HARROW, INC. (HROW) FY 2022 MD&A

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated
financial statements and the related notes contained in this Annual Report on Form 10-K (this “Annual Report”). Our consolidated
financial statements have been prepared and, unless otherwise stated, the information derived therefrom as presented in this discussion
and analysis is presented, in accordance with accounting principles generally accepted in the United States (GAAP). In addition to historical
information, the following discussion contains forward-looking statements based upon our current views, expectations and assumptions
that are subject to risks and uncertainties. Actual results may differ substantially from those expressed or implied by any forward-looking
statements due to a number of factors, including, among others, the risks described in the “Risk Factors” section and elsewhere
in this Annual Report.

As
used in this discussion and analysis, unless the context indicates otherwise, the terms the “Company,” “Harrow”
“we,” “us” and “our” refer to Harrow Health, Inc. and its consolidated subsidiaries, consisting of
Imprimis Rx NJ, LLC, Imprimis NJOF, LLC, ImprimisRx, LLC, and Harrow Eye, LLC.

Overview

We
are an ophthalmic-focused pharmaceutical company. Our business specializes in the development, production, sale, and distribution of
innovative prescription medications that offer unique competitive advantages and serve unmet needs in the marketplace through our subsidiaries
and deconsolidated companies. We serve ophthalmologists and optometrists by providing FDA-approved branded ophthalmic pharmaceuticals
and innovative compounded prescription medicines that are accessible and affordable. We own the U.S. commercial rights to ten branded
ophthalmic pharmaceutical products, including IHEEZOTM, IOPIDINE® (both approved concentrations), MAXITROL® eye drops,
MOXEZA®, ILEVRO®, NEVANAC®, VIGAMOX®, MAXIDEX®, and TRIESENCE®. We own and operate ImprimisRx, one of the nation’s
leading ophthalmology-focused pharmaceutical-compounding businesses, and our branded drugs are marketed under our Harrow name. In addition,
we also have non-controlling equity positions in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”),
both companies that began as subsidiaries of Harrow and were subsequently carved-out of our corporate structure and deconsolidated from
our financial statements. We also own royalty rights in certain drug candidates being developed by Surface and Melt.

Factors
Affecting Our Performance

We
believe the primary factors affecting our performance are our ability to increase revenues of our branded pharmaceutical products, proprietary
compounded formulations and certain non-proprietary products, grow and gain operating efficiencies in our operations, potential regulatory-related
restrictions, optimize pricing and obtain reimbursement options for our drug products, and continue to pursue development and commercialization
opportunities for certain of our ophthalmology and other assets that we have not yet made commercially available. We believe we have
built a tangible and intangible infrastructure that will allow us to scale revenues efficiently in the near and long-term. All of these
activities will require significant costs and other resources, which we may not have or be able to obtain from operations or other sources.
See “Liquidity and Capital Resources” below.

Recent
Developments

The
following describes certain developments in 2022 to date that are important to understand our financial condition and results of operations.
See the notes to our condensed consolidated financial statements included in this Annual Report for additional information about each
of these developments.

Divestiture
of Non-Ophthalmic Assets

In
October 2022, we entered into an Asset Purchase Agreement (the “RPC Agreement”) with Innovation Compounding Pharmacy, LLC
(the “Buyer”). Under the terms of the RPC Agreement, the Company agreed to sell substantially all its assets associated with
its non-ophthalmology related compounding business, including but not limited to, certain intellectual property rights, customer lists,
databases, and formulations (the “RPC Assets”). The Buyer agreed to make offers of employment to six of the Company’s
employees that were responsible for the sales activities associated with the RPC Assets. In connection with the RPC Agreement, the Company
entered into a separate transition services agreement with the Buyer related to providing on going services, such as procuring and dispensing
prescription orders associated with RPC Assets. The Company expects to provide transition services to the Buyer for six to nine months
following the effective date of the RPC Agreement. Under the terms of the RPC Agreement, the Buyer paid to the Company an aggregate cash
amount of $6,000,000 on October 5, 2022. In addition, the Buyer is obligated to pay up to $4,500,000 to the Company based on mutually
agreed upon revenue milestones during the calendar year 2023.

