HROW US Equity☆

Item 1A. Risk Factors 15

Item 1B. Unresolved Staff Comments 39

Item 2. Properties 40

Item 3. Legal Proceedings 40

Item 4. Mine Safety Disclosures 40

PART II

Item 6. Selected Financial Data 41

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 52

Item 8. Financial Statements and Supplementary Data 52

Item 9A. Controls and Procedures 52

Item 9B. Other Information 52

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 52

PART III

Item 10. Directors, Executive Officers and Corporate Governance 53

Item 11. Executive Compensation 53

Item 14. Principal Accountant Fees and Services 53

PART IV

Item 15. Exhibits, Financial Statement Schedules 54

SIGNATURES 58

As

used in this Annual Report on Form 10-K (this “Annual Report”), unless indicated or the context requires otherwise, the terms

the “Company,” “Harrow,” “we,” “us” and “our” refer to Harrow 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

We

are an ophthalmic-focused pharmaceutical company. Our business specializes in the development, production, sale, and distribution of

innovative prescription medications that offer unique competitive advantages and serve unmet needs in the marketplace through our subsidiaries

and deconsolidated companies. We serve ophthalmologists and optometrists by providing FDA-approved branded ophthalmic pharmaceuticals

and innovative compounded prescription medicines that are accessible and affordable. We own the U.S. commercial rights to ten branded

ophthalmic pharmaceutical products, including IHEEZOTM, IOPIDINE® (both approved concentrations), MAXITROL® eye drops,

MOXEZA®, ILEVRO®, NEVANAC®, VIGAMOX®, MAXIDEX®, and TRIESENCE®. We own and operate ImprimisRx, one of the nation’s

leading ophthalmology-focused pharmaceutical-compounding businesses, and our branded drugs are marketed under our Harrow name. In addition,

we also have non-controlling equity positions in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”),

both companies that began as subsidiaries of Harrow and were subsequently carved-out of our corporate structure and deconsolidated from

our financial statements. We also own royalty rights in certain drug candidates being developed by Surface and Melt.

ImprimisRx

ImprimisRx

is our ophthalmology-focused pharmaceutical compounding businesses. From its inception in 2014, ImprimisRx, whose business consists of

integrated research and development, production, dispensing/distribution, sales, marketing, and customer-service capabilities, has offered

physician customers and their patients access to critical medicines to meet their clinical needs. Initially, ImprimisRx focused

exclusively on compounded medications to serve needs unmet by commercially available drugs. Our compounded medications include various

combinations of drugs formulated into one bottle and numerous preservative-free formulations. Depending on the formulation, the regulations

of a specific state, and ultimately the needs of the patient, ImprimisRx products may be dispensed as patient-specific medications from

our 503A pharmacy, or for in-office use, made according to current good manufacturing practices (“cGMPs”) or other guidance

documents from the U.S. Food and Drug Administration (the “FDA”), in our FDA-registered New Jersey outsourcing facility.

Our current ophthalmology formulary includes over 30 compounded formulations, many of which are patented or patent-pending, that are

customizable for the specific needs of a patient. We make our formulations available at prices that are, in most cases, lower than non-customized

commercial drugs. ImprimisRx’s customer base has grown to include more than 10,000 U.S. eyecare-dedicated prescribers and institutions.

Branded

Pharmaceuticals and Drug Candidates

Over

the past three years, in order to more fully serve the needs of our growing customer base, we have invested in broadening our product

portfolio to include FDA-approved products. Our investments in this regard have led to the pursuit and completion of several announced

transactions, and others we are continuing to pursue, all of which are focused on eyecare pharmaceuticals. We believe that our continued

investments in these and other products will result in our ability to provide more physician prescribers and their patients with access

to a complete portfolio of affordable eyecare pharmaceuticals to address their clinical needs.

ILEVRO®,

NEVANAC®, VIGAMOX®, MAXIDEX®, TRIESENCE®

In

December 2022, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Novartis Technology, LLC and Novartis

Innovative Therapies AG (together, “Novartis”), pursuant to which the Company agreed to purchase from Novartis the exclusive

commercial rights to assets associated with the following ophthalmic products (collectively the “Fab 5 Products”) in the

U.S. (the “Fab 5 Acquisition”):

We

closed the Fab 5 Acquisition on January 20, 2023. Under the terms of the Purchase Agreement, we made a one-time payment of $130,000,000

at closing, with up to another $45,000,000 due in a milestone payment related to the timing of the commercial availability of TRIESENCE.

Pursuant to the Purchase Agreement and various ancillary agreements, immediately following the closing and subject to certain conditions,

for a period that we expect to last approximately six months, and prior to the transfer of the Fab 5 Products new drug applications (the

“NDAs”) to us, Novartis will continue to sell the Fab 5 Products on our behalf and transfer the net profit from the sale

of the Fab 5 Products to us. Novartis has agreed to supply certain Fab 5 Products to the Company for a period of time after the NDAs

are transferred to us and to assist with technology transfer of the Fab 5 Products manufacturing to other third-party manufacturers,

if needed.

