Harrow, Inc.

Good afternoon and welcome to HARO Health's third quarter 2021 earnings conference call. My name is Ilee 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. As a reminder, this conference is being recorded. I would now like to turn the call over to Jamie Webb, Director of Communications and Investor Relations for HARO Health.

Thank you, Operator. Good afternoon and welcome to Harrell Health's third 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 meeting of federal securities law. Forward-looking statements are subject to numerous risk and uncertainties, many of which are beyond Harrell Health control, including risk and uncertainties described from time to time in its SEC filings, such as the risk 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. Errol Health's results may differ materially from those projected. Harold 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, Harold 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 website. 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 website, www.harrellinc.com. Joining me on today's call are Harrell's Chief Executive Officer, Mark Elbaum, and Harrell's Chief Financial Officer, Andrew Bowe. 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?

Good afternoon, and thanks for taking the time to join us today. As usual, I would encourage you to review our third quarter 2021 earnings release, corporate presentation, and 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 take your questions, I'd like to provide some highlights of our results for the third quarter ended September 30th, 2021. Even though the third quarter has historically been the slowest quarter of the year and the effects of the COVID-19 pandemic were still lingering in certain regions of the country, Harrow Health delivered record top-line revenue and year-over-year earnings growth. We have now delivered our fifth consecutive quarter of record results in terms of revenue and many other key operational metrics. In the third quarter of 2021, Harrell reported record revenues of $18.7 million, and that was a 30% increase compared with $14.4 million reported for the same period in 2021. and a 3% sequential increase over our previous record revenues of $18.1 million in the second quarter of 2021. Gross margin of 74% for the third quarter of 2021 was consistent with the prior year period, but was slightly down on a sequential quarter basis, primarily due to an investment in additional personnel to accommodate a second shift at our production facilities as we prepare to increase our capacity in 2022. Adjusted EBITDA was $4.9 million for the third quarter of 2021, compared with $3 million in the prior year period, and that was a 62% year-over-year increase. Our ImpromiseRx subsidiary segment contribution for the third quarter was $6.6 million, including non-cash expenses related to depreciation, amortization, and stock based compensation of about $653,000. This compares to segment contribution of $4.7 million in the prior year period, amounting to a 39% year over year increase. In addition to our strong operating results, we continue to build momentum in the execution of our strategic vision, which includes incorporating high value FDA approved products into our family of ophthalmic pharmaceutical products and using technology to make it easier than ever to order our products and stay connected to our ophthalmic brands. That's Imprimis RX and Visionology. This momentum should lead to further customer-based expansion and increased revenue as a result of greater product purchasing depth within the practices we serve. Going forward, we expect these initiatives and others we are pursuing, all of which are focused on our core competency of ophthalmic healthcare to fuel Harrow's mission of becoming a leading US eye care company. As you may recall, during the third quarter, we announced several transactions, including the purchase of two drug candidates, AMP 100 and MAC 100. We are excited about the potential for the transformative power of these acquisitions and note that they are consistent with the types of deals we've been promising our stockholders we would complete. AMP 100 is a patented topical anesthetic intraoperative pain drug candidate with a TAM or total addressable market estimated at over 10 million annual ophthalmic procedures. That includes cataract surgeries and intravitreal injections. We expect a new drug application filing to be submitted to the FDA very soon. MAC-100 is a preservative-free steroid. It's triamcinolone acetonide, ophthalmic injectable drug candidate for visualization of the vitreous during vitrectomy. Heroin tends to communicate with the FDA in early 2022 about presenting the clinical data used for Japanese market approval of MAC-100, which is marketed in Japan as McCade for four separate indications. Our objective is to use the 11-year experience of McCade in Japan to support a U.S. and Canada market NDA submission. As we wind up 2021, we have used this past year to plow the ground and begin to make the capital investments necessary to transition HARO into a company offering not only the compounded pharmaceuticals that our business was built upon, but also FDA-approved ophthalmic pharmaceutical products. Now this is a feat which I believe we will be the first to accomplish in the ophthalmic industry. Our ability to offer both compounded and FDA-approved ophthalmic pharmaceuticals, branded products, will uniquely differentiate us, not only in the ophthalmic pharmaceutical industry, but also among publicly traded pharmaceutical companies. Once approved by FDA, AMP 100 and MAC 100 will expand our product portfolio and broaden our depth of offerings to include products for surgeries and interventions aimed at the back of the eye as well as the front of the eye. I also believe that our upcoming revenues from these new FDA-approvable products, when approved, should exceed our current level of revenues from compounded products not long after their respective approvals. And we remain on the hunt for other acquisition opportunities to add fuel to our strategic vision. This whole initiative is about leveraging our commercial platforms and strong customer relationships, and national direct distribution capabilities. That is what we're working towards, and that is why I believe we are still in the very early stages of our revenue opportunity. Now, let's take your questions. I will pause to have our operator poll for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you were using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today comes from Jeffrey Cohen with Ladenburg Salmon.

