ITEM 1A. RISK FACTORS
Risk Factors Summary
We are subject to a variety of
risks and uncertainties, including financial risks, operational risks, human capital risks, legal proceedings and regulatory risks and
certain general risks, that could have a material adverse effect on our business results of operations, financial condition and prospects.
Risks that we deem material are described below and include, but are not limited to, the following:
Risks Related to Economic Conditions and Operations
of Our Business.
● Our ability to achieve and maintain profitability for our business
● Our current indebtedness and ability to access additional capital
Risks Related to Government Regulations and Third-Party
Policies
Risks Related to Competition
● Retention, recruitment, and training of senior management and key personnel
Risks Related to Product Development, Regulatory
Approval, Manufacturing and Commercialization
● Our drug candidates may face competition sooner than we expect
Risks Related to Our Indebtedness
Risks Related to Our Common Stock
● Volatility of the price of our common stock
● Our stock price falling as a result of future offerings or sales
You should carefully consider
the following risk factors in addition to the other information contained in this Annual Report. Our business, financial condition, results
of operations, and prices of our common stock and Notes could be materially adversely affected by any of these risks.
Risks Related to Economic Conditions and Operations
of Our Business.
We may not be profitable in the future.
As of December 31, 2024, our
accumulated deficit was $(151,385,000). Our current projections indicate that we will have operating income and/or net income during
2025; however, these projections may not be correct and our plans could change. Also, we could incur increasing operating losses in the
foreseeable future for our commercialization activities, research and development, and our pharmaceutical compounding business, which
would impact net income. Although we have been generating revenue from our operations, our ability to generate the revenues necessary
to achieve and maintain profitability will depend on many factors, including those discussed in this “Risk Factors” section.
Our business plan and strategies involve costly activities that are susceptible to failure, and, therefore, we may not be able to generate
sufficient revenue to support and sustain our business or reach the level of sales and revenues necessary to achieve and sustain profitability.
We may not receive sufficient revenue to fund
our operations and recover our development costs.
Our business plan involves the
sale and marketing of FDA-approved products, compounded formulations and drug candidates through third-party wholesaler and pharmacy
channels and our ImprimisRx facilities. We have limited experience selling FDA-approved products, and we may be unable to successfully
manage this business or generate sufficient revenue to recover our development costs and operational expenses. We may have only limited
success in marketing and selling our products. Although we have established and plan to grow our internal sales teams to market and sell
our products, we have limited experience with such activities and may not be able to generate sufficient physician and patient interest
in our products to generate significant revenue from sales of these products.
We may fail to realize the anticipated benefits
of our recent and any future product acquisitions.
The success of our product
acquisitions will depend on, among other things, our ability to integrate the products into our commercial platform, transfer the
products NDAs, maintain and obtain sufficient payor reimbursement coverage, maintain an adequate supply of the products, market the
products to our existing customers and re-introduce TRIESENCE to the ophthalmic market. If we experience difficulties with the
implementation of plans with respect to our acquisitions, the anticipated benefits of recent or future acquisitions may not be
realized fully or at all, or may take longer to realize than expected. Integration efforts will also divert management’s
attention and resources. These matters could have an adverse effect during any transition period and for an undetermined period
after completion of the acquisitions.
We may not be able to correctly estimate our
future operating expenses, which could lead to cash shortfalls.
The estimates of our future
operating and capital expenditures are based upon our current business plan, our current operations and our current expectations
regarding the commercialization of our proprietary formulations. Our projections have varied significantly from actual performance
in the past as a result of changes to our business model, strategy and acquisitions. We may not accurately estimate the potential
revenues and expenses of our operations. If we are unable to correctly estimate the amount of cash necessary to fund our business,
we could spend our available financial resources much faster than we expect. If we do not have sufficient funds to continue to
operate and develop our business, we could be required to seek additional financing earlier than we expect, which may not be
available when needed or at all, or be forced to delay, scale back or eliminate some or all of our proposed operations.
If we do not successfully identify and acquire
rights to new products and drug candidates and successfully integrate them into our operations, our growth opportunities may be limited.
We plan to pursue the development
of new FDA approved products and drug candidates which may include continued activities to develop and commercialize current assets or,
if and as opportunities arise, potential acquisitions of new intellectual property rights and assets. We have historically relied, and
we expect to continue to rely, primarily upon third parties to provide us with additional development opportunities. We may seek to enter
into acquisition agreements or licensing arrangements to obtain rights to develop new formulations and FDA approved products in the future,
but only if we are able to identify attractive products and formulations and negotiate acquisition or license agreements on terms acceptable
to us, which we may not be able to do. Moreover, we have limited resources to acquire additional potential product development assets
and integrate them into our business. Acquisition opportunities may involve competition among several potential purchasers, which could
include large multi-national pharmaceutical companies and other competitors that have access to greater financial resources than we do.
If we are unable to obtain rights to development and commercial opportunities from third parties and we are unable to rely upon our compounding
pharmacies and current and future relationships with pharmacists, physicians and other inventors to provide us with additional development
opportunities, our growth and prospects could be limited.
Our product development strategy
is to focus on ophthalmology and eye care related products and formulations for which we believe there is broad market potential, large
unmet needs and/or unique value to physicians and patients and to develop and offer formulations and products within these therapeutic
areas that could afford us with gross and operating margins consistent with our current and historical figures. However, our expectations
and assumptions about market potential and patient needs may prove to be wrong, and we may invest capital and other resources on products,
drug candidates, and formulations that do not generate sufficient revenues for us to recoup our investment.
We may be unable to successfully develop and
commercialize our drug products, candidates or any other assets we may acquire.