IOPIDINE®,

MAXITROL® EYE DROPS, MOXEZA®

In

December 2021, we acquired U.S. commercial rights to four FDA-approved ophthalmic medicines: IOPIDINE 1% and 0.5% (apraclonidine hydrochloride);

MAXITROL (neomycin/polymyxin B/dexamethasone) ophthalmic suspension; and MOXEZA (moxifloxacin hydrochloride). We believe by expanding

our product portfolio to include branded FDA-approved products, we will be uniquely positioned to leverage our commercial platform to

introduce unique lifecycle management strategies that could grow sales and address needs of our customers that we are unable to meet

with our other compounded product offerings.

At

the time of closing the acquisition of the four products, we agreed to a transition period with the seller, which lasted six months following

the closing of the transaction. During the transition period, the seller continued to sell the products and transferred the net profit

from those sales to us. Following the transition period which ended in June 2022, we made IOPIDINE 1% and MAXITROL commercially available,

and expect to re-launch MOXEZA at a later date.

IHEEZO

In

July 2021, we acquired the exclusive U.S. and Canadian marketing and supply rights to IHEEZO (chloroprocaine hydrochloride ophthalmic

gel) 3% from Sintetica S.A. (“Sintetica”). The FDA approved IHEEZO for ocular surface anesthesia in September 2022. IHEEZO

is protected by an Orange Book-listed patent that is valid until 2038. We expect to commercially launch IHEEZO in the U.S. market during

2023.

We

expect our commercial focus of IHEEZO to be on ophthalmic procedures that traditionally require the eye to be anesthetized, including

intravitreal injections and lens replacement procedures, which in aggregate we estimate to be over 11 million instances annually in the

U.S. (see also subheading “Ophthalmology Market”).

IHEEZO

is protected by one issued, Orange Book listed patent and another patent-pending. The issued patent includes composition of matter and

method of use claims and could provide protection for IHEEZO into 2037.

MAQ-100

In

August 2021, we acquired exclusive marketing rights to MAQ-100 in the U.S. and Canada from Wakamoto Pharmaceutical Co., Ltd. (“Wakamoto”).

MAQ-100 is a preservative-free triamcinolone acetonide ophthalmic injection drug candidate. MAQ-100 is marketed and sold by Wakamoto

in Japan as MaQaid®. Following Japan’s Ministry of Health Labor and Welfare (“MHLW”) approval, MaQaid was launched

in Japan in 2010, indicated as an intravitreal injection for visualization for vitrectomy. Since its initial MHLW approval, the indication

for MaQaid was expanded to include (a) treatments for alleviation of diabetic macular edema, (b) macular edema associated with retinal

vein occlusion (or RVO), and (c) non-infectious uveitis. We are currently working with Wakamoto to assess a clinical pathway for MaQaid.

We

are currently evaluating several programs to internally develop product candidates based on technology and know-how we own. We also expect

to continue to acquire and/or develop additional FDA-approved/approvable ophthalmic products and product candidates that will allow us

to leverage our commercial infrastructure to promote, sell, and ultimately bring these products to market.

Ophthalmology

Market

For

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

surface preservation. The cataract surgery market continues to experience significant growth. According to Market Scope, approximately

4.8 million lens procedures were performed in the U.S. in 2021, 97% of those procedures for cataracts, with the number expected to grow

to 5.5 million lens procedures in 2026. Nearly 96% of the refractive surgery procedures performed are LASIK (laser in situ keratomileusis)

surgeries, an outpatient surgical procedure used to treat nearsightedness, farsightedness, and astigmatism. According to an article published

in 2021 in Clinical Ophthalmology, an estimated 800,000 eyes have been treated with laser correction surgery (such as LASIK) each

year for the last 10 years.

Intravitreal

injections are one of the most common procedures performed by ophthalmologists in the United States. According to a 2023 article

published in Healio, approximately 8 million intravitreal injections are expected to be performed this year. These injections

are utilized to administer critical medications into the eye that treat diseases including but not limited to: proliferative

diabetic retinopathy, diabetic macular edema, wet age-related macular degeneration, neovascular glaucoma, retinal vein occlusions,

intraocular tumors, and endophthalmitis. In addition, products and product candidates are being developed and used to treat symptoms

associated with an eye disease known as geographic atrophy. Most of the medicines in these products and product candidates are

administered via intravitreal injection. Therefore, we believe as these products and product candidates gain commercial adoption,

the number of annual intravitreal injections should increase further and at an increased rate as compared to recent

years.

