Exhibit 99.2
Letter
to Stockholders
May
11, 2023
Dear
Harrow Stockholders:
I
am pleased to report that the Harrow team delivered record revenues of $26.1 million for the first quarter of 2023. Even more important
than this strong sequential topline growth is that we have now entered a new revenue paradigm for Harrow from which we expect revenue
growth from our branded pharmaceutical products (“BPPs”) to meaningfully outpace growth from our compounded pharmaceutical
products (“CPPs”), with revenue from branded products ultimately driving the lion’s share of our future profitability
and topline growth. Simply put, with the addition of a powerful portfolio of branded and reimbursable products “in our bag,”
we are now beginning to experience financial leverage from the many years of hard work invested in building our commercial infrastructure,
distribution capabilities, and trusted relationships with thousands of U.S. prescribers and institutional customers.
Based
on our results to date, we are reaffirming our 2023 guidance of $135 million to $143 million in net revenues and $44 million to $50 million
in adjusted EBITDA. Harrow believes that both net revenues and adjusted EBITDA should grow further during 2024 and for at least three
to five years thereafter.
This
year, we also have made significant progress elevating Harrow into a leading position among top-tier U.S. eyecare pharmaceutical companies,
in large part through the following initiatives:
| ● | The
successful launch of IHEEZO™, following the issuances of a permanent J-Code
(J2403) and transitional pass-through reimbursement status. |
| ○ | IHEEZO
was officially launched at the recent American Society of Cataract and Refractive Surgery
(“ASCRS”) Annual Meeting in San Diego, where it was well received by leading
eyecare professionals in attendance. |
| ● | The
closing of the “Fab Five” acquisition of U.S. commercial rights to ILEVRO®,
NEVANAC®, MAXIDEX®, VIGAMOX®, and TRIESENCE®
(collectively, the “Fab Five Products”). |
| ○ | Harrow
recently announced the transfer of the new drug applications (“NDAs”) for ILEVRO,
NEVANAC, and MAXIDEX, and we expect to transfer the NDAs for VIGAMOX and TRIESENCE later
this year. |
| ● | At
the close of the first quarter, we announced a new $100 million secured credit facility
with Oaktree Capital Management, which was initially used to pay off a secured loan with
an affiliate of B. Riley Financial, Inc., and will be further used to support the remaining
milestone payment that will be due at the time TRIESENCE becomes commercially available. |
| ● | We
recently signed an agreement with a large health insurance carrier, including its national
vision care network of patients and providers, to make available several of our chronic care
CPPs on a cash-pay basis. See Page 4 for additional color on this big potential win. |
Now
let’s take a look at the results for the first quarter of 2023.
First
Quarter 2023 Financial Highlights and Commentary
Revenues
of $26.1 million for the first quarter of 2023 – a return to record revenue growth – represent an 18% increase over the prior-year
period revenues of $22.1 million as well as a 28% increase over revenues of $20.3 million in the fourth quarter of 2022.
As
we had previously promised, we achieved these record revenues with no revenues from (a) our non-ophthalmic assets (which we sold in early
October 2022) and (b) from sales of, or commissions from, DEXYCU® (as our agreement with EyePoint, the owner of DEXYCU®,
terminated at the end of 2022). The first quarter of 2023 did include profit transfers for two months (February and March) from sales
of ILEVRO, NEVANAC, MAXIDEX, and VIGAMOX. (There is currently no profit transfer from TRIESENCE because it remains out of stock –
more to say about TRIESENCE on page 4).
Core
gross margin was 76% in the first quarter of 2023 compared with core gross margin of 75% in the first quarter of 2022.
Selling,
general and administrative (SG&A) expenses for the first quarter of 2023 were $15.9 million compared with $13.4 million during the
same period last year and a slight increase compared with the $15.2 million reported in the fourth quarter of 2022.
Research
and development costs were $734,000 in the first quarter of 2023 compared with $658,000 during the same period last year. As we grow
our pharmaceutical presence and footprint with branded products, we expect this line item to grow in 2023.
GAAP
operating income was $1.2 million for the first quarter of 2023, compared with a GAAP operating income of $2.1 million during the same
period last year.
Adjusted
EBITDA was $5.3 million for the first quarter of 2023 compared with Adjusted EBITDA of $4.9 million during the same period last year.
