Good day, ladies and gentlemen, and welcome to the Conference Call covering Harrow Health’s Financial Results and Business Update for the Third Quarter 2019. My name is Kate and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

By now, you should have received a copy of the earnings release. If you have not received a copy, please go to the Investor Relations page of the company’s website at www.harrowinc.com. Before we begin today, let me remind you that the company’s remarks include forward-looking statements within the meanings of federal security laws.

Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Harrow’s Health 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 formulation, 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 most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission. Harrow Health 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 conference call contains some time-sensitive information and is accurate only as of today.

Additionally, Harrow will refer to non-GAAP financial metrics, specifically adjusted EBITDA and/or adjusted earnings. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in the company’s press release available on the website.

With that, I would like to turn the call over to Mark Baum, Chief Executive Officer of Harrow.

Mark, the floor is yours?.

Thank you for joining our call today. The first quarter of 2019 was the best quarter in the history of the company for ophthalmology business. The second quarter of 2019 became the best quarter in the history of the company for our core ophthalmology business.

And today, I’m proud to report that the third quarter of 2019 provided more record highs for our ophthalmology business and was the best quarter in the history of the company.

Why? Well, ophthalmology revenue was up 38% in Q3 year-over-year, and we continued our march towards hitting our $100 million revenue run rate goal by 2021, with ophthalmology revenue growing for the first nine months of the year at 46% in 2019 versus 2018 and reaching a new record high in the third quarter.

Margins rebounded, as we promised, to a record time high of 68% and brought our gross margins for the first nine months of the year to 66%, well on our way to hitting our promised 70% target. We have more visibility today, we have more clarity today, and we have less volatility in our business.

Our pharmaceutical compounding segment alone contributed record earnings of $2.3 million for the third quarter, and that included non-cash-based expenses of $529,000. Adjusted EBITDA reached a new record high of $1.5 million.

And with various litigation matters behind us, the ParkRx restructuring and consolidation and with continued growth and operational improvements during the fourth quarter, which is already apparent, we’ve given ourselves a clean slate to make 2020 our most successful year in business.

We expected in the fourth quarter, we will see more new records, not only in terms of the performance of our market-leading ophthalmology platform, ImprimisRx, but in terms of launching and funding two new ophthalmology businesses with tremendous potential, Stowe Pharmaceuticals and Visionology.

Both of these businesses have the potential to become paradigm-shifting businesses within ophthalmology, and I can’t wait to reveal more about them in the coming months. We’re also expecting significant value milestones from other drug development businesses.

Eton Pharmaceuticals already had their first drug approved last month, less than one year after their IPO and as a PDUFA date in March of 2020 for a much larger market opportunity, along with many other filing and approval events in 2020.

We anticipate Surface Pharmaceuticals and Melt Pharmaceuticals will both have human clinical data for their drug candidates by the end of 2020. And finally, Mayfield Pharmaceuticals is expected to file INDs from MAY-44 and MAY-88 in the first-half of 2020 and begin a Phase 2 program for MAY-44 by the end of 2020.

With a sustainably profitable, more efficient and thriving ImprimisRx, equity stakes in our deconsolidated pharmaceutical companies that have significant value creation catalysts coming in the next 12 months, potential royalty streams on several drug candidates and our two most exciting subsidiaries moving towards deconsolidation next year, I continue to be as bullish as I ever have been on Harrow Health.

As we described in our press release, going forward, we are going to provide a letter to stockholders, which we believe will provide more color and commentary on the progress our – of our business. Of course, we will conduct a question-and-answer session with analysts each quarter. And with that said, without further ado, let’s jump into the Q&A.

Now I will pause to have our operator poll for questions.

Operator?.

Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from Andrew D’silva from R.Riley – B.Riley, I’m sorry. Go ahead, Andrew..

Good afternoon. Congrats on the progress, and really, thank you very much for the detailed letter. It was very helpful. Just have a couple of quick questions. I’ll start off with CMS’ guidance for Dropless prescribing.