Vitrectomy

is a surgical procedure undertaken by a specialist where the vitreous humor gel that fills the eye cavity is removed to provide

better access to the retina. This allows for a variety of repairs, including the removal of scar tissue, laser repair of retinal

detachments and treatment of macular holes. According to an October 2022 article on the Cleveland Clinic website,

U.S. surgeons perform about 225,000 vitrectomies each year. The number is likely to continue to grow as eye care providers find more

uses for vitrectomy.

Chronic

non-infectious uveitis affecting the posterior segment of the eye is an inflammatory disease that afflicts people of all ages, producing

swelling and destroying eye tissues, which can lead to severe vision loss and blindness. We estimate this disease affects approximately

100,000 people each year in the U.S. and causes approximately 30,000 new cases of blindness every year. The standard of care treatment

for this disease typically involves the use of short-acting corticosteroids to reduce uveitic flares (such as TRIESENCE) followed by

additional treatments of sustained release, lower dose steroids to minimize the risk of further flares.

According

to the Glaucoma Research Foundation, there are over 3 million Americans experiencing glaucoma, and that only half of this population

are aware of their condition. 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 analog (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% 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 that combination products including a PGA

(Xalacom®, DuoTrav® and Ganfort®) are available outside of the U.S. According to a 2023 Market

Scope report, the global glaucoma pharmaceuticals market was expected to be $4.3 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 (“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 2022 Market Scope

report, the global dry eye product market was expected to grow from $5.7 billion in 2022 to $7.0 billion in 2027. Dry eye is among

the most common conditions seen by eyecare professionals.

Pharmaceutical

Compounding Businesses

Pharmaceutical

Compounding

Pharmaceutical

compounding is the science of combining different active pharmaceutical ingredients (APIs), all of which are approved by the FDA (either

as a finished form product or as a bulk drug ingredient), and excipients to create specialized pharmaceutical preparations. Physicians

and healthcare institutions use compounded drugs when commercially available drugs do not optimally treat a patient’s needs. In

many cases, compounded drugs, such as ours, have wide market utility and may be clinically appropriate for large patient populations.

Examples of compounded formulations include medications with alternative dosage strengths or unique dosage forms, such as topical creams

or gels, suspensions, or solutions with more tolerable drug delivery vehicles.

A

majority of our sales revenue in 2021 and 2022 was derived from making, selling and dispensing our compounded prescription drug formulations

as cash payment transactions between us and our end-user customer. As such, the majority of our commercial transactions did not involve

distributors, wholesalers, insurance companies, pharmacy benefit managers or other middle parties. In regard to our compounded formulations,

by not being reliant on insurance company formulary inclusion and pharmacy benefit manager payment clawbacks, we are able to simplify

the prescription transaction process. We believe the outcome of our compounding business model is a simple transaction, involving a patient-in-need,

a physician’s diagnosis, a fair price and great service for a quality pharmaceutical product.

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 the patient and is only permitted to distribute the drug interstate if the pharmacy is licensed to do so in the states where it is

compounded and where the medication is received.

Section

503B of the FDCA provides that a pharmacy engaged in preparing sterile compounded drug formulations may voluntarily elect to register

as an “outsourcing facility.” Outsourcing facilities are permitted to compound large quantities of drugs without a prescription

and distribute them out of state with certain limitations, such as the formulation appearing on the FDA’s drug shortage list or

the bulk drug substances contained in the formulations appearing on the FDA’s “clinical need” list. Entities voluntarily

registering with FDA as outsourcing facilities are subject to additional requirements that do not apply to compounding pharmacies (operating

under Section 503A of the FDCA), including adhering to standards such cGMPs or other FDA guidance documents and being subject to regular

FDA inspection.

We

operate two compounding facilities located in Ledgewood, New Jersey. Our New Jersey operations are comprised of two separate entities

and facilities, one of which is registered with the FDA as an outsourcing facility (“NJOF”) under Section 503B of the FDCA.

The other New Jersey facility (“RxNJ”) is a licensed pharmacy operating under Section 503A of the FDCA. All of our compounded

products that we sell, produce and dispense are made in the United States.

We

believe that, with our current compounding pharmacy facilities and licenses and FDA registration of NJOF, we have the infrastructure

to scale our business appropriately under the current regulatory landscape and meet the potential growth in demand we are targeting.

We plan to invest in one or both of our facilities to further their capacity and efficiencies. Also, we may seek to access greater pharmacy

and production related redundancy and markets through acquisitions, partnerships or other strategic transactions.

Carved-Out

Subsidiaries (De-Consolidated Businesses)

We

have ownership interests in Surface, Melt, and Eton Pharmaceuticals, Inc. (“Eton”) and hold royalty interests in some of

Surface’s and Melt’s drug candidates. These companies are pursuing market approval for their drug candidates under the FDCA,

including in some instances under the abbreviated pathway described in Section 505(b)(2), which 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.