We have acquired assets related
to drug products and drug candidates. We are currently pursuing development and commercialization opportunities with respect to a number
of these products and drug candidates, and we are in the process of assessing certain of our other assets in order to determine whether
to pursue their development or commercialization. In addition, we expect to consider the acquisition of additional intellectual property
rights or other assets in the future. Once we decide to pursue a potential drug candidate, we develop a commercialization strategy for
it, which may include pursuing FDA approval of the drug candidate. We may incorrectly assess the risks and benefits of the commercialization
options or we may not pursue a commercialization strategy that proves to be successful. If we are unable to successfully commercialize
one or more of our drug products and drug candidates, our operating results would be adversely affected. Even if we are able to successfully
sell one or more drug products and drug candidates, we may never recoup our investment in acquiring or developing the drug products and
drug candidates. Our failure to identify and expend our resources and technologies with commercial potential and execute an effective
commercialization strategy for each of our drug products and drug candidates would negatively impact the long-term profitability of our
business.
We may need additional capital in order to
continue operating our business and to operate as a going concern, and such additional funds may not be available when needed, on acceptable
terms, or at all.
We may need significant additional
capital to execute our business plan, execute on future acquisitions and fund our proposed business operations. Additionally, our plans
may change or the estimates of our operating expenses and working capital requirements could be inaccurate, we may pursue acquisitions
of FDA-approved products, drug candidates, pharmacies or other strategic transactions that involve large expenditures, or we may experience
growth more quickly or on a larger scale than we expect, any of which may result in the depletion of capital resources more rapidly than
anticipated and could require us to seek additional financing earlier than we expect to support our operations.
In January 2026 debt in the
amount of $107,500,000 principal amount becomes due under the Oaktree Loan. The maturity of this debt obligation without a
refinancing event could raise substantial doubt about the Company’s ability to continue as a going concern. While the Company
is currently in discussions with its current senior secured lender and other potential lenders about refinancing and management
believes it is probable that the Company will be able to refinance such amount based on the Company’s collateral strength and expected cash flows
from operations, there can be no assurance that the Company
completes a refinancing on terms acceptable to it, or at all. If the Company is unable to successfully refinance the Oaktree Loan,
the Company does not expect to have the ability to repay the amount in full. The Company believes that one of the other alternatives
available to it is the sale of one or more of the Company’s assets. There can be no assurance that any sale could be completed
on a timely basis or on terms acceptable to the Company.
We have raised over $375,000,000
in gross proceeds through equity and debt financings since 2021. We may seek to obtain additional capital through equity or debt financings,
funding from corporate partnerships or licensing arrangements, sales of assets or other financing transactions. If we issue additional
equity or convertible debt securities to raise funds, our existing stockholders may experience substantial dilution, and the newly issued
equity or debt securities may have more favorable terms or rights, preferences and privileges senior to those of our existing stockholders.
If we raise additional funds through collaboration and licensing arrangements or sales of assets, we may have to relinquish potentially
valuable rights to our drug candidates or proprietary technologies, or grant licenses on terms that are not favorable to us. If we raise
funds by incurring additional debt, we may be required to pay significant interest expenses and our leverage relative to our earnings
or to our equity capitalization may increase. Obtaining commercial loans, assuming those loans would be available, would increase our
liabilities and future cash commitments and may impose restrictions on our activities, such as the financial and operating covenants.
Further, we may incur substantial costs in pursuing future capital and/or financing transactions, including investment banking fees,
legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses
in connection with certain securities we may issue, such as options, convertible notes and warrants, which would adversely impact our
financial results.
We have in the past participated and may in
the future participate in strategic transactions that could impact our liquidity, increase our expenses and distract our management.
From time to time, we consider
engaging in strategic transactions, such as out-licensing or in-licensing of compounds, drug candidates, drug products or technologies,
acquisitions of companies, and asset purchases. We may also consider a variety of different business arrangements in the future, including
strategic partnerships, joint ventures, spin-offs, carve-outs, restructurings, divestitures, business combinations and investments. In
addition, another entity may pursue us or certain of our assets or aspects of our operations as an acquisition target. Any such transactions
may require us to incur expenses specific to the transaction and not incident to our operations, may increase our near- and long-term
expenditures, may pose significant integration challenges, may require us to hire or otherwise engage personnel with additional expertise,
or may result in our selling or licensing of our assets or technologies under terms that may not prove profitable, any of which could
harm our operations and financial results. Such transactions may also entail numerous other operational and financial risks, including,
among others, exposure to unknown liabilities, disruption of our business and diversion of our management’s time and attention
in order to develop acquired products, drug candidates, technologies or businesses.
As part of our efforts to complete
any significant transaction, we would need to expend significant resources to conduct business, regulatory, legal and financial due diligence,
with the goal of identifying and evaluating material risks involved in the transaction. We may be unsuccessful in ascertaining or evaluating
all the risks and, as a result, we may not realize the expected benefits of the transaction, whether due to unidentified risks, integration
difficulties, regulatory setbacks or other events. We may incur material liabilities for the past activities of any businesses we partner
with or acquire. If any of these events occur, we could be subject to significant costs and damage to our reputation, business, results
of operations and financial condition.
If we are unable to establish, train and maintain
an effective sales and marketing infrastructure, we will not be able to commercialize our drug candidates successfully.
We have built an internal sales
and marketing infrastructure to implement our business plan by developing internal sales teams and education campaigns to market our
proprietary formulations and FDA-approved drug products. We will need to expend significant resources to further establish and grow this
internal infrastructure and properly train sales personnel with respect to regulatory compliance matters. We may also choose to engage
or enter into other arrangements with third parties to provide sales and marketing services for us in place of or to supplement our internal
commercialization infrastructure. We may not be able to secure sales personnel or relationships with third-party sales organizations
that are adequate in number or expertise to successfully market and sell our proprietary formulations, drug products and pharmacy services.
Further, any third-party organizations we may seek to partner with or engage may not be able to provide sales and marketing services
in accordance with our expectations and standards, may be more expensive than we can afford or may not be available on otherwise acceptable
terms or at all. If we are unable to establish and maintain compliant and adequate sales and marketing capabilities, through our own
internal infrastructure or third-party services or other arrangements, we may be unable to sell our formulations, drug products or services
or generate meaningful revenues.
We depend upon consultants, outside contractors
and other third-party service providers for key aspects of our business.
