Good afternoon, and welcome to Harrow Health's Second Quarter 2021 Earning Conference Call. My name is Ilie, and I'll 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. And as a reminder this conference call is being recorded.

I would now like to turn the call over to Jamie Webb, Director of Communications and Investor Relations for Harrow Health..

Thank you, Operator. Good afternoon and welcome to Harrow Health's second quarter 2021 earnings conference call. Before we begin today, let me remind you that the company's remarks may 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 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'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 conference call contains 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 letter to stockholders available on the Web site.

By now you should have received a copy of the earnings press release. If you have not received a copy, please go to the Investor Relations page of the company's Web site, www.harrowinc.com. Joining me on today's call are Harrow's Chief Executive Officer, Mark L. Baum; and Harrow's Chief Financial Officer, Andrew Boll.

With that, I'd like to turn the call over to Mark to go over some prepared remarks prior to the question-and-answer session.

Mark?.

Thank you, Jamie and thanks for joining our call today. I would encourage everyone listening to review our second quarter 2021 earnings release, corporate presentation and to letter to stockholders, all of which were posted on the Investor Relations section of our website just after the close of trading today.

Before we begin the Q&A portion of today's call, I'd like to provide some additional color on our business since we last spoke in May.

Harrow continues to be a reliable and innovative pharmaceutical supplier to hundreds of thousands of Americans and many thousands of eyecare institutions across the country, including optometrists, ophthalmologists, ambulatory surgery centers and hospitals.

As a result of our commitment to our customers and the diligence of a dedicated team of Harrow affiliated employees, the second quarter of 2021 was our best financial quarter in company history, marking the fourth consecutive quarter of record results. We are pleased to report that total revenues for the second quarter were $18.1 million.

That's an increase of 125% compared with the $8.1 million reported in the prior year period, and up 17% from revenues of 15.4 million in the first quarter of this year 2021. For the first half of 2021, total revenues were $33.6 million, and that is a 69% increase compared with $19.9 million for the first half of 2020.

Gross margin of 75.6% for the second quarter of 2021 matched our company record for the first quarter of 2021 and was an increase over the prior year's gross margin of 60.2%.

Adjusted EBITDA of 5.7 million for the second quarter of 2021 was another record metric, a significant increase compared with a loss of $1.7 million in the prior year, quarter and an increase over adjusted EBITDA of 4.3 million recorded in the first quarter of 2021.

In the second quarter of 2021 segment contribution from ImprimisRx was $7.2 million, including non-cash expenses related to depreciation, amortization and stock based compensation of $521,000 compared to a negative segment contribution of $239,000 in the prior year period, and segment contribution of $5.7 million in the first quarter of 2021.

This important metric demonstrates the earnings power of the ImprimisRx business separately from other Harrow businesses, assets and liabilities. In addition to recording record operating results in our ophthalmic pharmaceuticals business, we are delivering on our promise to execute our strategic vision aimed at becoming a leading USI care company.

In alignment with that objective, we are focused on growing revenues from FDA approved products to the point where in the next few years they exceed our revenues from compounded products. Our partnership with EyePoint Pharmaceuticals to market DEXYCU was the first step towards the achievement of our goal.

Our new partnership with NovaBay for its product, prescription based Avenova was another step. And our recently announced acquisition of AMP-100 is yet another step and a potentially big step indeed. We hope there are more steps if you will, to announce soon.

During the second quarter, we raised $75 million in unsecured capital to fund our growth strategy and to lower our cost of capital. All I might add without any common stock dilution.

As I mentioned, we recently announced the acquisition of rights in the US and Canada to market and sell AMP-100, a patented ophthalmic topical anesthetic drug candidate with a total addressable market or TAM, estimated at over 10 million annual procedures in the United States, including cataract surgery and intravitreal injections.

We expect a new drug application to be submitted to the FDA in the next few months. And, if approved, we plan to launch AMP-100 in late 2022. Another component of our strategic goal, serving eyecare customers directly through Visionology has also made excellent progress.

Our regional soft launch continues as we fine tune our marketing strategy and operational processes before expanding to additional regions and eventually becoming a nationwide enterprise.

Based on our early results to date we believe Visionology has the right marketing approach, functionality and ease of use to be the national leader in the burgeoning direct-to-consumer eye care industry.

We believe we have developed a sound strategy for our company's future, raised the capital needed to execute that strategy responsibly leveraged our assets to promote growth, both organically and through a robust pipeline of new product opportunities, and have a strong management team and partner employees who have the expertise, talent and dedication needed to achieve our very clear and shared objectives.

