UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from                 to                             

Commission file number 001-37880

Novan, Inc.

(Exact name of registrant as specified in its charter)

Delaware

20-4427682

Delaware

20-4427682
(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer
Identification No.)

4105 Hopson Road

Morrisville, North Carolina

27560

4020 Stirrup Creek Drive, Suite 110

Durham,North Carolina27703
(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (919) 485-8080

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Each Class

Trading Symbol(s)

Name of each exchangeEach Exchange on which registered

Which Registered

Common Stock, $0.0001 per share

par value

NOVN

The Nasdaq GlobalStock Market

LLC

Securities registered pursuant to Section 12(g) of the Act: None

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ¨  No 

x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes ¨  No 

x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No 

¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x   No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Non-accelerated filer

  (Do not check if a small reporting company)

Small reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐   No  

1


As of June 30, 2017,2022, the last business day of the registrant'sregistrant’s most recently completed second fiscal quarter, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $47.0$49.3 million (based on a closing price of $4.03$2.33 per share as reported by the Nasdaq GlobalCapital Market on June 30, 2017)2022). For purposes of this calculation, shares of common stock beneficially owned by the registrant’s officers, directors and certain stockholders as of June 30, 20172022 have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The registrant has no non-voting common equity.

The number of shares of registrant’s common stock outstanding as of March 23, 201816, 2023 was 26,038,742.

Portions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant’s 2018 Annual Meeting of Stockholders, which will be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10-K. Such proxy statement will be filed with the Securities and Exchange Commission not later than 120 days following the end of the registrant’s fiscal year ended December 31, 2017.

28,015,371.
2


Table of Contents



SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

3


Forward-Looking Statements and Summary of Principal Risk Factors
This Annual Report on Form 10-K, (this “Annual Report”)or this Annual Report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,concerning our business, operations and financial performance and condition, as amended (the “Securities Act”),well as our plans, objectives and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”),expectations. Any statements contained herein that involve substantial risks and uncertainties. All statements other thanare not statements of historical facts contained in this Annual Report aremay be deemed to be forward-looking statements. These statements are often identified by the use of words such as “may,“believe,“will,“contemplate,” “continue,” “due,” “goal,” “objective,” “plan,” “seek,” “target,” “expect,” “believe,” “anticipate,” “intend,” “may,” “will,” “would,” “could,” “should,” “potential,” “predict,” “project,” or “estimate,” or “continue” and similar expressions or variations.

These statements are based on the beliefs and assumptions of our management based on information currently available to management. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include those set forth in the “Risk Factors” section of this Annual Report.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Such forward-looking statements speak only as of the date of this Annual Report. Except as may be required by law, we undertake no obligation to update anyor revise these forward-looking statements for any reason, even if new information becomes available in the future. As a result, any or all of our forward-looking statements in this Annual Report may turn out to reflect events or circumstances afterbe inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed below and under the section entitled “Risk Factors” in this Annual Report and those discussed elsewhere in this Annual Report. These forward-looking statements speak only as of the date of this Annual Report.

The following summary briefly highlights the principal risks and uncertainties facing our business that could affect an investment in our common stock, which represent only a select portion of those risks. A more complete statement of those risks and uncertainties is set forth in the section entitled “Risk Factors” in this Annual Report. This summary is qualified in its entirety by that more complete statement.
- We have incurred net losses since our incorporation and anticipate that we will continue to incur net losses for the foreseeable future.
- We will need significant additional funding to continue our commercial operating activities and for the advancement of our product development programs, including potential commercialization efforts for SB206, beyond what is currently included in our operating forecast and related cash projection. As of December 31, 2022, we had an accumulated deficit of $310.3 million and cash and cash equivalents of $12.3 million. If we are unable to raise capital, we would be forced to delay, reduce, terminate or eliminate our product development programs, or our current and future commercialization efforts and/or delay, defer, or reduce our cash expenditures, or we may need to dissolve and liquidate our assets or seek protection under bankruptcy laws. If we are forced to terminate or eliminate our product development programs or pursue other strategic alternatives or corporate transactions, there can be no assurance that such statements.

actions would result in any additional stockholder value. If we are forced to wind down our operations, liquidate or seek bankruptcy protection, it is unclear to what extent we will be able to pay our obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to our stockholders, whereby, our stockholders may lose some or all of their investment.

- In March 2022, we acquired EPI Health, LLC, or EPI Health, and such acquisition is referred to as the EPI Health Acquisition. Integrating the EPI Health and legacy Novan businesses is a continuing process that involves risks associated with acquisitions and integrating acquired businesses. Failure to do so effectively may have an adverse effect.

- Raising additional capital, including through the issuance of shares of our common stock through the March 11, 2022 Equity Distribution Agreement with Oppenheimer & Co. Inc., may reduce the trading price of our common stock. Any future additional issuances of equity, or debt convertible into equity, may result in significant dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies, product candidates or commercial products.
- The price of our common stock has been and may continue to be volatile and fluctuate significantly, which could result in substantial losses for our existing stockholders.
- Our revenue is dependent upon sales of our medical dermatology products, and setbacks relating to the sale of such commercial products have and may impair our operating results, including if our competitors develop treatments for our commercial portfolio’s target indications or more effectively execute their commercialization strategies, which could limit our commercial opportunity and profitability.
- Our products and product candidates may pose safety issues, cause adverse events, have side effects or have other properties that could delay or prevent the regulatory approval for our product candidates, limit the commercial profile of an approved label or result in significant negative consequences.
- Our product candidates, if approved, and our commercial products may face significant competition, and our failure to effectively compete may prevent us from achieving significant market penetration or share. We face, and will continue to face, competition in the development and marketing of products from academic institutions, government agencies, research institutions and biotechnology and pharmaceutical companies, including specialty and other large pharmaceutical companies, and over-the-counter, or OTC, companies and generic manufacturers. The dermatology competitive landscape is highly fragmented, with many mid-size and smaller companies competing in the prescription sector. To successfully compete for business with managed care and pharmacy benefits management organizations, we must often demonstrate that our products offer not only medical benefits, but also cost advantages as compared with other forms of care.
4


- Our research and development activities relate solely to developing nitric oxide-based therapeutics to treat a range of diseases with significant unmet needs, and if we do not successfully achieve regulatory approval for any of our product candidates or successfully commercialize them, we may not be able to continue as a business.
- Clinical drug development involves a lengthy and expensive process with uncertain timelines and outcomes, and results of earlier studies and trials may not be predictive of future trial results. The results of any further development activities may not be sufficient to support a new drug application, or NDA, submission for or regulatory approval of any of our product candidates.
- Ongoing or future product development activities may not be successful, including that our preclinical studies may not demonstrate proof-of concept or may show adverse toxicological findings, and our clinical trials may not show the requisite safety and efficacy of our product candidates. The regulatory approval processes of the Food and Drug Administration, or FDA, are lengthy, time-consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates on a timely basis or at all, our business will be substantially harmed.
- Delays or disruptions in the qualification of manufacturing facilities and processes or in the manufacture of our (i) active pharmaceutical ingredients, or APIs, including berdazimer sodium or any other Nitricil new chemical entities, or NCEs, or (ii) clinical trial materials and commercial supplies of any approved products, whether by us or any third-party manufacturer with whom we contract, including any delays in the transfer of technology to third-party manufacturers, could adversely affect our development timelines and result in increased costs of our development programs or in our breaching our obligations to others.
- We currently rely on third-party suppliers to provide the raw materials, finished goods and equipment that are used by us and our third-party manufacturers in the manufacture of our product candidates and commercial products. There are a limited number of suppliers for raw materials, including nitric oxide, and the equipment used to manufacture our product candidates. Any delay or disruption, especially in light of current global supply chain constraints, or price increases related to such manufacturing could adversely impact the timing or cost of our manufacturing activities or other associated development and commercialization activities.
- We currently rely on third-party logistics vendors to transport our raw materials, API, drug product and commercial products through our supply chain. Certain materials, including our API for our products in development, have designated hazard classifications that limit available transportation modes or quantities. Third-party logistics vendors may choose to delay or defer transportation of materials from time to time, which could adversely impact the timing or cost of our manufacturing activities or other associated development and commercialization activities.
- Many factors could cause production or distribution interruptions with the manufacture and distribution of any of our products and product candidates, including human error, natural disasters, pandemics, inflation, labor disputes, acts of terrorism or war, equipment malfunctions, or raw material shortages. If our commercial distribution partners are not able to satisfy our requirements within the expected timeframe, or are unable to provide us with accurate or timely information and data, including inventories and sales, serious adverse events, and/or product complaints, our business may be at risk. In addition, if specialty pharmacy services, including our third-party call center services, which provide patient support and financial services, prescription intake and distribution, reimbursement adjudication, and ongoing compliance support, are not effectively managed, the continuance of our sales of our commercial products or our product candidates, if approved, may be delayed or compromised. Finally, our third-party manufacturers may not be able to manufacture the materials required for our products or product candidates at a cost or in quantities necessary to make them commercially viable and have had and may in the future experience delays in manufacturing our products.
- We continue to assess global supply chain constraints, including any further impact of the COVID-19 pandemic and the military conflict between Ukraine and Russia, on our suppliers and vendors. Any delay could impact available inventories of our commercial products and our ability to meet demand.
- We rely on third parties to conduct some of our preclinical studies, clinical trials, stability and analytical testing, and regulatory activities. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize any of our product candidates as planned or at all.
- We have entered into and rely on, and may enter into and rely on other, strategic relationships for the further development and commercialization of our products and product candidates. If we are unable to enter into such relationships on favorable terms or at all, or if such relationships are unsuccessful, if disputes arise between us and our strategic partners or if we fail to trigger contingent payments under such strategic relationships, we may be unable to realize the potential economic benefit of our products and product candidates.
- Changes to our leadership team or operational resources, including with the EPI Health Acquisition and integration, could prove disruptive to our operations and have adverse consequences for our business and operating results.
- If we are unable to obtain and maintain patent protection for our product candidates and commercial products, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology, product candidates and commercial products may be impaired.
- As a result of our operating losses and negative cash flows from operations, the report of our independent registered public accounting firm on our December 31, 2022 financial statements includes an explanatory paragraph indicating that there was substantial doubt about our ability to continue as a going concern.
- We may not be able to achieve the objectives or successfully execute our strategy described in the sections entitled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.
5


PART I

Item 1. Business.

Overview

We are

Novan, Inc. is a clinical-stage biotechnologymedical dermatology company focused on leveragingdeveloping and commercializing innovative therapeutic products for skin diseases. Our goal is to deliver safe and efficacious therapies to patients, including developing product candidates where there are unmet medical needs. We are developing SB206 (berdazimer gel, 10.3%) as a topical prescription gel for the treatment of viral skin infections, with a current focus on molluscum contagiosum, or molluscum. In the first quarter of 2022, we completed the EPI Health Acquisition. EPI Health equips us with a commercial infrastructure across sales, marketing, and communications, as well as a dedicated market access and pharmacy relations team, and positions us as a fully integrated dermatology company with a pipeline of development candidates focused primarily on dermatological indications supported by a commercial platform to market and sell therapeutic products for skin diseases.
Following the acquisition, we employ approximately 90 staff, including sales personnel currently covering 42 territories. Through our acquisition of EPI Health, we promote products for plaque psoriasis, rosacea and acne. We also have a pipeline of potential product candidates using our proprietary nitric oxide-based technology platform, Nitricil, to generate new treatments for multiple indications.
We will continue to need additional funding to support our planned and future operating activities and make further advancements in our product development programs beyond what is currently included in our operating forecast and related cash projection. We do not currently have sufficient funds to complete commercialization of any of our product candidates that are under development, and our funding needs will largely be determined by our commercialization strategy for SB206 (berdazimer gel, 10.3%), subject to the regulatory approval process and outcome. We are pursuing a broad range of financing options that could be used to extend our cash runway, including, among other things, to further prepare for commercialization of SB206 following approval.
Further advancement of our molluscum program, including through the NDA process and potential commercialization of SB206, or advancement of any other early-stage or late-stage clinical program across our platform, is subject to our ability to secure additional capital. Sources of additional capital may potentially include (i) debt or equity financings, such as through sales of common stock, or (ii) other sources, such as partnerships, collaborations, licensing, grants or other strategic relationships. Any issuance of equity, or debt convertible into equity, would result in further significant dilution to our existing stockholders.
In addition to the regulatory progression of SB206, including implementing prelaunch strategy and commercial preparation, subject to obtaining additional financing or strategic partnering, we may progress (a) SB204, a topical monotherapy for the treatment of acne, by commencing a pivotal Phase 3 study, or (b) SB019, as a potential intranasal treatment option for respiratory infections.
Please refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report for further discussion regarding our current liquidity and our future funding needs in addition to the impact of the COVID-19 pandemic on our operations.
Recent Highlights
In March 2023, we announced that the FDA completed its filing review of our NDA submitted in early January seeking marketing approval for berdazimer gel, 10.3% (SB206) for the topical treatment of molluscum. The FDA determined our application was sufficiently complete, no filing review issues were identified, the substantive review process had commenced, and we were assigned a Prescription Drug User Fee Act goal date of January 5, 2024.
2022 Highlights
For the year ended December 31, 2022, we demonstrated growth in total prescriptions for our actively marketed portfolio:
Rhofade (oxymetazoline hydrochloride) - 33% annual growth for the year ended December 31, 2022 with 156,664 total prescriptions.
Wynzora (calcipotriene and betamethasone dipropionate) - 41,023 total prescriptions for the year ended December 31, 2022, following launch of the product in the third quarter of 2021.
Minolira (minocycline hydrochloride) - 61% annual growth for the year ended December 31, 2022 with 40,641 total prescriptions.
In late December 2022, we announced that we had entered into an exclusive license agreement with Sato Pharmaceutical Co., Ltd., or Sato, granting Sato the right to develop, manufacture and market Rhofade (oxymetazoline hydrochloride 1% cream) for rosacea in the Japan territory. Under the exclusive license agreement, we received an upfront payment of $5.0 million in January 2023 and are entitled to receive a $2.5 million milestone payment at the time of marketing approval in Japan and royalty payments on net sales of the product in Japan. Sato will be responsible for obtaining regulatory approval
6


in Japan and will have the right to use EPI Health’s U.S. dossier for Rhofade. Sato will also have a right of first negotiation related to Rhofade in certain other countries in the Asia Pacific region. A portion of the amounts of the upfront and milestone payments are payable by us to a third party under contractual obligations related to Rhofade.
In early December 2022, we announced that we entered into an accounts receivable-backed factoring agreement with Bay View Funding, a wholly owned subsidiary of Heritage Bank of Commerce. The new $15.0 million factoring facility provides working capital in an amount that is up to 70% of EPI Health’s gross eligible receivables.
In July 2022, we announced the publication of positive efficacy and safety data from our completed B-SIMPLE 4 pivotal Phase 3 clinical study evaluating berdazimer gel, 10.3% for the treatment of molluscum in the peer-reviewed journal, JAMA Dermatology. Berdazimer gel, 10.3%, Novan’s potential first-in-class topical nitric oxide-based prescription treatment, demonstrated favorable efficacy and safety with low adverse event rates.
In June 2022, we announced the closing of a $15.0 million registered direct offering priced at-the-market under Nasdaq rules with an institutional investor.
In March 2022, we announced the acquisition of EPI Health, a specialty pharmaceutical company focused on the U.S. dermatology market. The acquisition provided the commercial infrastructure for Novan to become a fully-integrated specialty dermatology company with a solid pipeline of development candidates complemented by a commercial foundation. In July 2022, we announced that we had reached agreement with Evening Post Group, LLC, or EPG, regarding payment, satisfaction and termination of our $16.5 million secured promissory note and security agreement associated with the EPI Health Acquisition. Novan and EPG agreed that, upon EPG’s receipt of $10.0 million, which Novan subsequently paid, all outstanding indebtedness and obligations of Novan under the promissory note were fully satisfied, and accordingly, the promissory note and related security agreements were terminated.
Commercial Portfolio
Our commercial portfolio includes six branded prescription drugs that we acquired in the EPI Health Acquisition. We actively promote three medical dermatological products in the United States and derive revenue from the sale of these branded products through pharmaceutical wholesalers as well as direct to pharmacies. These prescription dermatology therapies are targeted to patients with plaque psoriasis, rosacea, and acne. The branded and promoted product portfolio currently includes Wynzora, Rhofade, and Minolira.
The following summarizes our complete commercial product portfolio:
Wynzora Cream (calcipotriene and betamethasone dipropionate cream), or Wynzora, is a combination of calcipotriene, a vitamin D analog, and betamethasone dipropionate, a corticosteroid, indicated for the topical treatment of plaque psoriasis in patients 18 years of age or older. EPI Health entered into a collaboration agreement with MC2 Therapeutics, or MC2, in August 2020, as amended effective January 1, 2022, for the commercialization of Wynzora in the United States, or the MC2 Agreement. Under the MC2 Agreement, MC2 retains full ownership of Wynzora. In particular, we use our commercial infrastructure to promote and sell Wynzora in return for retaining a share of net sales of Wynzora in the United States. The portion of net sales we retain varies depending on the aggregate annual net sales of the product, and ranges from a percentage in the mid-teens to a mid-single digit percentage as net sales reach certain thresholds. Additionally, MC2 also pays for certain incremental costs incurred by us in commercialization activities according to a budget to be agreed annually between the parties. The term of the MC2 Agreement expires in June 2028, unless earlier terminated by either party under certain conditions.
Rhofade (oxymetazoline hydrochloride cream, 1%), or Rhofade, is an alpha1A adrenoceptor agonist indicated for the topical treatment of persistent facial erythema associated with rosacea in adults. EPI Health acquired the rights to Rhofade in October 2019. In connection with that acquisition and other historical acquisitions related to Rhofade, we are required to make certain milestone payments based on future net sales of Rhofade along with paying a combined royalty on net sales of Rhofade and related products initially in the low double digits, which rate may increase based on the thresholds of net sales we achieve.
Minolira (biphasic minocycline hydrochloride immediate release/extended release 105 mg and 135 mg tablets), or Minolira, is indicated to treat inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 years of age and older. EPI Health acquired the rights to Minolira in the United States in August 2018, and we are required to pay certain milestones based on future sales of Minolira.
Cloderm (clocortoline pivalate cream 0.1%), or Cloderm, is indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid-responsive dermatoses. EPI Health acquired the rights to Cloderm in September 2018. In connection with that acquisition, EPI Health is required to pay minimum royalty payments on net sales of Cloderm, subject to meeting certain net sales milestones.
Sitavig (acyclovir 50mg buccal tablets), or Sitavig, is indicated for the treatment of recurrent herpes labialis (cold sores) in immunocompetent adults. We are party to a license agreement EPI Health entered into with Vectans Pharma, or Vectans, for the rights to commercialize Sitavig in the United States and Canada.
7


Nuvail (poly-ureaurethane 16% nail solution), or Nuvail, is indicated for managing signs and symptoms of nail dystrophy, i.e. nail splitting or nail fragility, for intact or damaged nails. We are party to a license agreement EPI Health entered into for the sale of Nuvail and serve as an exclusive distributor of this product in the United States.
Research and Development Portfolio
Our proprietary technology platform leverages nitric oxide’s natural antiviralnaturally occurring anti-viral, anti-bacterial, anti-fungal, and immunomodulatory mechanisms of action to treat dermatological and oncovirus-mediated diseases.a range of diseases with significant unmet needs. Nitric oxide plays a vital role in the natural immune system response against microbial pathogens and is a critical regulator of inflammation. Our ability to harness nitric oxide and its multiple mechanisms of action has enabled us to create a platform with the potential to generate differentiated product candidates. The two key components of our nitric oxide platform are our proprietary Nitricil technology, which drives the creation of new chemical entities, ormacromolecular NCEs and our topical formulation science, both of which we use to tune our product candidates for specific indications. We believe that theOur ability to deploy nitric oxide in a solid form, on demand and in localized formulations allows us the potential to improve patient outcomes in a variety of diseases.

Nitric oxide is one

We have clinical-stage dermatology and anti-infective drug candidates with multi-factorial (SB204), anti-viral (SB206), anti-fungal (SB208), and anti-inflammatory (SB414) mechanisms of the most researched molecules in human physiology and has been extensively studied in many areas of medicine including in microbial diseases and in the modulation of inflammation. The scarcity of nitric oxide-based therapeutic products is due to the challenges associated with controlling the release ofaction. We have also introduced a gas, the poor stability and low storage capacity of nitric oxide-loaded molecules, the inability to target specific tissues and the toxicity of several small molecules used as backbones to store nitric oxide.

The following key components of our nitric oxide platform fuel the creation of differentiatedpossible anti-viral product candidates:

(1)

Novan’s Nitricil technology enables us to achieve stability for the chemical storage of large amounts of nitric oxide in solid form by loading it on an inert macromolecule, or polymer. The advantages of our proprietary Nitricil technology include tunability, stability, high storage capacity, targeted delivery and what we believe is an attractive safety profile. Our ability to select from several nitric oxide-loaded starting materials has created our proprietary library of Nitricil compositions, each of which possesses a unique nitric oxide release profile.

(2)

Our formulation science enables us to further tune the release of nitric oxide when applied by using proprietary combinations of inactive ingredients. This additional level of control enables us to use one new chemical entity, or NCE, for multiple indications by altering the nitric oxide pharmacology with the composition of the topical formulation. This component of our nitric oxide platform creates an additional barrier to entry, which we believe positions us to prolong the period of market exclusivity for each of our product candidates. Our formulation approach and expertise allow us to customize the drug delivery method for the relevant anatomical location of a variety of diseases.

At present, our nitric oxide platform has produced a portfolio that includes the following clinical stage product candidates.

SB204 is a once-daily, topical monotherapy being developedcandidate for the treatment of acne vulgaris, a multifactorial disease with multiple aspects of the disease pathology (anti-inflammatoryexternal genital warts (SB207). We have conducted or are currently conducting preclinical work on NCEs, including berdazimer sodium, and antibacterial) potentially treatable with SB204.

SB206 is a topical antiviral gel being developedformulations for the potential treatment of viral skin(i) respiratory infections, with a current focus onincluding SARS-CoV-2, the treatment of genital and perianal wartsvirus that causes COVID-19 (SB019), (ii) antimicrobial indications for the adjacent companion animal health market (NVN4100), (iii) cervical intraepithelial neoplasia caused by high-risk human papillomavirus,papilloma virus, or HPV, in the men’s and molluscum contagiosum, a contagious skin infection caused by the molluscipoxvirus.

women’s health field (WH504 and WH602), and (iv) inflammatory disorders.

SB208Our primary programmatic focus is a topical broad-spectrum antifungal gel being developed for the treatment of fungal infections of the skin and nails, including athlete’s foot (tinea pedis) and fungal nail infections (onychomycosis).

SB414 is a topical cream-basedon our molluscum product candidate, being developed for the treatment of inflammatory skin diseases, with a currentSB206, and we intend to continue to focus our near term development efforts on the treatment of psoriasis and atopic dermatitis (eczema).

this program.
Priority Development Pipeline

At present, we

We are currently focusing our efforts on our Priority Development Pipeline. We presently maintain exclusive, worldwide commercial rights for all product candidates currently in our pipeline, with the exception of the rights we have licensed to Sato Pharmaceutical Co., Ltd., or Sato, in January 2017 to develop, use and sell SB204 and SB206 in certainJapan.
SB206, a Topical Anti-viral Treatment for Molluscum Contagiosum (a Viral Skin Infection)
We are developing SB206 (12% berdazimer sodium, 10.3% berdazimer) as a topical dosage forms in Japangel with anti-viral properties for the treatment of acne vulgaris. We are also in


negotiationsviral skin infections, with a third party and intendcurrent focus on molluscum contagiosum. Molluscum is a contagious skin infection caused by the molluscipoxvirus that affects up to create a business structure that would enable further development and advancement of the SB204 programsix million people in the U.S. For additional information, please seeUnited States annually. The greatest incidence is in children aged one to 14 years. The average time to resolution is 13 months; however, 13% of children experience lesions that may not resolve in 24 months. There is no FDA-approved prescription drug treatment for molluscum. More than half of patients diagnosed with the section entitled “Business—Our Product Candidates—SB204 forinfection are untreated. The majority of patients in the Treatment of Acne Vulgaris”.

The Novan Nitric Oxide Platform

Nitric oxide, or NO, is a two-atom moleculeUnited States that is produced naturally by the human body. Since the Nobel Prize-winning discovery in 1998 that nitric oxide is responsible for regulating blood flow, or vasodilation, the effects of nitric oxide have been extensively studied in many areas of physiology.

As a fundamental component in host defense against invading organisms, cells of the immune system naturally generate nitric oxide using the enzyme nitric oxide synthase, or NOS,receive treatment are treated with potentially painful procedures and the amino acid precursor L-arginine. Nitric oxide is released in a targeted manner to kill microbial pathogens, including bacteria, fungi and viruses. Nitric oxide and its metabolites drive cell death within bacteria and fungi by targeting metal centers or amino acids on proteins critical to sustaining microbial viability. In virally infected cells, nitric oxide inhibits viral replication by binding directly to free sulfurs or metals thatremaining are a part of key enzymes that can induce apoptosis, or programmed cell death, in cells where tumor suppressors have been degraded or disabled.

We believe that nitric oxide has potential to be a novel antimicrobial agent due to its multiple mechanisms of action and its ability as a gas to diffuse freely through cell membranes – unlike most other pharmaceutical agents. Importantly, the pharmacologic activity of nitric oxide is such that its production is localized at or near the site of infection. Because nitric oxide is a key component of the immune system’s natural response to invading organisms, it may provide a therapeutic solution for degrading and killing microorganisms without the development of antimicrobial resistance.

Nitric oxide and its multiple mechanisms of action have wide ranging possibilities to treat human disease. We believe that our expertise at developing nitic oxide NCEs and fine tuning the formulation technology to the targeted disease separates us from other drug development companies focused in this space. Nitric oxide is a naturally occurring chemical in the human body, which enhances it safety profile. The proven antimicrobial and anti-inflammatory effects of nitric oxide, combined with its naturally strong safety profile and our ability to capture and deliver effective doses, positions Novan with the potential to bring multipleoften prescribed products to patients.  

Limitations of Other Nitric Oxide-Based Approaches

Despite its therapeutic potential, there is currently only one use of nitric oxide approved by the U.S. Food and Drug Administration, or FDA, which is the use of nitric oxide gasindicated for the treatment of pulmonary hypertensionexternal genital warts.

Following positive results of our phase 3 B-SIMPLE4 trial for SB206, in neonatal infants. However,April 2022, we held a pre-NDA meeting with the delivery of nitric oxide from a gas tank is inconvenientFDA, and limits practical applications. The scarcity of nitric oxide-based products is duesubsequently received written minutes related to this interaction. Based on the information provided and our consideration thereof, in early January 2023 we submitted an NDA to the historical challenges associated with developing safe and effective approachesFDA seeking marketing approval for berdazimer gel, 10.3% (SB206). In March 2023, we announced that the chemical storage and controlled release of a gas for therapeutic applications.

Advantages of Our Nitric Oxide Platform

We believe the Novan platform harnesses the potential of nitric oxide in a manner that leads to the creation of differentiated product candidates that address these limitations by (1) engineering tunable NCEs that store nitric oxide in solid form using our Nitricil technology and (2) using our formulation science to customize the drug delivery method for the anatomical location of a disease.


As shown in Figure 1 below, our Nitricil technology and formulation science are used in combination to effectively transform a useful, naturally occurring molecule into a therapeutic pipeline of product candidates.

Figure 1:

Our Nitric Oxide Platform

Our Product Candidates

We are advancing strategic development programs in the fields of dermatology and oncovirus-mediated disease.  We have clinical-stage dermatology drug candidates with anti-acne (SB204) and antifungal (SB208) applications, which we intend to advance through partnerships, collaborations or other strategic relationships that we are currently exploring. We are utilizing our existing capital resources to fund the ongoing and near-term development activities in our antiviral (SB206) and anti-inflammatory (SB414) programs, as described in further detail below. Advancement of the SB206 and SB414 development programs beyond ongoing and near-term activities is dependent upon our ability to access additional capital from non-dilutive sources, including partnerships, collaborations, licensing, grants or other strategic relationships, or through equity or debt financings. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for further discussionFDA completed its filing review of our current liquidityNDA seeking marketing approval for berdazimer gel, 10.3% (SB206). The FDA determined our application was sufficiently complete, no filing review issues were identified, the substantive review process had commenced, and our future funding needs.


Our clinical-stage product candidate pipeline is currently positioned as described in Figure 2 below.

Figure 2:

* Includes anti-inflammatory and antibacterial activity – P. acnes in the casewe were assigned a Prescription Drug User Fee Act goal date of SB204 for the treatment of acne.

January 5, 2024.

SB204, for the Treatment of Acne Vulgaris

We are developing,

SB204 is a product candidate designed as a once-daily, topical monotherapy for the treatment of acne vulgaris.vulgaris, a multi-factorial disease with multiple aspects of the disease pathology (immunomodulatory and anti-bacterial). Acne vulgaris is the most common skin condition in the U.S., affecting approximately 40 million to 50 million Americans annually.United States. The disease ranges in severity from mild to severe cystic acne and causes both physical and psychological effects, including permanent scarring, anxiety, depression and poor self-esteem. Acne is a multifactorialmulti-factorial disease with several mechanistic contributors to the disease pathology, often requiring multiple treatments that address more than one of the major causes of acne pathogenesis. Localized nitric oxide delivery may provide anti-inflammatoryimmunomodulatory (anti-inflammatory) and antibacterial activityanti-bacterial mechanisms of action from a single active ingredient.

We believe that acne continues to be characterized as an unmet medical need due to the difficulty of balancing efficacy, systemic safety and cutaneous tolerability, as well as the growing concerns with antibacterialanti-bacterial resistance with existing therapies. In our more than 3,200 patient SB204 clinical development program, topical application of SB204 has been well-tolerated with no significant safety concerns identified. In maximal-use pharmacokinetic trials that we have conducted in adult and pediatric patients with acne vulgaris, we observed no detectable systemic exposure from SB204 following its topical application.

8


Based on the positive pivotal Phase 3 results in the SB206 molluscum development program, we believe we can optimize the trial design of a pivotal Phase 3 study for SB204 that has the potential to serve as a second pivotal trial to support an NDA submission. As such, our intention is to progress SB204 by commencing a pivotal Phase 3 study, subject to obtaining additional financing or strategic partnering.
Sato Agreement
In the first quarter ofJanuary 2017, we reported top-line results from two identically designed Phase 3 pivotal clinical trials for SB204. SB204 demonstrated statistical significance comparedlicensed rights to vehicle on all three co-primary endpoints in one of the trials but demonstrated statistical significance on only one of three co-primary endpoints in the other trial. We conducted an in-depth examination of the full data sets from these trials, including post hoc analyses in pooled and sub populations, with extensive assistance from third-party expert consultants in biostatistics and regulatory affairs.


In mid-2017 we completed our 40-week long term safety trial in eligible patients with acne who had previously completed 12 weeks of treatment in the related Phase 3 pivotal trials of SB204. No serious adverse events were observed with over 400 patients followed for six months and over 200 patients followed for one year.

The information generated from the Phase 3 pivotal trials, the post hoc analyses and examinations as well as the long-term safety trial is fundamental to the advancement of the SB204 program through regulatory interactions and potential collaborative relationships described below.

January 2017—We entered into a license agreement, and a related amendment, with Sato or the Sato Agreement, whereby we licensed rights to develop, use, and sell SB204 in certain topical dosage forms in Japan for the treatment of acne vulgaris.vulgaris, and to manufacture the finished form of SB204 for sale in Japan. In 2018, we licensed rights to Sato to develop, use, and sell SB206 in certain topical dosage forms in Japan for the treatment of viral skin infections, and to manufacture the finished form of SB206 for sale in Japan. The significant terms and the related accounting considerations of theour licensing arrangement with Sato Agreement are further described in the “LicensingNote 14—“License and Collaboration Arrangements” section below and in “Note 4—Collaboration Arrangements”Revenues” to the accompanying consolidated financial statements included statements.

Pipeline Expansion Opportunities
Our pipeline expansion opportunities are as follows:
SB019, an Intranasal Treatment Option for COVID-19 or Other Respiratory Infections
We previously explored the use of our proprietary Nitricil technology to progress SB019, a potential intranasal treatment option for COVID-19 or other respiratory infections, targeting the reduction of viral shedding and transmission. Nitric oxide has generally demonstrated the ability to inhibit viral replication of viruses within the Coronaviridae family, and we have an extensive body of in this Annual Reportvitro and in vivo data demonstrating the efficacy of our proprietary technology for other anti-viral indications. Based on Form 10-K.

the scientific literature and data available to-date related to berdazimer sodium and SB206, we believe that nitric oxide may inhibit viral replication by disrupting protein function critical for viral replication and infection through generation of reactive intermediates.

September 2017—We held a productive guidance meeting withBased on the FDApositive preclinical and obtained clinical and regulatory guidance around the SB204 program relative to the previously completed parallel Phase 3 pivotal trials in patients with moderate and severe acne.

November 2017—We executed a non-binding term sheet with a third party to create a business structure that would enable further development and advancementdata demonstrating anti-viral effect of the SB204 program with an additional Phase 3 clinical trial. The business structure envisioned in the non-binding term sheet would access third-party financing and third-party execution of the additional clinical trial.

First Quarter of 2018—Novan and the third party continue to evaluate and work towards finalization of the most appropriate design of one or more clinical trial(s) to maximize the probability of success. As part of this process, we are also examining all aspects of the acne field, including recent Phase 3 clinical trial failures in this therapeutic area. The next step requires additional FDA input and guidance that we expect to obtain during a Type C meeting scheduled in the second quarter of 2018. We believe further FDA input from the upcoming meeting will facilitate (i) finalization of our Phase 3 strategy and (ii) conclusion and execution of a definitive agreement with the third party.

As outlined in the details of the November 2017 non-binding term sheet, the exclusivity period between ourselves and the third party expired in early March 2018. We continue to collaborate with the third party on all aspects of the Phase 3 program design and are actively working towards finalization of the definitive agreement. We are targeting these activities to be substantially complete prior to the upcoming FDA meeting so that SB204 can be advanced after the FDA’s feedback is fully incorporated into the final Phase 3 strategy. The finalized third-party business structure may differ from what was envisioned in the non-binding term sheet due to the fluidity of the regulatory feedback, the continued assessment of the optimal strategyberdazimer sodium against multiple viruses, as well as the challenging setpublic health need to reduce breakthrough infections and transmission of co-primary efficacy endpoints. As a result,COVID-19 and on our interactions with the business structureFDA, we believe there may include a blend of capital providers, including corporate and institutional investors. In addition, we may retainbe an optionopportunity to participate in some portion of the funding. Both Novan and the third party continue to evaluate the optimal path forwardexpand beyond our preclinical work for the assetSB019 product candidate. However, the SB019 program is currently on hold with further advancement subject to obtaining additional financing or strategic partnering.

SB414, for the Treatment of Inflammatory Skin Diseases, including Atopic Dermatitis and believe that feedback from the upcoming FDA meeting will help to provide clarity around that path.

We intend to continue to evaluate various risk/benefit scenarios as we determine how to deploy capital for development in the acne space. We remain highly focused on managing the dynamic process of balancing the upside optionality and the near-term risk that accompanies the anticipated business structure. We target substantially completingPsoriasis

SB414 is a strategic arrangement, consistent with the expected timing for completion of our Phase 3 program design, so that the remaining components of the Phase 3 program could commence during the third quarter of 2018 if the parties agree that the risk/benefit assessment is appropriate to move forward.

SB206, a Topical Antiviral Treatment for Viral Skin Infections

We are developing SB206product candidate designed as a topical antiviral gelcream for the treatment of viralinflammatory skin infections, diseases, with a current focus on genital and perianal warts caused by human papillomavirus and molluscum contagiosum, a contagious skin infection caused by the molluscipoxvirus.


External Genital Warts

Genital warts are among the world's most common sexually transmitted diseases. Genital warts are usually flesh-colored growths that can be raised, flat or cauliflower-shaped and are typically found on the surface of the external genitalia or in and around the anus. In males, they can appear on the surface of the penis and scrotum, and in females inside the vagina or on the cervix. Genital warts carry a substantial psychosocial burden due to the shame and embarrassment related to having a sexually transmitted disease as well as the inconvenience and discomfort of current treatment modalities. Current treatment options for genital warts consist of ablative procedures that cut, burn or freeze the warts but do not address the underlying viral infection, and there are no currently approved oral or topical prescription products indicated for the treatment of genital warts with a direct antiviral mechanism of action. Approximately 70% of patients treated for external genital warts receive locally destructive procedures, such as cryotherapy or curettage. Approximately 46% of patients are treated with prescription drugs alone or in combination with procedures. Both topical therapiesatopic dermatitis and ablative procedures for genital warts remain largely ineffective in achieving long-term wart eradication and the average recurrence rates range from 30% to 70%.psoriasis. The approved drugs for the treatment of warts are pro-inflammatory in their mechanism of action and lead to ulcers, erosions and burning/stinging.

We initially evaluated SB206’s antiviral activity in a Phase 2 randomized, double-blinded, vehicle-controlled clinical trial in 107 patients with genital warts caused by HPV. We announced top-line results from this Phase 2 clinical trial in the fourth quarter of 2016. SB206 demonstrated statistically significant results in the clearance of external genital and perianal warts. Once-daily treatment arms were generally well-tolerated, including the most effective dose, SB206 12% once-daily.

SB206SB414 program is currently positioned for Phase 3 pivotal trials in patientson hold with external genital warts. We expect futurefurther advancement of SB206 in this indicationsubject to occur after the formation of a partnering relationship, which we are actively exploring,obtaining additional financing or another form of additional funding.

Molluscum Contagiosum

At the end-of-Phase 2 meeting for SB206 in the external genital warts indication, we also had a constructive discussion with the FDA regarding expansion of the SB206 program into the treatment of molluscum contagiosum. Molluscum is a contagious skin infection caused by the molluscipoxvirus. Molluscum affects approximately six million people in the U.S. annually. The greatest incidence is in children aged one to 14 years. The average time to resolution is 13 months, however, 13% of children experience lesions that may not resolve in 24 months. There is no FDA-approved treatment for molluscum. More than half of patients diagnosed with the infection are untreated. The majority of patients that receive treatment are treated with painful procedures and the remaining are often prescribed products indicated for the treatment of external genital warts.

We believe that observational learnings from an in-licensed topical nitric oxide technology study showing clinically meaningful complete clearance rates of baseline molluscum lesions, combined with our SB206 program knowledge, provide a logical pathway for SB206 development in the molluscum indication. We submitted an investigational new drug application, or IND, to the FDA in December 2017 and initiated a Phase 2 clinical trial utilizing SB206 for the treatment of molluscum in the first quarter of 2018 with top line results targeted in the fourth quarter of 2018. The Phase 2 multi-center, randomized, double-blind, vehicle-controlled, ascending dose clinical trial is designed to evaluate the efficacy, safety and tolerability of SB206 in 192 patients, with an option to increase to 256 patients, ages 2 and above, with molluscum. Patients will be treated with one of three concentrations of SB206 or vehicle for up to 12 weeks. The primary endpoint is the proportion of patients achieving complete clearance of all molluscum lesions at Week 12.

Potential Future Therapeutic Areas of Exploration

In addition to the aforementioned current focus areas for SB206, we are also evaluating potential development activities for SB206 and other NCEs for the treatment of HPV-associated sexually transmitted infections, or STIs, and high-risk neoplasias, including cervical and anal neoplasias caused by HPV-16 and HPV-18. Our acquisition of exclusive worldwide rights for certain oncovirus applications of nitric oxide-based products from KNOW Bio, LLC, or KNOW Bio, in October 2017 enables the potential expansion into this therapeutic area. The terms of this

strategic partnering.

intellectual property acquisition transaction are further described in “Note 4—Collaboration Arrangements” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.

SB208, a Topical Antifungal for the Treatment of Athlete’s Foot (Tinea Pedis) and Fungal Nail Infections (Onychomycosis)

We are developing

SB208 is a product candidate designed as a topical broad-spectrum antifungalanti-fungal gel for the potential treatment of superficial cutaneous fungal infections of the skin and nails, such as tinea pedisincluding athlete’s foot (tinea pedis) and onychomycosis. Recent studies suggest that both thefungal nail plate, interdigital space and surrounding cutaneous tissue may serve as an overlooked reservoir of dermatophytes, perpetuating reinfection and coinfection of onychomycosis and tinea pedis. Additionally, studies have demonstrated enhanced efficacy when tinea pedis and onychomycosis are treated concurrently, suggesting that an effective topical treatment, suitable for simultaneous applicationinfections (onychomycosis). The SB208 program is currently on hold with further advancement subject to the nail plate and skin, may lead to lower rates of recurrence and enhanced efficacy.

Onychomycosis is a chronic fungal infection of the nails that affects approximately 40 million Americans and accounts for one-third of cutaneous fungal infections. The prevalence of disease increases with age, and more than 50% of patients are 70 yearsobtaining additional financing or older. The infection, caused by dermatophytes such as Trichophyton rubrum, often results in painful thickening and deformation of the nail and sometimes the separation of the nail plate from the nail bed, leading to an inability of the nail to perform its natural protective function. Oral therapies used to treat the infection are associated with severe side effects, and topical therapies have modest efficacy profiles with complete cure rates of less than 20%.

Tinea pedis, often referred to as Athlete’s Foot, is a common fungal infection of the feet, affecting approximately 75 million Americans. Trichophyton rubrum is the most prominent dermatophyte in tinea pedis and also a causative pathogen in onychomycosis. Approximately one-third of onychomycosis patients also suffer from tinea pedis. Topical treatments are the first-line therapy for tinea pedis, while oral antifungals are prescribed when the infection is severe or the use of topical antifungals is not feasible. Currently, there is no approved single topical therapeutic agent that provides for the simultaneous treatment of the nail plate, bed, and surrounding cutaneous tissue.

In the ChubTur® infected human nail assay, a model utilized previously in the drug development of Kerydin® (tavaborole) Topical Solution, 5%, and Jublia® (efinaconazole) Topical Solution, 10%, nitric oxide-releasing formulations including SB208 demonstrated rapid penetration of the nail and effective fungal killing of Trichophyton rubrum in 24 hours following a single treatment application.

We conducted a Phase 2 proof-of-concept trial in patients with clinical signs and symptoms of tinea pedis and announced top-line results in the second quarter of 2017. SB208 demonstrated a statistically significant effect compared to vehicle in (i) the primary endpoint of achieving negative fungal culture at day 14 and (ii) the secondary endpoint of achieving mycological cure at the day 14 (mycological cure is defined by having a negative laboratory culture and negative fungal clinical diagnosis). At the end of a 4-week post treatment follow-up period, mycological cure was maintained at day 42 in both dose groups.

We are currently exploring potential partnerships, collaborations or other strategic relationships to further advance SB208.

SB414, a Topical Creampartnering.

SB207, for the Treatment of Inflammatory Skin Diseases

External Genital Warts

Genital warts are among the world’s most common sexually transmitted diseases. We are developing SB414 ashave previously evaluated SB206’s anti-viral activity against genital warts caused by HPV. In response to our identification of targeted viral opportunities of high unmet need where we believe our nitric oxide releasing technology could provide clinical benefit to patients, we developed SB207, a topical creamnew anti-viral product candidate for the treatment of inflammatory skin diseases, suchexternal genital warts. Further advancement of SB207 is subject to further evaluation of clinical plans and developmental timelines, as psoriasiswell as obtaining additional financing or strategic partnering.
Advancement in Men’s and atopic dermatitis. Inflammatory skin disorders areWomen’s Health
We have been awarded federal grants of approximately $1.3 million from the resultsNational Institutes of immune system reactions that involveHealth, or NIH, and approximately $1.1 million from the skin. Biologic therapies are often usedU.S. Department of Defense’s, or DoD, Congressionally Directed Medical Research Programs, or CDMRP. These grants have enabled the conduct of IND-enabling toxicology and pharmacology studies and other preclinical activity of a nitric oxide containing intravaginal gel (WH602) designed to treat patients with severe disease. A non-steroidal topical therapyhigh-risk HPV infections that targets key inflammatory cytokines could address an unmet need for approximately 6 million psoriasis patientscan lead to cervical intraepithelial neoplasias, or CIN, and approximately 14 million atopic dermatitis patients with less severe disease burden.

We submitted an IND with SB414 cream fora non-gel formulation product candidate (WH504). Under the treatmentterms of inflammatory skin diseasesthese grants, we are entitled to receive the FDA during the third quarter of 2017.


Psoriasis

Psoriasis is a chronic inflammatory skin disease that affects approximately 7.5 million peoplegrant funds in the United States. The disease is characterized by an errant immune-system response that drives inflammationform of periodic reimbursements of our allowable direct expenses, allocated overhead, general and thickeningadministrative expenses and payment of the skin caused by rapid turnover of skin cells. This typically results in patches of plaques, or thick, red raised skin with silvery-white scales. There is no cure for psoriasis. The healthcare market has seen an increase in the introduction of systemic therapies, including biologics, to treat patients with higher disease burden, but the current systemic therapies are indicated only for patients with moderate-to-severe disease. For the approximately 80% of patients with mild-to-moderate psoriasis, prescription treatment options include topical corticosteroids, retinoids and vitamin D3. Vitamin D3 is not efficacious enough as a monotherapy and topical corticosteroids and retinoids have well-known side effects and are not well suited for chronic use.

other specified amounts.

Companion Animal Health
We have initiated clinical developmentexploratory work to evaluate our new chemical entity, NVN4100, as a potential product candidate for antimicrobial indications in companion animal health. This program is currently on hold, pending the engagement of SB414,potential collaborators or strategic partners to progress this asset, including the Company’s first useconduct of additional studies and formulation work.
9


Our Customers
We primarily sell our medical dermatology prescription products direct to pharmacies and to national wholesaler channels. Our wholesalers and distributors purchase products from us and, in turn, supply products to retail drug store chains, independent pharmacies and others. As of December 31, 2022, three of our nitric oxide platformwholesaler customers accounted for more than 10% of our total accounts receivable balance at 25%, 13% and 12%, respectively.
Seasonality of Business
Our business is affected by the standard annual insurance deductible resets, as well as the purchasing patterns and concentration of our customers. In addition, certain dermatological conditions, such as acne, may be impacted by the warmer months and prescriptions may also be impacted based on the activities of those who are prescribed our products, such as school and summer activities; however, our business is not materially impacted by seasonality. There are no assurances that these historical trends will continue in the field of immunology by dosing the first patient in October 2017 in a Phase 1b clinical trial to evaluate SB414 in a cream for the treatment of psoriasis. The purpose of the Phase 1b trial is to evaluate safety and to assess target engagement through a reduction of key pro-inflammatory biomarkers like interleukin-17, or IL-17, before progressing to Phase 2 clinical trials. According to a recent peer-reviewed article in the British Journal of Dermatology, IL-17 is known to be or is likely to be related to the mechanism and severity of a number of inflammatory skin disorders, including psoriasis, acne, atopic dermatitis, rosacea and alopecia areata. Earlier in 2017, we presented mechanistic evidence for SB414, demonstrating a statistically significant reduction in composite psoriasis scores and an inhibition of IL-17a and IL-17f in an animal model. Top line results for the Phase 1b trial are targeted in the second quarter of 2018.

Atopic Dermatitis

Atopic dermatitis, also known as atopic eczema, is the most common chronic relapsing inflammatory skin disease, affecting nearly 18 million people in the United States with no FDA-approved cure. Stabilizing the disease and reducing the number and severity of flares are the primary goals of current treatment options. The disease is characterized by recurrent red plaques, intense itching, dry skin with red papules and plaques, “weeping” clear fluid, crust and scaling. Immune cells in the deep layers of skin release inflammatory signals, causing an itchy rash. Scratching leads to defects in the skin barrier function, allowing environmental triggers, such as the bacteria Staphylococcus aureus, to penetrate the skin barrier and further exacerbate the immune cells. A recent study showed that the entry of S. aureus into the dermis triggers immune abnormalities seen in atopic dermatitis skin. Nearly 80% of the atopic dermatitis population suffers from mild-to-moderate disease and is treated with first-line monotherapies, such as corticosteroids and calcineurin inhibitors, however, corticosteroids and calcineruin inhibitors have side effects and are not well-suited for chronic use. Recently, the first biologic treatment for atopic dermatitis targeting interleukin-4, or IL-4, and IL-13 was approved, but it is reserved for patients with moderate to severe disease. Additionally, a topical PDE4 inhibitor was recently approved after more than a decade absent of any new mechanisms of action.

In two in vivo models that assess critical components of atopic dermatitis disease pathology, SB414 displayed potent anti-staphylococcal activity and dose-dependent inhibition of inflammation comparable to betamethasone, a mid-potency corticosteroid used to treat patients with atopic dermatitis. Based on preclinical data generated to date and documented literature on nitric oxide’s mechanisms of action, we believe that SB414 cream has the potential to offer non-steroidal, immunomodulatory activity and anti-staphylococcal activity for the treatment of atopic dermatitis. Additionally, SB414 cream is an occlusive formulation allowing for pH control in the skin and a possible reduction in trans-epidermal water loss, both important factors for treating the disease.

We initiated a Phase 1b trial with SB414 in adults with mild-to-moderate atopic dermatitis in December 2017. The Phase 1b trial is being conducted in 48 adults with mild-to-moderate atopic dermatitis with up to 30% body surface area at baseline. Two concentrations of SB414 and vehicle cream, applied twice-daily for two weeks, are being evaluated for safety, for systemic exposure and to assess target engagement through a reduction of key pro-inflammatory biomarkers such as IL-4 before progressing to Phase 2 clinical trials. Eczema area severity index (EASI) scores are also being recorded at baseline and at the end of treatment. Top line results are targeted for the third quarter of 2018.

future.

Competition

After the completion of both Phase 1b trials in psoriasis and atopic dermatitis, we expect to evaluate the results comprehensively during the second half of 2018 and then determine the appropriate developmental next steps for SB414.

Competition

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We consider our primary potential competition to be a broad base of existing providers and drug developers of therapeutics to treat acne vulgaris, genital warts, onychomycosis, psoriasis and atopic dermatitis.in the field of dermatology. Product competition includes over the counter products, or OTC, pharmaceutical generics, branded generics, pharmaceutical brands, biologics as well as biologics. over-the-counter, or OTC, products.
We expect continued future competition across research and drug development in various different fields of innovation; capital and resource allocation to many of these areas appears to be continuous and of a global nature. In addition, there are certain instances where competition extends into the medical procedure and the medical device spectrums of human health care. Any product candidates that we successfully develop and commercialize will compete with these existing therapies as well as new therapies that may become available in the future. Our success will be based in part on our ability to identify, develop and manage a portfolio of product candidates that are safer and more effective than competing products and therapies.

Pharmaceutical Industry
Our competitors include pharmaceutical companies and biotechnology companies, as well as universities and public and private research institutions. In addition, companies that are active in different but related fields represent substantial competition for us. Many of our competitors have significantly greater capital resources, larger research and development staffs and facilities and greater numbers of personnel in drug development, regulation, manufacturing and marketing than we do. These organizations also compete with us to recruit qualified personnel, attract partners for joint ventures or other collaborations, and license technologies that are competitive with ours. To compete successfully in this industry, we must identify novel and unique drugs or methods of treatment and then complete the development of those drugs as treatments in advance of our competitors.
Dermatology Sector
The dermatology competitive landscape is highly fragmented, with a large number of midsize and smaller companies competing in both the prescription sector and the OTC sector. Our competitors are pursuing the development and/or acquisition of pharmaceuticals, medical devices and OTC products that target the same diseases and conditions that we are targeting in dermatology. Competitive factors vary by product line and geographic area in which our products are sold. The principal methods of competition for our products include quality, efficacy, market acceptance, price, and marketing and promotional efforts.
Branded products often must compete with therapeutically similar branded or generic products or with generic equivalents. Such competition frequently increases over time. For example, if competitors introduce new products, delivery systems or processes with therapeutic or cost advantages, our products could be subject to progressive price reductions and/or decreased volume of sales. To successfully compete for business, we must often demonstrate that our products offer not only medical benefits, but also cost advantages as compared with other forms of care. Accordingly, we face pressure to continually seek out technological innovations and to market our products effectively.
Our major competitors, including Galderma Laboratories, Dermavant, Sol-Gel Technologies, Almirall, Verrica Pharmaceuticals, Journey Medical Corporation, Sun Pharma, Leo Pharma, Arcutis Biotherapeutics, Mayne Pharma, and Ortho Dermatologics, among others, vary depending on therapeutic and product category, dosage strength and drug-delivery systems, among other factors.
Generic Competition
We face increased competition from manufacturers of generic pharmaceutical products, who may submit applications to the FDA seeking to market generic versions of our products. In connection with these applications, the generic drug companies may seek to challenge the validity and enforceability of our patents through litigation. When patents covering certain of our products (if applicable) expire or are successfully challenged through litigation or in USPTO proceedings, if a generic company launches a competing product “at risk,” or when the regulatory or licensed exclusivity for our products (if applicable) expires or is otherwise lost, we may face generic competition as a result. Generic versions are generally significantly less expensive than branded versions,
10


and, where available, may be required to be utilized before or in preference to the branded version under third-party reimbursement programs, or substituted by pharmacies. Accordingly, when a branded product loses its market exclusivity, it normally faces intense price competition from generic forms of the product. To successfully compete for business with managed care and pharmacy benefits management organizations, we must often demonstrate that our products offer not only medical benefits, but also cost advantages as compared with other forms of care. Generic products generally face intense competition from other generic equivalents (including authorized generics) and therapeutically similar branded or generic products.
Intellectual Property

Our success depends in large part upon our ability to obtain and maintain proprietary protection for our productsproduct candidates and technologies and to operate without infringing the proprietary rights of others. We seek to avoid the latter by monitoring patents and publications that may affect our business, and to the extent we identify such developments, evaluating and taking appropriate courses of action. With respect to the former, our policy is to protect our proprietary position by, among other methods, filing for patent applications on inventions that are important to the development and conduct of our business with the U.S.United States Patent and Trademark Office, or USPTO, and its foreign counterparts. We also use other forms of protection, such as trademark, copyright and trade secret protection and confidentiality policies and procedures, to protect our intellectual property, particularly where we do not believe patent protection is appropriate or obtainable.

We own or have an exclusivea license to issued patents and pending patent applications in the United States and in foreign jurisdictions (including applications filed in foreign jurisdictions and international or Patent Cooperation Treaty, or PCT, applications that have not yet entered national phase). Patent coverage lasts for varying periods according to the date of filing of the patent application or the date of grant or issuance of the patent and the legal term of patents in various countries where patent protection is obtained. Generally, patents issued for regularly filed applications in the United States are granted a term of 20 years from the earliest filing date of a non-provisional patent application. In addition, in certain instances, the term of a patent can be extended to recapture a portion of the USPTO delay in issuing the patent or may be shortened if a patent is terminally disclaimed over another patent that expires earlier. The term of a patent may also be eligible for patent term extension to recapture a portion of the term effectively lost as a result of the FDA regulatory review period. However, as to the FDA component, the extension term cannot be longer than five years and the total patent term including the restoration period must not exceed 14 years following FDA approval. The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest filing date of a non-provisional patent application. However, the actual protection afforded by a patent varies on a product by product basis from country to country and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent.

Four of our marketed products, Rhofade, Minolira, Wynzora, and Sitavig, currently have one or more patents listed in the U.S. Food & Drug Administration Orange Book, or the Orange Book.

Nitricil Technology

We exclusively license from the University of North Carolina at Chapel Hill, or UNC, issued patents and pending applications directed to our library of Nitricil compounds, including patents issued in the United States, Canada, Italy, Great Britain, France, Ireland, Germany, Finland, Spain, Sweden, Switzerland, Japan and Australia with claims intended to cover NVN1000, the NCE for our current clinical-stage product candidates. Additionally, one such issued patent in the United States has claims specifically directed to the composition of matter of NVN1000. These patents and pending applications, if issued, are projected to expire in 2026 without taking into account any patent term extensions that may be available to us. Additionally, NVN1000 has been classified as an NCE, and patent term extensions may be


available to extend the life of a U.S.United States patent that covers NVN1000 beyond 2026. We also own patents issued in the United States, China, Germany, Spain, France, Great Britain, Ireland, Italy and Switzerland directed to methods of manufacturing Nitricil compounds. These patents are projected to expire in 2032.

Formulation Science and Therapeutic Uses

We own patents issued in the United States, Australia, Germany, Spain, France, Great Britain, Ireland, Italy, China, Mexico, and Japan and pending applications filed in foreign jurisdictions, includingSouth Korea, Brazil, Canada, Europe and South KoreaJapan directed to methods of reducing sebum production using nitric oxide-releasing macromolecules, including, in certain embodiments, through the use of Nitricil compounds. We also own issued U.S. patents in the United States, Australia, Germany, Spain, Great Britain, Italy, Finland, France, Japan, Brazil, Canada, and China and pending applications filed in the United States, Australia, Brazil, Canada, China, Europe and Japan directed to the alcohol gel component of SB204 and SB206 and/or the SB204 and SB206 two-component formulations. We are pursuingown patents issued in the United States, Australia, Germany, Spain, France, Italy, Great Britain, Brazil, Canada, China, Europe, Japan, South Korea, and PCTJapan and are pursuing patent applications in the United States, China, and Europe directed to the use of nitric oxide-releasing compounds, including, in certain embodiments, Nitricil compounds, for the treatment of viral skin infections.

Altogether, our issued U.S.United States and foreign patents and pending U.S.United States and foreign patent applications, if issued, relating to one or more of our clinical-stage product candidates are projected to expire between 2026 and 2037, without taking into account any patent term extensions that may be available to us and assuming that prosecution is pursued to issuance with no shortening of term.

11


Rhofade
We own or have a license to U.S. patents that are listed in the Orange Book for Rhofade cream that includes oxymetazoline hydrochloride. In addition, we own patents and pending applications directed to compositions including oxymetazoline and/or to methods of treating rosacea or a symptom thereof with a composition including oxymetazoline including patents issued in the United States, Austria, Belgium, Switzerland and Liechtenstein, Czech Republic, Germany, Denmark, Spain, France, the United Kingdom, Greece, Ireland, Italy, the Netherlands, Norway, Poland, Portugal, Romania, Sweden, Turkey, Australia, Canada, Japan, Hong Kong, South Korea, Russia, Mexico, and Taiwan and pending applications in the United States, Brazil, China, New Zealand, and Europe.
Our owned and licensed patents and pending applications, if issued, relating to oxymetazoline altogether are projected to expire between 2024 and 2035 without taking into account any patent term extensions that may be available to us and assuming that prosecution is pursued to issuance with no shortening of term.
Minolira
We have licenses to patents and pending applications in the United States for 105 mg and 135 mg dosage Minolira tablets. Altogether our licensed patents and pending applications, if issued, for Minolira are projected to expire between 2025 and 2036 without taking into account any patent term extensions that may be available to us and assuming that prosecution is pursued to issuance with no shortening of term.
Wynzora
We have an exclusive license from MC2 Therapeutics to patents and pending applications in the United States relating to Wynzora cream including to a United States patent listed in the Orange Book for Wynzora cream. The licensed patents and pending applications, if issued, for Wynzora are projected to expire in 2027 without taking into account any patent term extensions that may be available to us and assuming that prosecution is pursued to issuance with no shortening of term.
Sitavig
We own the United States patents listed in the Orange Book for Sitavig tablets, which include acyclovir as an active ingredient. We also own or have an exclusive license to patents directed to mucosal bioadhesive slow release carriers including an active ingredient such as acyclovir and/or to methods of treating orofacial herpes using mucoadhesive buccal tablets including issued patents in the United States and Canada.Altogether, the owned and licensed patents relating to Sitavig are projected to expire between 2027 and 2030 without taking into account any patent term extensions that may be available to us and assuming that prosecution is pursued to expiration with no shortening of term.
Other Patented Technology

In addition to the patents and pending applications we own or have an exclusive license related to Nitricil compounds and our product candidates, we also own or have exclusive licenses to issued patents and pending applications in the United States and in foreign jurisdictions covering other nitric oxide-based therapeutics andand/or methods of use in indications for dermatological and oncovirus-mediated diseases.

Trade Secrets

We rely upon trade secrets and know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietary information by limiting access to such information on a need-to-know basis exclusively. In addition, we seek to protect our proprietary information, in part, by requiring our employees, consultants, contractors and other advisors to execute nondisclosure and assignment of invention agreements, or to include such provisions in their consulting agreement, upon commencement of their respective employment or engagement. These agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements and provisions, to grant us ownership of technologies that are developed through a relationship with a third party. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our commercial partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

Trademarks

Novan®

Novan® is a registered trademark of our company in the United States.

States, and we own or have a license to use trademarks for our commercial products. In addition, we have pending trademark applications in the United States, including for Nitricil.

Research and Development Arrangements
On April 29, 2019, we entered into a royalty and milestone payments purchase agreement with Reedy Creek Investments LLC, or Reedy Creek, pursuant to which Reedy Creek provided us funding in an initial amount of $25.0 million, for us to use primarily to
12


pursue the development, regulatory approval and potential commercialization activities for SB206, for the treatment of molluscum, and advance programmatically other activities with respect to SB414, for atopic dermatitis, and SB204, for acne.
On May 4, 2019, we entered into a development funding and royalties agreement, or the Funding Agreement, with Ligand Pharmaceuticals Incorporated, or Ligand, pursuant to which Ligand provided us funding of $12.0 million, which we used to pursue the development and regulatory approval of SB206, for the treatment of molluscum.
Please see Note 15—“Research and Development Agreements” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding these research and development arrangements, including our obligations under these agreements.
Collaboration and Licensing Agreements

UNC

Wynzora Agreement
Effective as of January 1, 2022, EPI Health entered into the MC2 Agreement relating to the commercialization of Wynzora for treatment of plaque psoriasis in adults in the United States. Pursuant to the MC2 Agreement, which sets forth the collaborative efforts between EPI Health and MC2 to commercialize and promote Wynzora with MC2 in the United States, MC2 granted EPI Health an exclusive right and license under MC2’s intellectual property rights to sell, or detail (as defined in the MC2 Agreement), and engage in certain commercialization activities with respect to Wynzora in the United States.
In exchange for the provision of promotional and commercialization activities, under the terms of the MC2 Agreement, we are entitled to receive:
Reimbursement for all incremental costs incurred by us for the promotion and commercialization of Wynzora, including the incremental portion of our personnel and commercial operating costs. The supply price of Wynzora product inventory is also considered to be an incremental cost that is reimbursed by MC2.
A commercialization fee equivalent to a percentage of net sales ranging from the mid-teens for net sales less than or equal to $65.0 million to the upper single digits for annual net sales greater than $105.0 million. We collect this commercialization fee by retaining our portion of the Wynzora product net sales we collect from our customers, with the remainder of the net sales being remitted by us to MC2 periodically in the form of a royalty payment, pursuant to the MC2 Agreement.
A contingent incentive fee equal to 5% of the first $30.0 million in net sales of Wynzora sold in the United States by EPI Health in each of the 2022 and 2023 calendar years; provided that such incentive fee shall not exceed $1.5 million each year and such incentive fee shall not be credited to us until the royalty payments paid to MC2 surpass the amount of certain commercialization payments made previously by MC2.
The term of the MC2 Agreement runs until the seventh anniversary of the first commercial sale of Wynzora (as defined in the MC2 Agreement) or June 30, 2028, whichever is earlier. Either party may terminate the MC2 Agreement for the other party’s material uncured breach or the bankruptcy or insolvency of the other party. MC2 may terminate the MC2 Agreement under certain scenarios, including for convenience with twelve months’ advance notice to us, provided that the termination is not effective unless MC2 pays any unpaid historical liabilities related to commercialization of Wynzora owed by MC2. In the case of such termination, MC2 is also required to make an additional sunset payment to us, paid in installments over the 24 month period following termination. We may terminate the MC2 Agreement for convenience with twelve months’ advance notice to MC2 provided that the termination is not effective unless we provide MC2 with a guarantee of the payment of any outstanding royalty payments, to the extent such royalty payments owed by us exceeds any unpaid historical liabilities related to commercialization of Wynzora owed by MC2.
For additional information about the Wynzora and MC2 Agreement, please refer to Note 13—“Net Product Revenues” to the accompanying consolidated financial statements included in this Annual Report.
Sato Agreement - SB206 and SB204
On January 12, 2017, we entered into a license agreement, and related first amendment, with Sato, relating to SB204, our drug candidate for the treatment of acne vulgaris in Japan, or the Sato Agreement. Pursuant to the Sato Agreement, we granted to Sato an exclusive, royalty-bearing, non-transferable right and license under certain of our intellectual property rights, with the right to sublicense with our prior written consent, to develop, use and sell products in Japan that incorporate SB204 in certain topical dosage forms for the treatment of acne vulgaris, and to make the finished form of such products.
13


On October 5, 2018, we entered into the second amendment, or the Sato Amendment, to the Sato Agreement, or collectively, the Amended Sato Agreement. The Sato Amendment expanded the Sato Agreement to include SB206, our drug candidate for the treatment of viral skin infections. Pursuant to the Amended Sato Agreement, we granted to Sato an exclusive, royalty-bearing, non-transferable license under certain of our intellectual property rights, with the right to sublicense with our prior written consent, to develop, use and sell products in Japan that incorporate SB204 or SB206 in certain topical dosage forms for the treatment of acne vulgaris or viral skin infections, respectively, and to make the finished form of such products. We or our designated contract manufacturer will supply finished product to Sato for use in the development of SB204 and SB206 in the licensed territory. The rights granted to Sato do not include the right to manufacture the API of SB204 or SB206; rather, we agreed to negotiate a commercial supply agreement pursuant to which we or our designated contract manufacturer would be the exclusive supplier to Sato of the API for the commercial manufacture of licensed products in the licensed territory. Under the terms of the Amended Sato Agreement, we also have exclusive rights to certain intellectual property that may be developed by Sato in the future, which we could choose to use for our own development and commercialization of SB204 or SB206 outside of Japan.
The term of the Amended Sato Agreement (and the period during which Sato must pay royalties under the amended license agreement) expires on the twentieth anniversary of the first commercial sale of a licensed product in the licensed field in the licensed territory (adjusted from the tenth anniversary of the first commercial sale in the Sato Agreement). The term of the Amended Sato Agreement may be renewed with respect to a licensed product by mutual written agreement of the parties for additional 2-year periods following expiration of the initial term. All other material terms of the Sato Agreement remain unchanged by the Sato Amendment.
Sato is responsible for funding the development and commercial costs for the program that are specific to Japan. We are obligated to perform certain oversight, review and supporting activities for Sato, including: (i) using commercially reasonable efforts to obtain marketing approval of SB204 and SB206 in the United States; (ii) sharing all future scientific information we may obtain during the term of the Amended Sato Agreement pertaining to SB204 and SB206; (iii) performing certain additional preclinical studies if such studies are deemed necessary by the Japanese regulatory authority, up to and not to exceed a total cost of $1.0 million; and (iv) participating in a joint committee that oversees, reviews and approves Sato’s development and commercialization activities under the Amended Sato Agreement. Additionally, we have granted Sato the option to use our trademarks in connection with the commercialization of licensed products in the licensed territory for no additional consideration, subject to our approval of such use.
The Amended Sato Agreement may be terminated by (i) Sato without cause upon 120 days’ advance written notice to us; (ii) either party in the event of the other party’s uncured material breach upon 60 days’ advance written notice; (iii) force majeure; (iv) either party in the event of the other party’s dissolution, liquidation, bankruptcy or insolvency; and (v) by us immediately upon written notice if Sato challenges the validity, patentability, or enforceability of any of our patents or patent applications licensed to Sato under the Amended Sato Agreement. In the event of a termination, no portion of the upfront fees received from Sato is refundable.
For additional information about the Amended Sato Agreement, please refer to Note 14—“License and Collaboration Revenues” to the accompanying consolidated financial statements included in this Annual Report.
Sato Rhofade Agreement
In December 2022, we entered into a license agreement with Sato in which Sato was granted an exclusive, royalty-bearing, non-transferable right and license under certain of our intellectual property rights to develop, manufacture and market Rhofade for the treatment of rosacea in Japan, or the Sato Rhofade Agreement. In addition, per the Sato Rhofade Agreement, during a specified time period, Sato has an exclusive option to negotiate the terms under which its license would be expanded to include certain other countries in the Asia-Pacific region.
In exchange for the license granted to Sato, Sato agreed to pay us the following: (i) an upfront payment of $5.0 million; and (ii) a milestone payment of $2.5 million upon receipt of marketing approval of Rhofade for rosacea in the Japan territory. Sato also agreed to pay tiered royalty payments on net sales of the licensed product ranging over time from a percentage of net sales in the mid-teens to a percentage of net sales in the low single digits.
In addition, we are required to pay 25% of the upfront and milestone payment amounts to a third party under existing contractual obligations related to Rhofade and will also be required to pay a portion of the royalty amounts received under the Sato Rhofade Agreement to third parties, after which we will retain net royalties in the low single digits. For additional information about the Sato Rhofade Agreement related payment to a third party, please see below.
The initial term of the Sato Rhofade Agreement expires on the fifteenth anniversary of the first marketing approval of the licensed product for rosacea in the Japan territory. The term of the Sato Rhofade Agreement automatically extends for a further period of two years, unless either party gives one year’s notice before the end of the initial term.
The Sato Rhofade Agreement may be terminated, among other reasons, (i) by Sato without cause upon 120 days’ advance written notice to us; (ii) by either party in the event of the other party’s uncured material breach upon 60 days’ advance written notice; and (iii) by us if Sato challenges the validity, patentability or enforceability of any of our patents licensed to Sato under the Sato Rhofade Agreement.
14


For additional information about the Sato Rhofade Agreement, please refer to Note 14—“License and Collaboration Revenues” to the accompanying consolidated financial statements included in this Annual Report.
Rhofade Agreements
In connection with the Rhofade Acquisition Agreement that is described in Note 9—“Commitments and Contingencies” to the accompanying consolidated financial statements included in this Annual Report, EPI Health acquired rights to that certain Assignment and License Agreement,

and through the Assignment and License Agreement, we license certain intellectual property from Aspect Pharmaceuticals, LLC, or Aspect, and such agreement, the Aspect Agreement. Under the terms of the Aspect Agreement, we, through EPI Health, have exclusive rights to, and are required to use commercially reasonable efforts to, commercialize the Rhofade product. We, through EPI Health, also have a duty to certain other parties to use commercially reasonable efforts to commercialize the Rhofade product based on historical acquisition agreements for Rhofade that were assumed by EPI Health.

The Aspect Agreement expires upon the last-to-expire of patent claims made under the assigned and licensed patents under the Aspect Agreement. Aspect may terminate the agreement upon a material breach by EPI Health after providing an opportunity to cure. Upon such termination by Aspect, EPI Health will cease all development and commercialization of Rhofade and EPI Health will assign and convey to Aspect its entire right, title and interest in and to the assigned intellectual property transferred under the Aspect Agreement.
Additionally, under the Aspect Agreement, the Rhofade Acquisition Agreement and the other historical acquisitions related to Rhofade, we are also required to pay a combined royalty on net sales of Rhofade and related products initially in the low double digits, which rate may increase based on the thresholds of net sales we achieve. We are also required to pay 25% of any upfront, license, milestone or other related payments received by EPI Health related to any sublicenses of Rhofade and related products.
In connection with two abbreviated new drug application, or ANDA, settlement agreements that EPI Health entered into in connection with Rhofade in 2021, EPI Health granted two ANDA filers a license to launch their own generic product for the treatment of erythema in rosacea. The actual timing of the launch of such generic products is uncertain because the launch dates of such products under the settlement agreements are subject to acceleration under certain circumstances. In the absence of any circumstances triggering acceleration, the earliest launch of such a generic product would be in the third quarter of 2026.
For additional information about the Rhofade Agreements, please refer to Note 12—“License and Collaboration Agreements” and Note 9—“Commitments and Contingencies” to the accompanying consolidated financial statements included in this Annual Report.
Minolira Agreements
In connection with the Minolira acquisition that is described in Note 9—“Commitments and Contingencies”, EPI Health assumed the royalty obligation related to an ANDA settlement in connection with Minolira. Accordingly, we, through EPI Health, are required to pay a royalty to an ANDA filer in the low double digits of any generic form of Minolira that is the pharmaceutical equivalent of the 105 mg or 135 mg strength Minolira product.
For additional information about the Minolira Agreements, please refer to Note 12—“License and Collaboration Agreements” and Note 9—“Commitments and Contingencies” to the accompanying consolidated financial statements included in this Annual Report
UNC Agreements
We acquired exclusive rights to our library of Nitricil compounds pursuant to license agreements with UNC entered into in July 2007 and October 2009, which were subsequently amended, restated and consolidated in June 2012. We amended the consolidated license agreement in November 2012 to expand the scope of licensed patents to cover additional nitric oxide technologies in consideration for an upfront cash payment. We may obtain similar amendments to the consolidated license agreement to expand the scope of licensed patents to cover future additional nitric oxide technologies or as improvements on licensed technology and, if such amendments were executed, we


may be required to pay additional upfront cash payments. In April 2016, November 2018 and November 2021, we amended the agreement to clarify the scope of the intellectual property of the consolidated license agreement and to make modifications to certain milestones under the consolidated license agreement.

Under the consolidated license agreement with UNC, we are granted an exclusive, worldwide license, with the ability to sublicense, under the licensed UNC patents, including those directed to Nitricil compounds, to develop and commercialize products utilizing the licensed technology. As partial consideration for the consolidated license agreement, we issued 191,05219,105 shares of our common stock to UNC and a nominal upfront cash payment. Additionally, under the consolidated license agreement, we are obligated to pay UNC a running royalty percentage in the low single digits on net sales of licensed products (by us or any of our sublicensees, such as Sato), and to pay up to $425,000 to UNC in regulatory and commercial milestones on a licensed product by licensed product basis.

Under the consolidated license agreement, UNC controls prosecution activities with respect to licensed patents owned solely by UNC, we control prosecution activities with respect to licensed patents jointly owned by us and UNC and we are obligated to reimburse UNC for reasonable prosecution and maintenance costs. Pursuant to the consolidated license agreement, we have the first
15


right to defend against third-party claims of patent infringement with respect to the licensed products and to enforce the licensed patents against third-party infringers.

Unless earlier terminated by us at our election, or if we materially breach the agreement or becomesbecome bankrupt, the consolidated license agreement remains in effect on a country by country and licensed product by licensed product basis until the expiration of the last to expire issued patent covering such licensed product in the applicable country, and upon such expiration, we receive a perpetual, unrestricted, fully-paid and royalty free right to develop and commercialize such licensed product in such country. As of December 31, 2017,2022, the last to expire issued patent licensed to us under the consolidated license agreement is projected to expire in 2033.2036. UNC may terminate the agreement or render the license granted thereunder non-exclusive for our material breach of the agreement that remains uncured after 90 days of receipt of written notice thereof from UNC and may also terminate the agreement or render the license granted thereunder non-exclusive upon providing written notice for our bankruptcy or insolvency-related events within 30 days of the occurrence of such events. We may terminate the agreement at any time for convenience upon providing written notice of not less than 30 days to UNC.

Other Research and Development Agreements
We have entered into various licensing agreements with universities and other research institutions under which we receive the rights, and in some cases substantially all of the rights, of the inventors, assignees or co-assignees to produce and market technology protected by certain patents and patent applications. In addition to the UNC License Agreement, which is our primary license agreement, the counterparties to our various other licensing agreements are the University of Akron Research Foundation, Hospital for Special Surgery, Strakan International S.a.r.l., which is a licensee of the University of Aberdeen, KIPAX AB and KNOW Bio.
We are required to make payments based upon achievement of certain milestones and will be required to make royalty payments based on a percentage of future sales of covered products or a percentage of sublicensing revenue. As future royalty payments are directly related to future revenues (either sales or sublicensing), future commitments cannot be determined. No accrual for future payments under these agreements has been recorded, as we cannot estimate if, when or in what amount payments may become due.
Separation Transaction and Licensing Arrangements with KNOW Bio, including Amendments

2015 Separation Transaction and Licensing Arrangements

In connection with the December 2015 separation of our non-dermatology assets to KNOW Bio, we granted to KNOW Bio, through two separate agreements, exclusive licenses, with the right to sublicense, to certain U.S.United States and foreign patents and patent applications controlled by us as of the execution date of the agreement, and, under one of the agreements, patents and patent applications which may becomebecame controlled by us during the three years immediately following the execution date of such agreement, directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics.
Under the exclusive license,licenses, the following rights were retained by Novan or conveyed to KNOW Bio hasBio:
Novan retained exclusive development and commercialization rights in all fields for any products containing certain specified particles, referred to as the rightNovan Particles, including those in our NVN1000 API and in other NCEs we are developing.
Novan retained exclusive rights to develop and commercialize products utilizing the licensed technology (excluding products containing certain particles, including NVN1000) in all fields of use except generally forthe Retained Dermatology Field, which is defined as the diagnosis, treatment, prevention, and palliation of diseases, conditions, or disorders of the skin, nails, hair or scalp in humans or animals, and all cosmetic uses for the skin, nails, hair or scalp, other than (i) for wound care through formulations of therapeutic product specifically designed to treat chronic wounds, thermal burns, radiation injury, accidental injury, surgical sites or scars, and (ii) therapeutic uses for treating cancer, excluding basal cell carcinoma, squamous cell carcinoma, precancerous conditions of the skin, actinic keratosis, actinic cheilitis, cutaneous horn, Bowen disease, radiation dermatosis, and dysplastic nevi, ornevi. The Retained Dermatology Field was amended in 2017 as described in the section entitled “2017 Amendments to KNOW Bio Licensing Arrangements” in this Annual Report.
KNOW Bio received exclusive rights to develop and commercialize products utilizing the licensed technology, excluding products containing the Novan Particles, in the KNOW Bio Field, which is defined as all fields of use except for the Retained Dermatology Field.

The KNOW Bio Field was amended in 2017 as described in the section entitled “2017 Amendments to KNOW Bio Licensing Arrangements” in this Annual Report.

Under one of these exclusive license agreements, KNOW Bio granted to us an exclusive license, with the right to sublicense, under any patents and patent applications which may becomebecame controlled by KNOW Bio during the three years immediately following the execution date of such agreement and directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics, but not towards medical devices, for use in the diagnosis, treatment, prevention, and palliation of diseases, conditions, or disorders of the skin, nails, hair or scalp in humans or animals, and all cosmetic uses for the skin, nails, hair or scalp, other than (i) for wound care through formulations of


therapeutic product specifically designed to treat chronic wounds, thermal burns, radiation injury, accidental injury, surgical sites or scars, and (ii) therapeutic uses for treating cancer, excluding basal cell carcinoma, squamous cell carcinoma, precancerous conditions of the skin, actinic keratosis, actinic cheilitis, cutaneous horn, Bowen disease, radiation dermatosis, and dysplastic nevi, or the Retained Dermatology Field, including but not limited to SB204, SB206, SB208, SB414 and our other presently-contemplated dermatology pipeline candidates. KNOW Bio granted us a right of first negotiation to obtain a license under any patents and patent applications generated

16


by KNOW Bio during the first three years following the execution date of the agreement and directed towards medical devices to develop and commercialize licensed products in the Retained Dermatology Field. Additionally, Novan and KNOW Bio also agreed that neither party willwould commercialize any products in the other’s field of use during the first three years following the execution date of the agreement. The three-year period in which new patents and patent applications controlled by us or by KNOW Bio are added to the exclusive licenses and the three-year term of the commercialization non-compete both expired on December 2015 through December29, 2018. Neither we nor, to our knowledge, KNOW Bio has commercialized or expects to commercialize a product in the other party’s field during this period.

Additionally, we granted to KNOW Bio exclusive sublicenses, with the ability to further sublicense, under certain of the U.S.United States and foreign patents and patent applications exclusively licensed to us from UNC and another third party directed towards nitric oxide-releasing compositions, including certain Nitricil compounds, to develop and commercialize products utilizing the licensed technology in the KNOW Bio Field. Under the exclusive sublicense to the UNC patents and applications, KNOW Bio is subject to the terms and conditions under the consolidated license agreement with UNC, including diligence obligations and milestone payment obligations.

Under the exclusive license agreements and sublicense agreements, we retain all rights under our owned and exclusively licensed patents and patent applications with respect to development and commercialization of products for use in the Retained Dermatology Field. The exclusive license agreements and sublicense agreements will continue for so long as there is a valid patent claim under the respective agreement, unless earlier terminated, and upon expiration continues as a perpetual non-exclusive license. Under each agreement, Novan and KNOW Bio have the right to terminate the agreement by subsequent written notice for the other party’s material breach which remains uncured within 30 days of receipt of notice thereof. Novan also has the right to terminate each such agreement immediately upon written notice if KNOW Bio, its affiliates or sublicensees challenge the validity of any patent licensed in such agreement. KNOW Bio has the right to terminate each such agreement, with notice, for any reason upon ninety days advance written notice to the Company. The licenses granted by KNOW Bio to the Company in the agreements survive termination of the agreements.

For additional information about the Separation Transaction, please see the “Note 4—Collaboration Arrangements” to the accompanying consolidated financial statements in Item 8 of this Annual Report on Form 10-K

2017 Amendments to KNOW Bio Licensing Arrangements

In October 2017, we entered into certain amendments, or the KNOW Bio Amendments, to the original license and sublicense agreements described above between us and KNOW Bio, or the Original KNOW Bio Agreements, described above.Agreements. Pursuant to the terms of the KNOW Bio Amendments, we re-acquired from KNOW Bio exclusive, worldwide rights under certain U.S.United States and foreign patents and patent applications controlled by us as of the execution date of the Original KNOW Bio Agreements, and patents and patent applications which may becomebecame controlled by us during the three years immediately following the execution date of the Original KNOW Bio Agreements, directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics, to develop and commercialize products for all diagnostic, therapeutic, prophylactic and palliative uses for any disease, condition or disorder caused by certain oncoviruses, or the Oncovirus Field. KNOW Bio also granted to us an exclusive license, with the right to sublicense, under any patents and patent applications which may becomebecame controlled by KNOW Bio during the three years immediately following the execution date of the Original KNOW Bio Agreements and directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics, but not towards medical devices, to develop and commercialize products for use in the Oncovirus Field. Additionally, KNOW Bio agreed that KNOW Bio willwould not commercialize any products in the Oncovirus Field during the first three years following the execution date of the Original KNOW Bio Agreements.

The three-year period in which new patents and patent applications controlled by KNOW Bio are added to the exclusive license and the three-year term of the commercialization non-compete both expired on December 29, 2018.

The rights granted to us in the Oncovirus Field in the KNOW Bio Amendments continue for so long as there is a valid patent claim under the Agreements, and upon expiration continue on a perpetual non-exclusive basis, and are


subject to the termination rights of KNOW Bio and us that are set forth in the Original KNOW Bio Agreements. In addition, under the KNOW Bio Amendments, KNOW Bio may terminate the rights granted to usthe Company in the Oncovirus Field if: (i) we do not file a first IND application withwithout terminating the FDA for a product in the Oncovirus Field by October 2020; or (ii) we do not file a first NDA with the FDA by October 2025 for a product in the Oncovirus Field and do not otherwise have any active clinical programs related to the Oncovirus Field at such time.

Additional terms, including our financial obligations, under the Original KNOW Bio Amendments are described in further detail in “Note 4—Collaboration Arrangements” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.

Sato License Agreement

On January 12, 2017, we entered into a license agreement, and related amendment, with Sato relating to SB204, for the treatment of acne vulgaris in Japan, or the Sato Agreement. Pursuant to the Agreement, we granted to Sato an exclusive, royalty-bearing, non-transferable license under certain of our intellectual property rights, with the right to sublicense with our prior written consent, to develop, use and sell products in Japan that incorporate SB204 in certain topical dosage forms for the treatment of acne vulgaris, and to make the finished form of such products. We will also supply finished product for use in development of SB204 in the licensed territory. The rights granted to Sato do not include the right to manufacture the active pharmaceutical ingredient, or API, of SB204; rather, the parties agreed to negotiate a commercial supply agreement pursuant to which we or a third party contract manufacturer would be the exclusive supplier to Sato of the API for the commercial manufacture of licensed products in the licensed territory. Pursuant to the terms of the Sato Agreement, Sato had an exclusive option to negotiate for the license rights in certain additional territories within Asia, subject to Sato’s payment of a specified option exercise fee. During the third quarter of 2017, Sato elected not to execute this option and, as a result, the option expired unexercised. Under the terms of the Sato Agreement, we also have exclusive rights to certain intellectual property that may be developed by Sato in the future, which we may choose to use for our own development and commercialization of SB204 outside of Japan.

The term of the Sato Agreement (and the period during which Sato must pay royalties under the Sato Agreement) expires, on a licensed product-by-licensed product basis, on the tenth anniversary of the first commercial sale of a licensed product in the licensed field in the licensed territory.

For additional information about the Sato Agreement, please see the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Corporate Updates” and “Note 4—Collaboration Arrangements” of the accompanying financial statements.

Agreements.

Government Regulation

The FDA and comparable regulatory authorities in state and local jurisdictions and in other countries impose substantial and burdensome requirements upon companies involved in the clinical development, manufacture, marketing and distribution of drugs, such as those we are currently commercializing and those we are developing. These agencies and other federal, state and local entities regulate, among other things, the research and development, testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion, distribution, post-approval monitoring and reporting, sampling and export and import of our products and product candidates.

U.S.

17


United States Government Regulation

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approve pending NDAs, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters, product recalls, product seizures, total or partial suspension of production


or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties.

The process required by the FDA before a drug may be marketed in the United States generally involves the following:

completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s Good Laboratory Practice, or GLP, regulations;

submission to the FDA of an IND which must become effective before human clinical trials may begin;

approval by an independent Institutional Review Board, or IRB, or ethics committee at each clinical site before each trial may be initiated;

performance of adequate and well-controlled human clinical trials in accordance with good clinical practice, or GCP, requirements to establish the safety and efficacy of the proposed drug product for each indication;

submission to the FDA of an NDA after completion of all pivotal clinical trials;

satisfactory completion of an FDA advisory committee review, if applicable;

satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current good manufacturing practice, or cGMP, requirements and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity;purity, and

of selected clinical investigation sites to assess compliance with GCPs; and

FDA review and approval of the NDA to permit marketing of the product for particular indications for uses in the United States.

