HROW US Equity☆

Item 1A. Risk Factors 12

Item 1B. Unresolved Staff Comments 34

Item 2. Properties 34

Item 3. Legal Proceedings 34

Item 4. Mine Safety Disclosures 34

PART II

Item 6. Selected Financial Data 35

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 48

Item 8. Financial Statements and Supplementary Data 48

Item 9A. Controls and Procedures 48

Item 9B. Other Information 48

PART III

Item 10. Directors, Executive Officers and Corporate Governance 49

Item 11. Executive Compensation 49

Item 14. Principal Accountant Fees and Services 49

PART IV

Item 15. Exhibits, Financial Statement Schedules 50

SIGNATURES 55

As

used in this Annual Report, unless indicated or the context requires otherwise, the terms the “Company,” “Harrow,”

“we,” “us” and “our” refer to Harrow Health, 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: the impact of the COVID-19 pandemic on our financial condition, 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; 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: Imprimis®, ImprimisRx®, Harrow Health®,

Visionology®, Dropless®, LessDrops®, Dropless Cataract Surgery®, Klarity-C®,

Dropless Therapy®, 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

Our

business specializes in the development, production and sale of innovative medications that offer unique competitive advantages

and serve unmet needs in the marketplace through our subsidiaries and deconsolidated companies. We own and operate one of the

nation’s leading ophthalmic pharmaceutical businesses, ImprimisRx. In addition to wholly owning ImprimisRx, we also have

non-controlling equity positions in Eton Pharmaceuticals, Inc. (“Eton”), Surface Ophthalmics, Inc. (“Surface”),

and Melt Pharmaceuticals, Inc. (“Melt”), all companies that began as subsidiaries of Harrow. We also recently launched

a new business called Visionology and are exploring opportunities to launch other subsidiaries. We own royalty rights in various

drug candidates being developed by Surface and Melt. We intend to continue to create and hold equity and royalty rights in new

businesses that commercialize drug candidates that are internally developed or otherwise acquired or licensed from third parties.

ImprimisRx

ImprimisRx

is our ophthalmic focused prescription pharmaceutical business. We offer to over 9,000 physician customers and their patients

medically necessary prescription drugs to meet their needs that are otherwise unmet by commercially available drugs. We make our

formulations available at prices that are, in most cases, lower than non-customized commercial drugs. Our current ophthalmic formulary

includes over twenty compounded formulations, many of which are patented or patent-pending, and are customizable for the specific

needs of a patient. Some examples of our compounded medications are 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 federal current good manufacturing practices (or cGMPs) or other FDA guidance documents, in our FDA-registered

New Jersey Outsourcing Facility (“NJOF”).

On

August 1, 2020, ImprimisRx entered into a Commercial Alliance Agreement (the “Dexycu Agreement”) with Eyepoint Pharmaceuticals,

Inc. (“Eyepoint”), pursuant to which Eyepoint granted ImprimisRx the non-exclusive right to co-promote DEXYCU®

(dexamethasone intraocular suspension) 9% for the treatment of post-operative inflammation following ocular surgery in the

United States.Pursuant to the Dexycu

Agreement, Eyepoint pays ImprimisRx a fee that is calculated based on the

quarterly sales of DEXCYU in excess of predefined volumes to specific customers of ImprimisRx

in the U.S.

We

expect to acquire and/or develop additional FDA-approved ophthalmic drugs that allow us to leverage the commercial infrastructure

of ImprimisRx to promote, sell, and ultimately bring these products to market.

Visionology

Visionology

is a membership-based online eye health and medication platform. Visionology leverages our experience in the ophthalmic pharmaceutical

business, our relationships with eyecare professionals across the United States, and our expertise in developing and deploying

telemedicine software. We recently launched a proof-of-concept for Visionology in certain states in the southeast area of the

U.S. If successful, we expect Visionology will expand access to its service later in 2021.