We couldn't be more optimistic and excited about the remainder of 2021. Now, let's take your questions. I will pause to have our operator poll for questions.

Operator?.

We'll now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jeffrey Cohen with Ladenburg Thalmann..

Hi, Mark and Andrew.

How are you?.

We're good, Jeff, good to speak with you..

I'm just going to fire five or six at you.

So what's the timing of your Q filing this week?.

Hey, Jeff this is Andrew. The Q got filed today. So I think around 4:30, so just got filed..

Okay, got it.

And could you walk us through how we should think about the pull through into the back half of the year? Is that a 18.1 kind of a new baseline as far as you're thinking of it? Or how should we think about that?.

Andrew, do you want to talk through that question?.

Yeah, Jeff so 18.1, obviously, is a big number from the prior quarter. Q3 is traditionally sort of a seasonally low quarter for us. We're going to expect some of that here. And then, time coming out of that, and Q4 we expect to be building off of 18.1 and then the next year, as well..

Okay, got it and - yeah..

I'll add to that Jeff, and we're seeing in the month of July, and as we get into August the business continues to be robust, but Andrews spot on that the third quarter in the eyecare world has traditionally a softer quarter. But our businesses, as I said, been pretty robust..

Okay, got it.

And can you give us a little better sense of breakouts on revenue contribution, or at least perhaps call out the top few contributors behind Imprimis up to 7.2?.

Andrew, do you want to talk through a couple of the specific disclosures in our filing, it's usually - it's probably about as much detail as we can provide, I think..

Yeah, the - on a product-by-product basis, Jeff, other than that execute commissions, we're not going to - we don't provide a whole lot of detail. We did add some revenue concentration in this Q, which was, we do have two products that made up about 36% of total revenues. But that was about - that's consistent with prior quarters as well.

But the revenue growth in general, this quarter really came from the addition of new customers, we had record unit volumes. And so we're seeing new customers' depth us in new in the accounts - greater depth of new accounts and to stronger volumes on the units..

Okay, got it and then -.

Also wanted to add the - another trend, I think that's really important is that our chronic product growth has been strong. And so as it relates to formulations that we make, dispense to help patients manage dry eye disease and glaucoma.

We're seeing very strong refill rates and customer attention rates far higher than what you traditionally see in the industry..

Got it, okay.

And then any commentary on gross margins, it looked like you had a pretty large beat for the quarter of what we had, and that looks like a little lift going forward? How do you feel about this low to mid 70s number?.

I think - you mentioned the word baseline, I think that within a percentage point or two of where we are should be a new baseline for us. We're consistently hitting margins in the low to mid 70s. Although we predicted that we would be in the 70s a few years ago, back when we were in the 40s.

And we're quite happy that the team is delivering these types of margins. I always tend to look at what we still can do. And I strongly believe that we can see margins improve even from where they are now. We want to deliver on that. And the team is committed to that. But this is within a percentage point or two. I think a new baseline for us.

But as I said, as more and more revenue comes from FDA approved products, I think you'll see our gross margins continue to float up as opposed to down..

Okay, got it. And lastly, for us, could you talk about ASPs or revenues on a per order basis and any trends that you saw through Q2 or any trends that we should think about through Q3 and beyond? Thanks..

Thank you, Jeff. Yeah, so the - our revenues per 503B order were around the same level. I think they may have been even down a smidge, but they're right at sort of all-time highs. I think what Andrew mentioned a few minutes ago is a really critical point and that is what the key revenue drivers were this quarter.

And that was a meaningful increase in the number of new customers that joined the platform. We did all of this without price increases, by the way. So there were no price increases during this period. And we're also seeing greater density within these accounts that we have.

So more accounts are ordering more products from us and so we've talked about that on prior calls as well. We don't want to be an inch deep and a mile wide, we want to take more of the pharmaceutical revenue opportunity per cataract surgery, per LASIK procedure, per glaucoma surgery, per retina procedure.

So we are attempting to provide our customers with more of what they need. And our philosophy is clear. If we can help a customer with a product opportunity, we want to be there for our customer, we feel like we can provide them with as good or better of a product than any anyone else that they would seek to buy products from.

So we want to be there for our customers and capture more of that revenue per procedure..

Okay, got it. Thanks for the commentary..

Thank you, Jeff..

Our next question comes from Brooks O'Neil with Lake Street Capital Markets..