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Melt
Loan Amendments

In
April and September 2022, we entered into a First Amendment and Second Amendment (collectively the “Amendments”) to our loan
and security agreement previously entered into on September 1, 2021 with Melt. The Amendments provide for the following:

Acquisition
of ILEVRO, NEVANAC, VIGAMOX, MAXIDEX and TRIESENCE

In
December 2022, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Novartis Technology, LLC and Novartis
Innovative Therapies AG (together, “Novartis”), pursuant to which the Company agreed to purchase from Novartis the exclusive
commercial rights to assets associated with the following ophthalmic products (collectively the “Fab 5 Products”) in the
U.S. (the “Fab 5 Acquisition”):

We
closed the Fab 5 Acquisition on January 20, 2023. Under the terms of the Purchase Agreement, we made a one-time payment of $130,000,000
at closing, with up to another $45,000,000 due in a milestone payment related to the timing of the commercial availability of TRIESENCE.
Pursuant to the Purchase Agreement and various ancillary agreements, immediately following the closing and subject to certain conditions,
for a period that we expect to last approximately six months, and prior to the transfer of the Fab 5 Products new drug applications (the
“NDAs”) to us, Novartis will continue to sell the Fab 5 Products on our behalf and transfer the net profit from the sale
of the Fab 5 Products to us. Novartis has agreed to supply certain Fab 5 Products to the Company for a period of time after the NDAs
are transferred to us and to assist with technology transfer of the Fab 5 Products manufacturing to other third-party manufacturers,
if needed.

Common
Stock Offering

In
December 2022, we entered into an underwriting agreement (the “Common Stock Underwriting Agreement”) with B. Riley Securities,
Inc. related to a registered direct offering of shares of the Company’s common stock to certain accredited investors, at an offering
price of $10.52. Under the terms of the Common Stock Underwriting Agreement we sold 2,376,426 shares of our common stock for gross proceeds
of $25,000,002.

Senior
Notes Offering

In
December 2022, the Company entered into an underwriting agreement with B. Riley Securities, Inc., as representative of the several
underwriters named therein, pursuant to which we agreed to sell $35,000,000 aggregate principal amount of 11.875% senior notes due
2027 (the “2027 Notes”) plus up to an additional $5,250,000 aggregate principal amount of 11.875% senior notes due 2027
pursuant to the underwriters’ option to purchase additional 2027 Notes, which was exercised in January 2023.

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B.
Riley Loan and Security Agreement

On
December 14, 2022 (the “Effective Date”), we entered into a Loan and Security Agreement (the “BR Loan”) with
B. Riley Commercial Capital, LLC, as Administrative Agent for the Lenders. The proceeds from the BR Loan were used to finance the Fab
5 Acquisition.

The
BR Loan provided for a loan facility of up to $100,000,000 to the Company with a maturity date of December 14, 2025, at an interest rate
of 10.875% per annum. The BR Loan is secured by an intellectual property security agreement and by all assets of the Company and its
material subsidiaries. In January 2023, $59,750,000 of principal amount was funded pursuant to the BR Loan simultaneously with the consummation
of the Fab 5 Acquisition.

Results
of Operations

The
following period-to-period comparisons of our financial results are not necessarily indicative of results for any future period.

Comparison
of Years Ended December 31, 2022 and 2021

Revenues

Our
revenues include amounts recorded from sales of proprietary and non-proprietary pharmaceutical compounded drug formulations and revenues
received from royalty and milestone payments owed to us pursuant to out-license arrangements.

The
following presents our revenues for the years ended December 31, 2022 and 2021:

The
increase in revenues between periods was related to an increase in sales volumes of our ophthalmology products, an increase in commissions
attributable to sales of Dexycu® and transfer of profits from recently acquired products. In June of 2022, the Company completed
the transfer from the seller to Harrow of Iopidine and Maxitrol NDAs and relaunched those products. As a result, we will not record revenues
associated with the transfer of profits associated with those products in future periods.