Noncontrolling

Equity Interests

Melt

Pharmaceuticals, Inc.

Melt

is a clinical-stage pharmaceutical company focused on the development and commercialization of proprietary non-intravenous, sedation

and anesthesia therapeutics for human medical procedures in hospital, outpatient, and in-office settings. Melt is seeking regulatory

approval for its proprietary technologies, where possible. In December 2018, we entered into an Asset Purchase Agreement with Melt (the

“Melt Asset Purchase Agreement”), pursuant to which Harrow assigned to Melt the underlying intellectual property for Melt’s

current pipeline, including its lead drug candidate MELT-300. The core intellectual property Melt owns is a patented series of combination

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

MELT-300

is a novel, sublingually delivered, non-IV, opioid-free drug candidate being developed for procedural sedation. In February 2021, Melt

announced data from, and the successful completion of, its Phase 1 study. In December 2022, Melt announced topline data from its Phase

2 study for MELT-300:

● MELT-300’s safety profile was generally comparable to the placebo arm.

In

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

Melt from our consolidated financial statements. We own 3,500,000 shares of Melt common stock, which was approximately 46% of Melt’s

equity and voting interests issued and outstanding as of December 31, 2022. In September 2021, we provided Melt with a senior secured

loan with a principal amount of $13,500,000, which was used to fund the Phase 2 program of MELT-300.

Melt

is required to make mid-single digit royalty payments to the Company on net sales of MELT-300, while any patent rights remain outstanding,

subject to other conditions. Melt can require the Company to cease compounding like products at the time of FDA approval of MELT-300.

If approved, we do not expect a cessation of compounding like products to have a material impact on our operations and financial performance.

Surface

Ophthalmics, Inc.

Surface

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

diseases.

In

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

from our consolidated financial statements. During May, June and July of 2021, Surface closed an offering of its preferred stock at a

purchase price of $4.50 per share resulting in gross proceeds to Surface of approximately $25,000,000 (the “Surface Series B Offering”).

We own 3,500,000 shares of Surface common stock, which was approximately 20% of Surface’s equity and voting interests as of December

31, 2022. Harrow owns mid-single-digit royalty rights on net sales of SURF-100, SURF-200 and SURF-201.

Eton

Pharmaceuticals, Inc.

Eton

is an innovative pharmaceutical company focused on developing, acquiring, and commercializing treatments for rare diseases. Eton currently

commercializes ALKINDI SPRINKLE® and Carglumic Acid tablets and has additional rare disease products under development, including

dehydrated alcohol injection and the ZENEO® hydrocortisone autoinjector. In May 2017, we gave up our controlling interest in Eton.

We own 1,982,000 shares of Eton common stock, which represented less than 10% of Eton’s equity and voting interests issued and

outstanding as of December 31, 2022.

Sales

and Marketing

The

focus of our sales and marketing is in the U.S. We do, however, believe that our proprietary drug formulations, drug candidates and drug

products could have commercial appeal in international markets, and in the past 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 activities

consist primarily of efforts to educate doctors, ambulatory surgery centers, healthcare systems, hospitals and other users throughout

the U.S. about our branded drug products and compounded formulations. We expect that we may experience growth in the sales of our products

in future periods, particularly in light of our 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 continue to acquire and/or develop additional FDA-approved ophthalmic drugs that allow us to leverage our existing commercial

infrastructure to promote, sell, and ultimately bring these products to market. As we execute this strategy, we will continue to expand

our sales and marketing team, expertise and expenses. This includes 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.

In

the past, we entered into various sales and marketing agreements with certain organizations to provide exclusive sales and marketing

representation services 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 a certain percentage

of net sales for products above and beyond the initial existing sales amounts. At the end of 2022, we began to end many of these arrangements

and we plan to replace these arrangements with and invest in a traditional salaried salesforce over time.

Competition

The

pharmaceutical and pharmacy industries are highly competitive. We compete against branded drug companies, generic drug companies, outsourcing

facilities and compounding pharmacies. We are smaller than some of our competitors, and we may lack the financial and other resources

needed to develop, produce, distribute, market and commercialize any of our branded products and proprietary formulations or compete

for market share in these sectors. The drug products available through branded and generic drug companies with which our products and

formulations compete have been approved for marketing and sale by the FDA and are required to be manufactured in facilities compliant

with cGMP standards. Although we prepare some of our compounded formulations in accordance with cGMP standards and our other formulations

are produced according to the standards provided by United States Pharmacopoeia (USP) <795> and USP <797> and applicable

state and federal law, our compounded formulations are not required to be, and have not been, approved for marketing and sale by the

FDA. As a result, some physicians may be unwilling to prescribe, and some patients may be unwilling to use, our compounded formulations.