Good afternoon, guys and congratulations on a terrific results. I was hoping recognizing that COVID has been a topic of some interest nationally that you could just talk a little bit about how you've seen COVID impact your business in 2Q and what you expect going forward..

Well, thanks for the question Brooks. When you say Q2, and COVID impact, I'm always reminded of the incredible impact that COVID had on our business in Q2, but it was Q2 of 2020 and not obviously Q2 of 2021.

We were fortunate after the Q2 2020 impact to have record revenue quarter in Q3 of 2020, then again, a record period in the fourth quarter and then first quarter of 2021. And now we followed it up with more records in the most recent period.

We obviously are aware that there's a lot of media attention and concern and certainly real concern about the spread of COVID and the Delta variant in the like. We have not seen a lot of that show up in ordering patterns. We have not seen offices closed down.

Most of the surgeons, cataract surgeries, for example, take place in ambulatory surgery centers. And so we have not heard of what we saw last year, which is bans on electric procedures, not seeing any of the things that we saw in Q2 of 2020, fortunately.

And so we really have not seen the impact of COVID, certainly in the last period, that doesn't mean that we won't see things in the coming months, but even into the third quarter, in the month of July and so far through August, we really have not seen a lot of COVID impact..

Great, so just to follow on there and just be sure I'm hearing you correctly, you don't think as any kind of pent up demand being satisfied from eye surgery, eye visit any of that other stuff that might have actually helped you this quarter as opposed to hurt you this quarter?.

No and we don't think - first of all, we do believe that there is some pent up demand from last year without question. But we also don't believe that the capacity exists for all of that pent up demand to be satisfied in one quarterly period.

We, believe and we've talked to colleagues that are in the space, that feel the same way that very likely the pent up demand of estimates are of around a million or so cases will take place over probably five or six quarters and not the one quarter. But we definitely do not see a so called pent up demand hitting us this quarter.

This quarter was all about new customers coming to the platform and the customers that we had buying more from us allowing us to satisfy their needs more than we had in the past..

Great, that's fantastic.

So secondly, I'd love to just get any additional color you can offer on DEXYCU kind of what you hear about it? What that outlook is forward, would you just expect that business to continue to grow kind of steadily into the future? Or kind of how are you thinking that might play out and impact the company going forward?.

So, first of all, DEXYCU and we heard this before we took the product on and it remains the case today. DEXYCU is a fantastic product. We don't hear from ophthalmologists, who use the product that it produces bad clinical outcomes it's the opposite. Ophthalmologists like the product. Our commercial team has done an incredible job.

We have not had to DEXYCU for a year even and if you think about the success that we've been able to produce with this terrific product in a very short period of time. We've learned two things. One, as I said, DEXYCUs a terrific product, and we want to continue selling it. And it's financially rewarding for us to do that.

But at the same time, we're getting in the FDA approved products business in the future. I've talked about that many times. We talk about that in our stockholder letter. And so our commercial team now has dipped their toes in the water, they understand what's involved in selling the reimbursed product like DEXYCU.

We have experienced now and so as we acquire more products that are FDA approved that sort of fit into the surgical suite like a product, like DEXYCU does. We're going to be ready, when it comes to launch time for products that we go out and acquire. And so that's a real value for our commercial team. We're not starting from scratch, if you will..

Yeah, that's great. So I saw a couple of comments from some of the news services suggesting that EPS missed estimates. And I noticed there was a significant other expense item in the income statement.

Can Andrew just talk us through what that was and help us to understand how that impacted the quarter?.

Absolutely..

Yeah, certainly, Brook's. The biggest impact was related to the change in value of Eton of our Eton position. And so that drove most of that loss during the quarter. And we also had some investment loss in Surface and Melt as well as lost some early extinguishment of loan when we paid off our secured senior lender SWK..

Great and then, I guess last, I'd love to hear just a little bit about Visionology and how that's going and what your outlook is for that business as well..

Great, so Visionology, as you know, we did a soft launch about three months ago. And so far, we've built our core technology and this digital front door for consumers, which you can see if you visit the Visionology website, but integrated with the front door, the digital front door is a back door. And we now have our Visionology Doctor app.

We haven't publicized this, but it's out there. But you can go to the Apple iOS app store, you can go to the Google Play Store for Android users and the Visionology Doctor app is now live and downloadable for prescribers that will ultimately build out - will network with to build out our distributed network of eyecare providers.

So the entire system, by the way, is integrated with a back end fulfillment system in our pharmacy, so all of that has been done to date. We've gathered consumer feedback from our website utilization, using tools like Hotjar and other amazing tools. And we spent about a month of the last three months, optimizing the site to re-launch.

