| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis
of Presentation Harrow
has prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United
States of America (“GAAP”). The accompanying consolidated financial statements include the accounts of the Company and its
wholly owned and majority-owned subsidiaries. Harrow
consolidates entities in which it has a controlling financial interest. The Company assesses control under the variable interest entity
(“VIE”) model to determine whether the Company is the primary beneficiary of that entity. The Company consolidates (i) entities
in which it holds and/or controls, directly or indirectly, more than 50% of the voting rights, and (ii) VIEs for which the Company is
deemed to be the primary beneficiary. Use
of Estimates The
preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting periods. Significant estimates made by management are, among others, allowance
for credit losses, variable consideration determined based on accruals for chargebacks, administrative fees and rebates, government rebates,
returns and other allowances, renewal periods and discount rates for leases, realizability of inventories, recoverability of investments,
realizability of deferred tax assets, recoverability of long-lived assets and goodwill, valuations and purchase price allocations related
to business combinations and asset acquisitions, fair value of loans payable, and valuation of stock-based transactions with employees
and non-employees. Actual results could differ from those estimates. Risks,
Uncertainties and Liquidity The
Company is subject to certain regulatory standards, approvals, guidelines and inspections which could impact the Company’s ability
to make, dispense, and sell certain products. If the Company was required to cease compounding and selling certain products as a result
of regulatory guidelines or inspections, this may have a material impact on the Company’s financial condition, liquidity and results
of operations. Credit
Losses The
Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables.
Management considers historical collection rates, the current financial status of the Company’s customers, macroeconomic factors,
and other industry-specific factors when evaluating current expected credit losses. Forward-looking information is also considered in
the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable,
management believes that the carrying value, net of expected losses, approximates fair value and therefore, relies more on historical
and current analysis of such financial instruments, including its trade receivables. To
determine the provision for credit losses for accounts receivable, the Company has disaggregated its accounts receivable by class of
customer at the business component level, as management determined that risk profile of the Company’s customers is consistent based
on the type and industry in which they operate, mainly in the pharmaceuticals industry. Each business component is analyzed for estimated
credit losses individually. In doing so, the Company establishes a historical loss matrix, based on the previous collections of accounts
receivable by the age of such receivables, and evaluates the current and forecasted financial position of its customers, as available.
Further, the Company considers macroeconomic factors and the status of the pharmaceuticals industry to estimate if there are current
expected credit losses within its trade receivables based on the trends of the Company’s expectation of the future status of such
economic and industry-specific factors. Also, specific allowance amounts are established based on review of outstanding invoices to record
the appropriate provision for customers that have a higher probability of default. Accounts
receivable at December 31, 2023 and 2022 are net of allowances for credit losses of $ 371,000 73,000 SCHEDULE
OF ACCOUNTS RECEIVABLE ALLOWANCE OF CREDIT LOSS
Balance at January 1, 2023 $ 73,000
Change in expected credit
losses 332,000
Write-offs,
net of recoveries (34,000 )
Balance at December 31, 2023 $ 371,000 Business
Combinations and Asset Acquisitions The
Company evaluates acquisitions of assets and other similar transactions to assess whether the transaction should be accounted for as
a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross
assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction
is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether the Company has acquired
inputs, process, and output, which would meet the requirements of a business. If determined to be a business combination, the Company
accounts for the transaction under the acquisition method of accounting as indicated in Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”). ASC
805, Business Combinations The
consideration for the Company’s business acquisitions may include future payments that are contingent upon the occurrence of a
particular event or events. The obligation for such contingent consideration payments are recorded at fair value on the acquisition date.