Ophthalmology

Market

For

any ocular procedure, a surgeon may require drugs for sedation, dilation, and inflammation and infection prevention. The cataract

surgery market continues to experience significant growth. According to Market Scope, approximately 4.2 million cataract surgeries

were performed in the U.S. in 2019. The National Eye Institute estimates that over 24 million Americans currently have cataracts

and that this number will grow to 38 million by 2030 and reach more than 50 million by 2050. In addition, the American Academy

of Ophthalmology (AAO) estimates that over one-half of Americans require some form of vision correction and 43 million of these

individuals are candidates for refractive surgery. Nearly 96 percent 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 Statista, an estimated 600,000 LASIK procedures were performed in the U.S. in 2015.

According

to the Glaucoma Research Foundation, there are over 3 million Americans with glaucoma but only half are aware they have it. Open-angle

glaucoma (the most common type of glaucoma) is a condition of increased intraocular pressure that causes gradual loss of sight.

Glaucoma is incurable, and if not managed can lead to blindness. Generally, the first line of treatment consists of a prostaglandin

analogue (PGA) eye drop regimen. As the disease progresses, non-PGA products are generally added as a second line treatment. Topical

agents, other than PGAs, include beta blockers, alpha agonists, miotics and steroids. According to a 2013 article in Glaucoma

Today, up to 50 percent of glaucoma patients require more than one drug following a few months of initial treatment and there

is a direct correlation between the number of glaucoma bottles and decreased adherence; however, the FDA has yet to approve a

PGA combination product despite combination products including a PGA (Xalacom®, DuoTrav® and Ganfort®)

available outside of the U.S. According to a 2017 Market Scope report, the glaucoma pharmaceuticals market is expected to reach

$5.3 billion in 2022.

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. We believe that dry eye disease, or DED, affects over 30 million

people in the U.S., and a major epidemiological study, the Beaver Dam Offspring Study, published in 2014 in the American Journal

of Ophthalmology, reported that in a cohort of over 3,000 patients, DED was self-reported by 14.5% of the patients. According

to a 2017 Market Scope report, the global dry eye treatments market is expected to grow from $3.7 billion in 2017 to $4.9 billion

in 2022. Dry eye is among the most common conditions seen by eye care professionals.

Presbyopia

is the normal loss of near focusing ability that occurs with age. Most people begin to notice the effects of presbyopia sometime

after age 40, when they start having trouble seeing small print clearly. According to an American Academy of Ophthalmology report

from 2018, there are an estimated 1.8 billion people worldwide who suffer from presbyopia, with eye glasses (more commonly referred

to as “readers”) being the most common treatment option. Based on our understanding, there are currently four eyedrops

undergoing clinical trials/development in the U.S. aiming to be first to market topical eye drops to treat the symptoms associated

with presbyopia. We believe most of these are designed to enhance depth of field via a “pinhole effect” and in one

case to reduce lens stiffening; and some of these medications could be synergistic with each other or combined with refractive

surgery to enhance outcomes. However, as of the date of this Annual Report, none of these drug candidates has received market

approval from the FDA.

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

medical 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.

Almost

all of our sales revenue is derived from making, selling and dispensing our compounded prescription drug formulations as cash

pay transactions between us and our end-user customer. As such, the majority of our commercial transactions do not involve distributors,

wholesalers, insurance companies, pharmacy benefit managers or other middle parties. 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 business model is a simple and transparent transaction, involving a patient-in-need, a physician’s

diagnosis, a fair price and great service for a quality pharmaceutical product. We sell our products through a network of employees

and independent contractors, and we dispense our formulations in all 50 states, Puerto Rico and in selected markets outside the

United States.

Our

Compounding Facilities

Pharmaceutical

compounding businesses are governed by Sections 503A and 503B of the Federal Food Drug and Cosmetic Act (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 a 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 as current good manufacturing

practices (cGMP) or other FDA guidance documents and being subject to regular FDA inspection.

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 under Section 503B of the FDCA. The other New

Jersey facility (“RxNJ”) is a licensed pharmacy operating under Section 503A of the FDCA. All 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, production related redundancy, and distribution through acquisitions, partnerships or other strategic transactions.