Additionally, under federal and state laws applicable to our current compounding pharmacy operations operating under Section 503A of

the FDCA, we are not permitted to prepare significant amounts of a specific formulation in advance of a prescription, compound quantities

for office use or utilize a wholesaler for distribution of our formulations; instead, our compounded formulations must be prepared and

dispensed in connection with a physician prescription for an individually identified patient. Pharmaceutical companies, on the other

hand, are able to sell their FDA-approved products to large pharmaceutical wholesalers, who can in turn sell to and supply hospitals

and retail pharmacies. Even though we have registered NJOF with the FDA, our compounding business may not be scalable on the scope available

to our competitors that produce FDA-approved drugs, which may limit our potential for profitable operations. These facets of our operations

may subject our business to limitations our competitors offering only FDA-approved drugs may not face.

Biotechnology

and related pharmaceutical technologies are subject to rapid and significant change. Our future success will depend in large part on

our ability to maintain a competitive position with respect to these technologies. Products developed by our competitors, including FDA-approved

drugs and compounded formulations created by other pharmacies, could render our products and technologies obsolete or unable to compete.

Any products that we develop may become obsolete before we recover expenses incurred in developing the products, which may require that

we seek additional funds that may or may not be available to continue our operations. The competitive environment requires an ongoing,

extensive search for medical and technological innovations and the ability to develop and market these innovations effectively, and we

may not be competitive with respect to these factors. Other competitive factors include the safety and efficacy of a product, the size

of the market for a product, the timing of market entry relative to competitive products, the availability of alternative compounded

formulations or approved drugs, the price of a product relative to alternative products, the availability of third-party reimbursement,

the success of sales and marketing efforts, brand recognition and the availability of scientific and technical information about a product.

Although we believe we are positioned to compete favorably with respect to many of these factors, if our proprietary formulations are

unable to compete with the products of our competitors, we may never gain 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, potential regulatory-related restrictions,

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 near and long-term. All of these activities will require significant costs and other resources, which we may not have or be able

to obtain from operations or other sources. See “Liquidity and Capital Resources” below.

Medicare,

Medicaid and Other Reimbursement Options

Sales

in the United States of our marketed products are dependent, in large part, on the availability and extent of reimbursement from third-party

payors, including private payor healthcare and insurance programs, health maintenance organizations, pharmacy benefit management companies,

and government programs such as Medicare and Medicaid, see also Part I, Item 1A. “Risk Factors” for additional risks related

to reimbursement and government programs.

We

participate in, and have certain price reporting obligations to, the Medicaid Drug Rebate program, state Medicaid supplemental rebate

program(s), and other governmental pricing programs. We also have obligations to report the average sales price for certain drugs to

the Medicare program. Under the Medicaid Drug Rebate program, we are required to pay a rebate to each state Medicaid program for our

covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having

federal funds being made available for our drugs under Medicaid and Part B of the Medicare program.

Medicare

is a federal program that is administered by the federal government that covers individuals age 65 and over or that are disabled as well

as those with certain health conditions. Medicare Part B generally covers drugs that must be administered by physicians or other health

care practitioners; are provided in connection with certain durable medical equipment; or are certain oral anti-cancer drugs and certain

oral immunosuppressive drugs. Medicare Part B pays for such drugs under a payment methodology based on the average sales price of the

drugs. Manufacturers, including us, are required to report average sales price information to the Centers for Medicare & Medicaid

Services (“CMS”) on a quarterly basis. The manufacturer-submitted information may be used by CMS to calculate Medicare payment

rates. Starting in 2023, manufacturers must pay refunds to Medicare for single-source drugs or biological products, or biosimilar biological

products, reimbursed under Medicare Part B and packaged in single-dose containers or single-use packages for units of discarded drug

reimbursed by Medicare Part B in excess of 10% of total allowed charges under Medicare Part B for that drug. Manufacturers that fail

to pay refunds could be subject to civil monetary penalties. Further, starting in 2023, the Inflation Reduction Act of 2022 (“IRA”)

establishes a Medicare Part B inflation rebate scheme under which, generally speaking, manufacturers will owe rebates if the average

sales price of a Part B drug increases faster than the pace of inflation. Failure to timely pay a Part B inflation rebate is subject

to a civil monetary penalty.

The

IRA also creates a drug price negotiation program under which, after being on the market for a certain period of time, the prices for

certain high Medicare spending drugs and biological products provided to Medicare patients without generic or biosimilar competition

will be capped by reference to, among other things, a specified non-federal average manufacturer price, starting in 2026. Failure to

comply with requirements under the drug price negotiation program is subject to an excise tax and a civil monetary penalty. This or any

other legislative change could impact the market conditions for our products.

