exercise of options, with shares withheld for payroll tax obligations[137] - In April 2023, the Company granted 1,567,913 performance stock units (2023 PSUs) to senior management, subject to a two-year service period and common stock price targets ranging from $25 to $50 over a five-year term[139] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Harrow Health, Inc.'s financial condition and results of operations for the three months ended March 31, 2023, compared to the same period in 2022. It highlights the Company's focus on ophthalmic pharmaceuticals, recent strategic developments including product acquisitions and financing, and detailed analysis of revenue, expenses, and liquidity Overview This section provides a general description of the company's business, focusing on its specialization in ophthalmic pharmaceuticals and product portfolio - The Company specializes in developing, producing, selling, and distributing innovative prescription medications for unmet needs in the ophthalmic market[143] - Harrow owns U.S. commercial rights to ten branded ophthalmic pharmaceutical products, including IHEEZO™, IOPIDINE®, MAXITROL®, MOXEZA®, ILEVRO®, NEVANAC®, VIGAMOX®, MAXIDEX®, and TRIESENCE®[143] Recent Developments This section highlights key strategic developments, including the J-code for IHEEZO, its commercial launch, the Fab 5 Acquisition, and new financing - CMS issued a permanent, product-specific J-code (J2403) for IHEEZO, effective April 1, 2023, enabling transitional pass-through reimbursement for three years[146] - The Company initiated a regional launch of IHEEZO in early April 2023, followed by a full commercial launch in early May 2023[147] - The Fab 5 Acquisition of five ophthalmic products from Novartis closed on January 20, 2023, for an upfront payment of $130 million, with potential additional milestone payments[148][149] - The Company secured a $100 million Oaktree Loan in March 2023, drawing $65 million to repay the B. Riley Loan, which was used to finance the Fab 5 Acquisition[153][156][157] Results of Operations This section analyzes the company's financial performance, detailing changes in revenues, cost of sales, gross profit, and various expenses Revenues This section analyzes the changes in total revenues, including product sales, commission revenues, and transfer of profits | Revenue Source | Q1 2023 | Q1 2022 | Variance | | :--------------- | :------------- | :------------- | :----------- | | Product sales, net | $20,453,000 | $20,340,000 | $113,000 | | Commission revenues | $- | $1,320,000 | $(1,320,000) | | Transfer of profits | $5,650,000 | $460,000 | $5,190,000 | | Total revenues | $26,103,000 | $22,120,000 | $3,983,000 | - The increase in revenues was partially offset by a decrease in commission revenues due to the termination of the Dexycu® Commercial Alliance Agreement and reduced sales from non-ophthalmology compounded products after divestment[162] Cost of Sales This section details the increase in cost of sales, attributing it to higher unit volumes, production costs, and amortization of acquired NDAs | Metric | Q1 2023 | Q1 2022 | Variance | | :------- | :------------- | :------------- | :----------- | | Cost of sales | $8,271,000 | $5,963,000 | $2,308,000 | - Cost of sales increased by $2.31 million (38.7%) year-over-year, mainly due to higher unit volumes, increased direct/indirect production costs, and amortization of acquired product NDAs[164] Gross Profit and Margin This section analyzes the changes in gross profit and margin, highlighting the impact of amortization from the Fab 5 Acquisition | Metric | Q1 2023 | Q1 2022 | Variance | | :------- | :------------- | :------------- | :----------- | | Gross Profit | $17,832,000 | $16,157,000 | $1,675,000 | | Gross Margin | 68.3% | 73.0% | -4.7% | - Gross margin decreased by 4.7 percentage points to 68.3% in Q1 2023, primarily due to the amortization of acquired NDAs from the Fab 5 Acquisition[165] Selling, General and Administrative Expenses This section details the increase in SG&A expenses due to regulatory enhancements, acquisition transitions, and new employee additions | Metric | Q1 2023 | Q1 2022 | Variance | | :------- | :------------- | :------------- | :----------- | | Selling, general and administrative | $15,888,000 | $13,398,000 | $2,490,000 | - Selling, general and administrative expenses increased by $2.49 million (18.6%) year-over-year, driven by regulatory enhancements, costs for product acquisition transitions, and new employee additions for sales, marketing, and IHEEZO launch support[167] Research and Development Expenses This section analyzes the increase in R&D expenses, primarily due to regulatory enhancements and new employee additions | Metric | Q1 2023 | Q1 2022 | Variance | | :------- | :------------- | :------------- | :------- | | Research and development | $734,000 | $658,000 | $76,000 | - R&D expenses increased by $76,000 (11.6%) year-over-year, mainly due to regulatory enhancements and new employee additions[169] Interest Expense, Net This section details the significant increase in net interest expense, driven by higher outstanding debt obligations | Metric | Q1 2023 | Q1 2022 | | :------- | :------------- | :------------- | | Interest expense, net | $4,747,000 | $1,792,000 | - Net interest expense increased significantly to $4.75 million in Q1 2023 from $1.79 million in Q1 2022, primarily due to an increase in outstanding debt obligations[170] Equity in Losses of Unconsolidated Entities This section highlights the improvement in equity in losses of unconsolidated entities for the reported period | Metric | Q1 2023 | Q1 2022 | | :------- | :------ | :------------ | | Equity in losses of unconsolidated entities | $- | $(2,886,000) | - The Company recorded no equity in losses of unconsolidated entities in Q1 2023, a significant improvement from $(2.89) million in Q1 2022[171] Investment Gain from Eton This section details the increase in investment gain from Eton Pharmaceuticals for the reported period | Metric | Q1 2023 | Q1 2022 | | :------- | :------------- | :------------ | | Investment gain from Eton Pharmaceuticals | $2,042,000 | $139,000 | - Investment gain from Eton Pharmaceuticals increased to $2.04 million in Q1 2023 from $0.14 million in Q1 2022[172] Loss on Extinguishment of Debt This section reports the loss incurred due to the early extinguishment of the B. Riley