Pharmaceutical

Development Businesses

We

have ownership interests in Eton, Surface and Melt 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 FDCA, including in some instances

under the abbreviated pathway described in Section 505(b)(2) which permits the submission of a new drug application (“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. In 2018 and 2019, we formed and created subsidiaries named Radley Pharmaceuticals,

Inc. (“Radley”), Mayfield Pharmaceuticals, Inc. (“Mayfield”) and Stowe Pharmaceuticals, Inc. (“Stowe”).

In addition, we may create additional subsidiaries that will be focused on the development and FDA approval of certain proprietary

drug formulations that we currently own, will in-license/acquire and/or otherwise develop. We expect any new subsidiaries to be

focused on eye care.

De-Consolidated

Businesses (Noncontrolling Equity Interests)

Surface

Ophthalmics, Inc.

Surface

is a clinical-stage pharmaceutical company focused on development and commercialization of innovative therapeutics for ocular

surface diseases.

During

January 2021, Surface announced positive top-line results from a phase 2 trial of its drug candidate SURF-201, a 0.2% betamethasone,

preservative-free ophthalmic solution in the Klarity delivery vehicle for the treatment of post cataract surgery pain and inflammation.

According to the Surface results, SURF-201 was dosed twice daily, met its primary endpoints of absence of inflammation at both

Day 8 and Day 15 and was found to be safe and well-tolerated by the patient group. In addition, a secondary endpoint showed almost

90% of patients given SURF-201 were pain free at Day 15. SURF-201 marks the first ophthalmic therapeutic in the United States

to utilize betamethasone as well as being the first preservative-free unit dose therapy for the treatment of post-operative pain

and inflammation.

Also

in January 2021, Surface announced the first patient dosed in a head-to-head phase 2 trial for its drug candidate SURF-100 (mycophenolate

sodium and betamethasone in Klarity vehicle) for the treatment of chronic dry eye disease. The head-to-head study will compare

SURF-100 against leading on-market competitors lifitegrast ophthalmic solution 5% (marketed as Xiidra®) and cyclosporine ophthalmic

emulsion 0.05% (marketed as Restasis®).

In

February 2021, Surface announced the first patient dosed in a phase 2 trial for its drug candidate SURF-200 (betamethasone in

Klarity vehicle) for the treatment of episodic dry eye flares. The dose ranging study for SURF-200 will be administered in two

different low concentration formulations of betamethasone in the Klarity vehicle. The trial will enroll 120 to 140 patients with

a primary endpoint of Symptom Improvement of one unit based on the University of North Carolina Dry Eye Management Scale by the

eighth day.

In

2018, Surface closed on an offering of its Series A Preferred Stock. At that time, we lost our controlling interest and deconsolidated

Surface from our consolidated financial statements. We own 3,500,000 shares of Surface, which was approximately 30% of the equity

and voting interests as of December 31, 2020. Harrow owns mid-single digit royalty rights on net sales of SURF-100, SURF-200 and

SURF-201. We expect Surface to complete another round of financing within the next twelve months.

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 intends to seek

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”), and Harrow assigned to Melt the underlying intellectual property

for Melt’s current pipeline, including its lead drug candidate MELT-100. The core intellectual property Melt owns is a patented

series of combination non-opioid sedation drug formulations that we estimate to have multitudinous applications.

MELT-100

is a novel, sublingually delivered, non-IV, opioid-free drug candidate being developed for procedural sedation. Melt filed an

investigational new drug application (“IND”) with the FDA in June 2020 and began its clinical program for MELT-100.

In February 2021, Melt announced data from, and the successful completion of, its phase 1 study. Melt expects to begin its phase

2 study for MELT-100 in the second half of 2021.

In

January 2019, Melt closed an offering of its Series A Preferred Stock. At that time, we lost our controlling interest and deconsolidated

Melt from our consolidated financial statements. We own 3,500,000 shares of Melt common stock, which was approximately 44% of

the equity and voting interests issued and outstanding as of December 31, 2020. We expect Melt to complete another round of financing

within the next twelve months. Pursuant to the terms of the Melt Asset Purchase Agreement, Melt is required to make mid-single

digit royalty payments to the Company on net sales of MELT-100, 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-100. If approved, we do not

expect a cessation of compounding like products to have a material impact on our operations and financial performance.