IHEEZO

and TRIESENCE are covered under Medicare Part B and we may develop other drug candidates and/or acquire drug products that are also covered

under Medicare Part B. In February 2023, we announced that CMS had issued a permanent, product specific J-code for IHEEZO (J2403) which

will become effective under the Healthcare Procedure Coding System (HCPCS) on April 1, 2023. TRIESENCE has a permanent product specific

J-code (J3301) as well, which physicians can use for reimbursement purposes of that product. New drugs approved by the FDA that are used

in surgeries performed in a hospital outpatient departments or ambulatory surgical centers may receive a transitional pass-through reimbursement

under Medicare, provided they meet certain criteria, including a “not insignificant” cost criterion. Pass-through status

allows for separate payment (i.e., outside the packaged payment rate for the surgical procedure) under Medicare Part B, which consists

of Medicare reimbursement for a drug based on a defined formula for calculating the minimum fee that a manufacturer may charge for the

drug. Under current regulations of CMS, pass-through status applies for a period of three years; which is measured from the date Medicare

makes its first pass-through payment for the product. Following the three-year period, the product would be incorporated into the cataract

bundled payment system, which could significantly reduce the pricing for that product. Temporary pass-through reimbursement for IHEEZO

was awarded by CMS and will be made effective in the second quarter of 2023. Following the expiration of pass-through status, under current

CMS policy, non-opioid pain management surgical drugs when used on Medicare Part B patients in an outpatient setting can qualify for

ongoing separate payments. CMS’ current non-opioid separate payment policy, like other CMS policies, can be changed by CMS through

its annual rulemaking and comment process. We believe that CMS will continue its separate payment policy for non-opioid pain management

surgical drugs, which has been in effect since 2019.

In

July of 2022, CMS issued its Proposed CY 2023 Payment Rule for Hospital Outpatient Services and ASCs. Based on the summary in the proposed

rule, DEXYCU, a product we previously promoted through a commercial alliance agreement with EyePoint Pharmaceuticals, Inc. no longer

qualified as a separately payable product in an ASC or outpatient setting and instead is now bundled into the general cataract procedure

code effective January 1, 2023.

Medicaid

is a joint federal and state program that is administered by the states for low-income and disabled beneficiaries. Medicaid rebates are

based on pricing data reported by us on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid and Medicare

programs. These data include the average manufacturer price and, in the case of innovator products, the best price for each drug which,

in general, represents the lowest price available from the manufacturer to any entity in the U.S. in any pricing structure, calculated

to include all sales and associated rebates, discounts, and other price concessions. The amount of the rebate is adjusted upward if the

average manufacturer price increases at a faster rate than inflation (measured by reference to the Consumer Price Index – Urban).

Currently, the rebate is capped at 100% of the average manufacturer price, but effective January 1, 2024, this cap on the rebate will

be removed, and our rebate liability could increase accordingly.

If

we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data,

we are obligated to resubmit the corrected data for up to three years after those data originally were due, which revisions could affect

our rebate liability for prior quarters. The federal Patient Protection and Affordable Care Act (the “PPACA”) made significant

changes to the Medicaid Drug Rebate program, and CMS issued a final regulation, which became effective on April 1, 2016, to implement

the changes to the Medicaid Drug Rebate program under the PPACA. Effective in 2022, CMS modified Medicaid Drug Rebate program regulations

to, among other things, permit reporting multiple best price figures with regard to value-based purchasing arrangements and provide definitions

for “line extension,” “new formulation,” and related terms with the practical effect of expanding the scope of

drugs considered to be line extensions.

Civil

monetary penalties can be applied if we are found to have knowingly submitted any false pricing or other information to the government,

if we are found to have made a misrepresentation in the reporting of our average sales price, or if we fail to submit the required data

on a timely basis. Such conduct also could be grounds for CMS to terminate our Medicaid drug rebate agreement, in which case federal

payments may not be available under Medicaid or Medicare Part B for our covered outpatient drugs.

Federal

law requires that any company that participates in the Medicaid Drug Rebate program also participate in the Public Health Service’s

340B drug pricing program (the “340B program”) in order for federal funds to be available for the manufacturer’s drugs

under Medicaid and Medicare Part B. The 340B program, which is administered by the Health Resources and Services Administration (“HRSA”),

requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B “ceiling price”

for the manufacturer’s covered outpatient drugs. Covered entities include hospitals that serve a disproportionate share of financially

needy patients, community health clinics, and other entities that receive certain types of grants under the Public Health Service Act.

The PPACA expanded the list of covered entities to include certain free-standing cancer hospitals, critical access hospitals, rural referral

centers, and sole community hospitals, but exempts “orphan drugs” from the ceiling price requirements for these covered entities.

The 340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price and Medicaid rebate

amount for the covered outpatient drug as calculated under the Medicaid Drug Rebate program. In general, products subject to Medicaid

price reporting and rebate liability are also subject to the 340B ceiling price calculation and discount requirement.

