EXHIBIT
99.2
Harrow
Health, Inc.
Letter
to Stockholders
March
8, 2021
To
the Stockholders of Harrow Health, Inc.:
The
year 2020 was a pivotal year in the history of our company, marking the conclusion of the first major phase of development for
Harrow Health. We began commercial operations in April of 2014, nearly seven years ago, after acquiring our first pharmacy
in Randolph, New Jersey. We started with zero products, zero customers, limited cash, and boundless drive to build a great healthcare
company. Today, thanks to the extraordinary efforts of our team, the patience of many stockholders, and the patronage of about
10,000 prescribers and institutions in virtually every major populated county in the United States, we make about two dozen innovative
products and have been a democratizing force in the pharmaceutical industry, ensuring patients have access to affordable ophthalmic
pharmaceutical products. Our team has accomplished a great deal, delivering a 149% ophthalmic revenue CAGR through 2019 (pre-COVID),
followed by a record third quarter in 2020. Today, I am pleased to report continued growth in the fourth quarter of 2020.
While
I am proud of our accomplishments during our first seven years, I believe we are well-positioned to continue to grow, become more
profitable, and build a very large and valuable eyecare-focused healthcare company through the execution of our focused strategic
initiatives to expand beyond pharmaceutical compounding (see “Vision” section below). Unlike when we started,
today we are:
| ● | Commercially
Proven. Our team has proven that when we listen to our prescriber customers, deliver
the products that they need, and treat their patients like they’re our family,
we can sell nationally – to scale. |
| ● | We
Have National Reach. We are licensed to distribute pharmaceutical products into all
50 states, through registrations with the U.S. Food and Drug Administration, the Drug
Enforcement Agency, and all U.S. state Boards of Pharmacy. |
| ● | Beneficiaries
of Customer Trust. We own a trusted eyecare brand – ImprimisRx – that
serves thousands (and growing) of eyecare professionals along with their patients. |
| ● | Packed
with New Innovation. As you will see on Slide 7 of our new corporate presentation,
we have a very exciting body of new patented and patent-pending pharmaceutical products
that our research and development team is continuing to ready for commercial availability.
|
The
Harrow team showed financial and operating resilience for the fourth quarter of 2020, reflecting a continuation of the momentum
we saw in the record-setting third quarter of 2020. On both a year-over-year and a sequential-quarter basis, key financial metrics
continued to improve, despite interim challenges we faced during the fourth quarter related to COVID-19 resurgence and unpredictable
weather. We also saw significant progress in terms of major milestones, customer growth, product development and the expansion
of our revenue sources, which I will discuss in more detail later in this letter.
As
I reflect on full year 2020, I am proud of how our team stayed true to our mission and continued to execute our strategy, even
in the face of the challenges and uncertainties brought on by the COVID-19 pandemic. Early in the pandemic, Harrow Health took
steps to manage its balance sheet and expense levels, while also setting a goal to avoid dilution to stockholders. We also worked
aggressively to maintain our competitive advantages by strengthening our product and service offerings, further improving the
ImprimisRx prescriber and patient experience, advancing several key new product development opportunities, and beginning the process
of expanding ImprimisRx beyond pharmaceutical compounding. Those measures paid off, resulting in a rapid return to pre-COVID-19
performance levels and building a pipeline of new value drivers for our customers and stockholders alike.
Consolidated
Financial Highlights
Total
revenues were $14.6 million for the fourth quarter of 2020, a 16% increase compared with $12.6 million for the same period in
2019, and up slightly from revenues of $14.4 million on a sequential-quarter basis. The increase in revenues for the fourth quarter
of 2020 is partially due to the addition of $349,000 in Dexycu® commissions.
Gross
margins have remained relatively consistent at 73% for the fourth quarter of 2020 compared with 72% in the fourth quarter of 2019
and 74% in the third quarter of 2020. Gross margins for the full year 2020 were 70% compared with 67% for the prior-year period.
Adjusted
EBITDA for the fourth quarter of 2020 was a new high for the company of $4.0 million compared with $2.1 million reported in the
prior-year period and $3.0 million in the third quarter of 2020. A reconciliation of all non-GAAP financial results in this letter
appears beginning on page 6.