Cost
of Sales

Our
cost of sales includes direct and indirect costs to manufacture formulations and sell products, including active pharmaceutical
ingredients, personnel costs, packaging, storage, royalties, shipping and handling costs, manufacturing equipment and tenant
improvements depreciation, the write-off of obsolete inventory depreciation and amortization of certain intangibles and other
related expenses.

The
following presents our cost of sales for the years ended December 31, 2022 and 2021:

The
increase in our cost of sales between periods was largely attributable to an increase in unit volumes sold and increased direct and indirect
costs associated with production of our products during the year ended December 31, 2022 compared to 2021.

Gross
Profit and Margin

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The
decrease in gross margin is primarily attributable to amortization of acquired NDAs beginning in January 2022, along with a one-time
adverse production related event in April 2022, increased discounts provided during 2022 associated with volume-based purchases and increased
(direct and indirect) production costs incurred during 2022.

Selling,
General and Administrative Expenses

Our
selling, general and administrative expenses include personnel costs, including wages and stock-based compensation, corporate facility
expenses, and investor relations, consulting, insurance, filing, legal and accounting fees and expenses as well as costs associated with
our marketing activities and sales of our proprietary compounded formulations and other non-proprietary pharmacy products and formulations.

The
following presents our selling, general and administrative expenses for the years ended December 31, 2022 and 2021:

The
increase in selling, general and administrative expenses between periods was primarily attributable to an increase in consulting expenses
associated with regulatory improvements, to support the transition of recent product acquisitions, and an increase in expenses related
to the addition of new employees in sales, marketing and other departments to support current and expected growth, including the anticipated
commercial launch of IHEEZO in 2023.

Research
and Development Expenses

Our
research and development (“R&D”) expenses primarily include expenses related to acquired in-process R&D, the development
of acquired intellectual property, investigator-initiated research and evaluations and other costs related to the clinical development
of our assets and drug candidates.

The
following presents our R&D expenses for the years ended December 31, 2022 and 2021:

During
the year ended December 31, 2022, research and development expenses decreased from the same period in 2021 primarily as a result of a
one-time payment for acquired research and development incurred in 2021 related to the acquisition of IHEEZO.

Impairment
and Disposal of Long-Lived Assets

During
the year ended December 31, 2021, we recorded a loss of $249,000, of which, $99,000 was related to the impairment of patents and patent
applications and $150,000 was related to equipment that was no longer in service.

Interest
Expense, net

Interest
expense, net was $7,244,000 during the year ended December 31, 2022 compared to $5,436,000 during the year ended December 31, 2021. The
increase was primarily due to an increase in the principal balance of our loans throughout the two periods presented.

Equity
in Losses of Unconsolidated Entities

During
the years ended December 31, 2022 and 2021, we recorded a loss of $11,133,000 and $5,334,000, respectively, for our share of losses based
on our ownership of Melt and Surface.

Investment
Loss from Eton

We
recorded a loss of $2,914,000 related to the change in fair market value of Eton’s common stock for the year ended December 31,
2022. We recorded a loss of $10,126,000 related to our investment in Eton’s common stock for the year ended December 31, 2021,
including a realized loss of $1,406,000 from the sale of 1,518,000 shares of Eton’s common stock.

Loss on Early Extinguishment of Debt

During
the year ended December 31, 2021, we recorded a loss from early extinguishment of $756,000 related the payment of all outstanding
obligations to the Company’s previous senior lender, SWK Funding, LLC, and its partners.

Gain
on Forgiveness of PPP Loan

During
the year ended December 31, 2021, we recorded gain on forgiveness of loan of $1,967,000 related to the forgiveness of our PPP Loan.

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Gain
on Sale of Non-Ophthalmology Assets

During
the year ended December 31, 2022, we recorded a gain on the sale of our non-ophthalmology assets to Innovation Compounding Pharmacy,
LLC of $5,259,000.

Other
Income, net

During
the year ended December 31, 2022, we recorded other income, net of $102,000 which was primarily the result of income of $102,000 related
to the transition services provided as part of non-ophthalmology related compounding product line. During the year ended December 31,
2021, we recorded other income, net of $197,000. This was primarily the result of income of $238,000 related to negotiation of old payables
and expense of $41,000 related to loss on disposal of property, plant and equipment.