Core net loss was ($1.0) million for the first quarter of 2023 compared with core net income of $713,000 for the first quarter of 2022.
Core
diluted net loss per share for the first quarter of 2023 was ($0.03) compared with core diluted net income per share of $0.03 during
the same period last year.
We
had $19.2 million of cash and cash equivalents at the end of the first quarter, and we expect our cash balance to increase going forward.
First quarter cash flows used in operations were negatively impacted due to the timing differences from recognition of revenue related
to the profit transfer for the Fab Five products and their eventual cash receipts combined with an increase in our inventory levels as
we caught up from third and fourth quarter stockouts.
A
reconciliation of all non-GAAP financial measures in this letter begins on page 9.
Selected
highlights regarding GAAP operating results for the three months ended March 31, 2023 and 2022 are as follows:
| | |
For
the Three Months Ended March
31, | |
| | |
2023 | | |
2022 | |
| Total revenues | |
$ | 26,103,000 | | |
$ | 22,120,000 | |
| Cost of sales | |
| 8,271,000 | | |
| 5,963,000 | |
| Gross
profit | |
| 17,832,000 | | |
| 16,157,000 | |
| Selling, general and administrative | |
| 15,888,000 | | |
| 13,398,000 | |
| Research and development | |
| 734,000 | | |
| 658,000 | |
| Total
operating expenses | |
| 16,622,000 | | |
| 14,056,000 | |
| Income
from operations | |
| 1,210,000 | | |
| 2,101,000 | |
| Total other expense, net | |
| 8,141,000 | | |
| 4,539,000 | |
| Income
tax benefit | |
| 288,000 | | |
| - | |
| Total
net loss | |
$ | (6,643,000 | ) | |
$ | (2,438,000 | ) |
| Net
loss per share of common stock, basic and diluted | |
$ | (0.22 | ) | |
$ | (0.09 | ) |
In
2022, we began providing additional non-GAAP financial metrics – Core Results, which we define as the after-tax earnings
and other operational and financial metrics generated from our principal business.
| | |
For
the Three Months Ended March
31, | |
| | |
2023 | | |
2022 | |
| Net revenues | |
$ | 26,103,000 | | |
$ | 22,120,000 | |
| Gross margin | |
| 68 | % | |
| 73 | % |
| Core gross margin(1) | |
| 76 | % | |
| 75 | % |
| Net loss | |
| (6,643,000 | ) | |
| (2,438,000 | ) |
| Core net (loss) income(1) | |
| (1,042,000 | ) | |
| 713,000 | |
| Adjusted EBITDA(1) | |
| 5,342,000 | | |
| 4,940,000 | |
| Basic and diluted net loss
per share | |
| (0.22 | ) | |
| (0.09 | ) |
| Core basic and diluted
net (loss) income per share(1): | |
| (0.03 | ) | |
| 0.03 | |
| (1) | Core
gross margin, core net (loss) income, core basic and diluted net (loss) income per share
(collectively, “Core Results”), and Adjusted EBITDA are non-GAAP measures. For
additional information, including a reconciliation of such Core Results and Adjusted EBITDA
to the most directly comparable measures presented in accordance with GAAP, see the explanation
of non-GAAP measures and reconciliation tables at the end of this Letter to Stockholders. |
IHEEZO,
ASCRS 2023, and More
IHEEZO
This
year’s ASCRS Meeting included the formal launch of IHEEZO. In my experience, the most important factor in the success of an ophthalmic
product launch is whether the product performs for the patient, the surgeon, and the surgical staff. If a product doesn’t provide
unique and meaningful value for every one of these constituencies, roadblocks to adoption will exist, growth will flag, and once launched,
it’s hard to recover.