Fourth
quarter operating income increased to $2.6 million compared with $0.9 million during the same period last year and $1.6 million
during the third quarter of 2020.
One
additional metric we track is the ImprimisRx segment contribution. In the fourth quarter of 2020, segment contribution from ImprimisRx
was $5.0 million, including non-cash expenses related to depreciation, amortization and stock-based compensation of $434,000,
compared to $2.2 million in the prior-year period and $4.7 million in the third quarter of 2020. This important metric demonstrates
the earnings power of the ImprimisRx business separately from other Harrow businesses, assets, and liabilities.
Selected
highlights regarding operating results for the three months and year ended December 31, 2020 and for the same periods in 2019
are as follows (in thousands, except per share data):
| | |
For
the Three Months Ended December
31, | | |
For
the Years Ended December
31, | |
| | |
2020 | | |
2019 | | |
2020 | | |
2019 | |
| Total
revenues | |
$ | 14,595 | | |
$ | 12,604 | | |
$ | 48,871 | | |
$ | 51,165 | |
| Cost
of sales | |
| (3,937 | ) | |
| (3,565 | ) | |
| (14,463 | ) | |
| (16,749 | ) |
| Gross
profit | |
| 10,658 | | |
| 9,039 | | |
| 34,408 | | |
| 34,416 | |
| Selling,
general and administrative | |
| (7,441 | ) | |
| (7,689 | ) | |
| (31,247 | ) | |
| (33,088 | ) |
| Research
and development | |
| (591 | ) | |
| (424 | ) | |
| (2,413 | ) | |
| (2,083 | ) |
| Impairment
of long-lived assets | |
| - | | |
| - | | |
| (363 | ) | |
| (4,040 | ) |
| Total
operating expenses | |
| 8,032 | | |
| 8,113 | | |
| 34,023 | | |
| 39,211 | |
| Income
(loss) from operations | |
| 2,626 | | |
| 926 | | |
| 385 | | |
| (4,795 | ) |
| Total
other (loss) income, net | |
| (1,481 | ) | |
| 1,674 | | |
| (3,800 | ) | |
| 4,678 | |
| Income
taxes | |
| (4 | ) | |
| (8 | ) | |
| (4 | ) | |
| (8 | ) |
Net
income (loss), including noncontrolling interests | |
$ | 1,141 | | |
$ | 2,592 | | |
$ | (3,419 | ) | |
$ | (125 | ) |
Net
loss attributable to
noncontrolling interests | |
| 8 | | |
| 65 | | |
| 62 | | |
| 293 | |
Net
income (loss) attributable to Harrow
Health, Inc. | |
$ | 1,149 | | |
$ | 2,657 | | |
$ | (3,357 | ) | |
$ | 168 | |
Net
income (loss) per share of common
stock, basic | |
$ | 0.04 | | |
$ | 0.10 | | |
$ | (0.13 | ) | |
$ | 0.01 | |
Net
income (loss) per share of common
stock, diluted | |
$ | 0.04 | | |
$ | 0.10 | | |
$ | (0.13 | ) | |
$ | 0.01 | |
Vision
During
2020, we began to exclusively focus on growing our eyecare businesses into a world-class eyecare-focused healthcare company. For
the first seven years of our existence, we built our eyecare business by selling innovative pharmaceutical compounded products
to institutional customers such as doctors, hospitals, and ambulatory surgery centers (ASCs). We intend to expand beyond pharmaceutical
compounding. In the future, while we continue to organically grow our pharmaceutical compounding business, the next major phase
of the development of Harrow Health will leverage our market position and add high-value (in terms of revenue-per-unit and gross
margins) FDA-approved drugs and late-stage drug candidates to our platform. Our first strategy proof point was the transaction
we completed with EyePoint Pharmaceuticals to market Dexycu®, but we are working diligently to further expand Harrow’s
value by acquiring additional high-value products and technologies and by deploying new eyecare services, which will drive the
next major phase of our growth at Harrow.