The
following table presents our net loss for the years ended December 31, 2022 and 2021:

Liquidity
and Capital Resources

Liquidity

Our
cash on hand at December 31, 2022 was $96,270,000, compared to $42,167,000 at December 31, 2021. Since inception through December 31,
2022, we incurred aggregate losses of $109,493,000. These losses are primarily due to selling, general and administrative and research
and development expenses incurred in connection with developing and seeking regulatory approval for a former drug candidate, which activities
we have now discontinued, the development and commercialization of novel compounded formulations and the development of our pharmacy
operations.

As
of the date of this Annual Report, we believe that cash and cash equivalents of $96,270,000 at December 31, 2022, along with proceeds
received from the BR Loan will be sufficient to sustain our planned level of operations and capital expenditures for at least the next
12 months. We also may consider the sale of certain assets including, but not limited to, part of, or all of, our ownership interest
in Eton, Surface, Melt, and/or any of our consolidated subsidiaries. However, our plans for this period may change, our estimates of
our operating expenses, capital expenditures and working capital requirements could be inaccurate, we may pursue acquisitions of products,
companies or other strategic transactions that involve large expenditures or we may experience growth more quickly or on a larger scale
than we expect, any of which could result in the depletion of capital resources more rapidly than anticipated and could require us to
seek additional financing earlier than we expect to support our operations.

We
expect to use our current cash position and funds generated from our operations and any financing to pursue our business plan, which
includes developing and commercializing FDA-approved products, compounded formulations, and technologies, developing our overall operations,
pursuing potential future strategic transactions as opportunities arise, including potential acquisitions of products, compounding pharmacies
and outsourcing facilities, drug companies and manufacturers, and/or assets or technologies, and otherwise fund our operations. We may
also use our resources to conduct clinical trials or other studies in support of our formulations or any drug candidate for which we
pursue FDA approval, to pursue additional development programs or to explore other development opportunities.

Net
Cash Flows

The
following provides detailed information about our net cash flows for the years ended December 31, 2022 and 2021:

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Operating
Activities

Net
cash provided by operating activities was $1,705,000 in 2022, compared to $5,082,000 in the prior year. Net cash provided by operating
activities during the year ended December 31, 2022 decreased primarily as a result of an increase in operating expenses during year in
preparation of the launch of IHEEZO and in support of operationalizing other product acquisitions.

Investing
Activities

Net
cash used in investing activities in 2022 and 2021 was $(1,743,000) and $(18,686,000), respectively. Cash used in investing activities
during the 2022 period was primarily associated with equipment and software purchases and upgrades along with investments in our intellectual
property portfolio, offset by cash received on the sale of our non-ophthalmic assets. Cash used in investing activities in 2021 was primarily
associated with cash payments made in connection with the Melt note receivable and the acquisition of MAXITRO, IOPIDINE and MOXEZA, offset
by cash received through the sale of a portion of our Eton common stock.

Financing
Activities

Net
cash provided by financing activities in 2022 and 2021 was $54,141,000 and $51,470,000, respectively. Net cash provided by financing
activities during the year ended December 31, 2022 was primarily related to net proceeds from the sale of $35,000,000 Notes and sale
of common stock. Net cash provided by financing activities during the year ended December 31, 2021 was primarily related to net proceeds
received from the sale of $75,000,000 senior notes due April 2026, net of the payment of all outstanding obligations to the Company’s
previous senior lender, SWK Funding, LLC, and its partners.

Sources
of Capital

Our
principal sources of cash consist of cash provided by operating activities from our ImprimisRx business, our brand ophthalmic pharmaceuticals
business, proceeds from the sale of the Notes and sale of Eton common stock. We may also sell some or all of our ownership interests
in Surface, Melt or our other subsidiaries, along with the some or all of the remaining portion of our Eton common stock.