Preclinical Studies

Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess potential safety and efficacy. AnPrior to beginning the first clinical trial with a product candidate in the United States, a sponsor must submit an IND to the FDA, which is a request for authorization from the FDA to administer an investigational drug product to humans. To support an IND to conduct clinical trials, a sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and any available clinical data or literature, among other things, to the FDA as part of an IND. Some preclinical testing may continue even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.

Clinical Trials

Clinical trials involve the administration of the IND to human patientssubjects under the supervision of qualified investigators in accordance with GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. While the IND submission. is active, progress reports summarizing the results of the clinical trials and non-clinical studies performed since the last progress report, among other information, must be submitted at least annually to the FDA, and written IND safety reports must be submitted to the FDA and investigators for serious and unexpected suspected adverse events, findings from other studies suggesting a significant risk to humans exposed to the drug, findings from animal or in vitro testing suggesting a significant risk to humans exposed to the drug, and any clinically important increased rate of a serious suspected adverse reaction compared to that listed in the protocol or investigator brochure.
In addition, an IRB at each institution participating in the clinical trial must review and approve the planprotocol for any clinical trial before it commences at that institution. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on their www.clinicaltrials.gov website.

HumanSome clinical trials are typically conducted in threeoverseen by an independent group of qualified experts organized by the sponsor, known as a data safety monitoring board or four sequential phases, whichcommittee. Depending on its charter, this group may overlap or be combined:

Phase 1 clinical trial:determine whether a trial may move forward at designated check points based on access to certain data from the trial. The drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness.


Phase 2 clinical trial: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.

Phase 3 clinical trials: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product and to provide adequate information for the labeling of the product.

Phase 4 clinical trials: In some cases, the FDA may require, or companies may voluntarily pursue, additional clinical trials after a product is approved to gain more information about the product. In some cases, these Phase 4 studies are made a condition of approval of the NDA.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA, and more frequently if serious adverse events occur. Each of Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Clinical trials may be delayed for a variety of reasons including unexpected safety or efficacy concerns, slow enrollment of subjects, unexpected shortages in the drug product, or other reasons. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

Special Protocol Assessment

In addition, information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health for public dissemination on its www.clinicaltrials.gov website.

18


Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:
Phase 1 clinical trial: The SPA processdrug is designedinitially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to facilitategain an early indication of its effectiveness.
Phase 2 clinical trial: The drug is administered to a limited patient population with the FDA’s reviewspecified disease or condition to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
Phase 3 clinical trials: The drug is administered to an expanded patient population with the specified disease or condition, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product and to provide adequate information for the labeling of the product.
Post-approval trials, sometimes referred to as Phase 4 studies, may be conducted after initial marketing approval. These trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate the performance of Phase 4 clinical trials as a condition of approval of drugs by allowingan NDA.
Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the FDA to evaluate,chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the proposed designmanufacturer must develop methods for testing the identity, strength, quality and size of Phase 3 clinical trials that are intended to form the primary basis for determining a drug’s efficacy. Upon specific request by a clinical trial sponsor, the FDA will evaluate the protocol and respond to a sponsor’s questions regarding, among other things, primary efficacy endpoints, trial conduct and data analysis. The FDA aims to complete SPA reviews within 45 days of receiptpurity of the request.

The FDA ultimately assesses whether the protocol designfinal drug. In addition, appropriate packaging must be selected and planned analysis of the trial are acceptabletested and stability studies must be conducted to support regulatory approval ofdemonstrate that the product candidate with respect to effectiveness of the indication studied. All agreements and disagreements between the FDA and the sponsor regarding an SPA must be clearly documented in an SPA letter or the minutes of a meeting between the sponsor and the FDA.

Even if the FDA agrees to the design, execution and analyses proposed in protocols reviewed under the SPA process, the FDA may revoke or alterdoes not undergo unacceptable deterioration over its agreement under the following circumstances:

public health concerns emerge that were unrecognized at the time of the protocol assessment, or the director of the review division determines that a substantial scientific issue essential to determining safety or efficacy has been identified after testing has begun;

shelf life.

a sponsor fails to follow a protocol that was agreed upon with the FDA; or

the relevant data, assumptions or information provided by the sponsor in a request for SPA change are found to be false statements or misstatements or are found to omit relevant facts.

A documented SPA may be modified, and such modification will be deemed binding on the FDA review division, except under the circumstances described above, if the FDA and the sponsor agree in writing to modify the protocol and if generally such modification is intended to improve the study.

Marketing Approval

Assuming successful completion of the required testing in accordance with all applicable regulatory requirements, the results of the preclinical studies and clinical trials, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the product for one or more indications for use. In most cases, the submission of an NDA is subject to a substantial application user fee. Under the Prescription Drug User Fee Act, or PDUFA,


guidelines that are currently in effect, the FDA has a goal of ten months from the date of “filing” of a standard NDA for a new molecular entity to review and act on the submission. This review typically takes twelve months from the date the NDA is submitted to FDA because the FDA has approximately two months to make a “filing” decision as to whether it will accept the application for filing. The actual review time may be significantly longer, depending on the complexity of the review, FDA requests for additional information and the sponsor’s submission of additional information.

In addition, under the Pediatric Research Equity Act of 2003, or PREA, as amended and reauthorized, certain NDAs or supplements to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements.

The FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, plan to ensure that the benefits of the drug outweigh its risks. The REMS plan could include medication guides, physician communication plans, assessment plans or elements to assure safe use, such as restricted distribution methods, patient registries or other risk minimization tools.

The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. Under the Prescription Drug User Fee Act VII, or PDUFA, guidelines that are currently in effect, the FDA has a goal of ten months from the date of “filing” of a standard NDA for a new molecular entity to review and act on the submission. This review typically takes twelve months from the date the NDA is submitted to the FDA because the FDA has approximately two months to make a “filing” decision as to whether it will accept the application for filing. The actual review time may be significantly longer, depending on the complexity of the review, FDA requests for additional information and the sponsor’s submission of additional information.
The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which it is manufactured, processed, packaged or held meets standards designed to assure the product’s continued safety, quality and purity. During its review, the FDA may raise additional issues or request additional data or information, during which time, the review period is generally suspended until such requests are received. This can delay, sometimes substantially, the FDA’s review and potential approval of an application.

The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA may inspect one or more clinical trial sites to assure compliance with GCP requirements.

19


After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.

Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug’s safety after approval, or require testing and surveillance programs to monitor the product after commercialization, or imposecommercialization. The FDA may also place other conditions on approval, including


the requirement for a risk evaluation and mitigation strategy, or REMS, to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS. The FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans or elements to assure safe use, such as restricted distribution methods, patient registries and use restrictions or other risk management mechanisms under a REMS, which can materially affect the potential market and profitability of the product. minimization tools.

The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs or if unexpected safety or efficacy concerns arise. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval. In addition, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could impact the timeline for regulatory approval or otherwise impact ongoing development programs. For example, in December 2016, the 21st Century Cures Act was signed into law. The Act is intended, among other things, to modernize the regulation of drugs and biologics and to encourage innovation.

Special FDA Expedited Review and Approval Programs

The FDA has various programs, including fast track designation, accelerated approval, priority review and breakthrough therapy designation, which are intended to expedite or simplify the process for theoffers a number of expedited development and FDA review of drugs that are intendedprograms for the treatment of serious or life-threatening diseases or conditions and demonstrate the potential to address unmet medical needs. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDA review procedures.

qualifying product candidates. To be eligible for a fast track designation, the FDA must determine, based on the request of a sponsor, that a product is intended to treat a serious or life-threatening disease or condition and demonstrates the potential to address an unmet medical need.need for such disease or condition. Fast Track designation applies to the combination of the product candidate and the specific indication for which it is being studied. The sponsor of a Fast Track designated product candidate has opportunities for more frequent interactions with the applicable FDA will determine that areview team during product will fill an unmet medical need if it will provide a therapy where none exists or provide a therapy that may be potentially superior to existing therapy based on efficacy or safety factors. Thedevelopment. In addition, the FDA may review sections of the NDA for a fast track designated product candidate on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA.

A product candidate intended to treat a serious or life-threatening disease or condition may also be eligible for breakthrough therapy designation to expedite its development and review. A product candidate can receive breakthrough therapy designation if preliminary clinical evidence indicates that the product candidate, alone or in combination with one or more other drugs or biologics, may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The designation includes all of the fast track program features, as well as more intensive FDA interaction and guidance beginning as early as Phase 1, and an organizational commitment to expedite the development and review of the product candidate, including involvement of senior managers.
Any marketing application for a drug submitted to the FDA for approval, including a product candidate with a fast track designation or breakthrough therapy designation, may give aalso be eligible for other types of FDA programs intended to expedite development and review, such as priority review designationand accelerated approval. An NDA is eligible for priority review if the product candidate is designed to drugs that offer major advances in treatmenttreat a serious or life-threatening disease or condition, and, if approved, would provide a treatment where no adequate therapy exists.significant improvement in safety or effectiveness compared to available alternatives for such disease or condition. A priority review means that the goal for the FDA to review an application is six months, rather than the standard review of ten months under current PDUFA guidelines. Under the new PDUFA agreement, these six and ten-month review periods are measured from the “filing” date rather than the receipt date for NDAs for new molecular entities, which typically adds approximately two months to the timeline for review and decision from the date of submission and may be suspended if the FDA requests additional information. Many products that are eligible for fast track designation are also likely to be considered appropriate to receive a priority review.

submission.

In addition, product candidates studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may be eligible for accelerated approval and may be approved on the basis of adequate and well-controlled clinical trials establishingupon a determination that the drug product candidate has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may requiregenerally requires a sponsor of a drug receiving accelerated approval to perform post-marketingconfirmatory studies to verify and describe the predicted effect on irreversible morbidity or mortality or other clinical endpoint, and the drug may
20


be subject to accelerated withdrawal procedures.

Moreover, underprocedures if the provisionssponsor fails to conduct the required confirmatory studies in a timely manner or if such studies fail to verify the predicted clinical benefit. In addition, the FDA currently requires, as a condition for accelerated approval, pre-approval of promotional materials, which could adversely impact the timing of the Food and Drug Administration Safety and Innovation Act, or FDASIA, passed in July 2012, a sponsor can requestcommercial launch of the product.

Fast track designation, of a product candidate as a “breakthrough therapy.” A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Drugs designated as breakthrough therapies are also eligible for accelerated approval. The FDA must take certain actions, such as holding timely meetings and


providing advice, intended to expedite the development and review of an application for approval of a breakthrough therapy.

Fast track designation, priority review, and breakthrough therapy designationaccelerated approval do not change the standards for approval butand approval is not guaranteed. Such designation may, however, expedite the development or approval process. Even if a product candidate qualifies for one or more of these programs, the FDA may later decide that the product candidate no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened. We may explore some of these opportunities for our product candidates as appropriate.

Post-Approval Requirements

Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences associated with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also are continuing, annual userprogram fee requirements for any marketed products.

The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.

The FDA may also limit the indications for use or may impose labeling or other requirements on the product.

In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP requirements and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance.

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:

restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;

fines, warning letters or holds on post-approval clinical trials;

refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product approvals;

product seizure or detention, or refusal to permit the import or export of products; or

injunctions or the imposition of civil or criminal penalties.

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability. Failure to comply with these requirements can result in, among other things, adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties.


Other Health Care Laws

In addition to FDA restrictions on marketing of pharmaceutical products, other United States federal and state healthcare regulatory laws restrict business practices in the pharmaceutical industry, which include, but are not limited to, state and federal anti-kickback, false claims, and transparency laws with respect to drug pricing and payments and other transfers of value made to physicians and other healthcare providers.
The federal Anti-Kickback Statute prohibits, among other things, any person or entity from knowingly and willfully offering, paying, soliciting, receiving or providing any remuneration, directly or indirectly, overtly or covertly, to induce or in return for purchasing, leasing, ordering, or arranging for or recommending the purchase, lease, or order of any item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly
21


interpreted to include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
The federal False Claims Act prohibits any person or entity from, among other things, knowingly presenting, or causing to be presented, a false, fictitious or fraudulent claim for payment to, or approval by, the federal government or knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government, or from knowingly making a false statement to avoid, decrease or conceal an obligation. A claim includes “any request or demand” for money or property presented to the United States government. Violation of the federal Anti-Kickback Statute may also constitute a false or fraudulent claim for purposes of the federal civil False Claims Act. Actions under the civil False Claims Act may be brought by the Attorney General or as a “qui tam” action by a private individual in the name of the government. Violations of the civil False Claims Act can result in very significant monetary penalties and treble damages. In addition, the civil monetary penalties statute imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent. Many states also have similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Given the significant size of actual and potential settlements, it is expected that the government authorities will continue to devote substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws.
The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, prohibits, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians and certain other healthcare providers. Under the federal Physician Payments Sunshine Act, certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions, are required to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to payments and “transfers of value” provided to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain non-physician practitioners such as physician assistants and nurse practitioners, and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. In addition, certain states require implementation of compliance programs and compliance with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, impose restrictions on marketing practices, and/or tracking and reporting of pricing information and marketing expenditure as well as gifts, compensation and other remuneration or items of value provided to physicians and other healthcare professionals and entities.
Violation of any of such laws or any other governmental regulations that may apply to us can result in penalties, including, without limitation, administrative, civil and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs and individual imprisonment.
Coverage and Reimbursement

Sales of our currently marketed products (and any other product candidates, if approved, willapproved) by us or our commercial partners depend, in part, on the extent to which such products will beare covered by third-party payors, such as government healthcare programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly limiting coverage or reducing reimbursements for medical products and services. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Sales of our currently marketed products (and any other products for which we receive regulatory approval for commercial sale) therefore depend, in part, on the availability of coverage and adequate reimbursement from third-party payors. Third-party payors include government authorities, managed care plans, private health insurers and other organizations.
The process for determining whether a third-party payor will provide coverage for a drug typically is separate from the process for setting the price of such product or for establishing the reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors may limit coverage to specific products on an approved list, also known as a formulary, which might not include all of the FDA-approved products for a particular indication. A decision by a third-party payor not to cover our products or product candidates could reduce a physician’s willingness to prescribe our products once approved and have a material adverse effect on our sales, results of operations and financial condition. Moreover, a third-party payor’s decision to provide coverage for a
22


drug does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Additionally, coverage and reimbursement for products can differ significantly from payor to payor. One third-party payor’s decision to cover a particular medical product or service does not ensure that other payors will also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement rate.
In addition, the U.S.United States government, state legislatures and foreign governments have continued implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. DecreasesThird-party payors are increasingly challenging the prices charged for medical products and services, examining the medical necessity and reviewing the cost-effectiveness of drugs, in addition to questioning safety and efficacy. If these third-party reimbursement forpayors do not consider our product candidates or a decision by a third-party payorproducts to be cost-effective compared to other available therapies, they may not cover our products after FDA approval or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit.
Healthcare Reform
A primary trend in the United States healthcare industry and elsewhere is cost containment. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medical products. For example, the Affordable Care Act, or ACA, among other things, increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program; introduced a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected; extended the Medicaid Drug Rebate Program to utilization of prescriptions of individuals enrolled in Medicaid managed care plans; subjected drug manufacturers to new annual fees based on pharmaceutical companies’ share of sales to federal healthcare programs; and created a new Patient Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.
Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the ACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA without specifically ruling on the constitutionality of the ACA. Prior to the Supreme Court’s decision, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through August 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA.
In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. This included aggregate reductions of Medicare payments to providers, which went into effect on April 1, 2013 and, due to subsequent legislative amendments, will stay in effect through 2032, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022, unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals and imaging centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. In addition, on March 11, 2021, the American Rescue Plan Act of 2021 was signed into law, which eliminates the statutory Medicaid drug rebate cap, currently set at 100% of a drug’s average manufacturer price, beginning January 1, 2024.
Recently there has also been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted legislation designed to, among other things, bring more transparency to product candidatespricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies. On August 16, 2022, the Inflation Reduction Act of 2022, or IRA, was enacted into law. Among other things, the IRA requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (first due in 2023), and replaces the Part D coverage gap discount program with a new discounting program (beginning in 2025). The IRA permits the Secretary of the Department of Health and Human Services to implement many of these provisions through guidance, as opposed to regulation, for the initial years. For that and other reasons, it is currently unclear how the IRA will be effectuated.
Individual states in the United States have also become increasingly active in implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine which drugs and suppliers will be included in their healthcare programs Furthermore, there has been
23


increased interest by third party payors and governmental authorities in reference pricing systems and publication of discounts and list prices.
We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could reduce physician usage oflimit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our product candidates.
Data Privacy and have a material adverse effectSecurity
Pharmaceutical companies may be subject to United States federal and state and foreign data privacy, security and data breach notification laws governing the collection, use, disclosure and protection of health-related and other personal information. In the United States, numerous federal and state laws and regulations, including data breach notification laws, health information privacy and security laws and consumer protection laws and regulations govern the collection, use, disclosure, and protection of health-related and other personal information. In addition, certain foreign laws govern the privacy and security of personal data, including health-related data. Privacy and security laws, regulations, and other obligations are constantly evolving, may conflict with each other to complicate compliance efforts, and can result in investigations, proceedings, or actions that lead to significant civil and/or criminal penalties and restrictions on data processing.
Supply Chain
We continue to assess the impact of COVID-19 and related constraints on the global workforce on our sales, resultssupply chain and related vendors and global supply chain constraints across various industries, including interruption of, operationsor delays in receiving, supplies of raw materials, API, drug product or finished goods from third-party manufacturers due to staffing shortages, production slowdowns or stoppages and financial condition.

Manufacturingdisruptions in delivery systems and Supplies

potential price increases. We currently manufacture all drug substance, including NVN1000 (the API for allare also continuing to evaluate the impacts of COVID-19 and global supply chain constraints on our new facility. We have completed the commissioning of our clinical stage product candidates), at ournew facility in Morrisville, North Carolina. We believe that ourto support various research and development and cGMP activities, including small-scale manufacturing capabilities represent a core competency for our Nitricil technology. In 2017, we also beganAPI and drug product. We are in the process of, and proceeding with the related preparatory activities associated with, qualifying and validating the manufacturing all drug product materials at our Morrisville, North Carolina facility,equipment for use in our non-clinical studies and clinical trials.

We manufacture our investigational materials in accordance with cGMP required by the FDA, International Committee on Harmonization and other regulatory bodies. Our facilities have been audited for cGMP and Good Laboratory Practice, or GLP, compliance. In addition, our drug substance manufacturing processes and operating conditions have been evaluated and tested by qualified vendors to ensure a safe operating environment. These tests include raw materials and product handling, process chemistry, air quality and waste disposal and containment.

We are evaluating the potential transfer of API and drug product manufacturing to one or more third party contract manufacturing organizations, or CMOs, which would allow such CMOs to serve as secondary or possibly primary suppliers for our drug substances as well as clinical trial materials. Clinical trial materials manufacturing would include compounding and primary packaging necessary for finished drug product. These CMOs would also likely supply drug substance and drug product materials to support commercialization of any of our other product candidates, subject to FDA approval. In such cases, they may be the primary suppliers for these product candidates.

production.

We currently rely on third-party suppliers to provide the raw materials that are used by us orand our third-party manufacturers in the manufacture of our drugs.product candidates and commercial products. There are a limited number of suppliers for raw materials, including nitric oxide, that we use to manufacture our drugs.

Single Business Segment

product candidates and commercial products. We also rely on third-party logistics vendors to transport our raw materials, API, and drug products through our supply chain. Certain materials, including our API, have designated hazard classifications that limit available transportation modes or quantities. Third-party logistics vendors may choose to delay or defer transportation of materials from time to time, especially in light of global supply chain constraints, which could adversely impact the timing or cost of our manufacturing supply chain activities or other associated development activities.

Manufacturing and Supplies
We have adopted a strategy of engaging with, utilizing and relying on third parties through partnerships, collaborations, licensing or other strategic relationships for the performance of activities, processes and services that (i) do not typically result in the generation of significant new intellectual property and (ii) can leverage their existing robust infrastructure, systems and facilities, as well as associated subject matter expertise. A parallel and inter-related strategic objective has been to manage our operationsown internal resources, including our manufacturing capabilities.
Manufacturing and allocate resourcesSupply of Commercial Products
We currently rely upon contract manufacturers to produce our commercial product portfolio and expect to continue to rely upon these contract manufacturers for any current and future EPI Health legacy product production. As with any supply agreement with contract manufacturers, obtaining finished goods of appropriate quality cannot be guaranteed. Our third-party manufacturers have other customers, depend on other third party suppliers for materials and may have other priorities that could affect their ability to perform their supply obligations to us satisfactorily and on a timely basis. Any of these occurrences would be beyond our control. For example, due to a manufacturing delay with one supplier, we expect that the Rhofade commercial product may be on back order in mid-March 2023 until at least early April 2023. We believe that this temporary “stock out” of Rhofade may impact the overall prescription volume for Rhofade, but we expect that there will be a temporary increase in prescription volume when the product is back in stock. We expect to similarly rely on contract manufacturing relationships for any products that we may acquire in the future.
Preparatory Work for Product Candidates in Development
For our product candidates that are currently in development, which generally use the drug substance berdazimer sodium as one reporting segment. For additional information, please referthe API, we have adopted a dual approach of working with third parties and developing certain focused internal manufacturing capabilities. With third parties, we are conducting manufacturing process feasibility studies with a full-scale API manufacturer that, if successfully completed, could lead to the notesfull-scale production of our API, while also establishing a strategic alliance with Orion
24


Corporation, or Orion, a Finnish full-scale pharmaceutical company with broad experience in drug manufacturing, to enable technology transfer and manufacturing of clinical trial materials for future clinical trials with our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Researchtopical product candidates, and Development Expenses

Our research and development expenses were $25.2 million, $46.5 million and $16.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. Our research and development expenses for 2017, 2016 and 2015 consisted primarily of costs associated with the preclinical and clinical developmentif any of our product candidates including costsare approved, commercial supply of our nitric oxide-based drug products. Importantly, the Orion alliance is being structured to support major global markets in which we and our partners may pursue regulatory approvals for our product candidates. Within these arrangements with third parties, however, there are risks associated with these manufacturers that are similar to the manufacturing arrangements for our commercial products described above. Moreover, given the stage of these relationships, there are risks associated with the complexity, time and expense of technical transfer.

Internally, we have also worked to complete commissioning of our new facility to support various research and development and cGMP activities, including small-scale manufacturing capabilities for API and drug product. While we have more control over our internal manufacturing capabilities as compared to our relationships with third parties, we do face risks associated with operating a manufacturing facility, including supply chain matters, which have impacted and may further impact the validation of our new facility, and the inherent limitations that come from our internal capabilities being limited to small-scale manufacturing capabilities.
As we move forward with these initiatives, we will need significant additional funding to continue our operating activities, including these technical transfer projects, potential utilization and development of internal capabilities and cost structure changes, and to make further advancements in our product development and manufacturing capabilities. Seeprograms, as described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations—Liquidity and Capital Resources.”
Business Segments
We manage our operations and allocate resources in this Annual Report on Form 10-Ktwo reporting segments, which represent (i) the promotion of commercial products for more information regarding ourthe treatment of medical dermatological conditions, or the Commercial Operations segment, and (ii) research and development expenses.

activities related to the Company’s nitric oxide-based technology to develop product candidates, or the Research and Development Operations segment.

We disclose information about our reportable segments based on the way that we organize segments within the Company for making operating decisions and assessing financial performance. See Note 20—“Segment Information” to the accompanying consolidated financial statements for certain financial information related to our reportable segments.
Human Capital
Employees

As of December 31, 2017,2022, we had 59a total of 89 full-time employees, including 35in addition to 1 part-time employee.
Of the 89 full-time employees as of December 31, 2022, 44 were our dermatology sales specialists, 9 were dedicated to our Nitricil technology and formulation science research and development, and7 were dedicated to our manufacturing capability 10and product operations, 8 were in clinical, operations, non-clinical development,medical, quality and regulatory operations, 7 were in commercial operations, marketing and market access, and 14 were in general and administrative functions. functions including executives, human resources, finance and information technology. Our 1 part-time employee as of December 31, 2022 was in our technology and formulation science research and development function.
We also utilize consultants and contractors from time


to time to support our operating activities and our employees. None

Recruiting and retaining qualified personnel and key talent is critical to our success. Our business results depend in part on our ability to successfully manage our human capital resources. Factors that may affect our ability to attract and retain qualified employees include employee morale, competition from other employers and availability of qualified individuals. We recruit for talent in the biotechnology and pharmaceutical industry, which periodically experiences higher turnover rates than other industries. For example, in 2022, we experienced turnover, including within our commercial sales specialists. This turnover was mitigated by a robust recruiting effort, including extensive efforts to source and interview a talented and diverse pipeline of candidates.
Compensation and Benefits
We strive to provide robust compensation and benefits to our employees, while balancing the operational needs of the Company. In addition to salaries, compensation and benefit programs include annual bonuses, stock-based compensation awards, a 401(k) plan with employee matching opportunities, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off and other employee assistance programs. Our ability to attract and retain key personnel who are necessary to the operation of the business and the development of our employeesproduct candidates is subjectcritical to a collective bargaining agreement or represented by a labor or trade union. We believe that our relations with our employees are good.

success.

Other Information

We were incorporated under the laws of the State of Delaware in 2006. Our principal executive offices are located at 4105 Hopson Road Morrisville,4020 Stirrup Creek Drive, Suite 110, Durham, NC 27560,27703, and our telephone number is 919-485-8080.

We maintain an internet website at www.novan.com and make available free of charge through our website our Annual Report, on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to
25


Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We make these reports available through our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission, or the SEC. Additionally, the SEC maintains an internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The information contained on, or that can be accessible through, our website is not incorporated by reference into, and should not be considered to be a part of, this Annual Report on Form 10-K.

Report.
26


Item 1A. Risk Factors.

Our operations and financial results are subject to a high degree of risk. These risks include, but are not limited to, those described below, each of which may have a material and adverse effect on our business, results of operations, cash flows, financial condition and the trading price of our common stock. You should carefully consider the risks described below, together with all of the other information included in this Annual Report on Form 10-K.Report. The realization of any of these risks could have a significant adverse effect on our reputation, business, including our financial condition, results of operations and growth, which we refer to collectively in this section as our business, and ability to accomplish our strategic objectives. In that event, the trading price of our common stock could decline, and you may lose part or all of your investment.

Risks Related to Our Current Financial Position and Need for Additional Capital
We have incurred net losses since our inception and anticipate that we will continue to incur net losses for the Development, Regulatory Approval and Commercialization of our Current and Future Product Candidates

foreseeable future. We will need substantialsignificant additional funding.funding to continue our business operations and for the advancement of our product development programs. If we are unable to raise capital when needed, we would be forced to delay, reduce, terminate or eliminate our product development programs or ourthe commercialization efforts.

We expect to continue to incur substantial expenses in connection with our ongoing activities, including conducting clinical trials of our clinical-stage product candidates, and conducting activities necessary to pursue regulatory approvalefforts for our products and/or delay, defer, or reduce our cash expenditures, or we may need to dissolve and liquidate our assets or seek protection under bankruptcy laws.

We are a commercial-stage medical dermatology company with a limited operating history. Investment in pharmaceutical and biotechnology product candidates in the future. In addition, if wedevelopment is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate efficacy or an acceptable safety profile, obtain regulatory approval or become commercially viable. We have a history of anylosses and have not generated sufficient revenue to result in a profit from product sales. We have incurred losses in each period since inception, and may never achieve or maintain sustained profitability. For the years ended December 31, 2022, and December 31, 2021, we reported a net loss of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing$31.3 million and distribution. Furthermore, we expect to continue to incur substantial costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. Adequate funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, terminate or eliminate our product development programs, or our commercialization efforts.

$29.7 million, respectively. As of December 31, 2017, we had cash2022, and cash equivalents of $2.5 million and negative working capital of $(4.7) million. We believe that our existing cash and cash equivalents, together with the net proceeds of our public offering in January 2018, will be sufficient to meet our anticipated cash requirements into the second quarter of 2019 and will allow us to execute our ongoing and planned near-term development activities, as described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” of this Annual Report on Form 10-K. Although we successfully raised approximately $35.2 million in net proceeds from our January 2018 Public Offering, we anticipate that we will need substantial additional funding to continue our operating activities and make further advancements in each of our drug development programs, as described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” of this Annual Report on Form 10-K. Further advancement of our development programs is dependent upon our ability to access additional capital through non-dilutive sources, including partnerships, collaborations, licensing, grants or other strategic relationships or through the issuance of debt or equity securities. There can be no assurance that we will be able to obtain additional capital on terms acceptable to us, on a timely basis or at all. A


failure to obtain sufficient funds on acceptable terms when needed could cause us to alter or reduce our planned operating activities, including but not limited to delaying planned product candidate development activities, to conserve our cash and cash equivalents. Such actions could delay development timelines and have a material adverse effect on our results of operations, financial condition and market valuation. As of December 31, 2017,2021, we had an accumulated deficit of $160.2$310.3 million, and $279.0 million, respectively, and there is substantial doubt about our ability to continue as a going concern if we do not secure adequate additional financing.

Our future capital requirements will depend on many factors, including:

the initiation, progress, timing and costs of our non-clinical development, clinical trials and our analysis of the results of such trials for our clinical-stage product candidates;

concern.

the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other pre-clinical or future product candidates;

the extent to which we exercise any developmental or commercialization rights we may have under any arrangementsEven with collaborators or partners;

costs, timing and outcome of regulatory review of our product candidates;

costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive regulatory approval;

costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

the extent to which we acquire or invest in other businesses, products and technologies;

our ability to obtain government or other third-party funding for the development of our product candidates;

the costs associated with our securities litigation, and the outcome of that litigation;

the occurrence and timing of potential development and regulatory milestones achieved by Sato, our licensee for SB204 in certain topical dosage forms in Japan;

our ability to establish additional partnering and collaborations on favorable terms, if at all; and

revenue, if any, received from commercial sales of our product candidates, should any of our product candidates be approved by the FDA or a similar regulatory authority outside the United States.

Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues if any, will be derived from sales of our marketed products, that we do not expect to be commercially availablecontinue to incur significant losses for several years,the foreseeable future as we continue to spend substantial amounts on research and development, manufacturing and to commercialize our products and product candidates, if at all.approved. We may also encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Although we recognize revenue from product sales and we continue to earn amounts under our license and collaboration agreements, our revenue and profit potential is unproven and our future operating results are difficult to predict. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Additional financing may not be available to us on acceptable terms, or at all. In addition,Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

If we are forced to terminate or eliminate our product development programs or pursue other strategic alternatives or corporate transactions, there can be no assurance that such actions would result in any additional stockholder value. If we are forced to wind down our operations, liquidate or seek bankruptcy protection, it is unclear to what extent we would be able to pay our obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to our stockholders, whereby, our stockholders may lose some or all of their investment.
Raising additional capital may cause significant dilution to our existing stockholders, reduce the trading price of our common stock, restrict our operations or require us to relinquish rights to our technologies, products or product candidates.
Until such time as we can generate substantial product revenues, if ever, our ability to continue to operate our business, including our ability to advance our development programs, is dependent upon our ability to access additional capital through other sources, including partnerships, collaborations, licensing, grants or other strategic relationships, and/or through the issuance of debt or equity securities. Any issuance of equity or debt that could be convertible into equity would result in significant dilution to our existing stockholders. Debt financing, if available, involves and may involve agreements that include covenants requiring that we place liens on some or all of our assets or limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, effecting a change in control or declaring dividends. There can be no assurance that we will be able to obtain additional capital on terms acceptable to us, on a timely basis or at all. We currently do not have any committed sources of financing other than our accounts receivable factoring agreement, which requires us to meet certain conditions to utilize and there can be no assurance that we will meet those conditions.
Additionally, we have outstanding and exercisable warrants and options that if exercised may result in dilution to the interests of other stockholders and may reduce the trading price of our common stock. As of December 31, 2022, we had warrants to purchase approximately 105.5 million shares of common stock outstanding and exercisable with a weighted average exercise price of $2.86 per share. In addition, we had outstanding and exercisable options to purchase approximately 0.4 million shares of common stock as of December 31, 2022 with a weighted average exercise price of $18.70 per share.
27


We have entered into and rely on, and may enter into, engage in and rely on other, strategic relationships and transactions for the further development and commercialization of our products and product candidates and the expansion of our business, and if we are unable to enter into such relationships or transactions on favorable terms or at all, or if such are unsuccessful or if disputes arise between us and our strategic partners, we may be unable to realize the potential economic benefit of those products and product candidates.
We have entered into and rely on, and may enter into, engage in and rely on other, strategic relationships and transactions for the further development and commercialization of our products and product candidates and the expansion of our business, including out-licenses for commercialization of certain of our products and product candidates. In certain potential scenarios, the counterparty(ies) to such a strategic transaction have assumed and may assume responsibility for the planning, execution, or oversight of the clinical development and regulatory requirements for the associated products or product candidates and/or the commercialization of the products or product candidates. If we decide to engage in such a transaction and, as a result, no longer have significant involvement or responsibility for late-stage clinical development activities or commercialization, we would adjust our business strategy, operating plans, resources and capabilities accordingly. Alternatively, we may pursue a transaction in which the counterparty agrees to finance the continued development of one or more products or product candidates in exchange for future milestone or royalty payments.
However, there can be no assurance that we will be able to establish or enter into such arrangements on favorable terms, if at all, or that our current or future arrangements will be successful. If we are unable to establish successful agreements with suitable partners, we would face significant incremental costs, we may be required to limit the scope and number of our products and product candidates we can commercially develop or the territories in which we commercialize them or we might fail to commercialize products or programs for which a suitable collaborator or arrangement cannot be found.
Any strategic relationship or transaction may entail numerous risks, including taking on indebtedness or contingent liabilities; the issuance of equity securities which would result in dilution to our stockholders; assimilation of acquired operations, intellectual property, products and product candidates, including difficulties associated with integrating new personnel; risks and uncertainties associated with the other party to such a transaction, and our inability to generate revenue from acquired intellectual property, technology, products or operations sufficient to meet our objectives or even to offset the associated transaction and maintenance costs. Additionally, our current and future collaboration partners may not dedicate sufficient resources to the development and commercialization of our products and product candidates or may otherwise fail in their development and commercialization due to factors beyond our control. If we breach or fail to comply with any provision of a strategic arrangement, a collaborator may have the right to terminate, in whole or in part, such agreement or to seek damages. Some of our strategic arrangements are complex and involve sharing of certain data, know-how and intellectual property rights amongst the parties. Additionally, collaborators may not accept the transfer of critical methods and processes in order for development and commercialization work for our products and product candidates to take place. Our strategic partners could interpret certain provisions differently than we do, which could lead to unexpected or inadvertent disputes with such partners. Any one of our strategic partners could breach obligations, covenants or restrictions in our agreements, leading us into disputes and potential breaches of our agreements with other parties, which could have direct or indirect financial implications. If a strategic relationship terminates or is otherwise unsuccessful, we may need to identify and establish an alternative arrangement. This may not be possible, or we may not be able to do so on terms which are acceptable to us, in which case, it may be necessary for us to cease the development of the applicable product candidate, or conduct the remaining clinical development or commercialization of any product candidate on our own and with our own funds.
Our process of considering financial and strategic alternatives could adversely affect our business, financial condition, and results of operations.
We from time to time consider various financial and strategic alternatives to deliver value to our stockholders. Such alternatives might include, among other things, strategic acquisitions or in-licenses, out-licensing some or all of our products or product candidates, the sale of some or all of our assets, or a sale of our company, but there can be no assurance that we will be able to enter into such a transaction or transactions on a timely basis or at all or on terms that are favorable to us. We may pursue such alternatives at the same time as we seek to secure additional funding. This process could disrupt and create uncertainty concerning our business, regardless of whether we are able to obtain additional funding or complete any strategic alternatives, and poses other risks to our business, including:
potential uncertainty in the marketplace concerning our ongoing viability as a business
the possibility of disruption to our business and operations, including diversion of significant management time and resources towards the pursuit of funding and strategic alternatives
impairment of our ability to attract and retain key personnel who are necessary to the operation of the business and the development of its product candidates
28


restrictions on our business operations and ability to explore other strategic alternatives under any definitive agreement we may enter into as a result of this process; and
potential future stockholder litigation relating to the strategic process that could prevent or delay the strategic process, and the related costs of such litigation.
If any of the foregoing risks were realized, our business, financial condition, and results of operations could be adversely affected.
Amounts under our factoring arrangement are subject to terms that may adversely affect our operations and financial condition.
Our wholly owned subsidiary, EPI Health, entered into a factoring agreement in December 2022. The factoring agreement provides for an up to $15.0 million credit facility which we may draw upon to the extent we have qualifying accounts receivable as defined in the agreement. The lender has the right to demand repayment of advances under the facility if the accounts receivable purchased by the lender remain unpaid after the payment period or if such accounts receivable are disputed, and amounts owed under the agreement are secured by the assets of EPI Health. Novan is not a party to the agreement, but in connection with EPI Health entering into the agreement, Novan guaranteed payment and performance of all obligations of EPI Health to the lender under the agreement pursuant to the terms of a continuing guaranty agreement. If the lender demands repayment and EPI Health fails to make such repayment, or if EPI Health causes or permits any other event of default as defined in the agreement, or fails to comply with covenants set forth in the agreement (including restrictions on incurring other debt under unsecured loans), EPI Health would be subject to additional expenses (and Novan would be responsible if such payments were not made by EPI Health) or possible foreclosure on EPI Health’s assets that secure the obligations under the agreement. Such results could have a material adverse effect on our operations and financial condition.
Thereport of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2022, contains an explanatory paragraph regarding going concern, and we will need additional financing to execute our business plan, to fund our operations and to continue as a going concern.
Since inception, we have experienced recurring operating losses and negative cash flows and we expect to continue to generate operating losses and consume significant cash resources in the foreseeable future. These conditions raise substantial doubt about our ability to continue as a going concern without additional financing. As a result, our independent registered public accounting firm included explanatory paragraphs in its report on our 2022 consolidated financial statements, with respect to this uncertainty. Substantial doubt about our ability to continue as a going concern may materially and adversely affect the price per share of our common stock. stock and we may have a more difficult time obtaining financing.
Integrating the EPI Health and legacy Novan businesses is a continuing process that involves risks associated with acquisitions and integrating acquired businesses. Failure to do so effectively may have an adverse effect.
Since our acquisition of EPI Health in March 2022, we have been working to integrate the EPI Health businesses, operations, processes, and systems with our own. Achieving the anticipated benefits of the EPI Health Acquisition depends in significant part upon our ability to integrate the businesses, operations, processes, and systems in an efficient and effective manner. This effort has required the dedication of significant management and external resources and significant expenditures that we expect will continue as we work to complete our integration efforts. Any inability of management to successfully integrate the companies could have a material adverse effect on the business and results of operations of the combined company.
Risks Related to the Development and Regulatory Approval of our Current and Future Product Candidates
We may findexpend our limited resources to pursue one or more product candidates or indications within our product development strategy, which has and may continue to change over time, and thus fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we intend to focus the work within our Research & Development segment on developing product candidates for specific indications that we identify as most likely to succeed, in terms of their potential both to gain regulatory approval and to achieve commercialization. As a result, we may forego or delay the pursuit of opportunities with other product candidates or in other indications with greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable product candidates. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more difficultadvantageous for us to raise additional equity capital if it should be neededretain sole development and commercialization rights to the product candidate.
29


If we do not successfully achieve regulatory approval for any of our business while the warrants are outstanding.

Drug development involvesproduct candidates or successfully commercialize them, all of which is a lengthy and expensive process with uncertain timelines and outcomes, and results from earlier studies and trialswe may not be predictive of future trial results.

able to continue as a business.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure or delay can occur at any time during the clinical trial process. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. A number of companies in the pharmaceutical industry, and biotechnology industriesspecifically the dermatology sector, have suffered significant setbacks in clinical trials, even after obtaining promising results in earlier preclinical studies or clinical trials. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were underway and safety or efficacy observations made in clinical trials, including previously unreported adverse events.


The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the required safety profile or meet the efficacy endpoints despite having progressed through preclinical studies and initial clinical trials. Notwithstanding any potential promising results in earlier testing, we cannot be certain that we will not face similar setbacks. Even if our clinical development is completed for any of our product candidates, the results may not be sufficient to obtain regulatory approval for our product candidates.

For example, the

On June 11, 2021, we announced positive top-line results of our two identically designedfrom the Phase 3 pivotalB-SIMPLE4 clinical trialstrial for SB204 revealed that SB204 demonstrated statistical significance on all three co-primary endpoints in one trial, but demonstrated statistical significance on only oneSB206 for the treatment of the three co-primary endpoints in the other trial. Following an in-depth analysis of the full data sets from our two identically designed Phase 3 pivotal clinical trials for SB204, including post hoc analyses in pooled and sub populations, and after receiving feedback from the FDA in September 2017,molluscum contagiosum; however, we believe it is necessary to conduct additional Phase 3 program development activities for SB204 prior to NDA submission. As described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Product Candidate Outlook—SB204” of this Annual Report on Form 10-K, we expect to obtain additional FDA input and guidance during a Type C meeting scheduled in the second quarter of 2018. We believe further FDA input from the upcoming meeting will facilitate (i) finalization of our Phase 3 strategy and (ii) conclusion and execution of a strategic arrangement that will facilitate execution of our strategy. We cannot assure you that the FDA’s feedback, ifresults from B-SIMPLE4 will be sufficient for the FDA to approve the NDA submitted for SB206 in January 2023 or that any and the resultingadditional clinical trial designtrials we may conduct for any of our other product candidates will achieve trial results that are sufficient to support an FDANDA submission for our acnethe applicable product candidate,candidates or regulatory approval of that product, orthe product. We also cannot assure you that we will be able to complete a strategic arrangement, whether throughobtain financing sufficient to advance development of one or more of our product candidates. In addition, our ongoing or future preclinical studies may not prove successful in demonstrating proof-of concept, or may show adverse toxicological findings, and even, if successful, may not necessarily predict that subsequent clinical trials will show the contemplated arrangement or another one,requisite safety and efficacy of our product candidates. Moreover, all of our clinical development efforts to finance and supportdate in our Research & Development segment have focused on the development necessaryof nitric oxide-based topical therapies. There can be no assurance that the intended or anticipated results from the use of nitric oxide-based therapies will be reaped, and that we, or our existing or potential future commercial partners, will successfully bring our product candidates to achieve these objectives.

market. Because all of our current product candidates are based on nitric oxide and our Nitricil technology, the failure of our Nitricil technology to be safe or efficacious generally will have adverse implications for our entire product candidate pipeline. If, for any reason, our intended use of nitric oxide does not materialize, we may not be able to redeploy our resources to alternative components or raw materials, efficiently or at all.

Delay or termination of planned clinical trials for our product candidates couldwould result in unplanned expenses orand significantly adversely impact our remaining developmental activities and potential commercial prospects with respect to, and ability to generate revenues from, such product candidates.

We may experience delays in completing ongoing trials and initiating planned trials and we cannot be certain whether these trials or any other future clinical trials for our product candidates will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. Clinical trials can be delayed or terminated for a variety of reasons, including delays or failures related to:

the FDA disagreeing as to the design or implementation of our clinical trials;

reaching agreement on acceptable terms with prospective contractclinical research organizations, or CROs, clinical trial sites and prospective strategic partners, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs, trial sites and partners;

obtaining institutional review board, or IRB, approval at each site;

the safety profilesadverse events occurring in clinical studies of our product candidates;

recruiting suitable patients to participate in a trial;

having patients complete a trial or return for post-treatment follow-up;

clinical sites deviating from trial protocol;

addressinghow we address patient safety concerns that arise during the course of a trial;

adding a sufficient number of clinical trial sites;

manufacturing sufficient quantities of product candidate for use in clinical trials;

utilizing an adequate container and delivery device for the product candidate; or

30


changes to our financial priorities or insufficient capital available to fund clinical trials.

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory authorities. Such authorities may suspendfor a variety of reasons.
If we encounter difficulties or terminate adelays enrolling patients in our clinical trial due to a numbertrials, our clinical development activities would be delayed or otherwise adversely affected.
The timely completion of factors, including failure to conduct the clinical trialtrials in accordance with regulatory requirements ortheir protocols depends on, among other things, the ability to enroll a sufficient number of patients who remain in the trial until its conclusion. The enrollment of patients depends on many factors, including:
the patient eligibility criteria defined in the protocol;
the size of the patient population required for analysis of the trial’s primary endpoints;
the proximity of patients to trial sites;
the design of the trial;
our ability to recruit clinical trial investigators with the appropriate competencies and experience;
clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating;
our ability to obtain patient consents; and
the risk that patients enrolled in clinical trials will drop out of the trials before completion.
In addition, our clinical protocols,


inspectiontrials may compete for the recruitment of thepatients with other clinical trial operations or trial site by the FDA or other regulatory authorities resultingtrials for product candidates that are in the impositionsame therapeutic areas as our product candidates, and this competition may reduce the number and types of a clinical hold, unforeseen safety issues or adverse events, failurepatients available to demonstrate a benefit from using a drug, changesus, to the extent patients who might have opted to enroll in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. Even if we complete our trials on schedule, inconsistent trial results may resultinstead opt to enroll in a delay intrial being conducted by one of our completion of an overall program for a product candidate.

competitors.

If we experience delays in enrollment for or the completion, or termination, of anyour clinical trials for our product candidates, we may experience increased costs, have difficulty raising capital through non-dilutive or dilutive sources, and have to slow down our product candidate development and regulatory approval process timelines. Further, the commercial prospects of our product candidates may be harmed and our ability to generate product revenues from any of these product candidates could be delayed or not realized at all. Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

In addition, our ongoing or future preclinical studies may not prove successful in demonstrating proof-of concept, or may show adverse toxicological findings, and even if successful may not necessarily predict that subsequent clinical trials will show the requisite safety and efficacy of our product candidates.

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

The timely completion of clinical trials in accordance with their protocols depends on, among other things, our ability to enroll a sufficient number of patients who remain in the trial until its conclusion. We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons. The enrollment of patients depends on many factors, including:

the patient eligibility criteria defined in the protocol;

the size of the patient population required for analysis of the trial’s primary endpoints;

the proximity of patients to trial sites;

the design of the trial;

our ability to recruit clinical trial investigators with the appropriate competencies and experience;

clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating;

our ability to obtain patient consents; and

the risk that patients enrolled in clinical trials will drop out of the trials before completion.

In addition, our clinical trials will compete for the recruitment of patients with other clinical trials for product candidates that are in the same therapeutic areas as our product candidates, and this competition will reduce the number and types of patients available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors.

Delays in patient enrollment may result in increased costs, which would adversely impact our statement of operations and cash flows or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development of our product candidates and hurt our competitive position.


We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we intend to focus on developing product candidates for specific indications that we identify as most likely to succeed, in terms of their potential both to gain regulatory approval and to achieve commercialization. As a result, we may forego or delay pursuit of opportunities with other product candidates or in other indications with greater commercial potential.

Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable product candidates. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to the product candidate.

Our product candidates may pose safety issues, cause adverse events or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

We, any partner with whom we may collaborate in the future or the FDA may suspend, delay, require modifications to or terminate our clinical trials at any time, for various reasons, including the discovery of serious or unexpected toxicities or other safety issues experienced by trial participants.

In addition, adverse events caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of adverse events or unexpected characteristics. To date, patients treated with our product candidates have experienced drug-related cutaneous tolerability observations, including dryness, scaling, burning, erythema, itching, pain or irritation, and adverse events, including irritation and contact dermatitis.

If safety issues or unacceptable adverse events arise in the development of our product candidates, we, the FDA, the IRBs at the institutions in which our trials are conducted, or the DSMB could suspend or terminate our clinical trials or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-related adverse events could also affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. In addition, these adverse events may not be appropriately recognized or managed by the treating medical staff.

Any of the foregoing events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and may result in the loss of significant revenues to us, which would materially and adversely affect our results of operations and business.

We may rely on strategic relationships for the further development and commercialization of our product candidates, and if we are unable to enter into such relationships, or if such relationships are unsuccessful, we may be unable to realize the potential economic benefit of those product candidates.

We are exploring alternative pathways for continued development of our product candidates. For example, we are currently exploring and intend to advance certain clinical-stage product candidates through partnerships, collaborations or other strategic relationships, including the contemplated arrangement associated with our acne product candidate as described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Product Candidate Outlook—SB204” of this Annual Report on Form 10-K. We cannot assure you that we will be able to complete a strategic arrangement, whether through the contemplated arrangement or another one, to finance and support the necessary development for our acne product candidate. If we are unable to enter into strategic relationships on terms that are beneficial to us, or at all, we may not have sufficient capital to continue developing or commercialize our product candidates that are outside of our


current core focus. Even if we enter into such a strategic relationship, we may have to relinquish a significant portion of the future economic value of the underlying product candidate in connection with the applicable transaction and may be limited in our ability, or unable, to recover such value.

Our ability to enter into successful strategic relationships for the continued development of one or more of our product candidates may be impaired by several factors, including, among others, that:

we will face significant competition in seeking appropriate strategic partners, and the negotiation process is likely to be time-consuming and complex;

strategic partners may fail to secure sufficient capital resources from their investors in amounts required to fund planned development activities;

strategic partners may not devote the necessary resources to complete development activities because of limited financial or scientific resources or the belief that other product candidates may have a higher likelihood of obtaining approval or potentially generate a greater return on investment;

strategic partners may fail to properly maintain or defend our intellectual property rights, where applicable, or may use proprietary information in a way that may expose us to potential loss or liability;

we are likely to have limited control over decisions of strategic partners that may result in significant delays or the termination of development of our product candidates;

strategic partners may develop a product that competes, directly or indirectly, with our product candidates, or may choose to pursue alternative technologies, including those of our competitors; and

disputes between us and our strategic partners concerning the research, development or commercialization of our product candidates or our arrangements with respect to our product candidates could lead to ligation or arbitration that would be costly and detract time from development.

Further, if a strategic relationship terminates or is otherwise unsuccessful, we may need to seek out and establish an alternative arrangement. This may not be possible, or we may not be able to do so on terms which are acceptable to us, in which case, it may be necessary for us to cease the development of the applicable product candidate or candidates, or conduct the remaining clinical development on our own and with our own funds.

The regulatory approval processes of the FDA are lengthy, time-consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.

The time required to obtain approval by the FDA is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval. Neither we nor any future collaborator is permitted to market any of our product candidates in the United States until we receive regulatory approval of an NDA from the FDA.

Prior to obtaining approval to commercialize a product candidate in the United States or abroad, we or our collaborators must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA, that such product candidates are safe and effective for their intended uses. Results from preclinical studies and clinical trials can be interpreted in different ways. Even if we believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. For example, there are multiple methodologies for handling missing data and other statistical considerations to take into account that the FDA may utilize when analyzing the robustness of any data set during NDA review. The FDA may also require us to conduct additional preclinical studies or clinical trials for our product candidates either prior to or post-approval, or it may object to elements of our clinical development program.    


The FDA can delay, limit or deny approval of our product candidates or require us to conduct additional preclinical or clinical testing or abandon a program for many reasons, including:

the FDA’s disagreement with the design or implementation of our clinical trials;

negative or ambiguous results from our clinical trials;

results that may not meet the level of statistical significance required by the FDA for approval;

serious and unexpected drug-related adverse events experienced by participants in our clinical trials or by individuals using drugs similar to our product candidates;

our inability to demonstrate to the satisfaction of the FDA that our product candidates are safe and effective for the proposed indication;

the FDA’s disagreement with the interpretation of data from preclinical studies or clinical trials;

our inability to demonstrate that the clinical and other benefits of our product candidates outweigh any safety or other perceived risks;

the FDA’s requirement for additional preclinical studies or clinical trials;

the FDA’s disagreement regarding the formulation, labeling or the specifications of our product candidates;

the FDA’s failure to approve the manufacturing processes or facilities of third-party manufacturers with which we contract; or

the potential for approval policies or regulations of the FDA to significantly change in a manner rendering our clinical data insufficient for approval.

Of the large number of drugs in development, only a small percentage successfully complete the FDA approval process and become commercialized. The lengthy approval process as well as the unpredictability of outcomes from future clinical trials may result in our failing to obtain regulatory approval to market our product candidates.

Even if we eventually complete clinical testing and receive approval of an NDA or foreign marketing application for our product candidates, the FDA may grant approval contingent on the performance of costly additional clinical trials, including Phase 4 clinical trials, or the implementation of a Risk Evaluation and Mitigation Strategy, or REMS, which may be required to ensure safe use of the drug after approval. The FDA also may approve a product candidate for a more limited indication or patient population than we originally requested, and the FDA may not approve the labeling that we believe is necessary or desirable for the successful commercialization of a product candidate. Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of that product candidate.

Even if we make a submission under a special protocol assessment, or SPA, from the FDA, there is no guarantee that we will obtain agreement from the FDA on the SPA. Even if we do obtain the FDA’s agreement, an SPA would not guarantee approval of any of our product candidates or any other particular outcome from regulatory review.

We currently do not have an SPA in place with respect to any of our product candidates. However, we may, in the future, decide to make a submission for an SPA for any of our current or future product candidates.

The FDA’s SPA process is designed to facilitate the FDA’s review and approval of drugs by allowing the FDA to evaluate, among other things, the proposed design and size of clinical trials that are intended to form the primary basis for determining a drug product’s efficacy. Upon specific request by a clinical trial sponsor, the FDA will evaluate the protocol and respond to a sponsor’s questions regarding, among other things, primary efficacy endpoints, trial conduct and data analysis. The FDA aims to complete SPA reviews within 45 days of receipt of the request. The FDA ultimately assesses whether the protocol design and planned analysis of the trial are acceptable to support regulatory approval of the product candidate with respect to the effectiveness of the indication studied. All agreements and disagreements between the FDA and the sponsor regarding an SPA must be clearly documented in an SPA letter or the minutes of a meeting between the sponsor and the FDA.


Even if the FDA agrees to the SPA, an SPA agreement does not guarantee approval of a product candidate. Even if the FDA agrees to the design, execution, and analysis proposed in protocols reviewed under the SPA process, the FDA may revoke or alter its agreement in certain circumstances. In particular, an SPA agreement is not binding on the FDA if public health concerns emerge that were unrecognized at the time of the SPA agreement, other new scientific concerns regarding product safety or efficacy arise, the sponsor company fails to comply with the agreed upon trial protocols, or the relevant data, assumptions or information provided by the sponsor in a request for the SPA change or are found to be false or omit relevant facts. In addition, even after an SPA agreement is finalized, the SPA agreement may be modified, and such modification will be deemed binding on the FDA review division, except under the circumstances described above, if the FDA and the sponsor agree in writing to modify the protocol and if generally such modification is intended to improve the study. The FDA retains significant latitude and discretion in interpreting the terms of the SPA agreement and the data and results from any study that is the subject of the SPA agreement.

Moreover, if the FDA revokes or alters its agreement under the SPA, or interprets the data collected from the clinical trial differently than we do, the FDA may not deem the data sufficient to support an application for regulatory approval.

Regulatory approval of our product candidates by foreign regulatory authorities may be delayed or denied. We may be subject to pricing controls imposed by foreign governments and regulatory authorities.

We may seek regulatory approval of our product candidates from foreign regulatory authorities in the future. Such regulatory authorities may impose additional regulations and guidelines that differ in form and substance from those imposed by their counterparts in the United States and with which we are more familiar. Accordingly, the regulatory approval of our product candidates in those foreign jurisdictions could be delayed, limited or denied altogether. This could limit the scope of or prevent the commercialization of our products in the future and adversely affect our financial performance.

Further, in some countries, the pricing of pharmaceutical prescriptions is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after coverage and reimbursement have been obtained. Reference pricing used by various countries and parallel distribution or arbitrage between low-priced and high-priced countries can further reduce prices. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies, which is time-consuming and costly. If coverage and reimbursement of our product candidates are unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed.

We may face product liability exposure, and if successful claims are brought against us, we may incur substantial liability if our insurance coverage for those claims is inadequate.

We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. This risk exists even if a product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Our product candidates are designed to affect important bodily functions and processes. Any adverse events, manufacturing defects, misuse or abuse associated with our product candidates could result in injury to a patient or even death. We cannot offer any assurance that we will not face product liability suits in the future, nor can we assure you that our insurance coverage will be sufficient to cover our liability under any such cases.


In addition, a liability claim may be brought against us even if our product candidates merely appear to have caused an injury. Product liability claims may be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our product candidates, among others. If we cannot successfully defend ourselves against product liability claims we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:

withdrawal of clinical trial participants;

decreased enrollment rates of clinical trial participants;

termination of clinical trial sites or entire trial programs;

the inability to commercialize our product candidates;

decreased demand for our product candidates;

impairment of our business reputation;

product recall or withdrawal from the market or labeling, marketing or promotional restrictions;

substantial costs of any related litigation or similar disputes;

distraction of management’s attention and other resources from our primary business;

substantial monetary awards to patients or other claimants against us that may not be covered by insurance; or

loss of revenue.

We have obtained product liability insurance coverage, with an aggregate limit of $5.0 million, for clinical trials. Large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated adverse events. Our insurance coverage may not be sufficient to cover all of our product liability related expenses or losses and may not cover us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect us against losses due to product liability. We will need to increase our product liability coverage if any of our product candidates receive regulatory approval, which will be costly, and we may be unable to obtain this increased product liability insurance on commercially reasonable terms, or at all. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash, negatively impact our statement of operations and could harm our financial condition.

If we receive regulatory approval to market any of our product candidates, our relationships with healthcare providers, customers and third-party payors, as well as our general business operations, may be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, and failure to comply with such regulations could expose us to penalties including criminal sanctions, civil penalties, exclusion from government healthcare programs, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, customers and third-party payors will play a primary role in the recommendation and prescription of any product candidates for which we may obtain marketing approval. Our future arrangements with third-party payors, healthcare providers and customers and our general operations may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any product candidates for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations may include the following:

the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid. A person or entity does not


need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation.

the federal false claims and civil monetary penalties laws, including the civil False Claims Act, which impose criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or knowingly making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; in addition, the government may assert that a claim including items and services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for, among other things, executing or attempting to execute a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which also imposes obligations, including mandatory contractual terms, on certain types of people and entities with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

the federal Physician Payments Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to certain payments or other ‘‘transfers of value’’ made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires applicable manufacturers to report annually to the government ownership and investment interests held by the physicians described above and their immediate family members and payments or other ‘‘transfers of value’’ to such physician owners; and

analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or report marketing expenditures and pricing information; and state and foreign laws governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our internal operations and business arrangements with third parties comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including our relationships with physicians and other healthcare providers, some of whom will recommend, purchase or prescribe our products, could be subject to challenge under one or more of such laws.

If our operations are found to be in violation of any of these laws or any other governmental laws and regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative


sanctions, including exclusions from government funded healthcare programs, which would adversely impact our statement of operations and cash flows.

Even if our current product candidates or any future product candidates obtain regulatory approval, they may fail to achieve the broad degree of physician and patient adoption and use necessary for commercial success.

The commercial success of any of our current or future product candidates, if approved, will depend significantly on the broad adoption and use of the resulting product by physicians and patients for approved indications. Our product candidates may not be commercially successful. The degree and rate of physician and patient adoption of our current or future product candidates, if approved, will depend on a number of factors, including:

the clinical indications for which the product is approved and patient demand for approved products that treat those indications;

the effectiveness of our product as compared to other available therapies;

the availability of coverage and adequate reimbursement from managed care plans and other healthcare payors for any of our product candidates that may be approved;

the cost of treatment with our product candidates in relation to alternative treatments and willingness to pay for the product, if approved, on the part of patients;

acceptance by physicians, major operators of clinics and patients of the product as a safe and effective treatment;

physician and patient willingness to adopt a new therapy over other available therapies to treat approved indications;

overcoming any biases physicians or patients may have toward particular therapies for the treatment of approved indications;

patient satisfaction with the results and administration of our product candidates and overall treatment experience;

the willingness of patients to pay for certain of our product candidates relative to other discretionary items, especially during economically challenging times;

the revenue and profitability that our product candidates may offer a physician as compared to alternative therapies;

the prevalence and severity of adverse events;

limitations or warnings contained in the FDA-approved labeling for our product candidates;

any FDA requirement to undertake a REMS;

the effectiveness of our sales, marketing and distribution efforts;

adverse publicity about our product candidates or favorable publicity about competitive products; and

potential product liability claims.

If any of our current or future product candidates are approved for use but fail to achieve the broad degree of physician and patient adoption necessary for commercial success, our operating results and financial condition will be adversely affected, which may delay, prevent or limit our ability to generate revenue and continue our business.


Our product candidates may cause side effects which could delay or prevent their commercialization.

If any of our product candidates receives marketing approval, and we or other companies developing other nitric oxide-based therapies, including KNOW Bio, which has the right to develop our current nitric oxide-based technology in non-dermatological and non-oncoviral-mediated indications, later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

regulatory authorities may withdraw their approval of the product;

we may be required to recall a product or change the way such product is administered to patients;

additional restrictions may be imposed on the marketing of the particular product or the manufacturing processes for the product or any component thereof;

regulatory authorities may require the addition of labeling statements, such as a ‘‘black box’’ warning or a contraindication;

we may be required to implement a REMS or create a Medication Guide outlining the risks of such adverse events for distribution to patients;

we could be sued and held liable for harm caused to patients;

the product may become less competitive; and

our reputation may suffer.

We expect to educate and train medical personnel so they know how to use our product candidates to understand their potential side effect profiles. Inadequate training in recognizing or managing the potential side effects of our product candidates could result in patient injury.

If we are unable to establish sales, marketing and distribution capabilities for our product candidates or any future product candidate that receives regulatory approval, we may not be successful in commercializing those product candidates, if approved.

We do not currently have a sales, marketing or distribution infrastructure in place. To achieve commercial success for any product candidate for which we may obtain marketing approval, we will need to establish a sales, marketing and distribution framework internally or through a commercial partner or other form of strategic relationship for commercialization. In the future, we may build a focused sales, marketing and distribution infrastructure to market any of our product candidates in the United States. There are risks involved with establishing our own sales, marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time-consuming and could delay market uptake. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

Factors that may inhibit our efforts to commercialize our products on our own include:

our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;

the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future products;

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

unforeseen costs and expenses associated with creating an independent sales and marketing organization.

If we are unable to establish our own sales, marketing and distribution capabilities and enter into arrangements with third parties to perform these services, this could, in turn, decrease our revenue and our profitability. In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute our product candidates or may be unable to do so on terms that are favorable to us. We may not have adequate control over such


third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

Additionally, we have entered into an exclusive license agreement with Sato relating to SB204 for the treatment of acne vulgaris in Japan, and we expect to continue to evaluate strategic partnerships to commercialize our dermatology products in select international markets. We may not be sufficiently familiar or have the requisite resources to penetrate international markets where some of our competitors have already achieved broad recognition and have established commercialization strategies in place. Moreover, we may not succeed in targeting healthcare providers, including physicians, who may not be familiar with our product candidates.

Our product candidates, if approved, will face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration.

The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on developing proprietary therapeutics. Numerous companies are engaged in the development, patenting, manufacturing and marketing of healthcare products competitive with those that we are developing. We face competition from a number of sources, such as pharmaceutical companies, generic drug companies, biotechnology companies and academic and research institutions, many of which have greater financial resources, marketing capabilities, sales forces, manufacturing capabilities, research and development capabilities, clinical trial expertise, intellectual property portfolios, experience in obtaining patents and regulatory approvals for product candidates and other resources than we do. Some of the companies that offer competing products also have a broad range of other product offerings, large direct sales forces and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts. In addition, certain of our product candidates, if approved, may compete with other products, including over-the-counter treatments, for a share of some patients’ discretionary budgets and for physicians’ attention within their clinical practices.

Many pharmaceutical companies currently offer products and continue to develop additional alternative product candidates and technologies for indications similar to those targeted by our product candidates, as described in the section entitled “Business—Competition” in this Annual Report on Form 10-K. The markets in which we compete, particularly the market for dermatological therapies, are competitive and are characterized by significant technological development and new product introduction. We anticipate that, if we obtain regulatory approval of our product candidates, we will face significant competition from other approved therapies. If approved, our product candidates may also compete with unregulated, unapproved and off-label treatments. To compete successfully in the marketplace, we will have to demonstrate that the relative cost, safety and efficacy of our approved products, if any, provide an attractive alternative to existing and other new therapies. Such competition could lead to reduced market share for our product candidates and contribute to downward pressure on the pricing of our product candidates.

Due to less stringent regulatory requirements in certain foreign countries, there are many more products and procedures available for use in those international markets than are approved for use in the United States. In certain international markets, there are also fewer limitations on the claims that our competitors can make about the effectiveness of their products and the manner in which they can market them. As a result, we expect to face more competition in these markets than in the United States.

Even if we obtain marketing approval for any product candidates, the products may become subject to unfavorable third-party coverage or reimbursement policies, which would harm our business.

The success of our product candidates, if approved, depends on the availability of adequate coverage and reimbursement from government authorities and third-party payors, such as private health insurers and health maintenance organizations. Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors is critical to product acceptance.

Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs and treatments they will cover and the amount of reimbursement that will be provided. Coverage


decisions may depend on clinical and economic standards that disfavor new products when more established or lower cost therapeutic alternatives are already available or subsequently become available. Third-party payors may refuse to include a particular branded product in their formularies or lists of medications for which third-party payors provide coverage andreimbursement, or otherwise restrict patient access through formulary controls or otherwise to a branded product when a less costly generic equivalent or alternative is available. Coverage may be more limited than the purposes for which a product is approved by the FDA or similar regulatory authorities outside the United States.

Assuming that we obtain coverage for a given product, the resulting reimbursement rates might not be adequate to cover our costs, including research, development, manufacture, sale and distribution, or achieve or sustain profitability, or may require co-payments that patients find unacceptably high. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. Increasingly, third-party payors are requiring that pharmaceutical companies provide them with predetermined discounts from list prices and are challenging the prices charged for products. There is significant uncertainty related to insurance coverage and reimbursement of newly approved products. It is difficult to predict at this time what third-party payors will decide with respect to the coverage and reimbursement for our product candidates

In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. Therefore, coverage and reimbursement for a product can differ significantly from payor to payor. As a result, obtaining and maintaining coverage and reimbursement for a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payor separately, with no assurance that adequate coverage and reimbursement will be applied consistently or obtained in the first instance.

Governmental and third-party payors in the United States and abroad are developing increasingly sophisticated methods of controlling healthcare costs. Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in international markets. Third-party coverage and reimbursement for our product candidates for which we may receive regulatory approval may not be available, limited, or adequate in either the United States or international markets.

Risks Related to our Financial Results

We have incurred significant losses since our inception. We expect to incur losses for at least the next several years and may never achieve or maintain profitability.

Since inception, we have incurred significant operating losses. Our net loss was $28.1 million for the year ended December 31, 2015, $59.7 million for the year ended December 31, 2016 and $37.1 million for the year ended December 31, 2017. As of December 31, 2017, we had an accumulated deficit of $160.2 million. As a result of our historical operating losses and expected future negative cash flows from operations, we have concluded that there is substantial doubt about our ability to continue as a going concern. Similarly, the report of our independent registered public accounting firm on our December 31, 2017 financial statements includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. To date, we have financed our operations primarily through the sale of our securities in public offerings, private placements of our preferred stock, convertible notes and proceeds from government research contracts and grants. We also received an upfront payment following the execution of a license agreement for the exclusive right to develop, use and sell SB204 in certain topical dosage forms in Japan for the treatment of acne vulgaris. We have devoted substantially all of our efforts to research and development, including clinical trials. We have not completed development of any product candidates. We expect to continue to incur significant expenses and operating losses for at least the next several years. We anticipate that we will continue to incur substantial expenses if and as we:

continue to conduct clinical trials for our existing clinical stage product candidates;

initiate clinical trials for other future product candidates and new chemical entities;

seek regulatory approvals for our product candidates that complete clinical trials;


qualify contract manufacturing organizations for the manufacture of drug product for the commercial launch of our product candidates;

establish a sales, marketing and distribution infrastructure to commercialize products for which we may obtain regulatory approval;

maintain, expand and protect our intellectual property portfolio;

continue our research and development efforts;

exercise any development or commercialization rights we may have under any arrangements with collaborators or partners;

hire additional clinical, quality control, scientific and management personnel;

add executive, operational, financial and management information systems and personnel;

incur costs associated with our securities litigation, and the outcome of that litigation; and

incur additional legal, accounting and other expenses in operating as a public company.

To become and remain profitable, we must develop and eventually commercialize a product or products with significant market potential. This development and commercialization will require us to be successful in a range of challenging activities, including successfully completing clinical trials of our product candidates, obtaining regulatory approval for these product candidates, and marketing and selling those products for which we may obtain regulatory approval. We are only in the preliminary stages of some of these activities. We may never succeed in these activities and may never generate revenues that are significant or large enough to achieve profitability.

Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of the company and could impair our ability to raise capital, expand our business, maintain our research and development efforts or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

Our ability to utilize our net operating loss, or NOL, carryforwards may be limited.

As of December 31, 2017, we had NOL carryforwards available to reduce future taxable income, if any, for federal and state income tax purposes of $140.5 million and $142.4 million, respectively. If not utilized, the federal and state NOL carryforwards will begin expiring in 2028 and 2023 for federal and state tax purposes, respectively. Our ability to utilize NOL carryforward amounts to reduce taxable income in future years may be limited for various reasons, including if future taxable income is insufficient to recognize the full benefit of such NOL carryforward amounts prior to their expiration. Additionally, our ability to fully utilize these U.S. tax assets can also be adversely affected by “ownership changes” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, in a three-year period. Any ownership change is generally defined as a greater than 50% increase in equity ownership by “5% stockholders,” as that term is defined for purposes of Section 382 of the Code in any three-year period. Although we have not completed a full analysis under Section 382, our initial public offering, or IPO, combined with our public offering in January 2018 may have resulted in an ownership change as defined in Section 382. Further, we may experience an ownership change in the future as a result of further shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, government contracts, government and other third-party grants or other third-party funding from research, development and manufacturing service contracts, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. We will require


substantial funding to fund our operating expenses and other activities. To the extent that we raise additional capital through the sale of equity or convertible debt securities, or if we agree to grant warrants or issue other equity to our strategic partners in connection with collaboration arrangements, our existing stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

We have collaborated and intend to collaborate further with third parties for the development and commercialization of our product candidates.  If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.  For example, we have entered into an exclusive license agreement with Sato relating to SB204 for the treatment of acne vulgaris in Japan.

The issuance of shares upon exercise of our outstanding warrants and options may cause substantial dilution to our existing stockholders and reduce the trading price of our common stock.

We have outstanding and exercisable warrants and options that if exercised may result in dilution to the interests of other stockholders and may reduce the trading price of our common stock. We presently have 10 million warrants outstanding and exercisable with an exercise price of $4.66 per share. In addition, we had approximately 0.7 million outstanding and exercisable options as of December 31, 2017 with a weighted average exercise price of $7.76 per share.

The report of our independent registered public accounting firm on our 2017 consolidated financial statements contains an explanatory paragraph regarding going concern, and we will need additional financing to execute our business plan, to fund our operations and to continue as a going concern.

Since inception, we have experienced recurring operating losses and negative cash flows and we expect to continue to generate operating losses and consume significant cash resources in the foreseeable future. These conditions raise substantial doubt about our ability to continue as a going concern without additional financing. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our 2017 consolidated financial statements with respect to this uncertainty. Substantial doubt about our ability to continue as a going concern may materially and adversely affect the price per share of our common stock and we may have a more difficult time obtaining financing.

We have prepared our consolidated financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Our 2017 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

We have a limited operating history and no history of commercializing drugs, which may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

We commenced operations in 2006, and our operations to date have been largely focused on developing our Nitricil technology and platform of product candidates. We have not yet demonstrated our ability to obtain regulatory approvals, manufacture a drug on a commercial scale, or arrange for a third-party to do so on our behalf, or conduct sales and marketing activities necessary for successful commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing drugs.

We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our business objectives. We will need to transition at some point from a company with a development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.


We may be adversely affected by natural disasters and other catastrophic events, and by man-made problems such as terrorism, that could disrupt our business operations and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Our corporate headquarters are located in Morrisville, North Carolina, near major hurricane and tornado zones. If a disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as enterprise financial systems, manufacturing resource planning or enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. Our manufacturers’ and suppliers’ facilities are located in multiple locations, where other natural disasters or similar events, such as blizzards, tornadoes, fires, explosions or large-scale accidents or power outages, could severely disrupt their operations. In addition, acts of terrorism and other geo-political unrest could cause disruptions in our business or the businesses of our collaborators, manufacturers or the economy as a whole. All of the aforementioned risks may be further increased if we do not implement a disaster recovery plan or our collaborators’ or manufacturers’ disaster recovery plans prove to be inadequate. Any of the above could result in delays in the regulatory approval, manufacture, distribution or commercialization of our product candidates.

Risks Related to Manufacturing and our Reliance on Third Parties

We may not be successful in continuing to establish development and commercialization collaborations, which could adversely affect, and potentially prohibit, our ability to develop our product candidates.

We may continue to enter into strategic partnerships with third parties to develop and commercialize our product candidates. There can be no assurance that we will be able to establish such collaborations on favorable terms, if at all, or that our current or future collaborative arrangements will be successful. If we are unable to reach successful agreements with suitable collaborators for our product candidates, we would face significant incremental costs, we may be required to limit the scope and number of our product candidates we can commercially develop or the territories in which we commercialize them or we might fail to commercialize products or programs for which a suitable collaborator cannot be found. Our current and future collaboration partners may not dedicate sufficient resources to the development and commercialization of our product candidates or may otherwise fail in their development and commercialization due to factors beyond our control. If we fail to achieve successful collaborations, we may incur additional product development and commercialization expenses and our operating results and financial condition will be materially and adversely affected. If we breach or fail to comply with any provision of a collaboration agreement, a collaborator may have the right to terminate, in whole or in part, such agreement or to seek damages. Some of our collaboration agreements are complex and involve sharing of certain data, know-how and intellectual property rights amongst the parties. Additionally, these potential collaborators may not accept the transfer of critical methods and processes in order for development and commercialization work for our drug product candidates to take place.  Our collaborators could interpret certain provisions differently than we do, which could lead to unexpected or inadvertent disputes with our collaborators. Any one of our collaborators could breach covenants or restrictions in our agreements, leading us into disputes and potential breaches of our agreements with other collaborators.

We rely on third parties to conduct some of our preclinical studies and our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize any of our product candidates.

We currently do not have the ability to independently conduct preclinical studies that comply with the regulatory requirements known as good laboratory practice, or GLP, requirements. We also do not currently have the ability to independently conduct any clinical trials. The FDA and regulatory authorities in other jurisdictions require us to comply with regulations and standards, commonly referred to as good clinical practice, or GCP, requirements for conducting, monitoring, recording and reporting the results of clinical trials, in order to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. We rely on medical institutions, clinical investigators, contract laboratories and other third parties, such as CROs, to conduct GLP-compliant preclinical studies and GCP-compliant clinical trials on our product candidates properly and on time. While we will have agreements governing their activities, we control only certain aspects of their activities and have limited influence over their actual performance. The third parties with whom we contract for execution of our GLP preclinical studies and our GCP clinical trials play a


significant role in the conduct of these studies and trials and the subsequent collection and analysis of data. These third parties are not our employees and, except for restrictions imposed by our contracts with such third parties, we have limited ability to control the amount or timing of resources that they devote to our programs. Although we rely on these third parties to conduct our GLP-compliant preclinical studies and GCP-compliant clinical trials, we remain responsible for ensuring that each of our GLP preclinical studies and GCP clinical trials is conducted in accordance with its investigational plan and protocol and applicable laws and regulations, and our reliance on the third parties does not relieve us of our regulatory responsibilities. In addition, if any of our third parties terminate their involvement with us for any reason, we may not be able to enter into similar arrangements with alternative third parties within a short period of time or do so on commercially reasonable terms.

31


Many of the third parties with whom we contract may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities that could harm our competitive position. In addition, since the number of qualified clinical investigators is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials in such clinical trial site. If the third parties conducting our GLP preclinical studies or our GCP clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical trial protocols, GLPs or GCPs, or for any other reason, we may need to enter into new arrangements with alternative third parties. This could be difficult, costly or impossible, and our preclinical studies or clinical trials may need to be extended, delayed, terminated or repeated. As a result, we may not be able to obtain regulatory approval in a timely fashion, or at all, for the applicable product candidate, our financial results and the commercial prospects for our product candidates would be harmed, our costs could increase, and our ability to generate revenues could be delayed.

In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, or the FDA concludes that the financial relationship may have affected the interpretation of the trial, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection by the FDA of any NDA we submit. Any such delay or rejection could prevent us from commercializing our future product candidates.