Here
is what we know so far about IHEEZO:
| ● | All
reports from IHEEZO customers to date have described clinical outcomes that mirror those
that were reported in the clinical studies that supported IHEEZO’s NDA. |
| ● | Surgeons
and ophthalmic anesthesia providers who use IHEEZO are realizing what we learned when we
did our market research years ago – that the idiosyncratic use of different anesthetic
products, numerous instillation processes during various time intervals, and other related
protocols to anesthetize the eye, create practice inefficiencies, and that there is a compelling
need for a single agent to reliably anesthetize the eye – to “unify” the
ophthalmic anesthetic protocol. |
| ● | Early
adopters, and their staff, appreciate the ease of IHEEZO’s use in the clinic and surgical
suite – the way it seamlessly fits into their workflow. |
| ● | A
single dose of IHEEZO (minimally, three drops) – and IHEEZO alone – has
been reported to be sufficient, for example, to provide ocular surface anesthesia for cataract
surgeries and intravitreal injections – once again, simplifying their anesthesia protocol
and workflow. |
| ● | While
I believed IHEEZO would be used primarily for cataract surgery and intravitreal injection
anesthesia, several ophthalmologists I spoke to have other potential uses for IHEEZO, including
anesthesia for other surgical and in-office interventions (e.g., photorefractive keratectomy
(“PRK”), glaucoma surgeries, and laser procedures such as the yttrium aluminum
garnet capsulotomy (or “YAG”). |
I
am sure Harrow stockholders want to know how IHEEZO sales are looking. In fact, we are now recording sales of IHEEZO, and so far, we
are confident that we remain on track to meet or exceed current revenue expectations for the year. I want to say more, but we are very
early in the launch, and we still have market access work to do to optimize the potential for IHEEZO. Just know that, so far,
we appear to be in good shape.
The
Fab Five Products
By
transferring the NDAs ahead of schedule for ILEVRO, NEVANAC, and MAXIDEX, we were able to begin marketing and selling efforts for those
products at the ASCRS meeting. Customers we met with at ASCRS were pleased to see us support these important products and revitalize
them under the Harrow name.
We
still have a few additional pieces of the Fab Five transaction puzzle to implement. As an example, we believe the VIGAMOX NDA should
transfer sometime this summer, and once this occurs, we will reveal more information about our VIGAMOX strategy – which our commercial
team is excited about. We also continue to believe that TRIESENCE should be back in stock through our distributor partners later this
year and that soon thereafter, the TRIESENCE NDA will transfer.
My
takeaway from customer feedback at ASCRS aligned with our internal market research for all of the Fab Five products, especially TRIESENCE,
reinforcing our belief that we purchased the right products, paid the right price, and that the Fab Five products will beautifully complement
our ophthalmic pharmaceutical portfolio, expand our customer base, and drive further revenue and profit growth for many years to come.
ImprimisRx
(CPPs or Compounded Pharmaceutical Products)
I
remain highly enthusiastic about our ImprimisRx CPP business. As many of you know, we have historically seen double-digit year-over-year
revenue growth in our ophthalmic CPP business. We expect that growth trend to continue and that ImprimisRx will remain the dominant player
in the U.S. ophthalmic CPP business. My enthusiasm is based, in part, on our strong innovation culture, exemplified in the development
of CPPs such as the Fortisite™ and our proprietary compounded atropine formulations (available at atropine.com).
Innovative
product development alone is insufficient to fuel my enthusiasm. I want to see positive market reception such as what occurred at ASCRS
when Dr. Neel Desai presented two case studies citing his success using Fortisite compounded formulations, including the benefit of having
fortified antibiotics available in his office for patients in need of this potentially sight-saving treatment. In addition to the potential
for delays in filling custom prescriptions from local compounding pharmacies, there is no guarantee that such custom prescriptions will
have undergone many or any of the strict battery of analytical chemistry tests that Fortisite formulations do (e.g., color, clarity,
potency, sterility, fill size, pH, preservatives, and particulate matter, to name a few). I am making Dr. Desai’s talk available
if you are interested because he explains his experience with Fortisite much better than I can. (Full disclosure … Dr.
Desai was compensated a bit less than $1,000 for his time giving this talk). We also spoke to a large academic institution that requires
patients to be admitted to the hospital for them to have access to the in-patient pharmacy so that fortified antibiotics can be made
during normal business hours. Given the practical impact we anecdotally see, and the potential savings to our healthcare system, wouldn’t
it be great to develop Fortisite as an FDA-approved product?
Another
justification for my enthusiasm for our ImprimisRx CPP business is this:
Given
the trend of increasing patient out-of-pocket costs for many medicines, we have been working hard for many years to partner with insurance
carriers to make our cash-pay CPPs available to their prescriber networks and patients. Breaking into the insurance market with cash-pay
CPPs has been tough for many reasons I won’t expound on, but our drought with major insurance players is now over …
We
recently signed a vendor contract with a very large health insurer, which includes one of the nation’s largest vision care networks.