We are substantially dependent
on consultants and other outside contractors and service providers for key aspects of our business. For instance, we rely upon pharmacist,
physician and research consultants and advisors to provide us with significant assistance in the evaluation of product development opportunities,
and we have engaged or supported, and expect to continue to engage or support, consultants, advisors, contract manufacturers, clinical
research organizations (“CROs”), and others to design, conduct, analyze and interpret the results of any clinical or non-clinical
trials or other studies in connection with the research and development of our products. If any of our consultants or other service providers
terminates its engagement with us, or if we are unable to engage highly qualified replacements as needed on commercially reasonable terms,
we may be unable to successfully execute our business plan. We must effectively manage these third-party service providers to ensure
that they successfully carry out their contractual obligations and meet expected deadlines. However, these third parties often engage
in other business activities and may not devote sufficient time and attention to our activities, and we may have only limited contractual
rights in connection with the conduct of the activities we have engaged the service providers to perform. If we are unable to effectively
manage our outsourced activities or if the quality, timeliness or accuracy of the services provided by third-party service providers
is compromised for any reason, our development activities may be extended, delayed or terminated, and we may not be able to commercialize
our formulations or advance our business.
If a compounded drug formulation provided through
our compounding services leads to patient injury or death or results in a product recall, we may be exposed to significant liabilities
and reputational harm.
The success of our business,
including our proprietary formulations and pharmacy operations, is highly dependent upon medical and patient perceptions of us and the
actual safety and quality of our products. We could be adversely affected if we, any other compounding pharmacies or our formulations
and technologies are subject to negative publicity. We could also be adversely affected if any of our formulations or other products
we sell, any similar products sold by other companies, or any products sold by other compounding pharmacies prove to be, or are asserted
to be, harmful to patients. For instance, if any of the components of approved drugs or other ingredients used to produce our compounded
formulations have quality or other problems that adversely affect the finished compounded preparations, our sales could be adversely
affected. Because of our dependence upon medical and patient perceptions, adverse publicity associated with illness or other adverse
effects resulting from the use or misuse of our products, any similar products sold by other companies, or any other compounded formulations
could have a material adverse impact on our business.
To assure compliance with USP
guidelines, we have a policy whereby 100% of all sterile compound batches produced by our ImprimisRx compounding pharmacies are tested
prior to their delivery to patients and physicians both in-house and externally by an FDA-registered laboratory that has represented
to us that it operates in compliance with current good laboratory practices. However, we could still become subject to product recalls
and termination or suspension of our state pharmacy licenses if we fail to fully implement this policy, if the laboratory testing does
not identify all contaminated products, or if our products otherwise cause or appear to have caused injury or harm to patients. In addition,
laboratory testing may produce false positives, which could harm our business and impact our pharmacy operations and licensure even if
the impacted formulations are ultimately found to be sterile and no patients are harmed by them. If adverse events or deaths or a product
recall, either voluntarily or as required by the FDA or a state board of pharmacy, were associated with one of our proprietary formulations
or any compounds prepared by our ImprimisRx compounding pharmacies or any pharmacy partner, our reputation could suffer, physicians may
be unwilling to prescribe our proprietary formulations or order any prescriptions from such pharmacies, we could become subject to product
and professional liability lawsuits, and our state pharmacy licenses could be terminated or restricted. If any of these events were to
occur, we may be subject to significant litigation or other costs and loss of revenue, and we may be unable to continue our pharmacy
operations and further develop and commercialize our proprietary formulations.
We carry product and professional liability
insurance, which may be inadequate.
Although we have secured product
and professional liability insurance for our products, pharmacy operations and the marketing and sale of our formulations, our current
or future insurance coverage may prove insufficient to cover any liability claims brought against us. Because of the increasing costs
of insurance coverage, we may not be able to maintain insurance coverage at a reasonable cost or at a level adequate to satisfy liabilities
that may arise.
Business disruptions
could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our
operations, and those of CROs, contractors and consultants, could be subject to power shortages, telecommunications failures, wildfires,
water shortages, floods, earthquakes, hurricanes, typhoons, fires, extreme weather conditions, public health crises, and other natural
or man-made disasters or business interruptions for which we are predominantly self-insured. The occurrence of any of these business
disruptions could seriously harm our operations and financial condition and increase our costs and expenses. Our ability to obtain clinical
supplies of our product candidates could be disrupted if the operations of our contract manufacturers or the contract manufacturers of
our development partners are affected by a man-made or natural disaster or other business interruption.
We sell our proprietary formulations primarily
through pharmaceutical compounding facilities we own, but we may not be successful in our efforts to integrate these businesses into
our operations.
We currently have two compounding
facilities in New Jersey. We have developed “ImprimisRx” as a uniform brand for our compounding pharmaceutical business.
As we have in the past purchased and operated certain pharmaceutical compounding businesses and pharmacies and subsequently divested
or sold those associated assets, we may pursue similar strategies in the future. Those things considered, we may experience difficulties
implementing and/or executing on our compounding pharmacy strategy, including difficulties that arise as a result of our lack of experience,
and we may be unsuccessful and our plans may change materially. For instance:
Moreover, all our efforts to
expand pharmacy operations will involve significant costs and other resources, which we may not be able to afford and may disrupt our
other operations and distract management and employees from the other aspects of our business. As a result, our business could materially
suffer if we are unable to further develop a group of unified compounding facilities and, even if we are successful, we may be unable
to generate sufficient revenue to recover our costs.
We are dependent on market acceptance of compounding
pharmacies and compounded formulations, and physicians may be unwilling to prescribe, and patients may be unwilling to use, our proprietary
customizable compounded formulations.