The
changing trends and overall economic outlook, including the historic interim stay-at-home orders and bans on elective surgeries associated
with the COVID-19 pandemic, created uncertainty surrounding our operating outlook and may impact our future operating results if there
is a resurgence in COVID-19 cases in the U.S. In addition, we may acquire new products, product candidates and/or businesses and, as
a result, we may need significant additional capital to support our business plan and fund our proposed business operations. We may receive
additional proceeds from the exercise of stock purchase warrants that are currently outstanding. We may also seek additional financing
from a variety of sources, including other equity or debt financings, funding from corporate partnerships or licensing arrangements,
sales of assets or any other financing transaction. If we issue equity or convertible debt securities to raise additional funds, our
existing stockholders may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms
or rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration
or licensing arrangements or sales of assets, we may be required to relinquish potentially valuable rights to our product candidates
or proprietary technologies or formulations, or grant licenses on terms that are not favorable to us. If we raise funds by incurring
additional debt, we may be required to pay significant interest expenses and our leverage relative to our earnings or to our equity capitalization
may increase. Obtaining commercial loans, assuming they would be available, would increase our liabilities and future cash commitments
and may impose restrictions on our activities, such as the financial and operating covenants. Further, we may incur substantial costs
in pursuing future capital and/or financing transactions, including investment banking fees, legal fees, accounting fees, printing and
distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we
may issue, such as convertible notes and warrants, which would adversely impact our financial results.

We
may be unable to obtain financing when necessary as a result of, among other things, our performance, general economic conditions, conditions
in the pharmaceuticals and pharmacy industries, or our operating history, including our past bankruptcy proceedings. In addition, the
fact that we have a limited history of profitability could further impact the availability or cost to us of future financings. As a result,
sufficient funds may not be available when needed from any source or, if available, such funds may not be available on terms that are
acceptable to us. If we are unable to raise funds to satisfy our capital needs when needed, then we may need to forego pursuit of potentially
valuable development or acquisition opportunities, we may not be able to continue to operate our business pursuant to our business plan,
which would require us to modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back
or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing
and other activities, or we may be forced to discontinue our operations entirely.

Critical
Accounting Policies

We
rely on the use of estimates and make assumptions that impact our financial condition and results. These estimates and assumptions are
based on historical results and trends as well as our forecasts of how results and trends might change in the future. Although we believe
that the estimates we use are reasonable, actual results could differ materially from these estimates.

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We
believe that the accounting policies described below are critical to understanding our business, results of operations and financial
condition because they involve the use of more significant judgments and estimates in the preparation of our consolidated financial statements.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that
are highly uncertain at the time the estimate is made, and any changes in the assumptions used in making the accounting estimates that
are reasonably likely to occur could materially impact our consolidated financial statements.

Revenue
Recognition and Deferred Revenue

We
account for contracts with customers in accordance with Accounting Standards Codification (“ASC”) 606, Revenues from Contracts
with Customers. We have two primary streams of revenue: (1) revenue recognized from our sale of products within our pharmacy services
and (2) revenue recognized from intellectual property license and asset purchase agreements.

Product
Revenues from Pharmacy Services

We sell
prescription medications directly through our pharmacy, outsourcing facility and 3PL partner. Revenue from our pharmacy services includes:
(i) the portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the client, (ii)
the price paid to us by individuals, and (iii) customer copayments made directly to the pharmacy network. Sales taxes are not included
in revenue. Following the core principles of ASC 606, we have identified the following:

Commission Revenues

We entered into an
agreement whereby we are paid a fee calculated based on sales we generate from a pharmaceutical product that is owned by a third party.
The revenue earned from this arrangement is recognized, at which point there is no future performance obligation required by us and no
consequential continuing involvement on our part to recognize the associated revenue.

Revenues From Transfer of Acquired Product Profit

We entered
into an agreement whereby we purchased the exclusive commercial rights to assets associated with certain ophthalmic products from another
pharmaceutical company (the “Seller”). During a temporary, six month transition period, the Seller continued to
manufacture and market these products and transfer the net profit from the sale of the products to us. The revenue we recognized from
the transfer of net profit was recognized at the time profit from the product sales was calculated by the Seller and confirmed by us,
typically on a monthly basis, at which point there is no future performance obligation required and no consequential continuing involvement
on our part to recognize the associated revenue. On a quarterly basis, the Seller invoiced us for all credits and reimbursements (“Chargebacks”)
made to customers related to the products. We used historical actual experience to estimate Chargebacks associated with the net profit
transferred. The estimate is recorded as a reduction in revenues in our consolidated statements of operations and accounts receivable
in the consolidated balance sheets at the time the revenue is recognized.