Under this agreement, which kicks off on June 1 of this year, ImprimisRx will provide its next-generation preservative-free and boric
acid-free compounded atropine formulations (0.01%, 0.025%, and 0.05% concentrations) and its innovative Total Tears ophthalmic formulations,
including Klarity-C 0.1% cyclosporine, to members of its vision care network. Our partner’s national vision plan, which covers
over nine million U.S. members, includes approximately 36,000 private practice eyecare professionals (“ECPs”), local optical
stores, and national retail stores (including well-known national brand names). We are looking forward to building our relationship with
this new partner, serving its ECPs and its patients, and making this new agreement a great success for everyone.
Investments
and Royalties
Harrow
has non-controlling equity positions in three companies that were founded as Harrow subsidiaries before being deconsolidated into independent
and separately managed companies.
Our
largest interest is in Melt Pharmaceuticals,
with Harrow owning 46% of its equity interests, a $13.5 million principal amount secured note receivable, and a 5% royalty interest in
its lead drug candidate, MELT-300. Following the December 2022 release of robust results and topline data from Melt’s Phase 2 efficacy
and safety study of MELT-300, Melt scheduled a meeting with the FDA for May 16 to discuss the Phase 3 pathway for MELT-300. Because
of Harrow’s conservative approach to positioning itself in the Melt capital structure, Harrow should be able to capitalize on the
value of Melt Pharmaceuticals regardless of the outcome of this meeting.
We
continue to remain excited about being a large shareholder of both Eton Pharmaceuticals and Surface Ophthalmics. We are
big believers in the missions and potential of these companies and can’t wait to hear more about their achievements in 2023 as
they continue to execute their strategic initiatives.
Fulfilling
our Mission
In
my last Letter to Stockholders, I explained how your support of Harrow also supports our corporate mission of helping patients manage
the preservation of their sight by providing access to innovative and affordable medicine and services.
I
wanted to give you a quick update as we recently received e-mails from two separate physicians about mission trips to Guatemala. One
group had historically made their mission trip annually and had just made their first trip after a nearly four-year COVID hiatus. Combined,
the two teams were able to provide care to over 1,500 patients and provide cataract and other ophthalmic surgeries to nearly 100 patients.
It was very heart-warming to learn how our donations to these mission trips helped these beautiful souls, especially a 10-year-old girl
who had surgery on a tumor on one of her eyes that had prevented her from being able to completely close the eye for several years. Although
it was not medically feasible to completely remove the tumor, these heroic ophthalmologists were able to flatten it and allow her to
“once again close that eye.” These are the types of blessed wonders that Harrow, and you (through your stockholdings),
make possible. I am confident you are as honored to participate in these mission trips as we are!
Senior
Executive Equity Compensation
The
success of Harrow is dependent on the “above-and-beyond” efforts of many folks, including Andrew Boll, Dennis Saadeh, and
John Saharek. Andrew and I have worked together for over 15 years, and he was with me at Harrow from Day 1, when our office comprised
a grand total of 250 or so square feet. Dennis, whom I began to work with in the Fall of 2014, is responsible for building nearly all
of our compounded formulations. His brilliant pharmaceutical design creativity has been a backbone to help build our business. John has
been at the tip of the Harrow commercial spear, driving every single dollar of revenue we have produced from April 1, 2014 (the day we
began to generate revenue) to the present. These men are exceptional, and I am grateful to have them as partners.
Traditionally,
Compensation Committees of public company Boards of Directors provide senior executives with equity compensation, on an annual basis,
that vests over time, in the form of stock options or restricted stock units (RSUs) – as a retention tool. For many years,
we received stock options and, occasionally, RSUs with these time-based vesting criteria. A few years ago, I approached the Harrow Board
of Directors and said that Andrew, Dennis, John, and I wanted to forego future annual grants of both stock options and RSUs (which are
essentially shares of stock), and instead we wanted to totally align ourselves with our stockholders. In order to accomplish this, I
proposed that we receive an escalating number of shares of Harrow stock that would only vest if the price of our stock rose meaningfully
and maintained that certain level for a reasonable period of time (i.e., we didn’t want the stock to spike up, cause a vesting,
and thus a windfall). Additionally, under the policy, we had to maintain our employment with Harrow for at least two years in order to
receive any shares that vested. This meant that Harrow stock achieving the lowest target level would cause the vesting of a fraction
of the number of shares that would vest had the stock achieved the highest target level. The bottom line is that when our stockholders
“won,” – we would win. And the more our fellow stockholders won, the more we would win – in other words, management
and shareholder alignment.
