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.

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 impose~~commercialization. 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 21~~^st ~~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.~~

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 the~~offers a number of expedited development and ~~FDA~~ review ~~of drugs that are intended~~programs 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 a~~review 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. The~~development. 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 a~~also be eligible for other types of FDA programs intended to expedite development and review, such as priority review ~~designation~~and accelerated approval. An NDA is eligible for priority review if the product candidate is designed to ~~drugs that offer major advances in treatment~~treat 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 establishing~~upon 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 require~~generally requires a sponsor of a drug receiving accelerated approval to perform ~~post-marketing~~confirmatory studies to verify and describe the predicted effect on irreversible morbidity or mortality or other clinical endpoint, and the drug may

be subject to accelerated withdrawal ~~procedures.~~

~~Moreover, under~~procedures if the ~~provisions~~sponsor 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 request~~commercial 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 designation~~accelerated approval do not change the standards for approval ~~but~~and 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.~~

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 ~~user~~program 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:

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.

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

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 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.

Sales of our currently marketed products (and any other product candidates, if ~~approved, will~~approved) by us or our commercial partners depend, in part, on the extent to which such products ~~will be~~are 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

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. ~~Decreases~~Third-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 for~~payors do not consider our ~~product candidates or a decision by a third-party payor~~products 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.

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.

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 ~~candidates~~pricing, 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

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 of~~limit 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.

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.

We continue to assess the impact of COVID-19 and related constraints on the global workforce on our ~~sales, results~~supply chain and related vendors and global supply chain constraints across various industries, including interruption of, ~~operations~~or 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.~~

~~Manufacturing~~disruptions in delivery systems and ~~Supplies~~

potential price increases. We ~~currently manufacture all drug substance, including NVN1000 (the API for all~~are 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 our~~new facility ~~in Morrisville, North Carolina. We believe that our~~to 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 began~~API 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.

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 ~~operations~~own internal resources, including our manufacturing capabilities.

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.

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 refer~~the 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 notes~~full-scale production of our API, while also establishing a strategic alliance with Orion

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.~~

~~Research~~topical 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 costs~~are 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. See~~programs, as described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations—Liquidity and Capital Resources.”

We manage our operations and allocate resources in ~~this Annual Report on Form 10-K~~two reporting segments, which represent (i) the promotion of commercial products for ~~more information regarding our~~the 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.

As of December 31, ~~2017,~~2022, we had 59a total of 89 full-time employees, ~~including 35~~in 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, ~~and~~7 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.

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 ~~employees~~product candidates is ~~subject~~critical to ~~a collective bargaining agreement or represented by a labor or trade union. We believe that~~ our ~~relations with our employees are good.~~

success.

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

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.

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.

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:

If any of the foregoing risks were realized, our business, financial condition, and results of operations could be adversely affected.

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.

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.

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.

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 ~~difficult~~advantageous for us to ~~raise additional equity capital if it should be needed~~retain sole development and commercialization rights to the product candidate.

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 industries~~specifically 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.

On June 11, 2021, we announced positive top-line results ~~of our two identically designed~~from the Phase 3 ~~pivotal~~B-SIMPLE4 clinical ~~trials~~trial for ~~SB204 revealed that SB204 demonstrated statistical significance on all three co-primary endpoints in one trial, but demonstrated statistical significance on only one~~SB206 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, if~~results from B-SIMPLE4 will be sufficient for the FDA to approve the NDA submitted for SB206 in January 2023 or that any ~~and the resulting~~additional clinical ~~trial design~~trials we may conduct for any of our other product candidates will achieve ~~trial~~ results that are sufficient to support an ~~FDA~~NDA submission for ~~our acne~~the applicable product ~~candidate,~~candidates or regulatory approval of ~~that product, or~~the product. We also cannot assure you that we will be able to ~~complete a strategic arrangement, whether through~~obtain 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 support~~date in our Research & Development segment have focused on the development ~~necessary~~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, 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.