Can you give insight into where you are and being able to pursue that initiative? And what next steps are? And are there any additional overhead requirements we should think about, as you have to deal with patients now versus physicians?.

Well, thanks for the question, Andy. And as far as CMS’ recent amendment of their policy towards Dropless therapy, I think, it really speaks for itself. From a First Amendment perspective now, physicians have the freedom to talk about the benefits of Dropless therapy and the potential drawbacks.

They have the freedom under the First Amendment to write a prescription. It says so explicitly that they can prescribe Dropless therapy if it’s appropriate and if the patient so requests. And at that point, it will be up to the patient to ultimately decide to transact. What it was also clear is that, CMS is not going to be billed by a physician.

CMS won’t be billed by the surgery center or hospital, and that physicians will not be billing patients for Dropless therapy. These are transactions based on an individual prescription, transactions between a patient in need and a pharmacy. And so that was our interpretation.

And the second part of your question regarding overhead requirements, for this, I think is a great question, because over the last year-and-a-half or so, we’ve built up a considerable piece of technology that allows us to process individual prescriptions extremely efficiently to take payment information and shipping information really without much interface with a customer service agent.

So the answer is, as we can efficiently process these prescriptions much differently today than we did even six months ago, and we’re excited about the opportunity that this amendment in CMS policy towards Dropless offers patients..

Okay, great color. Thank you. And then just as it relates to the non-ophthalmology business, obviously, a transitional quarter as Park operations products moved over to New Jersey.

Could you give us a little bit of insight into some of the operating efficiencies we should expect now that those – the transaction and the move is complete? And are you going to have to have any non-ophthalmology-related to sales force expenses, now that it’s not part of Park?.

Yes. So the – there really are no new additional expenditures, to be clear. On the sales side, we took the seven highest volume products from Park. We shifted them to our new jersey operations. And the hope is that, those products will be able to move into our 503B facility actually, and be able to be shipped with the efficiency of the 503B offers.

So that’s really important, I think, from a margin perspective. Also, we’ve believed all along that if it was easier to buy those products without a patient-specific prescription that we would sell more units. And so, over the coming months and quarters, we expect to see an increase in individual sales for those products.

And by the way, for what it’s worth, the – that process has certainly begun. And we can see on a day-to-day, week-to-week, and now, after a month or so, sort of the green shoots of this idea coming to fruition, revenues are coming back.

And we expect, as we said, to recover at least half and I would say I’m not going out on a limb to say even more than half and potentially much more of that revenue from Park..

And then on the operational expense side, the Park restructuring should end up adding about or reducing our OpEx by about $400,000 per quarter going forward..

Okay, good, good. Thank you. And a lot to unwind as it relates to the spin out. Just one interesting point I saw was related to Melt and the reimbursement and third-party payment comments that you had in there, as well as just the general non-opioid issues and how Congress, CMS and FDA are viewing all that.

I was curious as it relates to your compound in Melt MKO product, is there any sort of overlap that we should think about as it relates to some of those initiatives? And that’s my final question. Thank you very much..

Thank you, Andy. Yes. Certainly, the opportunity with a Non-Opioid Conscious Sedation Formulation, obviously, the one that Melt Pharmaceuticals is funded to develop is seeking FDA approval. As it relates to the compounded version that has now been dispensed over 100,000 times, there are opportunities that we’re pursuing for reimbursement.

There’s nothing in the regulations that actually prohibits the reimbursement of a product like the MKO Melt. And so that is an area that we’re looking at and in discussion with our advisors about and pursuing, but we can’t make any promises as it relates to that, obviously, if we were to have success there.

And as I said, when we read the regulations, there’s nothing that prohibits our formulation from being paid for, and we certainly think it’s important to offer non-opioid-based sedation formulations. But as I said, it’s a program that we’re pursuing. It’s new.

But if it were to happen, it would be certainly, I would say very impactful to our financials..

Absolutely, and understandable as well. Great execution this quarter, and good luck closing out the year..