HRSA

issued a final regulation regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties on manufacturers

that knowingly and intentionally overcharge covered entities, which became effective on January 1, 2019. It is currently unclear how

HRSA will apply its enforcement authority under this regulation. Any charge by HRSA that we have violated the requirements of the regulation

could result in civil monetary penalties. Moreover, under a final regulation effective January 13, 2021, HRSA established a new administrative

dispute resolution (“ADR”) process for claims by covered entities that a manufacturer has engaged in overcharging, and by

manufacturers that a covered entity violated the prohibitions against diversion or duplicate discounts. Such claims are to be resolved

through an ADR panel of government officials rendering a decision that could be appealed only in federal court. An ADR proceeding could

subject us to onerous procedural requirements and could result in additional liability. On November 30, 2022, HRSA issued a notice of

proposed rulemaking that proposes several changes to the ADR process. HRSA also implemented a price reporting system under which we are

required to report our 340B ceiling prices to HRSA on a quarterly basis, which then publishes those prices to 340B covered entities.

In addition, legislation could be passed that would further expand the 340B program to additional covered entities or would require participating

manufacturers to agree to provide 340B discounted pricing on drugs used in an inpatient setting.

In

order to be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by

certain federal agencies and grantees, we participate in the U.S. Department of Veterans Affairs (“VA”) Federal Supply Schedule

(“FSS”) pricing program. FSS participation is required for our products to be purchased by the VA, Department of Defense

(“DoD”), Coast Guard, and Public Health Service (“PHS”). Prices for innovator drugs purchased by the VA, DoD,

Coast Guard, and PHS are subject to a cap (known as the “Federal Ceiling Price”) equal to 76% of the annual non-federal average

manufacturer price (“non-FAMP”) minus, if applicable, an additional discount. The additional discount applies if non-FAMP

increases more than inflation (measured by reference to the Consumer Price Index - Urban). We also participate in the Tricare Retail

Pharmacy Program, under which we pay quarterly rebates to DoD for prescriptions of our innovator drugs dispensed to Tricare beneficiaries

through Tricare Retail network pharmacies. The governing statute provides for civil monetary penalties for failure to provide information

timely or for knowingly submitting false information to the government.

Medicare

Part D provides coverage to enrolled Medicare patients for self-administered drugs (i.e., drugs that are not administered by a physician).

Medicare Part D is administered by private prescription drug plans approved by the U.S. government and, subject to detailed program rules

and government oversight, each drug plan establishes its own Medicare Part D formulary for prescription drug coverage and pricing, which

the drug plan may modify from time to time. The prescription drug plans negotiate pricing with manufacturers and pharmacies, and may

condition formulary placement on the availability of manufacturer discounts. In addition, manufacturers, including us, are required to

provide to CMS a 70% discount on brand name prescription drugs utilized by Medicare Part D beneficiaries when those beneficiaries are

in the coverage gap phase of the Part D benefit design. The IRA includes a sunset provision with respect to the coverage gap discount

program starting in 2025 and replaces it with a new manufacturer discount program. In addition, as of October 2022, the IRA established

a Medicare Part D inflation rebate scheme under which, manufacturers will generally owe additional rebates if the average manufacturer

price of a Part D drug increases faster than the pace of inflation. Failure to timely pay a Part D inflation rebate is subject to a civil

monetary penalty.

Private

payor healthcare and insurance providers, health maintenance organizations, and pharmacy benefit managers in the United States are adopting

more aggressive utilization management techniques and are increasingly requiring significant discounts and rebates from manufacturers

as a condition to including products on formulary with favorable coverage and copayment/coinsurance. These payors may not cover or adequately

reimburse for use of our products or may do so at levels that disadvantage them relative to competitive products.

Our

proprietary ophthalmic compounded formulations are primarily available on a cash-pay basis and generally are not subject to Medicare,

Medicaid, or other payor-related initiatives.

Intellectual

Property

Our

success and ability to compete depends upon our ability to protect our intellectual property. We conduct a fulsome analysis of the intellectual

property landscape prior to acquiring rights to formulations and filing patent applications. In addition, as of March 15, 2023, we owned

and/or licensed more than 50 total issued and pending patent applications, which include U.S.-issued patents, international-issued patents,

and U.S. and foreign/international patent pending applications. We expect to file additional patent applications in the U.S. and pursue

patent protection for certain of our formulations in other important international jurisdictions in the future.