Our product candidates may pose safety issues, cause adverse events, have side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following marketing approval, if any.
We, any partner with whom we may collaborate in the future, or the FDA may suspend, delay, require modifications to or terminate our clinical trials at any time, for various reasons, including the discovery of serious or unexpected toxicities or other safety issues experienced by trial participants. In addition, adverse events caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of adverse events or unexpected characteristics. To date, patients treated with our product candidates have experienced instances of drug-related cutaneous intolerability observations, including dryness, scaling, burning, erythema, itching, pain or irritation, and adverse events, including irritation and contact dermatitis.
If safety issues or unacceptable adverse events arise in the development of our product candidates, we, the FDA, the IRBs at the institutions in which our trials are conducted, or the DSMB could suspend or terminate our clinical trials or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-related adverse events could also affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. In addition, these adverse events may not be appropriately recognized or managed by the treating medical staff. Any of the foregoing events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and may result in the loss of significant revenues to us, which would materially and adversely affect our results of operations and business.
The regulatory approval processes of the FDA are lengthy, time-consuming and inherently unpredictable, and if we, or a potential future partner, are ultimately unable to obtain regulatory approval for our product candidates on a timely basis or at all, our business will be substantially harmed.
The time required to obtain approval by the FDA is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future ourselves or with a potential future strategic partner will ever obtain regulatory approval. Neither we nor any future collaborator is permitted to market any of our product candidates in the United States until we receive regulatory approval of an NDA from the FDA.
Prior to obtaining approval to commercialize a product candidate in the United States or abroad, we or our collaborators must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA or foreign regulatory authorities, that such product candidates are safe and effective for their intended uses. Results from preclinical studies and clinical trials can be interpreted in different ways. Even if we believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. For example, there are multiple methodologies for handling missing data and other statistical considerations to take into account
32


that the FDA may utilize when analyzing the robustness of any data set during NDA review. The FDA may also require us to conduct additional preclinical studies or clinical trials for our product candidates either prior to or post-approval, or it may object to elements of our clinical development program.
The FDA can delay, limit or deny approval of our product candidates or require us to conduct additional preclinical or clinical testing or abandon a program for many reasons, including:
the FDA’s disagreement with the design or implementation of our clinical trials;
unfavorable or ambiguous results from our clinical trials;
results that may not meet the level of statistical significance required by the FDA for approval;
serious and unexpected drug-related adverse events experienced by participants in our clinical trials or by individuals using drugs similar to our product candidates;
our inability to demonstrate to the satisfaction of the FDA that our product candidates are safe and effective for the proposed indication;
the FDA’s disagreement with the interpretation of data from preclinical studies or clinical trials;
our inability to demonstrate that the clinical and other benefits of our product candidates outweigh any safety or other perceived risks;
the FDA’s requirement for additional preclinical studies or clinical trials;
the FDA’s disagreement regarding the formulation, container, dosing delivery device, labeling or the specifications of our product candidates;
the FDA’s failure to approve the manufacturing processes or facilities of third-party manufacturers with which we contract; or
the potential for approval policies or regulations of the FDA to significantly change in a manner rendering our clinical data insufficient for approval.
Of the large number of drugs in development, only a small percentage successfully complete the FDA approval process and become commercialized. The lengthy approval process as well as the unpredictability of outcomes from future clinical trials may result in our failing to obtain regulatory approval to market our product candidates.
Even if we or a potential future partner, eventually complete clinical testing and receive approval of an NDA or foreign marketing application for our product candidates, the FDA may grant approval contingent on the performance of costly additional clinical trials, including Phase 4 clinical trials, or the implementation of a Risk Evaluation and Mitigation Strategy, or REMS, which may be required to ensure safe use of the drug after approval. The FDA also may approve a product candidate for a more limited indication or patient population than we originally requested, and the FDA may not approve the labeling that we believe is necessary or desirable for the successful commercialization of a product candidate. Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of that product candidate.
Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new or modified products from being developed, approved, or commercialized in a timely manner, or at all, which could negatively impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, the ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the FDA have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs or modifications to approved drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
Separately, in response to the COVID-19 pandemic, the FDA postponed most inspections of domestic and foreign manufacturing facilities at various points. Even though the FDA has since resumed standard inspection operations of domestic facilities where feasible, the FDA has continued to monitor and implement changes to its inspectional activities to ensure the safety of its employees and those of the firms it regulates as it adapts to the evolving COVID-19 pandemic, and any resurgence
33


of the virus or emergence of new variants may lead to further inspectional delays Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
Interim, top-line or preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publicly disclose interim, top-line, or preliminary data from our clinical trials, which are based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a full analyses of all data related to the particular trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the interim, top-line, or preliminary results that we report may differ from future results of the same trials, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Top-line and preliminary data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, top-line and preliminary data should be viewed with caution until the final data are available.
We may also disclose interim data from our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between interim, top-line, or preliminary data and final data could significantly harm our business prospects.
Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and our business in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular drug, product candidate or our business. If the interim, top-line, or preliminary data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for and commercialize our product candidates, our business, operating results, prospects or financial condition may be harmed.
Regulatory approval of our product candidates by foreign regulatory authorities may be delayed or denied. We, or our current or potential future partners, may be subject to pricing controls imposed by foreign governments and regulatory authorities.
We, or any current or potential future partners, may seek regulatory approval of our product candidates from foreign regulatory authorities. Such regulatory authorities may impose additional regulations and guidelines that differ in form and substance from those imposed by their counterparts in the United States and with which we are more familiar. Accordingly, the regulatory approval of our product candidates in those foreign jurisdictions could be delayed, limited or denied altogether. This could limit the scope of or prevent the commercialization of our products in the future and adversely affect our financial performance. Further, in some countries, the pricing of pharmaceutical prescriptions is subject to governmental control, including, for example, Japan. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after coverage and reimbursement have been obtained. Reference pricing used by various countries and parallel distribution or arbitrage between low-priced and high-priced countries can further reduce prices. To obtain reimbursement or pricing approval in some countries, we or our current or potential future partners may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies, which is time-consuming and costly. If coverage and reimbursement of our product candidates are unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed.
Risks Related to the Commercialization of Our Products and Product Candidates, if such Product Candidates Complete Development and Receive Regulatory Approval
Our products face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration.
34


The pharmaceutical industry and the markets in which our approved products compete are characterized by rapidly advancing technologies, intense competition and a strong emphasis on developing proprietary therapeutics. Numerous companies are engaged in the development, patenting, manufacturing and marketing of healthcare products competitive with those that we are commercializing and developing. We face competition from a number of sources, such as pharmaceutical companies, generic drug companies, biotechnology companies and academic and research institutions, many of which have greater financial resources, marketing capabilities, sales forces, manufacturing capabilities, research and development capabilities, clinical trial expertise, intellectual property portfolios, experience in obtaining patents and regulatory approvals for product candidates and other resources than we do. Some of the companies that offer competing products also have a broad range of other product offerings, large direct sales forces and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts. In addition, certain of our products compete with other products, including OTC treatments, for a share of some patients’ discretionary budgets and for physicians’ attention within their clinical practices. To compete successfully in the marketplace, our approved products must demonstrate that the relative cost, safety and efficacy of such products provide an attractive alternative to existing and other new therapies. Such competition could lead to reduced market share for our products and contribute to downward pressure on the pricing of our products. Any of our product candidates that receive regulatory approval will be subject to the same risks.
Due to less stringent regulatory requirements in certain foreign countries, there are many more products and procedures available for use in those international markets than are approved for use in the United States. In certain international markets, there are also fewer limitations on the claims that our competitors can make about the effectiveness of their products and the manner in which they can market them. As a result, we expect our products and product candidates, if approved, could face more competition in these markets than in the United States.
If we are unable to maintain sales, marketing and distribution capabilities for our products and any future product candidate that receives regulatory approval, either through a commercial partner or internally, we may not be successful in commercializing and generating revenues from those products and product candidates, if approved.
Our ability to generate revenue from product sales and our prospects for profitability are substantially dependent on our and our collaborators’ ability to effectively commercialize our products and expand their utilization. Following our acquisition of EPI Health, we have a sales, marketing and distribution infrastructure to support the commercialization of our products and product candidates, if approved. Our products and any future product candidates that receive regulatory approval depend on this commercial infrastructure, or any commercial or strategic partner with whom we collaborate, to achieve commercial success. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
Factors that may inhibit our efforts to commercialize our products on our own include:
an inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe our approved products and any future products;
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
unforeseen costs and expenses associated with maintaining and potentially expanding an independent sales and marketing organization.
We may enter into arrangements with third parties to perform sales, marketing and distribution services, which could decrease our revenue and our profitability. In addition, we may not be successful in entering into such arrangements with third parties or may be unable to do so on terms that are favorable to us. We may not have adequate control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. In addition, such third parties will be subject to the commercialization risks described above. If we do not maintain sales, marketing and distribution capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing our products and product candidates.
Additionally, we have entered into exclusive license agreements in Japan with Sato relating to certain of our products and product candidates, and we expect to continue to evaluate strategic partnerships to commercialize our dermatology products in select international markets. We may not be sufficiently familiar or have the requisite resources to penetrate international markets where some of our competitors have already achieved broad recognition and have established commercialization strategies in place. Moreover, we may not succeed in targeting healthcare providers, including physicians, who may not be familiar with our product candidates.
35


Our product revenues are dependent on sales to a few significant wholesale customers and the loss of, or substantial decline in, sales to one of these wholesale customers could have a material adverse effect on our expected future revenues and profitability.
Our product revenues are dependent on sales to a few significant wholesale customers and the loss of, or substantial decline in, sales to one of these wholesale customers could have a material adverse effect on our expected future revenues. Wholesale customers that purchase our products account for a substantial percentage of net sales revenue, and the loss of all or a portion of the sales to any one of these customers could have a material adverse effect on the results of operations generated by product sales. In particular, as of and for the year ended December 31, 2022, one of our wholesaler customers accounted for more than 10% of our annual total gross product revenue at 12%, and three of our wholesaler customers accounted for more than 10% of total accounts receivable at 25%, 13% and 12%, respectively. We expect that a small group of wholesale customers will continue to account for a significant portion of our net product revenues for the foreseeable future. Although we have developed long-standing relationships with our wholesale customers, we generally do not, consistent with industry norms, have advance commitments that require these wholesale customers to buy from us or to purchase a minimum amount of our products. A substantial decrease in sales to any of our wholesale customers could have a material adverse effect on our business and our financial condition and operating results.
Our Rhofade product currently represents a significant portion of our product revenues, and in the future a relatively small group of products may represent a significant portion of our revenues, gross profit, or net earnings from time to time.
Although we sell several approved products and have other product candidates in development, sales of our Rhofade products currently represents a significant portion of our product revenues. For the fiscal year ended December 31, 2022, sales of Rhofade, in the aggregate, represented approximately 73% of our total net product revenues. If the volume or pricing of our largest selling product declines in the future for anything more than a temporary delay, our business, financial condition, results of operations, cash flows, utilization of our accounts receivable-backed factoring agreement and/or share price could be materially adversely affected.
Our products, and any future product candidates that receive regulatory approval, may fail to achieve the broad degree of physician and patient adoption and use necessary for commercial success.
The commercial success of our approved products, and any future product candidates that receive regulatory approval, depends significantly on the broad adoption and use of such products by physicians and patients for approved indications. The degree and rate of physician and patient adoption of our approved products and any future product candidates, if approved, depends on a number of factors, including:
the clinical indications for which the product is approved and patient demand for approved products that treat those indications;
the effectiveness of our product as compared to other available therapies;
the availability of coverage and adequate reimbursement from managed care plans and other healthcare payors for any of our products and product candidates that may be approved;
the cost of treatment with our products and product candidates in relation to alternative treatments and willingness to pay for such products on the part of patients;
acceptance by physicians, major operators of clinics and patients of the product as a safe and effective treatment;
physician and patient willingness to adopt a new therapy over other available therapies to treat approved indications;
overcoming any biases physicians or patients may have toward particular therapies for the treatment of approved indications;
patient satisfaction with the results and administration of our products and any of our product candidates that may be approved and overall treatment experience;
the willingness of patients to pay for certain of our products and product candidates relative to other discretionary items, especially during economically challenging times;
the revenue and profitability that our products and any product candidates that may be approved may offer a physician as compared to alternative therapies;
the prevalence and severity of adverse events;
limitations or warnings contained in the FDA-approved labeling for our products and product candidates;
any FDA requirement to undertake a REMS;
36


the effectiveness of our sales, marketing and distribution efforts;
adverse publicity about our products and product candidates or favorable publicity about competitive products; and
potential product liability claims.
If any of our products or product candidates are approved for use but fail to achieve the broad degree of physician and patient adoption necessary for commercial success, our operating results and financial condition will be adversely affected, which may delay, prevent or limit our ability to generate revenue and continue our business.
Our relationships with healthcare providers, customers and third-party payors, as well as our general business operations, are subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, and failure to comply with such regulations could expose us to penalties including criminal sanctions, civil penalties, exclusion from government healthcare programs, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, customers and third-party payors play a primary role in the recommendation and prescription of our products and any product candidates for which we, or a potential future partner, may obtain marketing approval. Our arrangements with third-party payors, healthcare providers and customers and general operations mean we are subject to broadly applicable fraud and abuse and other healthcare laws and regulations that constrain the business or financial arrangements and relationships through which we, or our partners, market, sell and distribute our products and any product candidates for which we, or a potential future partner, obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:
the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation.
the federal false claims laws, including the civil False Claims Act, which impose criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or knowingly making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; in addition, the government may assert that a claim including items and services resulting from a violation of the United States federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for, among other things, executing or attempting to execute a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
the federal Physician Payments Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to certain payments or other ‘‘transfers of value’’ made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain non-physician practitioners such as physician assistants and nurse practitioners, and teaching hospitals, and requires applicable manufacturers to report annually to the government ownership and investment interests held by the physicians described above and their immediate family members; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; and state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or report marketing expenditures and pricing information.
Efforts to ensure that our internal operations and business arrangements with third parties comply with applicable healthcare laws and regulations involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of
37


interpretations. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including our relationships with physicians and other healthcare providers, some of whom recommend, purchase or prescribe our products, could be subject to challenge under one or more of such laws.
If our operations are found to be in violation of any of these laws or any other governmental laws and regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs, which would adversely impact our statement of operations and cash flows.
Our products may cause side effects which could delay or prevent their commercialization.
If we or other companies developing similar products identify undesirable side effects caused by our or similar products, a number of potentially significant negative consequences could result, including:
regulatory authorities may withdraw their approval of the product;
we may be required to recall a product or change the way such product is administered to patients;
additional restrictions may be imposed on the marketing of the particular product or the manufacturing processes for the product or any component thereof;
regulatory authorities may require the addition of labeling statements, such as a ‘‘black box’’ warning or a contraindication;
we may be required to implement a REMS or create a Medication Guide outlining the risks of such adverse events for distribution to patients;
we could be sued and held liable for harm caused to patients;
the product may become less competitive; and
our reputation may suffer.
We work to educate and train medical personnel so they know how to use our products and product candidates to understand their potential side effect profiles. Inadequate training in recognizing or managing the potential side effects of our products and product candidates could result in patient injury.
We face product liability exposure, and if successful claims are brought against us, we may incur substantial liability if our insurance coverage for those claims is inadequate.
Despite all reasonable efforts to ensure safety, it is possible that we or our distributors will sell products that are defective, to which patients/customers react in an unexpected manner, or which are alleged to have side effects or otherwise not work for the product’s intended purpose. We face an inherent risk of product liability as a result of the commercialization of our products and the clinical testing of our product candidates. This risk exists even though a product is approved for commercial sale by the FDA or an applicable foreign regulatory authority and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Our products and product candidates are designed to affect important bodily functions and processes. Any adverse events, manufacturing defects, misuse or abuse associated with our products or product candidates could result in injury to a patient or even death. We cannot offer any assurance that we will not face product liability suits in the future, nor can we assure you that our insurance coverage will be sufficient to cover our liability under any such cases. In addition, a liability claim may be brought against us even if our products or product candidates merely appear to have caused an injury. Product liability claims may be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products or product candidates, among others. If we cannot successfully defend ourselves against product liability claims we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in circumstances that are materially adverse to our business, including:
withdrawal of clinical trial participants;
decreased enrollment rates of clinical trial participants;
termination of clinical trial sites or entire trial programs;
the inability to commercialize our product candidates;
38


decreased demand for our products and product candidates;
impairment of our business reputation;
product recall or withdrawal from the market or labeling, marketing or promotional restrictions;
substantial costs of any related litigation or similar disputes;
distraction of management’s attention and other resources from our primary business;
substantial monetary awards to patients or other claimants against us that may not be covered by insurance; or
loss of revenue.
We have obtained product liability insurance coverage. Large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated adverse events. Our insurance coverage may not be sufficient to cover all of our product liability related expenses or losses and may not cover us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect us against losses due to product liability, or at all. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash, negatively impact our statement of operations and harm our financial condition.
Our products may become subject to unfavorable third-party coverage or reimbursement policies, which would harm our business.
The success of our products and our product candidates, if approved, depends on the availability of adequate coverage and reimbursement from government authorities and third-party payors, such as private health insurers and health maintenance organizations. Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors is critical to product acceptance.
Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs and treatments they will cover and the amount of reimbursement that will be provided. Coverage decisions may depend on clinical and economic standards that disfavor new products when more established or lower cost therapeutic alternatives are already available or subsequently become available. Third-party payors may refuse to include a particular branded product in their formularies or lists of medications for which third-party payors provide coverage and reimbursement, or otherwise restrict patient access through formulary controls or otherwise to a branded product when a less costly generic equivalent or alternative is available. Coverage may be more limited than the purposes for which a product is approved by the FDA or similar regulatory authorities outside the United States.
Any change in coverage of our products may result in reimbursement rates not being adequate to cover our costs, including research, development, manufacture, sale and distribution, or achieve or sustain profitability, or may require co-payments that patients find unacceptably high. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Increasingly, third-party payors are requiring that pharmaceutical companies provide them with predetermined discounts from list prices and are challenging the prices charged for products. There is significant uncertainty related to insurance coverage and reimbursement of newly approved products. It is difficult to predict at this time what third-party payors will decide with respect to the coverage and reimbursement for our product candidates.
In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. Therefore, coverage and reimbursement for a product can differ significantly from payor to payor. As a result, obtaining and maintaining coverage and reimbursement for a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payor separately, with no assurance that adequate coverage and reimbursement will be applied consistently or obtained in the first instance.
Governmental and third-party payors in the United States and abroad are developing increasingly sophisticated methods of controlling healthcare costs. Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in international markets. Third-party coverage and reimbursement for our product candidates for which we may receive regulatory approval may not be available, limited, or adequate in either the United States or international markets.
Risks Related to Our Operations and Manufacturing
39


Delays or disruptions in our supply chain and manufacturing of our products and product candidates could adversely affect our sales and marketing efforts and our development and commercialization timelines and result in increased costs or in our breaching our obligations to others.
Our ability to make, move, and sell our products is critical to our success. Historically, we have utilized internal small-scale manufacturing operations to support our research and development efforts. In acquiring EPI Health, we have expanded our product offerings and operations with several existing commercial relationships that supply the products we acquired in the EPI Health Acquisition. With this larger operational business and range of product offerings comes additional opportunity for us as well as corresponding risk in certain areas. Our subsidiary, EPI Health, uses third party contract manufacturers and suppliers to obtain substantially all raw materials, components, and packaging products and to manufacture finished products. Damage or disruption to our supply chain, including third-party manufacturing, assembly or transportation and distribution capabilities, due to weather, including any potential effects of climate change, natural disaster, fire or explosion, terrorism, pandemics (such as the COVID-19 pandemic), strikes, government action, inflation, war or other reasons beyond our control or the control of our suppliers and business partners, could impair our ability to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, particularly where our product is sourced from a single supplier or location, could adversely affect our business or financial results. Any interruption or failure by our suppliers, distributors and other partners to meet their obligations on schedule or in accordance with our expectations, misappropriation of our proprietary information, including trade secrets and know-how, or any termination by these third parties of their arrangements with us, which, in each case, could be the result of one or many factors outside of our control, could delay or prevent the manufacture or commercialization of our products, disrupt our operations or cause reputational harm to our company, particularly with wholesale customers, any or all of which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, except for the terms and conditions specified in our contractual arrangements with our contract manufacturers, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our API or drug products or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for, market and sell our products and product candidates, if approved.
We are required to identify the supplier(s) of all the raw materials for our products in our applications with the FDA. To the extent practicable, we attempt to identify more than one supplier in each drug application. However, some products and raw materials are available only from a single source and, in some of our drug applications, only one supplier of products and raw materials has been identified, even in instances where multiple sources exist. To the extent any difficulties experienced by our suppliers cannot be resolved within a reasonable time and at reasonable cost, or if raw materials for a particular product become unavailable from an approved supplier and we are required to qualify a new supplier with the FDA, our profit margins and market share for the affected product could decrease and our development and sales and marketing efforts could be delayed.
We have never produced at a commercial scale any products that utilize any of our Nitricil NCEs, and any delay or disruptions in the qualification of manufacturing facilities and process or in the manufacture of our (i) APIs, including berdazimer sodium, the API of our SB206 product candidate, or (ii) clinical trial materials or commercial supplies of any approved product candidates utilizing any of our Nitricil NCEs, could adversely affect our development and commercialization timelines and results or result in increased costs or in our breaching our obligations to others.
We have internally manufactured the berdazimer sodium API, one of our Nitricil NCEs that is utilized in our SB206 product candidate, for all of our current clinical stage product candidates, and at this stage, we intend to pursue a dual strategy of identifying and designating a partner to become the primary third-party external supplier of our proprietary berdazimer sodium drug substance to support short-term and long-term manufacturing needs, while continuing internal capabilities to provide optionality and support certain small-scale and short-term manufacturing needs. Any delays or disruptions in our third-party manufacturers’ performance and completion of the required technology transfer of the manufacturing processes and analytical methods for API development and commercial manufacturing under cGMP guidelines and regulations, or our inability to deliver such capabilities internally, could impact the development and commercialization timelines of our product candidates, as well as increase costs. Further, if we do not appropriately coordinate with, project manage, or provide adequate internal expertise, resources and documentation to a third-party API manufacturer, we may not be successful, or may be delayed, in transferring the activities, processes, capabilities and services. For example, in 2021, we entered into development services agreements with third-party full-scale API manufacturers for certain manufacturing process feasibility services including process familiarization, safety assessments, preliminary engineering studies, and initial process and analytical methods determinations. As we have internally manufactured the API necessary to support the NDA submission for SB206, we are now in the process of planning to proceed with a third-party API manufacturer beyond the initial stages noted above to support the commercial launch of SB206, if approved and expect to incur substantial costs associated with technical transfer efforts, capital expenditures, manufacturing capabilities, and ultimately, potential large-scale commercial quantities of our drug substance. If we are not able to successfully complete the stages noted above, we will need to be able to produce sufficient quantities of API
40


internally in order to support a commercial launch of SB206, if approved. We have a limited number of personnel who have experience in drug substance manufacturing and possess the expertise necessary to manufacture berdazimer sodium.
We believe increased utilization of and reliance upon third-party vendors and strategic partners for the performance of activities, processes and services can ultimately provide enhanced capabilities and operating efficiencies for us and any potential partnerships, collaborations, licensing or other strategic relationships we may enter. However, there can be no assurance that the technology transfer process with any of these potential API manufacturing partners, or with Orion, with whom we have formed a strategic alliance to enable Orion to manufacture our topical nitric oxide-releasing product candidates on our behalf and on behalf of our global strategic partners, will be successful or that it will take place within the time period needed to meet our targeted development and approval timeframes for our product candidates. For instance, we may not be successful in realizing the intended operating efficiencies from these arrangements based on a number of factors, including, among other things, (i) delays or failures, including delays in our ability to transition applicable technology and processes to our vendors or partners, (ii) reduced quality, (iii) delayed receipt of goods or services, (iv) increased and unexpected costs on the part of the third-party vendors or strategic partners, and (v) certain incremental and discrete costs to effect this strategy upon resumption of the manufacturers’ transfer activities. If we are unsuccessful in partnering with third-party manufacturers, we could experience delays in the development and commercialization timelines of our product candidates, as well as increased costs, in connection with shifting a greater portion of manufacturing to our internal resources or entering into new third party manufacturing arrangements.
Additionally, to date, we and our third-party manufacturers have only manufactured SB206 in limited quantities in batch sizes appropriate for our clinical trials and registration batches to support the NDA, for which batch sizes are a fraction of the size that will be necessary for commercialization. The manufacturing processes for commercial scale are in development and have not been fully tested and the process validation requirement has not yet been satisfied. There are risks associated with scaling up manufacturing to commercial volumes including, among others, cost overruns, technical or other problems with process scale-up, process reproducibility, stability issues, lot consistency and timely availability of raw materials. There is no assurance that our manufacturers will be successful in establishing a larger-scale commercial manufacturing process for SB206, if approved, that achieves our objectives for manufacturing capacity and cost of goods, in a timely manner, or at all.
The continuing effects of the COVID-19 pandemic have had an impact on our operations and could continue, directly or indirectly, to adversely affect our business, results of operations and financial condition.
We may experience disruptions from the continuing effects of the COVID-19 pandemic (and any changes or developments in the pandemic) that could impact our business, results of operations and financial condition, including impacting the supply chain for our products and product candidates, the sales of our products, our clinical trials and our work to develop commercialization plans for SB206. To the extent our suppliers and third-party manufacturers are unable to comply with their obligations under our agreements with them or if supply chain or other disruptions cause them to be unable to deliver or are delayed in delivering raw materials, API or drug products to us due to COVID-19-related effects, our ability to continue our sales, marketing and commercial operations may become impaired, and our ability to pursue regulatory approval, implement our commercialization efforts for SB206, if approved, or advance development of our product candidates may also become impaired.
Changes to our leadership team or operational resources, including our sales team, could prove disruptive to our operations and have adverse consequences for our business and operating results.
From time to time, we undergo changes and transitions among the ranks of senior executives and other senior-level managers, including in connection with the EPI Health Acquisition. Managing transitions with senior executives or other senior-level managers may divert our existing management team’s attention from our core operations, and the recent transitions we have experienced may make it more difficult for us to retain existing employees. In addition, the recent transitions we have experienced have increased our dependency on key members of the senior executive team and other senior-level managers within the organization. We have incurred costs related to transitions in our management team, including severance payments, and have required departing executives to agree to certain obligations in their separation agreements. We also expect to incur recruitment costs related to the hiring of new executives or engaging other operational resources from time to time.
Moreover, recruiting and retaining qualified personnel, including in sales and operational roles, is critical to our success. We have experienced and many continue to experience turnover among our workforce, including within our salesforce, and we may not be able to attract and retain these personnel on acceptable terms given our current financial position, recent market trends, and the competition among numerous pharmaceutical and biotechnology companies for similar personnel. In addition, we rely on consultants and advisors, including commercial, scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategies. Our consultants and advisors may be engaged by companies other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.
41


Unexpected results in the analysis of raw materials, the API or drug product or problems with the execution of or quality systems supporting the analytical testing work, whether conducted internally or by third-party service providers, could adversely affect our development and commercialization timelines and result in increased costs of our development programs.

We currently rely on third-parties to

Third parties engaged directly by us or by our API and drug product contract manufacturing organizations, or CMOs, test mostall of the raw materials necessary to produce theand finished API and drug products we require.products. It is a regulatory requirement that raw materials are tested and there are a limited number of suppliers for testing these raw materials. There may be a need to assess alternate suppliers to prevent a possible disruption of the supply of these raw materials for the manufacture of API or drug product. Additionally, the analytical equipment used by these third-partiesthird parties must be maintained and operational. With future third-partyExcept for the terms established within our, or our CMOs’, contracts with the third parties responsible for testing of raw materials and finished API and drug products, we do not have anylimited ability to control over the process or timing of their testing work. Additionally, if the results do not meet specifications, then obtaining additional raw materials may jeopardize our or the CMOs’ ability to manufacture API and/or drug product, the start or overall conduct of preclinical studies and clinical trials, which could result in the delaytiming of developingregulatory submissions, or commercializingthe commercialization of our futureproducts and product candidates.

candidates, if approved. We and our CMOs currently engage third parties to perform internalanalytical tests to ensure the API and drug product meets our quality specifications. The analytical equipment we useused by us or our CMOs to perform these tests must be maintained, qualified, calibrated and operational. If there are testing execution delays, equipment problems or if the results of the analytical testing do not meet our quality specifications, then manufacturing additional API or drug product may increase costs and may jeopardize our or the CMOs’ ability to manufacture API and/or drug product, which may cause delays in the start or overall conduct of preclinical studies and clinical trials, the submission of regulatory filings, or the commercialization of our products and product candidates, if approved.

Our business involves the use of hazardous materials and we and our third-party suppliers and manufacturers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.
Our manufacturing activities, and the manufacturing activities of our third-party suppliers and manufacturers, involve the controlled storage, use and disposal of hazardous materials. Further, our manufactured drug substance and drug products may be considered hazardous materials under applicable laws and regulations. Our manufacturing activities, whether conducted by us or our third-party suppliers and manufacturers, like all manufacturing processes that utilize hazardous materials, including those under high pressures, must be properly controlled to avoid unintended reactions or other accidents that could cause injury or damage to personnel, equipment or property. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, transportation, handling and disposal of these hazardous materials, and our failure to manage the use, manufacture, storage, transportation, handling or disposal of hazardous materials could subject us to significant costs or future liabilities. In some cases, these hazardous materials and various wastes resulting from their use are transported and stored at our suppliers’ or manufacturers’ facilities pending use and disposal. We and our suppliers and manufacturers cannot completely eliminate the risk of contamination, which could resultcause an interruption of our commercialization efforts, research and development efforts and business operations, injury to our service providers and others and environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the delayuse, storage, handling and disposal of developingthese materials and specified waste products. Although we believe that the manufacturing controls and safety procedures utilized by us and our third-party suppliers and manufacturers for handling, transporting and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or commercializingeliminate the risk (i) that the laws and regulations will not restrict our future product candidates.


Unexpected delays inor our third-party suppliers’ or manufacturers’ ability to use, manufacture, our NVN1000 API,store, transport, handle or any other Nitricil NCEs, in our facility, for supportdispose of such materials or (ii) of accidental contamination or injury from these hazardous materials and processes. If these risks were to materialize, we could experience an interruption of our development activities could adversely affect our developmentbusiness operations and commercialization timelines and result in increased costs of our development programs.

We currently manufacture the NVN1000 API, one of our Nitricil NCEs, for all of our product candidates at our facility in Morrisville, North Carolina. We have a limited number of personnel that have experience in drug substance manufacturing and who possess the expertise necessary to manufacture NVN1000. If our facility were to sustain significant damage, or if we had significant attrition in our manufacturing personnel, or if we have substantial problems with our equipment, our manufacturing operations could be delayed for an extended period of time. If our existing inventories of API are depleted, we may be unable to supply necessary materialsheld liable for preclinical studiesany resulting damages and clinical trials, causing longer timelines, increased costs and delays in the development and commercialization of drug products, if approved by the FDA or other regulatory authorities.

Further, the FDA requires API to be manufactured in accordance with current good manufacturing practices, or cGMP. Our facilities have been audited for cGMP compliance. In addition,such liability could exceed our NCE manufacturing processes and operating conditions have been evaluated and tested by qualified vendors to ensure a safe operating environment. These tests include raw materials and product handling, process chemistry, air quality and waste disposal and containment. However, if our facilities are found to be noncompliant with applicable regulatory requirements, we may be required to take remedial actions, causing further delays and increased costs.

Failure to qualify and contract with third party manufacturers or failure of those third parties to provide us with sufficient quantities of API at acceptable quality levels or prices, could adversely impact our development and commercialization of any of our product candidates or result in our breaching our obligations to others.

While we currently manufacture the API in our own facilities, we intend to identify and qualify third parties to manufacture the API for our own use and intend to rely on them for API that we may provide to others for development and commercial purposes. The facilities used by our future contract manufacturers to manufacture our API must be approved by the FDA pursuant to inspections that will be conducted after we submit our NDA to the FDA. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with the regulatory requirements, known as cGMP. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our API or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.

We currently manufacture clinical trial materials internally and we intend to qualify and contract with third parties to manufacture clinical trial materials and commercial supplies of any approved product candidates. If we do not have sufficient quantities of clinical trial materials at acceptable quality levels, it could adversely impact our development and commercialization of any of our product candidates or result in our breaching our obligations to others.

We currently have the infrastructure and capability internally to manufacture clinical trial materials.  However, we currently lack the resources and the capability to manufacture any of our product candidates on a commercial scale. While we currently manufacture the clinical trial materials in our own facilities, we intend to identify and qualify third parties to manufacture the finished drug product for our own use and intend to rely on them for finished drug products that we may provide to others for development and commercial purposes. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.

financial resources.

We currently intend to manufacture certain drug products in-house, including compounding, formulation and primary packaging for our clinical trials. We currently contract with multiple labeling and packaging materials suppliers for our drug products. If we or our labeling and packaging materials suppliers were unable to manufacture and provide the necessary drug product supplies to conduct our clinical trials, we may not be able to contract with another third party in a timely manner to meet our product candidate specifications and supply needs. As a result, we could experience delays in the development and commercialization timelines of our product candidates, as well as increased costs. Furthermore, we expect to continue to depend on internal capabilities and third-party suppliers of raw materials for the foreseeable future. See risks related to third party suppliers described below.

If future third party manufacturers are unable to perform the required technology transfer of the manufacturing processes and analytical methods for drug product development and commercial manufacturing under cGMP guidelines and regulations, we could experience delays in the development and commercialization timelines of our product candidates, as well as increased costs.  Further, while we intend to contract with third party manufacturers for clinical trial materials and prior to commercial launch in order to ensure that we maintain adequate supplies of finished drug product, we may be unable to enter into such agreements or do so on commercially reasonable terms.

We rely on third parties to supply raw materials necessary to manufacture our API and drug products. If these third parties do not successfully carry out their contractual duties or meet expected deadlines for raw materials, we may be unable to manufacture API or drug product which could jeopardize the start of preclinical studies or clinical trials and potentially delay or cause failure to obtain regulatory approval for or commercialize any of our product candidates.

We rely on third-party suppliers for the raw materials necessary to produce the API and drug products we require. There are a limited number of suppliers for raw materials, including nitric oxide, that are used in the manufacture of our product candidates, drugs (once approved by the FDA or comparable regulatory authority) or the drug products we supply to others, and there may be a need to assess alternate suppliers to prevent a possible disruption of the manufacture of the materials, importantly nitric oxide, necessary to produce our product candidates for our clinical trials, and if approved, ultimately for commercial sale, or to satisfy our obligations to others. We have not entered into long-term agreements with our current suppliers or with any alternate suppliers. We currently obtain our raw material supplies for finished drug products through individual purchase orders. With future third-party manufacturers of our product candidates, we do not have any control over the process or timing of the acquisition of these raw materials. Moreover, we currently do not have any agreements for the commercial production of these raw materials, including nitric oxide. Although we generally do not begin a clinical trial unless we believe we have a sufficient supply of a product candidate to complete the clinical trial, any significant delay in the supply of the raw material components to manufacture drug products for an ongoing clinical trial due to the need to replace a raw material supplier could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our product candidates. If we or our future third party manufacturers are unable to purchase these raw materials, including nitric oxide, after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of our product candidates.

Our employees, independent contractors, principal investigators, CMOs, CROs, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could expose us to liability and hurt our reputation.

We are exposed to the risk that our employees, independent contractors, principal investigators, CMOs, CROs, consultants, commercial partners and vendors may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or disclosure of unauthorized activities to us that violates: (i) FDA laws and regulations, including those laws that require the reporting of true, complete and accurate information to the FDA, (ii) manufacturing standards, (iii) federal, state and foreign data privacy, security, fraud and abuse and other healthcare laws, or (iv) laws that require the true, complete and accurate reporting of financial information or data. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials, creating fraudulent data in our preclinical studies or clinical trials or illegal misappropriation of drug product, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or


unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a

42


failure to be in compliance with such laws or regulations. Additionally, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and financial results, including, without limitation, the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, reputational harm, diminished profits and future earnings, and curtailment of our operations.

Risks Related

We may be adversely affected by the effects of inflation.
Inflation has the potential to Our Operations

Ouradversely affect our liquidity, business, involvesfinancial condition and results of operations by increasing our overall cost structure. The existence of inflation in the useeconomy has resulted in, and may continue to result in, higher interest rates and capital costs, supply shortages, increased costs of hazardous materialslabor, components, manufacturing and we and our third-party suppliers and manufacturers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

The manufacturing activities of our third-party suppliers and manufacturers involve the controlled storage, use and disposal of hazardous materials owned by us, including the components of our product candidates suchshipping, as nitric oxidewell as weakening exchange rates and other hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposalsimilar effects. As a result of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our suppliers’ or manufacturers’ facilities pending use and disposal. We and our suppliers and manufacturers cannot completely eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, injury to our service providers and others and environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party suppliers and manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our financial resources.

We specialize solely in developing nitric oxide-based topical therapeutics for dermatological and oncovirus-mediated diseases, and if we do not successfully achieve regulatory approval for any of our product candidates or successfully commercialize them, we may not be able to continue as a business.

All of our clinical development efforts to date have focused on the development of nitric oxide-based topical therapies. There can be no assurance that the intended or anticipated results from the use of nitric oxide-based therapies will be reaped, and that we will successfully bring our product candidates to market. Because all of our current product candidates are based on nitric oxide and our Nitricil technology, the failure of our Nitricil technology to be safe or efficacious generally will have adverse implications for our entire product candidate pipeline. If, for any reason, our intended use of nitric oxide does not materialize, we may not be able to redeploy our resources to alternative components or raw materials, efficiently or at all.

Changes to our leadership team could prove disruptive to our operations and have adverse consequences for our business and operating results.

We are currently conducting a search for a permanent chief executive officer and permanent chief financial officer. Managing transitions in our executive leadership team may divert our existing management team’s attention from our core operations, and the recent transitionsinflation, we have experienced and may make it more difficult for uscontinue to identifyexperience cost increases. Although we may take measures to mitigate the effects of inflation, if these measures are not effective and if the inflationary pressure is sustained, our business, financial condition, results of operations and liquidity could be negatively affected. Even if such measures are effective, there could be a permanent chief executive officer or permanent chief financial officer or to retain existing employees. If we are unable to timely locate successors for key management positions, it may negativelydifference between the timing of when these beneficial actions impact our business. In addition,results of operations and when the recent transitions we have experienced have increased our dependency on the remaining memberscost of the senior executive team and other key employees within the organization. We have incurred costs related to transitions in our management team, including severance payments, and expect to incur recruitment costs related to the hiring of new executives from time to time.


Our business and operations would suffer in the event of computer system failures, cyber-attacks or deficiencies in our cyber-security.

Despite the implementation of security measures, our internal computer systems, and those of third parties on which we rely, are vulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our product development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur material legal claims and liability, and damage to our reputation, and the further development of our product candidates could be delayed.

Our disclosure controls and procedures address cybersecurity and include elements intended to ensure that thereinflation is an analysis of potential disclosure obligations arising from security breaches. We also maintain compliance programs to address the potential applicability of restrictions against trading while in possession of material, nonpublic information generally and in connection with a cyber-security breach. However, a breakdown in existing controls and procedures around our cyber-security environment may prevent us from detecting, reporting or responding to cyber incidents in a timely manner and could have a material adverse effect on our financial position and value of the Company’s stock.

We may experience significant future growth which may adversely disrupt our operations.

As of December 31, 2017, we had 58 full-time employees and one part-time employee. As our development progresses, we may experience significant growth in the number of our employees and the scope of our operations, particularly in the area of product development and, if any of our product candidates receives marketing approval, sales, marketing and distribution. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

incurred.

Risks Related to Government Regulation

Even if we receive regulatory approval of our product candidates, we will be

We are subject to ongoing regulatory obligations and continued regulatory review of our products, which may resultresults in significant additional expense, and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our product candidates.

Anyproducts.

The regulatory approvals for our products are and any regulatory approvals that we receive for our product candidates may be subject to limitations on the approved indicated uses for which the product may be marketed or the conditions of approval or contain requirements for potentially costly post-market testing and surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require a REMS as a condition of approval of our product candidates, which could include requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or a comparable foreign regulatory authority approves our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for our product candidates will beproducts is subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well asand continued compliance with cGMPscGMP and GCP requirements for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems with any of our products or our product candidates, including adverse events of unanticipated


severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

restrictions on the marketing or manufacturing of our products or product candidates, withdrawal of the product from the market, or voluntary or mandatory product recalls;

fines, warning letters or holds on clinical trials;

refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of approvals;

product seizure or detention, or refusal to permit the import or export of our products or product candidates; and

injunctions or the imposition of civil or criminal penalties.

The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. For example,
We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in December 2016, the 21st Century Cures Act,United States or Cures Act, was signed into law. The Cures Act, among other things, is intended to modernize the regulation of drugs and spur innovation, but its ultimate implementation remains unclear.abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may failbe subject to obtain any marketing approvals, lose any marketing approval that we may have obtainedenforcement action and we may not achieve or sustain profitability.

We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either

The regulatory approvals for our products and any regulatory approvals for our product candidates in the United States are and will be limited to the specific indication authorized by the FDA. If we are found to be in violation of FDA and other regulations restricting the promotion of any approved products for unapproved uses, we could be subject to criminal penalties, substantial fines or abroad. For example, certainother sanctions and damage awards.
The regulatory approvals we have obtained to market our products are limited by an indication statement for the treatment of one or more indications, and we are prohibited from marketing any approved products for uses outside of those for which we have received approval. Similarly, if we obtain regulatory approval for any of our product candidates, such approval will be limited to the specific indication(s) authorized by the FDA.
43


The regulations relating to the promotion of products for unapproved uses are complex and subject to substantial interpretation by the FDA and other government agencies. Products may not be promoted for uses that are not approved in the labeling by the FDA or EMA. Physicians may, following FDA approval, nevertheless prescribe our products off-label to their patients in a manner that is inconsistent with the approved label. We have implemented compliance and training programs designed to ensure that our sales and marketing practices comply with applicable regulations. Notwithstanding these programs, the FDA or other government agencies may allege or find that our practices constitute prohibited promotion of our products for unapproved uses. We also cannot be sure that our employees will comply with company policies and applicable regulations regarding the promotion of products for unapproved uses, but we may nevertheless be deemed responsible for their marketing activities.
In recent years, a significant number of pharmaceutical and biotechnology companies have been the target of inquiries and investigations by various federal and state regulatory, investigative, prosecutorial and administrative entities in connection with the promotion of products for unapproved uses and other sales practices, including the Department of Justice and various United States Attorneys’ Offices, the Office of Inspector General of the Trump administrationDepartment of Health and Human Services, the FDA, the Federal Trade Commission and various state Attorneys General offices. These investigations have alleged violations of various federal and state laws and regulations, including claims asserting antitrust violations, violations of the Federal Food, Drug and Cosmetic Act, the False Claims Act, the Prescription Drug Marketing Act, anti-kickback laws and other alleged violations in connection with the promotion of products for unapproved uses, pricing and Medicare and/or Medicaid reimbursement. Many of these investigations originate as “qui tam” actions under the False Claims Act. Under the False Claims Act, any individual can bring a claim on behalf of the government alleging that a person or entity has presented a false claim, or caused a false claim to be submitted, to the government for payment. The person bringing a qui tam suit is entitled to a share of any recovery or settlement. Qui tam suits, also commonly referred to as “whistleblower suits,” are often brought by current or former employees. In a qui tam suit, the government must decide whether to intervene and prosecute the case. If it declines, the individual may impact our business and industry. Namely,pursue the Trump administration has taken several executive actions, includingcase alone.
If the issuance of a number of executive orders, that could impose significant burdens on,FDA or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. An under-staffed FDA could result in delays in FDA’s responsiveness or in its ability to review submissions or applications, issue regulations or guidance or implement or enforce regulatory requirements in a timely fashion or at all.  It is difficult to predict how these actions will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted. In addition, if we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies,any other governmental agency initiates an enforcement action against us or if we are not able to maintain regulatory compliance, we may lose any marketing approvalthe subject of a qui tam suit and it is determined that we mayviolated prohibitions relating to the promotion of products for unapproved uses, we could be subject to warning letters, untitled letters, substantial civil or criminal fines or damage awards and other sanctions such as consent decrees and corporate integrity agreements pursuant to which our activities would be subject to ongoing scrutiny and monitoring to ensure compliance with applicable laws and regulations. Any such fines, awards or other sanctions would have obtainedan adverse effect on our revenue, business, financial prospects and we may not achieve or sustain profitability.

reputation.

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.

In the United States and some foreign jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell our products and any product candidates for which we obtain marketing approval.

For example, in the United States, in In 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, was signed into law. Since its enactment, however, there have been significant ongoing efforts to modify or eliminate the ACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA without specifically ruling on the constitutionality of the ACA. Prior to the Supreme Court’s decision, President Biden issued an executive order to initiate a sweeping law intendedspecial enrollment period from February 15, 2021 through August 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to broadenreview and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance reducecoverage through Medicaid or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Among the provisions of the ACA of importance to our potential product candidates are the following:

an annual, nondeductible fee payable by any entity that manufactures or imports specified branded prescription drugs and biologic agents;

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;


a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries under their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;

extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;

expansion of eligibility criteria for Medicaid programs;

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research, along with funding for such research.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. We expect that the current presidential administration and U.S. Congress will likely continue to seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the Affordable Care Act. The impact that President Trump’s administration and the U.S. Congress may have, if any, is uncertain, and any changes will likely take time to unfold, and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that were authorized by the Affordable Care Act.

In addition, other legislative changes have been proposed and adopted in the U.S. since the ACA was enacted. These changes included aggregateOn August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, resulted in reductions to Medicare payments to providers, of up to 2% per fiscal year, which went into effect inon April 1, 2013 and, due to subsequent legislative amendments to the Bipartisan Budget Act of 2015,statute, will remain in effect through 20252032, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022, unless additional Congressional action is taken by Congress. Intaken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding. In addition, recentlyon March 11, 2021, the American Rescue Plan Act of 2021 was signed into law, which eliminates the statutory Medicaid drug rebate cap, currently set at 100% of a drug’s average manufacturer price, beginning January 1, 2024.
Further, there has been heightened governmental scrutiny overin the mannerUnited States of pharmaceutical pricing practices in which manufacturers set prices for their commercial products, whichlight of the rising cost of prescription drugs. Such scrutiny has resulted in several Congressionalrecent congressional inquiries and proposed billsand enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies.

44


methodologies for products. On August 16, 2022, the Inflation Reduction Act of 2022, or IRA, was into law. Among other things, the IRA requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (first due in 2023), and replaces the Part D coverage gap discount program with a new discounting program (beginning in 2025). The IRA permits the Secretary of the Department of Health and Human Services to implement many of these provisions through guidance, as opposed to regulation, for the initial years. For that and other reasons, it is currently unclear how the IRA will be effectuated.
At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Legally mandated price controls on payment amounts by third-party payors or other restrictions could harm our business, results of operations, financial condition and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce the ultimate demand for our product candidates, if approved, or put pressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects.
We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may, among other things, result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our product candidates, if approved.

Adoption of government controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for pharmaceuticals.

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S.United States Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.


We are subject to governmental economic sanctions and export and import controls that could impair our ability to compete in international markets or subject us to liability if we are not in compliance with applicable laws.

As a U.S.United States company, we are subject to U.S.United States import and export controls and economic sanctions laws and regulations, and we are required to import and export our API, products and product candidates, technology and services in compliance with those laws and regulations, including the U.S.United States Export Administration Regulations, the International Traffic in Arms Regulations, and economic embargo and trade sanction programs administered by the Treasury Department’s Office of Foreign Assets Control.

U.S. United States economic sanctions and export control laws and regulations prohibit the shipment of certain products and services to countries, governments and persons targeted by U.S.United States sanctions. While we are currently taking precautions to prevent doing any business, directly or indirectly, with countries, governments and persons targeted by U.S.United States sanctions and to ensure that our product candidates, if approved, are not exported or used by countries, governments and persons targeted by U.S.United States sanctions, such measures may be circumvented.

Furthermore, if we export our API, products or product candidates, if approved, the exports may require authorizations, including a license, a license exception or other appropriate government authorization. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Failure to comply with export control and sanctions regulations for a particular sale may expose us to government investigations and penalties.

If we are found to be in violation of U.S.United States sanctions or import or export control laws, it could result in civil and criminal, monetary and non-monetary penalties, including possible incarceration for those individuals responsible for the violations, the loss of export or import privileges and reputational harm.

We are subject to anti-corruption and anti-money laundering laws with respect to our operations and non-compliance with such laws can subject us to criminal or civil liability and harm our business.

We are subject to the U.S.United States Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.S.United States domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act and possibly other anti-bribery and anti-money laundering laws in countries in which we may conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees and third-party intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. As we commercialize our products and product candidates, if approved, and eventually commence international sales and business,as we sell products internationally, whether directly or through our strategic
45


partners, we may engage with collaborators and third-party intermediaries to sell our products abroad and to obtain necessary permits, licenses and other regulatory approvals. We or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We may be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities.

Noncompliance with anti-corruption and anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension or debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse media coverage and other collateral consequences. Responding to any action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees.

Recent U.S. tax legislation

Changes in and failures to comply with United States and foreign privacy and data protection laws, regulations and standards may adversely affect our business, operations and financial performance.
We are subject to or affected by numerous federal, state and foreign laws and regulations, as well as regulatory guidance, governing the collection, use, disclosure, retention, and security of personal data, such as information that we collect about patients and healthcare providers in connection with clinical trials in the United States and abroad. The global data protection landscape is rapidly evolving, and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. This evolution may create uncertainty in our business, affect our or our collaborators’, service providers’ and contractors’ ability to operate in certain jurisdictions or to collect, store, transfer use and share personal information, necessitate the acceptance of more onerous obligations in our contracts, result in liability or impose additional costs on us. The cost of compliance with these laws, regulations and standards is high and is likely to increase in the future. Any failure or perceived failure by us or our collaborators, service providers and contractors to comply with federal, state or foreign laws or regulation, our internal policies and procedures or our contracts governing processing of personal information could result in negative publicity, diversion of management time and effort and proceedings against us by governmental entities or others. In many jurisdictions, enforcement actions and consequences for noncompliance are rising.
In the United States, HIPAA imposes privacy, security and breach reporting obligations with respect to individually identifiable health information upon “covered entities” (health plans, health care clearinghouses and certain health care providers), and their respective business associates, individuals or entities that create, received, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. While we do not believe that we are currently acting as a covered entity or business associate under HIPAA and thus are not directly regulated under HIPAA, any person may be prosecuted under HIPAA’s criminal provisions either directly or under aiding-and-abetting or conspiracy principles. Consequently, depending on the facts and circumstances, we could face substantial criminal penalties if we knowingly receive individually identifiable health information from a HIPAA-covered healthcare provider or research institution that has not satisfied HIPAA’s requirements for disclosure of individually identifiable health information.
Further, even when HIPAA does not apply, according to the Federal Trade Commission or the FTC, failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities.
In addition, certain state laws govern the privacy and security of health-related and other personal information in certain circumstances, many of which may differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. For example, the California Consumer Privacy Act, or the CCPA, went into effect on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that has increased the likelihood of, and risks associated with data breach litigation. Additionally, the California Privacy Rights Act, or the CPRA, generally went into effect in January 2023, and imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data and opt outs for certain uses of sensitive data. It also creates a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. Similar laws have passed in Virginia, Colorado, Connecticut and Utah and have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the United States. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging. In the event that we are subject to or affected by HIPAA, the CCPA, the CPRA or other domestic privacy and data protection laws, any liability from failure to comply with the requirements of these laws could adversely affect our financial condition.
46


Our operations abroad may also be subject to increased scrutiny or attention from data protection authorities. Many countries in these regions have established or are in the process of establishing privacy and data security legal frameworks with which we, our collaborators, service providers, including our CROs, and contractors must comply. For example, the European Union, or EU, has adopted the EU General Data Protection Regulation, or GDPR, which went into effect in May 2018 and imposes strict requirements for processing the personal data of individuals within the EU and the European Economic Area, or EEA, including clinical trial data. The GDPR has and will continue to increase compliance burdens on us, including by mandating potentially burdensome documentation requirements and granting certain rights to individuals to control how we collect, use, disclose, retain and process personal data about them. Member states of the EEA may impose further obligations relating to the processing of genetic, biometric or health data, which could further add to our compliance costs and limit how we process this information. Further, the GDPR increases the scrutiny of transfers of personal data from clinical trial sites located in the EEA to the United States and other jurisdictions that the European Commission does not recognize as having “adequate” data protection laws; in July 2020, the CJEU, limited how organizations could lawfully transfer personal data from the EEA to the United States by invalidating the EU-US Privacy Shield and imposing further restrictions on use of the standard contractual clauses, which could increase our costs and our ability to efficiently process personal data from the EEA. In March 2022, the US and EU announced a new regulatory regime intended to replace the invalidated regulations; however, this new EU-US Data Privacy Framework has not been implemented beyond an executive order signed by President Biden on October 7, 2022 on Enhancing Safeguards for United States Signals Intelligence Activities. European court and regulatory decisions subsequent to the CJEU decision of July 16, 2020 have taken a restrictive approach to international data transfers. In addition, the GDPR provides for robust regulatory enforcement and fines of up to €20 million or 4% of the annual global revenue of the noncompliant company, whichever is greater. Further, from January 1, 2021, we have had to comply with the GDPR and the UK data protection regime, which imposes separate but similar obligations to those under the GDPR and comparable penalties, including fines of up to the greater of £17.5 million or 4% of global turnover.
Although we work to comply with applicable laws, regulations and standards, our contractual obligations and other legal obligations, these requirements are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another or other legal obligations with which we must comply. Any failure or perceived failure by us or our employees, representatives, contractors, consultants, collaborators, or other third parties to comply with such requirements or adequately address privacy and security concerns, even if unfounded, could result in additional cost and liability to us, damage our reputation, and adversely affect our business and results of operations. As we expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business.
We may be subject to confidential information theft or misuse, which could harm our business and results of operations. Our information technology systems, or those of any of our CROs, CMOs, other contractors or consultants or potential future collaborators, may fail or suffer security breaches, which could result in a material disruption of our commercial operations or product development programs, expose the Company to liability, affect our reputation and otherwise harm our business, which could materially affect our results.
We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary and other confidential information. Despite the implementation of security measures, our information technology systems and those of our current and any future CROs, CMOs and other contractors, consultants and collaborators are vulnerable to attack and damage from computer viruses and malware (e.g., ransomware), cybersecurity threats, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Attacks upon information technology systems are increasing in their frequency, levels of persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives and expertise. As a result of the COVID-19 pandemic, and continued hybrid working environment, we may also face increased cybersecurity risks due to our reliance on internet technology and the number of our employees who are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period. Even if identified, we may be unable to adequately investigate or remediate incidents or breaches due to attackers increasingly using tools and techniques that are designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence.
We and certain of our service providers are from time to time subject to cyberattacks and security incidents. While we do not believe that we have experienced any significant system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations or result in the unauthorized disclosure of or access to personally identifiable information or health-related information, it could result in a material disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. We could also incur liability, our commercial operations could be disrupted, and the
47


further development and commercialization of our product candidates could be delayed. In addition, we also rely on third parties to manufacture our products and product candidates, so similar events relating to their computer systems could also have a material adverse effect on our business. Some of the federal, state and foreign government requirements under data privacy and security laws include obligations of companies to notify individuals of security breaches involving particular personally identifiable information, which could result from breaches experienced by us or by our service providers or organizations with which we have formed strategic relationships. Notifications and follow-up actions related to a security breach could impact our reputation, cause us to incur significant costs, including legal expenses, harm customer confidence, hurt our expansion into new markets, cause us to incur remediation costs, or cause us to lose existing customers. Further, our insurance coverage may not be sufficient to cover the financial, legal, business or reputational losses that may result from an interruption or breach of our systems. To the extent that any disruption or security breach were to result in violations of privacy and security laws, we could also be subject to significant fines, penalties or liabilities, which could adversely affect our business, financial condition, results of operations and cash flows.

Recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate, limiting interest deductions, permitting immediate expensing of certain capital expenditures, and revising the rules governing net operating losses and foreign tax credits. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementation regulations by the U.S. Department of the Treasury and Internal Revenue Service, any of which could materially affect the impacts of the

prospects.

legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. See Note 9—Income Taxes for additional information about our deferred tax assets.

While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors to determine the full impact of this legislation on us.

Risks Related to Our Intellectual Property

If we fail to comply with our obligations under any license, collaboration or other agreements, it could have a material adverse effect on our, or our potential future commercial partners’, commercialization efforts for our product candidates.
Our current licenses impose, and any future licenses we enter into may impose, various development, commercialization, milestone, royalty, diligence, sublicensing, insurance, patent prosecution and enforcement, and other obligations on us. If we breach any of these obligations, or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages and the licensor may have the right to terminate the license, which could result in us being unable to develop, manufacture and sell products that are covered by the licensed technology or enable a competitor to gain access to the licensed technology.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for our technology (e.g., our Nitricil technology) and for our product candidates, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position.
We seek to protect our trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees (including through specific provisions in employment contracts), corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be materially impaired.
Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.
Because we expect to rely on third parties to manufacture any of our current or future product candidates, we must, at times, share trade secrets with them. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may adversely impact our business.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage, for reasons including but not limited to the following:
others may be able to make compounds, formulations, or compositions that are the same as or similar to certain of our product candidates or Nitricil compounds but that are not covered by the claims of the patents that we own or license;
48


others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our trade secret or similar rights;
issued patents that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges;
our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets; and
we may not develop additional proprietary technologies that are patentable.
Risks Related to Our Common Stock
The market price and trading volume of our common stock has fluctuated substantially and may fluctuate widely in the future and the value of an investment in our common stock may decline.
Our stock price has experienced extreme volatility and could vary significantly as a result of many factors. Between December 31, 2021 and March 14, 2023, the last reported sales price of our common stock fluctuated between a high of $4.41 and a low of $0.82. The market price and trading volume of our common stock may continue to fluctuate from time to time as a result of factors outside of our control. There is a potential for rapid and substantial decreases in the price of our common stock, including decreases unrelated to our operating performance or prospects, which could result in substantial losses for our existing stockholders.
In addition, the stock market in general and smaller reporting companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. These broad market and industry fluctuations, including but not limited to those connected with the ongoing military conflict between Russia and Ukraine and trade and monetary sanctions in response to such developments, may negatively impact the price or liquidity of our common stock, regardless of our operating performance. Any actual or perceived negative operational developments or market or industry fluctuations may compound each other’s negative impacts on the price of liquidity of our common stock.
If we fail to meet the requirements for continued listing on the Nasdaq Capital Market, our common stock could be delisted from trading, which would decrease the liquidity of our common stock and impact our ability to raise additional capital.
Although our common stock is currently listed on the Nasdaq Capital Market, an active trading market for our shares may not be sustained. We are required to meet specified requirements to maintain our listing on the Nasdaq Capital Market. If our common stock is delisted and there is no longer an active trading market for our shares, it may, among other things:
cause difficulty in stockholders selling their shares without depressing the market price for the shares or in selling their shares at all;
substantially impair our ability to raise additional funds;
result in a loss of institutional investor interest and fewer financing opportunities for us; and/or
result in potential breaches of representations or covenants of agreements pursuant to which we made representations or covenants relating to our compliance with applicable listing requirements. Claims related to any such breaches, with or without merit, could result in costly litigation, significant liabilities and diversion of our management’s time and attention and could have a material adverse effect on our financial condition, business and results of operations.
A delisting would also reduce the value of our equity compensation plans, which could negatively impact our ability to retain key employees.
We, and certain of our directors and current and former officers, have in the past been named as parties to putative stockholder class action lawsuits and may be subject to litigation or other claims again in the future, and such litigation or other claims could adversely affect us, require significant management time and attention, result in significant legal expenses or damages, and cause our business and financial condition, results of operations to suffer.
Putative stockholder class action lawsuits were filed against us and certain of our current and former directors and officers in 2017. The court dismissed those putative stockholder class actions with prejudice, and we have concluded that these matters are closed. We currently have no other pending litigation against us, but we may face additional claims in the future. If we face similar litigation or other claims again in the future, it could result in substantial costs and a diversion of management’s attention and resources and their ultimate outcomes could have a material adverse effect on our business, financial condition
49


and results of operations. While we expect insurance to cover certain costs associated with defending such litigation, insurance coverage may be insufficient and could require a diversion of our resources. There also may be adverse publicity associated with litigation or claims made against us and/or our directors and officers that could negatively affect perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions include those establishing (i) a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors, (ii) no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates and (iii) other provisions.
Our restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us and/or our directors, officers, or employees or agents.
Our restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees or agents to us and/or our stockholders; (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law or our amended and restated certificate of incorporation or amended and restated bylaws; or (iv) any action asserting a claim against us governed by the internal affairs doctrine. These choice of forum provisions do not preclude or contract the scope of exclusive federal or concurrent jurisdiction for any actions brought under the Securities Act of 1933, as amended or the Exchange Act. Accordingly, our choice of forum provisions will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations. Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to these provisions. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us and/or our directors, officers or other employees or agents, which may discourage lawsuits against us and our directors, officers and other employees or agents.
If a court were to find the choice of forum provision contained in our restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management and other employees.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.
As of December 31, 2022, we had federal and state net operating loss carryforwards, or NOLs, of $104.7 million and $65.1 million, respectively. The NOLs begin to expire in 2029 and 2024 for federal and state tax purposes, respectively. As of December 31, 2022, we had government research and development tax credits of approximately $2.4 million to offset future federal taxes which begin to expire in 2041.
During the course of preparing our consolidated financial statements as of and for the year ended December 31, 2022, we completed an assessment of the available NOL and tax credit carryforwards under Sections 382 and 383, respectively, of the Internal Revenue Code, or the Code. In the past, we have determined that we underwent multiple ownership changes throughout our history as defined under Section 382, including most recently in 2015 and 2020, and we made corresponding adjustments to our financial statements within those periods. If an ownership change, as defined in Section 382, occurs, it results in a Section 382 limitation that applies to all NOLs and tax credits generated prior to the ownership change date that can be used to offset taxable income incurred after the ownership change date. The annual limitation is based on a company’s stock value prior to the ownership change, multiplied by the applicable federal long-term, tax-exempt interest rate. The Company has not experienced a cumulative ownership change since 2020.
50


In addition, future changes in our stock ownership, as well as other changes that may be outside of our control, could result in additional ownership changes under Section 382. As a result, even if we achieve profitability, we may not be able to use a material portion of our NOLs or tax credit carryforwards. We have recorded a full valuation allowance related to our NOLs and tax credits due to the uncertainty of the ultimate realization of the future benefits of those assets.
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us and/or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our regulatory clearance timelines, clinical trial results or operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, we expect capital appreciation, if any, will be our stockholders’ sole source of gain.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. Additionally, any future debt agreements may preclude us from paying dividends. As a result, we expect capital appreciation, if any, of our common stock is expected to be our stockholders’ sole source of gain for the foreseeable future.
General Risk Factors
We may be subject to confidential information theft or misuse, which could harm our business and results of operations. Our internal computer systems, or those of any of our existing or potential future collaborators, CROs, CMOs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs or other operations, expose the Company to liability, affect our reputation and otherwise harm our business.
We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary and other confidential information. Despite the implementation of security measures, our internal computer systems and those of our current and any future CROs, CMOs, and other contractors, consultants and collaborators are vulnerable to damage from cyberattacks, “phishing” attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Attacks upon information technology systems are increasing in their frequency, levels of persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives and expertise. The risk of a security breach or disruption, particularly through cyberattacks or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. We may also face increased cybersecurity risks due to our increased reliance on internet technology and hybrid work environments following the onset of the COVID-19 pandemic, which may create additional opportunities for cybercriminals to exploit vulnerabilities. Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period.
If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. In addition, the FDA and comparable foreign regulatory authorities regulate, among other things, the record keeping and storage of data pertaining to approved and potential pharmaceutical products, and we currently store most of our preclinical research data, our clinical data and our manufacturing data at our facilities. In addition, such a breach may require notification to governmental agencies, the media or individuals pursuant to applicable data privacy and security law and regulations. We would also be exposed to a risk of loss, including financial assets or litigation and potential liability, which could materially adversely affect our business, financial condition, results of operations and prospects. We also rely on third parties to manufacture our products and product candidates, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could be subject to material legal claims and incur liability or other negative consequences, including increased cybersecurity protection costs, damage to our reputation, disruption of our internal operations and delays in the further development of and potential commercialization of our product candidates.
51


We may be adversely affected by natural disasters, pandemics and other catastrophic events, and by man-made problems such as terrorism, that could disrupt our business operations and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
Our corporate headquarters is located in Durham, North Carolina, near major hurricane and tornado zones. If a disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as enterprise financial systems, manufacturing, resource planning or enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. Our manufacturers’ and suppliers’ facilities are located in multiple locations, where other natural disasters, pandemics or similar events, such as blizzards, tornadoes, fires, explosions or large-scale accidents or power outages, could severely disrupt their operations. In addition, acts of terrorism, pandemic illness and other geo-political unrest could cause disruptions in our business or the businesses of our collaborators, manufacturers or the economy as a whole. All of the aforementioned risks may be further increased if we do not implement a disaster recovery plan or our collaborators’ or manufacturers’ disaster recovery plans prove to be inadequate. Any of the above could result in delays in the regulatory approval, manufacture, distribution or commercialization of our product candidates.
If we are unable to obtain and maintain patent protection for our product candidates or Nitricil compounds, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and product candidates may be impaired.

We rely upon a combination of patents, trade secret protection, and confidentiality agreements to protect the intellectual property related to our product candidates.candidates and Nitricil compounds. Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our product candidates.candidates and Nitricil compounds. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our product candidates.

candidates and Nitricil compounds.

The patent prosecution process is expensive and time-consuming, however, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our technology platform, Nitricil compounds, or product candidates before it is too late to obtain patent protection. We may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the rights to patents licensed to or from third parties. In particular, certain patents and patent applications covering our core technology platform are exclusively licensed from the University of North Carolina, or UNC, and under our license agreement with UNC, we rely on UNC to prosecute and maintain such patents and applications. Therefore, these patents and applications, and any other patents and applications that we may license from or to third parties, may not be prosecuted and enforced in a manner consistent with the best interests of our business.

If the patent applications we hold or have in-licensed with respect to our product candidates or Nitricil compounds fail to issue, if their breadth or strength of protection is threatened, or if they fail to provide meaningful exclusivity for our current or any future product candidates or Nitricil compounds, it could have a materially adverse effect on our business. Even if our owned andand/or licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned andand/or licensed patents by developing similar or alternative technologies, compounds, or products in a non-infringing manner.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States or vice versa. For example, European patent law restricts the patentability of methods of treatment of the human body more than United States law does. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned andand/or licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued that protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our owned andand/or licensed patents or narrow the scope of our patent protection while patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.


RecentChanges to patent reform legislationlaws in the United States or other countries could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011,For example, changes to the United

52


States patent system have come into force under the Leahy-Smith America Invents Act, or the Leahy-Smith Act, which was signed into law.law in September 2011. The Leahy-Smith Act includesincluded a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. The USPTO recently developed new regulations and procedures to govern administration ofUnder the Leahy-Smith Act, the United States transitioned in March 2013 to a “first to file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed to submit prior art before the issuance of a patent by the USPTO, and manymay invoke or participate in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the substantive changes toscope of, or invalidate, our patent law associatedrights, which could adversely affect our competitive position. While we cannot predict with certainty the impact the Leahy-Smith Act and in particular,or any potential future changes to the first to file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith ActUnited States or foreign patent systems will have on the operation of our business. However,business, the Leahy-Smith Act and its implementationsuch future changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have ana material adverse effect on our business, results of operations, financial condition and financial condition. For example,prospects. Additionally, the first to file system under the Leahy-Smith Act may incentivize companies like us in the biopharmaceutical industry to file patent applications as soon as possible, and filing applications as soon as possible runs the risk that the application will not have the supporting data to claim the broadest protection possible in the United States.

States or abroad.

Moreover, we may be subject to a third-party preissuance submission of prior art to the USPTO or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our owned andand/or licensed patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.

In addition, the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned andand/or licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

Finally, certain of our activities and our licensors’ activities have been funded, and may in the future be funded, by the U.S.United States federal government. When new technologies are developed with U.S.United States federal government funding, the government obtainshas certain rights in any resulting patents, including a nonexclusive license authorizing the government to use the invention for non-commercial purposes. These rights may permit the government to disclose our confidential information to third parties and to exercise “march-in” rights to use or allow third parties to use our patented technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the U.S.United States government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations or to give preference to U.S.United States industry. In addition, U.S.United States government-funded inventions must be reported to the government, U.S.United States government funding must be disclosed in any resulting patent applications, and our rights in such inventions may be subject to certain requirements to manufacture products in the United States.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and other foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign national or international patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result


in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of patent rights include, but are not limited to, failure to timely file national and regional stage patent applications based on our international patent application, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and patent applications covering our technology platform or product candidates, our competitors might be able to enter the market, which would have an adverse effect on our business.

Changes in U.S. patent laws could diminish the value of patents in general, thereby impairing our ability to protect our products.

The United States has recently enacted and implemented wide-ranging patent reform legislation. The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we have licensed or that we might obtain in the future.

We may be involved in lawsuits to protect or enforce our owned andand/or licensed patents, which could be expensive, time-consuming and unsuccessful. Further, our issued patents could be found invalid or unenforceable if challenged in court.

If we were to initiate legal proceedings against a third-party to enforce a patent directed to our Nitricil technology, our products or product candidates, or one of our future product candidates, the defendant could counterclaim that our patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, non-enablement or insufficient written description. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution. Third parties may also raise similar claims before the USPTO, even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our products or product candidates. Such a loss of patent protection would harm our business.

53


Interference proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions with respect to our owned andand/or licensed patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms, or at all.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

Most of our competitors are larger than we are and have substantially greater resources than we do. They are, therefore, likely to be able to sustain the costs of complex patent or other intellectual property rights litigation longer than we could. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Litigation could result in substantial costs and diversion of management resources, which could harm our business. In addition, the uncertainties associated with litigation could compromise our ability to raise the funds necessary to continue our clinical trials, continue our internal research programs, or in-license needed technology or other product candidates. There could also be public announcements of the results of


the hearing, motions, or other interim proceedings or developments. If securities analysts or investors perceive those results to be negative, it could cause the price of shares of our common stock to decline.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees on any issued patent are due to be paid to the USPTO and other foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign national or international patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse or assertion of entity size for payment of reduced fees can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment, unenforceability, or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of patent rights include, but are not limited to, failure to timely file national and regional stage patent applications based on our international patent application, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. Non-compliance events that could result in the unenforceability of patent rights include, but are not limited to, improperly claiming or maintaining small entity or micro entity status. If we or our licensors fail to maintain the patents and patent applications covering our technology platform or product candidates, our competitors might be able to enter the market, which would have an adverse effect on our business.
Changes in United States patent laws could diminish the value of patents in general, thereby impairing our ability to protect our products.
The United States has recently enacted and implemented wide-ranging patent reform legislation. The United States Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances, modifying some legal standards applied by the USPTO in examination of patent applications or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the United States Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents, increase the likelihood of challenges to patents we obtain or license or weaken our ability to enforce patents that we have licensed or that we might obtain in the future.
Changes in foreign patent laws could diminish the value of patents in general, thereby impairing our ability to protect our products.
In Europe, certain members of the European Union have executed an agreement (Agreement on a Unified Patent Court, or the UPCA) to create a European patent with unitary effect (a Unitary Patent) and to form a Unified Patent Court (UPC) system. Once the UPCA enters into force, which will occur on June 1, 2023, a patent owner may elect to receive a Unitary Patent, which will provide patent protection in all UPCA member countries, as an alternative to the current practice of registering and enforcing the patent in individual countries (“classic European patents”).This will be a significant change in European patent practice. In addition, the UPC system will also commence operations on June 1, 2023.The UPCA provides that the UPC system will eventually have sole jurisdiction over classic European patents and Unitary Patents in UPCA member states. However, the UPCA provides for a seven-year transitional period (which may be extended) in which owners of classic European patents will be subject to jurisdiction in both the UPC system and national courts, meaning that patent owners may bring a legal action, or be subject to a legal action, in either the UPC system or a national court. As the UPC is a new court system, there is no precedent for the court, increasing the uncertainty of any litigation. In addition, if a single litigation action
54


(e.g., an invalidity action) against a patent is successful under the UPC system, then the patent may be revoked in all UPCA member countries, whereas, for a classic European patent, a litigation action is separately brought, and the result effective in, each validated country.Thus, the UPC system, while potentially offering a cheaper streamlined process, has potential disadvantages to patent holders, such as making a European patent vulnerable in all UPCA member countries when challenged.
Geo-political actions in the United States and in foreign countries could increase the uncertainties and costs surrounding the prosecution, maintenance, enforcement, or defense of our owned and/or licensed patents or patent applications or those of any future owned and/or licensed patents or patent applications. For example, the United States and foreign government actions related to Russia’s invasion of Ukraine may limit or prevent filing, prosecution, maintenance, and/or enforcement of patent applications and patents in Russia and/or Ukraine. These actions could result in abandonment or lapse of our owned and/or licensed patents or patent applications, resulting in partial or complete loss of patent rights in Russia. If such an event were to occur, it could have a material adverse effect on our business. In addition, a decree was adopted by the Russian government in March 2022, allowing Russian companies and individuals to exploit inventions owned by patentees from the United States without consent or compensation. Consequently, we may not be able to prevent third parties from practicing our inventions in Russia or from selling or importing products made using our inventions in and into Russia. Accordingly, our competitive position may be impaired, and our business, financial condition, results of operations and prospects may be adversely affected.
We may not be able to protect our intellectual property rights throughout the world, which could impair our business.

Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our invention in such countries. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may export otherwise infringing products to territories where we have patent protection, but enforcement rights are not as strong as those in the United States. These products may compete with our product candidates and our owned andand/or licensed patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of some countries do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the infringement of our owned andand/or licensed patents generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our owned andand/or licensed patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful.

Many countries, including European Union countries, India, Japan and China, have compulsory licensing laws under which a patent owner may be compelled under specified circumstances to grant licenses to third parties. In those countries, we may have limited remedies if patents are infringed or if we are compelled to grant a license to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

In Europe, expected by the end of 2023, European applications will soon have the option, upon grant of a patent, of becoming a Unitary Patent which will be subject to the jurisdiction of the Unitary Patent Court (UPC). This will be a significant change in European patent practice. As the UPC is a new court system, there is no precedent for the court, increasing the uncertainty of any litigation. It is our initial belief that the UPC, while offering a cheaper streamlined process, has potential disadvantages to patent holders, such as making a single European patent vulnerable in all jurisdictions when challenged in a single jurisdiction
Geo-political actions in the United States and in foreign countries could increase the uncertainties and costs surrounding the prosecution or maintenance of our patent applications or those of any current or future licensors and the maintenance, enforcement or defense of our issued patents or those of any current or future licensors. For example, the United States and foreign government actions related to Russia’s invasion of Ukraine may limit or prevent filing, prosecution and maintenance of patent applications in Russia. Government actions may also prevent maintenance of issued patents in Russia. These actions could result in abandonment or lapse of our patents or patent applications, resulting in partial or complete loss of patent rights in Russia. If such an event were to occur, it could have a material adverse effect on our business. In addition, a decree was adopted by the Russian government in March 2022, allowing Russian companies and individuals to exploit inventions owned by patentees from the United States without consent or compensation. Consequently, we would not be able to prevent third parties from practicing our inventions in Russia or from selling or importing products made using our inventions in and into Russia.
55


Accordingly, our competitive position may be impaired, and our business, financial condition, results of operations and prospects may be adversely affected.
We may not be able to obtain licenses to third-party intellectual property. Third parties may initiate legal proceedings alleging infringement of their intellectual property rights.

A third party may hold intellectual property, including patent rights that are important or necessary to the development or commercialization of our product candidates. However, we may not be able to obtain such licenses on commercially reasonable terms, or at all. In addition, our existing licenses may be terminated or may not be renewed, which could hurt our business.

In addition, our commercial success depends upon our ability to develop, manufacture, market and sell our products and product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. There is considerable intellectual property litigation in the biotechnology and pharmaceutical industries. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference or derivation proceedings before the USPTO. Numerous U.S.United States and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are developing our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, and as we gain greater visibility and market exposure as a public company, the risk increases that our products and product candidates or other business activities may be subject to claims of infringement of the patent and other proprietary rights of third parties. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. We have conducted searches for information in support of efforts to obtain patent protection and have otherwise evaluatingevaluated the patent landscape for nitric oxide releasing materials and products, and, basedproducts. Based on our knowledge of these searches and evaluations to date, we doare not believe that there areaware of any valid patents whichthat contain granted claims that could be asserted with respect to our nitric oxide-based product candidates.


Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our products or product candidates or force us to cease some of our business operations. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. If we are found to infringe a third party’s intellectual property rights, we could be required to redesign our infringing products or obtain a license from such third party to continue developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. Moreover, we could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

We may be subject to claims by third parties asserting that we or our employees have misappropriated their intellectual property or claiming ownership of what we regard as our own intellectual property.

Many of our employees were previously employed at other biotechnology or pharmaceutical companies or universities. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these employees or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these claims.

In addition, while it is our policy to require our employees and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Our and their assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.

If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.

If we fail to comply with our obligations under any license, collaboration or other agreements, it could have a material adverse effect on our commercialization efforts for our product candidates.

Our current licenses impose, and any future licenses we enter into may impose, various development, commercialization, milestone, royalty, diligence, sublicensing, insurance, patent prosecution and enforcement, and other obligations on us. If we breach any of these obligations, or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages and the licensor may have the right to terminate the license, which could result in us being unable to develop, manufacture and sell products that are covered by the licensed technology or enable a competitor to gain access to the licensed technology.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for our product candidates, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position.

We seek to protect our trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees (including through specific provisions in employment contracts), corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such


breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be materially impaired.

Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

Because we expect to rely on third parties to manufacture any of our current or future product candidates, we must, at times, share trade secrets with them. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may adversely impact our business.

Any trademarks we have obtained or may obtain may be infringed or successfully challenged, materially harming to our business.

We expect to rely on trademarks as one means to distinguish our products and any of our product candidates that are approved for marketing from the products of our competitors. Once we select new trademarks and apply to register them, our trademark applications may not be approved. ThirdFrom time to time, third parties may oppose or attempt to cancel our trademark applications orand trademarks, or otherwise challenge our use of the trademarks.a trademark. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Further, our competitors may infringe our trademarks, including with respect to our Nitricil technology, and we may not have adequate resources to enforce our trademarks.

56


Outside of the United States we cannot be certain that any country’s patent or trademark office will not implement new rules that could seriously affect how we draft, file, prosecute and maintain patents, trademarks and patent and trademark applications.

We cannot be certain that the patent or trademark offices of countries outside the United States will not implement new rules that increase costs for drafting, filing, prosecuting and maintaining patents, trademarks and patent and trademark applications or that any such new rules will not restrict our ability to file for patent or trademark protection. For example, we may elect not to seek patent or trademark protection in some jurisdictions or for some product candidates or Nitricil compounds in order to save costs. We may be forced to abandon or return the rights to specific patents or trademark due to a lack of financial resources.

Intellectual property rights do not necessarily address all potential threats to our competitive advantage.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, In addition, changes in foreign patent or permit us to maintain our competitive advantage, for reasons including but not limited to the following:

others may be able to make formulations or compositions that are the same as or similar to certain of our product candidates but that are not covered by the claims of the patents that we own or license;

others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our trade secret or similar rights;

issued patents that we own or license may not provide ustrademark laws along with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges;


our competitors might conduct research and development activities ingeo-political actions involving the United States and other countries that provideand/or a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets; and

weforeign country may not develop additional proprietary technologies that are patentable.

Risks Related to Our Common Stock

The price of our common stock may be volatile and fluctuate significantly, which could result in substantial losses for our existing stockholders.

Our stock price has in the past been, and is likely to be in the future, volatile. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. During the period from January 1, 2017 to December 31, 2017, the closing sales price of our common stock ranged from a high of $26.86 per share to a low of $3.82 per share. Our stock price experienced significant decline following the announcement of top-line results of our Phase 3 clinical trials of SB204 in late January 2017, and for the period from February 1, 2017 to December 31, 2017, the closing sales price of our common stock ranged from a high of $7.09 per share to a low of $3.82 per share. As a result of this volatility, our existing stockholders may not be able to sell their stock at a favorable price. The market price for our common stock may be influenced by many factors, including:

actuallimit or anticipated fluctuations in our financial condition and operating results;

actual prevent filing, prosecution, maintenance, and/or anticipated changes in our growth rate relative to our competitors;

potential competition from existing products or new products that may emerge;

development of new technologies that may address our markets and may make our technology less attractive;

changes in physician, hospital or healthcare provider practices that may make our product candidates less attractive;

announcements by us, our partners or our competitors regarding significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;

developments or disputes concerning proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

the recruitment or departure of key personnel;

failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;

actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

variations in our financial results or those of companies that are perceived to be similar to us;

changes to reimbursement levels by commercial third-party payors and government payors, including Medicare, and negative announcements relating to reimbursement levels;

general economic, industry and market conditions; and

the other factors described in this “Risk Factors” section.

In addition, the stock market in general and emerging growth companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. A certain degree of stock price volatility can be attributed to being a newly public company. These broad market and industry fluctuations may negatively impact the price or liquidity of our common stock, regardless


of our operating performance.  Any actual or perceived negative operational developments or market or industry fluctuations may compound each other’s negative impacts on the price of liquidity of our common stock.

We have been named as a defendant in putative securities class action lawsuits. These, and potential similar or related litigation, could result in substantial damages and may divert management's time and attention from our business.

As described in the section entitled “Legal Proceedings” in this Annual Report on Form 10-K, putative stockholder class action lawsuits have been filed against us and certain of our current and former directors and officers. These lawsuits were filed on behalfenforcement of a putative class of all persons who purchasedpatent application, patent, or otherwise acquired our securities (1) pursuant or traceable to our IPO, or (2) ontrademark outside the open market during the period specified in the complaints. The lawsuits assert claims for violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder, in connection with statements related to our Phase 3 clinical trials of SB204. The complaints seek, among other things, an unspecified amount of compensatory damages and attorneys’ fees and costs on behalf of the putative class. We believe that the claims lack merit and intend to defend the lawsuits vigorously, but there can be no assurance that a favorable resolution will be obtained in any of these matters. An unfavorable resolution in such lawsuits, whether by final judgment or an unfavorable settlement, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, the actual cost of the litigation may be significant, and the litigation may divert management's time and attention from our business.

Our executive officers, directors and principal stockholders, if they choose to act together, will to have the ability to control or significantly influence matters submitted to stockholders for approval.

Our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock and their respective affiliates, in the aggregate, hold shares representing approximately 32% of our outstanding voting common stock as of January 10, 2018, following the close of our recent public offering. As a result, if these stockholders were to choose to act together, they would be able to significantly influence matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control or significantly influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership control may:

delay, defer or prevent a change in control;

United States.

entrench our management and the board of directors; or

impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.

The significant concentration of stock ownership may negatively impact the price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions include those establishing:

a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;


no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from filling vacancies on our board of directors;

the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

the ability of our board of directors to alter our amended and restated bylaws without obtaining stockholder approval;

the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our amended and restated bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors;

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

the requirement that a special meeting of stockholders may be called only by the chief executive officer, the chairman, the president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us; and

the requirement that the Court of Chancery of the State of Delaware be the sole and exclusive forum for derivative actions and other corporate claims unless we consent to an alternative forum in writing, which may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers or other employees and discourage lawsuits with respect to such claims.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

We have broad discretion in the use of our financial resources, including our cash and cash equivalents, and may not use them effectively.

Our management has broad discretion in the application of our financial resources, including our cash and cash equivalents, and could spend our cash in ways that do not improve our results of operations or enhance the value of our common stock. Our future use of our financial resources may differ substantially from our current plans. The failure by our management to apply our financial resources effectively could result in financial losses that could have a material adverse effect on our business and cause the price of our common stock to decline. Pending their use, we may invest our cash and cash equivalents in a manner that does not produce income or that loses value.

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock that are eligible for sale in the public market, in some cases subject to compliance with the requirements of Rule 144 and after expiration of lock-up agreements entered into in connection with the January 2018 Offering, the trading price of our common stock could decline significantly. As of January 10, 2018, we had approximately 26.0 million shares of common stock outstanding and exercisable warrants to purchase approximately 10.0 million shares of common


stock outstanding. Approximately 4.2 million shares are subject to lock-up restrictions, which restrictions expire beginning on April 5, 2018. Also, on October 2, 2017, we filed a registration statement on Form S-3, which the SEC declared effective on October 10, 2017, which registered for resale 2,623,485 shares of our common stock (or approximately 10% of our total outstanding shares of common stock as of January 10, 2018) held by Malin Life Sciences Holdings Limited, or Malin. Malin is among the stockholders subject to the lock-up restrictions. Certain other of our stockholders hold substantial amounts of our common stock. If substantial amounts of shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the end of the second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenue of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1.0 billion in non-convertible debt in a three-year period or (iv) December 31, 2021, the end of the fiscal year following the fifth anniversary of the completion of our IPO. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

reduced disclosure obligations regarding executive compensation; and

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We have taken advantage of reduced reporting requirements in this Annual Report on Form 10-K. In particular, we do not intend to provide all of the executive compensation related information that would be required if we were not an emerging growth company. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be reduced or more volatile. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards and the accompanying demands on time and resources as other public companies that are not emerging growth companies face.

We have and expect to continue to incur substantial costs as a result of operating as a public company, and our management has and will continue to be required to devote substantial time to new compliance initiatives and corporate governance practices.

As a public company, and particularly after we are no longer an emerging growth company, we have and will continue to incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The Nasdaq Global Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have and will continue to require substantial legal and financial compliance costs and make some activities more time-consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of directors.


We continue to evaluate these rules and regulations and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

Our management team has limited experience managing a public company.

Some members of our management team have limited experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our existence as a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These obligations and constituents require significant attention from our senior management and could divert their attention away from the day-to-day management of our business.

If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our regulatory clearance timelines, clinical trial results or operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be our stockholders’ sole source of gain.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. Any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be our stockholders’ sole source of gain for the foreseeable future.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired which could adversely impact the market price of our stock.

We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the stock market on which our common stock is listed. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We must perform system and process evaluations and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting in our Form 10-K filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. This requires that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts.

From time to time, we may identify weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be


subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

We currently operate out of our corporate headquarters is in Morrisville, North Carolina, where

On January 18, 2021, we lease an existing 51,350 square foot facility underentered into a lease with an initial term expiring in 2026.2032, which has subsequently been amended, for 19,265 rentable square feet located in Durham, North Carolina. This facility was designedsite serves as our corporate headquarters and upfit specifically for our nitric oxidewill support various cGMP activities, including research and development activities. and small-scale manufacturing capabilities, used principally by our Research and Development Operations segment. These capabilities include the infrastructure necessary to support small-scale drug substance manufacturing and the ability to act as a primary, or secondary backup, component of a potential future commercial supply chain.
We have an optionprepared our new location to extendsupport various cGMP activities, including research and development and small-scale manufacturing capabilities, as described in the leasesection entitled “Business—Manufacturing and Supplies” in this Annual Report.
On March 3, 2022, EPI Health entered into a sublease agreement by five years upon completionwith EPG for office space at 174 Meeting Street in Charleston, South Carolina for approximately 6,000 rentable square feet (the “Meeting Street Lease”). The term of the initial lease term. We useMeeting Street Lease was initially through September 30, 2024, was used principally by our facility for primary research, development,Commercial Operations segment, and drug compound and product manufacturing activities, as well as general and administrative purposes,we had the right to support our nitric oxide technology and drug development programs.

Interminate the future,Meeting Street Lease with prior notice. On August 31, 2022, we plan to evaluate the potential for transferring the manufacturenotified EPG of our drug product candidatestermination of the Meeting Street Lease effective February 28, 2023.

See “Note 6—“Leases” to contract manufacturing organizationsthe accompanying consolidated financial statements included in this Annual Report for development and commercial production or may establish a secondadditional information regarding facility for active pharmaceutical ingredient production manufacturing. We believe that our existing facilities are suitable and adequate for our current and near-term needs.

lease transactions.

Item 3. Legal Proceedings.

We are subject to putative stockholder class action lawsuits that were filed in November 2017 in the United States District Court for the Middle District of North Carolina against us and certain of our current and former directors and officers. The lawsuits were filed on behalf of a putative class of all persons who purchased or otherwise acquired our securities (1) pursuant or traceable to our IPO, or (2) on the open market during the period specified in the complaints. The lawsuits assert claims for violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder, in connection with statements related to our Phase 3 clinical trials of SB204. The complaints seek, among other things, an unspecified amount of compensatory damages and attorneys’ fees and costs on behalf of the putative class. We believe that the claims lack merit and intend to defend the lawsuits vigorously. However, there can be no assurance that a favorable resolution will be obtained in such lawsuits, and the actual costs may be significant.

Other than as described above, we are not currently a party to any material legal proceedings and are not aware of any claims or actions pending or threatened against us that we believe could have a material adverse effect on our business, operating results, cash flows or financial statements. In the future, we may from time to time become involved in litigation relating to claims arising from our ordinary course of business.

Item 4. Mine Safety Disclosures.

Not applicable.



57


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock has tradedtrades on the Nasdaq GlobalCapital Market under the symbol “NOVN” since September 21, 2016. Prior to that time, there was no public market for our common stock. As a result, we have only set forth quarterly information with respect to the high and low sales prices of our common stock since September 21, 2016. The following table states the high and low sales prices of our common stock as reported on the Nasdaq Global Market for the periods indicated.

“NOVN.”

 

 

Low

 

 

High

 

Fiscal Year Ended December 31, 2017

 

 

 

 

 

 

 

 

First Quarter

 

$

3.52

 

 

$

27.77

 

Second Quarter

 

$

3.67

 

 

$

7.85

 

Third Quarter

 

$

3.80

 

 

$

7.33

 

Fourth Quarter

 

$

4.14

 

 

$

6.69

 

Fiscal Year Ended December 31, 2016

 

 

 

 

 

 

 

 

Third Quarter (beginning September 21, 2016)

 

$

13.77

 

 

$

23.79

 

Fourth Quarter

 

$

17.50

 

 

$

30.90

 

Holders

The last price of our common stock as reported on the Nasdaq Global Market on March 26, 2018 was $3.09 per share.

Holders

As of March 22, 2018,16, 2023, there were approximately 177106 stockholders of record of our common stock. Holders of record are defined as those stockholders whose shares are registered in their names in our stock records and do not include beneficial owners of common stock whose shares are held in the names of brokers, dealers or clearing agencies.

Dividends

We have never paid cash dividends and do not anticipate paying cash dividends in the foreseeable future.


Stock Performance Graph

This performance graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing by us under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. The stock price performance shown on the graph is not necessarily indicative of future price performance.

Comparison of Cumulative Total Return

Among Novan, Inc., the Nasdaq Composite Index and the Nasdaq Biotechnology Index

The above graph measures the change in a $100 investment in our common stock from September 21, 2016 (the date our common stock commenced trading on the Nasdaq Global Market) through December 31, 2017. Our relative performance is then compared with the Nasdaq Composite Index (COMPX) and the Nasdaq Biotechnology Index (NBI).

Recent Sales of Unregistered Securities

None.

Use of Proceeds from IPO

On September 20, 2016, the SEC declared our Registration Statement on Form S-1 (File No. 333-213276) effective for our IPO, which closed on September 26, 2016, pursuant to which we sold an aggregate of 4,715,000 shares of our common stock, including the underwriters option to purchase 615,000 additional shares, at a price to the public of $11.00 per share for aggregate gross proceeds of $51.9 million.  As a result, we received net proceeds of $44.6 million (after underwriters’ discounts, commissions, and reimbursements totaling $4.1 million and additional offering related costs of $3.2 million). The managing underwriter of the offering was Piper Jaffray & Co.

During the period from the IPO through December 31, 2017, we used the proceeds in accordance with the planned use of proceeds as described in our final prospectus dated September 20, 2016 and filed with the SEC on September 22, 2016.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We did not purchase any of our equity securities during the fourth quarter of 2017.

2022.

Item 6. Selected Financial Data.

SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data together with the information under the caption “Management’s[Reserved]

58


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and the accompanying notes included in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017 and 2016 are derived from the audited financial statements included elsewhere in this Annual Report. The selected consolidated balance sheet data as of December 31, 2015, is derived from audited financial statements that are not included in this Annual Report.

Operations.

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands except share and per share data)

 

License and collaboration revenue

 

$

1,765

 

 

$

 

 

$

 

Research and development services revenue

 

 

375

 

 

 

 

 

 

 

Total revenue

 

 

2,140

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

25,212

 

 

 

46,489

 

 

 

16,569

 

General and administrative

 

 

13,113

 

 

 

13,337

 

 

 

9,265

 

Total operating expenses

 

 

38,325

 

 

 

59,826

 

 

 

25,834

 

Operating loss

 

 

(36,185

)

 

 

(59,826

)

 

 

(25,834

)

Other (expense) income, net

 

 

(942

)

 

 

127

 

 

 

48

 

Loss from continuing operations

 

 

(37,127

)

 

 

(59,699

)

 

 

(25,786

)

Loss from discontinued operations

 

 

 

 

 

 

 

 

(2,274

)

Net loss and comprehensive loss

 

$

(37,127

)

 

$

(59,699

)

 

$

(28,060

)

Loss per share, basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(2.32

)

 

$

(9.97

)

 

$

(11.36

)

Discontinued operations

 

 

 

 

 

 

 

 

(1.01

)

Net loss per share, basic and diluted (1)

 

$

(2.32

)

 

$

(9.97

)

 

$

(12.37

)

Weighted-average common shares used in computing net

   loss per share, basic and diluted (1)

 

 

15,981,247

 

 

 

5,985,985

 

 

 

2,269,124

 

(1)

See “Note 1—Organization and Significant Accounting Policies” to our consolidated financial statements included elsewhere in this Annual Report for an explanation of the method used to calculate the historical basic and diluted net loss per share.