We currently
distribute our proprietary formulations through compounding pharmacies and an outsourcing facility. Formulations prepared and dispensed
by compounding pharmacies contain FDA-approved ingredients, but are not themselves approved by the FDA. Thus, our compounded formulations
have not undergone the FDA approval process and only limited data, if any, may be available about the safety and efficacy of our formulations
for any particular indication. Certain compounding pharmacies have been subject to widespread negative media coverage in recent years,
and the actions of these pharmacies have resulted in increased scrutiny of compounding pharmacy activities from the FDA and state governmental
agencies. For example, the FDA has issued formal requests to compounding pharmacies and outsourcing facilities to conduct a recall of
all non-expired, purportedly sterile drug products and to cease sterile compounding operations due to lack of sterility assurance. As
a result, some health care providers may be reluctant to purchase and use compounded drugs. Our growth and future sales depend not only
on our ability to demonstrate in the face of increased scrutiny the quality and safety of our pharmacies and outsourcing facilities and
our compliance with more stringent regulatory standards at the federal and state levels, but also on the continued acceptance of compounded
drugs and formulations, particularly outsourced compounded drugs and formulations, in the marketplace.
An incident
similar to the fungal meningitis outbreak in 2012, which was caused by a compounding pharmacy employing a non-sterile-to-sterile business
model, could cause our customers to reduce their use of compounded formulations significantly or even stop using compounded drugs altogether.
States have in the past, and could in the future, enact regulations prohibiting or restricting the use of compounding pharmacies and
outsourcing facilities in response to such incidents. Such prohibitions or restrictions by states or reduced customer demand as a result
of an incident with compounded drugs and formulations could have a material adverse effect on our business, results of operations and
financial condition.
We have received multiple FDA
Forms 483, a MedWatch notice, warning letters and other regulatory notifications relating to issues at NJOF and our pharmacy RxNJ,
and have ongoing communications with the FDA about compliance and quality plans at NJOF. See “—We have been in discussions with the federal government regarding past FDA inspections of our 503B
facility, and to the extent we are unable to demonstrate compliance with cGMPs and other required regulations, the government could
pursue enforcement actions, the effects of which could be costly to us and could result in adverse consequences to our
business.” As a result of the MedWatch notice, warning letters and other regulatory notifications, some physicians may be
hesitant to prescribe and some patients may be hesitant to purchase and use non-FDA-approved compounded formulations, particularly
when an FDA-approved potential alternative is available. For other reasons, physicians may be unwilling to prescribe or patients may
be unwilling to use our proprietary compounded formulations, including, but not limited to, the following: legal prohibitions on our
ability to discuss the efficacy or safety of our formulations with potential users to the extent applicable data is available; our
pharmacy operations are primarily operating on a cash-pay basis and reimbursement may or may not be available from third-party
payors, including the government Medicare and Medicaid programs; and certain formulations are not required to be prepared and are
not presently being prepared in a manufacturing facility governed by cGMP requirements. Any failure by physicians, patients and/or
third-party payors to accept and embrace compounded formulations could substantially limit our market and cause our operations to
suffer.
Our business and operations
could suffer in the event of cybersecurity or other system failures.
Despite the implementation of
security measures, our internal computer systems and those of any third parties with which we partner are vulnerable to damage from computer
viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced
any cybersecurity or system failure, accident or breach to date that has been determined to have had a material impact, if a significant
event were to occur, it could result in a material disruption of our operations, substantial costs to rectify or correct the failure,
if possible, and potentially violation of HIPAA and other privacy laws applicable to our operations. For example, the California Consumer
Privacy Act (the “CCPA”) became effective on January 1, 2020 and gave California residents expanded rights to access and
require deletion of their personal information, opt out of certain personal information sharing and receive detailed information about
how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for
data breaches that may increase data breach litigation. Although the CCPA includes exemptions for certain clinical trials data, and HIPAA-protected
health information, the law may increase our compliance costs and potential liability with respect to other personal information we collect
about California residents. The CCPA has prompted a number of proposals for new federal and state privacy legislation. Other countries
also have, or are developing, laws governing the collection, use and transmission of personal information, such as the 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. We anticipate that over time we may expand our
business outside of the U.S. With such expansion, we would be subject to increased governmental regulation in the EU countries in which
we might operate, including the GDPR. These laws and similar laws adopted in the future could increase our potential liability, increase
our compliance costs and adversely affect our business. If any disruption or security breach resulted in a loss of or damage to our data
or applications or inappropriate disclosure of confidential or protected information, we could incur liability, further development of
our proprietary formulations could be delayed, and our pharmacy operations could be disrupted, subject to restriction or forced to terminate
their operations, any of which could severely harm our business and prospects.
A breakdown of our
information technology systems, or a cyberattack or information security breach could significantly compromise the confidentiality, integrity
and availability of our information technology systems, network-connected control systems and/or our data, interrupt the operation of
our business and/or affect our reputation.
To
achieve our business objectives, we rely on sophisticated information technology systems, including hardware, software, technology infrastructure,
online sites and networks for both internal and external operations, mobile applications, cloud services and network-connected control
systems, some of which are managed, hosted, provided or serviced by third parties. Internal or external events that compromise the confidentiality,
integrity and availability of our systems and data may significantly interrupt the operation of our business, result in significant costs
and/or adversely affect our reputation.
Our
information technology systems are highly integrated into our business, including our customer service infrastructure, R&D efforts,
clinical and commercial manufacturing processes and product sales and distribution processes. Further, as the large part of our employees
work remotely for some portion of their jobs, our reliance on our third-party information technology systems has increased substantially
and is expected to continue to increase. Remote and hybrid working arrangements can increase cybersecurity risks due to the challenges
associated with managing remote computing assets and security vulnerabilities that are present in many non-corporate and home networks.
The complexity and interconnected nature of software, hardware and our systems make them vulnerable to breakdown or other service interruptions,
and to software errors or defects, misconfiguration and other security vulnerabilities. Upgrades or changes to our systems or the software
that we use have resulted and we expect, in the future, will result in the introduction of new cybersecurity vulnerabilities and risks.