The contingent consideration obligations are then evaluated each reporting period. Changes in the fair value of contingent consideration,
other than changes due to payments, would be recognized as a gain or loss and recorded in the consolidated statement of operations. If
determined to be an asset acquisition, the Company accounts for the transaction under ASC 805-50, Business Combinations – Related
Issues Noncontrolling
Interests The
Company recognizes any noncontrolling interest as a separate line item in equity in the consolidated financial statements. A noncontrolling
interest represents the portion of equity ownership in a less-than-wholly-owned subsidiary not attributable to the Company. Generally,
any interest that holds less than 50% of the outstanding voting shares is deemed to be a noncontrolling interest; however, there are
other factors that are considered as well, such as decision-making rights. The
Company provides in the consolidated statements of stockholders’ equity a reconciliation at the beginning and the end of the period
of the carrying amount of total equity, equity attributable to the parent, and equity attributable to the noncontrolling interests that
separately discloses:
1. net
income or loss;
2. transactions
with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and
3. each
component of other income or loss. The
noncontrolling interests in the consolidated balance sheets as of December 31, 2023 and 2022, relate to consolidated subsidiaries that
the Company owns a controlling interest in, but not 100% of the equity interests, and that no longer have active operations, assets and
related financial activity. Revenue
Recognition and Deferred Revenue The
Company recognizes revenue at the time of transfer of promised goods or services to customers in an amount that reflects the consideration
to which the Company expects to be entitled in exchange for those goods or services (see Note 3). Cost
of Sales Cost
of sales includes direct and indirect costs to manufacture formulations and other products sold, including active pharmaceutical ingredients,
personnel costs, packaging, storage, royalties, shipping and handling costs, depreciation and amortization of certain intangible assets
and the write-off of obsolete inventory. Research
and Development Research
and development (“R&D”) expenses consist of expenses incurred in performing research and development activities, including
salaries and benefits, other overhead expenses, and costs related to clinical trials, contract services and outsourced contracts. We
expense all costs related to R&D as they are incurred. Upfront
and milestone payments related to the acquisition and licensing of technology for drug and product candidates that are not yet approved
by the FDA are considered acquisition of in process R&D and expensed as R&D in the period in which the expense occurs. Debt
Issuance Costs and Debt Discount Debt
issuance costs and the debt discount are recorded net of notes payable in the consolidated balance sheets. Amortization of debt issuance
costs and the debt discount is calculated using the effective interest method over the term of the related debt and is recorded in interest
expense in the accompanying consolidated statements of operations. At December 31, 2022, the Company recorded deferred financing costs
of $ 1,950,000 Intellectual
Property The
costs of acquiring intellectual property rights to be used in the research and development process, including licensing fees and milestone
payments, are charged to research and development expense as incurred in situations where the Company has not identified an alternative
future use for the acquired rights, and are capitalized in situations where we have identified an alternative future use for the acquired
rights. Patents and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks
become more certain (see “Goodwill and Intangible Assets” below). If costs are not capitalized they are expensed as incurred. Income
Taxes As
part of the process of preparing the Company’s consolidated financial statements, the Company must estimate the actual current
tax assets and liabilities and assess permanent and temporary differences that result from differing treatment of items for tax and accounting
purposes. The temporary differences result in deferred tax assets and liabilities, which are included within the consolidated balance
sheets. The Company must assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the
extent the Company believes that recovery is not more likely than not, a valuation allowance must be established which reduces the amount
of deferred tax assets recorded on the consolidated balance sheets. To the extent the Company establishes a valuation allowance or increase
or decrease this allowance in a period, the impact will be included in income tax expense in the consolidated statements of operations. The
Company accounts for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 740, Income Taxes 2,853,000 0 Cash