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Intellectual Property License Revenues

We currently
hold five intellectual property licenses and related agreements pursuant to which we have agreed to license or sell to a customer with
the right to access our intellectual property. License arrangements may consist of non-refundable upfront license fees, data transfer
fees, research reimbursement payments, exclusive license rights to patented or patent pending compounds, technology access fees, and various
performance or sales milestones. These arrangements can be multiple-element arrangements, the revenue of which is recognized at the point
in time that the performance obligation is met.

Non-refundable fees
that are not contingent on any future performance and require no consequential continuing involvement on our part are recognized as revenue
when the license term commences and the licensed data, technology, compounded drug preparation and/or other deliverable is delivered.
Such deliverables may include physical quantities of compounded drug preparations, design of the compounded drug preparations and structure-activity
relationships, the conceptual framework and mechanism of action, and rights to the patents or patent applications for such compounded
drug preparations. We defer recognition of non-refundable fees if it has continuing performance obligations without which the technology,
right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee and that are separate and
independent of our performance under the other elements of the arrangement. In addition, if our continued involvement is required, through
research and development services that are related to its proprietary know-how and expertise of the delivered technology or can only
be performed by us, then such non-refundable fees are deferred and recognized over the period of continuing involvement. Guaranteed minimum
annual royalties are recognized on a straight-line basis over the applicable term.

Investment
in Eton Pharmaceuticals, Inc.

We
own 1,982,000 shares of Eton common stock, which represented approximately 8% of the equity and voting interests of Eton as of December
31, 2022. At December 31, 2022, the fair market value of Eton’s common stock was $2.82 per share. In accordance with Accounting
Standard Update (“ASU”) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities, for the years ended December 31, 2022 and 2021, we recorded an investment loss from our Eton common
stock position of $2,914,000 and $10,126,000 respectively, related to the change in fair market value of our investment in Eton during
the measurement periods, including a realized loss of $1,406,000 from the sale of 1,518,000 shares of Eton’s common stock during
the year ended December 31, 2021. As of December 31, 2022 and 2021, the fair market value of our investment in Eton was $5,589,000 and
$8,503,000, respectively.

Investment
in Surface Ophthalmics, Inc. – Related Party

We
own 3,500,000 common shares of Surface, which represented approximately 20% of the equity and voting interests as of December 31, 2022,
and use the equity method of accounting for this investment, as management has determined that we have the ability to exercise significant
influence over the operating and financial decisions of Surface. Under this method, we recognize earnings and losses in Surface in its
consolidated financial statements and adjusts the carrying amount of its investment in Surface accordingly. Our share of earnings and
losses are based on our ownership interest of Surface. Any intra-entity profits and losses are eliminated. We recorded equity in the
net loss of Surface of $1,314,000 during the year ended December 31, 2021. As of December 31, 2022 and 2021, the carrying value of our
investment in Surface was $0 and $0, respectively.

See
Note 6 to our consolidated financial statements for more information and related party disclosure regarding Surface.

Investment
in Melt Pharmaceuticals, Inc. – Related Party

In
April 2018, we formed Melt as a wholly-owned subsidiary. In January and March of 2019, Melt entered into definitive stock purchase agreements
(collectively, the “Melt Series A Preferred Stock Agreement”) with certain investors and closed on the purchase and sale
of Melt’s Series A Preferred Stock (the “Melt Series A Stock”), totaling approximately $11,400,000 of proceeds (collectively
the “Melt Series A Round”) at a purchase price of $5.00 per share. As a result, we lost voting and ownership control of Melt
and ceased consolidating Melt’s financial statements.