Our systems are also subject to frequent perimeter network reconnaissance and scanning, phishing and other cyberattacks. As the cyber-threat
landscape evolves, these attacks are growing in frequency, sophistication, and intensity, and are becoming increasingly difficult to
detect and increasingly sophisticated in using techniques and tools—including artificial intelligence—that circumvent security
controls, evade detection and remove forensic evidence. Such attacks could include the use of harmful and virulent malware, including
ransomware or other denials of service, which can be deployed through various means, including the software supply chain, e-mail, malicious
websites and/or the use of social engineering/phishing.
We
have experienced attacks against our network, although none that have had a material adverse impact to our business. In November 2024,
we became aware of a cybersecurity incident that involved unauthorized access of an employee’s email account. Through this unauthorized
access the threat actor was able to fraudulently divert Company funds to its bank account. We detected the incident in a timeframe management
believes minimized the financial, operation or reputational risk to the Company, and at no point was our ability to generate revenues
disrupted. However, if future attacks occur, there is no assurance we will be able to detect the incident in a timely manner or at all.
There
can be no assurance that our efforts to guard against the wide and growing variety of potential attack techniques will be successful.
Attacks such as those experienced by government entities (including those that approve and/or regulate our products) and other multi-national
companies, including some of our peers, could leave us unable to utilize key business systems or access or protect important data, and
could have a material adverse effect on our ability to operate our business, including developing, gaining regulatory approval for, manufacturing,
selling and/or distributing our products. For example, in 2017, a pharmaceutical company experienced a cyberattack involving virulent
malware that significantly disrupted its operations, including its research and sales operations and the production of some of its medicines
and vaccines. As a result of the cyberattack, its orders and sales for certain products were negatively affected. In late 2020, SolarWinds
Corporation, a leading provider of software for monitoring and managing information technology infrastructure, disclosed that it had
suffered a cybersecurity incident whereby attackers had inserted malicious code into legitimate software updates for its products that
were installed by myriad private and government customers, enabling the attackers to access a backdoor to such systems. In 2022, Okta,
Inc., a provider of software that helps companies manage user authentication, disclosed that several hundred of its corporate customers
were vulnerable to a security breach that allowed attackers to access Okta’s internal network. Although this breach did not have
a significant effect on our business, there can be no assurance that a similar future breach would not result in a material adverse effect
on our business or results of operations.
Our
systems contain and use a high volume of sensitive data, including intellectual property, trade secrets and other proprietary business
information, financial information, regulatory information, strategic plans, sales trends and forecasts, litigation materials and/or
personal identifiable information belonging to us, our staff, our patients, customers and/or other parties. In some cases, we utilize
third-party service providers to collect, process, store, manage or transmit such data, which have increased our risk. Intentional or
inadvertent data privacy or security breaches (including cyberattacks) resulting from attacks or lapses by employees, service providers
(including providers of information technology-specific services), business partners, nation states (including groups associated with
or supported by foreign intelligence agencies), organized crime organizations, “hacktivists” or others, create risks that
our sensitive data may be exposed to unauthorized persons, our competitors or the public. System vulnerabilities and/or cybersecurity
breaches experienced by our third-party service providers constitute a substantial share of the information security risks to our business.
There can be no assurance that a cybersecurity incident would not result in a material adverse effect on our business or results of operations.
Further, the timeliness of our awareness of a cybersecurity incident affects our ability to respond to and work to mitigate the severity
of such events.
Cyberattackers
are also increasingly exploiting vulnerabilities in commercially available software from shared or open-source code. We rely on third
party commercial software that have had and may have such vulnerabilities, but as use of open-source code is frequently not disclosed,
our ability to fully assess this risk to our systems is limited. There can be no assurances that a vulnerability in the software and
services that we use would not result in a material adverse effect on our business or results of operations.
Domestic
and global government regulators, our business partners, suppliers with whom we do business, companies that provide us or our partners
with business services and companies we have acquired or may acquire face similar risks. Security breaches of their systems or service
outages have adversely affected systems and could, in the future, affect our systems and security, leave us without access to important
systems, products, raw materials, components, services or information, or expose our confidential data or sensitive personal information.
An extended service outage affecting these or other vendors, particularly where such vendor is the single source from which we obtain
the services, could have a material adverse effect on our business or results of operations. For example, in February 2024, UnitedHealth
Group announced that a suspected nation-state associated cyber security threat actor had gained access to some of the Change Healthcare
(“Change”) information technology systems. Change is the largest clearinghouse for medical claims in the U.S. While Harrow
was not directly impacted by this cybersecurity incident, it was reported that as a reaction to the cybersecurity incident, Change temporarily
disconnected over 100 related payment systems and Change was unable to process medical claims through its primary platforms. This resulted
in the delays to the revenue and cash collection cycle for several ASCs and physician offices, putting a strain on their cash resources.
While temporary, the cash constraints for these ASCs and physician offices, we believe, impacted sales of some of our products, such
as IHEEZO, during this disrupted period of time. In addition, we distribute our products in the U.S. primarily through three pharmaceutical
wholesalers, and a security breach that impairs the distribution operations of our wholesalers could significantly impair our ability
to deliver our products to healthcare providers and patients. There can be no assurance that our cybersecurity risk management program
and processes, including our policies, controls, or procedures, will be effective in protecting our information technology systems and
sensitive data.
We
will continue to experience varying degrees of cyberattacks and other incidents in the future. Even though we continue to invest in the
monitoring, protection and resilience of our critical and/or sensitive data and systems, there can be no assurances that our efforts
will detect, prevent or fully recover systems or data from all breakdowns, service interruptions, attacks and/or breaches of our systems
that could adversely affect our business and operations and/or result in the loss or exposure of critical, proprietary, private, confidential
or otherwise sensitive data, which could result in material financial, legal business or reputational harm to us or negatively affect
our stock price. While we maintain cyber-liability insurance, our insurance is not sufficient to cover us against all losses that could
potentially result from a service interruption, breach of our systems or loss of our critical or sensitive data.