Oh, hi, Jamie, Mark, and Andrew. How are you? Real good, Jeff. Good to speak with you. So, um, A few questions. So first, I see you're adding a second shift. Are you having any labor issues to speak of whatsoever?

You know, not really. We do have no problem, at least right now, finding talent, believe it or not. I think the issue is we do have a lot of open positions. We're growing, and we need to fuel that growth and hire the right folks to But we aren't having too much trouble finding folks. It's a pretty exciting place to work. It's dynamic. There's a lot going on. So we're finding people want to join the HARO team in New Jersey.

Got it. Okay. Could you talk about this upcoming AAO meeting? Are there any presentations or posters or anything of note that folks should be aware of?

We're going to have a presence at AEO that's a little bit different. I would say somewhat more muted than we have had in the past. The last couple of meetings during COVID have not been as fantastic as a lot of companies and industry would have liked, but we are going to be there. We've got a great booth. We've got a sales organization there, and we're looking forward to meeting customers there. Both existing customers and new customers, but there aren't any specific poster presentations that I can point you to. It's really going to be a commercial activity, as I said, meeting existing customers and then hopefully building our customer base, meeting some new folks as well that we can help.

Got it. It looked like a strong revenue quarter. However, we've seen some continual seasonality to Q3 and a lot of other sectors as far as weakness goes. So what's your OVID? Is there anything to read into as far as the patient population or the ophthalmologist population out there?

I have heard, you know, you may have noted that we really have not mentioned COVID much in the last couple of quarters. In the third quarter, we did hear some echoes of COVID. Some customers in different parts of the country that were having challenges, not only with their workforces, but also getting patients into the office. But it was definitely the minority of conversations that we had. And, you know, we did experience a little bit of that, but The third quarter is always a tough quarter for us. It's the time of year when doctors travel, they go on vacations. And so we were really delighted that we were able to see sequential revenue growth between Q2 and Q3. We put out more product, made more product. It was really a surprisingly strong quarter. And then I think importantly, You know, it's just been fantastic as we've gotten into the fourth quarter here, fortunately, as well.

Okay, got it. And then I see the SG&A was negatively impacted by 1.5 million legal settlements, so we should take that out as far as our modeling purposes going forward. And the 5 million in process R&D, was that related to AMP100 or MAC100 or both?

Andrew, do you want to take that? Yeah, the $5 million was related to our upfront payment for AMP 100, Jeff.

Okay. Is there any follow-on payments due that we should anticipate for either compound in the next couple quarters?

Yeah, I think we hope to have another milestone due and payable shortly after the NDA is filed. And that one should be about a $3 million expense.

And what kind of timelines on that? Is that first quarter, second quarter?

Our hope is that we can get that NDA filed or the team can get that filed before the end of this year.

Okay. So that would be Q4. Okay. And then lastly, for me, any commentary on Dexter Q as far as what you're seeing out there? It looks like a strong readout for the quarter. Are there any learnings or lessons out in the marketplace? Yes.

You know, we continue to love Dexacute. We think it's a great product. The feedback we get from customers is strong. It's solid. They like the product. We saw unit volume growths sequentially. Units, I think, were up, you know, north of 18% quarter over quarter. And the challenge has been that the ASP is slightly depressed and But we love to execute. Customers love to execute. It's been a great relationship with the people at iPoint. And, you know, we think as we get into next year, we'll see what's going to happen with pass-through. But hopefully, you know, the folks at iPoint are working on strategies to extend that pass-through period. And if so, we're really looking forward to continue to make it available to our customer base because they like it and it helps patients.

Got it. Okay. That's great. That does it for us. Thanks for the commentary. Thank you, Jeff.

Our next question comes from Nathan Weinstein with Aegis Capital.

Hi, and thanks for taking my call. This is Brian Holland on for Nathan Weinstein. Brian, good to speak with you. Yeah, good to speak with you as well. Would you mind please discussing visionology? In particular, we're interested in what trends you're seeing there, what the competitive landscape looks like, and what could that business become in the future? Yes.