So we're launching, we're learning and we're optimizing.

So over the next 60 days or so we're going to continue that process, continue to measure and optimize retention systems, build out the capability for call center operations and the like, and really build out and put on paper, the plan to create a national direct-to-consumer telemedicine service. So we're excited about it. We've accomplished a lot.

Drew and his team have done amazing things. And we believe there's a tremendous amount of value there. And we're excited about the future of Visionology. But it's very new it's at its infancy. But the good news is, is that it is working. We're delivering prescriptions, and we're taking care of patients..

Great, fantastic, thanks, for all that color..

Thank you, Brooks..

[Operator Instructions] Our next question comes from Andrew D'Silva with B. Riley FBR..

Yeah, it's B. Riley Securities now. But thank you, and good afternoon. And my apologies if you answered any of these questions, I was jumping between calls, but very impressive top line for the quarter.

I know you gave a context to the comparison relative to the first quarter, but am I correct in understanding that the primary driver between the 2Qs from a sequential growth standpoint is new customers predominantly, or was it also just better penetration with existing customers, as well as new product launches.

And primarily talking about from product sales standpoint, obviously, I saw the licensing sales sequentially up there..

Yeah. So Andy thanks for the call.

There were three revenue drivers; one, a meaningful increase in the number of new customers coming to the platform; two much more depth within the account, so accounts buying more from us; and then the third factor was continued growth in our chronic care business and related to that, we saw very solid refill rates for chronic care prescriptions and patient retention rates.

So our customer service team is doing an incredible job. We're really pleased there, with the improvements that they've made. We're using technology better than we ever have. It's really helping to drive our business and so all of those three factors contributed to this sequential revenue increase..

Great to hear that and then I heard you referenced 36% product concentration across two products. I remember a couple of years back around the time you were involved with Allergan, there were a couple of products that were almost at 65%.

Can you just talk about the diversification since then on the product side and where you're seeing increased sales come out to kind of bring down that concentration of those two primary products?.

Yeah.

So across the line we're taking a look at an ophthalmic surgery and we're making products now to serve the entire process from sedation, infection, inflammation, mydriasis, anti-sepsis, all of the components, that a surgeon, that an ASC, that a hospital would need to purchase in order to take care of a cataract case, a glaucoma surgery case, even retina case and a LASIK case.

We have a big presence in the LASIK market in the US as well. So we saw that entire process and we've now built formulations to serve patients throughout that entire process. And so there's more that we can offer to a customer.

So beyond infection, inflammation, topical medications, we make a number of injectable products that we didn't make back in the - during hell again days. But you're right I think the diversification is been impressive, not only in terms of the products that we sell, but also in terms of our customer base.

We don't have any single customers that if they fell off it would be a disaster for us. So we have a very broad customer base and national customer base. We operate in all 50 states.

But what I think is really exciting also is while it is the case that we have a diversified product portfolio now one of the points I wanted to highlight is that we really do believe in the next couple of years that our revenues from FDA approved products will exceed the revenues that we have from compound products.

And so as we make that transition that is going to create additional diversification as well and I think a more stable revenue source and a more profitable revenue source..

Useful - very useful context, a couple accounting questions to finalize this. I just noticed in your balance sheet, you no longer have anything attributed to your investment in Surface. Just give a little bit of context around that.

And then with the recent acquisition - or like in-licensing, acquisition of the AMP-100, any sense of how would you think about that from an accounting standpoint, will it see an R&D expense or amortized over certain periods that would be useful..

Andrew, do you want to tackle both of those?.

You bet. Hey, Andy, thanks for the questions. So on the service investment, we still account for that investment under equity method accounting. And so we had a value of the investment at the time of the consolidation back in 2018.

That value got put on the balance sheet, and then we've been decreasing it proportionally for our percentage ownership of their loss. This quarter, we had basically exhausted that investment balance.

The irony about GAAP is that during the quarter even though we've now got that investment in Surface up Pharmex [ph] is now down to zero during the quarter. Surface successfully raised capital at an increase in valuation. However, we're still maintaining an ownership position just over 20%.

So we'll continue to show that as a - as no value on our balance sheet even though the true value of the equity is as much more than zero.

And then on to the Sintetica milestones and how the accounting will be, I've had preliminary discussions with our auditors and it seems like we were on the same page with we'll probably expense most of the milestones, milestone payments through our income statement, probably - likely through R&D.