We are also subject to various
laws and regulations globally regarding privacy and data protection, including laws and regulations relating to the collection, storage,
handling, use, disclosure, transfer and security of personal data. The legislative and regulatory environment regarding privacy and data
protection is continuously evolving and developing and the subject of significant attention globally. For example, we are subject to
the CCPA, which became effective in January 2020, which can result in substantial penalties for noncompliance. The CCPA was amended in
late 2020, to create the California Privacy Rights Act to create opt in requirements for the use of sensitive personal data and the formation
of a new dedicated agency for the enforcement of the law, the California Privacy Protection Agency. Similar consumer privacy laws went
into effect in Virginia, Colorado, Utah, Connecticut and Florida in 2023. Consumer privacy laws were also passed in 11 other states,
with the earliest effective dates later this year, and proposed in three additional states. Failure to comply with these current and
future laws could result in significant penalties and reputational harm and could have a material adverse effect on our business and
results of operations.
Risks Related to Government Regulations and Third-Party
Policies
Our business is significantly impacted by state
and federal statutes and regulations.
Our proprietary compounded formulations
are comprised of active pharmaceutical ingredients that are components of drugs that have received marketing approval from the FDA, although
our proprietary compounded formulations have not themselves received FDA approval. FDA approval is not required in order to market and
sell our compounded formulations. We are pursuing FDA approval to market and sell drug candidates. The marketing and sale of those drug
candidates, FDA-approved drugs and compounded formulations are subject to and must comply with extensive state and federal statutes and
regulations governing those products and compounding pharmacies. These compounding statutes and regulations include, among other things,
restrictions on compounding for office use or in advance of receiving a patient-specific prescription or, for outsourcing facilities,
requirements regarding preparation, such as regular FDA inspections and cGMP requirements, prohibitions on compounding drugs that are
essentially copies of FDA-approved drugs, limitations on the volume of compounded formulations that may be sold across state lines, and
prohibitions on wholesaling or reselling. These and other restrictions on the activities of compounding pharmacies and outsourcing facilities
may significantly limit the market available for compounded formulations, compared to the market available for FDA-approved drugs.
Our pharmacy business is impacted
by federal and state laws and regulations governing the following: the purchase, distribution, management, compounding, dispensing, reimbursement,
marketing and labeling of prescription drugs and related services including: FDA and/or state regulation affecting the pharmacy and pharmaceutical
industries, including state pharmacy licensure and registration or permit standards; rules and regulations issued pursuant to HIPAA and
other state and federal laws related to the use, disclosure and transmission of health information; and state and federal controlled
substance laws. Our failure to comply with any of these laws and regulations could severely limit or curtail our pharmacy operations,
which would materially harm our business and prospects. Further, our business could be adversely affected by changes in these or any
newly enacted laws and regulations, and federal and state agency interpretations of the statutes and regulations. Statutory or regulatory
changes could require us to make changes to our business model and operations and/or could require us to incur significantly increased
costs to comply with such regulations.
On July 30, 2020, the FDA issued
a notice for comments related to certain bulk drug substances to be removed from the 503B Bulk’s List (or Category 1 List). Included
in this notice for comment were certain bulk drug substances which we currently use in some of our compounded products. In the event
one or more of these bulk substances are ultimately removed from the Category 1 List, we intend to utilize commercially available versions
of these substances or similar active pharmaceutical ingredients as replacements of the bulk powders contained in our sterile products.
In addition, nothing in the FDA’s notice affects the dispensing of bulk powder-containing products from our 503A pharmacy. Nonetheless,
if all or some of the bulk drug substances we use are removed from the 503B Bulk’s List, this may result in a disruption in our
operations, revenues and cash flows.
On October
27, 2020, the FDA announced availability of a final Memorandum of Understanding, Addressing Certain Distributions of Compounded Human
Drug Products Between the State Board of Pharmacy or Other Appropriate State Agency and the Food and Drug Administration (the “Final
MOU”). The Final MOU describes the responsibilities of a state board of pharmacy, or other appropriate state agency that chooses
to sign the Final MOU, in investigating and responding to complaints related to drug products compounded in such state and distributed
outside such state and in addressing the interstate distribution of inordinate amounts of compounded human drug products. Additionally,
as part of the Final MOU, the FDA refined the definition of “inordinate amount,” a threshold for certain information identification
and sharing which does not place a limit on the distribution of compounded human drug products interstate by a pharmacy located in a
state that has entered into the Final MOU. Section 503A of the FDCA sets a 5% limit on compounded drugs distributed outside the state
by a pharmacist, pharmacy or physician located in a state that has not entered into the Final MOU.
In February
2022, the FDA said it would suspend implementation of the Final MOU and engage in a formal rulemaking process. During the rulemaking
process, the agency will not enter into new agreements with states based on the Final MOU. The FDA does not expect states that have signed
the Final MOU to carry out the activities described in the Final MOU. Thus, there is no reporting requirement for any pharmacy concerning
interstate shipments pursuant to Section 503A and will not be until the Final MOU is finalized through the rulemaking process, which
will include the engagement of a notice-and-comment and rulemaking period to implement certain provisions of Section 503A. The agency
indicated that the process may take “several years” to complete. In the same announcement, the FDA stated it does not intend
to enforce the statutory 5% limit on the distribution of compounded drugs out of the state in which they are compounded by compounders
located in states that do not sign the Final MOU for the duration of the rulemaking process.
We have been in
discussions with the federal government regarding past FDA inspections of our 503B facility, and to the extent we are unable to
demonstrate compliance with cGMPs and other required regulations, the government could pursue enforcement actions, the effects of
which could be costly to us and could result in adverse consequences to our business.
In August 2017, the FDA issued
a MedWatch notification regarding a curcumin emulsion and two adverse events that had been associated with the use of these emulsions
by prescribing physicians. We issued a press release on August 7, 2017, clarifying certain facts regarding the notice which outlined
our belief that the adverse events associated with the two patients occurred due to an allergic reaction caused by the products being
inappropriately administered and obtained by the prescribing physician, and our use of curcumin and excipients in our curcumin emulsion
formulation met regulatory standards required for dispensing of the curcumin emulsion. In September 2017, the FDA released a letter confirming
that the alleged misuse of certain ingredients in our curcumin emulsions was due to mislabeling by the underlying supplier and not of
our own misdoing. We no longer compound curcumin emulsion products.