At
the time of deconsolidation, we recorded a gain of $5,810,000 and adjusted the carrying value in Melt to reflect the increased valuation
of Melt and our new ownership interest in accordance with ASC 810-10-40-4(c), Consolidation.

We
own 3,500,000 common shares of Melt, which represented approximately 46% of its equity and voting interests as of December 31, 2022.
We analyze our investment in Melt and related agreements on a regular basis to evaluate our position of variable interests in Melt. We
no longer have a controlling position in Melt; however, we do have the ability to exercise significant influence over the operating and
financial decisions of Melt. We use the equity method of accounting for this investment. Under this method, we recognize earnings and
losses of Melt in its consolidated financial statements and adjusts the carrying amount of its investment in Melt accordingly. Our share
of earnings and losses are based on our ownership interest of Melt. Any intra-entity profits and losses are eliminated. During the year
ended December 31, 2021 we reduced our common stock investment in Melt to $0. As of December 31, 2022 and 2021 and at the time of entering
into the Melt Loan Agreement, we owned 100% of the debt owed by Melt. Following the reduction of the carrying value of our common stock
investment in Melt to $0 we began recording 100% of the equity method losses of Melt, based on our ownership of total debt owed by Melt.
We recorded equity in net losses of Melt of $11,133,000 and $4,020,000 during the years ended December 31, 2021 and 2022, respectively.
As of December 31, 2022, our investment in Melt was $0 and $139,000 is due from Melt for reimbursable expenses and amounts due under
the Melt Master Service Agreement (“Melt MSA”).

See
Notes 2 and 5 to our consolidated financial statements for more information and related party disclosure regarding Melt.

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Stock-Based
Compensation

All
stock-based payments to employees, directors and consultants, including grants of stock options, warrants, restricted stock units and
restricted stock, are recognized in the consolidated financial statements based upon their estimated fair values. We use the Black-Scholes
option pricing model and Monte-Carlo simulation model to estimate the fair value of stock-based awards. 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.

Income
Taxes

As
part of the process of preparing our consolidated financial statements, we 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. We must assess
the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent we believe 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 we establish 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.

We
account for income taxes under the provisions of Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification
(“ASC”) 740, Income Taxes. As of December 31, 2022 and 2021, there were no unrecognized tax benefits included in the
consolidated balance sheets that would, if recognized, affect the effective tax rate. Our practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. We had no accrual for interest or penalties in its consolidated balance sheets at
December 31, 2022 and 2021, and have not recognized interest and/or penalties in the consolidated statements of operations for the years
ended December 31, 2022 and 2021. We are subject to taxation in the United States, California, Florida, Georgia, Illinois, New Jersey,
New York, Tennessee, and Wisconsin. Our tax years since 2000 may be subject to examination by the federal and state tax authorities due
to the carryforward of unutilized net operating losses.

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.

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 we have 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). We began capitalizing certain costs associated with
acquiring intellectual property rights during 2015, if costs are not capitalized, they are expensed as incurred.

Impairment
of Long-Lived Assets

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. 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 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. Assets to be disposed 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.

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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, we capitalize 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, we amortize these costs over the shorter of the legal life of the patent
or its estimated economic life, generally 20 years, using the straight-line method. Trademarks are an indefinite life intangible asset
and are assessed for impairment based on future projected cash flows as further described below.

We
review our 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:

The
goodwill impairment test consists of a two-step process as follows:

Step
1. We compare 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, an indication exists that the reporting
unit’s goodwill may be impaired and we then perform the second step of the impairment test. If the fair value of a reporting unit
exceeds its carrying amount, no further analysis is required.

Step
2. If further analysis is required, we compare the implied fair value of the reporting unit’s goodwill, determined by allocating
the reporting unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to
its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment loss will be
recognized in an amount equal to the excess.

Debt
Issuance Costs and Debt Discount

Debt
issuance costs and the debt discount are recorded net of loans payable in the consolidated balance sheet. Amortization of debt issuance
costs and the debt discount is calculated using the effective interest method over the term of the debt and is recorded in interest expense
in the accompanying consolidated statement of operations.

Off-Balance
Sheet Arrangements

Since
our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of
structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

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