Our
Board of Directors liked this idea, and after working with our compensation consultant, this program was formally started in the summer
of 2021, when our stock price was around $7 to $8 per share. The initial Harrow stock price targets were a 50% increase, a 100% increase,
a 150% increase, and, lastly, a 175% increase. Recently, we achieved the 175% price target ($21.45 price target), which will cause all
of the shares in this program to vest. We are set to receive these shares this summer on the two-year anniversary of the program.
Based
on the success of this program, earlier this year, we again requested that our Board adopt a new similar program, consisting of Harrow
stock price targets of $25 per share, $35 per share, $45 per share, and $50 per share. This is all described in more detail in our SEC
filings, but I wanted to call attention to this “eat what you kill” structure because, while it will have a non-cash impact
to our operating expenses, I believe (1) it provides a great incentive for the team to create long-term and sustainable stockholder value,
and (2) all Harrow stockholders should know that we as a management team are focused on value-creating initiatives that have the potential
to create significantly more shareholder value than what is currently reflected in the market value of Harrow.
Transparency
and Credibility
As
many of you know, I am a big fan of Warren Buffett and Charlie Munger, and the Harrow Stockholder Letters are 100% inspired by Mr. Buffett’s
Annual Letter to Shareholders. (As an aside, I had planned to make the pilgrimage to Omaha to participate in the so-called “Woodstock
for Capitalists.” However, my loyalty is always to Harrow, and ASCRS was the same weekend as the Berkshire Annual Meeting –
so I decided to work the booth at ASCRS, talk to customers, and sing the praises of the wonderful products we make, sell, and distribute.
As for the Berkshire Annual Meeting – I hope to be there next year).
I
wrote our first Letter to Stockholders for the third quarter of 2019 – and I’ve made the investment in writing these letters
every quarter since because I believe they’re a valuable tool that allows me to discuss with stockholders our strategic plan, our
goals, our successes, and of course, our failures. They also allow you to hold me and the rest of the Harrow team accountable for the
long-term value we are charged with and incentivized to create. In these letters, I do my best to offer transparency, knowing that credibility
is crucial to a long-term relationship between Harrow and its stockholders. The value of increasing one’s credibility to stockholders
is exponential – on the positive side as it grows, but in turn, it’s incredibly hard to regain credibility and can be increasingly
exponentially negative as it is lost.
In
the spirit of transparency and preserving and hopefully growing this management team’s credibility with our fellow stockholders,
after my signature line below, I am providing an index linked to all previous Letters to Stockholders.
Closing
Reflecting
on how we got to where we are today, I am proud that Harrow has what Steve Jobs once called a “cohesive vision.” We built
our business from the bottom up, based on the needs and desired experiences of our customers. We have always been commercially focused,
and only until we had confidence that we truly understood the market needs for ophthalmic pharmaceuticals, did we go about building and
developing our product portfolio and taking it to the market.
Getting
to where we are today has not been a linear process, and as I have stated many times before, it has certainly been painful at times,
as we failed repeatedly and over many years. But as Ray Dalio once said, “Pain + Reflection = Progress,” and our progress
is abundantly reflected in this Stockholder Letter. For many years to come, I believe the process we underwent to get to this place,
especially the pain, will serve us well and be further reflected in the ongoing growth of Harrow into a leading U.S. ophthalmic pharmaceutical
company.
Lastly,
even though we are proud of where we are today, we are just beginning to realize our potential. I believe we are well on our way to achieving
the core objective of our most recent Five-Year Plan (“FYP”), which is to develop Harrow into one of the largest (if not
the largest) pure-play U.S. ophthalmic pharmaceutical companies. I believe this can happen by maximizing the potential of our current
product portfolio and by remaining on the hunt for new accretive and strategic deals that fit well with our dedicated and 100% focus
on the U.S. ophthalmic pharmaceuticals market. Onward and upward.
I
look forward to updating you on our accomplishments and progress in my next Letter to Stockholders in August of 2023.