Eton

Pharmaceuticals, Inc.

Eton

is a commercial-stage pharmaceutical company focused on developing and commercializing innovative drug products. Its pipeline

includes several products and drug candidates in various stages of development across a variety of dosage forms. In May 2017,

Eton closed an offering of its Series A Preferred Stock. At that time, we gave up our controlling interest and deconsolidated

Eton from our consolidated financial statements. In November 2019, Eton completed an initial public offering of its common stock.

We own 3,500,000 shares of Eton common stock, which was less than 20% of the equity and voting interests issued and outstanding

as of December 31, 2020.

Consolidated

Businesses (Controlling Equity Interests)

Mayfield,

Stowe and Radley are consolidated subsidiaries of Harrow. Mayfield is a development-stage pharmaceutical company focused on developing

urology related drug candidates. Stowe is focused on the development of proprietary ophthalmic drug candidates. Radley is a development-stage

pharmaceutical company that has been focused on the development of proprietary drug candidates focused on rare diseases. Recently, we discontinued nearly all of the activities related to Mayfield, Stowe and

Radley, and may not resume those activities in the near term.

We

control over 50% of the equity and voting interests issued and outstanding of Mayfield, Stowe and Radley as of the date of this

Annual Report.

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 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

reference 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.

Sales

and Marketing

The

focus of our sales and marketing is in the United States. We do, however, believe that our proprietary drug formulations could

have commercial appeal in international markets, and we have engaged distributors and entered into out-licensing arrangements

for certain of our proprietary formulations in certain non-U.S. markets, including Canada. Our sales and marketing efforts are

currently organized into two teams, the larger of which focuses on our ophthalmology pharmaceutical business and the other on

our non-ophthalmology pharmaceutical compounding business. 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 compounded

formulations. We expect that we may experience growth in the sales of our proprietary pharmaceutical compounded formulations in

future periods, particularly in light of our current and planned launches of new formulations and commercialization campaigns.

However, we may not be successful in doing so, whether due to the safety, quality or availability of our proprietary compounded

formulations, the size of the markets for such formulations, 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 compounded formulations relative to alternative products or the success of our sales and marketing efforts, which is dependent

on our ability to build and grow a qualified and adequate internal sales function.

We

expect to acquire and/or develop additional FDA-approved ophthalmic drugs that allow us to leverage the commercial infrastructure

of ImprimisRx to promote, sell, and ultimately bring these products to market. As we execute this strategy, we will likely expand

our sales and marketing team, expertise and expenses. This would include the addition of market access expertise and team members,

where roles include discussions with payors regarding the costs and benefits of our products for their members, assisting with

the addition of our products to the medical policy of payors, and providing the market with assistance regarding reimbursement

queries.

We

have entered into various sales and marketing agreements with certain organizations to provide exclusive sales and marketing representation

services to ImprimisRx in select geographies in the U.S., in connection with our pharmaceutical products and compounded formulations.

Under the terms of the sales and marketing agreements, we are 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, we are required to make periodic

milestone payments to certain organizations in shares of our restricted common stock if net sales in the assigned territory reach

certain future levels by the end of their terms, as applicable. We believe these sales and marketing agreements will continue

to accelerate launches of our new ophthalmology programs and limit our initial capital requirements commonly associated with new

product launches and increased sizes of sales forces.

Competition

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, and we may

lack the financial and other resources needed to develop, produce, distribute, market and commercialize any of our proprietary

formulations or compete for 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 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) <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 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 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 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 market

share or achieve profitability.

Factors

Affecting Our Performance

We

believe the primary factors affecting our performance are our ability to increase revenues of our proprietary compounded formulations

and certain non-proprietary products, grow and gain operating efficiencies in our pharmacy operations, optimize pricing and obtain

reimbursement options for our proprietary compounded formulations, and continue to pursue development and commercialization opportunities

for certain of our ophthalmology and other assets that we have not yet made commercially available as compounded formulations.

We believe we have built a tangible and intangible infrastructure that will allow us to scale revenues efficiently in the 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.