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:

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

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~~

Inflation has the potential to ~~Our Operations~~

~~Our~~adversely affect our liquidity, business, ~~involves~~financial condition and results of operations by increasing our overall cost structure. The existence of inflation in the ~~use~~economy has resulted in, and may continue to result in, higher interest rates and capital costs, supply shortages, increased costs of ~~hazardous materials~~labor, 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 oxide~~well 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 disposal~~similar 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 us~~continue to ~~identify~~experience 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 negatively~~difference 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 members~~cost 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 there~~inflation 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.

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 be~~products is subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, ~~as well as~~and continued compliance with ~~cGMPs~~cGMP 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:

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 intended~~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 ~~broaden~~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 ~~reduce~~coverage 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.

Further, there has been heightened governmental scrutiny ~~over~~in the ~~manner~~United States of pharmaceutical pricing practices in ~~which manufacturers set prices for their commercial products, which~~light of the rising cost of prescription drugs. Such scrutiny has resulted in several ~~Congressional~~recent congressional inquiries and proposed ~~bills~~and 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.~~

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.

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 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

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~~

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.

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 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

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.

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.

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.

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.

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:

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.

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:

A delisting would also reduce the value of our equity compensation plans, which could negatively impact our ability to retain key employees.

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

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 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 (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.

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.

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.

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.

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.

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.

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.

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 ~~and~~and/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 ~~and~~and/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 ~~and~~and/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 ~~and~~and/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.

In addition, the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned ~~and~~and/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 ~~obtains~~has 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

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.

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 ~~and~~and/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.

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.

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.

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.

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 ~~and~~and/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 ~~and~~and/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 ~~and~~and/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.

Accordingly, our competitive position may be impaired, and our business, financial condition, results of operations and prospects may be adversely affected.

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 ~~evaluating~~evaluated the patent landscape for nitric oxide releasing materials and ~~products, and, based~~products. Based on our knowledge of these searches and evaluations to date, we doare not ~~believe that there are~~aware of any valid patents ~~which~~that contain granted claims that could be asserted with respect to our nitric oxide-based product candidates.

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

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. ~~Third~~From 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.

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 us~~trademark 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 in~~geo-political actions involving the United States ~~and other countries that provide~~and/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:

~~actual~~limit 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 purchased~~patent application, patent, or ~~otherwise acquired our securities (1) pursuant or traceable to our IPO, or (2) on~~trademark 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 under~~entered 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 designed~~site serves as our corporate headquarters and ~~upfit specifically for our nitric oxide~~will 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 option~~prepared our new location to ~~extend~~support various cGMP activities, including research and development and small-scale manufacturing capabilities, as described in the ~~lease~~section entitled “Business—Manufacturing and Supplies” in this Annual Report.

On March 3, 2022, EPI Health entered into a sublease agreement ~~by five years upon completion~~with 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 use~~Meeting 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 manufacture~~notified EPG of our ~~drug product candidates~~termination of the Meeting Street Lease effective February 28, 2023.

See “Note 6—“Leases” to ~~contract manufacturing organizations~~the accompanying consolidated financial statements included in this Annual Report for ~~development and commercial production or may establish a second~~additional 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 traded~~trades on the Nasdaq ~~Global~~Capital 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 ~~177~~106 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.

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

2022.

We are a ~~clinical-stage biotechnology~~medical dermatology company focused on ~~leveraging~~developing 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 mechanisms~~oxide-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 components~~approval 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 use~~profitable, 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 o~~ngoing 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~~secure additional capital. Sources of additional capital ~~from non-dilutive~~may potentially include (i) debt or equity financings, such as through sales of common stock, or (ii) other sources, ~~including~~such as partnerships, collaborations, licensing, grants or other strategic ~~relationships, or through~~relationships. Any issuance of equity, or debt ~~financings.~~

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

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 designed~~by 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.