Sincerely,
Mark
L. Baum
Founder,
Chairman of the Board, and Chief Executive Officer
Nashville,
Tennessee
Index
to Previous Letters to Stockholders
| 2022 |
|
2021 |
|
2020 |
|
2019 |
| 4Q 2022 |
|
4Q 2021 |
|
4Q 2020 |
|
4Q 2019 |
| 3Q 2022 |
|
3Q 2021 |
|
3Q 2020 |
|
3Q 2019
|
| 2Q 2022 |
|
2Q 2021 |
|
2Q 2020 |
|
|
| 1Q 2022 |
|
1Q 2021 |
|
1Q 2020 |
|
|
FORWARD-LOOKING
STATEMENTS
Management’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’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 FDA-approved products and 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’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 refers to non-GAAP financial measures, specifically Adjusted EBITDA, adjusted earnings, core gross margin, core net income(loss),
and core diluted net income (loss) per share. A reconciliation of non-GAAP measures with the most directly comparable GAAP measures is
included in this letter.
No
compounded formulation is FDA-approved. All compounded formulations are customizable. Other than drugs compounded at a registered outsourcing
facility, all 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.
Non-GAAP
Financial Measures
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 and Core Results, unaudited financial measures that
are not calculated in accordance with GAAP, to evaluate the Company’s financial results and performance and to plan and forecast
future periods. Adjusted EBITDA and Core Results are considered “non-GAAP” financial measures within the meaning of Regulation
G promulgated by the SEC. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of
the Company’s operations that, when viewed with GAAP results, provide a more complete understanding of the Company’s results
of operations and the factors and trends affecting its business. Management believes Adjusted EBITDA and Core Results provide meaningful
supplemental information regarding the Company’s performance because (i) they allow for greater transparency with respect to key
metrics used by management in its financial and operational decision-making; (ii) they exclude 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) they are used by institutional investors and the analyst community to help
analyze the Company’s results. However, Adjusted EBITDA, Core Results, 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 way 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.
Adjusted
EBITDA
The
Company defines Adjusted EBITDA as net income (loss), excluding the effects of stock-based compensation and expenses, interest, taxes,
depreciation, amortization, investment income (loss), net, loss on extinguishment of debt, 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
(loss). Adjusted EBITDA has limitations and should not be considered as an alternative to gross profit or net loss 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 (loss), for the
three months ended March 31, 2023 and 2022:
| | |
For
the Three Months Ended March
31, | |
| | |
2023 | | |
2022 | |
| GAAP net loss | |
$ | (6,643,000 | ) | |
$ | (2,438,000 | ) |
| Stock-based compensation
and expenses | |
| 1,633,000 | | |
| 2,016,000 | |
| Interest expense, net | |
| 4,747,000 | | |
| 1,792,000 | |
| Income tax benefit | |
| (288,000 | ) | |
| - | |
| Depreciation | |
| 292,000 | | |
| 419,000 | |
| Amortization of intangible
assets | |
| 2,207,000 | | |
| 404,000 | |
| Investment (income) loss,
net | |
| (2,042,000 | ) | |
| 2,747,000 | |
| Other expense, net | |
| 5,436,000 | (1) | |
| - | |
| Adjusted
EBITDA | |
$ | 5,342,000 | | |
$ | 4,940,000 | |
| (1) | Includes
$5,465,000 for the loss on extinguishment of debt. |
Core
Results
Harrow
Core Results, including core gross margin, core net income (loss), core operating income (loss), core basic and diluted income (loss)
per share, and core operating margin, exclude all amortization and impairment charges of intangible assets, excluding software development
costs, net gains and losses on investments and equity securities, including equity method gains and losses and equity valued at fair
value through profit and loss (“FVPL”), preferred stock dividends, and gains/losses on forgiveness of debt. In other periods,
Core Results may also exclude fair value adjustments of financial assets in the form of options to acquire a company carried at FVPL,
obligations related to product recalls, certain acquisition-related items, restructuring charges/releases and associated items, related
legal items, gains/losses on early extinguishment of debt or debt modifications, impairments of property, plant and equipment and software,
as well as income and expense items that management deems exceptional and that are or are expected to accumulate within the year to be
over a $100,000 threshold.