There are a few milestones post commercialization that we may be able to capitalize. But it will be more of a negotiation or discussion with our auditors at that point on the correct accounting treatment for those milestones, but the initial ones will run through R&D and the P&L..

Perfect. And last question is sticking with that AMP-100 offering, could you just help maybe frame the market a little bit? I understand it's very, very large. But just from a realistic opportunity to block in capital in the near term to medium term would be useful.

And then just a little bit about how synergies shift between that offering and just the infrastructure you've built over the last several years..

Yeah. So Andy, we are really excited about AMP-100. And I say that with five exclamation points behind it. And that's because it is really in our sweet spot. Fundamentally, if you look at how we created the revenue that we did this quarter, it's about ophthalmic surgeries and a lot of cataract surgeries.

We probably touch now close to 20% of all of the cataract surgeries in the United States, so a meaningful presence in the market and so every one of those cataract surgeries in the US can use a product like AMP-100. It is a non-opioid topical anesthetic product. And 100% of the clinical programs are completed.

And we expect to file an NDA with the FDA this year as we mentioned before, and hopefully launch the product little later than a year from now. But the product itself is going to offer unique advantages over the current standard of care. And so when we go to our customers and we have a lot of customers, so we know this space well.

We're going to offer a product that as I said has a set of advantages that are totally unique over the current standard of care. When you think about the overall market, and we said this in the press release, its cataract surgeries, ophthalmic procedures, and that includes intravitreal injections. So you're talking about a very large market.

There are a lot of products in the ophthalmic market that are made just for cataract surgery alone. And that's a big space. But this is 10 million procedures annually. It's sort of the granddaddy of them all in the ophthalmic market, 10 million a year. And by the way, we filed the agreement recently and the Q.

The specific economic terms are confidential. But we were able to build protections in our agreement related to gross margins, at least 80%. Now, you'll see that I think if you take a look at the agreement And if you look at our unit cost that's going to be below $10 a unit we expect.

And the bottom line is, is that AMP-100, if it's approved, we believe has the potential to be a $100 million plus per year product. We've never had access to products like that. That's a patented product. And we're not going out and hiring a sales organization and hoping to create a presence in the cataract surgery market. We have a great sales team.

We have an amazing commercial team. We have the ability to self-distribute our product. And we have a lot of customers to do a lot of cataract surgery. So we think our team is going to do an incredible job with AMP-100. So this is a big, big deal for us.

But the good news is that we have more hopefully that we'll be able to close kind of connected to our core focus in the ophthalmic surgery market. So we are transforming the company. In the next few years, we intend to become a much larger US eyecare company..

Great, sorry, I have one more question that just kind of popped into my head as it relates to AMP-100 again. You mentioned that the non-opioid aspect of it right now we're thinking about it, at least from a modeling standpoint, from the cash free basis.

How should we think about it from a reimbursement standpoint? And then obviously, there's pass through status, sometimes it can go perpetually if it's a non-opioid product. So I was just curious if the thinking about it right or how we should be thinking about payment for cash free or reimbursement..

So we're not really ready to comment on pricing specifically or our reimbursement strategy. But I would reiterate that this is a patented non-opioid topical anesthetic product that provides localized analgesia for ocular surgeries. And so we think it's a better product, and offers unique advantages over the standard of care.

And we've talked to customers about it. And we think there's going to be strong interest. We need to get the NDA application in front of the FDA. And that's the next step. But if we can get it approved, we think it's going to offer tremendous advantages, not only to physicians, but more importantly, even to patients.

So we're excited about this opportunity. It's game changer for us..

Great, awesome. Hey, thank you very much for taking my questions. Congrats on all of the progress really, and good luck going forward..

Thank you, Andy. We really appreciate it..

That concludes our question-and-answer session. I'd like to turn the call back over to Mark Baum for any closing remarks..

Thank you, Ilie. And in closing let me thank everyone on this call for your interest in Harrow Health. I know that a strong company is built on the hard work and commitment and perseverance of its stakeholders. Also, an amazing group of partner employees, and many of them are on this call listening right now.

And we appreciate the incredible work that you provide to us. But also loyal stockholders, tremendous numbers of customers and vendors, I'm thankful for all of you who share a strong belief, passion and faith in the products that we deliver and the service that we provide.

And I'm thankful once again for our stockholders, customers and vendors, without their support we could never hope to achieve our goals. Thank you for attending today's call and if you have any investors related questions please email Jamie Webb at jwebb@harrowinc.com. This will conclude our call. Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..