Eyecare
Businesses
ImprimisRx
is an ophthalmic-focused pharmaceutical company with capabilities that include formulation development, scalable production,
quality systems required by the highest federal manufacturing standards, U.S. and state-specific licensure to dispense direct-to-prescriber/institution
or direct-to-consumer, and a national commercial team that sells to and services prescribers, institutions and patients in all
50 states.
ImprimisRx
continued its operational progress during the fourth quarter, despite disruptions to sales related to a resurgence in COVID-19
infections and weather-related events. The team is continuing to enhance and launch new software systems to better the overall
customer experience and improve overall visibility into the performance of the business. Importantly, we continue to deliver amazing
customer service and build goodwill with our customers. I saw an instance recently when one of our pharmacists, Gloria, went above
and beyond the customer service norm:
During
one of the recent snowstorms in New Jersey, prescription deliveries became delayed. Gloria noticed one of those prescriptions
was an overnight delivery, but it would not make it because of the weather. She also noticed it was a location she could get to
on her way home. That night, the patient was surprised when, while outside shoveling snow off his driveway, he saw Gloria there
to hand deliver his prescription to him.
It’s
actions like these that make our team so unique. It’s also why, when we surveyed over 5,600 customers in the fourth quarter
of 2020 about their willingness to recommend our business to others, we received a Net Promoter Score of 90.
Regarding
key metrics, average revenue per shipping day in the fourth quarter of 2020 reached a new high of $232,000 compared to $197,000
in the fourth quarter of 2019. Importantly, we made significant progress with sales of Dexycu®, recording commissions of $349,000.
The ImprimisRx commercial team is making great progress with this product in terms of both converting customers and increased
sales. The Dexycu® commissions made an impact on revenues for the fourth quarter, and we believe we are well positioned to
build on this base in 2021.
This
year will see the launch of Visionology, our direct-to-consumer eyecare subsidiary we’ve been diligently developing
over the past three years. To give some context, before I had ever heard of the word “COVID,” I had a strong conviction
that with the help of new telemedicine technology, other software tools, and mobile diagnostics, the provision of eyecare goods
and services would move closer and closer to the consumer end user – the patient. With the help of Drew Livingston,
the co-founder and former CEO of Doxy.me, the world’s largest SaaS-based telemedicine business, we have been able to build
Visionology and what we call Eyecare-as-a-Service™, which – with the help of a network of local eyecare professionals
– will deliver a simple and seamless user experience to help patients manage their chronic eye diseases. Our goal is
to drive value, transparency, and access to eyecare through Visionology – which is launching regionally during the second
quarter. I look forward to updating you on our progress in rolling out this exciting new business.
Investments
and Royalties
Beginning
in 2017, Harrow began the process of monetizing assets it had developed as pharmaceutical compounded drugs. These were drug formulations
that we had either sold as a prescription compounded drug or that we had strong conviction would be well-received if they were
developed as a traditional FDA-approved product. We had a conviction in our strategy based on our belief that:
| ● | these
assets would more likely eventually be developed and commercialized as a part of a prescriber’s
armamentarium if they were managed by a management team focused exclusively on their
clinical development; |
| ● | Harrow
did not have the financial resources to develop all of the opportunities we possessed;
|
| ● | by
“carving-out” these assets into separate companies, Harrow would develop
a growing balance sheet; and finally, |
| ● | if
we retained a royalty right on drug candidates being developed by these “carved-out”
companies, we would eventually own valuable streams of cash flow in the form of royalties. |
In
2017, we began to execute this strategy, forming Eton Pharmaceuticals, Surface Ophthalmics, and Melt Pharmaceuticals. We contributed
our drug formulation assets, recruited top-tier management, and externally financed each of them. So far, the results are approximately
$57 million of non-GAAP value, based on the most proximate value of the equity-prices of these businesses, and, more specifically:
| ● | We
own 3,500,000 common shares of NASDAQ-listed Eton Pharmaceuticals (ETON), a small, but
exciting orphan-drug focused pharmaceutical company. |
| | | |
| ● | We
own approximately 30% of the equity interests in Surface Ophthalmics, which has three
active clinical stage and potentially large market ocular surface disease programs at
or beyond Phase 2 development. We expect Surface Ophthalmics to complete another round
of funding during 2021. Harrow also owns royalty rights on all drug candidates that Surface