Reimbursement

Options and Pricing Optimization

Our

proprietary ophthalmic compounded formulations are currently primarily available on a cash-pay basis. However, we work with third-party

insurers, pharmacy benefit managers and buying groups to offer patient-specific customizable compounded formulations at accessible

prices. We may devote time and other resources to seek reimbursement and patient pay opportunities for these and other compounded

formulations, and we have hired pharmacy billers to process certain existing reimbursement opportunities for certain formulations.

However, we may be unsuccessful in achieving these goals, as many third-party payors have imposed significant restrictions on

reimbursement for compounded formulations in recent years. Moreover, third-party payors, including Medicare, are increasingly

attempting to contain health care costs by limiting coverage and the level of reimbursement for new drugs and by refusing, in

some cases, to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling

approval. Further, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation

Act of 2010 (collectively, the “Health Care Reform Law”), may have a considerable impact on the existing U.S. system

for the delivery and financing of health care and could conceivably have a material effect on our business. As a result, reimbursement

from Medicare, Medicaid and other third-party payors may never be available for any of our products or, if available, may not

be sufficient to allow us to sell the products on a competitive basis and at desirable price points. We are communicating with

government and third-payor payors in order to make our formulations available to more patients and at optimized pricing levels.

However, if government and other third-party payors do not provide adequate coverage and reimbursement levels for our formulations,

the market acceptance and opportunity for our formulations may be limited.

Additionally,

we have previously made efforts to receive reimbursement and/or optimize the pricing for some of our currently available pharmaceutical

compounded formulations, including applying for transitional pass-through reimbursement status for one of our formulations. Pass-through

status allows for separate payment (i.e., outside the bundled payment) under Medicare Part B for new drugs and other medical technologies

that meet well-established criteria specified by federal regulations governing CMS spending. In September 2020, we were informed

by CMS that our application for pass-through payment was denied for one of our formulations. Any future efforts to attain optimized

pricing or reimbursement of our other proprietary compounded formulations could fail, which could make our products less attractive

or unavailable to some patients or could reduce our margins.

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, 2021, we owned and/or licensed 105 total issued and pending patent applications, which include 16 U.S. issued patents,

10 international issued patents, and 79 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, 2021, we had, on a worldwide basis, 275 issued trademarks, pending trademark and copyright applications, or

registered copyright and/or trademarks including, but not limited to: Imprimis®, ImprimisRx®, Harrow

Health®, Dropless®, LessDrops®, Dropless Cataract Surgery®, Dropless

Cataract Therapy®, Dropless Therapy®, MKO Melt®, and Simple Drops®.

We may choose to pursue trademark protection in other jurisdictions for any one or more of these or other marks in the future.

We

also rely on unpatented trade secrets and know-how and continuing technological innovation in order to develop our 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.

Governmental

Regulation

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 (“HIPAA”); the Health Care Reform Law; statutes and regulations

of the FDA, the U.S. Federal Trade Commission, 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 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

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.

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 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 a “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, 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, 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 five percent 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. States have

365 days to sign the Final MOU, before the FDA intends to enforce the five percent limit described in Section 503A of the FDCA

in states that have not signed the Final MOU. Our pharmacy is based in the state of New Jersey, and based on feedback we have

received from the state board of pharmacy in New Jersey, we believe the state board of pharmacy in New Jersey will sign the MOU

and as a result, our operations will not be materially affected by the Final MOU. In the event New Jersey does not sign the Final

MOU, our pharmacy that operates under Section 503A may be materially affected and we will transition as many prescription orders

as possible to our outsourcing facility, which is not subject to the Final MOU.

Certain

provisions of the FDCA govern the preparation, handling, storage, marketing and distribution of pharmaceutical products. The Drug

Quality and Security Act of 2013 (DQSA) clarifies and strengthens the federal regulatory framework governing compounding pharmacies.