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,524

 

 

$

34,611

 

 

$

45,688

 

Total current assets

 

 

3,704

 

 

 

35,569

 

 

 

46,933

 

Total assets

 

 

21,134

 

 

 

52,473

 

 

 

49,816

 

Total current liabilities

 

 

8,418

 

 

 

13,377

 

 

 

5,095

 

Total liabilities

 

 

23,356

 

 

 

21,407

 

 

 

5,099

 

Convertible preferred stock

 

 

 

 

 

 

 

 

104,798

 

Accumulated deficit

 

 

(160,160

)

 

 

(123,033

)

 

 

(63,334

)

Total stockholders' (deficit) equity

 

 

(2,222

)

 

 

31,066

 

 

 

(60,081

)


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.Report. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Where possible, we have tried to identify these forward-looking statements by using words such as “may,“believe,“will,“contemplate,” “continue,” “due,” “goal,” “objective,” “plan,” “seek,” “target,” “expect,” “believe,” “anticipate,” “intend,” “may,” “will,” “would,” “could,” “should,” “potential,” “predict,” “project,” or “estimate,” or “continue” and similar expressions or variations. OurThese statements are based on the beliefs and assumptions of our management based on information currently available to management. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, could differperformance or achievements to be materially different from those anticipatedany future results, performance or achievements expressed or implied by the forward-looking statements. Except as may be required by law, we undertake no obligation to update any forward-looking statements due to important factors andreflect events or circumstances after the date of such statements. These forward-looking statements are subject to numerous risks including, but not limited to, those set forth in the “Risk Factors” in Part I, Item 1A of this report.

Annual Report.

Overview

We are a clinical-stage biotechnologymedical dermatology company focused on leveragingdeveloping and commercializing innovative therapeutic products for skin diseases. Our goal is to deliver safe and efficacious therapies to patients, including developing product candidates where there are unmet medical needs. We are developing SB206 (berdazimer gel, 10.3%) as a topical prescription gel for the treatment of viral skin infections, with a current focus on molluscum contagiosum, or molluscum.
In March 2022, we completed the EPI Health Acquisition. EPI Health equips us with a commercial infrastructure across sales, marketing, and communications, as well as a dedicated market access and pharmacy relations team, and positions us as a fully integrated dermatology company with a pipeline of development candidates focused primarily on dermatological indications, supported by a commercial platform to market and sell therapeutic products for skin diseases. We promote products for plaque psoriasis, rosacea and acne. We also have a pipeline of potential product candidates using our proprietary nitric oxide’s natural antiviral and immunomodulatory mechanismsoxide-based technology platform, Nitricil, to generate new treatments for multiple indications.
Further advancement of action to treat dermatological and oncovirus-mediated diseases.  Nitric oxide plays a vital role in the natural immune system response against microbial pathogens and is a critical regulator of inflammation. Our ability to harness nitric oxide and its multiple mechanisms of action has enabled us to create a platform withour molluscum program, including through the potential to generate differentiated product candidates. The two key componentsapproval of SB206, advancement of any other early-stage or late-stage clinical program across our nitric oxide platform, and continuing our commercial operations until they are our proprietary Nitricil technology, which drives the creation of new chemical entities, or NCEs, and our topical formulation science, both of which we useprofitable, are all subject to tune our product candidates for specific indications for specific diseases. Our ability to deploy nitric oxide in a solid form, on demand and in localized formulations allows us the potential to improve patient outcomes in a variety of diseases.  

We are advancing strategic development programs in the fields of dermatology and oncovirus-mediated diseases. We have clinical-stage dermatology drug candidates with anti-acne (SB204) and antifungal (SB208) applications, which we intend to advance through partnerships, collaborations or other strategic relationships that we are currently exploring. We are utilizing our existing capital resources to fund the ongoing and near-term development activities in our antiviral (SB206) and anti-inflammatory (SB414) programs, as described in further detail below. Advancement of the SB206 and SB414 development programs beyond ongoing and near-term activities is dependent upon our ability to accesssecure additional capital. Sources of additional capital from non-dilutivemay potentially include (i) debt or equity financings, such as through sales of common stock, or (ii) other sources, includingsuch as partnerships, collaborations, licensing, grants or other strategic relationships, or throughrelationships. Any issuance of equity, or debt financings.

convertible into equity, would result in further significant dilution to our existing stockholders.

Our clinical-stage product candidate pipeline is currently positionedPlease see additional details related to our “Commercial Portfolio” and “Research and Development Portfolio”, as described in the table below:

* Includes anti-inflammatorysection entitled “Business” in this Annual Report.

Business Updates
In March 2023, we announced that the FDA completed its filing review of our NDA submitted in early January seeking marketing approval for berdazimer gel, 10.3% (SB206) for the topical treatment of molluscum contagiosum, or molluscum. The FDA determined our application was sufficiently complete, no filing review issues were identified, the substantive review process had commenced, and antibacterial activity – P. acnes we were assigned a Prescription Drug User Fee Act goal date of January 5, 2024.
For the year ended December 31, 2022, we demonstrated growth in total prescriptions for our actively marketed portfolio:
Rhofade (oxymetazoline hydrochloride) - 33% annual growth for the year ended December 31, 2022 with 156,664 total prescriptions.
Wynzora (calcipotriene and betamethasone dipropionate) - 41,023 total prescriptions for the year ended December 31, 2022, as the product was launched in the casethird quarter of SB2042021.
Minolira (minocycline hydrochloride) - 61% annual growth for the year ended December 31, 2022 with 40,641 total prescriptions.
In late December 2022, we announced that we had entered into an exclusive license agreement with Sato granting Sato the right to develop, manufacture and market Rhofade (oxymetazoline hydrochloride 1% cream) for rosacea in the Japan territory. Under the exclusive license agreement, we received an upfront payment of $5.0 million in January 2023 and are entitled to receive a $2.5 million milestone payment at the time of marketing approval in Japan and royalty payments on net sales of the product in Japan. Sato will be responsible for obtaining regulatory approval in
59


Japan and will have the right to use our U.S. dossier for Rhofade held by EPI Health. Sato will also have a right of first negotiation related to Rhofade in certain other countries in the Asia Pacific region. A portion of the amounts of the upfront and milestone payments are payable by us to a third party under contractual obligations related to Rhofade.
In early December 2022, we announced that we, through EPI Health, entered into an accounts receivable-backed factoring agreement with Bay View Funding, a wholly owned subsidiary of Heritage Bank of Commerce. The new $15.0 million factoring facility provides working capital in an amount that is up to 70% of our EPI Health subsidiary’s gross eligible receivables.
In July 2022, we announced the publication of positive efficacy and safety data from our completed B-SIMPLE 4 pivotal Phase 3 clinical study evaluating berdazimer gel, 10.3% for the treatment of acne.

Product Candidate Development Outlook

molluscum in the peer-reviewed journal,
JAMA Dermatology.
In June 2022, we announced the closing of a $15.0 million registered direct offering priced at-the-market under Nasdaq rules with an institutional investor.

In March 2022, we announced the acquisition of EPI Health, a specialty pharmaceutical company focused on the U.S. dermatology market. The acquisition provided the commercial infrastructure for us to become a fully-integrated specialty dermatology company with a solid pipeline of development candidates complemented by a commercial foundation. In July 2022, we announced that we had reached agreement with Evening Post Group, LLC, or EPG, regarding payment, satisfaction and termination of our $16.5 million secured promissory note and security agreement associated with the EPI Health Acquisition. We and EPG agreed that, upon EPG’s receipt of $10.0 million, which we subsequently paid, all of our outstanding indebtedness and obligations under the promissory note were fully satisfied, and accordingly, the promissory note and related security agreements were terminated.

Working Capital and Additional Capital Needs
We will continue to need additional funding to support our planned and future operating activities, to support our commercial operations until they are profitable and make further advancements in our product development programs beyond what is currently included in our operating forecast and related cash projection. We do not currently have sufficient funds to complete commercialization of any of our product candidates that are under development, and our funding needs will largely be determined by our commercialization strategy for SB206 (berdazimer gel, 10.3%), subject to the regulatory approval process and outcome. We are pursuing a broad range of financing options that could be used to extend our cash runway and further prepare for commercialization of SB206 following approval.
Further advancement of our molluscum program, advancement of any other early-stage or late-stage clinical program across our platform, and supporting our commercial operations until they are profitable are subject to our ability to secure additional capital. Sources of additional capital may potentially include (i) debt or equity financings, such as through sales of common stock, or (ii) other sources, such as partnerships, collaborations, licensing, grants or other strategic relationships. Any issuance of equity, or debt convertible into equity, would result in further significant dilution to our existing stockholders.
In addition to the regulatory progression of SB206, including implementing prelaunch strategy and commercial preparation, subject to obtaining additional financing or strategic partnering, we may progress (a) SB204, is a once-daily, topical monotherapy for the treatment of acne, vulgaris. In the first quarter of 2017, we reported top-line results from two identically designedby commencing a pivotal Phase 3 pivotal clinical trials for SB204. SB204 demonstrated statistical significance compared to vehicle on all three co-primary endpoints in one of the trials but demonstrated statistical significance on only one of three co-primary endpoints in the other trial. We conducted an in-depth examination of the full data sets from these trials, including post hoc analyses in pooled and sub populations, with extensive assistance from third-party expert consultants in biostatistics and regulatory affairs.

In mid-2017, we also completed our 40-week long term safety trial in eligible patients with acne who had previously completed 12 weeks of treatment in the related Phase 3 pivotal trials of SB204. No significant adverse events were observed with over 400 patients followed for six months and over 200 patients followed for one year.

The information generated from the Phase 3 pivotal trials, the post hoc analyses and examinations as well as the long term safety trial is fundamental to the advancement of the SB204 program through regulatory interactions and potential collaborative relationships described below.

o

January 2017—We entered into a license agreement, and a related amendment, with Sato, or the Sato Agreement, whereby we licensed rights to develop, use, and sell SB204 in certain topical dosage forms in Japan for the treatment of acne vulgaris. The significant terms and the related accounting considerations of the Sato Agreement are further described in the “Licensing and Collaboration Arrangements” section below and in “Note 4—Collaboration Arrangements” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.


o

September 2017—We held a productive guidance meeting with the FDA and obtained clinical and regulatory guidance around the SB204 program relative to the previously completed parallel Phase 3 pivotal trials in patients with moderate and severe acne.

o

November 2017—We executed a non-binding term sheet with a third party to create a business structure that would enable further development and advancement of the SB204 program with an additional Phase 3 clinical trial. The business structure envisioned in the non-binding term sheet would access third-party financing and third-party execution of the additional clinical trial.

o

First Quarter of 2018—Novan and the third party continue to evaluate and work towards finalization of the most appropriate design of one or more clinical trial(s) to maximize the probability of success. As part of this process, we are also examining all aspects of the acne field, including recent Phase 3 clinical trial failures in this therapeutic area. The next step requires additional FDA input and guidance that we expect to obtain during a Type C meeting scheduled in the second quarter of 2018. We believe further FDA input from the upcoming meeting will facilitate (i) finalization of our Phase 3 strategy and (ii) conclusion and execution of a definitive agreement with the third party.

As outlined in the details of the November 2017 non-binding term sheet, the exclusivity period between ourselves and the third party expired in early March 2018. We continue to collaborate with the third party on all aspects of the Phase 3 program design and are actively working towards finalization of the definitive agreement. We are targeting these activities to be substantially complete prior to the upcoming FDA meeting so that SB204 can be advanced after the FDA’s feedback is fully incorporated into the final Phase 3 strategy. The finalized third-party business structure may differ from what was envisioned in the non-binding term sheet due to the fluidity of the regulatory feedback, the continued assessment of the optimal strategy as well as the challenging set of co-primary efficacy endpoints. As a result, the business structure may include a blend of capital providers, including corporate and institutional investors. In addition, we may retain an option to participate in some portion of the funding. Both Novan and the third party continue to evaluate the optimal path forward for the asset and believe that feedback from the upcoming FDA meeting will help to provide clarity around that path.

We intend to continue to evaluate various risk/benefit scenarios as we determine how to deploy capital for development in the acne space. We remain highly focused on managing the dynamic process of balancing the upside optionality and the near-term risk that accompanies the anticipated business structure. We target substantially completing a strategic arrangement, consistent with the expected timing for completion of our Phase 3 program design, so that the remaining components of the Phase 3 program could commence during the third quarter of 2018 if the parties agree that the risk/benefit assessment is appropriate to move forward.

SB206 is a first-in-class, topical antiviral gelthat we are developing for the treatment of viral skin infections, with a current focus on genital and perianal warts caused by human papillomavirus, or HPV, and molluscum contagiosum, a contagious skin infection caused by the molluscipoxvirus.

o

Molluscum Contagiosum – In the fourth quarter of 2017, we submitted an investigational new drug application, or IND, for this indication and, in the first quarter of 2018, we initiated a Phase 2 clinical trial utilizing SB206 for the treatment of molluscum. Top line results from this Phase 2 trial are targeted in the fourth quarter of 2018. We will evaluate the results from this Phase 2 trial and consider our financial priorities before determining how best to progress with the development of SB206 in this indication.

o

External Genital Warts – In 2017, we advanced SB206 through the completion of a clinically successful Phase 2 dose-ranging trial in patients with external genital and perianal warts and held a positive end-of-Phase 2 meeting with the FDA. SB206 is currently positioned for Phase 3 pivotal trials in patients with external genital warts. We expect future advancement of SB206 in this indication to occur after the formation of a partnering relationship, which we are actively exploring, or another form of additional funding.

In addition to the aforementioned current focus areas, we are also evaluating whether to conduct development activities for SB206study, or (b) SB019, as a therapypotential intranasal treatment option for HPV-associated sexually transmitted infections, or STIs.

respiratory infections.

We may further consider selectingAs of December 31, 2022, we had total cash and performing pre-clinical developmentcash equivalents of an NCE$12.3 million and a working capital deficit of $4.0 million. As of December 31, 2022, we had $48.3 million in remaining availability for the treatment of high risk neoplasias, including cervical and anal neoplasias, caused by HPV-16 and HPV-18. 

SB208 is a broad-spectrum antifungal gel for the treatment of superficial cutaneous fungal infections of the skin and nails, such as tinea pedis and onychomycosis. We reported positive top-line results from a Phase 2 proof-of-concept trial in patients with clinical signs and symptoms of tinea pedis in the second quarter of 2017. We are currently exploring potential partnerships, collaborations or other strategic relationships to further advance SB208 in tinea pedis and onychomycosis indications.

SB414 is a topical cream-based product candidate that we are developing for the treatment of inflammatory skin diseases, with a current focus on the treatment of psoriasis and atopic dermatitis (eczema). In 2017, we completed all necessary pre-clinical studies, submitted an IND to the FDA, and initiated two Phase 1b clinical trials in the field of immunology. We have fully enrolled and completed patient treatment in a Phase 1b clinical trial to evaluate SB414 cream for the treatment of psoriasis. We are targeting complete results, including biomarker data, in the second quarter of 2018. We have also initiated a Phase 1b trial with SB414 in adults with atopic dermatitis and top line results are targeted in the third quarter of 2018. We expect to evaluate the results from these two trials comprehensively during the second half of 2018 and will then determine the appropriate developmental next steps for SB414.

Corporate Updates—Organizational and Governance Structure Alignment with Current Strategy

Board of Directors

We added three new directors to our board during 2017 and early 2018 to increase scientific, development, and manufacturing expertise critical to the oversight of our drug development strategy. Our board also recently formed a science and technology committee, consisting of members of the board in consultation with the Company’s Executive Management Team. This committee will assist the board in evolving and overseeing the strategic direction and medical applications of our proprietary nitric oxide-based technology.

In February 2018, Eugene Sun was appointed to the board of directors as a non-employee director and chairperson of our science and technology committee.

In September 2017, Machelle Sanders was appointed to the board of directors as a non-employee director and, in November 2017, was also appointed to our compensation committee.

In August 2017, Paula Brown Stafford, our Chief Development Officer, was appointed to the board of directors.

Executive Management Team

During 2017 and early 2018 we repositioned our organizational structure to align with the aforementioned drug development strategy. In addition to the changes described below, we expect certain targeted repositioning activities will continue during 2018 in alignment with our strategy.

In June 2017, G. Kelly Martin, one of our directors, assumed the role of our Chief Executive Officer on an interim basis. At the same time, Nathan Stasko, formerly President and Chief Executive Officer, began his new role of President and Chief Scientific Officer.

Following the departure of Richard Peterson, our former Chief Financial Officer, William L. Hodges was appointed as our Chief Financial Officer and principal financial and accounting officer on an interim basis in March 2017. Mr. Hodges served throughout the remainder of 2017 and then stepped down following the completion of our public offering in January 2018. Jeff N. Hunter, our Chief Business Officer, was appointed to fill the role of Interim Chief Financial Officer and principal financial and accounting officer upon Mr. Hodges stepping down. We are planning to hire a permanent Chief Financial Officer in the first half of 2018.

We expanded other portions of our executive and senior management team, including the appointment of Paula Brown Stafford as Chief Development Officer, the promotion of Jeff N. Hunter to Executive Vice


President and Chief Business Officer and the appointment of Tomoko Maeda-Chubachi, M.D., Ph.D. as Vice President of Medical Dermatology.

In May 2017, M. Joyce Rico, M.D., our former Chief Medical Officer, departed the Company, and in January 2018, Brian Johnson, our former Chief Commercial Officer, departed the Company.

Corporate Updates—Other

Shelf Registration Filing

On October 2, 2017, we filed a shelf registration statement on Form S-3 with the SEC, which the SEC declared effective on October 10, 2017, or the Shelf Registration. The Shelf Registration contained a prospectus which covers:

(i)

the offering, issuance and sale by us of up to a maximum aggregate offering price of $150 million of our common stock, preferred stock, debt securities, warrants, and units, including those that may be issued upon conversion of, in exchange for or upon exercise of any such securities; and

(ii)

the offering, issuance and sale of up to 2,623,485 shares of our common stock held by Malin Life Sciences Holdings Limited, or Malin, our largest stockholder at December 31, 2017. These common stock shares represent Malin’s total shareholding in Novan as of October 2, 2017. Malin requested that we register all of the shares it held to facilitate its ability to utilize the shares as collateral. At the time we filed the Shelf Registration, Malin represented to our board of directors that it had no present intention to sell its shares or monetize its shareholding but reserves its right to manage its balance sheet and equity positions going forward. Malin confirmed it remained supportive of the management team and board of Novan, the potential application of the underlying technology platform in broad dermatological indications and the value proposition of the Company.

January 2018 Offering

On January 9, 2018, we completed a public offeringsales of our common stock and warrants,under the Equity Distribution Agreement dated March 11, 2022, or the January 2018 Offering, under a prospectus supplementEquity Distribution Agreement, with Oppenheimer & Co., Inc., or Oppenheimer. Pursuant to our effective Shelf Registration. We sold an aggregate of 10,000,000 shares of common stockthe Equity Distribution Agreement, we may from time to time issue and warrants to purchase up to 10,000,000 shares ofsell our common stock at a public offering price of $3.80 per share of common stock and accompanying warrant. The warrant exercise price is $4.66 per share and will expire four years from the date of issuance. Net proceeds from the offering were approximately $35.2 million after deducting underwriting discounts and commissions and estimated offering expenses of approximately $2.8 million.  

2016 Incentive Award Plan Amendment

In June 2017,to or through Oppenheimer, acting as our stockholders approved an amendmentsales agent, in at-the-market transactions, subject to our 2016 Incentive Award Plan, or the 2016 Plan, to increase the number of shares that may be issued under the 2016 Plan by 1,200,000 shares.

Amendments to Sublicenses with KNOW Bio

In October 2017, we completed a transaction with KNOW Bio, LLC, or KNOW Bio, granting us exclusive worldwide rights for certain oncovirus applications of nitric oxide-based products. An oncovirus is a virus that causes cancer, including the neoplasias and carcinomas caused by high-risk HPV. The intellectual property rights also allow for potential future translations of nitric oxide as a treatment for rare and orphan diseases caused by other double stranded DNA viruses including Kaposi’s sarcoma-associated herpesvirus (HHV-8) and Merkel cell polyomavirus (MCV). The terms of this transaction are further described in “Note 4—Collaboration Arrangements”limitations. See Note 11—“Stockholders' Equity” to the accompanying consolidated financial statements included in this Annual Report for more information on Form 10-K. Our acquisitionthe Equity Distribution Agreement. In March 2023, we consummated a registered direct offering with an institutional investor for gross proceeds of these intellectual property rights to treat viral malignancies with nitric oxide enables the potential expansion of our product candidate pipeline in the field of virology using existing and new NCEs, as described in the “Overview—Product Candidate Development Outlook” section above.


Sato License Agreement

On January 12, 2017, we entered into a license agreement, and a related amendment, with Sato Pharmaceutical Co., Ltd., or Sato, relating to SB204, our drug candidate for the treatment of acne vulgaris in Japan,approximately $6 million, or the Sato Agreement. Pursuant to the Sato Agreement, as amended, we granted to Sato an exclusive, royalty-bearing, non-transferable right and license under certain of our intellectual property rights, with the right to sublicense with our prior written consent, to develop, use and sell products in Japan that incorporate SB204 in certain topical dosage forms for the treatment of acne vulgaris, and to make the finished form of such products. The rights granted to Sato do not include the right to manufacture the active pharmaceutical ingredient, or API, of SB204; rather the parties agreed to negotiate a commercial supply agreement pursuant to which we or a third party contract manufacturer would be the exclusive supplier to Sato of API for the commercial manufacture of licensed products in the licensed territory. We will also supply finished product for use in development of SB204 in the licensed territory. Under the terms of the Sato Agreement, we also have exclusive rights to certain intellectual property that may be developed by Sato in the future, which we may choose to use for our own development and commercialization of SB204 outside of Japan.  

In exchange for the licenses and rights granted to Sato under the Sato Agreement, Sato agreed to pay us a $10.8 million non-refundable upfront payment, as well as additional milestone payments upon achievement of various future development, regulatory and commercial milestones. Sato must also pay us a royalty equal to a mid-single digit percentage of net sales of licensed products in the licensed territory, subject to a reduction in the royalty payments under specified circumstances.

The Sato Agreement’s significant terms and the related accounting considerations are further described in the “Components of our Results from Operations” section below and in “Note 4—Collaboration Arrangements”March 2023 Registered Direct Offering. See Note 21—“Subsequent Events” to the accompanying consolidated financial statements included in this Annual Report for more information on Form 10-K.

the March 2023 offering.

Our inability to obtain significant additional funding on acceptable terms could have a material adverse effect on our business and cause us to alter or reduce our planned operating activities, including, but not limited to delaying, reducing, terminating or eliminating planned product candidate development activities or our preparations for potential commercial launch of SB206 (berdazimer gel, 10.3%), if approved, to conserve our cash and cash equivalents. We may pursue additional capital through equity or debt financings, including potential sales under the Equity Distribution Agreement, or from other sources, including partnerships, collaborations, licensing, grants or other strategic relationships. Alternatively, we may seek to engage in one or more potential transactions, which could include the sale of our company, or the sale, licensing or divestiture of some of our
60


assets, such as a sale of our dermatology platform assets, but there can be no assurance that we will be able to enter into such a transaction or transactions on a timely basis or at all on terms that are favorable to us.
If we are unable to obtain significant additional funding on acceptable terms or progress with a strategic transaction, we may instead determine to dissolve and liquidate our assets or seek protection under applicable bankruptcy laws. If we decide to dissolve and liquidate our assets or to seek protection under applicable bankruptcy laws, it is unclear to what extent we would be able to pay our obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to stockholders.
Please refer to “Liquidity and Capital Resources” for further discussion of our current liquidity and our future funding needs.
Supply Chain, Manufacturing and Supplies
We currently rely on third-party suppliers to provide the raw materials that are used by us and our third-party manufacturers in the manufacture of our product candidates and commercial products.
We have completed the commissioning of our new facility to support various research and development and cGMP activities, including small-scale manufacturing capabilities for API and drug product associated with our nitric oxide product candidates. We are in the process of, and proceeding with the related preparatory activities associated with, qualifying and validating the manufacturing equipment for use in API production in preparation for the FDA pre-approval inspection in connection with our pending NDA for SB206 (berdazimer gel, 10.3%) as a treatment for molluscum.
Please see additional details related to our “Supply Chain” and “Manufacturing and Supplies”, as described in the section entitled “Business” in this Annual Report.
Financial Overview

Since our inceptionincorporation in 2006 through mid-March 2022, we have devoted substantially all of our efforts to developing our nitric oxide platform technology and resulting product candidates, including conducting preclinical and clinical trials and providing general and administrative support for these operations. We conduct these activitiesWith the acquisition of a commercial entity, EPI Health, in a single operating segment. We have not generated any revenue from product sales and, to date, have funded our operations through a variety of sources described in further detail within the “Liquidity and Capital Resources” section below. From inception through December 31, 2017,March 2022, we have raised totalexpanded our business into marketing and sales efforts with a portfolio of therapeutic products for skin diseases.
To date, we have focused our funding activities primarily on equity raises and debt proceedsstrategic relationships. However, other historical forms of $148.7 million to fund our operations. Wefunding have incurred net losses in each year since inceptionincluded payments received from licensing and supply arrangements, as well as government research contracts.
As of December 31, 2017,2022, we had an accumulated deficit of $160.2 million.$310.3 million, and there is substantial doubt about our ability to continue as a going concern. We incurred net losses of $37.1 million, $59.7$31.3 million and $28.1$29.7 million in the years ended December 31, 2017, 20162022 and 2015,December 31, 2021, respectively. We expect to continue to incur substantial losses in the future as we conduct our planned operating activities.We do not expect
Please refer to generate revenue from product sales unlessthe section entitled “Management’s Discussion and until we obtain regulatory approval from the FDAAnalysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report for our clinical-stage product candidates. If we obtain regulatory approval for anyfurther discussion of our current liquidity and our future funding needs.
Components of our Results of Operations
Revenue
Net Product Revenues
The EPI Health Acquisition has provided our company with a commercial infrastructure to sell a marketed product candidates, there will be significant commercialization expensesportfolio of therapeutic products for skin diseases. Net product revenues represent the sales of medical dermatology products primarily for the treatment of rosacea, plaque psoriasis and acne, including Rhofade, Wynzora and Minolira.
For additional information regarding our accounting for net product revenues, see Note 1—“Organization and Significant Accounting Policies” and Note 13—“Net Product Revenues” to the accompanying consolidated financial statements.
61


License and Collaboration Revenues
License and collaboration revenues consist of (i) the amortization of certain fixed and variable consideration under the Sato license agreement that was entered into during the first quarter of 2017, as amended in October 2018, or the Sato Agreement, that either has been received to date in the form of upfront and milestone payments or non-contingent milestone payments that become payable upon the earlier occurrence of specified fixed dates or are contingent milestone payments that become payable upon the achievement of specified milestone events, (ii) amounts due under the Sato Rhofade Agreement in the form of upfront and milestone payments, and (iii) a distribution and supply agreement related to product sales, marketing, manufacturingan out-license of an authorized generic, or AG, version of Cloderm, or Cloderm AG.
For additional information regarding our accounting for license and distribution.

In addition, we expect that we will continuecollaboration revenues, see Note 1—“Organization and Significant Accounting Policies” and Note 14—“License and Collaboration Revenues” to incur substantial expenses as we continue clinical trialsthe accompanying consolidated financial statements.

Government Research Contracts and preclinical studies for,Grants Revenue
Government research contracts and grant revenue relates to the research and development of our product candidatesnitric oxide platform for preclinical advancement of NCEs and maintain, expandformulations related to potential treatments for illnesses in the women’s health field. Revenue related to conditional government contracts and protect our intellectual property portfolio. As a result, in additiongrants is recognized when qualifying expenses are incurred.
Cost of Goods Sold
Cost of goods sold includes all costs directly incurred to the proceeds that we recently receivedproduce net revenues from our January 2018 Offering, we will need substantial additional fundingmarketed portfolio of medical dermatology products. Cost of goods sold primarily consist of (i) costs to supportprocure, ship, handle and warehouse our plannedmarketed drug products, and future operating activities. Adequate future funding may not be available to us on acceptable terms, or at all. The current market value of our common stock may negatively impact funding options(ii) royalty and the acceptability of funding terms. Additionally, we expect future advancement of certain of our product candidates to occur after the formation of partnering relationships. Our failure to obtain sufficient additional funds on acceptable terms as and when needed, or our failure to enter into partnering relationships for our product candidates, could cause us to alter or reduce our planned operating activities, including but not limited to delaying or discontinuing planned product candidate development activities, to conserve our cash and cash equivalents. Such actions could delay development timelines and have a material adverse effect on our business, results of operations and financial condition and market valuation. As further discussedmilestone expenses incurred in our audited financial statements and related footnotes included in this Annual Report on Form 10-K, these matters raise substantial doubt about our ability to continue as a going concern.


Components of our Results of Operations

Revenue

Licensing and collaboration revenue consists of the amortization of a non-refundable $10.8 million upfront payment received under the Sato Agreement. The material terms of the Sato Agreement and related revenue recognition are described above and within “Note 4—Collaboration Arrangements” to our consolidated financial statements included in this Annual Report on Form 10-K. The $10.8 million upfront consideration under this agreement is being recognized on a straight-line basis over the estimated performance period, which is currently March 2017 through the first quarter of 2022.

Research and development services revenue is associatedconnection with the master development servicesvarious license, collaboration and clinical supply agreement and related statementsasset purchase agreements underlying our marketed portfolio of work we entered into with KNOW Bio, or collectively the KNOW Bio Services Agreement. Under the KNOW Bio Services Agreement, we are providing certain development and manufacturing services to KNOW Bio in exchange for service fees. Although existing services have contractual budget estimates totaling approximately $0.9 million, the service fees are billed on a cost-plus basis based on actual time and materials incurred by us. We recognized approximately $0.4 million of services revenue during the year ended December 31, 2017. In January 2018, upon request by KNOW Bio, we stopped performing remaining development or manufacturing services contemplated under the Services Agreement and we cannot currently estimate if or when we may perform further services for KNOW Bio under existing or future statements of work. We do not expect the fees we may receive under the KNOW Bio Services Agreement, if any, to significantly increase the period over which our cash and cash equivalents can fund our operating expenses. Our accounting policies pertaining to KNOW Bio are included in “Note 1—Organization and Significant Accounting Policies” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.

See “Note 1—Organization and Significant Accounting Policies” to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details regarding the new revenue recognition standard, which became effective January 1, 2018.

medical dermatology products.

Research and Development Expenses

Since our inception, we have focused our resources on our research

Research and development activities includinginclude conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. Research and development expenses, including those paid to third parties for which there is no alternative use, are expensed as they are incurred. Research and development expenses include:

external research and development expenses incurred under agreements with contractclinical research organizations, or CROs, investigative sites and consultants to conduct our clinical trials and preclinical and non-clinical studies;

costs to acquire, develop and manufacture supplies for clinical trials and preclinical studies including fees paidat our facilities;

costs to establish drug substance and drug product manufacturing capabilities with external contract manufacturing organizations, or CMOs;

CMOs, and to enhance drug delivery device technologies through partnerships with technology manufacturing vendors;

legal and other professional fees related to compliance with FDA requirements;

licensing fees and milestone payments incurred under license agreements;

salaries and related costs, including stock-based compensation, and travel expenses, for personnel in our research and development functions; and

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, utilities, equipment and other supplies.

From inception through December 31, 2017, we have incurred approximately $113.9 million in research and development expenses to develop, expand or otherwise improve our nitric oxide platform and resulting product candidates, as well as costs incurred to generate research and development services revenue. The table below sets forth our external research and development expenses incurred for current product candidates and unallocated internal research and development expenses for the years ended December 31, 2017, 2016 and 2015. All research


and development salaries and related personnel costs, as well as certain manufacturing costs, facilities expenses and costs incurred to generate research and development services revenue, are included in unallocated internal research and development expenses.

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

External:

 

 

 

 

 

 

 

 

 

 

 

 

SB204

 

$

7,000

 

 

$

33,158

 

 

$

8,569

 

SB206

 

 

527

 

 

 

2,362

 

 

 

2,141

 

SB208

 

 

386

 

 

 

1,594

 

 

 

 

SB414

 

 

2,757

 

 

 

602

 

 

 

 

Other programs

 

 

254

 

 

 

241

 

 

 

975

 

Unallocated internal research and development expenses

 

 

14,288

 

 

 

8,532

 

 

 

4,884

 

Total research and development expenses

 

$

25,212

 

 

$

46,489

 

 

$

16,569

 

We expect that for the foreseeable future, the substantial majority of our research and development efforts will be focused on (i) technical transfer and supportive manufacturing activities by our clinical programsdrug product CMO, (ii) operational testing and validation activities related to the NDA pre-inspection process, and (iii) regulatory and quality documentation compilation related to our CMC data, and our future pipeline development. Major clinicaldrug manufacturing and preclinical development activities conducted during the year ended December 31, 2017 are summarized as follows:

For SB204, we completed parallel pivotal Phase 3 trials early in 2017, followed by completion of a 40-week long term safety trial in eligible patients with acne who had previously completed 12 weeks of treatment in the related Phase 3 pivotal trials of SB204 in the third quarter of 2017.

related processes.

For SB206, we completed a Phase 2 clinical trial for the treatment of external genital warts and announced top-line results in the fourth quarter of 2016. We also submitted an IND in the fourth quarter of 2017 for the treatment of molluscum contagiosum and began start-up activities for the ongoing Phase 2 clinical trial in patients with molluscum.  

For SB208, we initiated a Phase 2 clinical development program in July 2016 and announced positive top-line results in April 2017.

For SB414, we completed our preclinical studies and submitted an IND to the FDA during the third quarter of 2017 and initiated our two currently ongoing Phase 1b clinical trials.   

We expect to incur substantial costs in 2023 associated with our research and development expenses inpersonnel, and manufacturing capability costs related to the future as we developinfrastructure necessary to support small-scale drug substance and drug product manufacturing operations at our clinical product candidates and for other existing or future product candidates. In particular, we expect to continue to incur substantial external development service provider fees and other research and developmentcorporate headquarters, including capital costs in 2018 for ongoing activities summarized in the development plan in the “Overview—Development Activities and Outlook” section above. Although we expect to incur substantial external research and development expenses in 2018 for the aforementioned activities, we expect these expenses will be lower than external research and development expenses incurred in 2017. Further, the future advancement of the SB204 and SB208 product candidates are subject to our ability to identify partnerships, collaborations or other strategic relationships currently being explored.depreciation and various ongoing operating costs. We may decide to revise our development and operating plans or the related timing, depending on information we learn through our research and development activities, and depending onincluding regulatory submission updates related to SB206, potential SB206 commercialization strategies, the impact of outside factors such as the COVID-19 pandemic, our ability to enter into strategic arrangements, our ability to access additional capital and our financial priorities.

62


The successful development and potential regulatory approval of our product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs required to complete the remaining development of our current product candidates or any future product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates. See the section entitled “Risk Factors” section in this Annual Report on Form 10-K for a discussion of the risks and uncertainties associated with our research and development projects.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of salaries and related costs, including stock-based compensation and travel expenses, for personnel in our executive,commercial, field sales, marketing, market access, medical affairs, regulatory, finance, commercial, corporate development and other administrative functions. Other selling, general and administrative expenses include advertising, promotion, travel, consulting, market research costs, prelaunch strategy costs, medical affairs, and commercial costs, including commercial preparation activities for our lead product candidate, SB206, allocated depreciation and


facility-related costs, legal costs of pursuing patent protection of our intellectual property, insurance coverage and professional services fees for auditing, tax, general legal, business development, litigation defense and other corporate and administrative services.

We expect to continue to incur substantial selling, general and administrative expenses in 20182023 in support of our commercial product developmentportfolio and the prelaunch strategy and commercial preparation activities for SB206. We may decide to revise our plans or the related timing associated with our commercial product portfolio, and prelaunch strategy and commercial preparation activities for SB206, depending on information we learn through our regulatory submission updates and potential SB206 commercialization strategies.
We also expect to continue to incur substantial selling, general and administrative expenses in 2023 in support of our operating activities and as necessary to operate in a public company environment. Significant general and administrativeThese expenses associated with operations in a public company environment include legal, accounting, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, directors’ and officers’ liability insurance premiums and investor relations activities. In addition, we expect litigation defense fees
Amortization of Intangible Assets
Amortization of intangible assets is associated with the amortization of definite lived intangible assets acquired as part of the EPI Health Acquisition.
For additional information regarding the recognition and amortization of our intangible assets, see Note 7—“Goodwill and Intangible Assets, net” to increase during 2018the accompanying consolidated financial statements.
Change in Fair Value of Contingent Consideration
Contingent consideration is recorded as we vigorously defenda liability and is the putative stockholder class action lawsuits as describedestimate of the fair value of potential milestone payments related to the EPI Health Acquisition. The estimated fair value of contingent consideration was determined based on a probability-weighted valuation model that measures the present value of the probable cash payments based upon the future milestone events of EPI Health at a discount rate that captures the risk associated with the liability and also based on a Monte Carlo simulation, whereby EPI Health’s forecasted net sales from the EPI Health legacy products were simulated over the measurement period to calculate the contingent consideration. Contingent consideration is remeasured at each reporting date and any changes in the section entitled “Legal Proceedings”liability are recorded within the consolidated statement of this Annual Reportoperations and comprehensive loss.
For additional information regarding the valuation of contingent consideration, see Note 19—“Fair Value” to the accompanying consolidated financial statements.
Impairment Loss on Form 10-K.

Long-lived Assets

During the second quarter of 2021, we assessed the carrying value of a disposal group classified as assets held for sale in the accompanying consolidated balance sheets. The disposal group and related assets consisted of certain manufacturing and laboratory equipment associated with our previous large scale drug manufacturing capability that was being sold over time through a consignment seller. Based on our assessment of the disposal group’s recoverability, during the three months ended June 30, 2021, we recognized an impairment loss on long-lived assets that represented the full write off of its remaining carrying value.
Other Income (Expense), net

Other income (expense), net consists primarily of (i) leaseforeign currency adjustments related to the contract asset and contract receivables related to the Sato Agreement, (ii) interest expense on our primary facility lease financing obligation, (ii)outstanding notes payable, (iii) interest income earned on cash and cash equivalents, (iv) gain on extinguishment of debt related to the forgiveness of our PPP loan and (iii)extinguishment of our note payable related to the EPI Health Acquisition, and (v) other miscellaneous expenses. We expect to continue to incur interest expense on our primary facility lease financing obligation during 2018income and through the remainderexpenses.
63


Financial Information About Segments
Management evaluates performance of the initial lease termCompany based on operating segments. Segment performance for our two operating segments is based on segment net revenue and net loss. Our reportable segments consist of (i) research and development activities related to our nitric oxide-based technology to develop product candidates, or the Research and Development Operations segment, and (ii) the promotion of commercial products for the treatment of medical dermatological conditions, or the Commercial Operations segment. We do not currently evaluate certain items at the segment level, including certain selling, general and administrative expenses that expiresresult from shared infrastructure, certain expenses associated with litigation and other legal matters, public company costs (e.g. investor relations), board of directors and principal executive officers, and other like shared expenses.
See Note 20—“Segment Information” in 2026.  

the accompanying consolidated financial statements included in this Annual Report for more information about our reportable segments.

Results of Operations

Comparison of the Years Ended December 31, 20172022 and 2016

December 31, 2021

The following table sets forth our results of operations for the periods indicated:

 

Year Ended December 31,

 

 

 

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

Year Ended December 31, 

 

(in thousands, except percentages)

 

20222021$ Change% Change
(in thousands, except percentages)
Net product revenuesNet product revenues$15,796 $— $15,796 *

License and collaboration revenue

 

$

1,765

 

 

$

 

 

$

1,765

 

 

 

100

%

License and collaboration revenue7,813 2,822 4,991 177 %

Research and development services revenue

 

 

375

 

 

 

 

 

 

375

 

 

 

100

%

Government research contracts and grants revenueGovernment research contracts and grants revenue73 136 (63)(46)%

Total revenue

 

 

2,140

 

 

 

 

 

 

2,140

 

 

 

100

%

Total revenue23,682 2,958 20,724 701 %

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:
Cost of goods soldCost of goods sold7,379 — 7,379 *

Research and development

 

 

25,212

 

 

 

46,489

 

 

 

(21,277

)

 

 

(46

)%

Research and development15,990 20,416 (4,426)(22)%

General and administrative

 

 

13,113

 

 

 

13,337

 

 

 

(224

)

 

 

(2

)%

Selling, general and administrativeSelling, general and administrative34,103 12,343 21,760 176 %
Amortization of intangible assetsAmortization of intangible assets1,600 — 1,600 *
Change in fair value of contingent considerationChange in fair value of contingent consideration(1,160)— (1,160)*
Impairment loss on long-lived assetsImpairment loss on long-lived assets— 114 (114)(100)%

Total operating expenses

 

 

38,325

 

 

 

59,826

 

 

 

(21,501

)

 

 

(36

)%

Total operating expenses57,912 32,873 25,039 76 %

Operating loss

 

 

(36,185

)

 

 

(59,826

)

 

 

23,641

 

 

 

(40

)%

Operating loss(34,230)(29,915)(4,315)14 %

Other (expense) income, net

 

 

(942

)

 

 

127

 

 

 

(1,069

)

 

 

(842

)%

Other income (expense), net:Other income (expense), net:
Interest incomeInterest income53 13 40 308 %
Interest expenseInterest expense(1,452)— (1,452)*
Gain on debt extinguishmentGain on debt extinguishment4,340 956 3,384 354 %
Other expenseOther expense(22)(746)724 (97)%
Total other income (expense), netTotal other income (expense), net2,919 223 2,696 1209 %

Net loss and comprehensive loss

 

$

(37,127

)

 

$

(59,699

)

 

$

22,572

 

 

 

(38

)%

Net loss and comprehensive loss$(31,311)$(29,692)$(1,619)%

Revenue

* Not meaningful
Net product revenues
The EPI Health Acquisition provided commercial infrastructure to sell a marketed product portfolio of therapeutic products for skin diseases. Net product revenues for the year ended December 31, 2022 were $15.8 million, which were all generated by our Commercial Operations segment.
Net product revenues represent the sales of medical dermatology products primarily for the treatment of rosacea, plaque psoriasis, acne and dermatoses, including Rhofade, Wynzora, Minolira and Cloderm. There were no such net product revenues in the comparative period in 2021.
For additional information regarding our accounting for net product revenues, see Note 1—“Organization and Significant Accounting Policies” and Note 13—“Net Product Revenues” to the accompanying consolidated financial statements included in this Annual Report.
64


License and collaboration revenues
License and collaboration revenues were $7.8 million and $2.8 million for the years ended December 31, 2022 and December 31, 2021, respectively. For the year ended December 31, 2022, license and collaboration revenue was comprised of $1.8amounts related to (i) the Amended Sato Agreement, related to the Japanese territory out-license of SB206 and SB204, of $2.6 million, recorded in the Research and Development Operations segment, (ii) $5.0 million related to the December 2022 Sato Rhofade Agreement and the related upfront payment, recorded in the Commercial Operations segment, and (iii) $0.2 million related to the distribution and supply agreement with Prasco, LLC related to the out-license of Cloderm AG (the “Prasco Agreement”), recorded in the Commercial Operations segment.
For the year ended December 31, 2021 license and collaboration revenue was comprised solely of amounts related to the Amended Sato Agreement.
The Amended Sato Agreement and the related revenue recognized is associated with our performance during the period and the related amortization of the non-refundable upfront and expected milestone payments under that agreement. A change in revenue recognized for the years ended December 31, 2022 and December 31, 2021 relates to a change in estimate related to the expected duration of the combined SB204 and SB206 development program timeline in July 2021. This most recent change in estimate resulted in a program timeline extension of the performance period estimate to 10 years, completing in the first quarter of 2027.
The material terms of the Amended Sato Agreement and the December 2022 Sato Rhofade Agreement and related revenue recognition are described in Note 14—“License and Collaboration Revenues” to the accompanying consolidated financial statements included in this Annual Report.
Government Research Contracts and Grants Revenue
Government research contracts and grants revenue totaled $0.1 million and $0.1 million for the years ended December 31, 2022 and December 31, 2021, respectively. These amounts relate to (i) a federal grant from the U.S. Department of Defense’s Congressionally Directed Medical Research Programs, and (ii) a federal grant from the National Institute of Health for certain nitric oxide based anti-viral therapies and their related development.
Cost of goods sold
Cost of goods sold of $7.4 million for the year ended December 31, 20172022 is recorded by our Commercial Operations segment and includes all costs directly incurred to produce net product revenues from our marketed portfolio of medical dermatology products. Cost of goods sold primarily consist of (i) costs to procure, ship, handle and warehouse our marketed drug products, and (ii) royalty and milestone expenses incurred in connection with the various license, collaboration and asset purchase agreements underlying our marketed portfolio of medical dermatology products.
As part of the Sato Rhofade Agreement and third-party obligations related to the amortizationour Rhofade agreements, we accrued 25% of a non-refundablethe upfront payment received underdue to us, resulting in an accrued milestone expense of $1.25 million within cost of goods sold as of December 31, 2022.
For additional information regarding our accounting for cost of goods sold, see Note 1—“Organization and Significant Accounting Policies”, Note 12—“License and Collaboration Agreements”, Note 13—“Net Product Revenues” and Note 14—“License and Collaboration Revenues” to the Sato Agreement, which was executedaccompanying consolidated financial statements included in 2017. this Annual Report.
Research and development services revenueexpenses
Our Research and Development Operations segment incurred the substantial majority of $0.4our research and development expenses, which were $16.0 million for the year ended December 31, 2017 is associated with the development services performed under the KNOW Bio Services Agreement. We had no revenues during the year ended December 31, 2016.

Research and development expenses

Research and development expenses were $25.22022, compared to $20.4 million for the year ended December 31, 2017, compared2021. The net decrease of $4.4 million, or 22%, was primarily related to $46.5a $4.6 million net decrease in the SB206 program, partially offset by a $0.2 million increase in other research and development expenses.

In the SB206 program, we experienced (i) a $6.8 million decrease in gross clinical trial costs primarily due to the B-SIMPLE4 Phase 3 trial execution activities that occurred during the prior year comparative period, and (ii) a $0.9 million increase in contra-research and development expense from the ratable amortization of the Ligand Funding Agreement liability, which represents Ligand’s contribution to specified clinical development and regulatory activities for SB206 as a treatment for molluscum, partly offset by (iii) a $3.1 million increase in regulatory consulting services, stability and other analytical testing services, and CMC consulting services and materials in support of our SB206 NDA submission.
The $0.2 million increase in other research and development expenses was primarily driven by (i) a $0.8 million net increase in research and development personnel costs, and (ii) a $0.4 million net increase in research and development facility operating expenses, partly offset by a $1.0 million net decrease in preclinical development activity costs, including the SB019 program, and research and development facility operating expenses.
65


The $0.8 million net increase in research and development personnel costs is primarily due to (i) a $0.7 million increase in non-cash compensation expense, including stock based compensation, and (ii) a $0.1 million increase in recurring salary and benefits costs.
Selling, general and administrative expenses
Selling, general and administrative expenses were $34.1 million for the year ended December 31, 2016. 2022, compared to $12.3 million during the year ended December 31, 2021.
The decrease of $21.3 million was primarily due totable below sets forth our total selling, general and administrative expenses incurred for the completion of certain clinical trials in our active development programs, including the two parallel Phase 3 pivotal trialsyear ended December 31, 2022 and December 31, 2021 and the long-term safety trialprimary drivers of the fluctuations from the prior period:
Selling, general and administrative expenses
Year Ended December 31, 2021$12,343 
Year Ended December 31, 202234,103 
Change from prior period$21,760
Prior Period Variance Detail
Increase / (Decrease)
EPI Health Acquisition Transaction-related costs$4,691 
EPI Health commercial sales operations13,733 
SB206 prelaunch and commercial preparation1,103 
Tax and insurance costs291 
Facility and depreciation costs295 
Professional services and other administrative costs598 
Personnel and related benefits1,049 
Change from prior period$21,760

The $4.7 million of transaction- and integration-related expenditures incurred in connection with the SB204 program, which resulted in a decreaseEPI Health Acquisition included transaction-related fees paid to banking advisors, insurance brokers, due diligence costs, and legal, regulatory, intellectual property, information technology, valuation and accounting consultants and specialists, and integration-related expenditures associated with transition services, information technology systems, integration project management and continued valuation and accounting consultants and specialists.
The $13.7 million of $26.2selling, general and administrative expenses incurred to support the conduct of EPI Health’s commercial sales operations included (i) $6.9 million of recurring salary, incentive compensation and benefits costs, (ii) $1.4 million of advertising and promotion costs, (iii) $3.8 million of administrative costs related to third-party consultants for regulatory services, external third-party data services and other service providers that support the Phase 2 clinical trial for SB206, which resulted in a decreasecommercial sales and operations teams, and (iv) $1.6 million of $1.9 milliontravel and the Phase 2 clinical trial for SB208, which resulted in a decrease of $1.2 million. These program costs were partially offset by a $2.2expense related costs.
The $1.0 million increase in SB414 development


program costs as we (i) completed preclinical studies in preparation for the IND that we submitted in the third quarter of 2017general and (ii) conducted clinical start-up activitiesadministrative personnel and initiated two Phase 1b trials in patients with psoriasis and atopic dermatitis.

We also had an increase of $5.8 million in unallocated internal research and development expenses due to a $3.2 million increase in research and development personnel costs, of which $1.3 million represents non-cash stock compensation expense, and a $2.6 million increase in facility and manufacturing costs. The $3.2 million increase in personnelrelated costs includes $0.6 million in cash severance costs associated with(i) a workforce reduction and the departure of certain officers and employees, which was incurred in the second quarter of 2017, and a related $0.2$0.9 million increase in non-cash stock compensation expense associated with the accelerated vesting of option awards. The remaining increase in personnel costs includes an increase in stock based compensation, expense of $1.1 million associated with awards recently granted to our research and development personnel and $1.3 million associated with the targeted expansion of our organizational structure in support of our current development strategy. The $2.6(ii) a $0.1 million increase in facilityrecurring salary and manufacturingbenefits costs is primarily due to a full yearbetween the two comparative periods.

Amortization of operations in our current office, laboratory and manufacturing facility in Morrisville, North Carolina, which we began to occupy in October 2016.

General and administrative expenses

General and administrative expenses were $13.1intangible assets

Amortization of intangible assets of $1.6 million for the year ended December 31, 2017, compared2022 is associated with the amortization of definite lived intangible assets acquired as part of the EPI Health Acquisition.
For additional information regarding the recognition and amortization of our intangible assets, see Note 7—“Goodwill and Intangible Assets, net” to $13.3 millionthe accompanying consolidated financial statements included in this Annual Report.
Change in fair value of contingent consideration
For the year ended December 31, 2022, the changes in fair value related to contingent consideration related to the EPI Health Acquisition related primarily to changes in market assumptions, management forecasts and discount rates since the transaction date. For additional information regarding contingent consideration valuation, see Note 19—“Fair Value” to the accompanying consolidated financial statements included in this Annual Report.
66


Impairment loss on long-lived assets
During the second quarter of 2021, we assessed the carrying value of a disposal group classified as assets held for sale in our condensed consolidated balance sheets. The disposal group and related assets consisted of certain manufacturing and laboratory equipment associated with our previous large scale drug manufacturing capability that was being sold over time through a consignment seller. Based on our assessment of the disposal group’s recoverability, during the year ended December 31, 2016. The decrease of approximately $0.2 million was primarily due to decreases of $1.9 million in market research and related costs,2021, we recognized a $0.1 million in personnel costs and $0.4 million in general corporate costs. These decreases were partially offset by an increasenon-cash impairment loss on long-lived assets that represented the full write off of $2.2 million in professional services, insurance, board compensation and other administrative costs necessary to support our operations as a public company. The $0.1 millionits remaining carrying value.
Other income (expense), net decrease in personnel costs included certain cost increases and decreases that ultimately resulted in a net decrease. For example, in 2017, we incurred discrete severance costs related to a workforce reduction and the departure of our former Chief Financial Officer that resulted in a total increase of $0.8 million, including $0.5 million of cash severance costs and $0.3 million in related non-cash stock compensation expense associated with the accelerated vesting of option awards.
Other personnel cost increases included a $0.9 million of non-cash stock compensation expense associated with awards granted in 2017 and $0.2 million of travel-related costs. These increases were offset by a $1.7 million decrease in salaries, benefits and accrued bonus compensation costs following the aforementioned resource realignment events that occurred in 2017.

Other (expense) income, net

Other (expense) income, net was ($0.9) million expense for the year ended December 31, 2017, compared to $0.1 million income for the year ended December 31, 2016.  The net expense increase of approximately $1.1 million was primarily due to the recognition of approximately $1.0 million of interest expense on our primary facility lease financing obligation beginning in the first quarter of 2017, following the completion of the facility’s build-out phase in December 2016.


Comparison of the Years Ended December 31, 2016 and 2015

The following table sets forth our results of operations for the periods indicated:

 

 

Year Ended December 31,

 

 

 

 

 

 

2016

 

 

2015

 

 

$ Change

 

 

% Change

 

 

 

(in thousands, except percentages)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

46,489

 

 

$

16,569

 

 

$

29,920

 

 

 

181

%

General and administrative

 

 

13,337

 

 

 

9,265

 

 

 

4,072

 

 

 

44

%

Total operating expenses

 

 

59,826

 

 

 

25,834

 

 

 

33,992

 

 

 

132

%

Operating loss

 

 

(59,826

)

 

 

(25,834

)

 

 

(33,992

)

 

 

132

%

Other income, net

 

 

127

 

 

 

48

 

 

 

79

 

 

*

 

Loss from continuing operations

 

 

(59,699

)

 

 

(25,786

)

 

 

(33,913

)

 

 

132

%

Loss from discontinued operations

 

 

 

 

 

(2,274

)

 

 

2,274

 

 

*

 

Net loss

 

$

(59,699

)

 

$

(28,060

)

 

$

(31,639

)

 

 

113

%

* Not Meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

Research and development expenses were $46.5$2.9 million for the year ended December 31, 2016,2022, compared to $16.6$0.2 million for the year ended December 31, 2015. The increase of $29.9 million was primarily due to increases in our active development programs, including $24.6 million in the SB204 program, $0.2 million in the SB206 program, $1.4 million in the SB208 program and $0.1 million in the SB414 program preclinical development activities. We also had an increase of $3.6 million in unallocated internal research and development expenses. The increases during the year ended December 31, 2016 were primarily associated with the commencement and conduct of our Phase 3 clinical trials for SB204, the continued conduct and completion of our Phase 2 clinical trial for SB206, the commencement and conduct of our Phase 2 clinical program for SB208 and continued preclinical research and development for SB414. The increase in our other unallocated internal research and development expenses was primarily the result of increased personnel and related costs that support and administer our active development programs.

General and administrative expenses

General and administrative expenses were $13.3 million for the year ended December 31, 2016, compared to $9.3 million during the year ended December 31, 2015. The increase of approximately $4.1 million2021. This change was primarily due to a $4.3 million gain on debt extinguishment recognized in connection with the termination of the Seller Note during the third quarter of 2022, partially offset by $1.4 million of interest expense related to the Seller Note issued in March 2022 in connection with the EPI Health Acquisition.

Total other income, net in the comparative 2021 period is primarily comprised of a $1.0 million gain on extinguishment of debt related to the forgiveness of our PPP loan in 2021, partially offset by $0.7 million of other expense related to the impact of foreign currency exchange rate fluctuations for certain time-based milestones related to the Amended Sato Agreement.
For additional information regarding the Seller Note and the accounting for its termination, see Note 10—“Notes Payable” to the accompanying consolidated financial statements included in this Annual Report.
Liquidity and Capital Resources
As of December 31, 2022, we had an accumulated deficit of $310.3 million. We incurred net losses of $31.3 million and $29.7 million for the years ended December 31, 2022 and December 31, 2021, respectively, and there is substantial doubt about our ability to continue as a going concern. Despite revenues generated from the sales of commercial products acquired during the EPI Health Acquisition, we anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we further commercialize our existing commercial products and continue the development of, and seek regulatory approvals for, our product candidates and potentially begin commercialization activities for our product candidates that are currently under development. We are subject to all of the risks inherent in personnelthe commercialization of drug products, such as risks related to competition, supply issues or issues that may impact use of our commercial drug products, and in the development of new pharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The sales of our commercial products will decrease over time if and when they face generic competition or if other risks materialize, and we do not expect to generate revenue from product sales for our clinical-stage product candidates unless and until we obtain regulatory approval from the FDA for such product candidates. We will continue to incur significant expenses related coststo the commercialization of our commercial products, and if we obtain regulatory approval for any of our product candidates, we and/or our commercial partners and commercial solutions providers would expect to incur significant expenses related to product sales, marketing, manufacturing and distribution.
As of December 31, 2022, we had total cash and cash equivalents of $12.3 million and a working capital deficit of $4.0 million. As discussed below, we used a portion of our cash and cash equivalents to pay off and terminate the Seller Note issued in connection with the EPI Health Acquisition, as well as to fund the EPI Health Acquisition. With the payment and termination of the Seller Note for a reduced amount of principal, we have removed certain previously existing liabilities and eliminated the need to make cash payments to service the interest on the Seller Note going forward. This allows us to use our cash for development of our product candidates and to support the growthcommercialization of our researchproducts. The payment and development activitiestermination of the Seller Note removed encumbrances from the assets of EPI Health and allows us to pursue a broader range of financing options that could be used to extend our cash runway and to perform various other administrative functions, a $2.1 million increase in market research and related costs and a $1.0 million increase in professional services, insurance, board compensation and other administrative costs necessary to support our operations as a public company.

Liquidity and Capital Resources

Since our inceptionfurther prepare for commercialization of SB206 following approval.

From January 1, 2021 through December 31, 2017,2022, we have financedraised total equity and debt proceeds of $70.1 million to fund our operations, primarily with $148.7including (i) $14.0 million in net proceeds from the issuance and sale of equity securitiescommon stock (or pre-funded warrants in lieu thereof) and convertible debt securities, including $44.6accompanying common warrants in the June 2022 Registered Direct Offering, (ii) $37.2 million in net proceeds from the sale of common stock in the June 2021 public offering, (iii) $6.3 million in proceeds from the sale of common stock under our 2016 initialcommon stock purchase agreements with Aspire Capital, (iv) $1.7 million from our Equity Distribution Agreement, (v) a net of $10.3 million from our accounts receivable factoring facility, (vi) an additional $0.5 million of proceeds associated with exercises of common stock warrants issued as part of the March 2020 public offering. Other historical formsoffering and March 2020 registered direct offering and (vii) less than $0.1 million of proceeds from the exercise of stock options.
To date, we have focused our funding have included payments received from licensingactivities primarily on equity financings, while generating additional liquidity and supply arrangements and governmentcapital through other sources, including (i) governmental research contracts and grants.  We received an upfront payment of approximately $10.8grants totaling $12.9 million, following(ii) our licensing and
67


supply arrangements with Sato, totaling $38.1 million, and (iii) $25.0 million and $12.0 million in proceeds from two funding transactions during the execution of the Sato Agreement in the firstsecond quarter of 20172019 with Reedy Creek Investments LLC, or Reedy Creek, and Ligand, respectively.
Going forward, we plan to finance our needs principally from the following:
equity and/or debt financing, including but not limited to sales under the Equity Distribution Agreement, with certain limitations as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Requirements”;
revenues from product sales;
payments under existing out-license and distribution arrangements for the exclusive right to develop, useour product candidates and sell SB204 in certain topical dosage forms in Japan for the treatment of acne vulgaris.  

As of December 31, 2017, we had $2.5 million ofcommercial products; and

payments under current or future collaboration and licensing agreements with strategic partners.
We believe that our existing cash and cash equivalents and negative working capital of ($4.7) million. We believe that cash on hand as of December 31, 2017, when combined2022, plus expected receipts associated with the net proceedsproduct sales from our January 2018commercial product portfolio and the proceeds of the March 2023 Registered Direct Offering, will provide us with adequate liquidity to fund our planned operating needs into the latter part of the second quarter of 2019. However,2023. Variability in our operating forecast, driven primarily by (i) commercial product sales, (ii) timing of operating expenditures, and (iii) unanticipated changes in net working capital, will impact our cash runway. This operating forecast and related cash projection includes (i) costs associated with preparing for and seeking U.S. regulatory approval of SB206 as described ina treatment for molluscum (ii) costs associated with the section below entitled “Capital Requirements,readiness and operation of our new manufacturing capability necessary to support small-scale drug substance and drug product manufacturing, (iii) conducting drug manufacturing activities with external third-party CMOs, (iv) ongoing commercial operations, including sales, marketing, inventory procurement and distribution, and supportive activities, related to our portfolio of therapeutic products for skin diseases acquired with the EPI Health Acquisition, and (v) initial efforts to support potential commercialization of SB206, but excludes additional operating costs that could occur between the NDA submission for SB206 through NDA approval, including, but not limited to, marketing and commercialization efforts to achieve potential launch of SB206. We may decide to revise our development and operating plans or the related timing, depending on information we anticipate that welearn through our research and development activities, including regulatory efforts related to SB206, potential commercialization strategies, the impact of outside factors such as the COVID-19 pandemic, our ability to enter into strategic arrangements, our ability to access additional capital and our financial priorities.
We will need


substantial significant additional funding to continue our operating activities, and make further advancements in eachour product development programs and potentially commercialize any of our drugproduct candidates beyond those activities currently included in our operating forecast and related cash projection. Therefore, we will need to secure additional capital or financing and/or delay, defer or reduce our cash expenditures before the end of the second quarter of 2023. There can be no assurance that we will be able to obtain additional capital or financing on terms acceptable to us, on a timely basis or at all.

Our inability to obtain significant additional funding on acceptable terms could have a material adverse effect on our business and cause us to alter or reduce our planned operating activities, including, but not limited to delaying, reducing, terminating or eliminating planned product candidate development programs.

activities, furloughing employees or reducing the size of the workforce, to conserve our cash and cash equivalents. We may pursue additional capital through equity or debt financings, including potential sales under the Equity Distribution Agreement, or from other sources, including partnerships, collaborations, licensing, grants or other strategic relationships. Alternatively, we may seek to engage in one or more potential transactions, which could include the sale of our company, or the sale, licensing or divestiture of some of our assets, such as a sale of our dermatology platform assets, but there can be no assurance that we will be able to enter into such a transaction or transactions on a timely basis or at all on terms that are favorable to us.

If we are unable to obtain significant additional funding on acceptable terms or progress with a strategic transaction, we may instead determine to dissolve and liquidate our assets or seek protection under applicable bankruptcy laws. If we decide to dissolve and liquidate our assets or to seek protection under applicable bankruptcy laws, it is unclear to what extent we would be able to pay our obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to stockholders.
Our cash and cash equivalents are held in a variety of interest-bearing instruments, including money market accounts. Cash in excess of immediate requirements is invested with a view toward liquidity and capital preservation, and we seek to minimize the potential effects of concentration and degrees of risk.

On January 9, 2018, we completed a public offering of our common stock and warrants under a prospectus supplement to our effective shelf registration statement on Form S-3. We sold an aggregate of 10,000,000 shares of common stock and warrants to purchase up to 10,000,000 shares of our common stock at a public offering price of $3.80 per share of common stock and accompanying warrant. The warrant exercise price is $4.66 per share and will expire four years from the date of issuance. Net proceeds from the offering were approximately $35.2 million after deducting underwriting discounts and commissions and estimated offering expenses of approximately $2.8 million.

Facility Lease Financing

Our 51,000 square foot leased facility

68


Factoring Arrangement
As discussed further in Morrisville, North Carolina serves as our corporate headquarters and primary research, development and manufacturing facility. We have accounted for the lease for this facility as a capitalized asset and a corresponding facility financing obligation on our balance sheets.  We began recognizing interest expense associated with this financing obligation in the first quarter of 2017, following completion of the build-out phase in December 2016. See “Note 1—Organization and Significant Accounting Policies” and “Note 6Note 9—“Commitments and Contingencies” to the accompanying consolidated financial statements included in this Annual Report, EPI Health entered into an accounts receivable-backed factoring agreement with Bay View. Pursuant to the Factoring Agreement, EPI Health may sell certain trade accounts receivable to Bay View from time to time, with recourse. The factoring facility provides for EPI Health to have access to the lesser of (i) $15.0 million, or the Maximum Credit, or (ii) the sum of all undisputed receivables purchased by Bay View multiplied by 70% (which percentages may be adjusted by Bay View in its sole discretion), less any reserved funds. Upon receipt of any advance, EPI Health will have sold and assigned all of its rights in such receivables and all proceeds thereof. EPI Health factors the accounts receivable on Form 10-Ka recourse basis. Therefore, if Bay View cannot collect the factored accounts receivable from the customer, EPI Health must refund the advance amount remitted to it for further discussionany uncollected accounts receivable from the customer.
As of December 31, 2022, $10.3 million of advances were outstanding under the factoring facility. The proceeds of the accountingfactoring will be used to fund general working capital needs. We have been and will be charged a financing and factoring fee in connection with the Factoring Agreement, and the extent to which we can utilize the Factoring Agreement is limited to the Maximum Credit and dependent on the extent to which we generate qualifying accounts receivable.
March 2022 Equity Distribution Agreement – At-the-Market Facility
On March 11, 2022, we entered into an Equity Distribution Agreement, or the Equity Distribution Agreement, with Oppenheimer & Co. Inc., or Oppenheimer. Pursuant to the Equity Distribution Agreement, we may from time to time issue and sell to or through Oppenheimer, acting as our sales agent, shares of our common stock, par value $0.0001 per share having an aggregate offering price of up to $50.0 million. Sales of the shares, if any, will be made by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act, or, if expressly authorized by us, in privately negotiated transactions. As sales agent, Oppenheimer will offer the shares at prevailing market prices and will use its commercially reasonable efforts, consistent with its sales and trading practices, to sell on our behalf all of the shares requested to be sold by us, subject to the terms and conditions of the Equity Distribution Agreement. We or Oppenheimer may suspend the offering of the shares upon proper notice to the other party. The offering of the shares pursuant to the Equity Distribution Agreement will terminate upon the sale of shares in an aggregate offering amount equal to $50.0 million, or sooner if either we or Oppenheimer terminate the Equity Distribution Agreement as permitted by its terms. We will pay Oppenheimer a commission in connection with sales under the Equity Distribution Agreement, and the extent to which we can utilize the Equity Distribution Agreement is limited by factors such as market conditions and the terms of the Equity Distribution Agreement.
During the year ended December 31, 2022, we sold 645,105 shares of our common stock at an average price of approximately $2.66 per share for total net proceeds of $1.7 million under the Equity Distribution Agreement.
See Note 11—“Stockholders' Equity” to the accompanying consolidated financial statements included in this lease.  

Annual Report for additional information regarding Equity Distribution Agreement.

June 2022 Registered Direct Offering
On June 9, 2022, we entered into a securities purchase agreement with an institutional investor, or the Purchaser, pursuant to which we agreed to issue and sell to the Purchaser, in a registered direct offering priced at-the-market under Nasdaq rules, or the June 2022 Registered Direct Offering (i) 2,080,696 shares, or the June 2022 Shares of our common stock, and accompanying common stock warrants, or the June 2022 Common Warrants, to purchase an aggregate of 2,080,696 shares of common stock, for a combined price of $2.851 per share and accompanying common warrant, and (ii) pre-funded warrants to purchase 3,180,615 shares of our common stock, or the June 2022 Pre-funded Warrants, and accompanying common warrants to purchase 3,180,615 shares of common stock, for a combined price of $2.841 per pre-funded warrant and accompanying common warrant. The June 2022 Registered Direct Offering closed on June 13, 2022. Net proceeds from the offering were approximately $14.0 million after deducting fees and commissions and offering expenses of approximately $0.9 million. Offering costs were netted against the offering proceeds and recorded to additional paid-in capital.
As of December 31, 2022, no June 2022 Pre-funded Warrants and 5,261,311 June 2022 Common Warrants are outstanding.
We entered into a placement agent agreement, or the “Placement Agent Agreement, dated as of June 9, 2022, engaging Oppenheimer to act as the sole placement agent in connection with the June 2022 Registered Direct Offering. Pursuant to the Placement Agent Agreement, we agreed to pay Oppenheimer a placement agent fee in cash equal to 5.0% of the gross proceeds from the sale of the June 2022 Shares, the June 2022 Pre-funded Warrants and the June 2022 Common Warrants, and to reimburse certain expenses of Oppenheimer in connection with the June 2022 Registered Direct Offering. Each June 2022 Pre-funded Warrant had an exercise price of $0.01 per share. The June 2022 Pre-funded Warrants were exercisable immediately upon issuance until all of the June 2022 Pre-funded Warrants were exercised in full. Each June 2022 Common Warrant is immediately exercisable and has an exercise price of $2.851 per share and will expire five years from the date of issuance.
69


The exercise price and the number of shares of common stock purchasable upon the exercise of the June 2022 Pre-funded Warrants and June 2022 Common Warrants are subject to adjustment upon the occurrence of specific events, including stock dividends, stock splits, reclassifications and combinations of the Company’s common stock.
See Note 11—“Stockholders' Equity” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding the June 2022 Registered Direct Offering.
EPI Health
Acquisition
On March 11, 2022, we completed the acquisition of EPI Health, a commercial-stage pharmaceutical company founded in 2017 that focuses on the commercialization of medical dermatology pharmaceutical products for the treatment of skin conditions. Following the EPI Health Acquisition, our current portfolio includes six branded prescription drugs, and we actively promote three medical dermatological products in the U.S. and derive revenue from the sale of these branded products through pharmaceutical wholesalers as well as direct to pharmacies. These prescription dermatology therapies are targeted to patients with plaque psoriasis, rosacea and acne. The branded and promoted product portfolio currently includes Wynzora, Rhofade and Minolira.
At closing, we paid or committed to pay non-contingent consideration totaling $27.5 million, as adjusted for cash, indebtedness, net working capital estimates and other contractually defined adjustments. The purchase price consisted of (i) $11.0 million paid in cash, (ii) a secured promissory note issued to EPG in the principal amount of $16.5 million, or the Seller Note, and (iii) a $1.0 million payment representing an adjustment for estimated net working capital.
The purchase agreement entered into in connection with the EPI Health Acquisition, or the EPI Heath Purchase Agreement, included the potential payment of additional contingent consideration totaling up to $23.0 million upon achievement of certain milestones.
See Note 2—“Acquisition of EPI Health” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding the acquisition of EPI Health.
Seller Note Payment and Termination
On July 13, 2022, we reached agreement with EPG regarding payment and termination of the outstanding $16.5 million Seller Note related to the EPI Health Acquisition. We achieved this termination by a payment of $10.0 million, or an approximate 39% discount on the original principal amount of the Seller Note. In addition to saving $6.5 million of principal with this termination, we also avoided paying interest over the previous term of the Seller Note of approximately $4.6 million.
Pursuant to the terms of the Seller Note, there was no penalty for repaying the Seller Note prior to the end of the term. In connection with the repayment of the Seller Note, the guaranty agreement between EPG and EPI Health, dated March 11, 2022, was terminated as of July 13, 2022. Accordingly, the liens on the membership interests and assets of EPI Health were also terminated such that no obligations with respect to the Seller Note and related securities agreement or the underlying loan remain outstanding.
See Note 2—“Acquisition of EPI Health” and Note 10—“Notes Payable” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding the acquisition of EPI Health and the Seller Note.
Working Capital Adjustment Payment
On July 7, 2022, we and EPG agreed to the final net working capital adjustment amount as part of the post-closing adjustment to the estimated purchase price for the EPI Health Acquisition. The total adjustment amount was positive and in the amount of $3.1 million, which was paid to EPG on July 7, 2022.
See Note 2—“Acquisition of EPI Health” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding the acquisition of EPI Health.
Licensing Arrangements
Sato Rhofade Agreement
In December 2022, we entered into a license agreement with Sato in which they were granted an exclusive, royalty-bearing, non-transferable right and license under certain of EPI Health's intellectual property rights to develop, manufacture and market Rhofade (oxymetazoline hydrochloride cream, 1%) for the treatment of rosacea in Japan, or the Sato Rhofade Agreement. In addition, per the Sato Rhofade Agreement, during a specified time period, Sato has an exclusive option to negotiate the terms under which its license would be expanded to include certain other countries in the Asia-Pacific region.
70


In exchange for the license granted to Sato, Sato agreed to pay us the following: (i) an upfront payment of $5.0 million; and (ii) a milestone payment of $2.5 million upon receipt of marketing approval of Rhofade for rosacea in the Japan territory. Sato also agreed to pay tiered royalty payments on net sales of the licensed product ranging over time from a percentage of net sales in the mid-teens to a percentage of net sales in the low single digits.
In addition, we are required to pay 25% of the upfront and milestone payment amounts to a third party under existing contractual obligations related to Rhofade and will also be required to pay a portion of the royalty amounts received under the Sato Rhofade Agreement to third parties, after which we will retain net royalties in the low single digits.
For additional information about the Sato Rhofade Agreement, please refer to Note 14—“License and Collaboration Revenues” to the accompanying consolidated financial statements included in this Annual Report.
Wynzora Agreement
Effective as of January 1, 2022, EPI Health entered into an amended and restated promotion and collaboration agreement with MC2 Therapeutics Limited, or MC2, relating to the commercialization of Wynzora for treatment of plaque psoriasis in adults in the United States, or the MC2 Agreement. Pursuant to the MC2 Agreement, which sets forth the collaborative efforts between EPI Health and MC2 to commercialize and promote Wynzora with MC2 in the United States, MC2 granted EPI Health an exclusive right and license under MC2’s intellectual property rights to sell, or detail (as defined in the MC2 Agreement), and engage in certain commercialization activities with respect to Wynzora in the United States.
In exchange for the provision of promotional and commercialization activities, under the terms of the MC2 Agreement, we are entitled to receive:
Reimbursement for all incremental costs incurred by us for the promotion and commercialization of Wynzora, including the incremental portion of our personnel and commercial operating costs. The supply price of Wynzora product inventory is also considered to be an incremental cost that is reimbursed by MC2.
A commercialization fee equivalent to a percentage of net sales ranging from the mid-teens for net sales less than or equal to $65.0 million to the upper single digits for annual net sales greater than $105.0 million. We collect this commercialization fee by retaining our portion of the Wynzora product net sales we collect from our customers, with the remainder of the net sales being remitted by us to MC2 periodically in the form of a royalty payment, pursuant to the MC2 Agreement.
A contingent incentive fee equal to 5% of the first $30.0 million in net sales of Wynzora sold in the United States by EPI Health in each of the 2022 and 2023 calendar years; provided that such incentive fee shall not exceed $1.5 million each year and such incentive fee shall not be credited to us until the royalty payments paid to MC2 surpass the amount of certain commercialization payments made previously by MC2.
The term of the MC2 Agreement runs until the seventh anniversary of the first commercial sale of Wynzora (as defined in the MC2 Agreement) or June 30, 2028, whichever is earlier. Either party may terminate the MC2 Agreement for the other party’s material uncured breach or the bankruptcy or insolvency of the other party. MC2 may terminate the MC2 Agreement under certain scenarios, including for convenience with twelve months’ advance notice to us, provided that the termination is not effective unless MC2 pays any unpaid historical liabilities related to commercialization of Wynzora owed by MC2. In the case of such termination, MC2 is also required to make an additional sunset payment to us, paid in installments over the 24 month period following termination. We may terminate the MC2 Agreement for convenience with twelve months’ advance notice to MC2 provided that the termination is not effective unless we provide MC2 with a guarantee of the payment of any outstanding royalty payments, to the extent such royalty payments owed by us exceeds any unpaid historical liabilities related to commercialization of Wynzora owed by MC2.
For additional information about the Wynzora and MC2 Agreement, please refer to Note 13—“Net Product Revenues” to the accompanying consolidated financial statements included in this Annual Report.
Rhofade Agreements
As described in Note 9—“Commitments and Contingencies” to the accompanying consolidated financial statements included in this Annual Report, EPI Health acquired rights to that certain Assignment and License Agreement, whereby EPI Health licenses certain intellectual property from Aspect Pharmaceuticals, LLC, or Aspect and such agreement, the Aspect Agreement. Under the terms of the Aspect Agreement, EPI Health, as successor-in-interest, has exclusive rights to, and is required to use commercially reasonable efforts to, commercialize the Rhofade product. EPI Health also has a duty to certain other parties to use commercially reasonable efforts to commercialize the Rhofade product based on historical acquisition agreements for Rhofade that were assumed by EPI Health.
The material terms of the Rhofade Agreements and related revenue recognition are described in Note 12—“License and Collaboration Agreements” to the accompanying consolidated financial statements included in this Annual Report.
71


Cash Flows

The following table sets forth our cash flows for the periods indicated:

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operating activities

 

$

(29,857

)

 

$

(48,911

)

 

$

(20,765

)

Continuing investing activities

 

 

(2,142

)

 

 

(6,218

)

 

 

(1,751

)

Continuing financing activities

 

 

(88

)

 

 

44,309

 

 

 

62,351

 

Net decrease in cash and cash equivalents –

   discontinued operations

 

 

 

 

 

(257

)

 

 

(1,566

)

Net increase (decrease) in cash and cash equivalents

 

$

(32,087

)

 

$

(11,077

)

 

$

38,269

 

 Year Ended December 31,
 20222021
 (in thousands)
Net cash (used in) provided by:  
Operating activities$(30,882)$(24,777)
Investing activities(18,859)(7,527)
Financing activities16,019 44,093 
Net increase in cash, cash equivalents and restricted cash$(33,722)$11,789 

Net Cash Used in Continuing Operating Activities

During the year ended December 31, 2017,2022, net cash used in operating activities was $29.9$30.9 million and consisted primarily of a net loss of $37.1$31.3 million, with adjustments for non-cash amounts related primarily to depreciation expense of $1.4 million,(i) stock-based compensation expense of $3.8$1.9 million, (ii) amortization of definite lived intangible assets acquired in the EPI Health Acquisition of $1.6 million, (iii) $1.2 million of depreciation and amortization of property and equipment expense, (iv) a favorable$1.2 million change in fair value of contingent consideration, (v) $4.3 million related to a gain on the extinguishment of the Seller Note, (vi) $0.6 million accretion of debt discount, (vii) a $0.1 million loss on disposal of equipment and (viii) a $0.6 million change in cash related to changes in other operating assets and liabilities of $2.0 million.liabilities. The favorable net changeimpacts to cash related to changes in assets and liabilities was primarily due to receipt of an upfront payment of $10.8(i) a $2.3 million following execution of the Sato Agreement. This increase was partially offset by decreaseschange in accounts receivable, (ii) a change in accounts payable of $11.0 million, and accrued expense balances associated with our outside(iii) a change in prepaid expenses and other current assets of $0.5 million. The unfavorable impacts to cash related to changes in (i) deferred revenue of $2.6 million, (ii) research and development activities duringservice obligation of $1.0 million, (iii) accrued expenses of $9.4 million, and (iv) a change in other long-term assets and liabilities of $0.2 million. The change in operating assets and liabilities and related changes from the prior period including a $4.3 million decrease in accrued outside researchpartially relate to the continued operations of the Research and development services. The decrease in payablesDevelopment Operations segment as it incurs expenditures to progress SB206, but primarily relate to the recently acquired EPI Health business, which comprises the Commercial Operations segment. See Note 2—“Acquisition of EPI Health” to the accompanying consolidated financial statements for additional detail regarding the EPI Acquisition Health and accruals for these services was primarilythe related impacts of the opening balances related to the completion of the Phase 3 pivotal trials and long-term safety trial in our SB204 program and the Phase 2 clinical trial in our SB206 program. In addition, we had approximately $0.2 million in accrued severance costs as of December 31, 2017, which we expect to settle through cash disbursements during the first half of 2018.

EPI Health Acquisition.

During the year ended December 31, 2016,2021, net cash used in operating activities was $48.9$24.8 million and consisted primarily of a net loss of $59.7$29.7 million, with adjustments for non-cash amounts related primarily to (i) depreciation


expense of $0.3 million, (ii) impairment of long-lived assets of $0.1 million, (iii) a foreign currency transaction loss of $0.8 million related to fair value adjustments for payments received and to be received under the Amended Sato Agreement, (iv) stock-based compensation expense of $1.6$0.3 million, (v) a $1.0 million gain on debt extinguishment related to forgiveness of the PPP loan, and (vii) a $8.5$4.3 million favorable change in cash related to changes in other operating assets and liabilities. The favorable net change in cash related to changes in assets and liabilities was primarily due to increasesa $1.5 million increase in accounts payable and accrued expense balancesdeferred revenue associated with our outside research(i) the recognition of license and development activitiescollaboration revenue of $2.8 million associated with the Company’s performance during the period includingand (ii) a $1.4time-based developmental milestone payment that became due and payable as of December 31, 2021 of $4.3 million, a $0.7 million decrease in prepaid insurance, prepaid expenses and other current assets primarily related to a decrease in certain prepaid service contracts, a $1.3 million increase in accrued expenses, which included a $0.7 million increase related to goods and services associated with the planning, design and build-out of our new facility, a $0.5 million increase in accounts payable, and a $4.6$0.3 million increasenet change in accrued outside researchother long-term assets and development services. The increaseliabilities.

Net Cash Used in accounts payable and accruals for these services was primarily related to (i) our increased development program activities in 2016, including the commencement and conduct of our SB204 Phase 3 clinical trials, SB206 Phase 2 clinical trial, and SB208 Phase 2 clinical program; and (ii) the timing of the invoicing and payment for such services. 

Investing Activities

During the year ended December 31, 2015, net cash used in operating activities was $20.82022, the $18.9 million and consisted primarily of a net loss of $28.1 million, which was the result of cash used in our research and development activities, with adjustments for loss from discontinued operations of $2.3 million, non-cash amounts related primarily to depreciation expense of $0.6 million, stock-based compensation expense of $2.0 million, a $0.6 million increase in prepaid expenses related to CRO pre-funding payments and a $3.0 million increase in accrued liabilities, primarily related to higher research and development accruals.

Net Cash Used in Continuing Investing Activities

During the year ended December 31, 2017, net cash used in investing activities was $2.1 million, which primarily related to (i) cash used in connection with the EPI Health Acquisition of $15.1 million, and (ii) $4.3 million in cash used for purchases of laboratoryproperty, equipment and leasehold improvements atservices associated with the build-out of our corporate headquarters and small-scale manufacturing facility in Morrisville,Durham, North Carolina.

Carolina, offset by $0.5 million of payments received related to the landlord funded tenant improvement allowance. See Note 2—“Acquisition of EPI Health” to the accompanying consolidated financial statements for additional detail regarding the EPI Health Acquisition.

During the year ended December 31, 2016,2021, the $7.5 million of net cash used in investing activities was $6.2 million, which related toincluded purchases of property, equipment and equipment of $6.1 million and the purchase of intangible assets of $0.1 million. The purchases of property and equipment in 2016 were primarilyservices associated with laboratory equipmentthe planning, design and our portionbuild-out of the facility build out costs at our new corporate headquarters and small-scale manufacturing facility in Morrisville,Durham, North Carolina.

Carolina, offset by payments received related to the landlord funded tenant improvement allowance. As of December 31, 2021, we also had goods and services associated with the planning, design and

72


build-out of our new facility of $1.5 million included in accounts payable and other accrued expenses in the accompanying balance sheets, which we settled through cash payments during the first half of 2022.
Net Cash Provided by Financing Activities
During the year ended December 31, 2015,2022, net cash used in investingprovided by financing activities was $1.8 million. Net cash used in investing activities during the year ended December 31, 2015 represented purchases of property and equipment of $1.3$16.0 million and $0.5consisted primarily of (i) net proceeds from the June 2022 Registered Direct Offering of $14.1 million, restricted(ii) net proceeds from our factoring arrangement of $10.3 million and (iii) proceeds from the sale of our common stock pursuant to secure a letterthe Equity Distribution Agreement entered into in March 2022 of credit.

Net Cash Provided$1.7 million, offset by Continuing Financing Activities

the repayment and termination of the Seller Note for $10.0 million.

During the year ended December 31, 2017,2021, net cash used inprovided by financing activities was $44.1 million and consisted primarily of (i) $37.6 million of proceeds from the sale of our common stock pursuant to the June 2021 Public Offering, (ii) $6.3 million of proceeds from the sale of our common stock pursuant to the July 2020 Aspire CSPA, (iii) $0.5 million of proceeds from the exercise of common warrants associated with the March 2020 Public Offering and March 2020 Registered Direct Offering, (iv) $0.1 million consisting primarily of deferred offering costs of $0.2 million, which were partially offset by proceeds from the exercise of stock options, partially offset by $0.4 million of $0.1 million.

Duringpayments of costs related to the year endedJune 2021 Public Offering.

Capital Requirements
As of December 31, 2016, net2022, we had a total cash provided by financing activities was $44.3and cash equivalents balance of $12.3 million consisting primarilyand a working capital deficit of $44.6 million in net proceeds$4.0 million. While we currently generate revenue from our IPO, offset by a repurchasecommercial portfolio of common stock, which is now held as treasury stock,products, we do not believe that such revenues will be sufficient to fund the operating expenses of approximately $0.2 million and payments on facility lease obligations of approximately $0.2 million.  

During the year ended December 31, 2015, net cash provided by financing activities was $62.4 million, consisting of $67.1 million from proceeds from the issuance of preferred stock and $0.5 million from the issuance of common stock in connection with the exercise of stock options, offset in part by the $5.2 million of cash distributed as part of the Separation Transaction.

Capital Requirements

our business. To date, we have not generated any revenue from product sales. Wesales of our product candidates, and we do not know when, or if, we will generate any such revenue from our product sales.candidates. We do not expect to generate revenue from product sales of our product candidates unless, and until, we obtain regulatory approval of and commercialize one of our current or future product candidates. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. We are subject to allachieve successful commercialization of the risks incident in the development of new pharmaceutical products, and we may


encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.

Our primary use of cash is to fund our operating expenses, which consist principally of research and development expenditures necessary to advance our clinical-stagesuch product candidates. Based upon our current operating plan, we anticipate that our existing cash and cash equivalents ascandidate. As of December 31, 2017, together with the $35.2 million in net proceeds from the January 2018 Offering, are sufficient to fund our operations into the second quarter2022, we had an accumulated deficit of 2019. $310.3 million.