is developing. |
| | | |
| ● | We
own approximately 44% of the common stock in Melt Pharmaceuticals, which recently completed
its Phase 1 study of its flagship drug candidate MELT-100. This Phase 1 data established
relative bioavailability and important pharmacokinetic parameters, including characterizing
absorption rates following administration, and found that MELT-100 was well tolerated
by patients. With the Phase 1 study successfully meeting its objectives, Melt plans to
finalize its clinical protocol in patients undergoing cataract surgery and begin enrolling
patients in its Phase 2 clinical study in the third quarter of 2021. We continue to expect
Melt to complete another round of funding during 2021. Harrow also owns royalty rights
on all drug candidates that Melt is developing. |
Financial
and Strategic Outlook
The
underlying fundamentals for our eyecare businesses and the momentum we have established with our customers and business partners
continue to strengthen. We demonstrated this with sequential third quarter to fourth quarter revenue growth despite some week-to-week
volatility in revenues during the fourth quarter. We are continuing to see that “chunkiness” of revenue in the first
quarter of 2021, mostly being driven by instances of COVID resurgence (in January) and more recently, weather-related events (in
February), that have caused physician customers to delay or re-schedule surgeries. I am confident this instability will be short-lived
and that, as we get closer to springtime, we will see better consistency in our revenue growth and trajectory, including a potential
revenue swell from the backlog of surgical cases that were not completed because of COVID.
Importantly,
during the fourth quarter of 2020, we were able to catch up completely on a number of outstanding payables and accrued expenses
that we had deferred during the first and second quarters due to the uncertainties around the pandemic, effectively reducing those
balances by over $3 million. We believe this positions Harrow to begin achieving improved cash flow from operations during 2021.
In addition, we continue to see opportunities for expansion of gross margins during 2021 and are excited to demonstrate the earnings
capability of incremental revenue growth in the business.
Lastly,
we recently updated our new corporate presentation, which is posted on our website, www.harrowinc.com. I would encourage
our stockholders to review it. In addition, we are making incremental changes to our corporate website to reflect our eyecare
focus, so be on the lookout for those improvements.
Closing
I
am grateful to the employees of the Harrow family for the unwavering hard work, dedication and loyalty delivered day after day
in the face of an extraordinary year full of challenges brought on by a global health crisis. Thanks to the team approach of all
our employees, we have made significant progress on many levels, and we are excited about the prospects of our future as we begin
this next major phase of our growth and development. Our pipeline of potential transformative transactions is strong, and I am
confident that our efforts will lead to new opportunities and the addition of new ophthalmic products that will continue to contribute
to our success. While we have achieved much, we are not letting down our guard. We will continue to work hard to reward our stockholders
for their support, and we look forward to reporting our progress in the next Letter to Stockholders in May of 2021.
Sincerely,
Mark
L. Baum
Founder
and Chief Executive Officer
Nashville,
Tennessee
FORWARD-LOOKING
STATEMENTS
The
Company’s remarks in this stockholder letter include forward-looking statements within the meaning of federal securities
laws. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Harrow Health’s
control, including risks and uncertainties described from time to time in its SEC filings, such as the risks and uncertainties
related to the Company’s ability to make commercially available its compounded formulations and technologies, and FDA approval
of certain drug candidates in a timely manner or at all.
For
a list and description of those risks and uncertainties, please see the “Risk Factors” section of the Company’s
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and other filings with the SEC.
Harrow
Health’s results may differ materially from those projected. Harrow disclaims any intention or obligation to update or revise
any financial projections or forward-looking statements whether because of new information, future events or otherwise. This stockholder
letter contains time- sensitive information and is accurate only as of today.
Additionally,
Harrow Health refers to non-GAAP financial measures, specifically Adjusted EBITDA and/or adjusted earnings. A reconciliation of
any non-GAAP measures with the most directly comparable GAAP measures is included in this letter.
No
compounded formulation is FDA-approved. All ImprimisRx compounded formulations are customizable. Other than drugs compounded at
a registered outsourcing facility, all ImprimisRx compounded formulations require a prescription for an individually identified
patient consistent with federal and state laws.