Thank you, Andy..

Thanks, Andy..

And our next question comes from Brooks O’Neil from Lake Street Capital. Go ahead, Brooks..

Hi, good afternoon. I confess I’m on the road, so in a public place, haven’t had a great chance to read the entire letter, but look forward to doing so. So my first question really relates to the Dropless that you were talking about a minute ago.

And I was curious if you made any progress in sort of figuring out the pricing dynamics that you think are going to optimize your success with that product?.

Sure. Thanks for the question, Brooks. We have not really talked about pricing publicly. But suffice it to say that there is a – an increase related to this for individual prescriptions, certainly, is a little bit more expensive to process those prescriptions.

I think, the important thing that we’re wanting to test and what we will be testing over the coming quarters is related to unit volumes. We think that there is a tremendous opportunity when we’re looking to ophthalmology surgical environment for this product family to do very well. We see other competitors out there not doing so well.

We’re doing, I would say, very well, and that’s exciting. And we think that if we can keep the price at a modest level, but certainly much higher than it is now, it would really make a huge impact for our financials and I think would also allow us to increase unit volume.

So we’re very much interested in increasing unit volumes and growing our market share, particularly in light of some of the challenges that competing products in the market have been dealing with..

Great, that’s perfect. Then secondly, I was curious, obviously, you appear to have tremendous momentum in the ophthalmology business sort of the core business.

Are there any other big items you’d call out in terms of finishing up this year and heading into 2020 that you think are going to be key to driving towards that $100 million a milestone for 2021? Thanks a lot..

Thanks, Brooks. Look, we’ve been growing at a great clip. I mentioned 38% first nine months in the mid-40s, margins are rebounding. And in order to hit our target that we laid out, we essentially over the next eight quarters need to double our revenue.

We have a number of new products that are going to be hitting the market, number of products and new therapeutic areas within the ophthalmology business. And we continue to have a high degree of confidence that we’ll be able to get there. As I said, in the next eight quarters, we need to essentially double our revenue.

And we have areas of our ophthalmology that are our ophthalmology business that are doing tremendous. And we continue to believe that target is certainly within our grasp during that timeframe. And hopefully, we won’t wait until the last week in the last month of the last quarter of that period to make that happen.

We think that we might be able to do it before then. But I think it’s also worth noting to be clear, the value of our commercial platform that we’ve created. We have thousands and thousands of customers. We have 40 or so, SKUs formulations that are purchased in the surgical setting.

Weekend and week out by, as I said, thousands of customers, we have products that are important to hundreds of thousands of patients who are chronic care users of our formulations. And so we have this commercial platform that we think is very valuable.

And I’ve seen companies that get products, for example, FDA approved and then they go out and try and sell them. It’s not so easy to sell things. It’s easy to come up with ideas and try and develop in. But when you have to go sell something to someone, it’s a bit of a challenge.

One of the things that we’re proud of is, is that we make a lot of products, sterile injectable products and we do that regularly for a very large audience. And we think it has tremendous appeal and we’re really proud of the team that’s helped us build that.

And we hope to show the value of that for our stockholders in the coming quarters in over the next few years..

Great. Let me just ask one more and this is a little bit more of a philosophical question. You were just talking about the ophthalmology platform and at the same time, we see now two new ophthalmology related projects, 15 businesses, we know about Stowe and Surface already.

Just talk philosophically about your thinking why create these new companies, these new businesses, which, to some extent, overlap with your sort of base business, and how you see that played out over the next couple of years? Thanks, again..

Thank you, Brooks. I think the key for any executive running a company is to be able to focus. And I can say that years ago, we had a great growing ophthalmology business and I tried to bring in some urology products and sinus products, and we sort of lost our focus.

And it was really important for me and for our team to focus on our core ophthalmology business, which we did do and the results speak for themselves. As it relates to these subsidiary businesses, we think it’s important to have a focused management team with a clear target of developing these products. And so, so far, it’s worked really well.