We are utilizing our existing capital resources to fund the ongoing and near-term development activities in our core programs, as described in the “Overview” section above. In addition to the net proceeds received from the January 2018 Offering, we anticipate that we will need substantialsignificant additional funding to continuesupport our planned and future operating activities and make further advancements in eachour product development programs beyond what is currently included in our operating forecast and related cash projection. We do not currently have sufficient funds to complete commercialization of any of our drugproduct candidates, and our funding needs will largely be determined by our commercialization strategy for SB206, subject to the NDA regulatory approval process and outcome.
Our ability to continue to operate our business, including our ability to advance development programs unrelated to SB206, as summarized in the “Overview” section above. Further advancement of these development programswell as our ability to progress SB206 for molluscum, if approved, is dependent upon future sales of our commercial products along with our ability to access additional sources of capital, through non-dilutiveincluding, but not limited to (i) equity or debt financings, including but not limited to potential sales using the remaining availability under the Equity Distribution Agreement, or (ii) other sources, includingsuch as partnerships, collaborations, licensing, grants or other strategic relationships, or through the issuance of debt or equity securities. We may decide to revise our activities or their timing depending on the availability of additional funding, partnership opportunities and our financial priorities.relationships. There can be no assurance that we will be able to obtain additional capitalnew funding on terms acceptable to us, on a timely basis, or at all. A failureIn addition, we agreed to certain limitations on our ability to raise funds in the short-term through equity financings in connection with the March 2023 Registered Direct Offering. In particular, we agreed not to issue any additional securities for 45 days after closing of the March 2023 Registered Direct Offering and not to make any sales under the Equity Distribution Agreement for 60 days after closing of the March 2023 Registered Direct Offering.
Our inability to obtain sufficient fundssignificant additional funding on acceptable terms when needed could have a material adverse effect on our business and cause us to alter or reduce our planned operating activities, including, but not limited to delaying, reducing, terminating or eliminating planned product candidate development activities, furloughing employees or reducing the size of the workforce, to conserve our cash and cash equivalents. Our anticipated expenditure levels may change if we make adjustments toadjust our current operating plan. Such actions could delay development or commercialization-related timelines and have a material adverse effect on our business, results of operations, financial condition and market valuation. We are also exploring the potential for alternative transactions, such as strategic acquisitions or in-licenses, sales, out-licenses or divestitures of some of our assets, or other potential strategic transactions, which could include a sale of the company. If we were to pursue such a transaction, we may not be able to complete the transaction on a timely basis or at all or on terms that are favorable to us.
Our equity issuances during the years ended December 31, 2022 and December 31, 2021, as well as the March 2023 Registered Direct Offering, have resulted in significant dilution to our existing stockholders. Any future additional issuances of equity, or debt that could be convertible into equity, would result in further significant dilution to our existing stockholders.
As of December 31, 2017,2022, we had an accumulated deficit24,722,308 shares of $160.2 millioncommon stock outstanding. In addition, as of December 31, 2022, we had reserved 7,327,414 shares of common stock for future issuance related to (i) outstanding warrants to purchase common stock, (ii) outstanding stock options and there is substantial doubt about our ability to continuestock appreciation rights, (iii) nonvested restricted stock units, and (iv) future issuances under the 2016 Incentive Award Plan. Our common stock consists of 200,000,000 authorized shares as a going concern if we do not secure adequate additional financing.

of December 31, 2022.

73


We have based our projections of operating capital requirements on assumptions that may prove to be incorrect, and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount or timing of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

market acceptance of approved products and successful commercialization of such products by either us or our partners;

our decision to expand our internal commercialization capabilities;

the initiation, progress, timing, costs, results, and evaluation of results of trials for our clinical-stage product candidates, including trials conducted by us or potential future partners;

the progress, timing, costs and results of development and preclinical study activities relating to other potential applications of our nitric oxide platform;

the number and characteristics of product candidates that we pursue;

the achievement of milestones that would require payment and whether such milestone payments are paid in cash or shares of our common stock, including those set forth in “Note 10—Commitments and Contingencies” to the accompanying condensed consolidated financial statements;

our ability to enter into strategic relationships forto support the continued development of certain product candidates and the success of those arrangements;

our success in scalingoptimizing the size and capability of our new manufacturing process;

facility and related processes to meet our strategic objectives;
our success in the technical transfer of methods and processes related to our drug substance and drug product manufacturing with our current and/or potential future contract manufacturing partners;

the outcome, timing and costs of seeking regulatory approvals;

the occurrence and timing of potential development and regulatory milestones achieved by Sato, our licensee for SB204, SB206 and Rhofade in Japan;

the terms and timing of any future collaborations, licensing, consulting, financing or other arrangements that we may enter into;

the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights;

defending against intellectual property related claims;

the costs associated with our securities litigation, and the outcome of that litigation;

the costs associated with any potential future securities litigation, and the outcome of that litigation;

the extent to which we in-license or acquire other products and technologies; and

subject to receipt of marketing approval, revenue received from commercial sales or out licensing of our product candidates.

candidates; and

We also expect to incur capital expenditures as we continue to invest in information technology systems and equipment at

revenue received from commercial sales of our corporate headquarters and manufacturing facility in Morrisville, North Carolina.

existing medical dermatology products.

Contractual Obligations and Contingent Liabilities

Facility financing lease

We entered into a lease agreement

Factoring Arrangement
As discussed in August 2015 for a facility totaling approximately 51,000 square feet in Morrisville, North Carolina and began to occupy and utilize the facility in October 2016. The term of the lease commenced April 1, 2016 and terminates June 2026. The remaining estimated lease payments for this facility over the term of the lease are approximately $10.8 million. Monthly rental payments will be allocated between principal and interest expense associated with the facility financing obligation, as well as grounds rent expense of $8 per month.

We have accounted for this lease as a capitalized asset and a corresponding facility financing obligation on our balance sheets. See “Note 1—Organization and Significant Accounting Policies” and “Note 6—Note 9—“Commitments and Contingencies” to the accompanying consolidated financial statements included in this Annual Report, EPI Health entered into the Factoring Agreement with Bay View on Form 10-K for further discussionDecember 1, 2022.

In connection with the factoring facility, EPI Health will be charged a finance fee, defined as a floating rate per annum on outstanding advances under the Factoring Agreement, equal to the prime rate plus 2.00%, due on the first day of each month. EPI Health will also be charged a factoring fee of 0.35% of the accountinggross face value of any trade accounts receivable for each 30 day period after the trade accounts receivable is purchased. Bay View has the right to demand repayment of any purchased receivables that remain unpaid for 90 days after purchase (or 100 days in the case of certain wholesale customers) or with respect to which any account debtor asserts a dispute.
74


The factoring facility is for an initial term of 12 months and will renew on a year to year basis thereafter, unless terminated in accordance with the Factoring Agreement. EPI Health may terminate the facility at any time upon 60 days prior written notice and payment to Bay View of an early termination fee equal to 0.25% of the Maximum Credit multiplied by the number of months remaining in the term.
Compensatory Obligations
The Company enters into employment agreements with certain officers and employees. These agreements are in the normal course of business and contain certain customary Company controlled termination provisions which, if triggered, could result in future severance payments.
See Note 16—“Stock Based Compensation” regarding Stock Appreciation Rights, Restricted Stock Units and Stock Options.
Contingent Payment Obligations Related to the Purchase of EPI Health
See Note 2—“Acquisition of EPI Health” for certain contingent payments related to consideration due to EPG upon achievement of certain milestones by EPI Health.
Contingent Payment Obligations from Historical Acquisitions by EPI Health
EPI Health has in the past acquired certain rights to pharmaceutical products and such arrangements have typically included requirements that EPI Health make certain contingent payments to the applicable seller as discussed below.
Rhofade. On October 10, 2019, EPI Health entered into an agreement whereby it acquired certain assets related to Rhofade, or the Rhofade Acquisition Agreement. In connection with the Rhofade Acquisition Agreement, we are required to make the following milestone payments to the seller upon reaching the following net sales thresholds during any calendar year following the closing date, as defined in the Rhofade Acquisition Agreement:
Calendar Year Net Sales ThresholdMilestone Payment
$50,000,000 $5,000,000 
$75,000,000 $5,000,000 
$100,000,000 $10,000,000 
Under the terms of the Rhofade Acquisition Agreement, EPI Health assumed certain liabilities of the prior licensees of the product Rhofade. In particular, we are required to pay certain earnout payments pursuant to historic acquisition agreements for Rhofade upon the achievement of net sales thresholds higher than those set forth above. However, we have not recognized a liability for such Rhofade milestones based on current and historical sales figures and management’s estimates of future sales.
Cloderm. On September 28, 2018, EPI Health entered into an agreement pursuant to which it acquired assets related to the product Cloderm. We are required to pay a low double-digit royalty once cumulative net sales of Cloderm reach $20.8 million, until we have made $6.5 million of royalty payments.
Minolira. On August 20, 2018, EPI Health entered into an agreement pursuant to which it acquired assets related to the product Minolira. In connection with the agreement, we are required to make the following milestone payments to the seller upon reaching cumulative net sales thresholds as defined in the acquisition agreement:
Cumulative Net Sales ThresholdMilestone Payment
$10,000,000 $1,000,000 
$20,000,000 $1,000,000 
Each additional$20,000,000 $1,500,000 
See Note 12—“License and Collaboration Agreements”, Note 13—“Net Product Revenues” and Note 14—“License and Collaboration Revenues” for certain obligations and contingent payments related to license agreements, including those related to our commercial product portfolio.
Facility Leasing Transactions
In January 2021 we entered into a new lease agreement, pursuant to which we leased space located in Durham, North Carolina to serve as the Company’s new corporate headquarters and support various cGMP activities, as described in the section entitled “Business—Manufacturing and Supplies” in this Annual Report.
See the section entitled “Properties” in this Annual Report and Note 6—“Leases” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding our facility lease.

75


Amended Sato Agreement

Pursuant to the Amended Sato Agreement, we are obligated to supply Sato with all quantities of licensed products required by Sato for their development activities in Japan. As part of the Amended Sato Agreement, as amended, we and Sato also agreed to negotiate a commercial supply agreement pursuant to which we or a third partythird-party contract manufacturer would be the exclusive supplier to Sato of the API of licensed products for the commercial manufacture of licensed products in the licensed territory. Additionally, we have agreed to perform certain oversight, review and supporting activities for Sato, including: (i) using commercially reasonable efforts to obtain marketing approval of SB204 and SB206 in the U.S, (ii) sharing all future scientific information we may obtain during the term of the Amended Sato Agreement pertaining to SB204 and SB206, (iii) performing certain additional pre-clinicalpreclinical studies if such studies are deemed necessary by the Japanese regulatory authority, up to and not to exceed a total cost of $1.0 million, and (iv) participating in a joint committee that oversees, reviews, and approves Sato’s development and commercialization activities under the Amended Sato Agreement. Additionally, we have granted Sato the option to use our trademarks in connection with the commercialization of licensed products in the licensed territory for no additional consideration, subject to our approval of such use. We cannot estimate if, when or in what amounts such payments will become due under the Amended Sato Agreement.

The intellectual property rights granted to Sato under the Amended Sato Agreement include certain intellectual property rights which we have licensed from UNC. Under our license agreement with UNC described in Note 12—“License and Collaboration Agreements” to the accompanying consolidated financial statements included in this Annual Report, we are obligated to pay UNC a running royalty percentage in the low single digits on net sales of licensed products, including net sales that may be generated by Sato. Additionally, we made a paymentare obligated to make payments to UNC in February 2017 representingthat represent the portion of the Sato upfront paymentand milestone payments that waswere estimated to be directly attributable to the UNC intellectual property rights included in the license to Sato.

We had also previously entered into an agreement with a third party to assist us in exploring the SB204 licensing opportunity thatwhich led to the execution of the Sato Agreement. We paid a fee of $0.2 million to the third party upon execution of the Sato Agreement and are obligated to pay the third party a low-single-digit percentage of any futureall upfront and milestone payments we may receivethe Company receives from Sato under the Amended Sato Agreement.


See Note 12—“License and Collaboration Agreements” to the accompanying consolidated financial statements included in this Annual Report for additional information on the Amended Sato Agreement.

Amendments to Sublicense Agreements with KNOW Bio

Pursuant to the terms of the amendments to the KNOW Bio Agreements that we entered into in October 2017, we re-acquired from KNOW Bio exclusive, worldwide rights under certain U.S.United States and foreign patents and patent applications controlled by us as of the execution date of the KNOW Bio Agreements, and patents and patent applications which may becomebecame controlled by us during the three years immediately following the execution date of the KNOW Bio Agreements, directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics, to develop and commercialize products for all diagnostic, therapeutic, prophylactic and palliative uses for any disease, condition or disorder caused by certain oncoviruses, or the Oncovirus Field. KNOW Bio also granted to us an exclusive license, with the right to sublicense, under any patents and patent applications which may becomebecame controlled by KNOW Bio during the three years immediately following the execution date of the KNOW Bio Agreements and directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics, but not towards medical devices, to develop and commercialize products for use in the Oncovirus Field. Additionally, KNOW Bio agreed that KNOW Bio willwould not commercialize any products in the Oncovirus Field during the first three years following the execution date of the KNOW Bio Agreements.

The three-year period in which new patents and patent applications are added to the exclusive license and the three-year term of the commercialization non-compete both expired on December 29, 2018.

In addition to the $0.3$0.3 million non-refundable upfront payment we made upon execution of the KNOW Bio Amendments, we are obligated to make the following contingent payments in exchange for the rights granted to us in the Oncovirus Field:

(i)

For products that incorporate a certain nitric oxide-releasing composition specified in the KNOW Bio Amendments and (i) are covered by KNOW Bio patents or (ii) materially use or incorporate know-how of KNOW Bio or us related to such composition that is created during the three years immediately following the execution date of the KNOW Bio Agreements, or the Covered Products, we must make the following payments to KNOW Bio:

o

A milestone payment upon the first time each Covered Product is approved by the FDA for marketing in the Oncovirus Field;

For products that incorporate a certain nitric oxide-releasing composition specified in the KNOW Bio Amendments and (i) are covered by KNOW Bio patents or (ii) materially use or incorporate know-how of KNOW Bio or us related to such composition that is created during the three years immediately following the execution date of the KNOW Bio Agreements, or the Covered Products, we must make the following payments to KNOW Bio:

o

A royalty in the low single digits on net sales of Covered Products in the Oncovirus Field until the later of the expiration of the KNOW Bio patents covering the applicable Covered Product or the expiration of regulatory exclusivity on the applicable Covered Product; and

o    A milestone payment upon the first time each Covered Product is approved by the FDA for marketing in the Oncovirus Field;

o

In the event we sublicense the rights to a Covered Product to a third party in the Oncovirus Field, the Company must pay KNOW Bio a low double-digit percentage of any clinical development or NDA approval milestones we receive from the sublicensee for the Covered Product in the Oncovirus Field.

o    A royalty in the low single digits on net sales of Covered Products in the Oncovirus Field until the later of the expiration of the KNOW Bio patents covering the applicable Covered Product or the expiration of regulatory exclusivity on the applicable Covered Product; and

76


o    In the event we sublicense the rights to a Covered Product to a third party in the Oncovirus Field, the Company must pay KNOW Bio a low double-digit percentage of any clinical development or NDA approval milestones we receive from the sublicensee for the Covered Product in the Oncovirus Field.
Nitricil is not the nitric oxide-releasing composition specified in the KNOW Bio Amendments as the subject of the foregoing payments. As such, products based on Nitricil are not subject to the foregoing milestone, royalty and sublicensing payment obligations. 

The rights granted to us in the Oncovirus Field in the KNOW Bio Amendments continue for so long as there is a valid patent claim under the KNOW Bio Agreements, and upon expiration continue on a perpetual non-exclusive basis, and are subject to the termination rights of KNOW Bio and us that are set forth in the KNOW Bio Agreements. In addition, under the KNOW Bio Amendments, KNOW Bio may terminate the rights granted to usthe Company in the Oncovirus Field if: (i)without terminating the Original KNOW Bio Agreements.
See Note 12—“License and Collaboration Agreements” to the accompanying consolidated financial statements included in this Annual Report for additional information on the sublicense agreement with KNOW Bio.
Royalty and Milestone Payments Purchase Agreement with Reedy Creek Investments LLC
In April 2019, we do not file a first INDentered into the Purchase Agreement with Reedy Creek pursuant to which Reedy Creek provided us funding and we are obligated to pay Reedy Creek certain ongoing quarterly payments. See the FDAsection entitled “Management’s Discussion & Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report and Note 15—“Research and Development Agreements” to the accompanying consolidated financial statements included in this Annual Report for a product in the Oncovirus Field by October 2020; or (ii) we do not file a first NDA with the FDA by October 2025 for a product in the Oncovirus Field and does not otherwise have any active clinical programsadditional information related to the Oncovirus Field atPurchase Agreement.
Development Funding and Royalties Agreement with Ligand Pharmaceuticals Incorporated
In 2019, we entered into the Funding Agreement with Ligand, pursuant to which Ligand provided us funding and we are obligated to pay Ligand up to $20.0 million in milestone payments. See the section entitled “Management’s Discussion & Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report and Note 15—“Research and Development Agreements” to the accompanying consolidated financial statements included in this Annual Report for additional information related to the Funding Agreement.
Warrants
In our June 2022 Registered Direct Offering, March 2020 Public Offering, and March 2020 Registered Direct Offering, we issued warrants to purchase shares of our common stock. The warrants provide each warrant holder with the right to require net cash settlement of the warrants upon the occurrence of certain fundamental transactions, provided that such time.

We also obtained a three-year exclusive option to includetransactions are within our rights described abovecontrol. For any fundamental transaction that is not within our control, including a fundamental transaction not approved by our board of directors, the warrant holder will only be entitled to receive from us or any successor entity the same type or form of consideration (and in the Oncovirus Field,same proportion) that is being offered and paid to our common stockholders in connection with the developmentfundamental transaction, whether that consideration be in the form of cash, stock or any combination thereof. In the event of any fundamental transaction, and commercializationregardless of products for all diagnostic, therapeutic, prophylacticwhether it is within our control, the settlement amount of the warrants (whether in cash, stock or a combination thereof) is determined based upon a Black-Scholes value that is calculated using inputs as specified in the warrants, including a defined volatility input equal to the greater of our 100-day historical volatility or 100%.

See the section entitled “Management’s Discussion and palliative uses for any disease, condition or disorder caused by upAnalysis—Critical Accounting Policies and Use of Estimates—Classification of Warrants and Pre-Funded Warrants Issued in Connection with Offerings of Common Stock” in this Annual Report and Note 11—“Stockholders' Equity” to four other specified oncoviruses, or the Option Field. If we elect to exercise this option, we will pay an exercise fee for each oncovirus for which the option is exercised, and the additional rights will beaccompanying consolidated financial statements included in this Annual Report for additional discussion regarding the Oncovirus Field as a resultterms of the option exercise will be subjectwarrants.
Drug Product Manufacturing
We have established a strategic alliance with Orion, a Finnish full-scale pharmaceutical company with broad experience in drug manufacturing. The alliance enables Orion to manufacture our topical nitric oxide-releasing product candidates on our behalf and on the same

behalf of our global strategic partners. We have executed a master contract manufacturing agreement to enable technology transfer and manufacturing of clinical trial materials for future clinical trials with our topical product candidates.

We enter into various statements of work, under the master contract manufacturing agreement, that govern certain workflows and deliverables, including production of drug product and other manufacturing related services. These statements of work

payment

77


generally provide for termination on notice, and, therefore, we believe that our non-cancelable obligations for Covered Products, conditions, and termination rights as described above for the Oncovirus Field.

under these statements of work are not material.

Other

We enter into contracts in the normal course of business, including, but not limited to, with clinical research organizations for clinical trials, and clinical supply manufacturing, and with vendors for preclinical research studies, research suppliesand with manufacturing related vendors for raw materials, production related equipment, drug product and drug substance stability testing, supportive consultative services, and other servicesproducts and productsservices for operating purposes. These contracts generally provide for termination on notice, and, therefore, we believe that our non-cancelable obligations under these agreements are not material.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

Net Operating Loss and Research and Development Tax Credit Carryforwards

As of December 31, 2017,2022, we had federal and state net operating loss carryforwardsNOLs of approximately of $140.5$104.7 million and $142.4$65.1 million, respectively. The net operating loss carryforwardsNOLs begin to expire in 20282029 and 20232024 for federal and state tax purposes, respectively. Certain of our federal and state net operating losses have an indefinite carryforward. We have research and development tax credits of approximately $5.7$2.4 million to offset future federal taxes. These credits begin to expire in 2028.

2041.

We record a valuation allowance to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that we will not recognize some or all of the deferred tax assets. We have had a history of net losses since inception, and, as a result, we have established a 100% valuation allowance of $39.3$39.8 million for our net deferred tax assets as of December 31, 2017.2022. If circumstances change and we determine that we will be able to realize some or all of these net deferred tax assets in the future, we will record an adjustment to the valuation allowance.

The Tax Reform Act of 1986 contains provisions which limit the ability to utilize the net operating loss carryforwards and general business credits, including the research and development credit in the case of certain events including significant changes in ownership interests. In accordance with Section 382 of the Code, a change in equity ownership of greater than 50% within a three-year period results in an annual limitation on our ability to utilize our NOL carryforwards created during the tax periods prior to the change in ownership. We have
During the course of preparing the Company’s consolidated financial statements as of and for the year ended December 31 2021, the Company completed an analysis under Sections 382 and 383 of the Code of its historical NOL and tax credit carryforward amounts. If an ownership change, as defined in Section 382, occurs, it results in a Section 382 limitation that applies to all NOLs and tax credits generated prior to the ownership change date that can be used to offset taxable income incurred after the ownership change date. The annual limitation is based on a company’s stock value prior to the ownership change, multiplied by the applicable federal long-term, tax-exempt interest rate. As a result, a portion of the prior year net operating loss and tax credit carryforwards were determined to be limited. The Company did not determined whetherexperience a cumulative ownership changes exceedingchange that would result in a Section 382 limitation during the year ended December 31, 2022.
See Note 17—“Income Taxes” to the accompanying consolidated financial statements included in this threshold, including our IPO and the January 2018 offering, have occurred.Annual Report for further details. If aan additional change in equity ownership has occurredoccurs in the future which exceeds the Section 382 threshold, a portion of our NOL carryforwards and research and development credits may be limited. Ifsubject to additional limitations. Since our net operating loss carryforwards are limited, andif we have taxable income which exceeds the permissible yearly net operating loss carryforwards, we would incur a federal income tax liability even though net operating loss carryforwards would be available in future years.

Jumpstart Our Business Startups Act of 2012 (JOBS Act)

In April 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable. We have chosen to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company” we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the


audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items, such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. We may remain an emerging growth company until the last day of 2021. However, if certain events occur prior to such date, including if we become a “large accelerated filer,” our annual gross revenue equals or exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to such date.

Recent Accounting Pronouncements

Recently issued accounting pronouncements that we have adopted or are currently evaluating are described in detail within “Note 1—Organization and Significant Accounting Policies” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.  

Report.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes in or disagreements with accountants on accounting and financial disclosures.

78


Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principlesUnited States generally accepted in the United States, or GAAP.accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Significant estimates made by us include provisions for product returns, coupons, rebates, chargebacks, trade and cash discounts, allowances and distribution fees paid to certain wholesalers, inventory net realizable value, useful lives of amortizable intangible assets, stock-based compensation, accrued expenses, valuation of assets and liabilities in business combinations, developmental timelines related to licensed products, valuation of contingent consideration and contingencies. Actual results may differ materially and adversely from these estimates.
Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

To the extent there are material differences between the estimates and actual results, our future results of operations will be affected.

While our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this annual report,Annual Report, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements and understanding and evaluating our reported financial results.

Revenue Recognition

Beginning

Business Acquisitions
Business acquisitions are accounted for using the acquisition method of accounting in 2017, we began to generate revenue from (i) providing researchaccordance with Accounting Standards Codification, or ASC, 805, Business Combinations, or ASC 805. ASC 805 requires, among other things, that assets acquired and development services and (ii) non-refundable upfront fees, milestone payments and royalties earned under license agreements.

Research and Development Services

Pursuant to U.S. GAAP that is effectiveliabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, Fair Value Measurements, as of the acquisition date. For certain assets and duringliabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the year ended December 31, 2017, our research and development services revenue is currently recognized when allclosing date of the following criteriaacquisition at the then-current market price. Under ASC 805, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. Our contract research and development services revenue is recognizedexpensed in the period in which the servicescosts are performed.

Licensing Arrangements

We entered into a licensing arrangement with Sato inincurred. The application of the first quarter of 2017 and may enter into additional licensing arrangements in the future, in exchange for non-refundable upfront payments and potential future milestone and royalty payments. Such arrangements include multiple elements, including the sale of licenses and the provision of services. Under U.S. GAAP effective as of and during the year ended December 31, 2017, for


arrangements that involve the delivery of more than one element, each product, service and/or right to use assets is evaluated to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has “stand-alone value” to the customer. The consideration that is fixed or determinable is then allocated to each separate unitacquisition method of accounting based on the relative selling prices of each deliverable. The consideration allocatedrequires us to each unit of accounting is recognized as the related goodsmake estimates and services are delivered, limited to the consideration that is not contingent upon future deliverables. When an arrangement is accounted for as a single unit of accounting, we determine the period over which the performance obligations will be performed and revenue recognized. Management exercises significant judgment in the determination of (i) whether a deliverable has stand-alone value, (ii) whether the deliverable is considered to be a separate unit of accounting and (iii) the estimation of the relative fair value of each deliverable in the arrangement.

We recognize a milestone payment when earned if it is substantive and we have no ongoing performance obligationsassumptions related to the milestone. A milestone payment is considered substantive if it: (i) is commensurateestimated fair values of net assets acquired.

Significant judgments are used during this process, particularly with either our performancerespect to achieveintangible assets. Generally, intangible assets are amortized over their estimated useful lives. Goodwill and other indefinite-lived intangibles are not amortized, but are annually assessed for impairment. Therefore, the milestone or the enhanced value of the delivered item aspurchase price allocation to intangible assets and goodwill has a result of a specific outcome from the performance to achieve the milestone; (ii) relates solely to past performance; and (iii) is reasonable relative to all of the deliverables and payment terms, including other potential milestone consideration, within the arrangement.

Amounts received prior to satisfying all revenue recognition criteria are recorded as deferred revenue in the accompanying balance sheets.

significant impact on future operating results.

See “Note 1—Organization and Significant Accounting Policies” to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details regarding the new revenue recognition standard, which is effective January 1, 2018.

Accrued Research and Development Expenses

As part2—“Acquisition of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable vendor personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued expenses include fees incurred by CROs in connection with clinical trials, fees paid to investigative sites in connection with clinical trials, professional service fees and unpaid salaries, wages and benefits.

We accrue our expenses related to clinical trials based on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust the accrual accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. We do not anticipate the future settlement of existing accruals to differ materially from our estimates.

Stock-Based Compensation

Determination of the Fair Value of Stock-based Compensation Grants

We record the fair value of stock options, restricted stock awards and other stock-based compensation issued to employees and non-employees as of the grant date as stock-based compensation expense. We typically recognize compensation expense over the requisite service period, which is typically the vesting period. We recorded non-cash stock-based compensation expense from continuing operations for employee and nonemployee stock option grants of $3.8 million, $1.6 million and $2.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.


We estimate the fair value of our stock-based awards to employees and non-employees using the Black-Scholes option-pricing model, which requires the input of assumptions, some of which are highly subjective, including (i) the fair value of our common stock on the date of grant (described in the section entitled “Determination of the Fair Value of Common Stock”), (ii) the expected volatility of our stock, (iii) the expected term of the award, (iv) the risk-free interest rate and (v) expected dividends. In applying these assumptions, we considered the following factors:

Due to the lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. We also considered characteristics such as industry, stage of life cycle, financial leverage, enterprise value, risk profiles and position within the industry, along with historical share price information sufficient to meet the expected life of the stock-based awards. We compute the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.

We have estimated the expected term of our employee stock options using the “simplified” method, whereby, the expected life equals the average of the vesting term and the original contractual term of the option.

The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of granted stock-based awards.

We have never declared or paid any cash dividends to common stockholders and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero.

See “Note 8—Stock Option Plan”EPI Health” to the accompanying consolidated financial statements included in this Annual Report on Form 10-Kfor additional discussion, in addition to Note 19—“Fair Value”, related to the EPI Health Acquisition.

Revenue Recognition
We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers, or ASC 606. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we (i) identify the contract with a customer, (ii) identify the performance obligations within the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations within the contract, and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the weighted average assumptions usedgoods or services we transfer to the customer.
Net Product Revenues
Net product revenues encompass sales resulting from transferring control of products to customers, excluding amounts collected on behalf of other third parties. The amount of revenue recognized is the amount allocated to the satisfied performance obligation taking into account variable consideration. The estimated amount of variable consideration is included in the Black-Scholes option-pricing model for awards grantedtransaction price only to the extent that it is probable that a significant reversal in the years ended December 31, 2017, 2016amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Product sales are recognized at the point in time when a product is delivered and 2015.

legal transfer of title has occurred. We record a reduction of the transaction price for estimated chargebacks, rebates, coupons, discounts and returns. A liability is recognized

79


for expected sales returns, rebates, coupons, trade and cash discounts, chargebacks or other reimbursements to customers in relation to sales made in the reporting period. Payment terms can differ from contract to contract, but no element of financing is deemed present based on the fact that typical payment terms are alsoless than 100 days. Therefore, the transaction price is not adjusted for the effects of a significant financing component. A receivable is recognized as soon as control over the products is transferred to the customer as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.
Variable consideration relates to estimate forfeituressales returns, rebates, coupons, trade and cash discounts, and chargebacks granted to various direct and indirect customers. We recognize provisions at the time of grant,sale and to revise those estimates in subsequent periodsadjust them if the actual forfeituresamounts differ from estimates.the estimated provisions.
There can be a significant lag between our establishment of an estimate and the timing of the invoicing or claim. We believe we have made reasonable estimates for future rebates and claims, however, these estimates involve assumptions pertaining to contractual utilization and performance, and payor mix. If the performance or mix across third-party payors is different from our estimates, we may be required to pay higher or lower total price adjustments and/or chargebacks than we had estimated.
See Note 1—“Organization and Significant Accounting Policies” and Note 13—“Net Product Revenues” to the accompanying consolidated financial statements included in this Annual Report for additional discussion.
License and Collaboration Revenues
We have entered into various types of agreements that either license our intellectual property to a third party, acquire license rights to intellectual property of a third party, or both.
Agreements where we license our intellectual property to a third party for development and commercialization in a licensed territory. If the applicable license is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use historical dataand benefit from the license. For licenses that are bundled with other promises, we utilize judgment to estimate pre-vesting option forfeituresassess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, record stock-basedif over time, the estimated performance period and the appropriate method of measuring progress during the performance period for purposes of recognizing revenue. We re-evaluate the estimated performance period and measure of progress each reporting period and, if necessary, adjust related revenue recognition accordingly. These arrangements often include milestone as well as royalty or profit-share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements from or payments to the collaboration partner. Because of the risk that products in development will not receive regulatory approval, we do not recognize any contingent payments until regulatory approval becomes probable. Future sales-based royalties are not recorded until the subsequent sale occurs.
Agreements where we acquire license rights to, or otherwise access, a third party’s intellectual property for commercialization of the third party’s product in a licensed territory. Wealso enter into various types of arrangements to commercialize products. Our services provided to the third party under such arrangements, in exchange for compensation that may take the form of cost reimbursements, may include promoting, marketing, selling and distributing the third party’s developed drugs, and may also involve certain license rights granted to the parties for use of the other party’s intellectual property while providing defined services under the arrangements. We assess the nature of each such arrangement and the various rights granted and services performed thereunder.
Royalty revenue from licenses provided to our collaboration partners, which is based on sales to third parties of licensed products and technology, is based on the later of when the third-party sale occurs or the performance obligation to which some or all of the royalty has been allocated has been satisfied.
When we perform and incur marketing and promotional services expense only for those awardsunder an arrangement that is determined to be within the scope of ASC 808, and where such services are on behalf of a collaboration partner that is not considered a customer under ASC 606, we recognize a contra-expense that reflects the value of the cost reimbursement to which we are expected to vest. Tobe entitled in exchange for those services. Such contractually required reimbursements are reported as a liability or an asset within the accompanying consolidated balance sheets based upon the timing of cash receipt from the collaboration partner.
See Note 14—“License and Collaboration Revenues” to the accompanying consolidated financial statements included in this Annual Report for additional discussion.
Intangible Assets and Goodwill
Intangible assets represent identifiable intangible assets including product rights consisting of pharmaceutical product licenses and patents. Amortization for pharmaceutical products licenses is computed using the straight-line method based on the lesser of the term or the useful life of the license. Amortization for pharmaceutical patents is computed using the straight-line method based on the useful life of the patent.
80


Definite-lived intangible assets are reviewed for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. In the event impairment indicators are present or if other circumstances indicate that an impairment might exist, we compare the future undiscounted cash flows directly associated with the asset or asset group to the carrying amount of the asset group being evaluated for impairment. If those estimated cash flows are less than the carrying amount of the asset group, an impairment loss is recognized. An impairment loss is recognized to the extent that actual forfeitures differ from our estimates, the differencecarrying amount exceeds the asset’s fair value. Considerable judgment is recorded as a cumulative adjustment in the period the estimates were revised. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest.

Determination of the Fair Value of Common Stock

Post-IPO Stock Option Grants—For all grants of stock options made following the completion of our IPO, we have determined, and will determine in the future, fair value based on the closing price of our common stock on the Nasdaq Global Market on the date of determination. As a result, the fair value of our common stock no longer requires a highly complex and subjective estimation process.

Pre-IPO Stock Option Grants—Prior to our IPO in September 2016, we were a private company with no active public market for our common stock. There were significant assumptions and estimates required in determining the fair value of our common stock for purposes of valuing stock-based compensation grants occurring prior to our IPO. Due to the absence of an active market for our common stock prior to our IPO, the fair value of our common stock was determined in good faith by our board of directors, with the assistance and upon the recommendation of management, based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid, including:

contemporaneous valuations of our shares of common stock;

the prices of each of our series of convertible preferred stock sold by us to outside investors in arm’s length transactions, and the rights, preferences and privileges of each of these series of preferred stock relative to our common stock;

our consolidated results of operations, financial position and the status of our research and development efforts;


the composition of our management team and board of directors;

the material risks related to our business;

the market performance of publicly traded companies in the life sciences and biotechnology sectors;

the likelihood of achieving a liquidity event for the holders of our shares of common stock, such as a sale of the company or an initial public offering, given prevailing market conditions;

the lack of marketability of our common stock; and

external market conditions affecting the life sciences and biotechnology industry sectors.

We utilized a combination of the “Last Money In” approach and “Market-Based,” or “Comps,” approach to estimate our enterprise value prior to our IPO in September 2016. The “Last Money In” approach considered our prior financing rounds, which can provide meaningful indications to determine our enterprise value. The Comps approach considered our enterprise value through an analysis of recent sales and offerings of comparable companies. We then used the option pricing method, or OPM,necessary to estimate the fair value of common stock associated with each pre-IPO stock option grant. Key assumptions reflectedthese assets, accordingly, actual results may vary significantly from such estimates.

Indefinite-lived intangible assets, including goodwill, are not amortized. We test the carrying amounts of goodwill for recoverability on an annual basis at October 1 or when events or changes in the OPM calculations included the anticipated timing ofcircumstances indicate evidence that a potential liquidity event, the estimated volatility of our common stock, and the discount for lack of marketability of our common stock.

Pursuant to the non-employee director compensation policy in effectimpairment exists, using a fair value based test. Goodwill is assessed at the time of our IPO, each non-employee director who served on the Boardreporting unit level. We performed a qualitative assessment as of the pricing date of our IPO was automatically granted an option on September 20, 2016 to purchase the number of shares of common stockOctober 1, 2022 and concluded that had an aggregateit is not more likely than not that the fair value of $100,000our reporting unit was less than its carrying amount. A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows, a sustained, significant decline in our stock price and market capitalization, a significant adverse change in legal factors or in the business climate, adverse assessment or action by a regulator, and unanticipated competition. Any change in these indicators could have a significant negative impact on our financial condition, impact the pricing dategoodwill impairment analysis or cause us to perform a goodwill impairment analysis more frequently than once per year.

See Note 7—“Goodwill and Intangible Assets, net” to the accompanying consolidated financial statements included in this Annual Report for additional discussion regarding intangible assets and goodwill related to the EPI Health Acquisition.
Contingent Consideration
Contingent consideration is recorded as a liability and is the estimate of the fair value of potential milestone payments related to business acquisitions. The estimated fair value of contingent consideration is determined based on a probability-weighted valuation model that measures the present value of the probable cash payments based upon the future milestone events of EPI Health at an exercise pricea discount rate that captures the risk associated with the liability and also based on a Monte Carlo simulation, whereby EPI Health’s forecasted net sales from the EPI Health legacy products is simulated over the measurement period to calculate the contingent consideration.
Significant increases or decreases in any of $11.00 per share.

the probabilities of success or changes in expected achievement of any of these milestones would result in a significantly higher or lower fair value of these milestones, respectively, and commensurate changes to the associated liability.
The contingent consideration is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations and comprehensive loss until settlement.
See Note 2—“Acquisition of EPI Health” to the accompanying consolidated financial statements included in this Annual Report for additional discussion regarding purchase consideration, including contingent consideration related to the EPI Health Acquisition.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks in the ordinary course of our business. Our primary exposure to market risk is currently limited to our cash and cash equivalents, all of which have maturities of less than three months. The primary objectives of our investment activities are the preservation of principal, maintenance of liquidity for the purpose of funding operations and maximizing total return. The related interest income sensitivity is affected by changes in the general level of short-term U.S. interest rates. We place our cash and cash equivalents with high-credit quality financial institutions. Our investment policy prohibits us from holding corporate bonds, auction rate securities, asset-backed securities, municipal obligations, structured investment vehicles, extendable commercial paper or collateralized debt/loan obligations.

As of December 31, 2017, we had cash and cash equivalents of $2.5 million. We believe that an immediate one percentage point increase in interest rates would not materially affect the fair value of these instruments. We do not believe that our cash and cash equivalents have significant risk of default or illiquidity and do not expect our operating results or cash flows to be affected significantly by a sudden change in market interest rates. While we believe our cash and cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in fair value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits.

Following the execution of the Sato Agreement in January 2017, we have become exposed to some degree of foreign exchange risk as a result of entering into transactions denominated in a currency other than U.S. dollars, particularly in Japanese yen. All foreign transactions settle on the applicable spot exchange basis at the time such payments are made, and all monetary balances are translated to U.S. dollars using period-end exchange rate. A hypothetical 10% change in the exchange rate between the Japanese yen and the U.S. dollar during any of the periods presented would not have had a significant impact on our financial statements.


Not applicable.

81


Item 8. Financial StatementsFinancial Statements and Supplementary Data.

NOVAN, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

(BDO USA, LLP; Raleigh, NC; PCAOB ID #243)

85

86

87

88

89

90



82




Report of Independent RegisteredRegistered Public Accounting Firm

To the

Stockholders and Board of Directors and Stockholders of
Novan, Inc.

Durham, North Carolina
Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Novan, Inc. and its subsidiaries (the “Company”) as of December 31, 20172022 and 2016, and2021, the related consolidated statements of operations and comprehensive loss, of convertible preferred stock and stockholders’ equity, (deficit) and of cash flows for each of the three years in the periodthen ended, December 31, 2017, includingand the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofat December 31, 20172022 and 2016,2021, and the results of theirits operations and theirits cash flows for each of the three years in the periodthen ended, December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt About the Company’s Ability to Continue as a

Going Concern

Uncertainty

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations negative cash flow from operating activities, and has an accumulated deficit thatnot generated significant revenue or positive cash flows from operations. These factors raise substantial doubt about itsthe Company’s ability to continue as a going concern. Management'sManagement’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Acquisition of EPI Health – Intangible Assets related to Acquired Product Rights
As described in Notes 1 and 2 to the Company’s consolidated financial statements, the Company acquired all of the issued and outstanding units of membership interest of EPI Health, LLC on March 11, 2022 for total consideration of approximately $32.0 million, which resulted in $29.0 million of intangible assets related to acquired product rights being recorded. Management applied significant judgment in estimating the fair value of the intangible assets acquired, which involved the use of significant estimates with respect to forecasted revenue and forecasted operating margin.
We have identified forecasted revenue and forecasted operating margin used in the valuation of the acquired product rights as a critical audit matter. The principal considerations of our determination were the inherent uncertainties of future revenue,
83


expected operating margin and the limited history of sales related to certain acquired product rights. Auditing management’s forecasted revenue and forecasted operating margin involved a high degree of auditor judgment and specialized skills and knowledge was needed.
The primary procedures we performed to address this critical audit matter included:
Evaluating the reasonableness of forecasted revenue and forecasted operating margin used to determine the fair value of the acquired product rights by: 1) performing sensitivity analyses and evaluating potential effect of changes in certain estimates, 2) comparing forecasted revenue to historical sales for certain product rights and operating margins in aggregate, 3) comparing forecasts to guideline companies and industry information for certain product rights, and 4) evaluating the consistency of forecasts against the terms of agreements related to the acquired product rights.
Utilizing professionals with specialized skills and knowledge to assist in: 1) evaluating the appropriateness of the valuation models used by management, and 2) testing the mathematical accuracy of the Company’s calculation.
Variable Consideration Related to Net Product Revenues
As described in Note 1 to the Company’s consolidated financial statements, the Company records product revenues net of variable consideration related to various items including sales returns, rebates, and coupons. Estimated provisions for these items as of December 31, 2022 are included in accrued rebates, discounts and chargebacks and accrued returns in Note 8. The Company’s estimates of these provisions are based on considerations including historical sales, product shelf life, contractual arrangements with customers, and utilization rates.
We have identified management’s estimates for sales returns, rebates and coupons as a critical audit matter. These estimates require a high degree of management judgment as they relate to estimates of future actions by customers and can have an extended period of time between accrual and settlement. Auditing these estimates involved especially challenging auditor judgment and a high degree of auditor subjectivity.
The primary procedures we performed to address this critical audit matter included:
Recalculating the accrual amounts based on historical return data and historical utilization of rebates and coupons and testing the completeness and accuracy of the historical data used in the recalculation.
Testing sales that were subject to future potential returns and product quantities that were subject to future utilization of rebates and coupons.
Performing sensitivity analyses related to the material components of the estimates to determine how sensitive the estimates were to potential fluctuations.
Performing a review of subsequent activity that may impact these accruals, as applicable, to evaluate the reasonableness of management’s estimates.


/s/ PricewaterhouseCoopersBDO USA, LLP

Raleigh, North Carolina

March 27, 2018

We have served as the Company’sCompany's auditor since 2014.

2018.

Raleigh, North Carolina

March 30, 2023

84


NOVAN, INC.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,524

 

 

$

34,611

 

Deferred offering costs

 

 

297

 

 

 

 

Prepaid expenses and other current assets

 

 

883

 

 

958

 

Total current assets

 

 

3,704

 

 

 

35,569

 

Restricted cash

 

 

539

 

 

 

539

 

Intangible assets

 

 

75

 

 

 

75

 

Other assets

 

 

192

 

 

 

 

Property and equipment, net

 

 

16,624

 

 

 

16,290

 

Total assets

 

$

21,134

 

 

$

52,473

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

479

 

 

$

3,130

 

Accrued compensation

 

 

2,168

 

 

 

2,305

 

Accrued outside research and development services

 

 

1,392

 

 

 

5,737

 

Accrued legal and professional fees

 

 

504

 

 

 

382

 

Other accrued expenses

 

 

1,700

 

 

 

1,813

 

Deferred revenue, current portion

 

 

2,164

 

 

 

 

Capital lease obligation, current portion

 

 

11

 

 

 

10

 

Total current liabilities

 

 

8,418

 

 

 

13,377

 

Deferred revenue, net of current portion

 

 

6,919

 

 

 

 

Capital lease obligation, net of current portion

 

 

21

 

 

 

32

 

Facility financing obligation

 

 

7,998

 

 

 

7,998

 

Total liabilities

 

 

23,356

 

 

 

21,407

 

Commitments and contingencies (Notes 3, 4 and 6)

 

 

 

 

 

 

 

 

Stockholders’ (deficit) equity:

 

 

 

 

 

 

 

 

Preferred stock $0.0001 par value; 10,000,000 shares designated as of

   December 31, 2017 and 2016; 0 shares issued and outstanding as of

   December 31, 2017 and 2016

 

 

 

 

 

 

Common stock $0.0001 par value; 200,000,000 shares authorized as of

   December 31, 2017 and 2016; 16,014,908 and 15,949,492 shares issued

   as of December 31, 2017 and 2016; 16,005,408 and 15,939,992 shares

   outstanding as of December 31, 2017 and 2016

 

 

2

 

 

 

2

 

Additional paid-in-capital

 

 

158,091

 

 

 

154,252

 

Treasury stock at cost, 9,500 shares as of December 31, 2017 and 2016

 

 

(155

)

 

 

(155

)

Accumulated deficit

 

 

(160,160

)

 

 

(123,033

)

Total stockholders' (deficit) equity

 

 

(2,222

)

 

 

31,066

 

Total liabilities and stockholders’ (deficit) equity

 

$

21,134

 

 

$

52,473

 

 Year Ended December 31,
 20222021
ASSETS 
Current assets:  
Cash and cash equivalents$12,316 $47,085 
Restricted cash, current1,047 — 
Accounts receivable, net22,002 4,473 
Inventory, net1,196 — 
Prepaid expenses and other current assets5,807 2,572 
Total current assets42,368 54,130 
Restricted cash, net of current portion583 583 
Property and equipment, net13,882 12,201 
Intangible assets, net27,475 75 
Other assets210 278 
Right-of-use lease assets1,756 1,693 
Goodwill4,056 — 
Total assets$90,330 $68,960 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$13,689 $2,170 
Accrued expenses18,624 4,988 
Factoring arrangement payable10,302 — 
Deferred revenue, current portion2,586 2,586 
Research and development service obligation liability, current portion555 1,406 
Contingent consideration liability, current portion451 — 
Operating lease liabilities, current portion191 — 
Total current liabilities46,398 11,150 
Deferred revenue, net of current portion8,079 10,665 
Operating lease liabilities, net of current portion3,739 3,613 
Research and development service obligation liability, net of current portion25 142 
Research and development funding arrangement liability25,000 25,000 
Contingent consideration liability, net of current portion2,037 — 
Other long-term liabilities447 71 
Total liabilities85,725 50,641 
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock $0.0001 par value; 200,000,000 shares authorized as of December 31, 2022 and 2021; 24,723,258 and 18,816,842 shares issued as of December 31, 2022 and 2021, respectively; 24,722,308 and 18,815,892 shares outstanding as of December 31, 2022 and 2021, respectively
Additional paid-in-capital315,038 297,441 
Treasury stock at cost, 950 shares as of December 31, 2022 and 2021(155)(155)
Accumulated deficit(310,280)(278,969)
Total stockholders’ equity4,605 18,319 
Total liabilities and stockholders’ equity$90,330 $68,960 

The accompanying notes are an integral part of these consolidated financial statements


85



NOVAN, INC.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

License and collaboration revenue

 

$

1,765

 

 

$

 

 

$

 

Research and development services revenue

 

 

375

 

 

 

 

 

 

 

Total revenue

 

 

2,140

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

25,212

 

 

 

46,489

 

 

 

16,569

 

General and administrative

 

 

13,113

 

 

 

13,337

 

 

 

9,265

 

Total operating expenses

 

 

38,325

 

 

 

59,826

 

 

 

25,834

 

Operating loss

 

 

(36,185

)

 

 

(59,826

)

 

 

(25,834

)

Other (expense) income, net

 

 

(942

)

 

 

127

 

 

 

48

 

Loss from continuing operations

 

 

(37,127

)

 

 

(59,699

)

 

 

(25,786

)

Loss from discontinued operations

 

 

 

 

 

 

 

 

(2,274

)

Net loss and comprehensive loss

 

$

(37,127

)

 

$

(59,699

)

 

$

(28,060

)

Loss per share, basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(2.32

)

 

$

(9.97

)

 

$

(11.36

)

Discontinued operations

 

 

 

 

 

 

 

 

(1.01

)

Net loss per share, basic and diluted

 

$

(2.32

)

 

$

(9.97

)

 

$

(12.37

)

Weighted-average common shares outstanding, basic and diluted

 

 

15,981,247

 

 

 

5,985,985

 

 

 

2,269,124

 

 Year Ended December 31,
 20222021
Net product revenues$15,796 $— 
License and collaboration revenue7,813 2,822 
Government research contracts and grants revenue73 136 
Total revenue23,682 2,958 
Operating expenses:
Cost of goods sold7,379 — 
Research and development15,990 20,416 
Selling, general and administrative34,103 12,343 
Amortization of intangible assets1,600 — 
Change in fair value of contingent consideration(1,160)— 
Impairment loss on long-lived assets— 114 
Total operating expenses57,912 32,873 
Operating loss(34,230)(29,915)
Other income (expense), net:
Interest income53 13 
Interest expense(1,452)— 
Gain on debt extinguishment4,340 956 
Other expense(22)(746)
Total other income (expense), net2,919 223 
Net loss and comprehensive loss$(31,311)$(29,692)
Net loss per share, basic and diluted$(1.42)$(1.74)
Weighted-average common shares outstanding, basic and diluted22,019,679 17,065,932 
The accompanying notes are an integral part of these consolidated financial statements



86


NOVAN, INC.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share amounts)

 

Convertible Preferred Stock

 

 

 

Common Stock

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Mezzanine B

 

Mezzanine A

 

Series 4

 

Series 3

 

Series 2

 

Series 1

 

 

 

Voting

 

Non-voting

 

Paid in

 

Treasury

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Stock

 

Deficit

 

Total

 

Balance as of

   December 31, 2014

 

 

$

 

 

1,178,802

 

$

16,161

 

 

1,833,333

 

$

11,000

 

 

1,322,570

 

$

7,538

 

 

1,226,242

 

$

2,000

 

 

1,229,862

 

$

1,000

 

 

 

 

2,044,815

 

$

 

 

191,052

 

$

 

$

400

 

 

 

$

(29,949

)

$

(29,549

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,385

 

 

 

 

 

 

2,385

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

191,023

 

 

 

 

 

 

 

 

468

 

 

 

 

 

 

468

 

Issuance of Mezzanine A

   preferred stock

 

 

 

 

 

2,498,820

 

 

34,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Mezzanine B

   preferred stock

 

1,242,069

 

 

32,840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution of KNOW

   Bio, LLC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,325

)

 

(5,325

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,060

)

 

(28,060

)

Balance as of

   December 31, 2015

 

1,242,069

 

 

32,840

 

 

3,677,622

 

 

50,420

 

 

1,833,333

 

 

11,000

 

 

1,322,570

 

 

7,538

 

 

1,226,242

 

 

2,000

 

 

1,229,862

 

 

1,000

 

 

 

 

2,235,838

 

 

 

 

191,052

 

 

 

 

3,253

 

 

 

 

(63,334

)

 

(60,081

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,573

 

 

 

 

 

 

1,573

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,333

 

 

 

 

 

 

 

 

35

 

 

 

 

 

 

35

 

Repurchase of treasury

   stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,500

)

 

 

 

 

 

 

 

 

 

(155

)

 

 

 

(155

)

Automatic conversion to

   common stock

 

(1,242,069

)

 

(32,840

)

 

(3,677,622

)

 

(50,420

)

 

(1,833,333

)

 

(11,000

)

 

(1,322,570

)

 

(7,538

)

 

(1,226,242

)

 

(2,000

)

 

(1,229,862

)

 

(1,000

)

 

 

 

8,967,321

 

 

1

 

 

(191,052

)

 

 

 

104,797

 

 

 

 

 

 

104,798

 

Common stock issued

   through initial public

   offering, net of

   underwriting discounts,

   commissions and

   offering costs (Note 1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,715,000

 

 

1

 

 

 

 

 

 

44,594

 

 

 

 

 

 

44,595

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(59,699

)

 

(59,699

)

Balance as of

   December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,939,992

 

 

2

 

 

 

 

 

 

154,252

 

 

(155

)

 

(123,033

)

 

31,066

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,758

 

 

 

 

 

 

3,758

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,416

 

 

 

 

 

 

 

 

81

 

 

 

 

 

 

81

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37,127

)

 

(37,127

)

Balance as of

   December 31, 2017

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

 

16,005,408

 

$

2

 

 

 

$

 

$

158,091

 

$

(155

)

$

(160,160

)

$

(2,222

)

 Additional
Paid-In
Capital
 Treasury
Stock
  
 Common StockAccumulated 
 SharesAmountDeficitTotal
Balance as of December 31, 202014,570,009 $$252,408 $(155)$(249,277)$2,977 
Stock-based compensation— — 941 — — 941 
Extinguishment of fractional shares resulting from reverse stock split(37)— — — — — 
Common stock issued pursuant to public offering, net3,636,364 — 37,236 — — 37,236 
Exercise of common stock warrants103,551 — 461 — — 461 
Common stock issued pursuant to common stock purchase agreements493,163 6,333 — — 6,334 
Exercise of stock options12,842 — 62 — — 62 
Net loss— — — (29,692)(29,692)
Balance as of December 31, 202118,815,892 $$297,441 $(155)$(278,969)$18,319 
Stock-based compensation— — 1,880 — — 1,880 
Common stock and pre-funded warrants issued pursuant to the June 2022 registered direct offering, net2,080,696 — 14,020 — — 14,020 
Exercise of pre-funded warrants related to the June 2022 registered direct offering3,180,615 — 32 — — 32 
Common stock issued pursuant to equity distribution agreement (at-the-market facility)645,105 — 1,665 — — 1,665 
Net loss— — — — (31,311)(31,311)
Balance as of December 31, 202224,722,308 $$315,038 $(155)$(310,280)$4,605 
The accompanying notes are an integral part of these consolidated financial statements



87


NOVAN, INC.

Consolidated Statements of Cash Flows

(in thousands)

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(37,127

)

 

$

(59,699

)

 

$

(28,060

)

Income from discontinued operations

 

 

 

 

 

 

 

 

2,274

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,423

 

 

 

757

 

 

 

631

 

Share-based compensation

 

 

3,758

 

 

 

1,573

 

 

 

1,974

 

Loss (gain) on disposal of property and equipment

 

 

45

 

 

 

(36

)

 

 

8

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

75

 

 

 

(22

)

 

 

(604

)

Accounts payable

 

 

(2,523

)

 

 

1,372

 

 

 

825

 

Accrued compensation

 

 

(137

)

 

 

1,258

 

 

 

769

 

Accrued outside research and development services

 

 

(4,345

)

 

 

4,649

 

 

 

837

 

Accrued legal and professional fees

 

 

(3

)

 

 

179

 

 

 

200

 

Accrued expenses

 

 

86

 

 

 

1,083

 

 

 

411

 

Deferred revenue

 

 

9,083

 

 

 

 

 

 

 

Other

 

 

(192

)

 

 

(25

)

 

 

(30

)

Net cash used in continuing operating activities

 

 

(29,857

)

 

 

(48,911

)

 

 

(20,765

)

Net cash used in discontinued operating activities

 

 

 

 

 

(257

)

 

 

(1,427

)

Net cash used in operating activities

 

 

(29,857

)

 

 

(49,168

)

 

 

(22,192

)

Cash flow from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,168

)

 

 

(6,143

)

 

 

(1,212

)

Proceeds from the sale of property and equipment

 

 

26

 

 

 

 

 

 

 

Purchase of intangible asset

 

 

 

 

 

(75

)

 

 

 

Cash restricted to secure letter of credit

 

 

 

 

 

 

 

 

(539

)

Net cash used in continuing investing activities

 

 

(2,142

)

 

 

(6,218

)

 

 

(1,751

)

Net cash used in discontinued investing activities

 

 

 

 

 

 

 

 

(139

)

Net cash used in investing activities

 

 

(2,142

)

 

 

(6,218

)

 

 

(1,890

)

Cash flow from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of preferred stock

 

 

 

 

 

 

 

 

67,099

 

Proceeds from initial public offering, net of underwriting fees and commissions

 

 

 

 

 

47,785

 

 

 

 

Payments related to public offering costs

 

 

(159

)

 

 

(3,190

)

 

 

 

Proceeds from exercise of stock options

 

 

81

 

 

 

35

 

 

 

458

 

Purchase of treasury stock

 

 

 

 

 

(155

)

 

 

 

Dividend Distribution

 

 

 

 

 

 

 

 

(5,200

)

Payments on capital lease obligation

 

 

(10

)

 

 

(7

)

 

 

(6

)

Payments on facility financing obligation

 

 

 

 

 

(159

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(88

)

 

 

44,309

 

 

 

62,351

 

Net (decrease) increase in cash and cash equivalents

 

 

(32,087

)

 

 

(11,077

)

 

 

38,269

 

Cash and cash equivalents as of beginning of period

 

 

34,611

 

 

 

45,688

 

 

 

7,419

 

Cash and cash equivalents as of end of period

 

$

2,524

 

 

$

34,611

 

 

$

45,688

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,011

 

 

$

410

 

 

$

1

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of equipment with accounts payable and accrued expenses

 

$

80

 

 

$

420

 

 

$

92

 

Distribution of KNOW Bio, LLC equipment

 

$

 

 

$

 

 

$

125

 

Equipment acquired through capital lease

 

$

 

 

$

39

 

 

$

 

Non-cash addition to construction in progress related to build-to-suit lease and

   facility financing obligation

 

$

 

 

$

8,157

 

 

$

 

Non-cash addition to deferred offering costs

 

$

138

 

 

$

 

 

$

309

 

Conversion of convertible preferred stock and non-voting common stock to voting

   common stock

 

$

 

 

$

104,798

 

 

$

 

Deferred offering costs reclassified to additional paid-in capital

 

$

 

 

 

$

3,190

 

 

$

 

 Year Ended December 31,
 20222021
Cash flow from operating activities:
Net loss$(31,311)$(29,692)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment1,178 344 
Impairment loss on long-lived assets— 114 
Amortization of intangible assets1,600 — 
Accretion of debt discount635 — 
Change in fair value of contingent consideration(1,160)— 
Stock-based compensation1,880 275 
Foreign currency transaction loss— 820 
Gain on debt extinguishment(4,340)(956)
Loss on disposal and write-offs of property and equipment70 — 
Changes in operating assets and liabilities:
Accounts receivable2,275 47 
Inventory(17)— 
Prepaid insurance, prepaid expenses and other current assets457 688 
Accounts payable10,997 544 
Accrued expenses(9,369)1,289 
Deferred revenue(2,586)1,525 
Research and development service obligation liability(968)(88)
Other long-term assets and liabilities(223)313 
Net cash used in operating activities(30,882)(24,777)
Cash flow from investing activities:
Purchases of property and equipment(4,274)(9,050)
Landlord reimbursement of tenant improvement allowance508 1,523 
Payment for EPI Health Acquisition(15,093)— 
Net cash used in investing activities(18,859)(7,527)
Cash flow from financing activities:
Proceeds from issuance of common stock and pre-funded warrants, net of underwriting fees and commissions14,252 37,600 
Proceeds from common stock issued pursuant to equity distribution agreement (at-the-market facility)1,665 — 
Payment of note payable(10,000)— 
Proceeds from exercise of common stock warrants— 461 
Proceeds from issuance of common stock under common stock purchase agreement— 6,334 
Proceeds from factoring arrangement18,427 — 
Repayments of factoring arrangement(8,125)— 
Payments related to public offering costs(200)(364)
Proceeds from exercise of stock options— 62 
Net cash provided by financing activities16,019 44,093 
Net (decrease) increase in cash, cash equivalents and restricted cash(33,722)11,789 
Cash, cash equivalents and restricted cash as of beginning of period47,668 35,879 
Cash, cash equivalents and restricted cash as of end of period$13,946 $47,668 
Supplemental disclosure of cash flow information:
Cash paid for interest$339 $— 
Supplemental disclosure of non-cash investing and financing activities:
Non-cash gain on debt extinguishment$4,340 $— 
Contingent consideration related to EPI Health Acquisition3,648 — 
Note payable issued for EPI Health Acquisition13,305 — 
Deferred offering costs reclassified to additional paid-in capital— 364 
Purchases of property and equipment with accounts payable and accrued expenses26 1,471 
Right-of-use assets obtained in exchange for lease liabilities— 1,693 
Non-cash gain on debt extinguishment from forgiveness of Paycheck Protection Program loan— 956 
Reconciliation to consolidated balance sheets:
Cash and cash equivalents$12,316 $47,085 
Restricted cash1,630 583 
Total cash, cash equivalents and restricted cash shown in the statement of cash flows$13,946 $47,668 


The accompanying notes are an integral part of these consolidated financial statements


88



NOVAN, INC.

INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollar values in thousands, except per share data)

Note 1: Organization and Significant Accounting Policies

Business Description and Basis of Presentation

Novan, Inc. (“Novan” and together with its subsidiaries, the “Company”), is a North Carolina-based clinical-stage biotechnologymedical dermatology company focused on leveraging nitric oxide’s natural antiviraldeveloping and immunomodulatory mechanismscommercializing innovative therapeutic products for skin diseases. Its goal is to deliver safe and efficacious therapies to patients, including developing product candidates where there are unmet medical needs. The Company is developing SB206 (berdazimer gel, 10.3%) as a topical prescription gel for the treatment of actionviral skin infections, with a current focus on molluscum contagiosum. On March 11, 2022, the Company acquired EPI Health, LLC, a specialty pharmaceutical company focused on medical dermatology (“EPI Health”), from Evening Post Group, LLC, a South Carolina limited liability company (“EPG” or the “Seller”). The acquisition of EPI Health (the “EPI Health Acquisition”) has provided the Company with a commercial infrastructure to treat dermatologicalsell a marketed portfolio of therapeutic products for skin diseases. Subsequent to the acquisition, the Company sells various medical dermatology products for the treatments of plaque psoriasis, rosacea and oncovirus-mediated diseases. acne.
Novan was incorporated in January 2006 under the state laws of Delaware and its wholly owned subsidiary,Delaware. In 2015, Novan Therapeutics, LLC, was organized in 2015as a wholly owned subsidiary under the state laws of North Carolina.

Carolina; in March 2019, the Company completed registration of a wholly owned Ireland-based subsidiary, Novan Therapeutics, Limited; and in March 2022, the Company acquired its wholly owned subsidiary, EPI Health, a South Carolina limited liability company. In August 2022, EPI Health, as sole equity member, formed and organized a new Delaware single member LLC which did not have any operating activity for the year ended December 31, 2022.

See Note 2—“Acquisition of EPI Health” for further information regarding the EPI Health Acquisition.
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted accounting principles in the United States of America (“U.S. GAAP”).

Additionally, the report of the Company’s independent registered public accounting firm on the Company’s consolidated financial statements as of and for the year ended December 31, 2022, includes an explanatory paragraph indicating that there is substantial doubt about the Company’s ability to continue as a going concern, as further discussed below.

Basis of Consolidation

The accompanying consolidated financial statements reflect the operations of the Company and its wholly owned subsidiary.subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

On December 30, 2015, the Company completed the distribution

The post-acquisition operating results of 100% of the outstanding member interests of KNOW Bio, LLC (“KNOW Bio”), a former wholly owned subsidiary of the Company, to Novan’s stockholders (the “Distribution”), pursuant to which KNOW Bio became an independent privately held company.  Beginning in the fourth quarter of 2015, KNOW Bio’s financial results for periods prior to the Distribution wereEPI Health are reflected inwithin the Company’s consolidated financial statements, retrospectively, as discontinued operations.  During the year ended December 31, 2016, the Company made payments of accounts payable associated with the discontinued operations that were not assumed by KNOW Bio as part of the Distribution.  These payments are classified as discontinued operating activities in the accompanying consolidated statement of cash flowsoperations and comprehensive loss for the year ended December 31, 2016.

The Company does not own an equity interest in KNOW Bio, but does have variable interests in KNOW Bio2022, specifically from March 11, 2022 through the following contractual arrangements:

At the time of the Distribution, the Company entered into exclusive sublicense agreements with KNOW Bio, which were amended in October 2017, as described in Note 4—Collaboration Arrangements.   The Company’s contingent obligation to pay future milestones or royalties to the University of North Carolina at Chapel Hill (“UNC”) and other licensors, including in the event of KNOW Bio non-performance under the sublicense arrangements, creates a variable interest.

The Company entered into a master development services and clinical supply agreement with KNOW Bio in April 2017 and related statements of work (“SOW”) in the second quarter and second half of 2017 (collectively, the “KNOW Bio Services Agreement”). Under the KNOW Bio Services Agreement, the Company is providing certain development and manufacturing services to KNOW Bio’s respiratory drug development subsidiary. Pursuant to applicable guidance in FASB ASC 810-10, Consolidation, a service provider arrangement such as the KNOW Bio Services Agreement is deemed a variable interest when a reporting entity has another previously existing variable interest in a legal entity, such as the Company’s sublicense arrangements with KNOW Bio, as described above.

Through its portfolio of operating subsidiary companies, KNOW Bio is advancing work in nitric oxide-based therapies in fields where they have exclusive intellectual property rights. The Company determined that KNOW Bio was a variable interest entity for 2017 based on reassessments of variable interest entity characteristics, pursuant to FASB ASC 810-10, Consolidation, performed by the Company in 2017.  These reassessments were required because certain triggering events occurred during 2017, including the execution of the KNOW Bio Services


Agreement and the series of related SOWs and the execution of the amendments to the exclusive sublicense agreements with KNOW Bio.  

The Company concluded that it is not the primary beneficiary of KNOW Bio and, therefore, does not consolidate KNOW Bio in its consolidated financial statements herein.  This conclusion is based on the fact that the Company has no significant power or decision-making authority over KNOW Bio’s drug and medical device development activities, which are the activities most significantly impacting KNOW Bio’s economic performance.  Under the KNOW Bio Services Agreement, the Company is providing certain development and manufacturing services to KNOW Bio on commercial terms.  In exchange for these services, KNOW Bio pays service fees for actual time and materials incurred by the Company on a cost-plus basis. The terms of the amendments to the exclusive sublicense agreements with KNOW Bio were evaluated by the Company, with the support of a third-party expert, and were determined to be at fair value and arms-length. As a result, the amendments did not create any ability for Novan to influence KNOW Bio’s decision-making.

As of December 31, 2017, the Company has a deferred revenue balance of $35 related to services performed under the KNOW Bio Services Agreement. The Company has no exposure to loss as a result of its involvement with KNOW Bio. The Company’s sublicense arrangement with KNOW Bio does expose the Company to potential future risk of loss, whereby the Company is obligated to pay contingent future milestones or royalties to UNC or other licensors, including in the event of KNOW Bio non-performance under the sublicense arrangement; however, if KNOW Bio failed to pay these obligations, KNOW Bio would be in breach of its agreements with the Company and intellectual property rights would revert back to the Company.  See Note 3—Research and Development Agreements for detailed information regarding potential future milestone and royalty payments due to UNC and other licensors.  The contractual terms of the KNOW Bio Services Agreement, including upfront payment requirements, cost-plus pricing and timely payment terms, mitigate the current or potential future risk of loss to the Company for services performed under the KNOW Bio Services Agreement.  

2022.

Liquidity and Ability to Continue as a Going Concern

The Company’s consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

The Company has evaluated principal conditions and events, in the aggregate, that may raise substantial doubt about its ability to continue as a going concern within one year from the date that these financial statements are issued. The Company identified the following conditions:

The Company has reported a net loss in all fiscal periods since inception and, as of December 31, 2017,2022, the Company had an accumulated deficit of $160,160.  

$310,280.

The Company’s primary useAs of cash is to fund its operating expenses, which consist principally of research and development expenditures necessary to advance its product candidates. TheDecember 31, 2022, the Company has evaluated its expected, probable future cash flow needs and has determined that it expects to incur substantial losses in the future as it conducts planned operating activities. The Company expects that the amount ofhad a total cash and cash equivalents on handbalance of $12,316. 

The Company anticipates that it will continue to generate losses for the foreseeable future, and it expects the losses to increase as it continues the development of, December 31, 2017, together with the proceeds from the public offering completed in January 2018 (see Note 13—Subsequent Events) will be sufficientand seeks regulatory approvals for, its product candidates and begins activities to meet its anticipated cash requirements into the second quarterprepare for potential commercialization of 2019.  

SB206, if approved.

The Company has concluded that the prevailing conditions and ongoing liquidity risks faced by the Company, coupled with its current forecasts, including costs associated with implementing the SB206 prelaunch strategy and commercial preparation, raise substantial doubt about its ability to continue as a going concern. To mitigate these prevailing
89


This evaluation is also based on other relevant conditions andthat are known or reasonably knowable at the date that the financial statements are issued, including ongoing liquidity risks faced by the Company, the Company’s conditional and unconditional obligations due or anticipated within one year, the funds necessary to maintain the Company’s operations considering its current financial condition, obligations, and other expected cash flows, and other conditions and events that, when considered in conjunction with the above, may adversely affect the Company’s ability to meet its obligations. The Company will continue to evaluate this going concern assessment in connection with the preparation of its quarterly and annual financial statements based upon relevant facts and circumstances, including, but not limited to, its cash and cash equivalents balance and its operating forecast and related cash projection.
The Company believes that its existing cash and cash equivalents as of December 31, 2022, plus expected receipts associated with product sales from its commercial product portfolio will not provide it with adequate liquidity to fund its planned operating needs for one year from the date of these financial statements. Variability in its operating forecast, driven primarily by (i) commercial product sales, (ii) timing of operating expenditures, and intends to raise additional(iii) unanticipated changes in net working capital, inwill impact the formCompany’s cash runway. This operating forecast and related cash projection includes (i) costs associated with preparing for potential U.S. regulatory approval of revenues, contributions, grants or other payments from collaborative or licensing partners or from equity or debt financings prior toSB206 as a treatment for molluscum, (ii) costs associated with the full developmentreadiness and operation of the Company’s new manufacturing capability necessary to support small-scale drug substance and drug product candidates. There canmanufacturing, (iii) conducting drug manufacturing activities with external third-party contract manufacturing organizations (“CMOs”), (iv) ongoing commercial operations, including sales, marketing, inventory procurement and distribution, and supportive activities, related to its portfolio of therapeutic products for skin diseases acquired with the EPI Health Acquisition, and (v) initial efforts to support potential commercialization of SB206, but excludes additional operating costs that could occur between the New Drug Application (“NDA”) submission for SB206 through NDA approval, including, but not limited to, manufacturing, marketing and commercialization efforts to achieve potential launch of SB206. The Company does not currently have sufficient funds to complete commercialization of any of its product candidates that are under development, and its funding needs will largely be no assurance that the Company will be able to obtain additional capital on terms acceptabledetermined by its commercialization strategy for SB206, subject to the Company, on a timely basis or at all. regulatory approval process and outcome, and the operating performance of its commercial product portfolio.
The failureinability of the Company to generate sufficient net revenues to fund its operations or obtain sufficient fundssignificant additional funding on acceptable terms when neededin the near term, could have a material adverse effect on the Company’s business and cause the Company to alter or


reduce its planned operating activities, including, but not limited to, delaying, reducing, terminating or eliminating planned product candidate development activities, furloughing employees or reducing the size of the workforce, to conserve its cash and cash equivalents. The Company has pursued and may continue to pursue additional capital through equity or debt financings or from other sources, including partnerships, collaborations, licensing, grants or other strategic relationships. The Company’s anticipated expenditure levels may change as it adjusts its current operating plan. Such actions could delay development timelines and have a material adverse effect on the Company’sits business, results of operations, financial condition and market valuation. Additionally, there is no assurance that

The Company may also explore the potential for additional strategic transactions, such as strategic acquisitions or in-licenses, sales, out-licenses or divestitures of some of its assets, or other potential strategic transactions, which could include a sale of the Company. If the Company can achieve its development milestones or that its intellectual property rights willwere to pursue such a transaction, it may not be challenged.

Reverse stock-splitable to complete the transaction on a timely basis or at all or on terms that are favorable to the Company. Alternatively, if the Company is unable to obtain significant additional funding on acceptable terms or progress with a strategic transaction, it could instead determine to dissolve and amendmentsliquidate its assets or seek protection under the bankruptcy laws. If the Company decides to certificatedissolve and liquidate its assets or to seek protection under the bankruptcy laws, it is unclear to what extent the Company would be able to pay its obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to stockholders.

Business Acquisitions
The Company accounts for business acquisitions using the acquisition method of incorporation

On September 7, 2016, following approval byaccounting in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, Fair Value Measurements (“ASC 820”), as of the acquisition date. For certain assets and liabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the closing date of the acquisition at the then-current market price. Under ASC 805, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) are expensed in the period in which the costs are incurred. The application of the acquisition method of accounting requires the Company to make estimates and assumptions related to the estimated fair values of net assets acquired, which require significant management judgment.

90


COVID-19
The extent to which COVID-19, and its variant strains, and domestic and global efforts to contain its spread along with lingering effects of the foregoing will impact the Company’s boardbusiness, including its operations, preclinical studies, clinical trials, and financial condition, will depend on future developments, which are highly uncertain and cannot be predicted, and include the duration, severity and scope of directorsthe pandemic and its lingering impacts, the availability and effectiveness of vaccines in preventing the spread of COVID-19 (and its variants), and the actions taken by other parties, such as governmental authorities, to contain and treat COVID-19 and its variants.
During the pandemic, the timetable for development of the Company’s product candidates has been impacted and may face further disruption and the Company’s stockholders,business could be further adversely affected by the Company amendedoutbreak of COVID-19 and its certificatevariants. In particular, COVID-19 impacted the timing of incorporation effecting a 1-for-1.2 reverse stock split of its voting and non-voting common stock and a proportional adjustment to the existing conversion ratio of each series of its convertible preferred stock. As a result of the reverse stock split, the Company also adjusted the share amounts under its employee incentive plan. All disclosure of common shares and per common share data in the accompanying financial statements and related notes have been adjusted to reflect the reverse stock split and adjustment of preferred stock conversion ratios for all periods presented.

The reverse stock split did not cause an adjustment to the par value or the authorized shares of the voting and non-voting common stock or the convertible preferred stock. However, subsequent to the reverse stock split and in conjunction with the closingtrial initiation of the Company’s initial public offering, (“IPO”),B-SIMPLE4 Phase 3 study and was a factor influencing the certificate was further amendedCompany’s previous adjustment of its targeted SB206 NDA submission timing.

In addition, certain factors from the COVID-19 pandemic may delay or otherwise adversely affect the Company’s generation of product revenues from its portfolio of therapeutic products for skin diseases, as well as adversely impact the Company’s business generally, including (i) changes in buying patterns caused by lack of normal access by patients to the healthcare system and concern about the supply of medications, (ii) adverse impacts on the Company’s manufacturing operations, supply chain and distribution processes, which may impact its ability to procure, produce and distribute its products or product candidates, (iii) the inability of third parties to fulfill their obligations to the Company due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems, (iv) the risk of shutdown in countries where the Company relies on CMOs to provide for an adjustment to the number of authorized shares to 210,000,000 shares of capital stock, of which 200,000,000 shares have been designated as $0.0001 par value common stock, and 10,000,000 shares have been designated as $0.0001 par value preferred stock.

Initial public offering

On September 26, 2016, the Company completed the IPOcommercial manufacture of its common stock. The Company sold an aggregateproducts or clinical batch manufacturing of 4,715,000 shares of common stock underits product candidates, (v) the registration statement on Form S-1 declared effective byability to procure raw materials needed for the Securities and Exchange Commission (“SEC”) on September 20, 2016, at a public offering price of $11.00 per share for aggregate gross proceeds of $51,865. Net proceeds were $44,595, after deducting underwriting discounts and commissions of $4,080 and offering expenses of $3,190. Upon the completion of the IPO, all outstanding sharesproduction of the Company’s non-voting common stockactive pharmaceutical ingredient (“API”) and convertible preferred stock were automatically converted into 8,967,321 shares of common stock. The shares issued as part of the IPO in September 2016 increased the number of shares outstanding, which impacts the comparability ofother manufacturing components for the Company’s reported net loss per share calculations betweenproduct candidates, (vi) the 2017, 2016 and 2015 periods.

Shelf Registration Filing

On October 2, 2017,possibility that third parties on which the Company filed a shelf registration statement on Form S-3 withmay rely for certain functions and services, including CMOs, suppliers, distributors, logistics providers, and external business partners, may be adversely impacted by restrictions resulting from the SEC,COVID-19 pandemic, which the SEC declared effective on October 10, 2017. The registration statement contained a prospectus which covers:

the offering, issuance and sale bycould cause the Company of up to a maximum aggregate offering price of $150,000 ofexperience delays or to incur additional costs, and (vii) the risk that the COVID-19 pandemic may intensify other risks inherent in the Company’s common stock, preferred stock, debt securities, warrants, and units, including those that may be issued upon conversion of, in exchange for or upon exercise of any such securities; and

business.

the offering, issuance and sale of up to 2,623,485 shares of the Company’s common stock held by Malin Life Sciences Holdings Limited (“Malin”), the Company’s largest stockholder at December 31, 2017. These common stock shares represent Malin’s total shareholding in the Company as of October 2, 2017. Malin requested that the Company register all of the shares it held to facilitate its ability to utilize the shares as collateral. At the time the Company filed the Shelf Registration, Malin represented to our board of directors that it had no present intention to sell its shares or monetize its shareholding but reserves its right to manage its balance sheet and equity positions going forward. Malin confirmed it remained supportive of the management team and board of Novan, the potential application of the underlying technology platform in broad dermatological indications and the value proposition of the Company.


The Company incurred costs directly related to (i) the shelf registration statement filing totaling $110 and (ii) the public offering completed in January 2018 (see Note 13—Subsequent Events) totaling $187, all of which were capitalized and included in deferred offering costs in the accompanying balance sheet as of December 31, 2017.   

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation.  These changes had no effect on previously reported net loss, financial position or cash flows.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The Company reviews all significant estimates affecting the consolidated financial statements on a recurring basis and records the effects of any necessary adjustments prior to their issuance.
Significant estimates made by management include provisions for product returns, coupons, rebates, chargebacks, trade and cash discounts, allowances and distribution fees paid to certain wholesalers, inventory net realizable value, useful lives of amortizable intangible assets, stock-based compensation, accrued expenses, valuation of assets and liabilities in business combinations, developmental timelines related to licensed products, valuation of notes payable issued in conjunction with the acquisition, valuation of contingent consideration and contingencies. Actual results couldmay differ materially and adversely from these estimates.

To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Reclassifications
Certain amounts in the Company’s consolidated balance sheet as of December 31, 2021 have been reclassified to conform to the current presentation. Prepaid insurance in the amount of $1,697 and other current assets related to leasing arrangement, net in the amount of $109 has been reclassified to prepaid expenses and other current assets. In addition, certain current liabilities totaling $2,164, which were previously classified as accrued compensation, accrued outside research and development services, and accrued legal and professional fees, have been reclassified to all be included in accrued expenses to conform with the current presentation.
These reclassifications had no impact on the Company’s consolidated current assets, current liabilities or on the consolidated statements of operations and comprehensive loss or cash flows from operations as of and for the year ended December 31, 2021.
Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents include deposits and money market accounts.

91


Restricted Cash

The Company included in noncurrent assets restricted

Restricted cash of $539 as of December 31, 20172022 and 2016, which consisted ofDecember 31, 2021 includes both a current and non-current component. The current component relates to a factoring facility entered into in December 2022. See Note 9—“Commitments and Contingencies” for further information. The non-current component relates to funds maintained in a separate deposit account to secure a letter of credit for the benefit of the lessor of facility space leased by the Company.  

Company’s headquarters. See Note 6—“Leases” for further information regarding the letter of credit.

Accounts Receivable, net
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables. An account receivable is considered to be past due if any portion of the receivable balance is outstanding beyond the agreed-upon due date.
The Company records an allowance for credit losses, which includes a provision for expected losses based on historical write-offs, adjusted for current conditions as deemed necessary, reasonable and supportable forecasts about future conditions that affect the expected collectability of the reported amount of the financial asset, as well as a specific reserve for accounts deemed at risk. The allowance is the Company’s estimate for accounts receivable as of the balance sheet date that ultimately will not be collected. Any changes in the allowance are reflected in the results of operations in the period in which the change occurs. As of December 31, 2022, the Company had recorded a provision for expected losses of $141. No allowance for credit losses was recorded as of December 31, 2021 as all amounts included in accounts receivable were expected to be collected.
Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Recoveries of receivables previously written off are recorded when received. The Company does not charge interest on accounts receivable.
As part of the EPI Health Acquisition, accounts receivable, net, were marked to fair value as part of the Company’s ASC 805 business combination accounting. See Note 2—“Acquisition of EPI Health” for additional detail.
Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash, cash equivalents and cash equivalents.accounts receivable. The Company places its cash and cash equivalents with financial institutions and these deposits may at times be in excess of insured limits.

Intangible Assets

Intangible assets representlimits and the cost to obtain and registerCompany assesses the creditworthiness of its customers on an on-going basis.

As of December 31, 2022, three of the Company’s internet domain. Indefinite-lived intangible assets are not amortizedwholesaler customers accounted for more than 10% of its total accounts receivable balance at 25%, 13% and are assessed12%, respectively.
As of December 31, 2022, 23% of accounts receivable related to amounts due from Sato under the Rhofade agreement. As of December 31, 2021, 97% of accounts receivable related to amounts due from Sato under the SB206 and SB204 license agreement. See Note 14—“License and Collaboration Revenues” for impairmentadditional detail.
Inventory, net
The Company maintains inventory consisting of for-sale pharmaceuticals related to its marketed product portfolio. The Company measures inventory using the first-in, first-out method and values inventory at least annually.

the lower of cost or net realizable value. Net realizable value represents the estimated selling price for inventories less all estimated costs to sell.

The Company performs an analysis and records a provision for potentially obsolete inventory. The reserve for obsolescence is generally an estimate of the amount of inventory held at period end that is expected to expire in the future based on projected sales volume and expected product expiration or sell-by dates. These assumptions require the Company to analyze the aging of and forecasted demand for its inventory and make estimates regarding future product sales.
Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives as follows:

Computer and office equipment

3 years

Furniture and fixtures

5-7 years

Laboratory equipment

7 years

Building asset under facility lease

25 years

Leasehold improvements are amortized over the shorter of the life of the lease or the useful life of the improvements. Expenditures for maintenance and repairs are expensed as incurred. Improvements and betterments that add new functionality or extend the useful life of an asset are capitalized.

Leases for real estate often include tenant improvement allowances, which

92



the Company assesses according to applicable accounting guidance to determine the appropriate owner, and capitalizes such tenant improvement assets accordingly.
Intangible Assets, net and Goodwill
Intangible assets represent certain identifiable intangible assets, including product rights consisting of pharmaceutical product licenses and patents. Amortization for pharmaceutical products licenses is computed using the straight-line method based on the lesser of the term of the agreement and the useful life of the license. Amortization for pharmaceutical patents is computed using the straight-line method based on the useful life of the patent.
Definite-lived intangible assets are reviewed for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. In the event impairment indicators are present or if other circumstances indicate that an impairment might exist, then management compares the future undiscounted cash flows directly associated with the asset or asset group to the carrying amount of the asset group being determined for impairment. If those estimated cash flows are less than the carrying amount of the asset group, an impairment loss is recognized. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Considerable judgment is necessary to estimate the fair value of these assets, accordingly, actual results may vary significantly from such estimates.
Indefinite-lived intangible assets, including goodwill and the cost to obtain and register the Company’s internet domain, are not amortized. The Company tests the carrying amounts of goodwill for recoverability on an annual basis at October 1 or when events or changes in circumstances indicate evidence that a potential impairment exists, using a fair value based test.
Goodwill is assessed at the reporting unit level.The Company performed a qualitative assessment as of October 1, 2022 and concluded that it is not more likely than not that the fair value of the Company’s reporting unit was less than its carrying amount.
A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows, a sustained, significant decline in the Company’s stock price and market capitalization, a significant adverse change in legal factors or in the business climate, adverse assessment or action by a regulator, and unanticipated competition. Any change in these indicators could have a significant negative impact on the Company’s financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.
Intellectual Property

The Company’s policy is to file patent applications to protect technology, inventions and improvements that are considered important to its business. Patent positions, including those of the Company, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. Due to the uncertainty of future value to be realized from the expenses incurred in developing the Company’s intellectual property, the cost of filing, prosecuting and maintaining internally developed patents are expensed as general and administrative costs as incurred.

Leases

The Company leases office space and certain equipment under non-cancelable lease agreements. The leases are reviewed for classification as operating or capital leases. For operating leases, rent is recognized on a straight-line basis overCompany applies the lease period. For capital leases,accounting guidance in ASC 842, Leases. As such, the Company recordsassesses all arrangements, that convey the leased asset with a corresponding liabilityright to control the use of property, plant and amortizes the asset over the lease term. Payments are recorded as reductions to the liability with an appropriate interest charge recorded based on the then-outstanding remaining liability.

The Company considers the nature of the renovations and the Company’s involvement during the construction period of newly leased office spaceequipment, at inception, to determine if it is, considered to beor contains, a lease based on the owner of the construction project during the construction period. Ifunique facts and circumstances present in that arrangement. For those leases identified, the Company determines the lease classification, recognition, and measurement at the lease commencement date. For arrangements that itcontain a lease the Company: (i) identifies lease and non-lease components; (ii) determines the consideration in the contract; (iii) determines whether the lease is an operating or financing lease; and (iv) recognizes lease Right of Use (“ROU”) assets and corresponding lease liabilities. Lease liabilities are recorded based on the ownerpresent value of lease payments over the expected lease term. The corresponding ROU asset is measured from the initial lease liability, adjusted by (i) accrued or prepaid rents; (ii) remaining unamortized initial direct costs and lease incentives; and (iii) any impairments of the construction project, it is requiredROU asset.