The
following is a reconciliation of Core Results, a non-GAAP measure, to the most comparable GAAP measure for the three months ended March
31, 2023 and 2022:
| For
the Three Months Ended March 31, 2023 |
| | |
| | |
Amortization
of Certain Intangible Assets | | |
| | |
| | |
| |
| Gross profit | |
$ | 17,832,000 | | |
$ | 2,045,000 | | |
$ | - | | |
$ | - | | |
$ | 19,877,000 | |
| Gross margin | |
| 68 | % | |
| | | |
| | | |
| | | |
| 76 | % |
| Operating income | |
| 1,210,000 | | |
| 2,207,000 | | |
| - | | |
| - | | |
| 3,417,000 | |
| Loss before taxes | |
| (6,931,000 | ) | |
| 2,207,000 | | |
| (2,042,000 | ) | |
| 5,436,000 | | |
| (1,330,000 | ) |
| Tax benefit | |
| 288,000 | | |
| - | | |
| - | | |
| - | | |
| 288,000 | |
| Net loss | |
| (6,643,000 | ) | |
| 2,207,000 | | |
| (2,042,000 | ) | |
| 5,436,000 | | |
| (1,042,000 | ) |
| Basic and diluted loss per
share ($)(1): | |
| (0.22 | ) | |
| | | |
| | | |
| | | |
| (0.03 | ) |
| Weighted average number of
shares of common stock outstanding: | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 30,289,730 | | |
| | | |
| | | |
| | | |
| 30,289,730 | |
| For
the Three Months Ended March 31, 2022 |
| | |
| | |
Amortization
of Certain Intangible Assets | | |
| | |
| | |
| |
| Gross profit | |
$ | 16,157,000 | | |
$ | 341,000 | | |
$ | - | | |
$ | - | | |
$ | 16,498,000 | |
| Gross margin | |
| 73 | % | |
| | | |
| | | |
| | | |
| 75 | % |
| Operating income | |
| 2,101,000 | | |
| 404,000 | | |
| - | | |
| - | | |
| 2,505,000 | |
| (Loss) income before taxes | |
| (2,438,000 | ) | |
| 404,000 | | |
| 2,747,000 | | |
| - | | |
| 713,000 | |
| Taxes | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Net (loss) income | |
| (2,438,000 | ) | |
| 404,000 | | |
| 2,747,000 | | |
| - | | |
| 713,000 | |
| Basic (loss) earnings per
share ($)(1) | |
| (0.09 | ) | |
| | | |
| | | |
| | | |
| 0.03 | |
| Diluted (loss) earnings per
share ($)(1) | |
| (0.09 | ) | |
| | | |
| | | |
| | | |
| 0.03 | |
| Weighted average number of
shares of common stock outstanding: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic
| |
| 27,226,819 | | |
| | | |
| | | |
| | | |
| 27,226,819 | |
| Diluted | |
| 27,226,819 | | |
| | | |
| | | |
| | | |
| 28,317,740 | |
| (1) | Core
basic and diluted (loss) earnings per share is calculated using the weighted-average number
of shares of common stock outstanding during the period. Core basic and diluted (loss) earnings
per share also contemplates dilutive shares associated with equity-based awards as described
in Note 2 and elsewhere in the Condensed Consolidated Financial Statements included in the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. |
Investment
Portfolio
(includes
Non-GAAP Values)
| | |
At
March 31, 2023 | |
| Company | |
Number
of Shares of Common Stock | | |
Management Estimated Value | |
| Eton Pharmaceuticals | |
| 1,982,000 | | |
$ | 7,630,700 | |
| Surface Ophthalmics | |
| 3,500,000 | | |
| 15,750,000 | (1) |
| Melt Pharmaceuticals | |
| 3,500,000 | | |
| 17,500,000 | (2) |
| Melt Pharmaceuticals –
Secured Loan + PIK | |
| - | | |
| 16,501,000 | (3) |
| Estimated
Total Value | |
| | | |
$ | 57,381,700 | |
| (1) | Represents
a non-GAAP value, calculated as the purchase and conversion price ($4.50) of the Series A-1
Preferred Stock (the most recent equity offering) multiplied by the number of common shares
owned by Harrow at March 31, 2023. |
| (2) | Represents
a non-GAAP value, calculated as the purchase and conversion price ($5.00) of the Series A
Preferred Stock (the most recent equity offering) multiplied by the number of common shares
owned by Harrow at March 31, 2023. |
| (3) | Represents
the principal balance owed under the loan agreement, including interest paid in kind (or
PIK). In accordance with ASC 323, Harrow’s presentation of this loan receivable on
its consolidated balance sheet is presented at its carry value less reductions in the carrying
value related to Harrow’s share of Melt equity losses. |