and Cash Equivalents Cash
equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition. Concentrations
of Credit Risk The
Company places its cash with financial institutions deemed by management to be of high credit quality. The Federal Deposit Insurance
Corporation (“FDIC”) provides basic deposit coverage with limits up to $ 250,000 Investment
in Eton Pharmaceuticals, Inc. The
Company’s investment in Eton Pharmaceuticals, Inc. (“Eton”) consists of common stock with a readily determinable fair
value which is carried at fair value with changes in fair value recognized in earnings. In accordance with ASC 321, Investments —
Equity Securities 3,092,000 (2,914,000) As
of December 31, 2023 and 2022, the Company owned 1,982,000 10 4.38 2.82 8,681,000 5,589,000 Accounts
Receivable Accounts
receivable are stated net of allowances for credit losses and contractual adjustments. The accounts receivable balance primarily includes
amounts due from customers the Company has invoiced or from third-party providers (e.g., insurance companies and governmental agencies),
but for which payment has not been received. Our gross product revenues are subject to a variety of contractual deductions, which generally
are estimated and recorded in the same period that the revenues are recognized. These deductions represent estimates of the related obligations
and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on gross sales for a reporting
period. Accounts receivable at December 31, 2023 are presented net of allowances for credit losses of $ 371,000 14,875,000 15,146,000 73,000 706,000 779,000 Inventories Inventories
are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The Company evaluates the
carrying value of inventories on a regular basis, based on the price expected to be obtained for products in their respective markets
compared with historical cost. Write-downs of inventories are considered to be permanent reductions in the cost basis of inventories. The
Company also regularly evaluates its inventories for excess quantities and obsolescence (expiration), taking into account such factors
as historical and anticipated future sales or use in production compared to quantities on hand and the remaining shelf life of products
and active pharmaceutical ingredients on hand. The Company establishes reserves for excess and obsolete inventories as required based
on its analyses. Investment
in Melt Pharmaceuticals, Inc. – Related Party The
Company owns 3,500,000 2,334,256 47 0 100 0 100 On
a quarterly basis, management assesses whether there are any indicators that the carrying value of the Company’s equity method
investments may be other than temporarily impaired. Indicators include financial condition, operating performance, and near-term prospects
of the investee. To the extent indicators suggest that a loss in value may have occurred, the Company will evaluate both quantitative
and qualitative factors to determine if the loss in value is other than temporary. If a potential loss in value is determined to be other
than temporary, the Company will recognize an impairment loss based on the estimated fair value of the equity method investments. During
the year ended December 31, 2023, the Melt Loan Agreement (as defined in Note 5) was settled in exchange for Melt preferred stock (see
Note 5 for loan settlement disclosure). The Company reduced the Melt Loan Agreement and subsequent preferred stock investment in Melt
to $ 0 The
following table summarizes the Company’s investments in Melt as of December 31, 2023: SCHEDULE OF INVESTMENT
Cost
Basis Share
of Equity Net
Carrying value
Common stock $ 5,810,000 $ (5,810,000 ) $ -
Preferred stock 18,397,000 (18,397,000 ) -
$ 24,207,000 $ (24,207,000 ) $ - The
following table summarizes the Company’s investments in Melt as of December 31, 2022:
Cost
Share
of Equity Paid-in-Kind
In-substance
Net
Common stock $ 5,810,000 $ (5,810,000 ) $ - $ - $ -
Loan 13,500,000 (13,500,000 ) 2,484,000 (2,484,000 ) -
$ 19,310,000 $ (19,310,000 ) $ 2,484,000 $ (2,484,000 ) $ - At
December 31, 2023 and 2022, the Company recorded $ 89,000 139,000 See
Note 5 for more information and related party disclosure regarding Melt. Investment
in Surface Ophthalmics, Inc. – Related Party The
Company owns 3,500,000 20 0 The
following table summarizes the Company’s investment in Surface as of December 31, 2023 and 2022: SCHEDULE OF INVESTMENT
Cost
Share
of Equity Method Losses Net
Common
stock $ 5,320,000 $ (5,320,000 ) $ - See
Note 6 for more information and related party disclosure regarding Surface. Property,
Plant and Equipment Property,
plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated using
the straight-line method over the estimated useful life of the asset. Leasehold improvements and finance lease equipment are amortized
over the estimated useful life or remaining lease term, whichever is shorter. Computer hardware and furniture and equipment are depreciated
over three five years Capitalized
Software Costs The