The Company elected the practical expedient to capitalizenot separate non-lease components from the fair valuelease components. Fixed lease payments on operating leases are recognized over the expected term of the buildinglease on a straight-line basis. Variable lease expenses that are not considered fixed are expensed as wellincurred. Fixed and variable lease expense on operating leases is recognized within operating expenses within the accompanying consolidated statements of operations and comprehensive loss. The Company has elected the short-term lease exemption and, therefore, does not recognize an ROU asset or corresponding liability for lease arrangements with an original term of 12 months or less.
The interest rate implicit in the Company’s lease contracts is typically not readily determinable and as the construction costs incurred, including capitalized interest, on its consolidated balance sheet along with a corresponding financing liability (“build-to-suit accounting”). Upon completion of the construction of the facility under a build-to-suit lease,such, the Company assesses whetheruses its incremental borrowing rate based on the circumstances qualify for sales recognition under the sale-leaseback accounting guidance. Ifinformation available at the lease meets the sale-leaseback criteria, the Company will remove the asset and related financial obligation from the balance sheet and evaluatecommencement date, which represents an internally developed rate that would be incurred to borrow, on a collateralized basis, over a similar term, an amount equal to the lease for treatment aspayments in a capital or operating lease. If upon completion of construction, the project does not meet the sale-leaseback criteria, the leased property will be treated as an asset financing for financial reporting purposes. The portion of the facility financing obligation representing the principal that will be repaid in the next 12 months will be classified as a current liability in the consolidated balance sheets, with the remaining portion of the obligation classified as a noncurrent liability. See Note 6—Commitments and Contingencies for further discussion of the Company’s application of this guidance related to the Company’s primary facility lease.

similar economic environment.

93


Impairment of Long-Lived Assets

Long-lived assets 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 for an amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no impairments
Revenue Recognition
The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). To determine revenue recognition for arrangements that are within the scope of long-lived assets duringASC 606, the years ended December 31, 2017, 2016 and 2015.

Deferred Offering Costs

Deferred offering costs consisting of legal, accounting, filing and other fees directly related to offerings orCompany (i) identifies the Company’s shelf registration, are offset against proceeds from each offering as applicable. Offering costs incurred priorcontract with a customer, (ii) identifies the performance obligations within the contract, (iii) determines the transaction price, (iv) allocates the transaction price to the completion of an offering are initially capitalized as assets, evaluated each period for likelihood of completion and subsequently reclassified to additional paid-in capital upon completion of the offering.  Deferred cost associated with the shelf registration will be reclassified to additional paid in capital on a pro-rata basisperformance obligations in the eventcontract, and (v) recognizes revenue when (or as) the Company completes an offering under the shelf registration, with any remaining deferred offering costs charged to general and administrative expense at the end of the three-year life of the shelf registration.  

Revenue Recognition—Licensing Arrangements

satisfies a performance obligation. The Company entered into a licensing arrangement inonly applies the first quarter of 2017 and may enter into additional licensing arrangements infive-step model to contracts when it is probable that it will collect the future,consideration to which it is entitled in exchange for non-refundable upfront paymentsthe goods or services it transfers to the customer.

At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within the contract and potential future milestonedetermines those that are performance obligations and royalty payments. Such arrangements include multiple elements, includingassesses whether each promised good or service is distinct. The Company then recognizes as revenue the saleamount of licenses and the

transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

provisionUpon occurrence of services. Under U.S. GAAP effective as of and duringa contract modification, the year ended December 31, 2017, for arrangements that involveCompany conducts an evaluation pursuant to the delivery of more than one element, each product, service and/or right to use assets is evaluatedmodification framework in ASC 606 to determine whether it qualifies as a separate unit of accounting. This determination is based onthe appropriate revenue recognition. The framework centers around key questions, including (i) whether the deliverable has “stand-alone value” to the licensee. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling prices of each deliverable. The consideration allocated to each unit of accounting is recognized as the relatedmodification adds additional goods and services, (ii) whether those goods and services are delivered, limiteddistinct, and (iii) whether the contract price increases by an amount that reflects the standalone selling price for the new goods or services. The resulting conclusions will determine whether the modification is treated as a separate, standalone contract or if it is combined with the original contract and accounted for in that manner. In addition, some modifications are accounted for on a prospective basis and others on a cumulative catch-up basis.

The Company currently has the following types of revenue generating arrangements:
Net Product Revenues
Net product revenues encompass sales resulting from transferring control of products to the customer, excluding amounts collected on behalf of third parties. The amount of revenue recognized is the amount allocated to the satisfied performance obligation taking into account variable consideration. The estimated amount of variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Product sales are recognized at the point in time when legal transfer of title has occurred, based on shipping terms. The Company records a reduction to the transaction price for estimated chargebacks, rebates, coupons, trade and cash discounts and sales returns. A liability is recognized for expected sales returns, rebates, coupons, trade and cash discounts, chargebacks or other reimbursements to customers in relation to sales made in the reporting period. Payment terms can differ from contract to contract, but no element of financing is deemed present as the typical payment terms are less than 100 days. Therefore, the transaction price is not contingentadjusted for the effects of a significant financing component. A receivable is recognized as soon as control over the products is transferred to the customer as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.
Variable consideration relates to sales returns, rebates, coupons, trade and cash discounts, and chargebacks granted to various direct and indirect customers. The Company recognizes provisions at the time of sale and adjusts them if the actual amounts differ from the estimated provisions. The following describes the nature of each deduction and how provisions are estimated:
Chargebacks – The Company has arrangements with various third-party wholesalers that require the Company to issue a credit to the wholesaler for the difference between the invoice price to the wholesaler and the customer’s contract price. Provisions for chargebacks involve estimates of the contract prices within multiple contracts with multiple wholesalers. The provisions for chargebacks vary in relation to changes in product mix, pricing and the level of inventory at the wholesalers and, in addition, fluctuate in proportion to an increase or decrease in sales. Provisions for estimated chargebacks are calculated using the historical chargeback experience and expected chargeback levels for new products and anticipated pricing changes, which involves significant estimates by management. Chargeback provisions are compared to externally obtained distribution channel reports for reasonableness. The Company regularly monitors the provisions for chargebacks and makes adjustments when the Company believes that actual chargebacks may differ from estimated provisions.
Rebates – Rebates include managed care services, fee for service and the Medicaid rebate programs. Rebates are primarily related to volume-based incentives and are offered to key customers to promote loyalty. Customers receive rebates upon future deliverables. When an arrangementthe
94


attainment of a pre-established volume or the attainment of revenue milestones for a specified period. Since rebates are contractually agreed upon, provisions are estimated based on the specific terms in each agreement based on historical trends and expected sales.
Returns – Returns primarily relate to customer returns of expired products that the customer has the right to return up to one year following the product’s expiration date. Such returned products are destroyed and credits and/or refunds are issued to the customer for the value of the returns. Accordingly, no returned assets are recorded in connection with those products. The returns provision is estimated by applying a historical return rate to the amounts of revenue estimated to be subject to returns. Revenue subject to returns is estimated based on the lag time from time of sale to date of return. The estimated lag time is developed by analyzing historical experience. Additionally, the Company considers specific factors, such as levels of inventory in the distribution channel, product dating and expiration, size and maturity of launch, entrance of new competitors, changes in formularies or packaging and any changes to customer terms, in determining the overall expected levels of returns, which involves significant estimates by management.
Prompt pay discounts – Prompt pay discounts are offered to most customers to encourage timely payment. Discounts are estimated at the time of invoice based on historical discounts in relation to sales. Prompt pay discounts are almost always utilized by customers. As a result, the actual discounts typically do not vary significantly from the estimated amount.
Coupons – The Company offers coupons to market participants in order to stimulate product sales. The redemption cost of consumer coupons is based on historical redemption experience by product and value.
Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Shipping and handling costs are accounted for as a single unitfulfillment cost and are recorded as cost of accounting, we determinerevenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Costs incurred to obtain a contract will be expensed as incurred when the amortization period over whichis less than a year.
There can be a lag between the Company’s establishment of an estimate and the timing of the invoicing or claim. The Company believes it has made reasonable estimates for future rebates and claims, however, these estimates involve assumptions pertaining to contractual utilization and performance, and payor mix. If the performance or mix across third-party payors is different from the Company’s estimates, the Company may be required to pay higher or lower total price adjustments and/or chargebacks than it had estimated.
License and Collaboration Revenues
The Company has entered into various types of agreements that either license the Company’s intellectual property to a third party or acquire license rights to intellectual property of a third party, or both.
Agreements where the Company licenses its intellectual property to a third party for development and commercialization in a licensed territory. If the applicable license is determined to be distinct from the other performance obligations will be performed and revenue recognized. Management exercises significant judgmentidentified in the determinationarrangement, the Company recognizes revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company’s management utilizes judgment to assess the nature of (i) whether a deliverable has stand-alone value, (ii)the combined performance obligation to determine whether the deliverablecombined performance obligation is consideredsatisfied over time or at a point in time and, if over time, the estimated performance period and the appropriate method of measuring progress during the performance period for purposes of recognizing revenue. The Company re-evaluates the estimated performance period and measure of progress each reporting period and, if necessary, adjusts related revenue recognition accordingly. These arrangements often include milestone as well as royalty or profit-share payments, contingent upon the occurrence of certain future events linked to be a separate unit of accounting and (iii) the estimationsuccess of the relative fair valueasset in development, as well as expense reimbursements from or payments to the collaboration partner. Because of the risk that products in development will not receive regulatory approval, the Company does not recognize any contingent payments until regulatory approval becomes probable. Future sales-based royalties are not recorded until the subsequent sale occurs.
Agreements where the Company acquires licensed rights to, or otherwise accesses, a third party’s intellectual property for commercialization of the third party’s product in a licensed territory. The Company also enters into various types of arrangements to commercialize products. The Company’s services provided to the third party under such arrangements, in exchange for compensation that may take the form of cost reimbursements, may include promoting, marketing, selling and distributing the third party’s developed drugs, and may also involve certain license rights granted to the parties for use of the other party’s intellectual property while providing defined services under the arrangements. The Company assesses the nature of each deliverable in the arrangement.

The Company recognizes a milestone payment when earned if it is substantivesuch arrangement and the Company has no ongoing performance obligations relatedvarious rights granted and services performed thereunder, and determines the applicable accounting standard, which may include ASC 808, Collaborative Arrangements (“ASC 808”) or ASC 606.

Royalty revenue from licenses provided to the milestone. A milestone paymentCompany’s collaboration partners, which is considered substantive if it: (i)based on sales to third parties of licensed products and technology, is commensurate with eitherrecorded based on the Company’s performance to achievelater of when the milestonethird-party sale occurs or the enhanced value of the delivered item as a result of a specific outcome from the performance obligation to achieve the milestone; (ii) relates solely to past performance; and (iii) is reasonable relative towhich some or all of the deliverablesroyalty has been allocated has been satisfied. This royalty revenue is included in license and payment terms, including consideration of other potential milestones, within the arrangement.

Amounts received prior to satisfying all revenue recognition criteria are recorded as deferredcollaboration revenue in the accompanying balance sheets. See Note 4Collaboration Arrangements for further informationconsolidated statements of operations and accounting considerations related to licensing arrangements revenue recognition.

Revenue Recognition—Research and Development Services

During 2017,comprehensive loss.

95


When the Company entered intoperforms and incurs marketing and promotional services expense under an arrangement to provide research and development services on a fee-for-service basis and may enter into additional arrangements in the future. Pursuant to U.S. GAAP that is effective asdetermined to be within the scope of ASC 808, and duringwhere such services are on behalf of a collaboration partner that is not considered a customer under ASC 606, the year ended December 31, 2017, under such arrangements, revenue is recognized when allCompany recognizes a contra-expense that reflects the value of the following conditionscost reimbursement to which the Company is expected to be entitled in exchange for those services.
Such contractually required reimbursements are met: (i) persuasive evidencereported as a liability or an asset within the accompanying consolidated balance sheets based upon the timing of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) feescash receipt from the collaboration partner.
Government research contracts and grants revenue
Under the terms of the contracts and grants awarded, the Company is entitled to receive reimbursement of its allowable direct expenses, allocated overhead, general and administrative expenses and payment of other specified amounts. Revenues from development and support activities under government research contracts and grants are fixed or determinable, and (iv) collection of fees is reasonably assured. The Company’s contract research and development services revenue is recognizedrecorded in the period in which the servicesrelated costs are performed.

Duringincurred. Associated expenses are recognized when incurred as research and development expense. Revenue recognized in excess of amounts collected from funding sources is recorded as accounts receivable. Any of the funding sources may, at their discretion, request reimbursement for expenses or return of funds, or both, as a result of noncompliance by the Company with the terms of the grants. No reimbursement of expenses or return of funds has been requested or made since inception of the contracts and grants.

Cost of Goods Sold
Cost of goods sold includes the direct costs attributable to the Company’s product revenue and any licenses of the Company’s commercial products. It includes the cost of the purchased finished goods, shipping and storage costs related to the Company’s marketed drug products, sales based royalty and milestone expenses, and certain third-party intellectual property licensing costs.
Advertising Costs
Promotion, marketing and advertising costs are expensed as incurred. Promotion, marketing and advertising costs for the year ended December 31, 2017,2022, were approximately $1,434. There were no costs for the Company recognized $375 in research and development services revenue for services performed under the KNOW Bio Services Agreement and had current deferred revenue related to these services of $35 as ofyear ended December 31, 2017.

2021. The costs are included in selling, general and administrative expenses in the consolidated statement of operations and comprehensive loss.

Research and Development Expenses

Research and development expenses include all direct and indirect development costs incurred for the development of the Company’s drug candidates. These expenses include salaries and related costs, including stock-based compensation and travel costs for research and development personnel, allocated facility costs, laboratory and manufacturing materials and supplies, consulting fees, product development, preclinical studies, clinical trial costs, licensing fees and milestone payments under license agreements and other fees and costs related to the development of the drug candidates. The costcosts of tangible and intangible assets that are acquired for use on a particular research and development project, have no alternative future uses, and are not required to be capitalized in accordance with the Company’s capitalization policy, are expensed as research and development costs as incurred.

Accrued Outside Research and Development Expense Accruals

Expenses

The Company is required to estimate its expenses resulting from its obligations under contracts with clinical research organizations, clinical site agreements, vendors, and consultants in connection with conducting clinical trials and preclinical development. The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts. The Company’s objective is to reflect the appropriate


development and clinical trial expenses in its financial statements by matching those expenses with the period in which the services and efforts are expended.

For clinical trials, the Company accounts for these expenses according to the progress of the trial as measured by actual hours expended by contract research organization (CRO) personnel, investigator performance or completion of specific tasks, patient progression, or timing of various aspects of the trial. During the course of a clinical trial, the Company adjusts its rate of clinical trial expense recognition if actual results differ from its estimates. The Company utilizes judgment and experience to estimate its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known at that time. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of status and timing of services performed relative to the actual status and timing of services performed may vary and may result in increases or decreases in research and development expenses in future periods when the actual results become known.

For preclinical development services performed by outside service providers, the Company determines accrual estimates through financial models, taking into accountconsidering development progress data received from outside service providers and discussions with applicable Company and service provider personnel.

Share-Based

96


Contingent Consideration
Contingent consideration is recorded as a liability and is the estimate of the fair value of potential milestone payments related to the EPI Health Acquisition. The estimated fair value of contingent consideration was determined based on a probability-weighted valuation model that measures the present value of the probable cash payments based upon the future milestone events of EPI Health at a discount rate that captures the risk associated with the liability and also based on a Monte Carlo simulation, whereby EPI Health’s forecasted net sales from the EPI Health legacy products were simulated over the measurement period to calculate the contingent consideration. See Note 2—“Acquisition of EPI Health” for further information regarding purchase consideration.
Contingent consideration is remeasured at each reporting date and any changes in the liability are recorded within the consolidated statement of operations and comprehensive loss. See Note 19—“Fair Value” for further information.
Classification of Warrants Issued in Connection with Offerings of Common Stock
The Company accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, whether the warrants meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and remeasured each balance sheet date thereafter. Changes in the estimated fair value of the liability-classified warrants are recognized as a non-cash gain or loss in the accompanying consolidated statements of operations and comprehensive loss.
Fair Value of Financial Instruments
The carrying values of cash equivalents, accounts receivable, accounts payable and accrued liabilities as of December 31, 2022 and December 31, 2021 approximated their fair values due to the short-term nature of these items.
The Company has categorized its financial instruments, based on the priority of the inputs used to value the investments, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). If the inputs used to measure the investments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. Financial instruments recorded in the accompanying consolidated balance sheets are categorized based on the inputs to valuation techniques as follows:
    Level 1 - Observable inputs that reflect unadjusted quoted market prices for identical assets or liabilities in active markets.
    Level 2 - Observable inputs other than Level 1 that are observable, either directly or indirectly, in the marketplace for identical or similar assets and liabilities.
    Level 3 - Unobservable inputs that are supported by little or no market data, where values are derived from techniques in which one or more significant inputs are unobservable.
See Note 19—“Fair Value” for additional detail regarding the fair value of certain balances reflected within the accompanying consolidated financial statements.
Stock-Based Compensation

Equity-Based Awards
The Company applies the fair value method of accounting for share-basedstock-based compensation, which requires all such compensation to employees, including the grant of employee stock options and restricted stock units, to be recognized in the statementaccompanying consolidated statements of operations and comprehensive loss based on its fair value at the measurement date (generally the grant date). The expense associated with share-basedstock-based compensation is recognized over the requisite service period of each award. For awards with only service conditions and graded-vesting features, the Company recognizes compensation cost on a straight-line basis over the requisite service period. For awards with performance conditions, once achievement of the performance condition becomes probable, compensation cost is recognized over the expected period from the date the performance condition becomes probable to the date the performance condition is expected to be achieved. The Company will reassess the probability of vesting at each reporting period for performance awards and adjust compensation cost based on its probability assessment.  Share-basedStock-based awards granted to non-employee directors as compensation for serving on the Company’s board of directors are accounted for in the same manner as employee share-basedstock-based compensation awards.

97


The fair value of each option grant is estimated using a Black-Scholes option-pricing model on the grant date using expected volatility, risk-free interest rate, expected life of options and fair value per share assumptions. DueThe Company uses the simplified method of estimating the expected life of options for all options granted given the Company’s limited history of option exercises. The risk-free rate is based on the United States Treasury yield curve during the expected life of the option. The Company estimates forfeitures based on the historical experience of the Company and adjusts the estimated forfeiture rate based upon actual experience.
Liability-Based Awards
Stock appreciation rights (“SARs”) that include cash settlement features are accounted for as liability-based awards pursuant to limited historical data,ASC 718 Share Based Payments. The fair value of such SARs is estimated using a Black-Scholes option-pricing model on each financial reporting date using expected volatility, risk-free interest rate, expected life and fair value per share assumptions.
The fair value of obligations under the Tangible Stockholder Return Plan were estimated using a Monte Carlo simulation approach. The Company’s common stock price is simulated under the Geometric Brownian Motion framework under each simulation path. The other assumptions for the Monte Carlo simulation include the risk-free interest rate, estimated volatility and the expected term.
The fair value of each liability award is estimated with a valuation model that uses certain assumptions, such as the award date, expected volatility, risk-free interest rate, expected life of the award and fair value per share assumptions. The Company estimates stock price volatility based on the Company’s actual historical volatility of comparable publicly traded companies over a historical period equal to the expected remaining life of the option. In evaluating similarity, the Company considered factors such as industry, stage of life cycle, financial leverage, size and risk profile.

The Company does not have sufficient stock option exercise history to estimate the expected term of employee stock options and thus continues to calculate expected life based on the mid-point between the vesting date and the contractual term, which is in accordance with the simplified method.award. The expected term for share-based compensation granted to non-employeesliability-based awards is the estimated contractual life. The risk-free rate is based on the U.S.United States Treasury yield curve during the expected life of the option.

For option grants occurring prior to the Company’s IPO in September 2016, the fair value of common stock was estimated by a third-party valuation specialist and approved by the board of directors as of the grant date. For options granted to non-employee directors on September 20, 2016 in conjunction with the pricing of the IPO, pursuant to the non-employee director compensation policy then in effect, the fair value of common stock was equal to the public offering price of $11.00 per share. For option grants occurring subsequent to the Company’s IPO in September 2016, the fair value of common stock will be based upon the closing stock price as of the grant date.

award.

Income Taxes

Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. In estimating future tax consequences, all expected future events are considered other than enactment of changes in the tax law or rates.

The Company recognizes thedid not record a federal or state income tax benefit from an uncertain tax position only if it is more likely than not thatfor the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

The Company’s policy for recording interest and penalties is to record them as a component of general and administrative expenses. As of December 31, 2017, 2016 and 2015, the Company accrued no interest and penalties related to uncertain tax positions.

Tax years that remain subject to examination by federal and state tax jurisdictions date back to the year ended December 31, 2008. The Company has not been informed by any2022 and December 31, 2021 due to its conclusion that a full valuation allowance is required against the Company’s deferred tax authorities for any jurisdiction that any of its tax years are under examination.

assets.

The determination of recording or releasing a tax valuation allowance is made, in part, pursuant to an assessment performed by management regarding the likelihood that the Company will generate future taxable income against which benefits of its deferred tax assets may or may not be realized. This assessment requires management to exercise judgment and make estimates with respect to its ability to generate taxable income in future periods.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.
The Company’s policy for recording interest and penalties is to record them as a component of general and administrative expenses. As of December 31, 2022 and December 31, 2021, the Company accrued no interest and penalties related to uncertain tax positions.
Tax years 2019-2021 remain open to examination by the major taxing jurisdictions to which the Company is subject. Additionally, years prior to 2019 are also open to examination to the extent of loss and credit carryforwards from those years.
In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, a change in equity ownership of greater than 50% within a three-year period results in an annual limitation on the Company’s ability to utilize its net operating loss carryforwards and general business credits, including the research and development credits, created during the tax periods prior to the change in ownership. The Company has not determined whether ownership changes exceeding this threshold, including the Company’s IPO, have occurred. If a change in equity ownership has occurred which exceeds the Section 382 threshold, a portion of the Company’s net operating loss carryforwards may be limited.

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the years ended December 31, 2017, 20162022 and 2015,December 31, 2021, comprehensive loss was equal to net loss.

Net Loss Per Share

Basic net loss per share attributable to common stockholders is calculatedcomputed by dividing the net loss attributable to common stockholders by the weighted average number of shares outstanding during the period, without consideration forof common stock equivalents. outstanding for the period.
98


Diluted net loss per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutiveanti-dilutive for all periods presented.

The following securities, presented on a common stock equivalent basis, have been excluded from the calculation of weighted average common shares outstanding for the years ended December 31, 2017, 20162022 and 2015December 31, 2021 because the effect is anti-dilutive due to the net loss reported in each of those periods. All share amounts presented in the table below represent the total number outstanding as of the end of each period.The convertible preferred stock securities will no longer be potentially dilutive in future periods because, as discussed above, in September 2016, upon completion of the IPO, all outstanding shares of the convertible preferred stock were converted into shares of common stock at their conversion prices.

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Convertible preferred stock

 

 

 

 

 

 

 

 

8,776,269

 

Stock options outstanding

 

 

1,399,484

 

 

 

825,130

 

 

 

458,234

 


 December 31,
 20222021
Warrants to purchase common stock (Note 11)5,535,637 1,274,176 
Stock options outstanding under the 2008 and 2016 Plans (Note 16)1,031,320 517,303 
Nonvested restricted stock units (Note 16)457,406 — 
Stock appreciation rights outstanding under the 2016 Plan (Note 16)60,000 60,000 
Inducement stock options outstanding (Note 16)1,250 1,250 

Segment and Geographic Information

The Company has determined that it operates in one segment. The Company uses its nitric oxide-based technology to develop product candidates. The Chief Executive Officer, who

Operating segments are identified as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker. The Company’s chief operating decision maker reviews financial information on an aggregatea disaggregated basis for purposes of allocating resources and evaluating financial performance.

Although all operations are based in See Note 20—“Segment Information” for further information on reportable segments.

Related Parties
Members of the United States,Company’s board of directors held 27,654 and 100,497 shares of the Company generated revenueCompany’s common stock as of $1,765, or 82% of total revenue, from its licensing partner in Japan during the year ended December 31, 2017.  Revenues are attributed to countries based on the location of the partner or customer.

2022 and December 31, 2021, respectively.

Recently Issued Accounting Standards

Accounting Pronouncements Adopted

In MarchJune 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) No. 2016-09, Compensation—Stock Compensation2016-13, Financial Instruments-Credit Losses (Topic 718)326): ImprovementsMeasurement of Credit Losses on Financial Instruments, which is designed to Employee Share-Based Payment Accounting.provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The FASB issued ASU 2016-09 to simplify several aspectsadoption of thethis new accounting for share-based payment transactions, including the income tax consequences. This ASU is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. This standard was effective for the Companyguidance, as of January 1, 2017.  The adoption of this standard2022, did not have a material impact on itsthe Company’s consolidated financial statements.

In October 2016,

Note 2: Acquisition of EPI Health
On March 11, 2022, the FASBCompany completed the EPI Health Acquisition, in which the Company acquired all of the issued ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control, which amendsand outstanding units of membership interest of EPI Health from EPG for an estimated fair value of purchase consideration of $32,046. EPI Health is an integrated medical dermatology company providing the consolidation guidance on howCompany with a reporting entity that iscommercial infrastructure to support the commercialization of products. Subsequent to the EPI Health Acquisition, the Company sells various dermatological products for the treatments of plaque psoriasis, rosacea and acne.
At closing, the Company paid or committed to pay non-contingent consideration totaling $27,500, as adjusted for cash, indebtedness, net working capital estimates and other contractually defined adjustments (the “Closing Purchase Price”). The Closing Purchase Price consisted of (i) $11,000 paid in cash and (ii) a single decision maker of a variable interest entity should treat indirect interestssecured promissory note issued to EPG in the entity held throughprincipal amount of $16,500 (the “Seller Note”). See Note 10—“Notes Payable” for additional detail regarding the Seller Note and its related terms. The Company also paid a total working capital adjustment of $4,093, including (i) a $993 payment at closing and (ii) a $3,100 payment post-closing in July 2022 as the parties that areagreed the final net working capital adjustment amount.
The purchase agreement entered into in connection with the EPI Health Acquisition (the “EPI Heath Purchase Agreement”) included the potential payment of additional contingent consideration totaling up to $23,000 upon achievement of certain milestones, as follows:
a.$500, as a one-time cash payment, upon EPG’s performance of transition services and the successful completion of the transition provided under common control. This guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. This ASU was effective forthe transition services agreement between the Company and EPG;
99


b.$3,000, as a one-time payment, payable in cash or the Company’s common stock, at the discretion of Januarythe Company, upon net sales of certain of EPI Health’s legacy products exceeding $30,000 during the period from April 1, 2017.  Adoption2022 through March 31, 2023;
c.up to $2,500, paid in quarterly installments in cash or the Company’s common stock at the discretion of the Company, upon net sales of Wynzora Cream (“Wynzora”) exceeding certain quarterly thresholds or an annual threshold of $12,500 during the period from April 1, 2022 through March 31, 2023;
d.$5,000, as a one-time payment, payable in cash or the Company’s common stock at the discretion of the Company, upon the first occurrence of post-closing net sales of certain of EPI Health’s legacy products exceeding $35,000 during any twelve-month period from April 1, 2023 through March 31, 2026; and
e.up to $12,000 based on receipt by EPI Health of regulatory and net sales milestones related to Sitavig from EPI Health’s over-the-counter (“OTC”) Switch License Agreement with Bayer.
Certain of the above milestone payments will accelerate and become immediately payable upon certain specified events during the applicable milestone periods, including a sale of all or substantially all of the assets with respect to certain of EPI Health’s legacy products. The EPI Health Purchase Agreement provides that payment of any additional consideration may be made in cash or in shares of the Company’s common stock, so long as the number of shares that may be issued pursuant to the EPI Health Purchase Agreement or otherwise in connection with the EPI Health Acquisition is limited to no more than 19.99% of the Company’s outstanding shares of common stock immediately prior to the closing, unless stockholder approval is obtained to issue more than 19.99%.
The EPI Health Acquisition is being accounted for as a business combination using the acquisition method in accordance with ASC 805. Under this standard did not have a material impact on its consolidated financial statements.

Accounting Pronouncements Being Evaluated

In May 2014,method of accounting the FASBfair value of the consideration transferred is allocated to the assets acquired and the International Accounting Standards Board issued a converged standardliabilities assumed based upon their estimated fair values on the recognition of revenue from contracts with customers. The converged standard has been codified within Topic 606, Revenue from Contracts with Customers of the FASB Accounting Standard Codification (ASC). The objective of the new standard is to establish a single comprehensive revenue recognition model that is designed to create greater comparability of financial statements across industries and jurisdictions. Under the new standard, companies will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will require expanded disclosures on revenue recognition and changes in assets and liabilities that result from contracts with customers. As amended, the effective date of the new standard is January 1, 2018 for calendar year end companies. Since ASU 2014-09 was issued, FASB has issued and incorporated several additional ASUs to provide expanded or clarifying guidance within Topic 606.

The Company is adopting the new standard as of January 1, 2018 and will use the full retrospective adoption method, which will require the Company to recast each prior reporting period presented. The Company’s material revenues are derived from the Sato Agreement, which provides for consideration in the form of an upfront payment, milestone payments, and royalties. As partEPI Health Acquisition. Any excess of the Company’s adoption efforts, management has completed an assessmentpurchase price over the fair value of its revenue accounting for the Sato Agreement under Topic 606. The Company has concluded that there are four contractual terms within the Sato Agreement, that these contractual terms are not distinct but should be bundled together in one bundled performance obligation,identified assets acquired and that revenue recognition should occur over time for the bundled performance obligation using a time-based input method that results in straight-line recognition over period thatliabilities assumed is materially consistent with the period used under previous GAAP. The Company has determined that certain variable consideration in the form of future milestone payments should be included in the transaction price at inception and is allocable to the performance obligations, which results in earlier revenue recognized for this


variable consideration under Topic 606, as compared to the Company’s recognition policy under previous GAAP. The Company expects a licensing revenue increase of approximately 30% ingoodwill.

For the year ended December 31, 2017 as a result of adoption of2022 and December 31, 2021, the new standard. The impact of the new standard will be finalized upon adoption in the first quarter of 2018 and is therefore subject to change.  

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidance revises the accountingCompany incurred costs related to leases by requiring lessees to recognize a lease liabilitythe EPI Health Acquisition of $4,981 and $290, respectively, recognized in selling, general and administrative expenses within the consolidated statements of operations and comprehensive loss.

From the EPI Health Acquisition date through December 31, 2022, $21,023 of total net revenue and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions. This ASU is effective for annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impactnet loss of the adoption of this ASU on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The FASB issued ASU 2016-15 to improve U.S. GAAP by providing guidance on the cash flow statement classification of eight specific areas where there is existing diversity in practice. The FASB expects that the guidance in this ASU will reduce the current and potential future diversity in practice in such areas. This ASU is effective for annual and interim periods beginning after December 15, 2017,$1,776 associated with early adoption permitted. This ASU is effective for the Company as of January 1, 2018. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, to improve U.S. GAAP by providing guidance on how to classify and present changes in restricted cash or restricted cash equivalents occurring due to transfers between cash, cash equivalents and restricted cash.  This ASU is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. This ASU is effective for the Company as of January 1, 2018. The Company’s restricted cash will be presented in conformance with the requirements in this ASU but does not expect this presentation to have a material effect on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to provide additional guidance with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. This ASU is effective for the Company as of January 1, 2018. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, to clarify and reduce diversity in practice and cost and complexity of applying guidance for modifications in Topic 718.  Specifically, this ASU further defines which changes to terms or conditions of share-based awards require application of modification accounting in Topic 718.  This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted.  This ASU is effective for the Company as of January 1, 2018. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s consolidated financial statements.

Note 2: Discontinued Operations

On December 14, 2015, the board of directors of Novan approved the separation of its non-dermatological assets and rights from Novan, Inc. through the Distribution. To consummate the Distribution, the Company’s board of directors declared a pro rata dividend of KNOW Bio member units to Novan’s stockholders of record as of the close of business on December 29, 2015 (the “Record Date”). Each Novan stockholder received one member unit of KNOW Bio for every share of Novan preferred or common stock held at the close of business on the Record Date. The Distribution occurred on December 30, 2015 (the “Distribution Date”). Immediately following the Distribution, KNOW Bio became an independent, privately-held company and the Company does not own an equity interest in KNOW Bio and has no significant influence by contract or other means. The results of KNOW Bio have been classified as discontinuedEPI Health’s operations are included in the consolidated statements of operations for all periods presented. Additionally, the related liabilities outstanding as of December 31, 2015 not assumed by KNOW Bio as part of the Distribution are classified as discontinued operations in the accompanying consolidated balance sheets.


At the Distribution Date, KNOW Bio had cash of $5,200 and equipment of $125. The cash included in the Distribution was recorded as a dividend distribution in the statement of cash flows. Certain intellectual property rights were licensed to KNOW Bio as further described in Note 4—Collaboration Arrangements.

The financial results of KNOW Bio through the Distribution are presented as loss from discontinued operations in the consolidated statements of operations. comprehensive loss.

Purchase Consideration
The following table presents the financial resultsestimated fair value of KNOW Bio:

 

 

Year Ended

 

 

 

 

2015

 

 

Federal research contract and grant revenue

 

$

229

 

 

Operating expenses:

 

 

 

 

 

Research and development

 

 

1,826

 

 

General and administrative

 

 

677

 

 

Total operating expenses

 

 

2,503

 

 

Loss from discontinued operations

 

$

(2,274

)

 

Note 3: Research and Development Licenses

purchase consideration as of each interim reporting period end date since the EPI Health Acquisition date, including measurement period adjustments made during each interim period. The Company has entered into various licensing agreements with universities and other research institutions under whichestimated fair value of purchase consideration is then allocated to the Company receives the rights, and in some cases substantially allestimated fair values of the rights, ofnet assets acquired at the inventors, assignees or co-assignees to produce and market technology protected by certain patents and patent applications. The Company’s primary license agreement is with UNC and has been described in further detail within the subsection below. The counterparties to the Company’s various other licensing agreements are the University of Akron Research Foundation, Hospital for Special Surgery, Strakan International S.a.r.l., which is a licensee of the University of Aberdeen, KIPAX AB and KNOW Bio. The Company is generally required to make milestone payments based on development milestones and will be required to make royalty payments based on a percentage of future sales of covered products or a percentage of sublicensing revenue. Costs to acquire rights under license agreements and pre-commercialization milestone payments are classified as research and development expenses in the consolidated statements of operations. Research and development expense recognized in connection with the incurrence of such costs totaled $250, $125 and $260 during the years ended December 31, 2017, 2016 and 2015, respectively.

The Company is generally required by the various licensing agreements to reimburse the licensor for certain legal and other patent related costs. These costs are expensed as incurred and are classified as general and administrative expenses in the consolidated statements of operations. General and administrative expense recognized in connection with the incurrence of such costs totaled $58, $87 and $112 during the years ended December 31, 2017, 2016 and 2015, respectively.

These license arrangements could require the Company to make payments upon achievement of certain milestones by the Company. As future royalty payments are directly related to future revenues (either sales or sublicensing), future commitments cannot be determined. No accrual for future payments under these agreements has been recorded, as the Company cannot estimate if, when or in what amount payments may become due.

UNC License Agreement

The Amended, Restated and Consolidated License Agreement dated June 27, 2012, as amended, (the “UNC Agreement”) provides the Company with an exclusive license to issued patents and pending applications directed to the Company’s library of Nitricil compounds, including patents issued in the U.S., Japan and Australia, with claims intended to cover NVN1000, the new chemical entity (“NCE”) for the Company’s current product candidates. The UNC Agreement requires the Company to pay UNC up to $425 in regulatory and commercial milestones on a licensed product by licensed product basis and a running royalty percentage in the low single digits on net sales of licensed products. Licensed products include any products being developed by the Company or by its sublicensees, KNOW Bio and Sato Pharmaceutical Co., Ltd. (“Sato”),EPI Health Acquisition date, as described further in Note 4—Collaboration Arrangements. Additionally,following the Company made a payment to UNC in February 2017 representing the portion of the upfront paymenttable under the Sato Agreement that was estimatedsection entitled Allocation of Purchase Consideration to be directly attributable to the UNC intellectual


property rights included in the license to Sato. See Note 4—Collaboration Arrangements for the Company’s accounting for this February 2017 payment.    

Unless earlier terminated by the Company at its election, or if the Company materially breaches the agreement or becomes bankrupt, the UNC Agreement remains in effect on a country by country and licensed product by licensed product basis until the expirationEstimated Fair Values of the last to expire issued patent covering such licensed product in the applicable country. The projected date of expiration of the last to expire of the patents issued under the UNC Agreement is 2033.

Note 4: Collaboration Arrangements

KNOW Bio Technology Agreements

In connection with the Distribution, the Company entered into exclusive license agreements and sublicense agreements with KNOW Bio, as described below. The agreements will continue for so long as there is a valid patent claim under the respective agreement, unless earlier terminated, and upon expiration, will continue as perpetual non-exclusive licenses. KNOW Bio has the right to terminate each such agreement, for any reason upon 90 days advance written notice to the Company.

License of existing and potential future intellectual property to KNOW Bio.  The Company granted to KNOW Bio exclusive licenses, with the right to sublicense, to certain U.S. and foreign patents and patent applications controlled by the Company as of December 29, 2015 (the “KNOW Bio License Agreement”). The Company also granted to KNOW Bio a non-exclusive license, with the right to sublicense, to any patents and patent applications that may become controlled by the Company during the three years immediately following the agreement’s effective date related to nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing and other nitric oxide-based therapeutics.

Sublicense of UNC and other third party intellectual property to KNOW Bio.  The Company also granted to KNOW Bio exclusive sublicenses, with the ability to further sublicense, under certain of the U.S. and foreign patents and patent applications exclusively licensed to the Company from UNC and another third party directed towards nitric oxide-releasing compositions, to develop and commercialize products utilizing the licensed technology (the “KNOW Bio Sublicense Agreements”). Under the exclusive sublicense to the UNC patents and applications, KNOW Bio is subject to the terms and conditions under the UNC License Agreement, including milestone and diligence payment obligations. However, the Company is obligated to pay UNC any future milestones or royalties in the event of KNOW Bio non-performance under the sublicense arrangement. In such an event, KNOW Bio would be in breach of its agreements withNet Assets Acquired.

As of March 11, 2022Measurement Period AdjustmentsAs of June 30, 2022Measurement Period AdjustmentsAs of September 30, 2022Measurement Period AdjustmentsAs of December 31, 2022
Initial cash consideration to Seller$11,000 $— $11,000 $— $11,000 $— $11,000 
Secured promissory note issued to Seller16,500 — 16,500 (3,195)(B)13,305 — 13,305 
Closing date fair value of contingent consideration liability3,773 — 3,773 (125)(C)3,648 — 3,648 
Remaining working capital adjustment to be paid4,069 (969)(A)3,100 — 3,100 — 3,100 
Working capital adjustment paid at close993 — 993 — 993 — 993 
Total estimated purchase consideration$36,335 $(969)$35,366 $(3,320)$32,046 $— $32,046 

A.On July 7, 2022, the Company and intellectual property rights would revert backEPG agreed to the Company. There were no milestone or royalty payments required duringfinal net working capital adjustment amount (the “Total Adjustment Amount”), as defined in the years ended December 31, 2017, 2016 and 2015.

Amendments to License and Sublicense Agreements with KNOW Bio

The Company and KNOW Bio entered into certain amendments dated October 13, 2017 (the “KNOW Bio Amendments”)EPI Health Purchase Agreement, as part of the post-closing adjustment to the KNOW Bio License Agreementestimated purchase price for the EPI Health Acquisition. The Total Adjustment Amount was determined to be positive and KNOW Bio Sublicense Agreements (the “Original KNOW Bio Agreements”) described above. Pursuantin the amount of $3,100, which was paid to EPG on July 7, 2022. As of March 31, 2022, the Company had previously estimated that the Total Adjustment Amount would be $4,069. Therefore, the Company has reflected a

100


$969 measurement period adjustment to the termsestimated fair value of the KNOW Bio Amendments, the Company re-acquired from KNOW Bio exclusive, worldwide rights under certain U.S. and foreign patents and patent applications controlled by the Company as of the execution date of the Original KNOW Bio Agreements, and patents and patent applications which may become controlled by the Company during the three years immediately following the execution date of the Original KNOW Bio Agreements, directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics, to develop and commercialize products for all diagnostic, therapeutic, prophylactic and palliative uses for any disease, condition or disorder caused by certain oncoviruses (the “Oncovirus Field”). KNOW Bio also granted to the Company an exclusive license, with the right to sublicense, under any patents and patent applications which may become controlled by KNOW Bio during the three years immediately following the execution date of the Original KNOW Bio Agreements and directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics, but not towards medical devices, to develop and commercialize products for use in the Oncovirus Field. Additionally, KNOW Bio agreed that KNOW Bio will not commercialize any products


in the Oncovirus Field during the first three years following the execution date of the Original KNOW Bio Agreements.

The Company is obligated to make the following fixed and contingent payments in exchange for the rights granted to the Company in the Oncovirus Field:

(ii)

A non-refundable upfront payment of $250 due upon execution of the KNOW Bio Amendments, which was paid in October 2017 and is classified as research and development expense in the consolidated statements of operations.

(iii)

For products that incorporate a certain nitric oxide-releasing composition specified in the KNOW Bio Amendments and (i) are covered by KNOW Bio patents or (ii) materially use or incorporate know-how of KNOW Bio or the Company related to such composition that is created during the three years immediately following the execution date of the Original KNOW Bio Agreements (“Covered Products”), the Company must make the following payments to KNOW Bio:

o

A milestone payment upon the first time each Covered Product is approved by the U.S. Food and Drug Administration (“FDA”) for marketing in the Oncovirus Field;

o

A royalty in the low single digits on net sales of Covered Products in the Oncovirus Field until the later of the expiration of the KNOW Bio patents covering the applicable Covered Product or the expiration of regulatory exclusivity on the applicable Covered Product; and

o

In the event the Company sublicenses the rights to a Covered Product to a third party in the Oncovirus Field, the Company must pay KNOW Bio a low double-digit percentage of any clinical development or NDA approval milestones the Company receives from the sublicensee for the Covered Product in the Oncovirus Field.

Nitricil is not the nitric oxide-releasing composition specified in the KNOW Bio Amendments as the subject of the foregoing payments.total purchase consideration. As such, products based on Nitricil are not subject to the foregoing milestone, royalty and sublicensing payment obligations.  

The rights granted to the Company in the Oncovirus Field in the KNOW Bio Amendments continue for so long as there is a valid patent claim under the Original KNOW Bio Agreements, and upon expiration continue on a perpetual non-exclusive basis, and are subject to the termination rights of KNOW Bio and the Company that are set forth in the Original KNOW Bio Agreements. In addition, under the KNOW Bio Amendments, KNOW Bio may terminate the rights granted to the Company in the Oncovirus Field if: (i) the Company does not file a first investigational new drug (“IND”) application with the FDA for a product in the Oncovirus Field by October 2020; or (ii) the Company does not file a first new drug application (“NDA”) with the FDA by October 2025 for a product in the Oncovirus Field and does not otherwise have any active clinical programsthis adjustment related to the Oncovirus Field at such time.

The Company also obtainedestimated fair value of purchase consideration and did not affect the fair value of any assets acquired or liabilities assumed, it resulted in a three-year exclusive option to include within the Company’s rights described above in the Oncovirus Field, the development and commercializationreduction of products for all diagnostic, therapeutic, prophylactic and palliative uses for any disease, condition or disorder caused by up to four other specified oncoviruses (the “Option Field”). If the Company elects to exercise its option, it will pay an exercise fee for each oncovirus for which the option is exercised, and the additional rights included in the Oncovirus Field as a result of the option exercise will be subject to the same payment obligations for Covered Products, conditions, and termination rights as described above for the Oncovirus Field.

The KNOW Bio Amendments also provide a mechanism whereby either party can cause an NCE covered by the Original KNOW Bio Agreements to become exclusive to such party by filing an IND on the NCE. An NCE that becomes exclusive to a party under this provision may not be commercialized by the other party until the later of expiration of patents covering the NCE or regulatory exclusivity covering the NCE. A party who obtains exclusivity for an NCE must advance development of the NCE pursuant to terms of the KNOW Bio Amendments in order to maintain such exclusivity; otherwise, such exclusivity will expire.

goodwill.

The terms of the KNOW Bio Amendments were negotiated at arms-length and do not provide the Company with an ability to significantly influence KNOW Bio or its operations.

Sato License Agreement

Significant Terms

On January 12, 2017, the Company entered into a license agreement, and related amendment, with Sato, relating to SB204, its drug candidate for the treatment of acne vulgaris in Japan (the “Sato Agreement”). Pursuant to the Sato Agreement, the Company granted to Sato an exclusive, royalty-bearing, non-transferable right and license under certain of the Company’s intellectual property rights, with the right to sublicense with the Company’s prior written consent, to develop, use and sell products in Japan that incorporate SB204 in certain topical dosage forms for the treatment of acne vulgaris, and to make the finished form of such products. The Company, or its designated contract manufacturer, will also supply finished product to Sato for use in the development of SB204 in the licensed territory. The rights granted to Sato do not include the right to manufacture the active pharmaceutical ingredient (“API”) of SB204; rather, the parties agreed to negotiate a commercial supply agreement pursuant to which the Company or a third party contract manufacturer would be the exclusive supplier to Sato of the API for the commercial manufacture of licensed products in the licensed territory. Under the terms of the Sato Agreement, the Company also has exclusive rights to certain intellectual property that may be developed by Sato in the future, which the Company could choose to use for its own development and commercialization of SB204 outside of Japan.  

Pursuant to the terms of the Sato Agreement, Sato had an exclusive option to negotiate for the license rights in certain additional territories within Asia, subject to Sato’s payment of a specified option exercise fee. B.During the third quarter of 2017, Sato elected not2022, the Company continued to execute this option. This option expired, unexercised onconduct a fair value assessment of the Seller Note as of the EPI Health Acquisition date of March 11, 2022. The Company completed the fair value assessment and updated the Seller Note fair value estimate as of March 11, 2022 to $13,305 via a downward measurement period adjustment of $3,195 during the interim quarterly period ended September 30, 2017.

In exchange2022. The Seller Note fair value assessment included both quantitative and qualitative analyses. The quantitative analysis utilized observable credit spreads for market debt transactions with credit ratings similar to the licenses grantedCompany’s credit ratings. The qualitative analysis took into consideration the fact pattern leading up to Sato under the Sato Agreement, Sato agreed to pay the Company an upfront payment,Seller Note’s original issuance in March 2022 as well as additional milestone payments upon achievementthe subsequent period through July 2022 when the Seller Note was settled and terminated. These qualitative and quantitative analyses were used in conjunction with one another to determine the best estimate of various future development, regulatorythe Seller Note’s fair value as of March 11, 2022. See Note 10—“Notes Payable” to these consolidated financial statements for further discussion regarding the Seller Note, including its repayment and commercial milestones. Pursuanttermination during the third quarter of 2022.

C.During the third quarter of 2022, the Company continued to conduct a fair value assessment of the contingent consideration liability as of the EPI Health Acquisition date of March 11, 2022. The Company updated the contingent consideration provisional fair value estimate as of March 11, 2022 to $3,648 via a downward measurement period adjustment of $125 during the interim quarterly period ended September 30, 2022, based on progression of the fair value assessment procedures conducted.
Allocation of Purchase Consideration to Estimated Fair Values of Net Assets Acquired
ASC 805 requires, among other things, that the assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. Further, ASC 805 requires any consideration transferred or paid in a business combination in excess of the fair value of the assets acquired and liabilities assumed should be recognized as goodwill.
101


The total estimated purchase consideration was allocated to the termsestimated fair values of the Sato Agreement, Sato was required to payassets acquired and liabilities assumed as of March 11, 2022 as follows:
As of March 11, 2022Measurement Period AdjustmentsAs of June 30, 2022Measurement Period AdjustmentsAs of September 30, 2022Measurement Period AdjustmentsAs of December 31, 2022
Assets acquired and liabilities assumed:
Accounts receivable, net of $282 allowance$20,083 $— $20,083 $— $20,083 $(279)(e)$19,804 
Inventory1,710 — 1,710 (410)(b)1,300 (121)(e)1,179 
Prepaid expenses and other current assets3,692 — 3,692 — 3,692 — 3,692 
Property and equipment100 — 100 — 100 — 100 
Intangible assets33,000 — 33,000 (4,000)(c)29,000 — 29,000 
Other assets27 — 27 — 27 — 27 
Right-of-use lease assets400 — 400 — 400 — 400 
Total assets$59,012 $— $59,012 $(4,410)$54,602 $(400)$54,202 
Accounts payable$947 $— $947 $— $947 $— $947 
Accrued expenses24,892 — 24,892 — 24,892 (467)(e)24,425 
Operating lease liabilities, current portion208 — 208 — 208 — 208 
Operating lease liabilities, net of current portion342 — 342 — 342 — 342 
Other long-term liabilities290 — 290 — 290 — 290 
Total liabilities$26,679 $— $26,679 $— $26,679 $(467)$26,212 
Total identifiable net assets acquired$32,333 $— $32,333 $(4,410)$27,923 $67 $27,990 
Goodwill4,002 (969)(a)3,033 1,090 (d)4,123 (67)(e)4,056 
Total estimated purchase consideration$36,335 $(969)$35,366 $(3,320)$32,046 $— $32,046 
a.On July 7, 2022, the Company an upfront paymentand EPG agreed to the final net working capital adjustment amount (the “Total Adjustment Amount”), as defined in the EPI Health Purchase Agreement, as part of 1.25 billion Japanese Yen (“JPY”), which the Company received in January 2017post-closing adjustment to the estimated purchase price for the EPI Health Acquisition. The Total Adjustment Amount was determined to be positive and in the amount of $10,813 when converted$3,100, which was paid to U.S. Dollars. Sato is also required to payEPG on July 7, 2022. As of March 31, 2022, the Company an aggregate of 2.75 billion JPY uponhad previously estimated that the achievement of various development and regulatory milestones. Under the Sato Agreement, Sato also agreed to pay the Company up to an aggregate of 0.9 billion JPY in milestone payments upon the achievement of various commercial milestones. Sato must also pay the Company a royalty equal to a mid-single digit percentage of net sales of licensed products in the licensed territory, subject to a reduction in the royalty payments in certain circumstances.

The term of the Sato Agreement and the period during which Sato must pay royalties under the Sato Agreement expires, on a licensed product-by-licensed product basis, on the tenth anniversary of the first commercial sale of a licensed product in the licensed field in the licensed territory. The term of the Sato Agreement may be renewed with respect to a licensed product by mutual written agreement of the parties for additional two year periods following expiration of the initial term.

The Company, by itself or through its designated third party contract manufacturer, is obligated pursuant to the Sato Agreement to supply Sato with all quantities of licensed products required by Sato to develop the licensed products in the licensed field in the licensed territory. As part of the Sato Agreement, the Company and Sato have also agreed to negotiate a commercial supply agreement pursuant to which the Company, by itself or through its designated third party contract manufacturer,Total Adjustment Amount would be the exclusive supplier to Sato of the API of licensed products for the manufacture of licensed products in the licensed territory.

Sato is responsible for funding the development and commercial costs for the program that are specific to Japan. The Company is obligated to perform certain oversight, review and supporting activities for Sato, including: (i) using commercially reasonable efforts to obtain marketing approval of SB204 in the U.S, (ii) sharing all future scientific information the Company may obtain during the term of the Sato Agreement pertaining to SB204, (iii) performing certain additional pre-clinical studies if such studies are deemed necessary by the Japanese regulatory authority, up to and not to exceed a total cost of $1,000 and (iv) participating in a joint committee that oversees, reviews and


approves Sato’s development and commercialization activities under the Sato Agreement. Additionally,$4,069. Therefore, the Company has granted Sato the option to use the Company’s trademarks in connection with the commercialization of licensed products in the licensed territory for no additional consideration, subjectreflected a $969 measurement period downward adjustment to the Company’s approvalestimated fair value of such use.

The Sato Agreement may be terminated by (i) Sato without cause upon 120 days’ advance written noticetotal purchase consideration. As this adjustment related to the Company, (ii) either party inestimated fair value of purchase consideration and did not affect the event of the other party’s uncured material breach upon 60 days’ advance written notice, (iii) force majeure, (iv) either party in the event of the other party’s dissolution, liquidation, bankruptcy or insolvency and (v) the Company immediately upon written notice if Sato challenges the validity, patentability, or enforceabilityfair value of any of the Company’s patentsassets acquired or patent applications licensed to Sato under the Sato Agreement. In the event of a termination, no portion of the upfront fee received from Sato in January 2017 is refundable.

Accounting Considerations and Revenue Recognition

The Company has identified the following four performance deliverables under the Sato Agreement: (i) the grant of the intellectual property license to Sato, (ii) the obligation to participateliabilities assumed, it resulted in a joint committee that oversees, reviews, and approves Sato’s research and development activities and provides advisory support during Sato’s development process, (iii) the obligation to manufacture and supply Sato with all quantitiesreduction of licensed product required for development activities in Japan, and (iv) the grant of an optional right to use the Company’s trademark. The Sato Agreement also contains an obligation to negotiate terms of a commercial supply agreement that will provide for the manufacture and supply all quantities of the API contained in the licensed product manufactured by Sato for commercial sale in Japan. The Company concluded this commercial supply obligation was a contingent deliverable because SB204 is not yet a commercially approved product and is currently subject to additional clinical studies prior to commercial approval in Japan. The Company considered the provisions of the multiple-elements arrangement guidance and determined that none of the deliverables have standalone value because Sato’s ability to utilize the value of the licensed intellectual property rights is limited absent the delivery of the other elements of the arrangement. In particular, the Company has maintained control of the methods and expertise necessary to manufacture and supply the API in the licensed product, which limits the utility and causes an interdependency of the remaining elements on the delivery of quantities of licensed product required for development activities in Japan. As a result, all deliverables have been combined into a single unit of accounting.

The Company evaluated the timing of delivery for each of the deliverables and concluded that its obligation to participate on the joint committee during Sato’s development process would be the last delivered element under the arrangement and therefore would be the basis for revenue recognition for the combined unit of accounting. The Company began to participate on the joint committee in March 2017 and currently estimates that its participation will continue through the first quarter of 2022. This time period is the Company’s estimated performance period, which the Company monitors and reassesses during each reporting period. The total upfront consideration under this agreement is being recognized as license and collaboration revenue on a straight-line basis over the estimated performance period. Prior togoodwill.

b.During the third quarter of 2017,2022, the Company had estimated that its participation incontinued to conduct a fair value assessment of the joint committee would continue throughtrade inventory on hand as of the EPI Health Acquisition date of March 11, 2022. The Company updated the trade inventory’s provisional fair value estimate as of March 11, 2022 to $1,300 via a downward measurement period adjustment of $410 during the interim quarterly period ended September 30, 2022, based on progression of the fair value assessment procedures conducted.
c.During the third quarter of 2021. 2022, the Company continued to conduct a fair value assessment of the acquired definite-lived intangible product rights assets as of the EPI Health Acquisition date of March 11, 2022, which included further
102


analysis of the forecasts used in the initial preliminary valuation. This downward measurement period adjustment also resulted in the recognition of $192 of additional amortization expense during the interim quarterly period ended September 30, 2022.
d.The changeaforementioned measurement period adjustments made to the acquired assets and assumed liabilities, as well as the measurement period adjustments made to the estimated fair value of purchase consideration in estimatethe preceding section entitled Purchase Consideration, result in an updated goodwill balance of $4,123 as of September 30, 2022 based on a net upward adjustment of $1,090 during the interim quarterly period ended September 30, 2022.
e.During the fourth quarter of 2022, the Company continued and completed its fair value assessment of accounts receivable, trade inventory and accrued expenses as of the EPI Health Acquisition date of March 11, 2022, which included analysis based upon year to date activity of those related balances. The related measurement period downward adjustments related to (i) $141 associated with the collectability of certain trade accounts receivable, (ii) $121 related to both inventory and accrued expenses for finished goods purchases that should not have been included in the acquisition date balances, (iii) $138 related to amounts due from a collaboration partner that should not have been included in the acquisition date balances, and (iv) $346 of certain previously accrued legal costs that should not have been accrued. The net results of these adjustments resulted in a $137 decreasereduction to goodwill of $67 during the quarterly period ended December 31, 2022.
The Company determined the estimated fair value of the acquired intangible assets as of the closing date using the income approach. This is a valuation technique that is based on the market participant’s expectations of the cash flows that the intangible assets are forecasted to generate. The projected cash flows from these intangible assets were based on various assumptions, including estimates of revenues, expenses, and operating profit, and risks related to the viability of and commercial potential for alternative treatments. The cash flows were discounted at a rate commensurate with the level of risk associated with the projected cash flows. The Company believes the assumptions are representative of those a market participant would use in revenue recognized duringestimating fair value.
Goodwill was determined on the basis of the fair values of the assets and liabilities identified at the time of the EPI Health Acquisition. Goodwill was calculated as the excess of the consideration paid consequent to completing the acquisition, compared to the net assets recognized. Goodwill represents the future economic benefits arising from the other acquired assets, which could not be individually identified and separately valued. Goodwill is primarily attributable to the acquired commercial platform and infrastructure, including personnel, and expected synergies related to the commercialization of product candidates and has therefore been allocated to the Research and Development Operations reporting unit.
Pro forma Information
The following pro forma information presents the combined results of operations for the year ended December 31, 20172022 and December 31, 2021, as compared toif the revenue thatCompany had completed the EPI Health Acquisition at the beginning of the periods presented. The pro forma financial information is provided for comparative purposes only and is not indicative of what actual results would have been recognized usinghad the previously estimated performanceEPI Health Acquisition occurred at the beginning of the periods presented, nor does it give effect to synergies, cost savings, fair market value adjustments, and other changes expected to result from the EPI Health Acquisition. Accordingly, the pro forma financial results do not purport to be indicative of consolidated results of operations as of the date hereof, for any period ended on the date hereof, or for any other future date or period. The change in estimate does not affectpro forma financial information has been calculated after applying the total amountCompany’s accounting policies and includes adjustments for transaction-related costs.
Twelve Months Ended
December 31, 2022
(unaudited)
December 31, 2021
(unaudited)
Total revenue$27,701 $19,047 
Net loss and comprehensive loss(32,365)(59,748)
Net loss per share, basic and diluted$(1.47)$(3.50)
Note 3: Inventory, net
The major components of revenue expected to be recognized over the terminventory, net, were as follows:
December 31, 2022
Finished goods available for sale$2,037 
Reserve for obsolescence(841)
Inventory, net$1,196 
103


As part of the Sato Agreement.

The Company determined that the future contingent payments meet the definition of a milestone. The development and regulatory milestones are not consideredEPI Health Acquisition, inventory, net, were marked to be substantive because they do not relate solely to past performance. Accordingly, revenue for the achievement of development milestones will be recognized over the performance period, assuming collectability is reasonably assured. The revenue for the achievement of regulatory milestones will be recognized over the ten year commercial termfair value as part of the Sato Agreement. AsCompany’s ASC 805 business combination accounting. See Note 2—“Acquisition of December 31, 2017, no amounts have been recognizedEPI Health” for additional detail.

Note 4: Prepaid Expenses and Other Current Assets
The following table represents the components of prepaid expenses and other current assets as license and collaboration revenue for any of these potential future milestones and all the contingent payments remained eligible for achievement as of December 31, 2017.

During the year ended December 31, 2017, the Company recognized $1,765 in license and collaboration revenue under this agreement. The deferred revenue balance pertaining to the Sato Agreement as of December 31, 2017 was $9,048, including $2,129 and $6,919 in current and non-current deferred revenue, respectively.

of:


Contract Acquisition Costs

The intellectual property rights granted to Sato under the Sato Agreement include certain intellectual property rights which the Company has licensed from UNC. Under the Company’s license agreement with UNC described in Note 3—Research and Development Licenses, the Company is obligated to pay UNC a running royalty percentage in the low single digits on net sales of licensed products, including net sales that may be generated by Sato. Additionally, the Company made a payment to UNC in February 2017 representing the portion of the Sato upfront payment that was estimated to be directly attributable to the UNC intellectual property rights included in the license to Sato.

The Company also entered into an agreement with a third party to assist the Company in exploring the licensing opportunity which led to the execution of the Sato Agreement. The Company paid a fee of $216 to the third party upon execution of the Sato Agreement and is obligated to pay the third party a low-single-digit percentage of any future milestone payments the Company may receive from Sato under the Sato Agreement.

The fees associated with payments made to UNC and the third party have been capitalized as other assets, including current and noncurrent portions, in the accompanying balance sheet and are being amortized as general and administrative expense on a straight-line basis over the same estimated period used to recognize revenue on the upfront payment received from Sato.

December 31, 2022December 31, 2021
Inventory and raw material deposits$1,280 $— 
Prepaid service contracts121 — 
Prepaid insurance1,341 1,697 
Prepaid Prescription Drug User Fee Act (PDUFA) fees1,182 — 
Product samples1,362 — 
Other current assets related to leasing arrangement— 109 
Prepaid expenses and other current assets521 766 
Total prepaid expenses and other current assets$5,807 $2,572 

Note 5: Property and Equipment, Net

Property and equipment consisted of the following:

 

December 31,

 

December 31,

 

2017

 

 

2016

 

20222021

Computer equipment

 

$

529

 

 

$

500

 

Computer equipment$58 $58 

Furniture and fixtures

 

 

354

 

 

 

504

 

Furniture and fixtures43 23 

Laboratory equipment

 

 

6,819

 

 

 

5,723

 

Laboratory equipment6,195 4,134 

Office equipment

 

 

400

 

 

 

106

 

Office equipment177 177 

Building related to facility lease obligation

 

 

10,557

 

 

 

10,557

 

Leasehold improvements

 

 

1,000

 

 

 

1,338

 

Leasehold improvements10,117 9,391 

 

 

19,659

 

 

 

18,728

 

Property and equipment, grossProperty and equipment, gross16,590 13,783 

Less: Accumulated depreciation and amortization

 

 

(3,035

)

 

 

(2,438

)

Less: Accumulated depreciation and amortization(2,708)(1,582)

 

$

16,624

 

 

$

16,290

 

Total property and equipment, netTotal property and equipment, net$13,882 $12,201 

Depreciation and amortization expense was $1,423, $757$1,178 and $631$344 for the years ended December 31, 2017, 20162022 and 2015,2021, respectively.

Corporate and Manufacturing Facility
For the years ended December 31, 2022 and December 31, 2021, the Company had construction in progress amounts related to leasehold improvements of $210 and $7,485, respectively.
Note 6: Leases
The Company leases office space and certain equipment under non-cancelable lease agreements.
In accordance with ASC 842, Leases, arrangements meeting the definition of a lease are classified as operating or finance leases and are recorded on the balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease, if available, or otherwise at the Company’s incremental borrowing rate. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred.
In calculating the right-of-use asset and lease liability, the Company elected, and has in practice, historically combined lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.
Office Lease at Triangle Business Center, Durham, North Carolina
On January 18, 2021, the Company entered into a lease with an initial term expiring in 2032, as amended for 19,265 rentable square feet, located in Durham, North Carolina. This lease dated as of January 18, 2021, as amended (the “TBC Lease”), is by and between the Company and Copper II 2020, LLC (the “TBC Landlord”), pursuant to which the Company is leasing space serving as its corporate headquarters and small-scale manufacturing site (the “Premises”) located within the Triangle Business
104


Center. The lease executed on January 18, 2021, as amended, was further amended on November 23, 2021 to expand the Premises by approximately 3,642 additional rentable square feet from 15,623 rentable square feet.
The Premises serves as the Company’s corporate headquarters and supports various cGMP activities, including research and development and small-scale manufacturing capabilities. These capabilities include the infrastructure necessary to support small-scale drug substance manufacturing and the ability to act as a primary, or secondary backup, component of a potential future commercial supply chain.
The TBC Lease commenced on January 18, 2021 (the “Lease Commencement Date”). Rent under the TBC Lease commenced in October 2021 (the “Rent Commencement Date”). The term of the TBC Lease expires on the last day of the one hundred twenty-third calendar month after the Rent Commencement Date. The TBC Lease provides the Company with one option to extend the term of the TBC Lease for a period of five years, which would commence upon the expiration of the original term of the TBC Lease, with base rent of a market rate determined according to the TBC Lease; however, the renewal period was not included in the calculation of the lease obligation as the Company determined it was not reasonably certain to exercise the renewal option.
The monthly base rent for the Premises is approximately $40 for months 1-10 and approximately $49 for months 11-12, per the second amendment to the primary lease. Beginning with month 13 and annually thereafter, the monthly base rent will be increased by 3%. Subject to certain terms, the TBC Lease provided that base rent was abated for three months following the Rent Commencement Date. The Company is obligated to pay its pro-rata portion of taxes and operating expenses for the building as well as maintenance and insurance for the Premises, all as provided for in the TBC Lease.
The TBC Landlord has agreed to provide the Company with a tenant improvement allowance in an amount not to exceed $130 per rentable square foot, totaling approximately $2,450, per the primary lease, inclusive of the first amendment, and $115 per rentable square foot, totaling $419, per the second amendment to the TBC Lease. The tenant improvement allowance was to be paid over four equal installments corresponding with work performed by the Company. Pursuant to the terms of the TBC Lease, the Company delivered to the TBC Landlord a letter of credit in the amount of $583, as amended, as collateral for the full performance by the Company of all of its obligations under the TBC Lease and for all losses and damages the TBC Landlord may suffer as a result of any default by the Company under the TBC Lease. Cash funds maintained in a separate deposit account at the Company’s financial institution to fully secure the letter of credit are presented as restricted cash in non-current assets on the accompanying consolidated balance sheets.
Office Lease at Meeting Street, Charleston, South Carolina
On March 3, 2022 EPI Health entered into a sublease agreement with EPG (the “Meeting Street Lease”) for office space at 174 Meeting Street in Charleston, South Carolina for approximately 6,000 rentable square feet.
The term of the Meeting Street Lease was initially through September 30, 2024, and EPI Health had the right to terminate the Meeting Street Lease with prior notice. On August 31, 2022, EPI Health notified EPG of its termination of the sublease effective February 28, 2023. The monthly base rent for the Meeting Street Lease is $20 for months 1-12, inclusive of taxes and operating expenses such as maintenance and insurance.
TBC Lease and Meeting Street Lease
Rent expense, including both short-term and variable lease components associated with the TBC Lease and the Meeting Street Lease, as applicable, was $562 for the year ended December 31, 2022. Rent expense was $467 for the year ended December 31, 2021.
The remaining lease term for the TBC Lease and the Meeting Street Lease are 9.17 years and 0.17 years, respectively, as of December 31, 2022. The weighted average discount rate for both leases was 8.35% as of December 31, 2022.
Rent expense for leases less than one year in duration was $245 and $539 for the years ended December 31, 2022 and December 31, 2021, respectively.
105


Future minimum lease payments, net of amounts expected to be received related to the tenant improvement allowance, as of December 31, 2022 were as follows:
Maturity of Lease LiabilitiesOperating Leases
2023$229 
2024626 
2025645 
2026665 
2027685 
2028 and beyond3,016 
Total future undiscounted lease payments$5,866 
Less: imputed interest(1,936)
Total reported lease liability$3,930 
The table above reflects payments for an operating lease with a remaining term of one year or more, but does not include obligations for short-term leases. In addition, the net cash flow related to the 2023 fiscal year presented above includes the expected timing of the remaining tenant improvement allowance being funded by the TBC Landlord, which the Company reasonably expects to receive within the next twelve months, offset by expected lease payments for the corresponding period. During the year ended December 31, 2022 and December 31, 2021 the Company received $508 and $1,523, respectively, related to payments as part of the total TBC Landlord funded tenant improvement allowance.
Components of lease assets and liabilities as of December 31, 2022 were as follows:
As of December 31, 2022
Assets
Right-of-use lease assets$1,756 
Total lease assets$1,756 
Liabilities
Operating lease liabilities, current portion$191 
Operating lease liabilities, net of current portion3,739 
Total lease liabilities$3,930 
Note 7: Goodwill and Intangible Assets, net
Goodwill
The Company’s goodwill balance as of December 31, 2022 was $4,056. The entire goodwill balance relates to the EPI Health Acquisition during the year ended December 31, 2022. None of the goodwill is expected to be deductible for income tax purposes. All of the goodwill has been allocated to the Research and Development Operations reporting unit and operating segment, which has a negative carrying amount.
Intangible Assets
The following table presents both definite and indefinite lived intangible assets as of December 31, 2022, comprised primarily of acquired product rights related to the EPI Health Acquisition:
Initial Carrying ValueAccumulated AmortizationNet Book ValueRemaining Useful Life (Years)
Rhofade$15,500 $835 $14,665 14.25
Wynzora2,000 108 1,892 14.25
Minolira8,500 458 8,042 14.25
Cloderm1,000 54 946 14.25
Sitavig2,000 145 1,855 13.94
Website domain75 — 75 
Total intangible assets$29,075 $1,600 $27,475 
106


The Company amortizes the product rights related to its commercial product portfolio over their estimated useful lives. As part of the EPI Health Acquisition, product rights were recorded at fair value as part of the Company’s ASC 805 business combination accounting. See Note 2—“Acquisition of EPI Health” for additional detail.
The following table represents annual amortization of definite lived intangible assets for the next five fiscal years, and thereafter:
2023$1,935 
20241,941 
20251,935 
20261,935 
20271,935 
Thereafter17,719 
Total amortization$27,400 
107


Note 8: Accounts Payable and Accrued Expenses
The following table represents the components of accounts payable as of December 31, 2022 and December 31, 2021:
December 31, 2022December 31, 2021
Rebates, coupons, discounts and chargebacks$9,509 $— 
Finished goods inventory721 — 
Construction in process— 451 
Outside research and development services721 140 
Facility service providers— 87 
Legal and professional fees530 193 
SB206 regulatory activities422 417 
SB206 pre-commercial and marketing153 682 
Other payables1,633 200 
Total accounts payable$13,689 $2,170 

The following table represents the components of accrued expenses as of December 31, 2022 and December 31, 2021:
December 31, 2022December 31, 2021
Accrued rebates, coupons, discounts and chargebacks$8,671 $— 
Accrued returns3,011 — 
Accrued compensation937 1,543 
Accrued outside research and development services410 194 
Accrued legal and professional fees542 427 
Accrued royalties675 — 
Accrued milestones1,250 — 
Accrued construction in process— 1,020 
Accrued insurance747 — 
Accrued SB206 regulatory activities165 — 
Accrued Wynzora payments due to collaborator532 — 
Accrued MC2 collaboration deposit1,149 — 
Accrued other expenses535 1,804 
Total accrued expenses$18,624 $4,988 

See Note 9—“Commitments and Contingencies”, Note 12—“License and Collaboration Agreements”, Note 13—“Net Product Revenues” and Note 14—“License and Collaboration Revenues” for certain obligations and contingent payments related to license agreements, including those related to the Company’s commercial product portfolio.

Note 6:9: Commitments and Contingencies

Lease Obligations

Primary Facility Lease

In August 2015, the Company

Commitments
Factoring Arrangement
On December 1, 2022, EPI Health entered into an accounts receivable-backed factoring agreement (the “Factoring Agreement”) with CSNK Working Capital Finance Corp. d/b/a lease agreementBay View Funding (“Bay View”), a subsidiary of Heritage Bank of Commerce. Pursuant to the Factoring Agreement, EPI Health may sell certain trade accounts receivable to Bay View from time to time, with recourse. The factoring facility provides for approximately 51,000 rentable square feetEPI Health to have access to the lesser of (i) $15,000 (the “Maximum Credit”) or (ii) the sum of all undisputed receivables purchased by Bay View multiplied by 70% (which percentages may be adjusted by Bay View in its sole discretion), less any reserved funds. Upon receipt of any advance, EPI Health will have sold and assigned all of its rights in such receivables and all proceeds thereof.
108


In connection with the factoring facility, spaceEPI Health will be charged a finance fee, defined as a floating rate per annum on outstanding advances under the Factoring Agreement, equal to the prime rate plus 2.00%, due on the first day of each month. EPI Health will also be charged a factoring fee of 0.35% of the gross face value of any trade accounts receivable for each 30 day period after the trade accounts receivable is purchased. Bay View has the right to demand repayment of any purchased receivables that remain unpaid for 90 days after purchase (or 100 days in Morrisville, North Carolina, commencing in April 2016. the case of certain wholesale customers) or with respect to which any account debtor asserts a dispute.
The factoring facility is for an initial term of twelve months and will renew on a year to year basis thereafter, unless terminated in accordance with the lease agreement extends through June 30, 2026. Factoring Agreement. EPI Health may terminate the facility at any time upon 60 days prior written notice and payment to Bay View of an early termination fee equal to 0.25% of the Maximum Credit multiplied by the number of months remaining in the term.
All collections of purchased receivables will go directly to a controlled lockbox and Bay View shall apply these collections to EPI Health’s obligations. At the end of each reconciliation period, the collection amount, net of the advanced amount, factoring and financing fees, and other payment obligations, as applicable, will be refunded to EPI Health. Bay View has a full recourse right as stated above. If Bay View cannot collect the factored receivables from debtors, EPI Health must refund the advanced amount for any uncollected receivables from debtors.
The Company has an option to extendevaluated the leaseFactoring Agreement under guidance in ASC 860, Transfers and Servicing (“ASC 860”). Based upon that evaluation, the Company has concluded that this agreement by five years upon completion ofdoes not meet the initial lease term. Current contractual base rent payments are $93 per month, subject tocriteria for sales accounting, and therefore is accounting for the Factoring Agreement as a three percent increase annually oversecured borrowing. Accordingly, the term ofCompany records the lease agreement.

Asadvanced amount outstanding as a result of the nature ofshort-term liability and the involvementamounts in the renovations during the construction period of the leased space, the Company was the “deemed owner,” for accounting purposes only, of the construction project and was requiredcontrolled lockbox, which represent funds in transit to capitalize the fair value of the buildingbe applied against outstanding borrowings, as well as the construction costs incurred by either the landlord or the Companycurrent restricted cash on its consolidated balance sheet pursuant to FASB ASC 840, Leases, and the accounting policy described in Note 1—Organization and Significant Accounting Policies. The Company determined that the facility was substantially complete assheet. As of December 31, 2016 because2022, $10,302 of advances were outstanding under the Company began to utilize the facility for all

Factoring Agreement.

intended purposes, including primary research, development and drug compound manufacturing operations, in addition to administrative and corporate headquarters activities. Following the determination that the facility was substantially complete, the Company assessed the facility for sale-leaseback criteria qualification, which could result in a de-recognition of the building asset and the related financing obligation. The Company concluded that the facility did not meet the sale-leaseback criteria due to the Company’s continuing involvement in the leased facility. As a result, the facility is being accounted for as an asset financing, with the building asset and related facility financing obligation remaining on the Company’s balance sheet. The building asset is being depreciated over a 25 year period and the facility financing obligation will be amortized so that the net carrying value of the building asset and the facility financing obligation are equivalent at the end of the initial term of the lease agreement. Monthly rental payments will be allocated between principal and interest expense associated with the facility financing obligation, as well as grounds rent expense of $8 per month.  

The Company has recorded an asset related to the building and construction costs within property and equipment of $10,557 as of December 31, 2017. The non-current facility lease obligation on the Company’s consolidated balance sheet is $7,998 as of December 31, 2017 and 2016. During the year ended December 31, 2017,2022, the Company recognizedincurred total costs of factoring, including the factoring fees, financing fees and administrative fees of $185, with $73 included as interest expense of $1,044, including $37 of accrued interestand the reminder included in other accrued expenses asselling, general and administrative expense in the consolidated statement of December 31, 2017.    

Future minimum payments, including interest, required under the Company’s primary facility lease agreement, accounted for as an asset financing as of December 31, 2017 are as follows:

operations.

 

 

Build-to-Suit

Lease

 

2018

 

$

1,135

 

2019

 

 

1,170

 

2020

 

 

1,205

 

2021

 

 

1,241

 

2022

 

 

1,278

 

Thereafter

 

 

4,784

 

Total minimum lease payments

 

$

10,813

 

Contingencies

Operating Leases

The Company leased a facility under a non-cancelable operating lease that expired in April 2017.

Rent expense for operating leases totaled $440, $525 and $337 for the years ended December 31, 2017, 2016 and 2015, respectively.

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. See Legal Proceedings below for further discussion of pending legal claims.

The Company has entered into, and expects to continue to enter into, contracts in the normal course of business with various third parties who support its clinical trials, preclinical research studies and other services related to its development activities.activities, including drug substance and drug product manufacturing technical transfer capabilities, production and supportive costs. The scope of the services under these agreements can generally be modified at any time, and these agreements can generally be terminated by either party after a period of notice and receipt of written notice. There
In connection with entering into the Equity Distribution Agreement with Oppenheimer discussed in Note 11—“Stockholders' Equity”, the Company terminated its common stock purchase agreement with Aspire Capital on March 10, 2022. Other than such termination and the repayment and termination of the Seller Note discussed in Note 10—“Notes Payable”, there have been no material contract terminations as of December 31, 2017.

Legal Proceedings

The Company is subject to putative stockholder class action lawsuits that were filed in November 2017 in the United States District Court for the Middle District of North Carolina against the Company2022.

See Note 11—“Stockholders' Equity” regarding outstanding common stock warrants.
See Note 12—“License and certain of its currentCollaboration Agreements”, Note 13—“Net Product Revenues” and


former directors Note 14—“License and officers. The lawsuits were filed on behalf of a putative class of all persons who purchased or otherwise acquiredCollaboration Revenues” regarding the Company’s securities (1) pursuant or traceable tolicense agreements.

See Note 15—“Research and Development Agreements” regarding the Company’s IPO, or (2) on the open market between September 21, 2016 and January 26, 2017. The lawsuits assert claims for violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 promulgated thereunder, in connectionPurchase Agreement with statements related to the Company’s Phase 3 clinical trials of SB204. The complaints seek, among other things, an unspecified amount of compensatory damages and attorneys’ fees and costs on behalf of the putative class. The Company believes that the claims lack merit and intends to defend the lawsuits vigorously. However, there can be no assurance that a favorable resolution will be obtained in such lawsuits,Reedy Creek and the actual costs may be material.

Other than as described above, theFunding Agreement with Ligand.

Legal Proceedings
The Company is not currently a party to any material legal proceedings and is not aware of any claims or actions pending or threatened against the Company that the Company believes could have a material adverse effect on the Company’s business, operating results, cash flows or financial statements. In the future, the Company might from time to time become involved in litigation relating to claims arising from its ordinary course of business.

Compensatory Obligations

The Company enters into employment agreements with certain officers and employees. These agreements are in the normal course of business and contain certain customary Company controlled termination provisions which, if triggered, could result in future severance payments.
109


See Note 16—“Stock Based Compensation” regarding Stock Appreciation Rights, Restricted Stock Units and Stock Options.
Contingent Payment Obligations Related to the Purchase of EPI Health
See Note 2—“Acquisition of EPI Health” for certain contingent payments related to consideration due to EPG upon achievement of certain milestones by EPI Health.
Contingent Payment Obligations from Historical Acquisitions by EPI Health
EPI Health has in the past acquired certain rights to pharmaceutical products and such arrangements have typically included requirements that EPI Health make certain contingent payments to the applicable seller as discussed below.
Rhofade. On October 10, 2019, EPI Health entered into an agreement whereby it acquired certain assets related to Rhofade (the “Rhofade Acquisition Agreement”). In conjunctionconnection with the departuresRhofade Acquisition Agreement, EPI Health is required to make the following milestone payments to the seller upon reaching the following net sales thresholds during any calendar year following the closing date, as defined in the Rhofade Acquisition Agreement:
Calendar Year Net Sales ThresholdMilestone Payment
$50,000 $5,000 
$75,000 $5,000 
$100,000 $10,000 
Under the terms of two formerthe Rhofade Acquisition Agreement, EPI Health assumed certain liabilities of the prior licensees of the product Rhofade. In particular, EPI Health is required to pay certain earnout payments pursuant to historic acquisition agreements for Rhofade upon the achievement of net sales thresholds higher than those set forth above. However, the Company officershas not recognized a liability for such Rhofade milestones based on current and historical sales figures and management’s estimates of future sales.
Cloderm. On September 28, 2018, EPI Health entered into an agreement pursuant to which it acquired assets related to the product Cloderm. EPI Health is required to pay a low double-digit royalty once cumulative net sales of Cloderm reach $20,833, until $6,500 of royalty payments have been made by EPI Health.
Minolira. On August 20, 2018, EPI Health entered into an agreement pursuant to which it acquired assets related to the product Minolira. In connection with the agreement, EPI Health is required to make the following milestone payments to the seller upon reaching cumulative net sales thresholds as defined in the acquisition agreement:
Cumulative Net Sales ThresholdMilestone Payment
$10,000 $1,000 
$20,000 $1,000 
Each additional$20,000 $1,500 
See Note 12—“License and Collaboration Agreements”, Note 13—“Net Product Revenues” and Note 14—“License and Collaboration Revenues” for certain obligations and contingent payments related to license agreements, including those related to the Company’s commercial product portfolio.
Note 10: Notes Payable
Seller Note with Evening Post Group
On March and May11, 2022, at the closing of 2017, respectively,the EPI Health Acquisition, the Company entered into separationa secured promissory note and general release agreementssecurity agreement with both individuals that included separation benefits consistentEPG. The Company entered into the Seller Note with EPG to finance a portion of the Company’s obligations under their previously existing employment agreementsClosing Purchase Price related to the EPI Health Acquisition.
The Seller Note had a principal amount of $16,500 with interest-only payments due over the course of the 24-month term of the Seller Note. The Seller Note bore interest at the rate of 5.0% per annum for “separation from service”the first 90 days after the closing date, 15.0% per annum for “good reason.”the following 12 months, and 18.0% per annum for the remainder of the term. The resulting combined severancenon-amortizing principal of the Seller Note was to be paid in full at maturity and was secured by the membership interests of EPI Health held by the Company. EPI Health was a guarantor of the Seller Note. There was no penalty for repaying the Seller Note prior to the end of the term. Based on the escalating interest rate over the term of the Seller Note, the Company recorded interest expense recognized duringusing the effective interest method.
110


During the year ended December 31, 2017, totaled approximately $793. The remaining accrued severance obligation in respect2022, the Company recorded interest expense of the two former officers was $235 as of December 31, 2017, which is included in accrued compensation in the accompanying consolidated balance sheet. The Company also recognized approximately $374 in stock compensation expense during the year ended December 31, 2017,$1,375, related to the accelerated vestingSeller Note, of which $635related to accretion of the former officers’ stock options.

In June 2017,debt discount which was recorded related to the Seller Note’s fair value estimate as of the date of the EPI Health Acquisition.

On July 13, 2022, the Company reducedreached agreement with EPG regarding payment and termination of the Seller Note. Upon the Company’s payment to EPG of $10,000, or an approximate 39% discount on the original principal amount of the Seller Note, the Seller Note and all related security agreements were terminated.
Pursuant to the terms of the Seller Note, there was no penalty for repaying the Seller Note prior to the end of the term. In connection with the repayment of the Seller Note, the guaranty agreement between EPG and EPI Health, dated March 11, 2022, was terminated as of July 13, 2022. Accordingly, the liens on the membership interests and assets of EPI Health were also terminated such that no obligations with respect to the Seller Note and related securities agreement or the underlying loan remain outstanding.
Upon repayment and termination of the Seller Note, the Company recognized a $4,340 gain on debt extinguishment within the consolidated statements of operations and comprehensive loss. This gain represents (i) the $3,939 difference between the Seller Note’s $10,000 termination and settlement value and its overall employee workforce$13,939 carrying value at the date of termination; and (ii) a $401 write-off of accrued interest outstanding upon termination of the Seller Note.
See Note 2—“Acquisition of EPI Health” for additional detail regarding the Seller Note as it relates to reduce operating expendituresthe EPI Health purchase consideration and preserve cashits estimated fair value and measurement period adjustments.
Paycheck Protection Program
On April 22, 2020, the Company entered into a promissory note, which was subsequently amended (the “Note”), evidencing an unsecured loan in the amount of approximately $956 made to the Company (the “Loan”) under the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the United States Small Business Administration (the “SBA”). The Loan was made through PNC Bank, National Association. Subject to the terms of the Note, the Loan’s interest rate was fixed at one percent (1%) per annum.
Under the terms of the CARES Act, PPP loan recipients could apply for and be granted forgiveness for all or a portion of loans granted under the PPP, with such forgiveness to be determined, subject to limitations, based on hand. Employee severance costs associated with this action were $224, which were expensedthe use of loan proceeds for payment of permitted and program-eligible expenses. Interest payable on the Note could be forgiven only if the SBA agrees to pay such interest on the forgiven principal amount of the Note.
The Company previously applied for and during the second quarter of 2017. These severance costs were fully paid2021 received notification of forgiveness of the entire loan balance, including any accrued interest. Based upon the Notice of Paycheck Protection Program Forgiveness Payment received by the Company from the SBA, as of December 31, 2017.

June 14, 2021, the forgiveness of the principal balance of $956 is presented within the consolidated statements of operations and comprehensive loss as a gain on debt extinguishment.

Note 7:11: Stockholders’ Equity

Capital Structure

Authorized Shares.

In conjunction with the completion of the IPOCompany’s initial public offering in September 2016, the Company further amended its amended and restated certificate of incorporation and amended and restated its bylaws. The amendment providesprovided for 210,000,000 authorized shares of capital stock, of which 200,000,000 shares have beenare designated as $0.0001 par value common stock and 10,000,000 shares have beenare designated as $0.0001 par value preferred stock.

Prior

At the Company’s Annual Meeting of Stockholders held on July 28, 2020 (the “2020 Annual Meeting”), the Company’s stockholders approved an amendment to the September 2016 amendment,Company’s restated certificate of incorporation of the Company was authorized to issue 36,729,263 shares of capital stock, of which 22,000,000 shares were designated as $0.0001 par value common stock, 229,263 shares as $0.0001 par value non-voting common stock, and 14,500,000 shares of $0.0001 par value convertible preferred stock.  The authorized shares of convertible preferred stock were designated as follows:  1,229,862 as Series 1 Convertible Preferred Stock (“Series 1”), 1,226,242 as Series 2 Convertible Preferred Stock (“Series 2”), 1,349,382 as Series 3 Convertible Preferred Stock (“Series 3”), 1,833,333 as Series 4 Preferred Stock (“Series 4”), 3,677,622 as Mezzanine A Convertible Preferred Stock (“Mezzanine A”) and 5,000,000 as Mezzanine B Convertible Preferred Stock (“Mezzanine B”).  