So thanks for the question. You know, we are building visionology not for what it is right this minute or what it's going to be, frankly, this year or even next year. We really believe that the future of eye care is going to be bringing the physician to the home of the patient. And that doesn't only include the physician. That includes also diagnostics related to that course of care. And it also means making it much easier for patients to access pharmacy services to get access to medications that are delivered to their home. And so the vision for Visionology is to integrate a national network of physicians that make available the latest technologies to empower physicians, a national network of physicians to provide care to patients when and where they want it and on demand even. So it's an exciting project. But as I said, it's a project for the future. And we did do a regional launch, and it has been successful. The learnings have been incredible. And I think the important thing to note about Visionology is that, you know, we are going to expand the program, the rollout nationally in 2022. We've been focusing on SPARCs. the patented diagnostic technology that we acquired from two partners. And we're excited about that. And I think the next thing that our shareholders can look forward to related to visionology is connected to Sparks because we've done a lot of work on reimbursement for Sparks. And so I think you'll see hopefully fairly soon here some interesting information about the reimbursability of of some of the services that Visionology offers vis-a-vis our patented Sparks technology.

Thanks for that, Collar. And then last one for me. HARO has clearly been very successful striking partnerships, for example, with iPoint Pharmaceuticals. Can you speak at a high level to what the partnership funnel looks like and if you see any interesting potential out there?

Yes, so we are... we've said for gosh, a year and a half, two years now, uh, that we were going to engage in, in transactions like we did with iPoint, uh, but also go out and acquire products, products that were near approval or even products that were approved, but were in larger organizations and were kind of, uh, underloved if you will. Um, and so we, we've done the Mac 100 deal, the amp 100 deal. We are really close with, uh, a couple of other really exciting opportunities that we hope to close and talk more about soon. But finding products like Dexacute to push through our platform have not really been the focus. The relationship with our partners at iPoint has been fantastic, and we really love what we're doing with Dexacute. As I said, our customers like it. and it provides great surgical outcomes. But we have also, I think, been approached by other companies who are interested in our distribution capabilities, our distribution platform. So with MAC 100 and with AMP 100, these are products that we will be able to self-distribute. And if you look at what the costs are to distribute a product using the traditional sort of big three distribution platforms, it can be considerable. And one of the things that we're investing in and that we're getting ready to deploy as these two products and hopefully others that we get access to are under the HARO umbrella is to self-distribute. And so for other potential partner companies that are looking to access our large and growing customer base, I think they're not only looking at us as a potential commercial partner, but also as a partner that can help them distribute their products because our team is distributes each month to thousands and thousands of ophthalmology practices, the largest in the country, leading eye hospitals, as well as all of the major ambulatory surgery center groups. And so we're sending things to these customers, and we can hopefully send their things as well. And so we have been approached by a few, and we continue to have discussions in that regard. Thank you. Thank you, Brian.

If you have further questions, please press star then 1 at this time. And at this time, I'm showing no further questions, so I'd like to turn the call back over to Mark Baum for some closing remarks.

Thank you, Eileen. On a personal note, next month will mark my 10th year at the helm of this company. December of 2011, when Andrew and I began to build what we now know as Harrow Health. Along the way, we've been blessed to grow our family of employees, build strong relationships with new partners, and attract new investors who have been tremendously supportive and patient. It certainly hasn't been a straight path to this point, and as we set our sights on growing into a much larger revenue and public market capitalization company, I don't expect that process to be a straight path either. And with that said, we are very optimistic about our prospects for 2022 and beyond and look forward to what we believe will be a positive transformation of our company and a major step forward in our mission. I also want to assure our stakeholders, our stakeholders, all of our stakeholders that HARO is committed to its corporate values of integrity, innovation, evidence-based development, great products, and people. Our company has grown to where it is today by steadfastly following these corporate values, and we intend to continue to do so. We believe that our commitments to innovation, quality, and our corporate values are the source of long-term business sustainability and value creation for our customers, patients, the local communities we serve, other stakeholders, and of course our shareholders. Finally, I want to highlight that this Thursday is Veterans Day. This is an important day for my family because my wife served as a United States Navy officer. And within the Harrow family, there are so many wonderful and brave folks who volunteered to serve our great nation to protect and even fight for our unique American way of life. The freedoms enshrined in our Constitution and our Bill of Rights, our right to govern our own choices, to pursue opportunity, and to enjoy the blessings of liberty. So veterans, Harrow Health thanks you. We appreciate and honor your service. Thanks to everyone today for attending our conference call and for your interest in Harrow Health. If you have any investor-related questions, please email Jamie Webb, that's two Bs, W-E-B-B, at jwebb, W-E-B-B, at 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.