Company capitalizes certain costs related to the development of internal-use software. Costs incurred during the application development
phase are capitalized only when the Company believes it is probable the development will result in new or additional functionality. The
types of costs capitalized during the application development phase include consulting fees for third-party developers working on these
projects. Costs related to the preliminary project stage and post-implementation activities are expensed as incurred. Internal-use software
is amortized on a straight-line basis over the estimated useful life of the asset, which ranges from two five years Goodwill
and Intangible Assets Patents
and trademarks are recorded at cost and capitalized at a time when the future economic benefits of such patents and trademarks become
more certain. At that time, the Company capitalizes third-party legal costs and filing fees associated with obtaining and prosecuting
claims related to its patents and trademarks. Once the patents have been issued, the Company amortizes these costs over the shorter of
the legal life of the patent or its estimated economic life, generally 20 4 15 The
Company reviews its goodwill and indefinite-lived intangible assets for impairment as of January 1 of each year and when an event or
a change in circumstances indicates the fair value of a reporting unit may be below its carrying amount. Events or changes in circumstances
considered as impairment indicators include but are not limited to the following:
● significant
underperformance of the Company’s business relative to expected operating results;
● significant
adverse economic and industry trends;
● significant
decline in the Company’s market capitalization for an extended period of time relative to net book value; and
● expectations
that a reporting unit will be sold or otherwise disposed. The
goodwill impairment test consists of a two-step process as follows: Step
1. The Company compares the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value
of each reporting unit is determined using a discounted cash flow valuation analysis. The carrying amount of each reporting unit is determined
by specifically identifying and allocating the assets and liabilities to each reporting unit based on headcount, relative revenues or
other methods as deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered
impaired and the Company then performs the second step of the impairment test to measure the impairment loss. If the fair value of a
reporting unit exceeds its carrying amount, no further analysis is required. Step
2. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to the
excess, limited to the total amount of goodwill allocated to that reporting unit. As
a result of its assessment in 2023, the Company concluded that goodwill is not impaired as of December 31, 2023. Impairment
of Other Long-Lived Assets Other
long-lived assets, such as property, plant and equipment, purchased intangibles subject to amortization and patents and trademarks, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant
adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition of an asset. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying
amount of the asset exceeds the fair value of the asset. The fair value of the asset is based on the discounted value of its estimated
future cash flows. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group
classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance
sheet, if material. As
a result of its assessment in 2023, the Company recorded an impairment charge of $ 380,000 Leases At
the inception of a contract the Company determines if the arrangement is, or contains, a lease. Operating lease right-of-use (“ROU”)
assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation
to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on
the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term. The
Company has made certain accounting policy elections whereby it (i) does not recognize ROU assets or lease liabilities for short-term
leases (those with original terms of 12-months of less) and (ii) combines lease and non-lease elements of its operating leases as a single
lease component. As of December 31, 2023 and 2022, the Company did not have any finance leases. Fair
Value Measurements Fair
value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. GAAP
establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when available. The established fair value hierarchy prioritizes
the use of inputs used in valuation methodologies into the following three levels:
● Level
1: Applies to assets or liabilities for which there are quoted prices (unadjusted) for identical assets or liabilities in active
markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value
whenever available.
● Level
2: Applies to assets or liabilities for which there are significant other observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data for substantially the full term of the assets or liabilities.