Separately, in December 2017,
we were issued a warning letter from the FDA alleging that, in its interpretation of our public communications, we had made false or
misleading claims and omitted risk and side effect information regarding certain of our ophthalmology-focused compounded medications.
We immediately performed a full review of our public communications referenced in the warning letter and responded to the FDA in January
2018; notwithstanding our continued belief that our public communications were not, in fact, false and misleading, we remained in communication
with the FDA and took steps to address the items outlined in the FDA letter. The Company received another warning letter from the FDA
in June 2022 related to our alleged marketing activities. We immediately responded to the warning letter and the FDA sent the Company
notice in January 2023 that our corrective actions appear adequate.
In June 2019, our New Jersey-based
outsourcing facility (“NJOF”) was issued a warning letter related to an April 2017 inspection and our use of certain active
pharmaceutical ingredients in our compounded medications. During September 2020 through January 2021, our New Jersey based outsourcing
facility was inspected by the FDA (the “2020 Inspection”) and certain observations were made by the FDA in a Form 483. Five
observations made during the 2020 Inspection were considered repeat observations from a 2017 FDA inspection. In addition, during the
2020 inspection, the FDA noted that we were compounding drugs for which there is no change that produces a clinical difference for an
individual patient, as determined by a prescribing practitioner between a compounded drug and the comparable approved drug. We have responded
to the FDA regarding all of their observations from the 2020 Inspection, including providing documentation from prescribing clinicians
that indicate a clinical difference between our compounded drugs and the comparable approved drugs, while also committing to amend our
order process to collect “medical necessity/clinical difference” information for each order of our compounded drugs on a
go-forward basis.
Our pharmacy was inspected in
August 2022 and received a Form 483 with several observations from the FDA. In May 2023, our pharmacy received a warning letter related
to the inspection that occurred in August 2022. The warning letter indicated that our corrective actions from the inspection had appeared
to be adequate; however, the FDA could not fully evaluate the adequacy of our actions because we did not include sufficient information
or supporting documentation. As an example, we stated that smoke studies related to airflow in our laminar airflow hoods had been redone
to satisfy FDA requirements, however, we did not provide the FDA with supporting documentation (such as smoke study protocol, updated
detailed report and/or videos). We have responded to this warning letter and provided the FDA with additional information requested.
From March 2024 through April 2024,
NJOF was inspected by the FDA (the “2024 Inspection”), and the FDA issued a Form 483 with five observations. Following the
2024 Inspection, NJOF voluntarily recalled certain products in coordination with the FDA. Since the 2024 Inspection, NJOF has provided
regular updates to the FDA regarding its remediation activities and other commitments, including providing the FDA with a comprehensive
update in February 2025. Since January 2025, we have engaged in separate but related discussions with the federal government regarding
the NJOF quality system and the 2024 Inspection. In support of our ongoing commitment to compliance, we engaged an independent third-party
current good manufacturing practices (“cGMP”) expert to review our NJOF operations and to recommend actions to improve our
compliance and quality activities (the “cGMP Expert Engagement”). The cGMP Expert Engagement is ongoing, and we expect to
regularly update the FDA regarding our compliance and quality activities.
These regulatory actions
could increase further scrutiny and could create negative publicity on us as a company. As part of our commitment to actively work
with regulators, at times, we have become aware of concerns related to certain formulations, and as a result, discontinued
compounding certain drug formulations in an attempt to help mitigate potential regulatory risk. For other reasons, including, but
not limited to, the following, physicians may be unwilling to prescribe or patients may be unwilling to use our compounded
formulations: legal prohibitions on our ability to discuss the efficacy or safety of our formulations with potential users to the
extent applicable data is available; our pharmacy operations are primarily operating on a cash-pay basis and reimbursement may or
may not be available from third-party payors, including the government Medicare and Medicaid programs; and certain formulations are
not required to be prepared and are not presently being prepared in a manufacturing facility governed by cGMP requirements. These
factors and any future regulatory action could continue to limit our production, and our ability to dispense and distribute our
compounded products, which would negatively affect sales of our compounded products.
If we or our partner
facilities fail to comply with the Controlled Substances Act, FDCA, or similar state statutes and regulations, the pharmacy facilities
could be required to cease operations or become subject to restrictions that could adversely affect our business.
State pharmacy laws require pharmacy
locations in those states to be licensed as an in-state pharmacy to dispense pharmaceuticals. In addition, state controlled substance
laws require registration and compliance with state pharmacy licensure, registration or permit standards promulgated by the state’s
pharmacy licensing authority. Pharmacy and controlled substance laws often address the qualification of an applicant’s personnel,
the adequacy of its prescription fulfillment and inventory control practices and the adequacy of its facilities. These laws also subject
pharmacies to oversight by state boards of pharmacy and other regulators that could impose burdensome requirements or restrictions on
operations if a pharmacy is found not in compliance with these laws. We believe that our compounding pharmacies are in material compliance
with applicable regulatory requirements. Further, if any of our compounding pharmacies fail to comply with regulatory requirements, they
could be forced to permanently or temporarily cease or limit their compounding operations, which would severely limit our ability to
market and sell our proprietary formulations and would materially harm our operations and prospects. Any noncompliance could also result
in complaints or adverse actions by other state boards of pharmacy. FDA inspection of a facility to determine compliance with the FDCA,
if not successful, may result in the loss of FDCA exemptions provided under Sections 503A and 503B, warning letters, injunctions, prosecution,
fines and loss of required government licenses, certifications and approvals, any of which could involve significant costs and could
cause us to be unable to realize the expected benefits of these pharmacies’ operations. Additionally, the permanent injunction
entered on July 22, 2019, by the U.S. District Court of the Central District of California (the “Court”) in the Allergan
litigation (also referenced in Item. 3 Legal Proceedings), enjoins the Company from engaging in activities that are inconsistent with
current FDA guidelines for 503A and 503B operations.