All
trademarks, service marks and trade names included or referenced in this publication are the property of their respective owners.
Adjusted
EBITDA
In
addition to the Company’s results of operations determined in accordance with U.S. generally accepted accounting principles
(GAAP), which are presented and discussed above, management also utilizes Adjusted EBITDA, an unaudited financial measure that
is not calculated in accordance with GAAP, to evaluate the Company’s financial results and performance and to plan and forecast
future periods. Adjusted EBITDA is considered a “non-GAAP” financial measure within the meaning of Regulation G promulgated
by the SEC. Management believes that this non-GAAP financial measure reflects an additional way of viewing aspects of the Company’s
operations that, when viewed with GAAP results, provides a more complete understanding of the Company’s results of operations
and the factors and trends affecting its business. Management believes Adjusted EBITDA provides meaningful supplemental information
regarding the Company’s performance because (i) it allows for greater transparency with respect to key metrics used by management
in its financial and operational decision-making; (ii) it excludes the impact of non-cash or, when specified, non-recurring items
that are not directly attributable to the Company’s core operating performance and that may obscure trends in the Company’s
core operating performance; and (iii) it is used by institutional investors and the analyst community to help analyze the Company’s
results. However, Adjusted EBITDA and any other non-GAAP financial measures should be considered as a supplement to, and not as
a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Further, non-GAAP financial measures
used by the Company and the manner in which they are calculated may differ from the non-GAAP financial measures or the calculations
of the same non-GAAP financial measures used by other companies, including the Company’s competitors.
The
Company defines Adjusted EBITDA as net income excluding the effects of interest, taxes, depreciation, amortization, stock-based
compensation and expenses, other (income) loss, net, investment losses (gains), net, and, if any and when specified, other non-recurring
income or expense items. Management believes that the most directly comparable GAAP financial measure to Adjusted EBITDA is net
income. Adjusted EBITDA has limitations and should not be considered as an alternative to gross profit or net income as a measure
of operating performance or to net cash provided by (used in) operating, investing or financing activities as a measure of ability
to meet cash needs.
The
following is a reconciliation of Adjusted EBITDA, a non-GAAP measure, to the most comparable GAAP measure, net income, for the
three months ended December 31, 2020 and for the same period in 2019 (in thousands):
| | |
For
the Three Months Ended
December 31, | |
| | |
2020 | | |
2019 | |
| GAAP
Net Income | |
$ | 1,149 | | |
$ | 2,657 | |
| Stock-based
compensation and expenses | |
| 780 | | |
| 465 | |
| Interest
expense, net | |
| 673 | | |
| 561 | |
| Income
taxes | |
| 4 | | |
| 8 | |
| Depreciation | |
| 503 | | |
| 571 | |
| Amortization
of intangible assets | |
| 40 | | |
| 34 | |
| Investment
losses (gains), net | |
| 711 | | |
| (2,235 | ) |
| Other
(income) loss, net | |
| 97 | | |
| - | |
| Non-recurring
expenses (1) | |
| - | | |
| 75 | |
| Adjusted
EBITDA | |
$ | 3,957 | | |
$ | 2,136 | |
| (1) | 2019
non-recurring expenses includes costs accrued in connection with litigation settlements,
impairment of long-lived assets and wind-down costs (including severance) associated
with the restructuring of our Irvine, California pharmacy business. |
Equity
Portfolio
| Company | |
Number
of Shares
of Common Stock | | |
Estimated
Value at
December
31, 2020 | |
| Eton
Pharmaceuticals | |
| 3,500,000 | | |
$ | 28,455,000 | |
| Surface
Ophthalmics | |
| 3,500,000 | | |
$ | 11,550,000 | (1) |
| Melt
Pharmaceuticals | |
| 3,500,000 | | |
$ | 17,500,000 | (1) |
| Estimated
Total Value | |
| | | |
$ | 57,505,000 | |
| (1) | Represents
a non-GAAP value, which is calculated as the conversion price of the Series A Preferred
Stock (from the most recent offering of the applicable company) multiplied by the number
of shares owned by Harrow. |