● Level
3: Applies to assets or liabilities for which there are significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, Level 3 inputs
would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method. At
December 31, 2023 and 2022, the Company measured its investment in Eton on a recurring basis. The Company’s investment in Eton
is classified as Level 1 as the fair value is determined using quoted market prices in active markets for the same securities. As of
December 31, 2023 and 2022, the fair market value of the Company’s investment in Eton was $ 8,681,000 5,589,000 The
Company’s 2026 Notes (as defined in Note 13) are carried at face value, including the unamortized premium, less unamortized debt
issuance costs, the 2027 Notes (as described in Note 13) are carried at face value less unamortized debt issuance costs, and the Oaktree
Loan (as defined in Note 13) is carried at face value less the original issue discount and unamortized debt issuance costs on the consolidated
balance sheets and the Company presents fair value for disclosure purposes only. The 2026 Notes and 2027 Notes are classified as Level
1 instruments as the fair value is determined using quoted market prices in active markets for the same securities. The Oaktree Loan
is classified as a Level 2 instrument and its fair value is determined through an income approach that considers collateral coverage,
yield calibration, yield analysis and any adjustments to implied yield associated with the Company’s fundamental measures. The
following table presents the estimated fair values and the carrying values: SCHEDULE
OF ESTIMATED FAIR VALUE
December
31,
2023 2022
Carrying
Value Fair
Value Carrying
Value Fair
Value
2026 Notes $ 73,218,000 $ 70,260,000 $ 72,436,000 $ 71,550,000
2027 Notes $ 37,413,000 $ 40,363,000 $ 31,738,000 $ 35,112,000
Oaktree Loan $ 72,541,000 $ 76,627,000 $ - $ - The
Company’s other financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses,
accrued payroll and related liabilities, deferred revenue and customer deposits and operating lease liabilities. The carrying amount
of these financial instruments, except for operating lease liabilities, approximates fair value due to the short-term maturities of these
instruments. Based on borrowing rates currently available to the Company, the carrying values of the operating lease liabilities approximate
their respective fair values. Stock-Based
Compensation All
stock-based payments to employees, directors and consultants, including grants of stock options, warrants, restricted stock units (“RSUs”),
performance stock units (“PSUs) and restricted stock, are recognized in the consolidated financial statements based upon their
estimated fair values. The Company uses the Black-Scholes-Merton option pricing model and Monte Carlo simulation model to estimate the
fair value of stock-based awards. The estimated fair value is determined at the date of grant. The financial statement effect of forfeitures
is estimated at the time of grant and revised, if necessary, if the actual effect differs from those estimates. Basic
and Diluted Net Loss per Common Share Basic
net loss per common share is computed by dividing net loss attributable to Harrow, Inc. for the year by the weighted average number of
common shares outstanding during the year. Diluted net loss per share is computed by dividing the net loss attributable to Harrow, Inc.
for the year by the weighted average number of common and common equivalent shares, such as stock options, RSUs, PSUs, and warrants,
outstanding during the year. Common
stock equivalents (using the treasury stock or “if converted” method) from stock options, unvested RSUs, and unvested PSUs
were 4,642,259 5,089,420 215,539 319,859 The
following table shows the computation of basic and diluted net loss per share of common stock for the years ended December 31, 2023 and
2022: SCHEDULE
OF BASIC AND DILUTED EARNINGS PER COMMON SHARE
For
the Years Ended December 31,
2023 2022
Numerator
– net loss attributable to Harrow, Inc. $ (24,411,000 ) $ (14,086,000 )
Denominator –
weighted average number of shares outstanding, basic and diluted 32,616,777 27,460,968
Net
loss per share, basic and diluted $ (0.75 ) $ (0.51 ) Recently
Adopted Accounting Pronouncements In
September 2016, FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments Accounting
Guidance Issued but Not Adopted at December 31, 2023 In
August 2023, FASB issued ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial
Measurement In
October 2023, the FASB issued ASU 2023-06, Disclosure Improvements—Codification Amendments in Response to the SEC’s Disclosure
Update and Simplification Initiative In
November 2023, FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures In
December 2023, FASB issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures Reclassifications Certain
prior period items and amounts have been reclassified to conform to the classifications used to prepare the consolidated financial statements
for the current period. These reclassifications had no material impact on the Company’s consolidated financial position, results
of operations, or cash flows as previously reported. |