Convertible Preferred Stock

The Company issued multiple series of convertible preferred stock between 2008 and 2015. In September 2016, in conjunction with the Company’s IPO, all outstanding shares of convertible preferred stock automatically converted into an aggregate of 8,776,269 shares of common stock at their conversion prices. The significant features of the


convertible preferred stock series in place immediately prior to the conversion to common shares are summarized in the subsection below.

Significant Features of Series 1, Series 2, Series 3, Series 4, Mezzanine A and Mezzanine B Convertible Preferred Stock

Voting. The holders of Series 1, Series 2, Series 3, Series 4, Mezzanine A and Mezzanine B were entitled to vote equally with the shares of common stock.

Dividends. Holders of preferred shares were entitled to dividends if and when declared by the board of directors. Other than the Distribution (see Note 1—Organization and Significant Accounting Policies), no dividends were declared prior to the IPO.

Conversion. Each share of Series 1, Series 2, Series 3, Series 4, Mezzanine A and Mezzanine B were convertible at the option of the holder at any time after the date of issuance into sucheffect a number of common shares as is determined by dividing the original issue price by the conversion price in effect at the time of the conversion. The conversion prices were subject to adjustment for subdivisions, dividends, combinations, reclassifications, merger, sale, etc. As discussed in Note 1—Organization and Significant Accounting Policies, the Company’s 1-for-1.2 reverse stock split of the Company’s common stock at a ratio of not less than one-for-two and not more than one-for-fifteen, with such ratio and the implementation and timing of such reverse stock split to be determined by the Company’s board of directors in its sole discretion. On May 18, 2021, the Company’s board of directors approved a one-for-ten reverse stock split of the Company’s issued and outstanding common stock. On May 24, 2021, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to the Restated Certification of Incorporation of the Company in order to effect the Reverse Stock Split. The Reverse Stock Split became effective as of 5:00 p.m. Eastern Time on May 25, 2021, and the Company’s common stock began trading on a split-adjusted basis on May 26, 2021. As a result of the Reverse Stock Split, on the effective date thereof, each outstanding ten (10) shares of common stock resulted in a proportional adjustmentcombined into and became one (1) share of common stock, and the number of the Company’s issued and outstanding shares of common stock was reduced to 15,170,678. The accompanying consolidated financial statements and related notes give retroactive effect to the existing conversion ratio of each series of convertible preferred stock, effective September 7, 2016.  

Automatic ConversionReverse Stock Split.

111


March 2022 Equity Distribution Agreement – At-the-Market Facility
On March 11, 2022, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Oppenheimer & Co. Inc. (“Oppenheimer”). Each share of Series 1, Series 2, Series 3, Series 4, Mezzanine APursuant to the Equity Distribution Agreement, the Company may from time to time issue and Mezzanine B automatically converted into common stock atsell to or through Oppenheimer, acting as the then effective conversion prices for each series upon the completion of the IPOCompany’s sales agent, shares of the Company’s common stock, becausepar value $0.0001 per share having an aggregate offering price of up to $50,000. Sales of the shares, if any, will be made by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933 (“Securities Act”), or, if expressly authorized by the Company, in privately negotiated transactions. As sales agent, Oppenheimer will offer the shares at prevailing market prices and will use its commercially reasonable efforts, consistent with its sales and trading practices, to sell on the Company’s behalf all of the shares requested to be sold by the Company, subject to the terms and conditions of the Equity Distribution Agreement. The Company or Oppenheimer may suspend the offering of the shares upon proper notice to the other party. The offering of the shares pursuant to the Equity Distribution Agreement will terminate upon the sale of shares in an aggregate offering amount equal to $50,000, or sooner if either the Company or Oppenheimer terminates the Equity Distribution Agreement as permitted by its terms.
The Company will pay Oppenheimer a commission equal to 3.0% of the aggregate gross proceeds from the IPO exceeded $40,000.  

Consent Rights. Without consentsale of the holdersshares sold pursuant to the Equity Distribution Agreement and will reimburse Oppenheimer for certain expenses incurred in connection with its services under the Equity Distribution Agreement. The foregoing rate of a majority of Series 1, Series 2, Series 3, Series 4, Mezzanine A and Mezzanine B shares,compensation will not apply when Oppenheimer acts as principal, in which case the Company couldmay sell the shares to Oppenheimer as principal at a price agreed upon among the parties.

During the year ended December 31, 2022, the Company sold 645,105 shares of its common stock at an average price of approximately $2.66 per share for total net proceeds of $1,665 under the Equity Distribution Agreement.
In relation to the June 2022 Registered Direct Offering (as defined and described below), the Company agreed not taketo issue any additional securities in any variable rate transaction (as defined in the related securities purchase agreement), including under the Equity Distribution Agreement, until December 13, 2022, unless, on or after September 11, 2022, the VWAP (as defined in the related securities purchase agreement) for the trading day prior to the date of the transaction was greater than 50% above the exercise price for the June 2022 Common Warrants.
Equity Offerings and Outstanding Common Stock Warrants
The Company has historically entered into equity offerings with underwriters and placement agents. Certain of these offerings, such as the June 2022 Registered Direct Offering, the March 2020 Public Offering, the March 2020 Registered Direct Offering and the January 2018 Offering, included certain actions, including liquidation, dissolution, recapitalization or reorganization; increase or decreasecommon stock warrant and pre-funded warrant issuances.
The following table presents the Company’s outstanding warrants to purchase common stock for the periods indicated.
 December 31,
Exercise
Price Per
Share
 20222021
Warrants to purchase common stock issued in the January 2018 Offering— 999,850 $46.60 
Warrants to purchase common stock issued in the June 2022 Registered Direct Offering5,261,311 — 2.851 
Warrants to purchase common stock issued in the March 2020 Public Offering252,417 252,417 3.00 
Underwriter warrants to purchase common stock associated with the March 2020 Public Offering11,304 11,304 3.75 
Placement agent warrants to purchase common stock issued in the March 2020 Registered Direct Offering10,605 10,605 5.375 
 5,535,637 1,274,176 
112


The weighted average exercise price per share for warrants outstanding as of December 31, 2022 and December 31, 2021 was $2.86 and $37.24, respectively. For the years ended December 31, 2022 and December 31, 2021, total proceeds from the exercise of common stock warrants was zero and $461, respectively.
June 2022 Registered Direct Offering
On June 9, 2022, the Company entered into a securities purchase agreement with an institutional investor (the “Purchaser”), pursuant to which the Company agreed to issue and sell to the Purchaser, in a registered direct offering priced at-the-market under Nasdaq rules (the “June 2022 Registered Direct Offering”) (i) 2,080,696 shares (the “June 2022 Shares”) of the Company’s common stock, and accompanying common stock warrants (the “June 2022 Common Warrants”) to purchase an aggregate of 2,080,696 shares of common stock, for a combined price of $2.851 per share and accompanying common warrant, and (ii) pre-funded warrants to purchase 3,180,615 shares of the Company’s common stock (the “June 2022 Pre-funded Warrants”) and accompanying common warrants to purchase 3,180,615 shares of common stock, for a combined price of $2.841 per pre-funded warrant and accompanying common warrant. The June 2022 Registered Direct Offering closed on June 13, 2022. Net proceeds from the offering were approximately $14,020 after deducting fees and commissions and offering expenses of approximately $948. Offering costs were netted against the offering proceeds and recorded to additional paid-in capital.
As of December 31, 2022, no June 2022 Pre-funded Warrants and 5,261,311 June 2022 Common Warrants are outstanding.
The Company entered into a placement agent agreement (the “Placement Agent Agreement”) dated as of June 9, 2022, engaging Oppenheimer to act as the sole placement agent in connection with the June 2022 Registered Direct Offering. Pursuant to the Placement Agent Agreement, the Company agreed to pay Oppenheimer a placement agent fee in cash equal to 5.0% of the gross proceeds from the sale of the June 2022 Shares, the June 2022 Pre-funded Warrants and the June 2022 Common Warrants, and to reimburse certain expenses of Oppenheimer in connection with the June 2022 Registered Direct Offering. Each June 2022 Pre-funded Warrant had an exercise price of $0.01 per share. The June 2022 Pre-funded Warrants were exercisable immediately upon issuance until all of the June 2022 Pre-funded Warrants were exercised in full. Each June 2022 Common Warrant is immediately exercisable and has an exercise price of $2.851 per share and will expire five years from the date of issuance.
The exercise price and the number of authorized shares of preferredcommon stock purchasable upon the exercise of the June 2022 Pre-funded Warrants and June 2022 Common Warrants are subject to adjustment upon the occurrence of specific events, including stock dividends, stock splits, reclassifications and combinations of the Company’s common stock.
Common warrants. The June 2022 Common Warrants include certain provisions that establish warrant holder settlement rights that take effect upon the occurrence of certain fundamental transactions. The June 2022 Common Warrants define a fundamental transaction to generally include any consolidation, merger or other transaction whereby another entity acquires more than 50% of the Company’s outstanding common stock; authorizestock or issue sharesthe sale of capital stockall or substantially all of the Company’s assets. The fundamental transaction provision provides the warrant holders with preferences or priorities over the existing sharesoption to settle any unexercised warrants for cash in the event of preferred stock; or effectcertain fundamental transactions that are within the control of the Company. For any amendment tofundamental transaction that is not within the certificate of incorporation or bylawscontrol of the Company, which would have had an adverse effect onincluding a fundamental transaction not approved by the holdersCompany’s board of Series 1, Series 2, Series 3, Series 4, Mezzanine Adirectors, the warrant holder will only be entitled to receive from the Company or any successor entity the same type or form of consideration (and in the same proportion) that is being offered and Mezzanine B.

Liquidation Preference. Upon liquidation, dissolution, or winding uppaid to the stockholders of the Company holdersin connection with the fundamental transaction, whether that consideration be in the form of cash, stock or any combination thereof. In the event of any fundamental transaction, and regardless of whether it is within the control of the Mezzanine B would have been entitled to receive, prior and in preference to any distributionCompany, the settlement amount of the assets to holders of Mezzanine A, Series 4, Series 3, Series 2, Series 1June 2022 Common Warrants (whether in cash, stock or common stock, an amounta combination thereof) is determined based upon a Black-Scholes value that is calculated using inputs as specified in the June 2022 Common Warrants, including a defined volatility input equal to the greater of the original purchase priceCompany’s 100-day historical volatility or 100%.

The June 2022 Common Warrants also include a separate provision whereby the per shareexercisability of such warrants may be limited if, upon exercise, the warrant holder or any of its affiliates would beneficially own more than 4.99% (or an amount on an as converted basis. After such distributionup to 9.99% if the holder so elects) of the Company’s common stock.
The Company assessed the June 2022 Common Warrants for appropriate equity or liability classification pursuant to the Company’s accounting policy described in Note 1—“Organization and Significant Accounting Policies”. During this assessment, the Company determined (i) the June 2022 Common Warrants did not constitute a liability under ASC 480; (ii) the June 2022 Common Warrants met the definition of a derivative under ASC 815; (iii) the warrant holder’s option to receive a net cash settlement payment under the June 2022 Common Warrants only becomes exercisable upon the occurrence of certain specified fundamental transactions that are within the control of the Company; (iv) upon the occurrence of a fundamental transaction that is not within the control of the Company, the warrant holder would receive the same type or form of consideration offered and paid to common stockholders; (v) the June 2022 Common Warrants are indexed to the Company’s common stock; and (vi) the June 2022 Common Warrants met all other conditions for equity classification under ASC 480 and ASC 815. Based on the results of this assessment, the Company concluded that the June 2022 Common Warrants are
113


freestanding equity-linked derivative instruments that met the criteria for equity classification. Accordingly, the June 2022 Common Warrants were classified as equity and were accounted for as a component of additional paid-in capital at the time of issuance.
Pre-funded warrants. The June 2022 Pre-funded Warrants’ fundamental transaction provision did not provide the warrant holders with the option to settle any unexercised warrants for cash in the event of Mezzanine B,any fundamental transactions; rather, in all fundamental transaction scenarios, the holders of Mezzanine A would have beenwarrant holder was only entitled to receive priorfrom the Company or any successor entity the same type or form of consideration (and in the same proportion) that was being offered and in preferencepaid to any distributionthe stockholders of the assetsCompany in connection with the fundamental transaction, whether that consideration be in the form of cash, stock or any combination thereof. The June 2022 Pre-funded Warrants also included a separate provision whereby the exercisability of the warrants could be limited if, upon exercise, the warrant holder or any of its affiliates would beneficially own more than 4.99% (or an amount up to holders9.99% if the holder so elects) of Series 4, Series 3, Series 2, Series 1the Company’s common stock.
The Company assessed the June 2022 Pre-funded Warrants for appropriate equity or liability classification pursuant to the Company’s accounting policy described in Note 1—“Organization and Significant Accounting Policies”. During this assessment, the Company determined the June 2022 Pre-funded Warrants were freestanding instruments that did not meet the definition of a liability pursuant to ASC 480 and did not meet the definition of a derivative pursuant to ASC 815. The June 2022 Pre-funded Warrants were indexed to the Company’s common stock and met all other conditions for equity classification under ASC 480 and ASC 815. Based on the results of this assessment, the Company concluded that the June 2022 Pre-funded Warrants were freestanding equity-linked financial instruments that met the criteria for equity classification under ASC 480 and ASC 815. Accordingly, the June 2022 Pre-funded Warrants were classified as equity and were accounted for as a component of additional paid-in capital at the time of issuance.
June 2021 Public Offering
On June 17, 2021, the Company entered into an amount equalunderwriting agreement with Cantor Fitzgerald & Co., as underwriter, pursuant to which the Company agreed to issue and sell an aggregate of 3,636,364 shares of the Company’s common stock at a price to the greaterpublic of the original purchase price or the$11.00 per share, amount onless underwriting discounts and commissions. The Company also granted the underwriter a 30-day option (the “Underwriter Option”) to purchase up to an as converted basis. After such distribution to the holders of Mezzanine A, the holders of the Series 4 would have been entitled to receive, prior and in preference to any distribution of the assets to holders of Series 3, Series 2, Series 1 or common stock, an amount equal to the greater of the original purchase price or the per share amount on an as converted basis. After such distribution to the holders of Series 4, the holders of Series 3 would have been entitled to receive, prior and in preference to any distribution of the assets to holders of Series 2, Series 1 or common stock, an amount equal to the greater of the original purchase price or the per share amount on an as converted basis. After such distribution to the holders of Series 3, the holders of Series 2 would have been entitled to receive, prior and in preference to any distribution of the assets to holders of Series 1 or common stock, an amount equal to the greater of the original purchase price or the per share amount on an as converted basis. After such distribution to the holders of Mezzanine B, Mezzanine A, Series 4, Series 3 and Series 2, the holders of Series 1 would have been entitled to receive, prior and in preference to any distribution of the assets to holdersadditional 545,454 shares of common stock an amount equalat the public offering price, less underwriting discounts and commissions. The June 2021 Public Offering closed on June 21, 2021, and the Underwriter Option expired unexercised in July 2021.
Net proceeds from the June 2021 Public Offering were approximately $37,236 after deducting underwriting discounts and commissions and offering expenses of approximately $2,764. Offering costs were netted against the offering proceeds and recorded to additional paid-in capital.
The June 2021 Public Offering was made pursuant to the greaterCompany’s effective shelf registration statement on Form S-3 (No. 333-236583), filed with the Securities and Exchange Commission (“SEC”) and declared effective by the SEC on April 10, 2020, including a prospectus contained therein dated as of April 10, 2020, as supplemented by a prospectus supplement, dated June 17, 2021.
March 2020 Public Offering
On February 27, 2020, the original purchase price or the per share amount onCompany entered into an underwriting agreement with H.C. Wainwright, as converted basis. Any assets remaining after such preferential distributions would be distributed to holders of common stock.

Anti-Dilution. Series 1, Series 2, Series 3, Series 4, Mezzanine A and Mezzanine B had a weighted average anti-dilution provision which protected against stock splits, stock dividends and recapitalizations. Priorunderwriter, relating to the IPO, in September 2016, the Company’s board of directorsoffering, issuance and existing stockholders approved a waiver of the existing


preferred stockholders’ rights within the certificate of incorporation pertaining to (i) a notice requirement for the mandatory conversion of preferred stock to common stock in the IPO and (ii) the application of anti-dilution provisions with respect to issuancesale of common stock, pre-funded warrants, and accompanying common warrants (the “CMPO Common Warrants”), in a public offering (the “March 2020 Public Offering”). The number of CMPO Common Warrants, excluding pre-funded warrants, issued in connection with the March 2020 Public Offering totaled 2,108,333. At closing, the Company also issued to designees of H.C. Wainwright, as underwriter, warrants to purchase an aggregate of up to 59,496 shares of common stock (the “CMPO UW Warrants”) representing 3.0% of the aggregate number of shares of common stock sold and shares of common stock underlying the pre-funded warrants sold in the IPO.

March 2020 Public Offering.

The CMPO Common Warrants have an exercise price of $3.00 per share and expire five years from the date of issuance. During the year ended December 31, 2022, there were no exercises of CMPO Common Warrants. During the year ended December 31, 2021, warrant holders exercised 10,000 of the CMPO Common Warrants for total proceeds of approximately $30. There were 252,417 of the CMPO Common Warrants outstanding as of December 31, 2022.
The CMPO UW Warrants have an exercise price of $3.75 per share and expire five years from the date of issuance. During the year ended December 31, 2022, there were no exercises of CMPO UW Warrants. During the year ended December 31, 2021, warrant holders exercised 48,192 of the CMPO UW Warrants for total proceeds of approximately $181. There were 11,304 of the CMPO UW Warrants outstanding as of December 31, 2022.
March 2020 Registered Direct Offering
On March 24, 2020, the Company entered into a securities purchase agreement with several institutional and accredited investors, pursuant to which the Company agreed to sell and issue shares of the Company’s common stock and pre-funded
114


warrants in a registered direct offering priced at the market (the “March 2020 Registered Direct Offering”). The March 2020 Registered Direct Offering closed on March 26, 2020. At closing, the Company issued to designees of H.C. Wainwright, as placement agent, warrants to purchase an aggregate of up to 55,814 shares of common stock (the “RDO PA Warrants”) representing 3.0% of the aggregate number of shares of common stock sold and shares of common stock underlying pre-funded warrants sold in the March 2020 Registered Direct Offering.
The RDO PA Warrants have an exercise price of $5.375 per share and expire five years from the date of issuance. During the year ended December 31, 2022, there were no exercises of RDO PA Warrants. During the year ended December 31, 2021, warrant holders exercised 45,209 of the RDO PA Warrants for total proceeds of approximately $243. There were 10,605 of the RDO PA Warrants outstanding as of December 31, 2022.
January 2018 Offering
There were no exercises of warrants issued in the Company’s public offering that closed on January 9, 2018 (the “January 2018 Offering”) during the year ended December 31, 2022. During the year ended December 31, 2021, warrant holders exercised 150 of the warrants issued in the January 2018 Offering. On January 9, 2022, the remaining 999,850 outstanding warrants related to the January 2018 Offering expired without being exercised.
Aspire Common Stock Purchase Agreement
On July 21, 2020, the Company entered into the Common Stock Purchase Agreement (the “July 2020 CSPA”) with Aspire Capital Fund, LLC (“Aspire”), which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire was committed to purchase up to an aggregate of $30,000 of shares of the Company’s common stock at the Company’s request from time to time during the 30-month term of the July 2020 Aspire CSPA. Upon execution of the July 2020 Aspire CSPA, the Company agreed to sell to Aspire 555,555 shares of its common stock at $9.00 per share for proceeds of $5,000. In consideration for entering into the July 2020 Aspire CSPA, upon satisfaction of certain conditions under the July 2020 Aspire CSPA, the Company issued to Aspire 100,000 shares of the Company’s common stock (the “July 2020 Commitment Shares”). The July 2020 Commitment Shares, valued at approximately $847, were recorded in July 2020 as non-cash costs of equity financing and included within general and administrative expenses. The July 2020 Aspire CSPA replaced the June 2020 Aspire Common Stock Purchase Agreement, which was terminated under the terms of the July 2020 Aspire CSPA.
On March 9, 2022, the Company provided notice to Aspire electing to terminate the July 2020 CSPA effective as of March 10, 2022. By its terms, the July 2020 CSPA could be terminated by the Company at any time, at its discretion, without any penalty or additional cost to the Company.
During the year ended December 31, 2022, there were no sales of common stock under the July 2020 CSPA. During the year ended December 31, 2021, the Company sold 493,163 shares of its common stock at an average price of $1.28 for total proceeds of $6,334.
Common Stock
The Company’s common stock has a par value of $0.0001 per share and consists of 200,000,000 authorized shares as of December 31, 2022 and December 31, 2021. There were 24,722,308 and 18,815,892 shares of common stock outstanding as of December 31, 2022 and December 31, 2021, respectively. 
The Company had reserved shares of common stock for future issuance as follows: 
 December 31,
 20222021
Outstanding warrants to purchase common stock (Note 11)5,535,637 1,274,176 
Outstanding stock options (Note 16)1,032,570 518,553 
Nonvested restricted stock units (Note 16)457,406 — 
Outstanding stock appreciation rights (Note 16)60,000 60,000 
For possible future issuance under the 2016 Stock Plan (Note 16)241,801 1,213,224 
 7,327,414 3,065,953 
Related Party Stock Repurchase

In April 2016, the Company repurchased 9,500950 shares of its common stock for an aggregate price of $155 from an executive of the Company who iswas also a member of the Company’s board of directors.directors at that time. The repurchase of these shares is recorded as treasury stock on the Company’saccompanying consolidated balance sheetsheets as of December 31, 20172022 and 2016.

Significant Features of Non-Voting Common Stock

Non-voting common stock had provisions for automatically converting into one share of common stock, as adjusted for any dividends and stock-splits, upon the closing of a qualified public offering of the Company’s common stock. Other than the Distribution (see Note 1—Organization and Significant Accounting Policies), there were no previously declared dividends or stock-splits prior to the IPO. As discussed in Note 1—Organization and Significant Accounting Policies, the Company’s stockholders approved a 1-for-1.2 reverse stock split of the Company’s shares of common stock, including all outstanding non-voting common stock, effective September 7, 2016. Subsequently, in conjunction with the Company’s IPO, all outstanding shares of non-voting common stock were converted into an aggregate of 191,052 shares of common stock.

December 31, 2021.

115


Preferred Stock

The Company’s amended and restated certificate of incorporation provides the Company’s board of directors with the authority to issue $0.0001 par value preferred stock from time to time in one or more series by adopting a resolution and filing a certificate of designations. Voting powers, designations, preferences, dividend rights, conversion rights and liquidation preferences shall be stated and expressed in such resolutions. There were 10,000,000 shares designated as preferred stock and no shares outstanding as of December 31, 20172022 and 2016.

Common Stock

Authorized, IssuedDecember 31, 2021.

Note 12: License and Outstanding Common Shares

Collaboration Agreements

Wynzora Agreement
Effective as of January 1, 2022, EPI Health entered into an amended and restated promotion and collaboration agreement with MC2 Therapeutics Limited (“MC2”), relating to the commercialization of Wynzora for treatment of plaque psoriasis in adults in the United States (the “MC2 Agreement”). Pursuant to the MC2 Agreement, which sets forth the collaborative efforts between EPI Health and MC2 to commercialize and promote Wynzora with MC2 in the United States, MC2 granted EPI Health an exclusive right and license under MC2’s intellectual property rights to sell, or detail (as defined in the MC2 Agreement), and engage in certain commercialization activities with respect to Wynzora in the United States.
In exchange for the provision of promotional and commercialization activities, under the terms of the MC2 Agreement, EPI Health is entitled to receive:
Reimbursement for all incremental costs incurred by the Company for the promotion and commercialization of Wynzora, including the incremental portion of the Company’s personnel and commercial operating costs. The Company’s common stocksupply price of Wynzora product inventory is also considered to be an incremental cost that is reimbursed by MC2.
A commercialization fee equivalent to a percentage of net sales ranging from the mid-teens for net sales less than or equal to $65,000 to the upper single digits for annual net sales greater than $105,000. EPI Health collects this commercialization fee by retaining its portion of the Wynzora product net sales it collects from its customers, with the remainder of the net sales being remitted by EPI Health to MC2 periodically in the form of a royalty payment, pursuant to the MC2 Agreement.
A contingent incentive fee equal to 5% of the first $30,000 in net sales of Wynzora sold in the United States by EPI Health in each of the 2022 and 2023 calendar years; provided that such incentive fee shall not exceed $1,500 each year and such incentive fee shall not be credited to EPI Health until the royalty payments paid to MC2 surpass the amount of certain commercialization payments made previously by MC2.
The term of the MC2 Agreement runs until the seventh anniversary of the first commercial sale of Wynzora (as defined in the MC2 Agreement) or June 30, 2028, whichever is earlier. Either party may terminate the MC2 Agreement for the other party’s material uncured breach or the bankruptcy or insolvency of the other party. MC2 may terminate the MC2 Agreement under certain scenarios, including for convenience with twelve months’ advance notice to EPI Health, provided that the termination is not effective unless MC2 pays any unpaid historical liabilities related to commercialization of Wynzora owed by MC2. In the case of such termination, MC2 is also required to make an additional sunset payment to EPI Health, paid in installments over the 24 month period following termination. EPI Health may terminate the MC2 Agreement for convenience with twelve months’ advance notice to MC2 provided that the termination is not effective unless the Company provides MC2 with a guarantee of the payment of any outstanding royalty payments, to the extent such royalty payments owed by EPI Health exceed any unpaid historical liabilities related to commercialization of Wynzora owed by MC2.
Rhofade Agreements
In connection with the Rhofade Acquisition Agreement that is described in Note 9—“Commitments and Contingencies”, EPI Health acquired rights to that certain Assignment and License Agreement, whereby EPI Health licenses certain intellectual property from Aspect Pharmaceuticals, LLC (“Aspect” and such agreement, the “Aspect Agreement”). Under the terms of the Aspect Agreement, EPI Health, as successor-in-interest, has exclusive rights to, and is required to use commercially reasonable efforts to, commercialize the Rhofade product. EPI Health also has a par valueduty to certain other parties to use commercially reasonable efforts to commercialize the Rhofade product based on historical acquisition agreements for Rhofade that were assumed by EPI Health.
The Aspect Agreement expires upon the last-to-expire of $0.0001 perpatent claims made under the assigned and licensed patents under the Aspect Agreement. Aspect may terminate the agreement upon a material breach by EPI Health after providing an opportunity to cure. Upon such termination by Aspect, EPI Health will cease all development and commercialization of Rhofade and EPI Health will assign and convey to Aspect its entire right, title and interest in and to the assigned intellectual property transferred under the Aspect Agreement.
116


Additionally, under the Aspect Agreement, the Rhofade Acquisition Agreement and the other historical acquisitions related to Rhofade, EPI Health is also required to pay a combined royalty on net sales of Rhofade and related products initially in the low double digits, which rate may increase based on the thresholds of net sales achieved by EPI Health. EPI Health is also required to pay 25% of any upfront, license, milestone or other related payments received by EPI Health related to any sublicenses of Rhofade and related products.
In connection with two abbreviated new drug application (“ANDA”) settlement agreements that EPI Health entered into in connection with Rhofade in 2021, EPI Health granted two ANDA filers a license to launch their own generic product for the treatment of erythema in rosacea. The actual timing of the launch of such generic products is uncertain because the launch dates of such products under the settlement agreements are subject to acceleration under certain circumstances. In the absence of any circumstances triggering acceleration, the earliest launch of such a generic product would be in the third quarter of 2026.
Minolira Agreements
In connection with the Minolira acquisition that is described in Note 9—“Commitments and Contingencies”, EPI Health assumed the royalty obligation related to an ANDA settlement in connection with Minolira. Accordingly, EPI Health is required to pay a royalty to an ANDA filer in the low double digits of any generic form of Minolira that is the pharmaceutical equivalent of the 105 mg or 135 mg strength Minolira product.
Sitavig Agreements
On February 21, 2020, EPI Health entered into an agreement with Vectans Pharma (“Vectans”) in which the parties terminated an existing license agreement dated March 17, 2014 which granted EPI Health the exclusive right to develop and commercialize a prescription Sitavig product in the United States and Canada, and instead provided that EPI Health would purchase outright certain intellectual property (and license other intellectual property) related to the prescription Sitavig Rx product in the United States and Canada (the “Vectans Agreement”).
At the time it entered into the Vectans Agreement, EPI Health also entered into an OTC Switch License Agreement (the “OTC License Agreement”) with Bayer Healthcare LLC (“Bayer”). Under the OTC License Agreement, EPI Health granted to Bayer an exclusive and sublicensable license to develop and commercialize an OTC product in the United States and Canada.
Under the OTC License Agreement, Bayer has agreed to pay EPI Health various regulatory milestone payments upon the achievement of such regulatory milestones equaling a maximum aggregate amount of $9,500, along with various commercial milestone payments upon the achievement of such commercial milestones equaling a maximum aggregate amount of $20,000. Under the Vectans Agreement, EPI Health is required to pay Vectans various milestone and royalty payments in amounts ranging from 32% ‐ 50% of the amounts paid by Bayer to EPI Health pursuant to the OTC License Agreement, and the Company will also be required to pay a portion of such milestone payments to EPG under the EPI Health Purchase Agreement.
Bayer has also agreed to pay to EPI Health a tiered royalty ranging from a mid-single digit to a low-double digit percentage of net sales of licensed products in the licensed territory, subject to a reduction in the royalty payments in certain circumstances.
Bayer is responsible for funding the development and commercial costs for the OTC product in the United States and Canada. The Company is obligated to perform certain oversight, review and supporting activities for Bayer, including (i) maintaining existing EPI Health patents related to the Sitavig product, and (ii) participating in a joint committee that oversees, reviews and approves development and commercialization activities under the OTC License Agreement.
The OTC License Agreement expires on the tenth anniversary of the first commercial sale of an OTC product on a country-by-country basis. The OTC License Agreement may be terminated by (i) Bayer without cause upon nine months’ advance written notice to EPI Health, (ii) either party in the event of the other party’s uncured material breach upon 60 days’ advance written notice, (iii) either party, upon three months’ notice, in the event Bayer provides EPI Health with notice that Bayer has elected to permanently discontinue development of the OTC product in the United States and Canada, and (iv) either party in the event of the other party’s dissolution, liquidation, bankruptcy or insolvency. On the tenth anniversary of the first commercial sale of the OTC product on a country-by-country basis, assuming Bayer is not in breach and the OTC License Agreement has not been terminated, Bayer will have an irrevocable, royalty-free license to commercialize the OTC product without any further obligations to EPI Health.
Nuvail Agreements
On November 7, 2021, a predecessor of EPI Health entered into an exclusive license agreement with Chesson Laboratory Associates, Inc. (“Chesson”), as subsequently amended, for the sale of Nuvail, and pursuant to such agreement, EPI Health serves as an exclusive distributor of this product in the United States. Pursuant to the Nuvail license agreement, EPI Health is required to pay a tiered royalty up to a low double digit percentage of net sales of Nuvail, subject to a minimum annual royalty payment. The initial term of the license agreement expired in 2021 and was automatically extended for an additional five year renewal period. The license agreement may be terminated by either party for material breach. Chesson may terminate the license agreement early for convenience upon 12 months’ notice but is required to pay a termination fee based on a multiple of
117


trailing twelve months gross sales. EPI Health is not currently actively promoting this product as part of its commercial portfolio.
UNC Agreements
The Amended, Restated and Consolidated License Agreement dated June 27, 2012, as amended, with the University of North Carolina at Chapel Hill (“UNC,” and such agreement, the “UNC License Agreement”) provides the Company with an exclusive license to issued patents and pending applications directed to the Company’s library of Nitricil compounds, including patents issued in the United States, Japan and Australia, with claims intended to cover NVN1000, the new chemical entity (“NCE”) for the Company’s current product candidates. The UNC License Agreement requires the Company to pay UNC up to $425 in regulatory and commercial milestones on a licensed product by licensed product basis and a running royalty percentage in the low single digits on net sales of licensed products. Licensed products include any products being developed by the Company or by its sublicensees.
Unless earlier terminated by the Company at its election, or if the Company materially breaches the agreement or becomes bankrupt, the UNC License Agreement remains in effect on a country by country and licensed product by licensed product basis until the expiration of the last to expire issued patent covering such licensed product in the applicable country. The projected date of expiration of the last to expire of the patents issued under the UNC License Agreement is 2036.
Other Research and Development Agreements
The Company has entered into various licensing agreements with universities and other research institutions under which the Company receives the rights, and in some cases substantially all of the rights, of the inventors, assignees or co-assignees to produce and market technology protected by certain patents and patent applications. In addition to the UNC License Agreement, which is the Company’s primary license agreement, the counterparties to the Company’s various other licensing agreements are the University of Akron Research Foundation, Hospital for Special Surgery, Strakan International S.a.r.l., which is a licensee of the University of Aberdeen, KIPAX AB and KNOW Bio.
The Company is required to make payments based upon achievement of certain milestones and will be required to make royalty payments based on a percentage of future sales of covered products or a percentage of sublicensing revenue. As future royalty payments are directly related to future revenues (either sales or sublicensing), future commitments cannot be determined. No accrual for future payments under these agreements has been recorded, as the Company cannot estimate if, when or in what amount payments may become due.
KNOW Bio Agreements
On December 30, 2015, the Company completed the distribution of 100% of the outstanding membership interests of KNOW Bio, LLC (“KNOW Bio”), a former wholly owned subsidiary of the Company, to Novan’s stockholders (the “Distribution”), pursuant to which KNOW Bio became an independent privately held company. In connection with the Distribution, the Company entered into exclusive license agreements and sublicense agreements with KNOW Bio, as described below. The agreements will continue for so long as there is a valid patent claim under the respective agreement, unless earlier terminated, and upon expiration, will continue as perpetual non-exclusive licenses. KNOW Bio has the right to terminate each such agreement, for any reason upon 90 days advance written notice to the Company.
License of existing and potential future intellectual property to KNOW Bio. The Company and KNOW Bio entered into an exclusive license agreement dated December 29, 2015 (the “KNOW Bio License Agreement”). Pursuant to the terms of the KNOW Bio License Agreement, the Company granted to KNOW Bio exclusive licenses, with the right to sublicense, under certain United States and foreign patents and patent applications that were controlled by the Company as of December 29, 2015 or that became controlled by the Company between that date and December 29, 2018, directed towards nitric-oxide releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds and other nitric oxide-based therapeutics.
Sublicense of UNC and other third party intellectual property to KNOW Bio. The Company and KNOW Bio also entered into sublicense agreements dated December 29, 2015 (the “KNOW Bio Sublicense Agreements” and together with the KNOW Bio License Agreement, the “Original KNOW Bio Agreements”). Pursuant to the terms of the KNOW Bio Sublicense Agreements, the Company granted to KNOW Bio exclusive sublicenses, with the ability to further sublicense, under certain of the United States and foreign patents and patent applications exclusively licensed to the Company from UNC under the UNC License Agreement, and another third party directed towards nitric oxide-releasing compositions, to develop and commercialize products utilizing the licensed technology. Under the exclusive sublicense to the UNC patents and applications (the “UNC Sublicense Agreement”), KNOW Bio is subject to the terms and conditions under the UNC License Agreement, including milestone and diligence payment obligations.However, pursuant to the terms of the UNC License Agreement, the Company is directly obligated to pay UNC any future milestones or royalties, including those resulting from actions conducted by the Company’s sublicensees, including KNOW Bio. Therefore, in the event of KNOW Bio non-performance with respect to its obligations under the UNC Sublicense Agreement, the Company would be obligated to make such payments to UNC. KNOW
118


Bio would then become obligated to repay the Company pursuant to the UNC Sublicense Agreement, otherwise KNOW Bio would be in breach of its agreements with the Company and intellectual property rights would revert back to the Company. There were no milestone or royalty payments required during the years ended December 31, 2022 and December 31, 2021.
On October 13, 2017, the Company and KNOW Bio entered into certain amendments to the Original KNOW Bio Agreements (the “KNOW Bio Amendments”). Pursuant to the terms of the KNOW Bio Amendments, the Company re-acquired from KNOW Bio exclusive, worldwide rights under certain United States and foreign patents and patent applications controlled by the Company as of December 29, 2015, and that became controlled by the Company between December 29, 2015 and December 29, 2018, directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics, to develop and commercialize products for all diagnostic, therapeutic, prophylactic and palliative uses for any disease, condition or disorder caused by certain oncoviruses (the “Oncovirus Field”).
KNOW Bio also granted to the Company an exclusive license, with the right to sublicense, under any patents and patent applications which became controlled by KNOW Bio during the three-year period between December 29, 2015 and December 29, 2018 and directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics, but not towards medical devices, to develop and commercialize products for use in the Oncovirus Field.
Upon execution of the KNOW Bio Amendments, in exchange for the Oncovirus Field rights, the Company paid KNOW Bio a non-refundable upfront payment of $250. Products the Company develops in the Oncovirus Field based on Nitricil will not be subject to any further milestones, royalties or sublicensing payment obligations to KNOW Bio under the KNOW Bio Amendments. However, if the Company develops products in the Oncovirus Field that incorporate a certain nitric oxide-releasing composition specified in the KNOW Bio Amendments and (i) are covered by KNOW Bio patents or (ii) materially use or incorporate know-how of KNOW Bio or the Company related to such composition that was created between December 29, 2015 and December 29, 2018, the Company would be obligated to make the certain contingent milestone and royalty payments to KNOW Bio under the KNOW Bio Amendments.
The rights granted to the Company in the Oncovirus Field in the KNOW Bio Amendments continue for so long as there is a valid patent claim under the Original KNOW Bio Agreements, and upon expiration continue on a perpetual non-exclusive basis, and are subject to the termination rights of KNOW Bio and the Company that are set forth in the Original KNOW Bio Agreements. In addition, under the KNOW Bio Amendments, KNOW Bio may terminate the rights granted to the Company in the Oncovirus Field without terminating the Original KNOW Bio Agreements.
The KNOW Bio Amendments also provide a mechanism whereby either party may cause a NCE covered by the Original KNOW Bio Agreements to become exclusive to such party by filing an investigational new drug application (“IND”) on the NCE. An NCE that becomes exclusive to a party under this provision may not be commercialized by the other party until the later of expiration of patents covering the NCE or regulatory exclusivity covering the NCE. A party who obtains exclusivity for an NCE must advance development of the NCE pursuant to terms of the KNOW Bio Amendments in order to maintain such exclusivity; otherwise, such exclusivity will expire.
See Note 13—“Net Product Revenues” and Note 14—“License and Collaboration Revenues” for additional detail regarding revenue generating license and collaboration agreements, including related accounting treatments.
Note 13: Net Product Revenues
The Company has the following commercial products that generate net product revenues:
Rhofade (oxymetazoline hydrochloride cream, 1%), or Rhofade, is an alpha1A adrenoceptor agonist indicated for the topical treatment of persistent facial erythema associated with rosacea in adults.
Wynzora (calcipotriene and betamethasone dipropionate cream), or Wynzora, is a combination of calcipotriene, a vitamin D analog, and betamethasone dipropionate, a corticosteroid, indicated for the topical treatment of plaque psoriasis in patients 18 years of age or older.
Minolira (biphasic minocycline hydrochloride immediate release/extended release 105 mg and 135 mg tablets), or Minolira, is indicated to treat inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 years of age and older.
Cloderm (clocortoline pivalate cream 0.1%), or Cloderm, is indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid-responsive dermatoses.
The post-acquisition operating results of EPI Health are reflected within the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2022, specifically from March 11, 2022 through December 31, 2022.
Net product revenues are summarized as follows:
119


Year Ended
December 31, 2022
Total Net Product RevenuesPercentage of Net Product Revenues
Rhofade$11,488 72.7 %
Wynzora1,640 10.4 %
Minolira1,572 10.0 %
Cloderm505 3.2 %
Other591 3.7 %
Net product revenues$15,796 100.0 %
For the period March 11, 2022 through December 31, 2022, the Company recorded adjustments for certain commercial products for accruals that were assumed as of the EPI Health Acquisition date within the Other category in the table above.
For the year ended December 31, 2022, one of the Company’s wholesaler customers accounted for more than 10% of its total gross product revenues, at 12%.
For the year ended December 31, 2022, the Company recorded $3,995 of expense related to royalties on net sales for its commercial product portfolio, including Wynzora residual net sales royalty payments due to the collaboration partner.
MC2 Agreement
The Company assessed the MC2 Agreement and determined it is a collaboration arrangement within the scope of ASC 808. Per the MC2 agreement, the Company proposes a commercialization plan and incremental cost budget annually, which is developed in consultation with and subject to the approval of MC2. The Company is required to use commercially reasonable efforts to perform its commercialization activities in accordance with the commercialization plan.
The Company and MC2 work collaboratively in promoting and commercializing Wynzora by performing their respective promotional and commercialization responsibilities, as established within the MC2 Agreement. Pursuant to the MC2 Agreement, MC2 is responsible for leading the overall strategy of messaging for the promotional materials for Wynzora and the Company is responsible for generating such promotional materials and executing all field promotional and sales activities via the Company’s existing commercial sales force. MC2 is responsible for the manufacturing of Wynzora via a third-party contract manufacturer, and subject to MC2’s obligation to supply product under the supply terms, the Company purchases product inventory from MC2 (and its third-party contract manufacturer) by periodically placing firm purchase orders and then taking title, physical possession and control of the product inventory. The Company then fulfills orders and distributes Wynzora to the Company’s wholesale, distributor and other pharmacy customers. The parties share regulatory responsibilities, and consistsexcept for the regulatory responsibilities assigned to the Company under the terms of 200,000,000 authorized sharesthe MC2 Agreement, MC2 is responsible for maintaining the NDA for Wynzora and all remaining regulatory activities. The MC2 Agreement also establishes a joint steering committee, which monitors and oversees the development, promotion, commercialization, and manufacturing of Wynzora, coordinates the collaborative activities of the parties and resolves disputes.
MC2 pays advance payments to the Company on a quarterly basis, prior to the beginning of each calendar quarter, for incremental costs expected to be incurred by the Company during such calendar quarter for the promotion and commercialization of Wynzora, including (i) promotional campaigns and related services performed by third parties, (ii) a portion of the Company’s personnel and commercial operating costs, and (iii) the supply price of Wynzora product inventory. The Company records an accrued deposit liability within accrued expenses on its balance sheets upon receipt of an advance payment for promotional and commercialization services not yet performed or incurred by the Company. As such services are performed and qualifying incremental expenses are incurred, the Company recognizes a contra-expense pursuant to the Company’s accounting policy described in Note 1—“Organization and Significant Accounting Policies”.
During the year ended December 31, 2022, the Company recognized contra-expenses of $8,284 under this agreement. The accrued deposit liability related to the receipt of advance payments from MC2 for future incremental costs was $1,149 as of December 31, 2022, which is presented within accrued expenses in the accompanying consolidated balance sheets.
The Company also identified the wholesalers, distributors and other pharmacies (collectively referred to as “End Customers”) who purchase Wynzora from the Company to be customers pursuant to ASC 606. When more than one party is involved in providing goods or services to the End Customer, ASC 606 requires an entity to determine whether it is a principal or an agent in such transactions by evaluating the nature of its promise to the End Customer. Control of the specified good or service prior to transfer of control to the customer is the determining factor when assessing whether an entity is a principal or an agent. The Company determined it is a principal in this arrangement because it takes title and physical possession of the Wynzora product
120


inventory, at which point it can direct the inventory to any End Customer that submits an enforceable purchase order issued under an active, stand-alone agreement between the Company and the End Customer.
With respect to its performance obligations to the End Customers and associated revenue recognition, the Company recognizes all Wynzora revenues pursuant to its accounting policies for net product revenues as described further in Note 1—“Organization and Significant Accounting Policies”.
Note 14: License and Collaboration Revenues
The Company has license and collaboration revenues summarized as follows:
Year Ended
December 31, 2022
Total License and Collaboration RevenuesPercentage of License and Collaboration Revenues
Sato Agreement - SB206 and SB204$2,586 33.1 %
Sato Rhofade Agreement5,000 64.0 %
Prasco Agreement - Cloderm AG227 2.9 %
License and collaboration revenues$7,813 100.0 %
The post-acquisition operating results of EPI Health are reflected within the Company’s consolidated statement of operations for the year ended December 31, 2022, specifically from March 11, 2022 through December 31, 2022. For the year ended December 31, 2021, all license and collaboration revenues related to the Sato Agreement (related to SB206 and SB204).
For the year ended December 31, 2022, the Company recorded $1,407 of expense related to milestones, including cumulative sales-based milestones and amounts related to the receipt of certain upfront payments.
Sato Agreement - SB206 and SB204
On January 12, 2017, the Company entered into a license agreement, and 2016.  Thererelated first amendment, with Sato Pharmaceutical Co., Ltd. (“Sato”), relating to SB204, its drug candidate for the treatment of acne vulgaris in Japan (the “Sato Agreement”). Pursuant to the Sato Agreement, the Company granted to Sato an exclusive, royalty-bearing, non-transferable right and license under certain of the Company’s intellectual property rights, with the right to sublicense with the Company’s prior written consent, to develop, use and sell products in Japan that incorporate SB204 in certain topical dosage forms for the treatment of acne vulgaris, and to make the finished form of such products.
On October 5, 2018, the Company and Sato entered into the second amendment (the “Sato Amendment”) to the Sato Agreement (collectively, the “Amended Sato Agreement”). The Sato Amendment expanded the Sato Agreement to include SB206, the Company’s drug candidate for the treatment of viral skin infections. Pursuant to the Amended Sato Agreement, the Company granted to Sato an exclusive, royalty-bearing, non-transferable license under certain of its intellectual property rights, with the right to sublicense with the Company’s prior written consent, to develop, use and sell products in Japan that incorporate SB204 or SB206 in certain topical dosage forms for the treatment of acne vulgaris or viral skin infections, respectively, and to make the finished form of such products. The Company or its designated contract manufacturer will supply finished product to Sato for use in the development of SB204 and SB206 in the licensed territory. The rights granted to Sato do not include the right to manufacture the API of SB204 or SB206; rather, the parties agreed to negotiate a commercial supply agreement pursuant to which the Company or its designated contract manufacturer would be the exclusive supplier to Sato of the API for the commercial manufacture of licensed products in the licensed territory. Under the terms of the Amended Sato Agreement, the Company also has exclusive rights to certain intellectual property that may be developed by Sato in the future, which the Company could choose to use for its own development and commercialization of SB204 or SB206 outside of Japan.
The term of the Amended Sato Agreement (and the period during which Sato must pay royalties under the amended license agreement) expires on the twentieth anniversary of the first commercial sale of a licensed product in the licensed field in the licensed territory (adjusted from the tenth anniversary of the first commercial sale in the Sato Agreement). The term of the Amended Sato Agreement may be renewed with respect to a licensed product by mutual written agreement of the parties for additional two-year periods following expiration of the initial term. All other material terms of the Sato Agreement remain unchanged by the Sato Amendment.
121


Sato is responsible for funding the development and commercial costs for the program that are specific to Japan. The Company is obligated to perform certain oversight, review and supporting activities for Sato, including: (i) using commercially reasonable efforts to obtain marketing approval of SB204 and SB206 in the United States; (ii) sharing all future scientific information the Company may obtain during the term of the Amended Sato Agreement pertaining to SB204 and SB206; (iii) performing certain additional preclinical studies if such studies are deemed necessary by the Japanese regulatory authority, up to and not to exceed a total cost of $1,000; and (iv) participating in a joint committee that oversees, reviews and approves Sato’s development and commercialization activities under the Amended Sato Agreement. Additionally, the Company has granted Sato the option to use the Company’s trademarks in connection with the commercialization of licensed products in the licensed territory for no additional consideration, subject to the Company’s approval of such use.
The Amended Sato Agreement may be terminated by (i) Sato without cause upon 120 days’ advance written notice to the Company; (ii) either party in the event of the other party’s uncured material breach upon 60 days’ advance written notice; (iii) force majeure; (iv) either party in the event of the other party’s dissolution, liquidation, bankruptcy or insolvency; and (v) the Company immediately upon written notice if Sato challenges the validity, patentability, or enforceability of any of the Company’s patents or patent applications licensed to Sato under the Amended Sato Agreement. In the event of a termination, no portion of the upfront fees received from Sato are refundable.
The Company assessed the Sato Agreement in accordance with ASC 606 and concluded that the contract counterparty, Sato, is a customer within the scope of ASC 606. The Company identified the following promises under the Sato Agreement (i) the grant of the intellectual property license to Sato, (ii) the obligation to participate in a joint committee that oversees, reviews, and approves Sato’s research and development activities and provides advisory support during Sato’s development process, (iii) the obligation to manufacture and supply Sato with all quantities of licensed product required for development activities in Japan, and (iv) the stand-ready obligation to perform any necessary repeat preclinical studies, up to $1,000 in cost. The Company determined that these promises were 16,005,408not individually distinct because Sato can only benefit from these licensed intellectual property rights and 15,939,992 sharesservices when bundled together; they do not have individual benefit or utility to Sato. As a result, all promises have been combined into a single performance obligation.
The Sato Agreement also provides that the two parties agree to negotiate in good faith the terms of voting common stock outstandinga commercial supply agreement pursuant to which the Company or a third-party manufacturer would be the exclusive supplier to Sato of the API for the commercial manufacture of licensed products in the licensed territory. The Company concluded this obligation to negotiate the terms of a commercial supply agreement does not create (i) a legally enforceable obligation under which the Company may have to perform and supply Sato with API for commercial manufacturing, or (ii) a material right because the incremental commercial supply fee consideration framework in the Sato Agreement is representative of a stand-alone selling price for the supply of API and does not represent a discount. Therefore, this contract provision is not considered to be a promise to deliver goods or services and is not a performance obligation or part of the combined single performance obligation described above.
Sato Amendment
On October 5, 2018, the Company and Sato entered into the second amendment to the Sato Agreement (the “Sato Amendment”). The Sato Amendment expanded the Sato Agreement to include SB206, the Company’s drug candidate for the treatment of viral skin infections. The Company assessed the Sato Agreement in accordance with ASC 606 and concluded the contract modification should incorporate the additional goods and services provided for in the Sato Amendment into the existing, partially satisfied single bundled performance obligation that will continue to be delivered to Sato over the remaining development period. The Company determined that this contract modification accounting is appropriate as the additional goods and services conveyed under the Sato Amendment were determined to not be distinct from the single performance obligation, and the additional consideration provided did not reflect the standalone selling price of those additional goods and services. As such, the Company recorded a cumulative adjustment as of the amendment execution date to reflect revenue that would have been recognized cumulatively for the partially completed bundled performance obligation.
The Company concluded that the following consideration would be included in the transaction price as they were (i) received prior to December 31, 2022, or (ii) payable upon specified fixed dates in the future and not contingent upon clinical or regulatory success in Japan:
The 1.25 billion JPY (approximately $10,813 USD) original upfront payment received on January 19, 2017 following the execution of the Sato Agreement on January 12, 2017.
A milestone payment of 0.25 billion JPY (approximately $2,162 USD) received during the fourth quarter of 2018 following Sato’s initiation of a Phase 1 trial in Japan.
The Sato Amendment upfront payment of 1.25 billion JPY, payable in installments of 0.25 billion JPY, 0.5 billion JPY and 0.5 billion JPY on October 5, 2018, February 14, 2019 and September 13, 2019, respectively. On October 23, 2018, the Company received the first installment from the Amended Sato Agreement of 0.25 billion JPY (approximately $2,224 USD). On March 14, 2019, the Company received the second installment payment related to
122


the Amended Sato Agreement of 0.5 billion JPY (approximately $4,460 USD). On November 7, 2019, the Company received the third installment payment related to the Amended Sato Agreement of 0.5 billion JPY (approximately $4,554 USD).
An aggregate of 1.0 billion JPY in non-contingent milestone payments that become payable upon the earlier occurrence of specified fixed dates in the future or the achievement of specified milestone events. On May 20, 2021, the Company received one such non-contingent milestone payment in the form of a payment of 0.5 billion JPY (approximately $4,572 USD) related to achievement of a time-based developmental milestone. On February 28, 2022, the Company received the remaining time-based milestone payment of 0.5 billion JPY (approximately $4,323 USD).
The Company concluded that the following elements of consideration would not be included in the transaction price as they are contingent upon clinical or regulatory success in Japan:
Up to an aggregate of 0.5 billion JPY upon the achievement of various development and regulatory milestones.
Up to an aggregate of 3.9 billion JPY upon the achievement of various commercial milestones. 
A tiered royalty ranging from a mid-single digit to a low-double digit percentage (adjusted from a mid-single digit percentage in the Sato Agreement) of net sales of licensed products in the licensed territory, subject to a reduction in the royalty payments in certain circumstances.
The payment terms contained within the Sato Agreement related to upfront, developmental milestone and sales milestone payments are of a short-term nature and, therefore, do not represent a financing component requiring additional consideration.
The following tables present the Company’s contract assets, contract liabilities and deferred revenue balances for the dates indicated.
 Contract AssetContract LiabilityNet Deferred Revenue
December 31, 2021$— $13,251 $13,251 
December 31, 2022$— $10,665 $10,665 
 Short-term Deferred RevenueLong-term Deferred RevenueNet Deferred Revenue
December 31, 2021$2,586 $10,665 $13,251 
December 31, 2022$2,586 $8,079 $10,665 
The Company has recorded the Sato Agreement (both the initial agreement and as amended by the Sato Amendment) transaction price, including the upfront payments received and the unconstrained variable consideration, as deferred revenue.
The change in the net deferred revenue balance during the year ended December 31, 2022 was associated with the recognition of license and collaboration revenue associated with the Company’s performance during the period (continued amortization of deferred revenue).
During the year ended December 31, 2022 and December 31, 2021, the Company recognized $2,586 and $2,822, respectively, in license and collaboration revenue under the Sato Agreement. The Company has concluded that the above consideration is probable of not resulting in a significant revenue reversal and therefore included in the transaction price and is allocated to the single performance obligation. No other variable consideration under the Sato Agreement is probable of not resulting in a significant revenue reversal as of December 31, 20172022 and 2016, respectively.  

therefore, is currently fully constrained and excluded from the transaction price.

The Company had reserved sharesevaluated the timing of common stockdelivery for future issuance as follows:

 

 

December 31,

 

 

 

2017

 

 

2016

 

Outstanding stock options

 

 

1,399,484

 

 

 

825,130

 

For possible future issuance under 2016 Stock Plan (Note 8)

 

 

1,023,378

 

 

 

615,207

 

 

 

 

2,422,862

 

 

 

1,440,337

 

Note 8: Stock Option Plan

2008 Stock Plan

During 2008,its performance obligation and concluded that a time-based input method is most appropriate because Sato is accessing and benefiting from the intellectual property and technology (the predominant items of the combined performance obligation) ratably over the duration of Sato’s estimated development period in Japan. Although the Company adoptedconcluded that the intellectual property is functional rather than symbolic, the services provided under the performance obligation are provided over time. Therefore, the allocated transaction price will be recognized using a time-based input method that results in straight-line recognition over the Company’s performance period.

The Company monitors and reassesses the estimated performance period for purposes of revenue recognition during each reporting period. In late July 2021, Sato communicated an updated plan regarding its amended design for its additional Japanese Phase 1 study for SB206. The amended study design included evaluation of potential lower dose strengths, including potential
123


further refinement in a subsequent dose tolerability study. As part of the communication regarding these Phase 1 studies, Sato also communicated an updated comprehensive timeline for the Japanese SB206 program.
The Company currently estimates a 10-year performance period, completing in the first quarter of 2027, based upon a Sato-prepared SB206 Japanese development program timeline. The SB204 Japanese development plan and program timeline has not been presented by Sato and remains under evaluation by the Company and Sato. Currently, the Company understands that the progression of the Japanese SB204 program could follow the same timeline as the Japanese SB206 program, subject to the nature of the results of Sato’s comprehensive asset developmental program, including SB206.
The estimated timeline remains subject to prospective reassessment and adjustment based upon Sato’s interaction with the Japanese regulatory authorities and other developmental and timing considerations. The combined SB204 and SB206 development program timeline in Japan is continuously reevaluated by Sato and the Company, and may potentially be further affected by various factors, including (i) the analyses, assessments and decisions made by the joint development committee and the applicable regulatory authorities, which will influence and establish the combined SB204 and SB206 Japan development program plan, (ii) the remaining timeline and progression of the SB206 NDA approval process in the United States, (iii) the API and drug product supply chain progression, including the Company’s in-house drug manufacturing capabilities, (iv) the Company’s manufacturing technology transfer projects with third-party CMOs, and (v) a drug delivery device technology enhancement project with a technology manufacturing vendor.
If the duration of the combined SB204 and SB206 development program timeline is further affected by the establishment of or subsequent adjustments to, as applicable, the mutually agreed upon SB204 and SB206 development plan in the Japan territory, the Company will adjust its estimated performance period for revenue recognition purposes accordingly, as needed.
In future periods, the Company would lift the variable consideration constraint from each contingent payment if there were no longer a probable likelihood of significant revenue reversal. When the constraint is lifted from a milestone payment, the Company will recognize the incremental transaction price using the same time-based input method that is being used to recognize the revenue, which results in straight-line recognition over the performance period. If the Company’s performance is not yet completed at the time that the constraint is lifted, a cumulative catch-up adjustment will be recognized in the period. If no other performance is required by the Company at the time the constraint is lifted, the Company expects to recognize all revenue associated with such milestone payments at the time that the constraint is lifted.
Performance Obligations under the Amended Sato Agreement
The net amount of existing performance obligations under long-term contracts unsatisfied as of December 31, 2022 was $10,665. The Company expects to recognize approximately 24% of the remaining performance obligations as revenue over the next 12 months, and the balance thereafter. The Company applied the practical expedient and does not disclose information about variable consideration related to sales-based or usage-based royalties promised in exchange for a license of intellectual property. This expedient specifically applied to the sales-based milestone payments that are present in the Amended Sato Agreement (3.9 billion JPY), as well as percentage-based royalty payments in the Amended Sato Agreement that are contingent upon future sales.
Sato Rhofade Agreement
In December 2022, the Company entered into a license agreement with Sato in which they were granted an exclusive, royalty-bearing, non-transferable right and license under certain of EPI Health's intellectual property rights to develop, manufacture and market Rhofade (oxymetazoline hydrochloride cream, 1%) for the treatment of rosacea in Japan (the “Sato Rhofade Agreement”). In addition, per the Sato Rhofade Agreement, during a specified time period, Sato has an exclusive option to negotiate the terms under which its license would be expanded to include certain other countries in the Asia-Pacific region.
The Company assessed the Sato Rhofade Agreement in accordance with ASC 606 and concluded that the contract counterparty, Sato, is a customer within the scope of ASC 606. The Company also identified one performance obligation within the Sato Rhofade Agreement, comprised of the delivery of a functional intellectual property license including scientific information, or know-how. The Company assessed certain options provided to Sato within the agreement, including the option to enter into additional licenses for other geographies, but concluded these rights were not material in regards to the determination of the performance obligation that was fixed and determinable as they would involve separate negotiations. Therefore, the contract provisions to provide certain options to Sato is not considered to be a material right and is not a performance obligation or part of the performance obligation described above.
In exchange for the license granted to Sato, Sato agreed to pay the Company the following: (i) an upfront payment of $5,000; and (ii) a milestone payment of $2,500 upon receipt of marketing approval of Rhofade for rosacea in the Japan territory. Sato also agreed to pay tiered royalty payments on net sales of the licensed product ranging over time from a percentage of net sales in the mid-teens to a percentage of net sales in the low single digits. Therefore, the Company concluded that the transaction price was comprised of both fixed and variable consideration. The Company’s assessment of variable consideration related to the milestone payment and potential future royalty payments were completely constrained at contract inception.
124


The Company concluded that the performance obligation related to the recognition of the upfront payment was satisfied at a point in time, in which the license and related know-how were transferred. Therefore, the upfront payment was recognized on the Sato Rhofade Agreement effective date. The milestone will be recognized when marketing approval in Japan is probable. The Company applied the practical expedient related to sales-based or usage-based royalties promised in exchange for a license of intellectual property and will record any royalties as the future sales occur.
In addition, the Company is required to pay 25% of the upfront and milestone payment amounts to a third party under existing contractual obligations related to Rhofade and will also be required to pay a portion of the royalty amounts received under the Sato Rhofade Agreement to third parties, after which the Company will retain net royalties in the low single digits. See Note 9—“Commitments and Contingencies” for additional detail regarding this obligation.
The initial term of the Sato Rhofade Agreement expires on the fifteenth anniversary of the first marketing approval of the licensed product for rosacea in the Japan territory. The term of the Sato Rhofade Agreement automatically extends for a further period of two years, unless either party gives one year’s notice before the end of the initial term.
The Sato Rhofade Agreement may be terminated, among other reasons, (i) by Sato without cause upon 120 days’ advance written notice to the Company; (ii) by either party in the event of the other party’s uncured material breach upon 60 days’ advance written notice; and (iii) by the Company if Sato challenges the validity, patentability or enforceability of any of the Company’s patents licensed to Sato under the Sato Rhofade Agreement.
Prasco Agreement - Cloderm AG
In connection with the Cloderm acquisition that is described in Note 9—“Commitments and Contingencies”, on September 28, 2018, EPI Health entered into a distribution and supply agreement with Prasco, LLC (“Prasco”), whereby EPI Health has agreed to supply and Prasco has the right to purchase, distribute and sell an authorized generic (“AG”) version of the Cloderm product in the United States. Prasco is required to pay EPI Health the supply price for the products, along with an amount equal to net sales of the product, minus an amount for certain fees and expenses of Prasco initially equal to the low double digits of net sales of such product, which is retained by Prasco. The agreement will continue, on a product-by-product basis, for an initial five-year term from the first commercial sale of such product, which will automatically renew for an additional one-year term unless either party elects not to renew. The agreement may be terminated for convenience by EPI Health upon nine months’ written notice. Prasco may terminate with respect to a specific product based, among other factors, on a failure by EPI Health to deliver launch quantities. Either party may terminate immediately upon the occurrence of certain regulatory matters or based on a force majeure event.
Note 15: Research and Development Agreements
Royalty and Milestone Payments Purchase Agreement with Reedy Creek Investments LLC
On April 29, 2019, the Company entered into a royalty and milestone payments purchase agreement (the “Reedy Creek Purchase Agreement”) with Reedy Creek Investments LLC (“Reedy Creek”), pursuant to which Reedy Creek provided funding to the Company in an amount of $25,000 for the Company to use primarily to pursue the development, regulatory approval and commercialization activities (including through out-license agreements and other third-party arrangements) for SB206, a topical gel with anti-viral properties being developed as a treatment for molluscum, and advancing programmatically such activities with respect to SB204, a once-daily, topical monotherapy being developed for the treatment of acne vulgaris, and SB414, a topical cream-based product candidate being developed for the treatment of atopic dermatitis. If the Company successfully commercializes any such product, following regulatory approval, the Company will be obligated to pay Reedy Creek a low single digit royalty on net sales of such products in the United States, Mexico or Canada.
The Company determined that the Reedy Creek Purchase Agreement is within the scope of ASC 730-20, Research and Development Arrangements (“ASC 730-20”), and that there has not been a substantive and genuine transfer of risk related to the Reedy Creek Purchase Agreement. As such, the Company determined that the appropriate accounting treatment under ASC 730-20 was to record the proceeds of $25,000 as cash and cash equivalents, as the Company had the ability to direct the usage of funds, and a long-term liability within its classified balance sheet.
Development Funding and Royalties Agreement with Ligand Pharmaceuticals Incorporated
On May 4, 2019, the Company entered into a development funding and royalties agreement (the “Ligand Funding Agreement”) with Ligand Pharmaceuticals Incorporated (“Ligand”), pursuant to which Ligand provided funding to the Company of $12,000, for the Company to use to pursue the development and regulatory approval of SB206, a topical gel with anti-viral properties being developed as a treatment for molluscum.
125


Pursuant to the Ligand Funding Agreement, the Company will pay Ligand up to $20,000 in milestone payments upon the achievement by the Company of certain regulatory and commercial milestones associated with SB206 or any product that incorporates or uses NVN1000, the API for the Company’s clinical stage product candidates, as a treatment for molluscum. In addition to the milestone payments, the Company will pay Ligand tiered royalties ranging from 7% to 10% based on annual aggregate net sales of such products in the United States, Mexico or Canada.
The Company determined that the Ligand transaction is within the scope of ASC 730-20 as it represents an obligation to perform contractual services for the development of SB206 using commercially reasonable efforts. As such, the Company concluded that the appropriate accounting treatment under ASC 730-20 was to record the proceeds of $12,000 as a liability and amortize the liability ratably during each reporting period, based on the Ligand funding as a percentage of the total direct costs incurred by the Company during the reporting period related to the estimated total cost to progress the SB206 program to a regulatory approval in the United States. The ratable Ligand funding is presented within the accompanying consolidated statements of operations and comprehensive loss within research and development expenses associated with the SB206 program.
For the years ended December 31, 2022 and December 31, 2021, the Company recorded $968 and $88, respectively, of contra-research and development expense related to the SB206 developmental program, funded by Ligand. During the year ended December 31, 2021, after the announcement of the B-SIMPLE4 positive top-line results on June 11, 2021, the Company reassessed and identified additional estimated costs necessary to progress the SB206 program to a potential United States regulatory approval. As such, the estimated regulatory costs subject to the Ligand funding increased from prior periods. The Company will continue to monitor and adjust its estimated regulatory costs, through approval, as needed.
Note 16: Stock Based Compensation
2016 Incentive Award Plan
For the years ended December 31, 2022 and December 31, 2021, the Company continued to administer and grant awards under the 2016 Incentive Award Plan, as amended (the “2016 Plan”), the Company’s only active equity incentive plan. Certain of the Company’s stock options granted under the Company’s 2008 Stock Plan (the “2008 Plan”). As amended, a total of 1,416,666 shares of common stock were reserved for issuance under, which was the 2008 Plan. Eligible plan participants included employees, directors, and consultants. The 2008 Plan permitted the granting of incentive stock options, nonqualified stock options, and other stock-based awards. As further described below, as of September 20, 2016, no additional awards will be granted under the 2008 Plan.


2016 Stock Plan

Effective September 20, 2016 (the “Effective Date”), the Company adoptedpredecessor to the 2016 Incentive Award Plan (the “2016 Plan”). The 2016 Plan is the successor to the 2008 Plan. As of the Effective Date, no additional awards will be granted under the 2008 Plan, but all stock awards granted under the 2008 Plan prior to the Effective Date will remain subject to the terms of the 2008 Plan. Any shares associated with stock awards previously granted under the 2008 Plan that are forfeited subsequent to the Effective Dateand became inactive upon adoption of the 2016 Plan are not eligible for future issuance under theeffective September 20, 2016, Plan. All awards granted onremain outstanding and after the Effective Date will be subject to the terms of the 2016 Plan.exercisable. The 2016 Plan provides for the grant of the following awards: (i) incentive stock options, (ii) nonstatutory stock options, (iii) stock appreciation rights,SARs, (iv) restricted stock awards, (v) restricted stock unit awards and (vi) other stock awards. Eligible plan participants include employees, directors, and consultants. An aggregate of 833,333 shares of

At the Company’s common stock were initially available for issuance under awards granted pursuant to the 2016 Plan, which shares may be authorized but unissued shares, treasury shares, or shares purchased in the open market.  

On June 5, 2017,Annual Meeting of Stockholders held on May 4, 2021, the Company’s stockholders approved an amendment to the 2016 Plan (the “2016 Plan Amendment”), to increase the aggregate number of shares of the Company’s common stock that may be issued pursuant to awards underauthorized for issuance thereunder by 1,500,000 shares. This amendment was approved by the 2016 PlanCompany’s board of directors on March 10, 2021. The approval by an additional 1,200,000 shares. All other material termsthe Company’s stockholders of the 2016 Plan otherwise remained unchanged.Amendment was contingent upon the occurrence of certain other events, including that the 2016 Plan Amendment would become effective at the effective time of a certificate of amendment to the Company’s certificate of incorporation filed with the Secretary of State of the State of Delaware in relation to a potential reverse stock split pursuant to the authority previously granted to the Company’s board of directors by the Company’s stockholders at the 2020 Annual Meeting. The Certificate of Amendment filed in connection with the Reverse Stock Split became effective at 5:00pm on May 25, 2021, and thus, the 2016 Plan Amendment became effective on May 25, 2021. As of December 31, 2017,2022, there were 1,023,378241,801 shares available for future issuance under the 2016 Plan. 

Under both the 2008 Plan and the 2016 Plan, options to purchase the Company’s common stock may be granted at a price no less than the fair value of a common stock share on the date of grant. The Black-Scholes option-pricing model uses the common stock fair value shall bebased on the closing sales price for a share as quoted on any established securities exchange for such grant date or the last preceding date for which such quotation exists. Vesting terms of options issued are determined by the board of directors or compensation committee of the board. The Company’s stock options vest based on terms in the stock option agreements and have a maximum term of ten years.

126


Restricted Stock Compensation Expense

InUnits

The Company accounts for restricted stock units (“RSUs”) based on their estimated fair values on the date of grant. The fair value of RSUs is estimated based on the closing price of the underlying common stock on the date of grant. Stock-based compensation expense related to the RSUs is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures.
The terms of the RSUs, including the vesting provisions, are determined by the board of directors. Each RSU represents the contingent right to receive one share of common stock of the Company. The RSUs granted typically cliff vest after a one-year period for grants to directors and a two-year period for grants to employees, provided that the grantee remains a director, employee or consultant of the Company as of such vesting date.
For the year ended December 2015,31, 2022, 263,000 and 216,606 RSUs were granted to employees and directors, respectively. There were no RSU grants for the year ended December 31, 2021.
Stock Appreciation Rights
The Company has occasionally used stock appreciation rights (“SARs”) as a component of executive compensation. As of December 17, 2019, the Company entered into an amended and restated employment agreement with Paula Brown Stafford which provided for a grant of 60,000 SARs with an exercise price of $8.20 per share (the fair market value of the Company’s common stock on the grant date) and with a ten-year term. These SAR awards were vested in full as of December 31, 2021. As of December 31, 2022, there were a total of 60,000 SARs outstanding, which were fully exercisable.
Tangible Stockholder Return Plan
On August 2, 2018, the Company’s board of directors approved and established the accelerationTangible Stockholder Return Plan, which was a performance-based long-term incentive plan (the “Performance Plan”). The Performance Plan was effective immediately upon approval and expired on March 1, 2022. The Performance Plan covered all employees, including the Company’s executive officers, consultants and other persons deemed eligible by the Company’s compensation committee. The core underlying metric of each option holder’s unvestedthe Performance Plan was the potential achievement of two share price goals for the Company’s common stock, which, if achieved, could have represented measurable increases in stockholder value.
The Performance Plan expired on March 1, 2022. As the Company’s stock price did not reach the minimum share price targets necessary to trigger a payment, no payments were made under the Performance Plan to any participants during the period the Performance Plan was effective.
Inducement Grants
In prior years, the Company awarded nonstatutory stock options to purchase shares of common stock to newly-hired employees as inducements material to the individuals’ entering into employment with the Company within the meaning of Nasdaq Listing Rule 5635(c)(4) (the “Inducement Grants”). The Inducement Grants were awarded outside of the Company’s 2016 Plan, pursuant to Nasdaq Listing Rule 5635(c)(4), but have terms and conditions generally consistent with the Company’s 2016 Plan and vest over three years, subject to the employee’s continued service as an employee or consultant through the next annual anniversary of the grant’s vesting commencement date provided that the option holder consents to the option acceleration in writing.period. As of December 31, 2015, 159,159 options2022, there were vested pursuant to this option acceleration and the Company recognized $1,312a total of additional compensation expense.  

1,250 Inducement Grants outstanding.

127


Stock Compensation Expense
During the years ended December 31, 2017, 20162022 and 2015,December 31, 2021, the Company recorded employee share-basedstock-based compensation expense, from continuing operationsincluding fair value adjustments of $3,758, $1,573 and $1,974, respectively. the Tangible Stockholder Return Plan, as follows:
 Year Ended December 31,
 20222021
Stock options$1,333 $826 
Restricted stock units547 — 
Stock appreciation rights— 115 
Tangible Stockholder Return Plan— (666)
Total$1,880 $275 
Total share-basedstock-based compensation expense for the years ended December 31, 2022 and December 31, 2021 included in the accompanying consolidated statements of operations and comprehensive loss is as follows:

 

Year Ended December 31,

 

Year Ended December 31,

 

2017

 

 

2016

 

 

2015

 

20222021

Research and development

 

$

1,768

 

 

$

477

 

 

$

541

 

Research and development$449 $(250)

General and administrative

 

 

1,990

 

 

 

1,096

 

 

 

1,433

 

General and administrative1,431 525 

Discontinued operations

 

 

 

 

 

 

 

 

410

 

 

$

3,758

 

 

$

1,573

 

 

$

2,384

 

TotalTotal$1,880 $275 

The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model, usingand the following weighted average assumptions:

 

Year Ended December 31,

 

Year Ended December 31,

 

2017

 

 

2016

 

 

2015

 

20222021

Estimated dividend yield

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

Estimated dividend yield— %— %

Expected volatility

 

 

82.16

%

 

 

75.08

%

 

65.96-102.77%

 

Expected volatility110.97 %107.54 %

Risk-free interest rate

 

 

1.81

%

 

 

1.32

%

 

1.48-1.81%

 

Risk-free interest rate2.59 %1.02 %

Expected life of options (in years)

 

 

5.04

 

 

 

5.72

 

 

5.1-5.9

 

Expected life of options (in years)5.955.79

Weighted-average fair value per share

 

$

3.31

 

 

$

11.47

 

 

$

6.83

 

Weighted-average fair value per share$2.72 $7.13 


The Company estimates forfeitures based on various classes of option grantees and the rates used ranged from 12.2% to 11.9% during the years ended December 31, 2022 and December 31, 2021, respectively.

128


Stock optioncompensation activity for the periods indicated is as follows:

 Shares
Available
for Grant
Shares
Subject to
Outstanding
Options
Weighted-
Average
Exercise
Price Per
Share
Weighted-
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
Options outstanding as of December 31, 202052,378 199,199 $30.71 
Additional shares reserved under plan1,500,000 — 
SARs forfeited1,000 — 
Options granted(385,885)385,885 8.82 
Options forfeited45,731 (53,689)26.72 
Options exercised— (12,842)4.74 
Options outstanding as of December 31, 20211,213,224 518,553 $15.48 
RSUs granted(479,606)— 
RSUs forfeited22,200 — 
Options granted(543,300)543,300 3.25 
Options forfeited29,283 (29,283)4.92 
Options outstanding as of December 31, 2022241,801 1,032,570 $9.34 8.47$— 
Vested and expected to vest as of
   December 31, 2021
470,773 $16.24 8.67$
Exercisable as of December 31, 2021200,638 $26.59 7.46$
Vested and expected to vest as of
   December 31, 2022
943,355 $9.82 8.42$— 
Exercisable as of December 31, 2022352,915 $18.70 7.38$— 

 

 

Shares

Available

for Grant

 

 

Shares

Subject to

Outstanding

Options

 

 

Weighted-

Average

Exercise

Price Per

Share

 

 

Weighted-

Average

Remaining

Contractual

Term (in years)

 

 

Aggregate

Intrinsic

Value

 

Options outstanding as of December 31, 2014

 

 

301,971

 

 

 

336,513

 

 

$

0.91

 

 

 

 

 

 

 

 

 

Additional shares reserved under plan

 

 

416,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

(366,909

)

 

 

366,909

 

 

 

8.80

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

54,165

 

 

 

(54,165

)

 

 

3.70

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

(191,023

)

 

 

2.45

 

 

 

 

 

 

 

 

 

Options outstanding as of December 31, 2015

 

 

405,893

 

 

 

458,234

 

 

$

6.26

 

 

 

 

 

 

 

 

 

Additional shares reserved under plan

 

 

611,272

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

(405,624

)

 

 

405,624

 

 

 

16.06

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

3,666

 

 

 

(7,395

)

 

 

6.62

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

(31,333

)

 

 

1.11

 

 

 

 

 

 

 

 

 

Options outstanding as of December 31, 2016

 

 

615,207

 

 

 

825,130

 

 

$

11.27

 

 

 

 

 

 

 

 

 

Additional shares reserved under plan

 

 

1,200,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

(926,195

)

 

 

926,195

 

 

 

5.15

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

134,366

 

 

 

(286,425

)

 

 

13.81

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

(65,416

)

 

 

1.25

 

 

 

 

 

 

 

 

 

Options outstanding as of December 31, 2017

 

 

1,023,378

 

 

 

1,399,484

 

 

$

7.17

 

 

 

8.80

 

 

$

399

 

Vested and expected to vest as of

   December 31, 2015

 

 

 

 

 

 

430,730

 

 

$

6.16

 

 

 

8.80

 

 

$

5,102

 

Exercisable as of December 31, 2015

 

 

 

 

 

 

232,827

 

 

$

4.27

 

 

 

8.38

 

 

$

3,196

 

Vested and expected to vest as of

   December 31, 2016

 

 

 

 

 

 

766,402

 

 

$

10.95

 

 

 

8.49

 

 

$

12,314

 

Exercisable as of December 31, 2016

 

 

 

 

 

 

303,162

 

 

$

7.32

 

 

 

7.53

 

 

$

5,974

 

Vested and expected to vest as of

   December 31, 2017

 

 

 

 

 

 

1,319,798

 

 

$

7.23

 

 

 

8.77

 

 

$

390

 

Exercisable as of December 31, 2017

 

 

 

 

 

 

678,480

 

 

$

7.76

 

 

 

8.24

 

 

$

366

 

The total intrinsic value of options exercised during the years ended December 31, 2017, 20162022 and 2015December 31, 2021 was $901, $543zero and $1,655,$3, respectively. 

As of December 31, 20172022 and 2016,December 31, 2021, total unrecognized compensation expense related to non-vested share based compensation arrangementsstock options was $2,343$1,912 and $4,896,$1,852, respectively, which is expected to be recognized over a weighted average period of 1.431.91 and 1.992.26 years, respectively.

RSU activity for the year ended December 31, 2022 is as follows:
 Shares
Subject to
Outstanding
RSUs
Weighted-
Average
Grant Date Fair Value
Nonvested RSUs outstanding as of December 31, 2021— $— 
RSUs granted479,606 2.87 
RSUs forfeited(22,200)2.98 
RSUs vested— — 
Nonvested RSUs outstanding as of December 31, 2022457,406 $2.86 
As of December 31, 2022, total unrecognized compensation expense related to non-vested RSUs was $762, which is expected to be recognized over a weighted average period of 0.96 years.
As of December 31, 2022, there were a total of 1,032,570 stock options, 457,406 RSUs and 60,000 SARs outstanding; and there were 241,801 shares available for future issuance under the 2016 Plan.
Note 9:17: Income Taxes

There was no income tax benefit recognized for the years ended December 31, 2017, 20162022 and 2015December 31, 2021 due to the Company’s history of net losses combined with an inability to confirm recovery of the tax benefits from the Company’s losses and other net deferred tax assets. The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets.


129



Net operating loss (“NOL”) and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carry forwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or “the Code,” as well as similar state tax provisions. The amount of the annual limitation, if any, will be determined based on the value of the company immediately prior to an ownership change. Subsequent ownership changes may further affect the utilization in future years. Additionally, U.S. tax laws limit the time during which certain of these carry forwards may be applied against future taxable income (in the case of NOL carryforwards) and tax liabilities (in the case of tax credits). Therefore, the Company may not be able to take full advantage of these carry forwards for federal or state income tax purposes.
During the course of preparing the Company’s consolidated financial statements as of and for the year ended December 31, 2021, the Company completed an assessment of the available NOL and tax credit carryforwards under Sections 382 and 383, respectively, of the Code. The Company determined that it underwent multiple ownership changes throughout its history as defined under Section 382, including most recently in 2015 and 2020. As a result of the identified ownership changes, the portion of NOL and tax credit carryforwards attributable to the pre-ownership change periods are subject to a substantial annual limitation under Sections 382 and 383 of the Code. The Company adjusted its NOL and tax credit carryforwards to address the impact of the Section 382 ownership changes, resulting in a reduction of available federal and state NOLs of $113.8 million and $149.4 million, respectively. The Company has not experienced another cumulative ownership change since 2020.
The reasons for the difference between actual income tax benefit for the years ended December 31, 2017, 20162022 and 2015,December 31, 2021, and the amount computed by applying the statutory federal income tax rate to losses before income tax benefit are as follows:

 

Year Ended December 31,

 

Year Ended December 31,

 

2017

 

 

2016

 

 

2015

 

20222021

Income tax benefit at federal statutory rate

 

$

(12,623

)

 

$

(20,298

)

 

$

(9,540

)

Income tax benefit at federal statutory rate$(6,569)$(6,235)

State income taxes, net of federal benefit

 

 

(762

)

 

 

(1,204

)

 

 

(741

)

State income taxes, net of federal benefit(389)— 

Non-deductible expenses

 

 

235

 

 

 

229

 

 

 

608

 

Non-deductible expenses98 63 

Federal rate impact

 

 

18,960

 

 

 

 

 

 

 

Distribution of intellectual property rights

 

 

 

 

 

 

 

657

 

Research and development tax credits

 

 

(1,732

)

 

 

(1,692

)

 

 

(767

)

Research and development tax credits(775)(768)
Change in State Tax RateChange in State Tax Rate(545)1,532 

Other

 

 

431

 

 

 

(124

)

 

 

283

 

Other163 (96)

Change in valuation allowance

 

 

(4,509

)

 

 

23,089

 

 

 

9,500

 

Change in valuation allowance8,017 5,504 

Total income tax provision

 

$

 

 

$

 

 

$

 

Total income tax provision$— $— 


In 2021, following the enactment of North Carolina’s 2021 Appropriations Act, which included a gradual corporate income tax rate decrease to 0% by 2030, the Company reduced all of its North Carolina deferred tax assets, including the NOLs, to zero, as no benefit is expected to be realized from these deferred tax assets prior to 2030 when there would be no income tax in North Carolina. With the acquisition of EPI Health, the Company now has nexus in states other than North Carolina, and has revalued its deferred tax assets and the corresponding valuation allowance accordingly.








130


Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows:

 

As of December 31,

 

As of December 31,

 

2017

 

 

2016

 

20222021

Deferred tax assets:

 

 

 

 

 

 

 

 

Deferred tax assets:

Accrued compensation

 

$

329

 

 

$

618

 

Accrued compensation$28 $247 

Accrued liabilities

 

 

121

 

 

 

700

 

Accrued liabilities2,332 117 

Tax loss carryforwards

 

 

32,395

 

 

 

37,857

 

Tax loss carryforwards22,041 21,008 

Intangible assets

 

 

307

 

 

 

401

 

Intangible assets213 

Share-based compensation

 

 

728

 

 

 

412

 

Stock-based compensationStock-based compensation778 499 

Tax credits

 

 

5,662

 

 

 

3,930

 

Tax credits2,427 1,653 

Facility financing lease obligation

 

 

1,861

 

 

 

2,881

 

Research and development service obligationResearch and development service obligation5,701 5,575 
Right-of-use lease liabilitiesRight-of-use lease liabilities867 736 
Deferred revenueDeferred revenue2,377 1,849 
Capitalized research expensesCapitalized research expenses3,454 — 
Fixed assetsFixed assets— 305 

Other

 

 

13

 

 

 

33

 

Other280 50 

Total deferred tax assets

 

 

41,416

 

 

 

46,832

 

Total deferred tax assets40,292 32,252 

Less valuation allowance

 

 

(39,291

)

 

 

(43,800

)

Less valuation allowance(39,823)(31,808)

Net deferred tax asset

 

 

2,125

 

 

 

3,032

 

Net deferred tax asset469 444 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Deferred tax liabilities:

Fixed assets

 

 

(2,067

)

 

 

(3,032

)

Fixed assets(18)— 
Right-of-use lease assetsRight-of-use lease assets(389)(356)

Other

 

 

(58

)

 

 

 

Other(62)(88)

Net noncurrent deferred tax asset (liability)

 

$

 

 

$

 

Net noncurrent deferred tax asset (liability)$— $— 

In December 2017, the Tax Cuts and Jobs Act, or TCJA, was signed into law. Among other things, the TCJA permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. Based on provisions of the TCJA, the Company remeasured its deferred tax assets and liabilities to reflect the lower statutory tax rate, which resulted in a provision of $18,960 to income tax expense. However, there is no impact to our effective tax rate because a corresponding and offsetting reduction was made in the valuation allowance. The other provisions of the TCJA did not have a material impact on the consolidated financial statements. The Company’s deferred tax remeasurement is complete and all tax effects of the TJCA have been reflected in the Company’s income tax provision for the year ended December 31, 2017.

As of December 31, 2017,2022, the Company had federal and state net operating lossNOL carryforwards of $140,508$104,745 and $142,388,$65,061, respectively. The net operating loss carryforwardsNOLs begin to expire in 20282029 and 20232024 for federal and state tax purposes, respectively. As of December 31, 2017, the Company had charitable contribution carryforwards of approximately $63 available to offset future federal taxable income which will begin to expire in 2018. As of December 31, 2017,2022, the Company had government research and development tax credits of approximately $5,662$2,427 to offset future federal taxes which begin to expire in 2028.

2041.

The Company had no unrecognized tax benefits as of December 31, 20172022 and 2016.December 31, 2021. The Company does not anticipate a significant change in total unrecognized tax benefits within the next 12 months.