You’ve seen the job that Sean has been able to do over at Eton Pharmaceuticals. I just spoke to Kamran Hosseini, who is doing a terrific job. With Surface Pharmaceuticals, we’re going to have Phase 2 data next year, very exciting. And Greg over at Melt is just really grabbing the bull by the horn.

So doing once again a terrific job, but they’re all focused on specifically what they’re doing. And I can tell you that when it comes to, for example, the team at Stowe that we’re looking at or the folks that we’re looking to run Visionology, these are very different enterprises.

And so we want a bankable, financeable management team totally focused in on the execution of the specific strategy for that enterprise. And that philosophically is how we approach these issues..

Makes a ton of sense. Thanks a lot and congratulations. Keep up all the good work..

Thank you, Brooks..

Thanks, Brooks..

And our next question comes from [Patrick Roza from Razor Capital.] [ph] Go ahead, Patrick..

Good afternoon, gentlemen. I wanted to do complementary on another great quarter and also in the way you’ve streamlined the story and simplified that this year with the Park disposition and cleaning up some of the legal issues. I had one question.

Towards the end of the shareholder letter where you talk about prospects for growing asset values, you list several sources of capital.

You don’t mention issuing stocks or should we move forward thinking that despite the tremendous growth, both in Project 15 spin-offs and the core business that you don’t see the need, at least currently, the issue on a stack in the foreseeable future?.

Yes. Thank you for the question. We tried to make it clear last year, this year, we certainly, on the management team, have a lot of reasons why we are disinterested in diluting our shareholders and frankly, diluting ourselves. So we have a bias against dilution.

I’ve also seen companies, when I’ve sat on your side of the table as an investor, companies that just raise money, hand over fist, every few months, every few quarters, and they just never seem to make a profit or get themselves out of that tailspin. And we don’t want to get there. We don’t want to go there. We aren’t there. We have a great business.

We don’t need to do that. And it would be great to have a bigger balance sheet and someday we will. We think the prospects for that happening are tremendous, and maybe sooner than people think. But candidly, eventually, we want to be buyers of our stock and not sellers of our stock. And that’s the way we sort of look at it..

Okay, great. Well, thanks for that. Unfortunately, I’ve seen too many of those types of companies as well. So congratulations, again, and keep up the good work..

Thank you for your support..

And we have a question from Don Besser from Manchester. Go ahead, Don..

Hi. Good afternoon.

I noticed you spent in the latest 10-Q $1.659 million on R&D related to?.

Sorry, I’ll get him back into one moment. Don, can you just hit star one? Okay, Don. There you go..

Okay, sorry. So far this year, you spent $1.65 million on R&D for formulation development studies of formulations, so that’s a big increase.

So can you clarify what are some of the prospects or what are these some of these products that you’re spending the money on?.

Sure. Hey, Don, this is Andrew. So a lot of the R&D spend was on formulation development that actually occurred last in Q2. Some of it was related to changing of the antibiotic that we use in some of our ophthalmology drops. Some of that R&D spend, though, is also related to the spin-up businesses that are consolidated currently.

So some of the development work we’re doing for Mayfield and Stowe and some of these other works that we are working on..

Okay, good. That’s helpful..

To be clear, obviously, I think you notice. We – once these businesses are deconsolidated, Don, we do get – we have the ability to recoup that cash..

Okay. And lastly, a second question.

Have we drawn down any of the extra $5 million line from SWK?.

We have drawn down exactly zero..

Good. Okay. Thank you..

Thank you, Don..

Thanks, Don..

And at this time, we have no more questions. I’d like to turn it back to Mark Baum. Sir, the floor is yours, again..

Thanks, again, for attending our call today. And I hope this new format provides shareholders with better insight into our progress and the outlook for the future of the business. If you have any Investor-related questions, please contact our Investor Relations associate, Jon Patton. His direct phone number is 858-704-4587.

And this will conclude our call. Thank you..

Thank you. This does conclude today’s conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day..