Loan | Metric | Q1 2023 | Q1 2022 | | :------- | :------------- | :------ | | Loss on extinguishment of debt | $5,465,000 | $- | - A loss of $5.47 million was recorded in Q1 2023 due to the early extinguishment of the B. Riley Loan[173] - Total revenues increased by $3.98 million (18.0%) year-over-year to $26.10 million in Q1 2023, driven by increased sales volumes of ophthalmology products and higher transfer of profits from the Fab 5 Acquisition[161][162] - Net loss increased to $(6.64) million in Q1 2023 from $(2.44) million in Q1 2022, primarily due to higher interest expense and a $5.47 million loss on extinguishment of debt[173][174] Liquidity and Capital Resources This section discusses the company's cash position, funding sources, and ability to meet its financial obligations for the next 12 months Net Cash Flows This section provides a summary of cash flows from operating, investing, and financing activities | Cash Flow Activity | Q1 2023 | Q1 2022 | | :--------------------------------- | :------------- | :------------- | | Operating activities | $(8,214,000) | $967,000 | | Investing activities | $(130,970,000) | $(410,000) | | Financing activities | $62,162,000 | $(776,000) | | Net change in cash and cash equivalents | $(77,022,000) | $(219,000) | | Cash and cash equivalents, end of period | $19,248,000 | $41,948,000 | Operating Activities This section analyzes the cash used in operating activities, attributing it to increased receivables, inventory, and operating expenses - Net cash used in operating activities increased to $(8.21) million in Q1 2023, from cash provided of $0.97 million in Q1 2022, due to increased accounts receivable from the Fab 5 Acquisition, higher inventory levels, and operating expenses for the IHEEZO launch[179] Investing Activities This section details the significant cash used in investing activities, primarily driven by the Fab 5 Acquisition - Net cash used in investing activities was $(130.97) million in Q1 2023, a significant increase from $(0.41) million in Q1 2022, primarily driven by the Fab 5 Acquisition[180] Financing Activities This section analyzes the cash provided by financing activities, mainly from new debt issuances - Net cash provided by financing activities was $62.16 million in Q1 2023, compared to cash used of $(0.78) million in Q1 2022, mainly from proceeds of senior notes and the Oaktree Loan[181] - Cash and cash equivalents decreased from $96.27 million at December 31, 2022, to $19.25 million at March 31, 2023[175] - The Company believes its current cash position and funds from operations will be sufficient for the next 12 months, but may seek additional financing for acquisitions or faster-than-expected growth[176][177] - Primary sources of capital include operating activities from ImprimisRx and branded pharmaceutical businesses, and proceeds from senior notes and the Oaktree Loan[182] - Harrow Health is an ophthalmic-focused pharmaceutical company, owning U.S. commercial rights to ten branded ophthalmic products and operating ImprimisRx, a leading ophthalmology-focused pharmaceutical-compounding business[143] - Key performance factors include increasing revenues from branded products and compounded formulations, achieving operating efficiencies, managing regulatory restrictions, optimizing pricing and reimbursement, and pursuing development and commercialization opportunities[144] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no quantitative and qualitative disclosures about market risk applicable to the Company for the reported period - The Company has no applicable quantitative and qualitative disclosures about market risk for the period[187] Item 4. Controls and Procedures This section details the Company's evaluation of its disclosure controls and procedures and reports on any changes in internal controls over financial reporting - Management, including the principal executive and financial officers, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023[189] - There were no material changes in the Company's internal control over financial reporting during the quarter ended March 31, 2023[190] PART II OTHER INFORMATION This part includes legal proceedings, risk factors, and other miscellaneous information relevant to the company's operations Item 1. Legal Proceedings This section refers to Note 16 of the financial statements for information on the Company's various legal proceedings and other matters - Information on legal proceedings is incorporated by reference from Note 16 to the condensed consolidated financial statements[193] Item 1A. Risk Factors This section advises readers to consider the risk factors detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, as well as additional risks and uncertainties that may arise - Readers should review risk factors from the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and other SEC filings[194] - Adverse outcomes from identified risks could materially affect the Company's business, financial condition, results of operations, and future growth prospects, potentially leading to a decline in common stock price[194] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds occurred during the period[195] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities to report for the period - No defaults upon senior securities were applicable for the period[196] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable to the Company[197] Item 5. Other Information This section states that there is no other information to report for the period - No other information is reported for the period[198] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including various agreements, certifications, and XBRL documents - Exhibits include the Loan and Security Agreement with B. Riley Commercial Capital, LLC, the Credit and Guaranty Agreement with Oaktree Fund Administration, LLC, and certifications from the principal executive and financial officers[199] - The report also includes Inline XBRL Instance, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase Documents[199][200] Signatures This section contains the duly authorized signatures of Harrow Health, Inc.'s Chief Executive Officer and Chief Financial Officer, certifying the filing of the report - The report is signed by Mark L. Baum, Chief Executive Officer and Director, and Andrew R. Boll, Chief Financial Officer, on May 11, 2023[203]