Title 1 of the DQSA, the Compounding Quality Act, modifies 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 cGMP, 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 an Interim Policy on Compounding Using Bulk Drug Substances Under Section 503B of the FFDCA

(“Interim Policy”) that 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, as well as in March 2019 the FDA issued guidance for industry Evaluation of Bulk Substances Nominated for Use in

Compounding Under Section 503B of the Federal Food, Drug and Cosmetic Act, which further describes 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 NJ are governed by Section 503A of the FDCA, and our NJ 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. 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. In addition, during

September 2020 through January 2021, NJOF was inspected by the FDA (the “2020 Inspection”) and certain observations

were made by 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 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.

In

two recent California federal court decisions, Allergan USA, Inc. v. Prescribers Choice, Inc. and Allergan USA, Inc.

v. Imprimis Pharmaceuticals, Inc., the Court made rulings which impact 503B and 503A facilities operating in and shipping

to the state of California. In the Prescribers Choice case, the Court determined that while the FDA’s interim policies

do not override the statutory obligations of the DQSA, the Court supported the FDA’s authority and flexibility as it determines

what clinical needs exist and finalizes the bulk drug substances list. The Court would not hold a party liable under California’s

Sherman Food, Drug and Cosmetic Law (“Sherman Law”) for selling, delivering, or giving away any new drug that has

not been approved by the California Department of Health Services or FDA if that party has complied with the FDA’s Interim

Policy. In other words, it is not unlawful in California to utilize bulk drugs appearing on the Category 1 list while the FDA

finalizes its clinical needs list. In the Imprimis Pharmaceuticals case, the Court made clear that its rulings related

to violations of California’s Unfair Competition Law (“UCL”) (Cal. Bus. Prof. Code §17200) were limited

in geographical scope to drugs prepared in, dispensed from within or shipped to the State of California. With respect to 503A

facilities, the Court followed FDA’s guidance allowing compounding pharmacies to ship more than 5% of its medications out

of state while finalizing the MOUs. It further held that 503A facilities operating within or shipping into the state of California

must follow statutory guidance found in 21 U.S.C. 353(a). With respect to the statutory guidance related to compounding in response

to valid prescription orders, the Court added a requirement that the valid prescription order must contain language that “an

FDA-approved drug is not medically appropriate.” The practical effect of these two rulings is that 503A and 503B facilities

operating within or shipping drugs into the State of California now have clear guidance as to what is, and is not, lawful behavior

with respect the California’s UCL and Sherman Law.

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, or 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 will likely impact our business activities and 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. 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.

Medicare

and Medicaid Reimbursement

Medicare

is a federally funded program that provides health insurance coverage for qualified persons age 65 or older and for some disabled

persons with certain specific conditions. State-funded Medicaid programs provide medical benefits to groups of low-income and

disabled individuals, some of whom may have inadequate or no medical insurance. Currently, most of our compounded formulations

are sold in cash transactions, and the customers decide whether or not to seek reimbursement opportunities from Medicare, Medicaid

and other third parties. We work with third-party insurers, pharmacy benefit managers and buying groups to offer patient-specific

customizable compounded formulations at accessible prices. We plan to continue to devote time and other resources to seek reimbursement

and patient pay opportunities for these and other compounded formulations, and we have hired pharmacy billers to process certain

existing reimbursement opportunities for certain formulations. Moreover, third-party payors, including Medicare, are increasingly

attempting to contain health care costs by limiting coverage and the level of reimbursement for new drugs and by refusing, in

some cases, to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling

approval. Further, the Health Care Reform Law may have a considerable impact on the existing U.S. system for the delivery and

financing of health care and could conceivably have a material effect on our business. As a result, reimbursement from Medicare,

Medicaid and other third-party payors may never be available for any of our products or, if available, may not be sufficient to

allow us to sell the products on a competitive basis and at desirable price points.

To

the extent we obtain third-party reimbursement for our compounded formulations, we may become subject to Medicare, Medicaid and

other publicly financed health benefit plan regulations prohibiting kickbacks, beneficiary inducement and the submission of false

claims.

FDA

New Drug Application Process

As

discussed in other sections of this report, we are and may continue to, alone or with project partners, pursue FDA approval to

market and sell one or more of our formulations through the FDA’s NDA process. 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 Orange Book publication.

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