If we market any of our drug candidates in
a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting laws, we may be subject to civil
or criminal penalties.
The FDA enforces laws and regulations
which require that the promotion of pharmaceutical products be consistent with the approved prescribing information. While physicians
may prescribe an approved product for a so-called “off label” use, it is unlawful for a pharmaceutical company to promote
its products in a manner that is inconsistent with its approved label, and any company which engages in such conduct can subject that
company to significant liability. Similarly, industry codes in the EU and other foreign jurisdictions prohibit companies from engaging
in off-label promotion, and regulatory agencies in various countries enforce violations of the code with civil penalties. While we intend
to ensure that our promotional materials are consistent with our label, regulatory agencies may disagree with our assessment and may
issue untitled letters, warning letters or may institute other civil or criminal enforcement proceedings. In addition to FDA restrictions
on marketing of pharmaceutical products, several other types of state and federal healthcare fraud and abuse laws have been applied in
recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include the U.S. Anti-Kickback Statute,
U.S. False Claims Act and similar state laws. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible
that some of our business activities could be subject to challenge under one or more of these laws.
Our sales depend on coverage and reimbursement
from government and commercial third-party payors, and pricing and reimbursement pressures have affected, and are likely to continue
to affect, our profitability.
Sales of our branded products
depend on the availability and extent of coverage and reimbursement from third-party payors, including government healthcare programs
and private insurance plans. Governments and private payors continue to pursue initiatives to manage drug utilization and contain costs.
Further, pressures on healthcare budgets from the pandemic, the economic downturn and inflation continue and are likely to increase across
the markets we serve. Payors are increasingly focused on costs, which have resulted, and are expected to continue to result, in lower
reimbursement rates for our branded products or narrower populations for which payors will reimburse. Continued intense public scrutiny
of the price of drugs and other healthcare costs, together with payor dynamics, have limited, and are likely to continue to limit, our
ability to set or adjust the price of our products based on their value, which can have a material adverse effect on our business. In
the U.S., particularly over the past few years, a number of legislative and regulatory proposals have been introduced and/or signed into
law that attempt to lower drug prices. These include legislation promulgated by the IRA that enables the U.S. government to set prices
for certain drugs in Medicare, redesigns Medicare Part D benefits to shift a greater portion of the costs to manufacturers and enables
the U.S. government to impose penalties if drug prices are increased at a rate faster than inflation in addition to rebates imposed on
manufacturers associated with drug waste (which could potentially impact sales of TRIESENCE). Additional proposals focused on drug pricing
continue to be debated, and additional executive orders focused on drug pricing and competition are likely to be adopted and implemented
in some form. Government actions or ballot initiatives at the state level also represent a highly active area of policymaking and experimentation,
including pursuit of proposals that limit drug reimbursement under state run Medicaid programs based on reference prices or permitting
importation of drugs from Canada. Such state policies may also eventually be adopted at the federal level.
We are unable to predict which
or how many policy, regulatory, administrative or legislative changes may ultimately be, or effectively estimate the consequences to
our business if, enacted and implemented. However, to the extent that payor actions further decrease or modify the coverage or reimbursement
available for our products, require that we pay increased rebates or shift other costs to us, limit or affect our decisions regarding
the pricing of or otherwise reduce the use of our products, such actions could have a material adverse effect on our business and results
of operations.
Changing U.S. federal
coverage and reimbursement policies and practices have affected and are likely to continue to affect access to, pricing of and sales
of our products.
A substantial portion of our
branded product portfolio relies on reimbursement from federal government healthcare programs and commercial insurance plans regulated
by federal and state governments. Our business has been and will continue to be affected by legislative actions changing U.S. federal
reimbursement policy. The IRA’s drug pricing controls and Medicare redesign is likely to have a material adverse effect on our
sales (particularly for our branded products that are more substantially reliant on Medicare reimbursement), our business and our results
of operations. However, as the degree of impact from this legislation on our business depends on a number of implementation decisions,
the extent of the IRA’s impact on our sales and, in turn, our business remains unclear.
Changing reimbursement
and pricing actions in various states have negatively affected and may continue to negatively affect access to and have affected and
may continue to affect sales of our products.
At the state level, government
actions or ballot initiatives can also affect how our branded products are covered and reimbursed and/or create additional pressure on
our pricing decisions. Existing and proposed state pricing laws have added complexity to the pricing of drugs and may already be affecting
industry pricing decisions. A number of states have adopted, and many other states are considering, drug importation programs or other
pricing actions, including proposals designed to require biopharmaceutical manufacturers to report to the state proprietary pricing information
or provide advance notice of certain price increases. For example, a California law requires biopharmaceutical manufacturers to notify
health insurers and government health plans at least 60 days before scheduled prescription drug price increases that exceed certain thresholds.
Similar laws exist in Oregon and Washington. Additional proposals directed at Medicaid seek to penalize manufacturers for pricing drugs
above a certain threshold or limit spending on biopharmaceutical products. States are also seeking to change the way they pay for drugs
for patients covered by state programs. New York has established a Medicaid drug spending cap, and Massachusetts implemented a new review
and supplemental rebate negotiation process. Six states (Colorado, Maine, New Hampshire, Maryland, Oregon and Washington) have enacted
laws that establish Prescription Drug Affordability Boards (“PDABs”) to study drug prices and identify drugs that pose affordability
challenges, and in three states (Colorado, Maryland and Washington) include authority for the state PDABs to set upper payment limits
on certain drugs in state regulated plans. Other states may consider implementing similar policies and laws. Additionally, Colorado,
Florida, Maine, New Hampshire, New Mexico and Vermont have enacted laws, and several other states have proposed bills, to implement importation
of drugs from Canada. The FDA has met with representatives from Colorado, Florida, Maine and New Mexico to discuss those states’
proposed importation programs, and the FDA may be working towards approving such plans. Other states could adopt similar approaches or