The Tax Reform Act of 1986 contains provisionsyears 2019-2021 remain open to examination by the major taxing jurisdictions to which limit the ability to utilize the net operating loss carryforwards in the case of certain events including significant changes in ownership interests. If the Company’s net operating loss carryforwards are limited, and the Company has taxable income which exceedsis subject. Additionally, years prior to 2019 are also open to examination to the permissible yearly net operatingextent of loss and credit carryforwards the Company would incur a federal income tax liability even though net operating loss carryforwards would be available in futurefrom those years.

Note 10:18: Retirement Plan

The Company maintains a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees who meet minimum age requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company has made discretionary matching contributions up to 3%5% of gross wages during 20172022 and 2016 and up to 2% of gross wages during 2015.2021. The Company contributed $201, $170$524 and $100,$258 for the years ended December 31, 2017, 20162022 and 2015,December 31, 2021, respectively.

Note 11: Related Party Transactions

19: Fair Value

The Company has contingent consideration associated with the EPI Health Acquisition that is required to be measured at fair value on a recurring basis, presented within the consolidated balance sheets as both current and long-term liabilities, beginning as of March 11, 2022.
131


For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data and therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent uncertainties in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.
The Company’s contingent consideration liability is measured on a recurring basis using level 3 inputs.
The following table summarizes the change in fair value, as determined by Level 3 inputs for the contingent consideration liabilities for the year ended December 31, 2022:

Balance at March 31, 2022$3,773 
Change in fair value(454)
Balance at June 30, 2022$3,319 
Change in fair value186 
Measurement period adjustment (see Note 2)(125)
Balance at September 30, 2022$3,380 
Change in fair value(892)
Balance at December 31, 2022$2,488 
Contingent consideration liability, current portion$451 
Contingent consideration liability, net of current portion2,037 
Balance at December 31, 2022$2,488 
The following tables present the significant inputs and valuation methodologies used for the Company’s fair value of the contingent consideration liabilities as of March 11, 2022, in addition to EPI Health’s forecasted net sales from the EPI Health legacy products:
Transition Services AgreementSitavig Milestone (Regulatory)
Valuation methodologyProbability-WeightedProbability-Weighted
Term0.811.89
Payment term1.052.14
Adjusted discount rate12.11 %13.15 %
First Sales Based Legacy MilestoneWynzora MilestoneSecond Sales Based Legacy MilestoneSitavig Milestone (Commercial)
Valuation methodologyMonte CarloMonte CarloMonte CarloMonte Carlo
Risk-adjusted discount rates (minimum)5.39%5.39%5.39%6.89%
Risk-adjusted discount rates (maximum)6.99%6.23%6.99%7.15%
Net sales volatility (per annum)13.0%12.0%13.0%13.0%
Credit spread (continuous)10.42%10.55%10.42%11.13%
132


The following tables present the significant inputs and valuation methodologies used for the Company’s fair value of the contingent consideration liabilities as of December 31, 2022, in addition to EPI Health’s forecasted net sales from the EPI Health legacy products:
Transition Services AgreementSitavig Milestone (Regulatory)
Valuation methodologyProbability-WeightedProbability-Weighted
Term0.23.25
Payment term0.443.5
Adjusted discount rate19.17 %19.50 %
First Sales Based Legacy MilestoneWynzora MilestoneSecond Sales Based Legacy MilestoneSitavig Milestone (Commercial)
Valuation methodologyMonte CarloMonte CarloMonte CarloMonte Carlo
Risk-adjusted discount rates (minimum)8.90%8.90%8.90%8.70%
Risk-adjusted discount rates (maximum)9.53%8.97%9.53%8.90%
Net sales volatility (per annum)13.0%12.0%13.0%13.0%
Credit spread (continuous)14.82%14.01%14.82%15.57%
For the year ended December 31, 2022, there was a $1,160 change in fair value related to contingent consideration related to the EPI Health Acquisition recorded in the accompanying consolidated statements of operations and comprehensive loss related primarily to changes in market assumptions, management forecasts and discount rates since the transaction date.
Significant increases or decreases in any of the probabilities of success or changes in expected achievement of any of the milestones underlying the contingent consideration would result in a significantly higher or lower fair value of the contingent consideration liability. The contingent consideration is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations and comprehensive loss until settlement.
The following table presents information about the classification and potential earnout periods for the Company’s contingent consideration liabilities as of December 31, 2022:
Fair ValueClassificationEarnout Period
Transition Services Agreement$451 Current portion11-Mar-2022 to 11-Mar-2023
First Sales Based Legacy Milestone— Current portion1-Apr-2022 to 31-Mar-2023
Wynzora Milestone— Current portion1-Apr-2022 to 31-Mar-2023
Second Sales Based Legacy Milestone620 Non-current portion1-Apr-2023 to 31-Mar-2026
Sitavig Milestones1,417 Non-current portion1-Apr-2026 to 1-Oct-2036
$2,488 
See Note 2—“Acquisition of EPI Health” for additional detail regarding contingent consideration related to the transaction.
Note 20: Segment Information
The Company has determined that it operates in two segments, which represent (i) the promotion of commercial products for the treatment of medical dermatological conditions (the “Commercial Operations” segment), and (ii) research and development activities related to the Company’s nitric oxide-based technology to develop product candidates (the “Research and Development Operations” segment).
The Commercial Operations segment consists of the Company’s portfolio of commercial products.
The Research and Development Operations segment consists of multiple drug product candidates under clinical development.
Costs associated with the development of SB206 are currently included in the Research and Development Operations segment. There are no significant inter-segment sales. The Company evaluates the financial performance of each segment based on operating profit or loss. There is no inter-segment allocation of non-operating expenses and income taxes. The Company’s chief operating decision-maker (“CODM”) is the Company’s Chairman, President and Chief Executive Officer.
133


Segment revenue, net and comprehensive loss and total assets were as follows:
Twelve Months EndedTwelve Months Ended
December 31, 2022December 31, 2021
Revenue
Commercial operations$21,023 $— 
Research and Development operations2,659 2,958 
Total revenue$23,682 $2,958 
Net loss
Commercial operations$(1,776)$— 
Research and Development operations(29,535)(29,692)
Net loss and comprehensive loss$(31,311)$(29,692)
As of
December 31, 2022
Assets
Commercial operations$63,564 
Research and Development operations26,766 
Total assets$90,330 
The net revenues attributed to the Commercial Operations segment are primarily derived from the sale of the Company’s commercial products and licensing agreements of those commercial products, such as the Sato Rhofade Agreement, and the net revenues attributed to the Research and Development Operations segment are primarily derived from the arrangement with the Company’s licensing partner in Japan for SB206 and SB204. Drug development and potential commercialization costs are included in the Research and Development Operations segment. Total assets by reporting segment are not reviewed by the CODM when evaluating the reporting segments’ performance, however, the Commercial Operations segment includes the acquired assets associated with the EPI Health Acquisition and changes in such assets, while the Research and Development Operations segment is comprised of the assets associated with the historical business of the Company related to the Company’s product candidates that are in development.
Substantially all revenue was derived from product sales or from licensing agreements originating in the United States. All of the Company’s long-lived assets are maintained in the United States.
Although all of the Company’s operations are based in, and all net product revenue is generated from, sales in the United States, the revenue generated from its licensing partner in Japan was $7,586, or 32% of total revenue, during the year ended December 31, 2022, of which $5,000 was attributed to the Commercial Operations segment and $2,586 was attributed to the Research and Development Operations segment. During the year ended December 31, 2015,2021, the Company paid a former director $88generated revenue from its licensing partner in conjunction with a research and development consulting agreement. No such payments were made duringJapan of $2,822, or 95% of total revenue. Prior to the yearsquarter ended DecemberMarch 31, 2017 and 2016. These costs were expensed as incurred and are classified as research and development expenses in the consolidated statements of operations.

Members of the Company’s board of directors held 2,486,656 shares of convertible preferred stock as of December 31, 2015. As discussed in Note 1—Organization and Significant Accounting Policies, all convertible preferred stock was converted into common stock in conjunction with the IPO in September 2016. As a result, Board members held zero preferred shares as of December 31, 2017 and 2016. Board members held 1,585,916, 1,561,916 and 1,761,416 shares of the Company’s common stock as of December 31, 2017, 2016 and 2015, respectively. See Note 7—Stockholders’ Equity regarding a repurchase of common stock from a related party officer and director of the Company.

In June 2017, G. Kelly Martin assumed the role of the Company’s Chief Executive Officer on an interim basis. Mr. Martin also continues to serve as a member of the Company’s board of directors. Until October 1, 2017, Mr. Martin served as chief executive officer of Malin Corporation plc, the parent company of Malin, a greater than 10% shareholder of2022, the Company as of December 31, 2017.  Mr. Martin has not received any additional compensation for his service asoperated in only one segment, which was the Company’s Chief Executive Officer during the year ended December 31, 2017.  Mr. Martin has continued to be compensated pursuant to the Company’s non-employee director compensation policy.  

Upon stepping into the Company’s Chief Executive Officer role on an interim basis, Mr. Martin engaged a number of Malin employees to assist him in certain strategicResearch and tactical initiatives and activities. The Company has agreed to reimburse Malin for its out-of-pocket expenses for Mr. Martin and other Malin employees related to this effort.  During the year ended December 31, 2017, the Company recognized $230 in out-of-pocket travel expenses owed to Malin which are classified as general and administrative expense in the accompanying consolidated statements of operations.  These expenses were included in other accrued expenses as of December 31, 2017 and were reimbursed in the first quarter of 2018.  

Two of the Company’s directors are also affiliated with Malin, including Sean Murphy, an executive officer and a director of Malin and an executive vice president of Malin Corporation plc, and Robert A. Ingram, a director of Malin Corporation plc.   

During the year ended December 31, 2017, the Company incurred costs of $69 in relation to a development and manufacturing consulting agreement with Cilatus BioPharma AG, which is majority-owned by Malin Corporation plc. These costs were expensed as incurred and are classified as research and development expenses in the


accompanying consolidated statements of operations. See Note 13—Subsequent Events for additional contractual obligations that became effective subsequent to December 31, 2017.

See Note 1—Organization and Significant Accounting Policies and Note 4—Collaboration Arrangements for additional information regarding related party transactions with KNOW Bio.

Note 12: Quarterly Results ofDevelopment Operations (Unaudited)

The following table contains quarterly financial information for 2017 and 2016. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair statement of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

segment.

 

 

Three Months Ended

 

 

 

(unaudited)

 

 

 

March 31,

 

 

June 30,

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2017

 

 

2017

 

 

2017

 

Total revenue

 

$

100

 

 

$

669

 

 

$

750

 

 

$

621

 

Total operating expenses

 

 

11,477

 

 

 

10,323

 

 

 

7,955

 

 

 

8,570

 

Operating loss

 

 

(11,377

)

 

 

(9,654

)

 

 

(7,205

)

 

 

(7,949

)

Other (expense) income, net

 

 

(230

)

 

 

(233

)

 

 

(239

)

 

 

(240

)

Net loss and comprehensive loss

 

$

(11,607

)

 

$

(9,887

)

 

$

(7,444

)

 

$

(8,189

)

Net loss per share, basic and diluted

 

$

(0.73

)

 

$

(0.62

)

 

$

(0.47

)

 

$

(0.51

)

Weighted-average common shares outstanding,

   basic and diluted

 

 

15,967,882

 

 

 

15,975,108

 

 

 

15,984,428

 

 

 

15,997,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

June 30,

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2016

 

 

2016

 

 

2016

 

Total operating expenses

 

$

11,272

 

 

$

17,935

 

 

$

17,481

 

 

$

13,138

 

Operating loss

 

 

(11,272

)

 

 

(17,935

)

 

 

(17,481

)

 

 

(13,138

)

Other (expense) income, net

 

 

12

 

 

 

31

 

 

 

7

 

 

 

77

 

Net loss and comprehensive loss

 

$

(11,260

)

 

$

(17,904

)

 

$

(17,474

)

 

$

(13,061

)

Net loss per share, basic and diluted

 

$

(4.60

)

 

$

(7.31

)

 

$

(5.76

)

 

$

(0.82

)

Weighted-average common shares outstanding,

   basic and diluted

 

 

2,445,351

 

 

 

2,448,747

 

 

 

3,033,967

 

 

 

15,938,941

 

Note 13:21: Subsequent Events

January 2018

March 2023 Registered Direct Offering

On January 9, 2018,March 13, 2023, the Company completedentered into a publicsecurities purchase agreement with an institutional investor pursuant to which the Company agreed to issue and sell to the purchaser, in a registered direct offering, an aggregate of (i) 5,042,017 shares of its common stock and(or pre-funded warrants pursuant to the Company’s effective Shelf Registration. The Company sold an aggregate of 10,000,000 shares ofpurchase common stock in lieu thereof) and (ii) warrants to purchase up to 10,000,0005,042,017 shares of the Company’s common stock, at a public offeringan effective combined purchase price of $3.80$1.19 per share (or pre-funded warrant) and associated common warrant. The offering closed on March 16, 2023.
The gross proceeds to the Company from the offering were approximately $6,000, before deducting placement agent fees and offering expenses, and excluding the exercise of any warrants. The Company estimates that its net proceeds from its issuance and sale of shares, pre-funded warrants and common warrants will be approximately $5,400.
In connection with the offering, the Company and the purchaser agreed to amend the June 2022 Common Warrants to reduce the exercise price thereof from $2.851 to $1.20 per share of common stock, to delay the exercisability of the June 2022 Common Warrant until six months after the closing of the March 2023 Registered Direct Offering, and accompanying warrant. The warrantto extend the exercise period of the June 2022 Common Warrant until December 13, 2027. No other changes to the June 2022 Common Warrants
134


were made. Outstanding common stock warrants, including pre-funded warrants, totaled 12,869,671 after the March 2023 Registered Direct Offering with a weighted-average exercise price is $4.66of $1.03.
March 2022 Equity Distribution Agreement – At-the-Market Facility
Subsequent to December 31, 2022, the Company sold 543,063 shares of its common stock at an average price of approximately $1.64 per share and will expire four years fromfor total net proceeds of $865 under the date of issuance. Net proceeds from the offering were approximately $35,200 after deducting underwriting discounts and commissions and estimated offering expenses of approximately $2,800.  

Statements of Work with Cilatus BioPharma AG

During the first quarter of 2018, the Company entered into additional statements of work with Cilatus BioPharma AG, an affiliate of Malin and related party of the Company, to perform research and development consulting services. The statements of work include aggregate estimated fees of $418, which are expected to be incurred throughout 2018.

Equity Distribution Agreement.


135


Item 9. Changes in and Disagreements with AccountantsAccountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that we fileit files or submitsubmits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and formsforms. Disclosure controls and (ii)procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to oura company’s management, including ourits principal executive officer and principal financial officer,officers, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, cannot provide absolute assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
We closed the EPI Health Acquisition on March 11, 2022, and EPI Health’s total assets and revenues constituted 70.4% and 88.8%, respectively, of our consolidated total assets (including intangible assets, net) and revenues as shown on our consolidated financial statements as of and for the year ended December 31, 2022. As the EPI Health Acquisition occurred in the first quarter of fiscal 2022, we excluded the internal control over financial reporting of EPI Health from the scope of our assessment of the effectiveness of our disclosure controls and procedures as of December 31, 2022. This exclusion is in accordance with the general guidance issued by the Staff of the Securities and Exchange Commission that an assessment of a recently-acquired business may be omitted from our scope in the year of acquisition, if specified conditions are satisfied.
As of December 31, 2017,2022, our management, with the participation of our principal executive officer and principal financial officer,officers, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)Act). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. OurBased upon such evaluation, our principal executive officer and principal financial officerofficers have concluded based upon the evaluation described above that, as of December 31, 2017,2022, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Because of these inherent limitations, management does not expect that our internal controls over financial reporting will prevent all error and all fraud. Management conducted an evaluation of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 Framework”). Based on our evaluation under the 2013 Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2017.

This Annual Report on Form 10-K does not include an attestation report of2022.

As we are a non-accelerated filer, our independent registered public accounting firm regarding internal control over financial reporting dueis not required to a transition period established by the rules of the SEC for newly public companies. We areissue an “emerging growth company” as defined in the JOBS Act. For as long as we remain an “emerging growth company,” we are exempt from the auditor attestation requirement in the assessment of the effectiveness ofreport on our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

As noted above, on March 11, 2022, we completed the EPI Health Acquisition. We are in the process of integrating the operations of EPI Health into our overall internal control over financial reporting process.
136


We have devoted, and plan to continue to devote, significant efforts and resources to our internal control over financial reporting with respect to the complex accounting matters associated with a commercial pharmaceutical business. During the quarter ended December 31, 2022, we have hired additional personnel with technical expertise to assist in accounting for our Commercial Operations segment, in addition to engaging additional external resources to assist the Company.
There werehave been no other changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the last quarter that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.

Item 9B. Other Information.

None.


On March 29, 2023, our board of directors approved an amendment to the Novan, Inc. 2016 Incentive Award Plan, as amended (“2016 Plan”), to increase the number of shares reserved for future issuance under the 2016 Plan and also make changes to withhold payment of dividends and dividend equivalents to those that receive grants under the 2016 Plan until such awards vest in full. Such approval is contingent on stockholder approval of the amendment, which we will seek at our upcoming annual meeting.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.


137


PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Directors
Our board of directors consists of six directors and is divided into three classes with staggered, three-year terms. The terms of office of directors in Class I will expire at our annual meeting of stockholders to be held in 2023, or the 2023 Annual Meeting, and when such director’s successor is elected and qualified, or upon such director’s death, resignation or removal, and our Class I directors are expected to stand for re-election at the 2023 Annual Meeting. The terms of office of directors in Class II and Class III do not expire until our annual meetings of stockholders to be held in 2024 and 2025, respectively, and until his or her successor is elected and qualified, or until his or her death, resignation or removal.
Information about our directors, their ages as of February 4, 2023, occupations and length of board service are provided in the table below. Additional biographical descriptions are set forth in the text below the tables and include the primary individual experience, qualifications, qualities and skills of each director that led to the conclusion that such director should serve as a member of our board of directors at this time.
Name of DirectorAgePrincipal OccupationDirector Since
Class I Directors:
Steven D. Skolsky (1)(3)66Principal, Expis Partners2021
Paula Brown Stafford58President and Chief Executive Officer, Novan, Inc.2017
Class II Directors:
James L. Bierman (2)(3)70Retired President and Chief Executive Officer, Owens & Minor, Inc.2020
Machelle Sanders (2)(3)59Secretary of the N.C. Department of Commerce2017
Class III Directors:
W. Kent Geer (1)68Managing Director—Finance and Investor Relations, Med1 Ventures, LLC2015
Robert J. Keegan (1)(2)75Retired Chief Executive Officer, Goodyear Tire and Rubber Co.2016
(1)    Member of our audit committee
(2)    Member of our compensation committee
(3)    Member of our nominating and corporate governance committee
Steven D. Skolsky has served as a member of our board of directors since 2021. Since January 2010, Mr. Skolsky has served as the founding principal of Expis Partners, a strategic consulting firm to the biotech, pharmaceutical, life science and clinical services community, with a focused expertise in commercialization, marketing strategy, drug development, operations, strategic planning and corporate and business development. From September 2011 to December 2016, Mr. Skolsky held senior executive roles at Quintiles Transnational Holdings Inc. (now IQVIA Holdings Inc.), a leading multinational provider of biopharmaceutical development services and commercial outsourcing service, most recently as senior vice president & managing director and previously, senior vice president and head of global clinical operations. Prior to joining Quintiles, from August 2007 to December 2009, he served as the president and chief executive officer of Sequoia Pharmaceuticals, Inc., and from June 2004 to December 2006, he served as the chief executive officer of Trimeris, Inc. Prior to that, Mr. Skolsky served for more than 20 years at GlaxoSmithKline plc where he held a number of positions including senior leadership roles as managing director of GlaxoSmithKline’s operations in Australia and New Zealand and senior vice president, global product strategy and clinical development. We believe that Mr. Skolsky’s significant experience and leadership in the biotechnology and pharmaceutical industries with a focus on drug development, commercialization and operations qualifies him to serve on our board of directors.
Paula Brown Stafford is our President and Chief Executive Officer and was appointed as Chairman of our board of directors effective July 28, 2020. Mrs. Stafford has served as our President since January 2019. Prior to her appointment as our Chief Executive Officer effective February 2, 2020, Mrs. Stafford served as our Chief Operating Officer from January 2019 to February 2020 afterserving as our Chief Development Officer from March 2017 to January 2019. Mrs. Stafford has served as a member of our board of directors since August 2017. Prior to joining Novan, Mrs. Stafford held various roles of increasing importance at Quintiles Transnational Holdings Inc. (now IQVIA Holdings Inc.), a leading multinational provider of biopharmaceutical development services and commercial outsourcing services, since 1985, including serving as president of clinical development from 2010 to 2015, where she was responsible for all Phase I-IV clinical development operations globally
138


and served on the Quintiles Executive Committee. Mrs. Stafford has served as an adjunct professor in Public Health Leadership at the Gillings School of Global Public Health at the University of North Carolina, Chapel Hill, and operates her own third-party consulting business. In early 2022, Mrs. Stafford joined the board of the Alliance For Multispecialty Research, LLC, a private clinical research company comprised of more than 20 experienced clinical research centers in the U.S. We believe that Mrs. Stafford’s extensive experience and leadership in clinical research and pharmaceutical product development, along with her extensive executive experience and her service as our Chief Executive Officer, qualifies her to serve as Chairman of our board of directors.
James L Bierman was appointed to our board of directors in September 2020. Mr. Bierman served as president and chief executive officer and as a member of the board of directors of Owens & Minor, Inc., a Fortune 500 company and a leading distributor of medical and surgical supplies, from September 2014 to June 2015. Previously, he served in various other senior roles at Owens & Minor, including president and chief operating officer from August 2013 to September 2014, executive vice president and chief operating officer from March 2012 to August 2013, executive vice president and chief financial officer from April 2011 to March 2012 and senior vice president and chief financial officer from June 2007 to April 2011. Earlier in his career, Mr. Bierman served as executive vice president and chief financial officer at Quintiles Transnational Corp. (now IQVIA Holdings Inc.). Before joining Quintiles, Mr. Bierman was a partner with Arthur Andersen LLP from 1988 to 1998. Mr. Bierman currently serves on the board of directors of Tenet Healthcare Corporation, a public healthcare services companies listed on the New York Stock Exchange, and MiMedX Group, Inc., a public biomedical company listed on the Nasdaq stock exchange. Mr. Bierman earned his B.A. from Dickinson College and his M.B.A. at Cornell University’s Johnson Graduate School of Management. We believe that Mr. Bierman’s extensive board and executive experience, particularly in the healthcare and pharmaceutical services industries, as well as his substantial public accounting experience, qualifies him to serve on our board of directors.
Machelle Sanders joined our board of directors in September 2017 and is a seasoned executive with over 30 years of progressive pharmaceutical and biotechnology experience. Ms. Sanders is Secretary of the N.C. Department of Commerce, appointed by Governor Roy Cooper. Prior to her appointment as the Secretary of the N.C. Department of Commerce, Ms. Sanders served as Secretary of the N.C. Department of Administration after being appointed by Governor Cooper in January 2017. In the private sector, Ms. Sanders was most recently responsible for the pharmaceutical operations and technology operational strategy for Biogen’s multiple sclerosis franchise (i.e. AVONEXTM, PLEGRIDYTM, TECFIDERATM, and TYSABRITM). She held the title of vice president of manufacturing and general manager of the company’s largest and most advanced manufacturing facility in Research Triangle Park, North Carolina. Ms. Sanders has also held leadership positions in manufacturing, global quality assurance and quality control at Biogen, Purdue Pharmaceuticals, a pharmaceutical company, and Diosynth-Akzu Nobel, a company that develops and offers manufacturing processes for active ingredients for pharmaceutical companies. Ms. Sanders currently serves on the board of directors of BioCryst Pharmaceuticals, Inc., a public biopharmaceutical company listed on Nasdaq. She previously served on the Board of Radius Health, Inc. She holds a Bachelor of Science degree in Biochemistry from North Carolina State University and a Master of Health Administration from Pfeiffer University. We believe that Ms. Sanders’ broad and extensive knowledge of pharmaceutical manufacturing and quality systems and leadership experience, particularly among early and developing stage companies, qualifies her to serve on our board of directors.
W. Kent Geer has served as a member of our board of directors since 2015 and as our Lead Independent Director since June 2017. Mr. Geer is a retired audit partner with Ernst & Young, LLP. His 37-year career working with public and private companies includes an extensive track record in a variety of industries including biotechnology, pharmaceuticals, and other technology companies. During his tenure, Mr. Geer was the audit practice leader for the Ernst & Young Entrepreneurial Services Group in Raleigh, North Carolina and was the market team leader for the technology industry practice of the Carolinas. Beginning in 2012, Mr. Geer served as the chairman of the board of directors of PowerSecure International, Inc., a NYSE registered company, until the successful sale of the company in May 2016. Mr. Geer is a partner in Med1 Ventures LLC, a medical device incubator and service provider that provides general management, engineering and financial management services to investee companies. During 2022, Mr. Geer became chairman of the board of Utility Innovations Holdings, a privately held company in the utility services industry. We believe that Mr. Geer’s significant experience and leadership in public accounting and the biotechnology, pharmaceutical and technology industries qualifies him to serve on our board of directors.
Robert J. Keegan has served as a member of our board of directors since 2016. Mr. Keegan held the roles of chief executive officer and chairman of the board of directors of Goodyear Tire and Rubber Co. from 2003 to 2010. Most recently, he served as the non-executive chairman of the board of directors of Xerox Corporation and was an operating partner of the San Francisco-based private equity firm Friedman, Fleischer & Lowe. From 1972 to 2000, Mr. Keegan held various marketing, financial and managerial posts at Eastman Kodak, except for a two-year period from 1995 to 1997 when he worked as an executive vice president of the Avery Dennison Corporation. Mr. Keegan serves on the board of directors of the Heart Center of Duke University and the Duke Health Board of Visitors. Mr. Keegan is a trustee of the University of Rochester and a partner of L&K
139


Properties of North Carolina, LLC. We believe that Mr. Keegan’s broad business experience, executive leadership expertise and extensive knowledge of financial and operational matters qualifies him to serve on our board of directors.
Executive Officers
Certain information requiredregarding our executive officers is set forth below as of February 4, 2023. Executive officers are appointed by this itemour board of directors to hold office until their successors are duly appointed and qualified, or until their resignation or removal.
NameAgePosition(s)
Paula Brown Stafford58President, Chief Executive Officer and Chairman of the Board of Directors
John M. Gay46Chief Financial Officer
John A. Donofrio55Chief Operating Officer
Brian M. Johnson56Chief Commercial Officer
For information regarding Mrs. Stafford, please refer to “Directors,” above.
John M. Gay was appointed as our Chief Financial Officer in September 2020, and also serves as our principal financial officer and Corporate Secretary. He joined Novan in May of 2018 and previously held the position of Senior Director of Finance and Corporate Controller through January 2019, and Vice President, Finance and Corporate Controller from January 2019 until September 2020. Prior to Novan, Mr. Gay held previous director positions, including director of SEC reporting, with Valassis Digital Corp. and MaxPoint Inc., from May 2014 to April 2018. Mr. Gay also served as corporate controller of Furiex Pharmaceuticals, Inc. from June 2010 to May 2014, including from its initial listing on the Nasdaq stock exchange through the execution of an agreement providing for the acquisition of the company by Forest Laboratories, Inc., a subsidiary of Actavis plc, in an all-cash transaction valued at approximately $1.1 billion. Prior to joining Furiex Pharmaceuticals, Inc., Mr. Gay served as audit senior manager and in other roles of increasing responsibilities at Deloitte and Arthur Andersen from September 2000 to May 2010. Mr. Gay is incorporated hereina certified public accountant and holds Bachelor’s degrees in Economics and History, and a Master of Accounting degree from the University of North Carolina at Chapel Hill.
John A. Donofrio was appointed as our Executive Vice President and Chief Operating Officer on March 11, 2022, following the EPI Health Acquisition, and Mr. Donofrio also serves as President of EPI Health. Mr. Donofrio served as President and Chief Executive Officer of EPI Health, LLC from March 2019 through the closing date of the EPI Health Acquisition. From March 2018 through March 2019, Mr. Donofrio served as chief financial officer at TrialCard Incorporated, and from August 2013 through March 2018, Mr. Donofrio served as chief financial officer and head of North America business development for Merz North America, Inc. In addition to his executive positions, Mr. Donofrio spent over 20 years with GlaxoSmithKline in various US and international roles of increasing responsibility, including global vice president of finance for the global dermatology business unit, Stiefel, a GSK company. Mr. Donofrio is also a board member, the independent lead director and audit chair for Aytu Bioscience and serves on the board of directors of the Children’s Skin Disease Foundation and Alliance Medical Ministries, He holds a Bachelor’s degree in Accounting from North Carolina State University.
Brian M. Johnson was appointed as our Chief Commercial Officer effective November 1, 2021. In addition to previously serving as the Chief Commercial Officer at Novan from 2015 to 2018, Mr. Johnson most recently served as a principal at Two Hearts Group, a pharmaceutical and life science consulting firm where he acted as UCB's head, digital marketing, psoriasis in the global mission for bimekizumab. Additionally, Mr. Johnson served as the vice president of prescription marketing and chief digital officer at Galderma, Mr. Johnson has also served as president at Revian, Inc, director, peer to peer marketing at Novartis and positions of increasing seniority at Ortho Pharmaceutical Corporation and Medicis. Mr. Johnson holds an MBA from Southern Methodist University and a BS in Business Administration from the University of Kansas. He is a member of the American Acne and Rosacea Society, Masters of Dermatologic Society, Women's Dermatology Society and the American Academy of Dermatology.
Audit Committee and Audit Committee Financial Experts
Our board of directors has a standing audit committee, which consists of W. Kent Geer, Robert J. Keegan, and Steven D. Skolsky, and included John Palmour prior to his death in November 2022. The chair of our audit committee is W. Kent Geer, who our board of directors has determined is an “audit committee financial expert,” as that term is defined by reference from our Proxy Statement, which will be filed withthe rules of the SEC within 120 days afterimplementing Section 407 of the endSarbanes-Oxley Act, and possesses financial sophistication, as defined under the listing standards of the Nasdaq Capital Market. Our board of directors has also determined that each member of our 2017 fiscal year pursuant to Regulation 14A foraudit committee can read and understand fundamental financial statements in accordance with applicable SEC and Nasdaq requirements. To arrive at these determinations, our 2018 Annual Meetingboard of Stockholders (the “Proxy Statement”), underdirectors has examined each audit committee member’s scope of experience and the captions “Executive Officersnature of his experience in the Company,” “Proposal 1—Electioncorporate finance sector.

140


Code of Directors,” “Section 16 Beneficial Ownership Reporting Compliance.”

Business Conduct and Ethics

We have adopted a codeCode of business conductBusiness Conduct and ethicsEthics that applies to our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions) and other employees. A copy of ourOur Code of Business Conduct and Ethics is available on the “Corporate Governance” page of the “Investor Relations” section of our website, at www.novan.comwhich may be accessed by navigating to http://novan.com/investors/, by clicking the link under “Investors & Media—Corporate Governance.“Corporate Governance” and then by clicking on “Code of Business Conduct and Ethics” under “Governance Documents.” We intend to post on our website and (if required) file on Form 8-K all disclosures that are required by applicable law, the rules of the SEC or the Nasdaq listing standards, concerning any amendment to, or waiver from, our Code of Business Conduct and Ethics.

However, the reference to our website does not constitute incorporation by reference of the information contained on or available through our website, and you should not consider it to be a part of this Annual Report.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our executive officers, directors and persons who beneficially own more than 10% of our common stock to file initial reports of ownership and reports of changes in ownership with the SEC. To our knowledge, based solely on a review of the copies of such reports filed electronically on the SEC’s website and written representations that no other reports were required during the fiscal year ended December 31, 2022, we believe that all Section 16(a) filing requirements applicable to the executive officers, directors and persons who beneficially own more than 10% of our common stock were complied with in 2022, except for a Form 4 filed late on January 25, 2022 for Mrs. Stafford, to report an option award that became effective on January 3, 2022, a Form 4 filed late on March 18, 2022 for Mr. Donofrio, to report an option award granted on March 11, 2022, and a Form 4 filed late on June 9, 2022 for Mr. Novak, to report a restricted stock unit and option award granted on April 21, 2022.

Item 11. Executive Compensation.

This section discusses the material components of the executive compensation program with respect to the 2022 fiscal year for the individuals who served as our principal executive officer during the year and our other most highly compensated executive officers who were serving as an executive officer as of December 31, 2022. We refer to these persons as our “named executive officers” elsewhere in this Annual Report.
Our named executive officers for the 2022 fiscal year were:
Paula Brown Stafford, Chairman, President andChief Executive Officer;
John M. Gay, Chief Financial Officer and Corporate Secretary; and
John A. Donofrio, Executive Vice President and Chief Operating Officer
Summary Compensation Table
The following table sets forth information concerning the compensation of our named executive officers for the years ended December 31, 2022 and December 31, 2021.
Name and Principal PositionFiscal YearSalary
 ($)
Bonus
 ($)
Option Awards
 ($)(1)
Stock
Awards
($)(2)
All Other Compensation
 ($)(3)
Total
($)
Paula Brown Stafford (4)2022$604,608 $— $269,954 $— $18,617 $893,179 
President and Chief Executive Officer2021598,850 389,253 432,150 — 18,780 1,439,033 
John M. Gay (5)2022340,913 35,000 101,055 80,282 10,982 568,232 
Chief Financial Officer and Corporate Secretary2021318,544 146,421 308,049 — 17,300 790,314 
John A. Donofrio (6)2022317,366 200,000 223,584 — 8,979 749,929 
Executive Vice President and Chief Operating Officer2021— — — — — — 
1.Amounts reflect the grant-date fair value of equity-based awards granted to our named executive officers, as applicable, including stock options in 2022 and 2021. Stock option fair values are estimated using the Black Scholes Option Pricing Model in accordance with ASC Topic 718, rather than the amounts paid to or realized by the named individual. For a discussion of the assumptions used to estimate the value of the options made to our named executive officers, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of
141


Operations—Critical Accounting Policies and Use of Estimates—Stock-Based Compensation” in this Annual Report, “Note 1—“Organization and Significant Accounting Policies”” and “Note 11—Stock-Based Compensation” to the accompanying consolidated financial statements included in this Annual Report.
2.Amounts reflect the grant-date fair value of equity-based awards granted to our named executive officers, as applicable, including restricted stock units in 2022. Restricted stock unit fair values are based on their estimated fair values on the date of grant based on the closing price of the underlying common stock in accordance with ASC Topic 718. For a discussion of the assumptions used to estimate the value of the restricted stock units made to our named executive officers, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates—Stock-Based Compensation” in this Annual Report, “Note 1—“Organization and Significant Accounting Policies” and “Note 11—Stock-Based Compensation” to the accompanying consolidated financial statements included in this Annual Report.
3.All other compensation includes matching contributions made under our 401(k) plan for 2022 and 2021 and Health Savings Account contributions for 2022 and 2021 for Mrs. Stafford and Mr. Gay, and premiums for executive life insurance for the benefit of Mrs. Stafford in 2022 and 2021.Life insurance premiums payment made for the benefit of Mrs. Stafford were $1,480 in 2022 and 2021.
4.Mrs. Stafford became our Chief Executive Officer effective February 2, 2020, and in connection therewith, Mrs. Stafford entered into an amended and restated employment agreement, as further amended by that first amended dated as of November 9, 2021, or the Stafford Employment Agreement, as described in further detail within the section entitled “Executive Compensation—Arrangements with our Named Executive Officers—Arrangements with Paula Brown Stafford.”
5.Mr. Gay was appointed as our Chief Financial Officer effective September 23, 2020, and we entered into a new employment agreement with Mr. Gay, as amended August 11, 2021, or the Gay Employment Agreement, as described in further detail within the section entitled “Executive Compensation—Arrangements with our Named Executive Officers—Arrangements with John M. Gay.”
6.Mr. Donofrio was appointed as our Executive Vice President and Chief Operating Officer effective March 11, 2022, and we entered into an employment agreement with Mr. Donofrio, or the Donofrio Employment Agreement, as described in further detail within the section entitled “Executive Compensation—Arrangements with our Named Executive Officers—Arrangements with John A. Donofrio.”
Narrative to Summary Compensation Table
Elements of Compensation
During 2022, we compensated our named executive officers through a combination of base salary, cash bonuses, long-term performance-based awards under the Performance Plan and 2016 Incentive Award Plan, or the 2016 Plan, and other perquisites and benefits as described below.
Please see the section entitled “Executive Compensation—Arrangements with our Named Executive Officers” in this Annual Report for further description of each named executive officer’s employment agreement.
Annual Base Salaries
The named executive officers receive a base salary to compensate them for services rendered to us. The base salary payable to each named executive officer is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role(s) and responsibilities. In 2022, our named executive officers were entitled to the following total base salaries:
Mrs. Stafford was entitled to $604,608 pursuant to the Stafford Employment Agreement;
Mr. Gay was entitled to $340,913 pursuant to the Gay Employment Agreement; and
Mr. Donofrio was entitled to $317,366, which reflects the prorated amount of Mr. Donofrio’s $400,000 annual base salary for services rendered from March 11, 2022, through December 31, 2022, pursuant to the Donofrio Employment Agreement.
Bonuses
Each named executive officer’s employment agreement provided for certain cash bonuses for the year ended December 31, 2022, as described below:
In 2022, the Stafford Employment Agreement provided Mrs. Stafford with an annual target cash bonus opportunity equal to not less than 55% and up to a maximum of 75% of her base salary, payable based on performance criteria.
142


Our compensation committee has determined that Mrs. Stafford will not receive a bonus for the year ended December 31, 2022.
In 2022, the Gay Employment Agreement provided Mr. Gay with an annual target cash bonus opportunity equal to 35% of his base salary, payable based on performance criteria. Our compensation committee has determined that Mr. Gay will not receive a bonus for the year ended December 31, 2022. On March 17, 2022, a $35,000 one-time payment was approved for Mr. Gay in connection with success bonuses paid to employees following the EPI Health Acquisition.
In 2022, the Donofrio Employment Agreement provided Mr. Donofrio with an annual target cash bonus opportunity equal to not less than 50% and up to a maximum of 75% of his base salary, payable based on performance criteria. In the first year, following the completion of the EPI Health Acquisition, the Donofrio Employment Agreement provides that the bonus will be guaranteed at the target level, and thus will be paid out at $200,000 for the year ended December 31, 2022.
Long-term Performance-based Compensation—2016 Incentive Award Plan
We currently sponsor the 2016 Plan, for purposes of granting stock options, SARs, RSUs and other equity-based instruments to our executive officers, directors and employees.
Initial and promotion option grants to our executive officers are generally set forth in their employment agreements. These initial and promotion grants are the product of negotiation with the executive officer, but we generally seek to establish equity ownership levels that we believe are commensurate with the equity positions held by executive officers serving in similar roles at comparable biopharmaceutical companies. Stock option grants made to our executive officers include (i) time-based vesting awards with vesting provisions ranging from six months to three years and (ii) awards that have also included performance-based vesting conditions.
In 2022, Ms. Stafford received an option to purchase 75,000 shares of common stock, granted in the first quarter of 2022, granted in accordance with the terms of the Stafford Employment Agreement.
In 2022, Mr. Gay received an option to purchase 41,100 shares of common stock and an RSU covering 27,400 shares of common stock, both granted in the third quarter of 2022.
In 2022, Mr. Donofrio received an option to purchase 75,000 shares of common stock, which was granted in the first quarter of 2022 in connection with completion of the EPI Health Acquisition and Mr. Donofrio entering into the Donofrio Employment Agreement.
Long-term Performance-based Compensation—Performance Plan
In August 2018, our board of directors approved and established the Performance Plan, which is a performance-based long-term incentive plan. The Performance Plan was intended to tie long-term employee incentive compensation to specific, significant increases in our underlying common stock price and thus directly align employee and stockholder objectives. The Performance Plan provided for employees to receive long-term incentive compensation payments only if the established stock price targets ($111.70 per share and $254.50 per share, subject to adjustment) were achieved. The Performance Plan provided for the bonus pool to generally be paid in the form of cash.
The Performance Plan was effective immediately upon approval and expired on March 1, 2022. As our stock price did not reach the minimum share price targets necessary to trigger a payment, no payments were made under the Performance Plan to any participants during the period the Performance Plan was effective.
Other Elements of Compensation
Retirement Plans
We currently maintain the Novan, Inc. 401(k) Plan, a defined contribution retirement savings plan, or the 401(k) Plan, for the benefit of our employees, including our named executive officers, who satisfy certain eligibility requirements. Our named executive officers were eligible to participate in the 401(k) Plan on the same terms as our other full-time employees. The Internal Revenue Code allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) Plan. Each participant in the 401(k) Plan was eligible to receive matching contributions of up to 5% in 2022, of such participant’s gross wages. These matching contributions are fully vested after one full year of employment. We believe that providing a vehicle for retirement savings though our 401(k) Plan and making matching contributions adds to the overall desirability of our executive compensation package and further incentivizes our employees, including our named executive officers.
143


Employee Benefits and Perquisites
All of our full-time employees, including our named executive officers, are eligible to participate in our health and welfare plans, including:
medical, dental and vision benefits;
medical and dependent care flexible spending accounts;
short-term and long-term disability insurance; and
life insurance.
In addition to the health and welfare benefits described above, certain named executive officers may participate in a company-paid executive life insurance plan. In 2022, we also paid certain executive life insurance premiums for the benefit of Mrs. Stafford. We generally do not provide any other perquisites to our named executive officers.
We believe the benefits and perquisites described above are necessary and appropriate to provide a competitive compensation package to our named executive officers.
No Tax Gross-Ups
We do not make gross-up payments to cover our named executive officers’ personal income taxes that may pertain to any of the compensation or perquisites paid or provided by us.
Outstanding Equity Awards at Fiscal Year End
The following table provides information regarding outstanding equity awards held by our named executive officers as of December 31, 2022.
Option AwardsStock Awards
Name
Grant
Date
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Option
Exercise
Price
($/Share)
Option
Expiration
Date
Equity Incentive Plan Awards: Number of unearned shares, units or other right that have not vested (#)Equity Incentive Plan Awards: Payout value of unearned shares, units or other right that have not vested ($)
Paula Brown Stafford03/20/17(1)5,400— $65.30 03/20/27
Chairman, President and

08/25/17(2)3,050— 42.7008/14/27
Chief Executive Officer10/12/17(3)6,840— 50.3009/14/27
02/12/18(4)1,215— 30.3002/11/28
01/28/19(5)5,500 — 13.5001/01/29
09/06/19(6)13,000 — 26.8009/05/29
02/01/20(7)60,000 — 8.2001/05/30
11/09/21(15)37,500 37,500 7.0911/08/31
01/03/22(8)— 75,000 4.4101/02/32
John M. Gay05/31/18(10)1,250 — 31.5005/20/28
Chief Financial Officer11/16/18(11)250 — 24.3011/12/28
and Corporate Secretary01/28/19(12)3,500 — 13.5001/27/29
09/06/19(6)500 — 26.8009/05/29
04/06/20(13)3,400 — 3.6904/06/30
05/17/21(16)2,500 — 11.8005/16/31
05/26/21(17)12,586 25,164 9.1905/25/31
8/8/2022(9)— 41,100 2.933/14/2032
8/8/2022(14)27,400 $80,282 
John A. Donofrio03/11/22(18)— 75,000 3.5603/10/32
Executive Vice President
and Chief Operating Officer
144


(1)The option was granted under the 2016 Plan and vested six months from March 20, 2017.
(2)The option was granted under the 2016 Plan and vested in four equal quarterly installments, with the first installment vesting on September 5, 2017.
(3)The option was granted under the 2016 Plan and vested six months from vesting commencement date of September 15, 2017.
(4)The option was granted under the 2016 Plan and vested in thirty-six equal monthly installments on the first day of each month following February 12, 2018.
(5)This option was granted under the 2016 Plan, one-half vested six months from the January 2, 2019 vesting commencement date, and subsequent to the six-month anniversary of the vesting commencement date, one-twelfth vested each successive monthly anniversary following July 2, 2019.
(6)The option was granted under the 2016 Plan and vested in its entirety on June 25, 2020.
(7)The SARs were granted in connection with entering into the Stafford Employment Agreement and vested in equal quarterly installments over the initial term of the agreement, such that the SARs were fully vested on December 31, 2021.
(8)The option was granted under the 2016 Plan and vests in three installments, with one-half vesting upon the first anniversary of the grant date and one-half of the remaining options vesting on each of the next two anniversaries of the grant date.
(9)The option was granted under the 2016 Plan and vests in three equal annual installments, with the first installment vesting on March 15, 2023.
(10)The option was granted as an inducement grant in accordance with Nasdaq Listing Rule 5635(c)(4), and vested in three equal annual installments with the first installment vesting on May 21, 2019.
(11)The option was granted under the 2016 Plan and vested in three equal annual installments with the first installment vesting on November 13, 2019.
(12)The option was granted under the 2016 Plan and vests in three equal annual installments with the first installment vesting on January 28, 2020.
(13)The option was granted under the 2016 Plan, and one half vested on June 30, 2020, one quarter vested on September 30, 2020, and the remaining one quarter vested on December 31, 2020.
(14)The restricted stock unit was granted under the 2016 Plan and shall be fully vested on March 15, 2024, which is the second anniversary of the vesting commencement date.
(15)The option was granted under the 2016 Plan and vests in three installments with one-half vesting upon the first anniversary of the grant date and one-half of the remaining options vesting on each of the next two anniversaries of the grant date.
(16)The option was granted under the 2016 Plan and vests in four equal quarterly installments with the first installment vesting on June 30, 2021.
(17)The option was granted under the 2016 Plan and vests in three equal annual installments with the first installment vesting on May 26, 2022.
(18)The option was granted under the 2016 Plan and vests in three equal annual installments with the first installment vesting on March 11, 2023.
Arrangements with our Named Executive Officers
We have entered into employment arrangements with our named executive officers that set forth certain terms and conditions of their employment, including base salary and employee benefits.
145


Arrangements with Paula Brown Stafford
Mrs. Stafford serves as our President and Chief Executive Officer and is compensated pursuant to the Stafford Employment Agreement. Pursuant to the Stafford Employment Agreement, Mrs. Stafford receives an annual base salary of $598,850 and is eligible to receive an annual performance-based bonus with a target bonus of 55% to 75% of her base salary. Mrs. Stafford is also eligible to participate in our incentive award plans. Mrs. Stafford continues to be eligible to participate in standard benefit plans as well as an executive life insurance plan, as well as for reimbursement of reasonable business expenses. In addition, our board of directors approved a stock appreciation right, or the Stafford SAR Award, for Mrs. Stafford under the 2016 Plan covering 60,000 shares of our common stock. The Stafford SAR Award was granted on a contingent basis and would have been considered irrevocably forfeited and voided in full if sufficient shares of our common stock were not available under the 2016 Plan or if we failed to obtain stockholder approval for amendments to the 2016 Plan at the next annual stockholders’ meeting to provide sufficient shares for the Stafford SAR Award. In such event, we would have been required to pay Mrs. Stafford the cash-equivalent value of the amount that would have been due and payable per the Stafford SAR Award upon any properly noticed exercise of any vested portion of the Stafford SAR Award. Such condition was satisfied, and the SARs were no longer considered to be granted on a contingent basis, as of February 1, 2020. In connection with the amendment of the Stafford Employment Agreement in November 2021, Mrs. Stafford was awarded 75,000 nonqualified stock options to purchase shares of the Company’s common stock in November 2021 and January 2022.
In the event of Mrs. Stafford’s termination of employment either upon nonrenewal by the Company of the term of the Stafford Employment Agreement, by the Company without “cause” or by Mrs. Stafford for “good reason” (except as set forth below), then in addition to any accrued amounts and subject to Mrs. Stafford timely delivering an effective release of claims in the Company’s favor and her continued compliance with the previously signed Restrictive Covenants Agreement between the Company and Mrs. Stafford, Mrs. Stafford will be entitled to receive payment of her then-current base salary, plus a prorated annual bonus calculated at the minimum target level of the calendar year in which the “separation date,” as defined in the Stafford Employment Agreement, occurs based on the percentage of the calendar year actually worked by Mrs. Stafford as of the separation date, each multiplied by 1.5, plus the amount of any unpaid Annual Bonus for the prior calendar year. Such amounts will be paid in equal monthly installments over 12 months in accordance with standard payroll practices and provided, that to the extent that any such cash award constitutes nonqualified deferred compensation under Section 409A, the cash payment will be paid subject to any delay required by this item is incorporated herein by referenceSection 409A. Mrs. Stafford will also be entitled to vesting of any then unvested portion of the Stafford SAR Award or any then unvested portion of any other equity award from the Proxy StatementCompany to give credit for the pro-rated portion of such equity awards for which Mrs. Stafford would have qualified based on service through the twelve-month period following the separation date, upon Mrs. Stafford’s termination without “cause” or for “good reason” not due to a “change in control” (each as defined in the Stafford Employment Agreement) . Upon termination of employment by Mrs. Stafford other than for good reason or due to her death or disability, or by the Company for cause, Mrs. Stafford will not be entitled to any additional compensation beyond any accrued amounts.
Notwithstanding the foregoing, the Stafford Employment Agreement further provides that, in the event of a “double trigger” event, Mrs. Stafford will be entitled to receive payment of her then-current base salary, plus a prorated annual bonus calculated at the minimum target level of the calendar year in which the separation date occurs based on the percentage of the calendar year actually worked by Mrs. Stafford as of the separation date, each multiplied by 2.5, plus the amount of any unpaid Annual Bonus for the prior calendar year. Such amounts will be paid in equal monthly installments over 24 months in accordance with standard payroll practices and provided, that to the extent that any such cash award constitutes nonqualified deferred compensation under Section 409A, the cash payment will be paid subject to any delay required by Section 409A. Mrs. Stafford will also be entitled to vesting of any then unvested portion of the Stafford SAR Award and any other equity grant as of the separation date.
The following circumstances are considered a “double trigger” event:
    (i) a “change in control,” as defined in the Stafford Employment Agreement (which incorporates the definition from the 2016 Plan), and
    (ii) Mrs. Stafford is terminated from employment by the Company without cause or upon the nonrenewal by the Company of the term of the Stafford Employment Agreement or by Mrs. Stafford for good reason (other than due to certain changes on the Company’s board of directors) within 12 months after a change in control, subject to Mrs. Stafford timely delivering an effective release of claims in the Company’s favor and her continued compliance with the Restrictive Covenants Agreement between the Company and Mrs. Stafford.
Arrangements with John M. Gay
Mr. Gay serves as our Chief Financial Officer and Corporate Secretary and is compensated pursuant to the Gay Employment Agreement. The Gay Employment Agreement may be terminated at-will by the Company or Mr. Gay at any time, for any or no cause or reason, and with or without prior notice. Pursuant to the Gay Employment Agreement, Mr. Gay receives an annual base salary of $319,725, is eligible to receive an annual performance-based bonus with a target bonus equal to 35% of his base
146


salary, is eligible to participate in the Company’s incentive award plans and is entitled to the maximum amount of paid time-off allowed under the captions “ExecutiveCompany’s policies. The Gay Employment Agreement also provides Mr. Gay with eligibility to participate in the Company’s employee benefit plans, programs and arrangements as are provided generally from time to time to all other similarly situated employees of the Company, as well as for reimbursement of reasonable business expenses.
In the event of termination of Mr. Gay’s employment by the Company without “cause” or by Mr. Gay for “good reason,” in each case not in connection with a “change in control,” with such terms as defined in the Gay Employment Agreement, then in addition to any accrued amounts and subject to Mr. Gay timely delivering an effective release of claims in the Company’s favor and continued compliance with the existing Restrictive Covenants Agreements, as defined in the Gay Employment Agreement, Mr. Gay will be entitled to receive (i) payment of an amount equal to twelve months of his base salary, plus a prorated annual bonus, calculated at the target bonus level for the calendar year in which the separation date occurs based on the percentage of the calendar year actually worked by Mr. Gay as of the separation date, with such amount generally to be paid in equal installments over twelve months in accordance with the Company’s standard payroll practices, (ii) vesting of any of Mr. Gay’s then-unvested equity awards that would have otherwise vested through the end of the calendar year in which the separation date occurs, and (iii) reimbursement of a portion of Mr. Gay’s applicable Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, or COBRA, premiums for up to six months after such separation date. In the event of termination of Mr. Gay’s employment by the Company without “cause” or by Mr. Gay for “good reason,” at the time of or within twelve months after a “change in control,” then in addition to any accrued amounts and subject to Mr. Gay timely delivering an effective release of claims in the Company’s favor and continued compliance with the existing Restrictive Covenants Agreements, Mr. Gay will be entitled to receive (i) payment of an amount equal to twelve months of his base salary, plus an amount equal to an annual bonus calculated at the target bonus level for the calendar year in which the separation date occurs, with such amount generally to be paid in equal installments over twelve months in accordance with the Company’s standard payroll practices, (ii) accelerated vesting of the remaining unvested portion of any and all equity awards issued to Mr. Gay as of the separation date and (iii) reimbursement of a portion of Mr. Gay’s applicable COBRA premiums for up to twelve months after such separation date. In the event of termination of Mr. Gay’s employment by the Company for “cause,” by Mr. Gay other than for “good reason,” or due to Mr. Gay’s death or “disability,” as defined in the Gay Employment Agreement, Mr. Gay will not be entitled to any additional compensation under the Gay Employment Agreement beyond any accrued amounts.
Arrangements with John A. Donofrio
As of March 11, 2022, Mr. Donofrio serves as our Chief Operating Officer and is compensated pursuant to the Donofrio Employment Agreement. The Donofrio Employment Agreement may be terminated at-will by the Company or Mr. Donofrio at any time, for any or no cause or reason, and with or without prior notice. Pursuant to the Donofrio Employment Agreement, Mr. Donofrio receives an annual base salary of $400,000, is eligible to receive an annual performance-based bonus with a target bonus equal to not less than 50% and up to a maximum of 75% of his base salary, payable based on performance criteria. The Donofrio Employment Agreement provided that Mr. Donofrio’s annual bonus for fiscal 2022 was guaranteed to equal at least the target level. Mr. Donofrio is eligible to participate in the Company’s incentive award plans and is entitled to the maximum amount of paid time-off allowed under the Company’s policies. The Donofrio Employment Agreement also provides Mr. Donofrio with eligibility to participate in the Company’s employee benefit plans, programs and arrangements as are provided generally from time to time to all other similarly situated employees of the Company, as well as for reimbursement of reasonable business expenses.
In the event of Mr. Donofrio’s termination of employment by the Company without “cause” or by Mr. Donofrio for “good reason,” not due to a “change in control,” each as defined in the Employment Agreement, then in addition to any accrued amounts and subject to Mr. Donofrio timely delivering an effective release of claims in the Company’s favor and substantial and material compliance with existing confidentiality and noncompetition agreements, Mr. Donofrio will be entitled to receive (i) payment of an amount equal to 12 months of his base salary, plus an amount equal to an annual bonus calculated at the target bonus level for the calendar year in which the separation date occurs but prorated based on the percentage of the calendar year actually worked by Mr. Donofrio as of the separation date, paid in installments over 12 months in accordance with standard payroll practices, (ii) vesting of any of Mr. Donofrio’s time-based options that would have vested through the end of the calendar year in which the separation occurred and (iii) reimbursement of Mr. Donofrio’s applicable COBRA premiums for up to 12 months after such separation. In the event of Mr. Donofrio’s termination of employment by the Company without “cause” or by Mr. Donofrio for “good reason,” within 12 months of a “change in control,” each as defined in the Employment Agreement, then in addition to any accrued amounts and subject to Mr. Donofrio timely delivering an effective release of claims in the Company’s favor and substantial and material compliance with existing confidentiality and noncompetition agreements, Mr. Donofrio will be entitled to receive (i) payment of an amount equal to 12 months of his base salary, plus an amount equal to an annual bonus calculated at the target bonus level for the calendar year in which the separation date occurs, paid in installments over 12 months in accordance with standard payroll practices, (ii) vesting of all of Mr. Donofrio’s outstanding unvested options and (iii) reimbursement of Mr. Donofrio’s applicable COBRA premiums for up to 12 months after such separation.
147


Director Compensation
The following table sets forth information concerning the compensation of our directors, other than Mrs. Stafford, for the year ended December 31, 2022.
Name
Fees Earned or
Paid in Cash (1)
Option Awards (2)Total
James L. Bierman$62,750$100,000$162,750
W. Kent Geer102,896100,000202,896
Robert J. Keegan82,813100,000182,813
Machelle Sanders63,125100,000163,125
Steven D. Skolsky62,188100,000162,188
John Palmour (3)73,438100,000173,438
(1)Amounts reflected in this column include the fees earned during the fourth quarter ended December 31, 2021, but paid in cash to the applicable director during the year ended December 31, 2022, and Related Information.fees earned during the fourth quarter ended December 31, 2022, but paid in cash to the applicable director during the year ended December 31, 2023. In this column we are required to report all fees either earned or paid to directors during 2022. As a result, fees earned in 2021 for fourth quarter service in 2021 but paid in 2022 are also included; thus the dollar amount represents fees paid for five (not four) successive quarters. Fees earned in 2021 but paid in 2022 were as follows: Mr. Bierman, $11,250; Mr. Geer, $21,875; Mr. Keegan, $16,563; Dr. Palmour, $13,438; and Ms. Sanders, $11,875.
(2)Amounts reflect the grant-date Black-Scholes value of stock awards and stock options granted during 2022, computed in accordance with ASC Topic 718, rather than the amounts paid to or realized by the named individual. For a discussion of the assumptions used to calculate the value of all stock awards and option awards made to our directors, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates—Stock-Based Compensation” in this Annual Report, “Note 1—“Organization and Significant Accounting Policies”

and “Note 11—Stock-Based Compensation” to the accompanying consolidated financial statements included in this Annual Report. These amounts do not necessarily correspond to the actual value that may be recognized from the option awards by the applicable directors.
(3)Dr. Palmour served on the board of directors until his death in November 2022.
The table below shows the aggregate numbers of option awards and restricted stock unit awards (exercisable and unexercisable) held as of December 31, 2022, by each director who served as a member of our board of directors during the year ended December 31, 2022, other than Mrs. Stafford. No such director held any other equity awards. 
Name
Options Outstanding at Fiscal
Year End December 31, 2022
RSUs Outstanding at Fiscal
Year End December 31, 2022
James L. Bierman14,42336,101
W. Kent Geer24,79736,101
Robert J. Keegan23,27236,101
Machelle Sanders20,34736,101
Steven D. Skolsky15,62036,101
John Palmour
Non-Employee Director Compensation Policy
Effective March 29, 2023, we amended the Novan, Inc. Non-Employee Director Compensation Policy, or the Director Compensation Policy, for our non-employee directors that consists of annual retainer fees and equity awards that will be paid or made automatically and without further action by our board of directors. Pursuant to the Director Compensation Policy, subject to continued service on our board, (i) each non-employee director receives an annual cash retainer of $40,000; (ii) each non-employee director serving as a committee chair receives an additional annual retainer between $10,000 and $20,000; (iii) each non-employee director serving as a committee member (unless also serving as the committee chair) receives an additional annual retainer between $5,000 and $8,750, or in the event our board of directors creates a special committee, such additional cash compensation in the form of a retainer or a per meeting fee paid at the rate established by our board of directors at the time our board of directors establishes such committee; (iv) the non-employee chairman of our board of directors receives an additional annual retainer of $32,500; and (v) the lead independent director receives an additional annual retainer of $22,500. The Director Compensation Policy also provides each non-employee director with an annual equity award, contingent upon
148


service on our board of directors as of the date of any annual meeting of our stockholders and continued service on our board of directors immediately following such annual meeting and automatically granted on the date of such annual meeting, of an option to purchase the number of shares of our common stock (at a per-share exercise price equal to the closing price per share of our common stock on the date of such annual meeting, or on the last preceding trading day if the annual meeting is not a trading day) equal to the number of shares that have an aggregate grant-date fair value of $100,000 (as determined in accordance with ASC Topic 718, with the number of shares of our common stock underlying each such award subject to adjustment as provided in the 2016 Plan); provided that at the discretion of the Compensation Committee and pursuant to the exercise of its business judgment, taking into account such factors, circumstances and considerations as it shall deem relevant from time to time, the Compensation Committee can impose a cap on the number of shares subject to such annual equity award. The equity awards described in the Director Compensation Policy are granted under and subject to the terms and provisions of the 2016 Plan or any other applicable Company equity incentive plan then-maintained by the Company. Each non-employee director who is initially elected or appointed on any date other than the date of an annual meeting of stockholders will receive a prorated portion of such annual equity award for the year of such election or appointment. Notwithstanding the foregoing, our board of directors in its sole discretion may determine that the annual equity award for any year or the prorated portion of any such annual equity award, as applicable, be granted in the form of restricted stock units with equivalent value on the date of grant. Each director option award will vest and become exercisable in four equal quarterly installments, and each RSU award will vest on the first anniversary, such that each such award shall be fully vested and exercisable on the first anniversary of the date of grant, subject to the director’s continued service on our board of directors through each applicable vesting date. The equity awards will accelerate and vest in full upon the death or disability of any director.
Directors have been and will continue to be reimbursed for expenses directly related to their activities as directors, including attendance at board and committee meetings. Directors are also entitled to the protection provided by their indemnification agreements and the indemnification provisions in our certificate of incorporation and bylaws.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

EQUITY COMPENSATION PLAN INFORMATION
The following table presents information as of December 31, 2022, with respect to compensation plans under which shares of our common stock may be issued. The category “Equity Compensation Plans approved by security holders” in the table below consists of the 2016 Plan and the Company’s 2008 Stock Plan, or the 2008 Plan.
Plan Category
Number of Securities
to be Issued upon
Exercise of
Outstanding Options, RSUs and SARs
Weighted Average
Exercise Price of
Outstanding Options, RSUs and SARs
Number of Securities
Remaining Available
for Future Issuances
under Equity
Compensation Plans
(excluding securities
reflected in column (a))
(a)($)(b)(c)
Equity Compensation Plans approved by security holders1,548,726(1)$7.36 (2)241,801(3)
Equity Compensation Plans not approved by security holders (4)1,25031.50-
Total1,549,9767.38241,801
(1)    Includes shares of common stock issuable upon exercise of outstanding options under the 2008 Plan – 3,633 shares; outstanding options and SARs under the 2016 Plan – 1,087,687 shares; and outstanding RSUs under the 2016 Plan – 457,406.
(2)    The weighted-average remaining contractual term (in years) was 6.20.
(3)    Includes shares remaining for future issuance under the 2016 Plan.
(4)    In May 2018, we awarded nonstatutory stock options to purchase an aggregate of 10,050 shares of common stock to newly-hired employees, not previously employees or directors of the Company, as inducements material to the individuals’ entering into employment with us within the meaning of Nasdaq Listing Rule 5635(c)(4), or the Inducement Grants. The Inducement Grants had a grant date of May 31, 2018 and an exercise price of $31.50 per share. The Inducement Grants were awarded outside of the 2016 Plan, pursuant to Nasdaq Listing Rule 5635(c)(4), but had terms and conditions generally consistent with our 2016 Plan and vested over three years, subject to the employee’s continued service as an employee or consultant through the vesting period. As of December 31, 2021, there were a total of 1,250 Inducement Grants outstanding.
149


SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the beneficial ownership of our common stock as of March 16, 2023, by the following:
each stockholder known by us to be the beneficial owner of more than 5% of our common stock;
each of our directors;
each of our named executive officers; and
all of our directors and executive officers as a group.
Applicable percentages are based on 28,015,371 shares outstanding on March 16, 2023, adjusted as required by this itemrules promulgated by the SEC.
The number of shares beneficially owned by each stockholder is incorporated hereindetermined under rules issued by reference from the Proxy Statement, underSEC. Under these rules, beneficial ownership includes any shares as to which the captions “Security Ownershipindividual or entity has sole or shared voting power or investment power. The following table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G filed with the SEC. In computing the number of Certain Beneficial Ownersshares beneficially owned by an individual or entity and Management”the percentage ownership of that person, shares of common stock issuable upon the exercise of stock options, SARs or warrants exercisable or RSUs that will vest within 60 days of March 16, 2023, are considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person. Unless otherwise indicated, the address of each of the individuals and “Equity Compensation Plan Information.”

entities named below is c/o Novan, Inc., 4020 Stirrup Creek Drive, Suite 110, Durham, NC 27703. Each of the stockholders listed has sole voting and investment power with respect to the shares beneficially owned by the stockholder unless noted otherwise, subject to community property laws where applicable.
Name of Beneficial Owner
Number of Shares
Beneficially
Owned
Percentage of
Outstanding
Shares
5% Stockholders:
None
Directors and Named Executive Officers:
Paula Brown Stafford (1)185,074*
John M. Gay (2)40,189*
John A. Donofrio (3)25,000*
James L. Bierman (4)18,423*
W. Kent Geer (5)26,379*
Robert J. Keegan (6)29,575*
Machelle Sanders (7)21,747*
Steven D. Skolsky (8)15,620*
All current directors and executive officers, as a group (9 persons) (9)378,6771.3%
*    Represents beneficial ownership of less than one percent.
(1)Consists of (i) 15,069 shares of common stock held by Mrs. Stafford (ii) options to purchase 110,005 shares of common stock that are exercisable within 60 days of March 16, 2023, 2023 and (iii) 60,000 SARs exercisable within 60 days of March 16, 2023.
(2)Consists of (i) 2,500 shares of common stock held by Mr. Gay and (ii) options to purchase 37,689 shares of common stock that are exercisable within 60 days of March 16, 2023.
(3)Consists of options to purchase 25,000 shares of common stock that are exercisable within 60 days of March 16, 2023.
(4)Consists of (i) 4,000 shares of common stock held by Mr. Bierman and (ii) options to purchase 14,423 shares of common stock that are exercisable within 60 days of March 16, 2023.
(5)Consists of (i) 1,582 shares of common stock held by Mr. Geer and (ii) options to purchase 24,797 shares of common stock that are exercisable within 60 days of March 16, 2023.
(6)Consists of (i) 6,303 shares of common stock held by the Robert J. Keegan Trust, with Mr. Keegan as trustee and (ii) options to purchase 23,272 shares of common stock that are exercisable within 60 days of March 16, 2023.
150


(7)Consists of (i) 700 shares of common stock held by Ms. Sanders, (ii) warrants to purchase 700 shares of common stock that are exercisable within 60 days of March 16, 2023 and (iii) options to purchase 20,347 shares of common stock that are exercisable within 60 days of March 16, 2023.
(8)Consists of options to purchase 15,620 shares of common stock that are exercisable within 60 days of March 16, 2023.
(9)Consists of (i) 30,154 common shares held by our current executive officers and current directors, (ii) warrants to purchase 700 shares of common stock that are exercisable within 60 days of March 16, 2023 and (iii) options and SARs to purchase 347,823 shares of common stock exercisable within 60 days of March 16, 2023.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required

Policies and Procedures for Related Party Transactions
Our board of directors has adopted a written related person transaction policy setting forth the policies and procedures for the review and approval or ratification of related person transactions. This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be a participant, the amount involved exceeds the lesser of (i) $120,000 or (ii) one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which a related person had, has or will have a direct or indirect material interest, including without limitation, purchases of goods or services by this item is incorporated herein by referenceor from the Proxy Statement, underrelated person or entities in which the captions “Corporate Governance”related person has a material interest, indebtedness, guarantees of indebtedness and “Certainemployment by us of a related person. In reviewing and approving any such transactions, our audit committee is tasked to consider all relevant facts and circumstances, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in an arm’s length transaction and the extent of the related person’s interest in the transaction. All of the transactions described in this section either were approved or ratified pursuant to this policy or occurred prior to the adoption of this policy.
Certain Relationships and Related Party Transactions.Transactions
The following includes a summary of transactions since January 1, 2020, to which we were or are to be a participant, in which the amount involved exceeded or will exceed the lesser of (i) $120,000 or (ii) one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our common stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which are described in “Executive Compensation.

We also describe below certain other transactions with our directors, executive officers and stockholders.
2020 Registered Direct Offering
On March 24, 2020, we entered into a securities purchase agreement with certain institutional investors, pursuant to which we agreed to sell and issue, in a registered direct offering priced at the market, an aggregate of 1,860,465 shares of our common stock (or pre-funded warrants to purchase shares of common stock in lieu thereof). The purchase price for each share of common stock was $4.30, and the price for each pre-funded warrant was $4.299. Each pre-funded warrant had an exercise price of $0.001 per share. The pre-funded warrants were exercisable immediately upon issuance until all of the pre-funded warrants were exercised in full.
In the offering, Sabby Volatility Warrant Master Fund, Ltd., a greater than 5% stockholder at the time of the offering, purchased 620,000 shares of common stock and pre-funded warrants to purchase up to 260,233 shares of common stock for approximately $3.8 million. Based solely on information reported in a Schedule 13G/A filed with the SEC on January 5, 2021, Sabby no longer held any of our common stock or pre-funded warrants to purchase shares of our common stock as of that date.
Joseph Moglia, a greater than 5% stockholder at the time of the offering, purchased 100,000 shares of common stock for $430,000. Based solely on information reported in a Schedule 13D/A filed with the SEC on January 27, 2021, Mr. Moglia was no longer a greater than 5% stockholder as of that date.
Arrangements with Executive Officers and Directors
We have entered into employment arrangements with our named executive officers. For more information regarding our arrangements with our named executive officers, see the section entitled “Executive Compensation—Arrangements with our Named Executive Officers.”
We have entered, or will enter, into an indemnification agreement with each of our directors and executive officers. The indemnification agreements and our bylaws require us to indemnify our directors and officers to the fullest extent permitted by Delaware law.
151


Independence of Directors
Our common stock is listed on the Nasdaq Capital Market. Under the listing requirements and rules of the Nasdaq Capital Market, independent directors must comprise a majority of our board of directors, and each member of our audit committee, compensation committee and nominating and governance committee must be independent. Under the rules of the Nasdaq Capital Market, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Audit committee members must also satisfy independence criteria set forth in Rule 10A-3 under the Exchange Act. To be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of a company’s audit committee, the company’s board of directors or any other board committee, (i) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries or (ii) be an affiliated person of the listed company or any of its subsidiaries.
Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that James L. Bierman, W. Kent Geer, Robert J. Keegan, Machelle Sanders and Steven D. Skolsky, and John Palmour, during his service on the board until his death in November 2022, do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the applicable rules and regulations of the listing requirements and rules of the Nasdaq Capital Market. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with us and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.
Our board of directors determined that W. Kent Geer, Robert J. Keegan, and Steven D. Skolsky, each of the three members of our audit committee, and John Palmour, until his death in November 2022, satisfy the independence standards for our audit committee established by applicable SEC rules and the listing standards of the Nasdaq Capital Market and Rule 10A-3.
Our board of directors has determined that Robert J. Keegan, James L. Bierman and Machelle Sanders, each of the three current members of our compensation committee, satisfy the independence standards for our compensation committee established by applicable SEC Rules and the listing standards of the Nasdaq Capital Market, taking into consideration all factors specified in the applicable standards.
Our board of directors has determined that James L. Bierman, Machelle Sanders and Steven D. Skolsky, each of the three members of our nominating and corporate governance committee, and John Palmour, during his service on the committee until his death in November 2022, are independent within the meaning of the applicable listing standards of the Nasdaq Capital Market.

Item 14. Principal Accounting Fees and Services.

The information required by this item will be set forth in our Proxy Statement under the caption “Principal Accountant Fees and Services.”  


Principal Accountant Fees and Services

The following table represents the aggregate fees and expenses for services provided by BDO USA, LLP, or BDO, our independent registered public accounting firm for the fiscal years ended December 31, 2022 and 2021.
Fiscal Year Ended
20222021
(in thousands)
Audit Fees (1)$756 $329 
Audit-Related Fees— — 
Tax Fees— — 
All Other Fees— — 
Total Fees$756 $329 

1.Audit fees consist of fees billed, or expected to be billed, for professional services rendered for the audit of our consolidated annual financial statements, review of the interim consolidated financial statements, the issuance of consent
152


and comfort letters in connection with registration statement filings with the SEC and all services that are normally provided by the accounting firm in connection with statutory and regulatory filings or engagements.
All fees described above were approved by our audit committee.
Pre-Approval Policies and Procedures
Our audit committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered public accounting firm. The policy generally pre-approves specified services in the defined categories of audit services, audit-related services and tax services up to specified amounts. Pre-approval may also be given as part of our audit committee’s approval of the scope of the engagement of the independent auditor or on an individual, explicit, case-by-case basis before the independent auditor is engaged to provide each service. The pre-approval of services may be delegated to one or more of our audit committee’s members, but the decision must be reported to the full audit committee at its next scheduled meeting.

153


PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a)

The following financial statements are included in this Annual Report on Form 10-K:

(1)

List of Financial Statements:

(a)The following financial statements are included in this Annual Report:

(1)List of Financial Statements:
The financial statements required by this item are listed in Item 8, “Financial Statements and Supplementary Data” herein.

(2)

List of Financial Statement Schedules:

(2)List of Financial Statement Schedules:

All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial statements or notes thereto.

(3)

List of Exhibits.


 

 

 

 

 

 

INCORPORATED BY REFERENCE

EXHIBIT NO.

 

DESCRIPTION

 

Filed Herewith

 

FORM

 

File No.

 

ExhibIt

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

 

 

3.1

 

Restated Certificate of Incorporation of Novan, Inc., effective September 26, 2016.

 

 

 

8-K

 

001-37880

 

3.1

 

September 27, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

3.2

 

Amended and Restated Bylaws of Novan, Inc., effective September 26, 2016.

 

 

 

8-K

 

001-37880

 

3.2

 

September 27, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.1

#

Form of Director and Executive Officer Indemnification Agreement.

 

 

 

S-1

 

333-213276

 

10.1

 

August 24, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.2

#

2008 Stock Plan, as amended, and form of option agreements thereunder.

 

 

 

S-1

 

333-213276

 

10.2

 

August 24, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.3

#

2016 Incentive Award Plan, as amended.

 

 

 

S-8

 

333-219913

 

99.1

 

August 11, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

10.4

#

Senior Executive Annual Incentive Plan.

 

 

 

10-K

 

001-37880

 

10.4

 

March 20, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

10.5

#

Form of Award Agreement Awarding Non-Qualified Stock Options to Employees under the Novan, Inc. 2016 Incentive Award Plan.

 

 

 

10-Q

 

001-37880

 

10.1

 

November 14, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.6

#

Form of Award Agreement Awarding Incentive Stock Options to Employees under the Novan, Inc. 2016 Incentive Award Plan.

 

 

 

10-Q

 

001-37880

 

10.2

 

November 14, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.7

#

Form of Award Agreement Awarding Non-Qualified Stock Options to Non-Employee Directors under the Novan, Inc. 2016 Incentive Award Plan.

 

 

 

10-Q

 

001-37880

 

10.3

 

November 14, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.8

#

Amended and Restated Employment Agreement, dated April 13, 2016, by and between Novan, Inc. and Nathan Stasko.

 

 

 

S-1

 

333-213276

 

10.4

 

August 24, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.9

#

First Amendment to Amended and Restated Employment Agreement, dated June 4, 2017, by and between Novan, Inc. and Nathan Stasko.

 

 

 

8-K

 

001-37880

 

10.1

 

June 5, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

10.10

#

Employment Agreement, dated April 13, 2016, by and between Novan, Inc. and Richard Peterson.

 

 

 

S-1

 

333-213276

 

10.5

 

August 24, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

(3)List of Exhibits.

    INCORPORATED BY REFERENCE
EXHIBIT NO. DESCRIPTIONFiled HerewithFORMFile No.ExhibitFiling Date
2.1††8-K001-378802.1March 11, 2022
3.1  8-K001-378803.1September 27, 2016
3.28-K001-378803.1May 25, 2021
3.3  8-K001-378803.2September 27, 2016
4.1S-1/A333-2132764.1September 8, 2016
4.2X
4.38-K001-378804.1September 5, 2019
4.48-K001-378804.1July 22, 2020
4.58-K001-378804.1March 3, 2020
4.68-K001-378804.3March 3, 2020
4.78-K001-378804.2March 26, 2020
4.88-K001-378804.3March 16, 2023
4.9


8-K001-378804.2June 10, 2022

 

 

 

 

 

 

INCORPORATED BY REFERENCE

EXHIBIT NO.

 

DESCRIPTION

 

Filed Herewith

 

FORM

 

File No.

 

ExhibIt

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

 

 

10.11

 

 

#

Separation and General Release Agreement, dated March 24, 2017, by and between Novan, Inc. and Richard Peterson.

 

 

 

10-Q

 

001-37880

 

10.3

 

May 12, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

10.12

#

Offer Letter, dated March 21, 2017, by and between Novan, Inc. and William B. Hodges

 

 

 

8-K

 

001-37880

 

10.1

 

March 22, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

10.13

#

Letter Agreement, dated October 31, 2017, by and between Novan, Inc. and William B. Hodges

 

 

 

8-K

 

001-37880

 

10.1

 

November 6, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.14

#

Employment Agreement, dated August 25, 2016, by and between Novan, Inc. and M. Joyce Rico.

 

 

 

10-K

 

001-37880

 

10.11

 

March 20, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

10.15

#

Separation and General Release Agreement, dated May 6, 2017, by and between Novan, Inc. and M. Joyce Rico.

 

 

 

10-Q

 

001-37880

 

10.5

 

May 12, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

10.16

#

Employment Agreement, dated March 16, 2017, by and between Novan, Inc. and Paula Brown Stafford, as amended October 12, 2017 and March 14, 2018.

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.17

#

Non-employee Director Compensation Policy

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.18

Amended, Restated and Consolidated License Agreement between The University of North Carolina and Novan, Inc., dated as of June 27, 2012, and as amended on November 30, 2012.

 

 

 

S-1/A

 

333-213276

 

10,7

 

September 8, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.19

Second Amendment, dated April 12, 2016, to the Amended, Restated and Consolidated License Agreement between The University of North Carolina and Novan, Inc., dated as of June 27, 2012.

 

 

 

10-Q

 

001-37880

 

10.4

 

November 14, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.20

UNC Sublicense Agreement, dated December 29, 2015, by and between Novan, Inc. and KNOW Bio, LLC.

 

 

 

S-1

 

333-213276

 

10.8

 

August 24, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

154



    INCORPORATED BY REFERENCE
EXHIBIT NO. DESCRIPTIONFiled HerewithFORMFile No.ExhibitFiling Date
10.1# 10-Q001-3788010.6October 30, 2020
10.2# S-1333-21327610.2August 24, 2016
10.3# 8-K001-3788010.1May 25, 2021
10.4# 10-Q001-3788010.1November 14, 2016
10.5# 10-Q001-3788010.2November 14, 2016
10.6# 10-Q001-3788010.3November 14, 2016
10.7#10-Q001-3788010.1May 16, 2022
10.8#10-Q001-3788010.3August 8, 2018
10.9#10-K001-3788010.12February 24, 2020
10.10#10-Q001-3788010.1November 10, 2021
10.11#10-K001-3788010.13February 24, 2020
10.12#8-K001-3788010.2September 24, 2020
10.13#10-Q001-3788010.3August 12, 2021
10.14#10-Q001-3788010.2May 16, 2022
10.15#X

 

 

 

 

 

 

INCORPORATED BY REFERENCE

EXHIBIT NO.

 

DESCRIPTION

 

Filed Herewith

 

FORM

 

File No.

 

ExhibIt

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

 

 

10.21

First Amendment, dated October 13, 2017, to the UNC Sublicense Agreement, dated December 29, 2015, by and between Novan, Inc. and KNOW Bio, LLC.

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.22

Novan Patent and Know-How License Agreement, dated December 29, 2015, by and between Novan, Inc. and KNOW Bio, LLC.

 

 

 

S-1

 

333-213276

 

10.9

 

August 24, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.23

First Amendment, dated October 13, 2017, to the Novan Patent and Know-How License Agreement, dated December 29, 2015, by and between Novan, Inc. and KNOW Bio, LLC.

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.24

License Agreement, dated January 12, 2017, by and between Novan, Inc. and Sato Pharmaceutical Co. Ltd.

 

 

 

10-K

 

001-37880

 

10.17

 

March 20, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

10.25

First Amendment, dated January 12, 2017 to the License Agreement, dated January 12, 2017, by and between Novan, Inc. and Sato Pharmaceutical Co. Ltd.

 

 

 

10-K

 

001-37880

 

10.18

 

March 20, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.26

 

Lease, dated as of August 17, 2015, by and between Novan, Inc. and Durham Hopson Road, LLC, as amended on January 6, 2015.

 

 

 

S-1

 

333-213276

 

10.11

 

August 24, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.27

 

Second Amendment, dated as of September 12, 2016, to the Lease, dated as of August 17, 2015, by and between Novan, Inc. and Durham Hopson Road, LLC.

 

 

 

10-Q

 

001-37880

 

10.7

 

November 14, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

10.28

 

Stock Sale and Purchase Agreement, dated April 13, 2016, by and between Novan, Inc. and Stasko Living Trust.

 

 

 

S-1

 

333-213276

 

10.12

 

August 24, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

23.1

 

Consent of PricewaterhouseCoopers LLP.

 

X

 

 

 

 

 

 

 

 

155



    INCORPORATED BY REFERENCE
EXHIBIT NO. DESCRIPTIONFiled HerewithFORMFile No.ExhibitFiling Date
10.16†† 10-Q001-3788010.8May 16, 2022
10.17†† 10-Q001-3788010.9May 16, 2022
10.1810-K001-3788010.23March 27, 2019
10.19††10-K001-3788010.19February 18, 2022
10.20††10-K001-3788010.20February 18, 2022
10.21†† 10-Q001-3788010.10May 16, 2022
10.2210-K001-3788010.21March 27, 2018
10.2310-K001-3788010.26March 27, 2019
10.24†† 10-Q001-3788010.11May 16, 2022
10.2510-K001-3788010.23March 27, 2018
156


    INCORPORATED BY REFERENCE
EXHIBIT NO. DESCRIPTIONFiled HerewithFORMFile No.ExhibitFiling Date
10.2610-K001-3788010.29March 27, 2019
10.27††X
10.28††X
10.2910-Q001-3788010.1November 5, 2018
10.30††8-K001-3788010.1December 21, 2022
10.31††10-Q001-3788010.6May 16, 2022
10.32††10-Q001-3788010.7May 16, 2022
10.33††10-Q001-3788010.12May 16, 2022
10.34††

10-K001-3788010.30February 18, 2022
10.35††10-K001-3788010.31February 18, 2022
10.3610-Q001-3788010.1May 11, 2021
157


    INCORPORATED BY REFERENCE
EXHIBIT NO. DESCRIPTIONFiled HerewithFORMFile No.ExhibitFiling Date
10.378-K001-3788010.1March 11, 2022
10.388-K001-3788010.1December 6, 2022
10.398-K001-3788010.2December 6, 2022
21.1X
23.1 X
23.2X
31.1  X        
31.2  X        
32.1  X        
32.2  X        
99.18-K001-3788099.1March 11, 2002
99.28-K001-3788099.2March 11, 2002
99.38-K001-3788099.3March 11, 2002
101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. X        
101.SCH Inline XBRL Taxonomy Extension Schema Document.  X        
158


INCORPORATED BY REFERENCE

EXHIBIT NO.

DESCRIPTION

Filed Herewith

FORM

File No.

ExhibIt

Exhibit

Filing Date

101.CAL

31.1

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

31.2

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

X

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

X

101.INS

XBRL Instance Document.

X

101.SCH

XBRL Taxonomy Extension Schema Document. 

X

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

X

101.DEF

101.DEF

Inline XBRL Taxonomy Extension Definition Document.

X

101.LAB

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

X

101.PRE

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

X

104

Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL Instance document included in Exhibit 101.

X


Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

††

Certain confidential information contained in these exhibits were omitted by means of redacting a portion of the text and replacing it with [***], pursuant to Regulation S-K Item 601(b) of the Securities Act of 1933, as amended. Certain confidential information has been excluded from the respective exhibits because it is: (i) not material; and (ii) the Company treats such information as private or confidential.

#

Indicates management contract or compensatory plan.



159


Item 16. Form 10-K Summary.

None.


160

SIGNATURES



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Novan, Inc.

Novan, Inc.

Date: March 27, 2018

30, 2023

By:

/s/ G. Kelly Martin

Paula Brown Stafford

G. Kelly Martin

Paula Brown Stafford

InterimChairman, President and Chief Executive Officer


(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name

Title

Date

Name

Title

Date

/s/ G. Kelly Martin

Paula Brown Stafford

InterimChairman, President, Chief Executive Officer and Director (Principal
(Principal
Executive Officer)

March 27, 2018

30, 2023

G. Kelly Martin

Paula Brown Stafford

/s/ Jeff N. Hunter

John M. Gay

Interim Chief Financial Officer
 (Principal Financial Officer)

March 30, 2023
John M. Gay
/s/ Andrew J. NovakVice President, Accounting and Business Operations
(Principal
Accounting Officer)

March 27, 2018

30, 2023

Jeff N. Hunter

Andrew J. Novak

/s/ Robert A. Ingram

James L. Bierman

Chairman of the Board

Director

March 27, 2018

30, 2023

Robert A. Ingram

James L. Bierman

/s/ W. Kent Geer

Director

March 27, 2018

30, 2023

W. Kent Geer

/s/ Robert J. Keegan

Director

March 27, 2018

30, 2023

Robert J. Keegan

/s/ Sean Murphy

Director

March 27, 2018

Sean Murphy

/s/ John Palmour

Director

March 27, 2018

John Palmour

/s/ Machelle Sanders

Director

March 27, 2018

30, 2023

Machelle Sanders

/s/ Paula Brown Stafford

Steven D. Skolsky

Director

March 27, 2018

30, 2023

Paula Brown Stafford

Steven D. Skolsky

/s/ Nathan Stasko

Director

March 27, 2018

Nathan Stasko

/s/ Eugene Sun

Director

March 27, 2018

Eugene Sun

123


161