As

of March 15, 2023, we had, on a worldwide basis, more than 100 issued trademarks, pending trademark and copyright applications, or

registered copyright and/or trademarks including, but not limited to IHEEZOTM, 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 of 1996 (“HIPAA”); the Health Care Reform Law; statutes and regulations of the FDA, the

U.S. Federal Trade Commission (the “FTC”), the U.S. Drug Enforcement Administration and the U.S. Consumer Product Safety

Commission, as well as regulations promulgated by comparable state agencies concerning the sale, advertisement and promotion of the products

we sell. The regulatory and quality compliance environment for compounded drugs has become significantly more rigorous, complex and strict

since the passage of The Drug Quality and Security Act of 2013. The 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.

FDA

New Drug Application Process

As

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

to market and sell one or more of our product candidates through the FDA’s NDA process. As a condition of approval, the FDA or

other regulatory authorities may require further studies, including Phase 4 post-marketing studies, to provide additional data. Other

post-marketing studies may be required to gain approval for the use of a product as a treatment for clinical indications other than those

for which the product was initially tested and approved. Also, the FDA or other regulatory authorities require post-marketing reporting

to monitor the adverse effects of a drug. Results of post-marketing programs may limit or expand the further marketing of a product.

The

FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer

advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet.

A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements

can result in adverse publicity, warning letters, corrective advertising, fines and potential civil and criminal penalties.

Section

505(b)(2) New Drug Applications

As

an alternate path for FDA approval of new indications or new formulations of previously-approved products, a company may file a Section

505(b)(2) NDA instead of a “stand-alone” or “full” NDA. Section 505(b)(2) of the FDCA was enacted as part of

the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Amendments. Section 505(b)(2)

permits the submission of an NDA where at least some of the information required for approval comes from studies not conducted by or

for the applicant and for which the applicant has not obtained a right of reference. Some examples of products that may be allowed to

follow a Section 505(b)(2) path to approval are drugs that have a new dosage form, strength, route of administration, formulation or

indication. The AMP-100 NDA that was submitted and we expect the MAQ-100 NDA will be submitted as Section 505(b)(2) NDAs.

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.

Pharmacy

Regulation

Our

pharmacy operations are regulated by both individual states and the federal government. Every state has laws and regulations addressing

pharmacy operations, including regulations relating specifically to compounding pharmacy operations. These regulations generally include

licensing requirements for pharmacists, pharmacy technicians and pharmacies, as well as regulations related to compounding processes,

safety protocols, purity, sterility, storage, controlled substances, recordkeeping and regular inspections, among other things. State

rules and regulations are updated periodically, generally under the jurisdiction of individual state boards of pharmacy. Failure to comply

with the state pharmacy regulations of a particular state could result in a pharmacy being prohibited from operating in that state, financial

penalties and/or becoming subject to additional oversight from that state’s board of pharmacy. In addition, many states are considering

imposing, or have already begun to impose, more stringent requirements on compounding pharmacies. If our pharmacy operations become subject

to additional licensure requirements, are unable to maintain their required licenses or if states place burdensome restrictions or limitations

on pharmacies, our ability to operate in some states could be limited.

Federal

law limits compounding pharmacies from engaging in the practice of anticipatory compounding, which involves preparing compounded medications

before the actual receipt of a prescription or practitioner’s order, unless the compounding pharmacy has a history of filling certain

prescriptions for a customer. In such cases, it is acceptable to engage in anticipatory compounding or the preparation of larger batches

so that medications will be ready when they are needed. Anticipatory compounding also reduces the cost of compounded medications, as

economies of scale can be realized by producing larger batches. Anticipatory compounding also leads to less wasted chemicals, dilutions,

fillers, and other associated products that are produced, and greater accuracy and uniformity in finished medications, as larger batches

decrease the variation caused by preparing multiple, smaller batches. Based on our history of meeting the needs of our customers, we

are able to anticipatorily compound batches of our formulations for our customers, per the applicable regulations.

Many

of the states into which we deliver pharmaceuticals have laws and regulations that require out-of-state pharmacies to register with,

or be licensed by, the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing

pharmacy to follow the laws of the state within which the dispensing pharmacy is located. However, various state pharmacy boards have

enacted laws and/or adopted rules or regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by,

among other things, requiring compliance with all laws of the states into which the out-of-state pharmacy dispenses medications, whether

or not those laws conflict with the laws of the state in which the pharmacy is located, or requiring the pharmacist-in-charge to be licensed

in that state. To the extent that such laws or regulations are found to be applicable to our operations, we believe we comply with them.

Further,

under federal law, Section 503A of the FDCA previously had language that implied a limitation of the amount of compounded products that

a pharmacy can distribute interstate. The interpretation and enforcement of this provision is dependent on the FDA entering into a standard

Memorandum of Understanding (“MOU”) with each state setting forth limits on shipments of interstate compounding. In January

of 2019, the FDA released the “2018 Compounding Policy Priorities Plan” (the “2018 Compounding Plan”) which provided

an overview of the key priorities the FDA planned to focus on in 2018 in connection with compounding regulations. One of the priorities