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

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.

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.

Since our ~~inception~~incorporation 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 activities~~With 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 total~~expanded 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 proceeds~~strategic relationships. However, other historical forms of ~~$148.7 million to fund our operations. We~~funding have ~~incurred net losses in each year since inception~~included 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, 2016~~2022 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 unless~~the section entitled “Management’s Discussion and ~~until we obtain regulatory approval from the FDA~~Analysis 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 any~~further discussion of our current liquidity and our future funding needs.

The EPI Health Acquisition has provided our company with a commercial infrastructure to sell a marketed product ~~candidates, there will be significant commercialization expenses~~portfolio 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.

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, manufacturing~~an 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 continue~~collaboration revenues, see Note 1—“Organization and Significant Accounting Policies” and Note 14—“License and Collaboration Revenues” to ~~incur substantial expenses as we continue clinical trials~~the accompanying consolidated financial statements.

Government research contracts and grant revenue relates to the research and development of our ~~product candidates~~nitric oxide platform for preclinical advancement of NCEs and ~~maintain, expand~~formulations 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 addition~~grants is recognized when qualifying expenses are incurred.

Cost of goods sold includes all costs directly incurred to ~~the proceeds that we recently received~~produce net revenues from our ~~January 2018 Offering, we will need substantial additional funding~~marketed portfolio of medical dermatology products. Cost of goods sold primarily consist of (i) costs to ~~support~~procure, ship, handle and warehouse our ~~planned~~marketed 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 associated~~connection with the ~~master development services~~various license, collaboration and ~~clinical supply agreement and related statements~~asset 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 activities ~~including~~include 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:

~~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.~~

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.

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 ~~2018~~2023 in support of our commercial product ~~development~~portfolio 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.

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 2018~~the accompanying consolidated financial statements.

Contingent consideration is recorded as ~~we vigorously defend~~a liability and is the ~~putative stockholder class action lawsuits as described~~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. 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 Report~~operations and comprehensive loss.

For additional information regarding the valuation of contingent consideration, see Note 19—“Fair Value” to the accompanying consolidated financial statements.

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 consists primarily of (i) ~~lease~~foreign 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 2018~~income and ~~through the remainder~~expenses.

Management evaluates performance of the ~~initial lease term~~Company 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 ~~expires~~result 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.

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

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.

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 ~~$1.8~~amounts 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 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 of $7.4 million for the year ended December 31, ~~2017~~2022 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 amortization~~our Rhofade agreements, we accrued 25% of ~~a non-refundable~~the upfront payment ~~received under~~due 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 executed~~accompanying consolidated financial statements included in ~~2017.~~ this Annual Report.

Our Research and Development Operations segment incurred the substantial majority of ~~$0.4~~our 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 $25.2~~2022, compared to $20.4 million for the year ended December 31, ~~2017, compared~~2021. The net decrease of $4.4 million, or 22%, was primarily related to ~~$46.5~~a $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.

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 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 to~~table 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 trials~~year ended December 31, 2022 and December 31, 2021 and the ~~long-term safety trial~~primary drivers of the fluctuations from the prior period:

The $4.7 million of transaction- and integration-related expenditures incurred in connection with the ~~SB204 program, which resulted in a decrease~~EPI 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 ~~$26.2~~selling, 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 decrease~~commercial sales and operations teams, and (iv) $1.6 million of ~~$1.9 million~~travel 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 $2.2~~expense 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 2017~~general and ~~(ii)~~ ~~conducted clinical start-up activities~~administrative 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 ~~facility~~recurring salary and ~~manufacturing~~benefits costs ~~is primarily due to a full year~~between the two comparative periods.

Amortization of intangible assets of $1.6 million for the year ended December 31, ~~2017, compared~~2022 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 million~~the accompanying consolidated financial statements included in this Annual Report.

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.

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 increase~~non-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 million~~its remaining carrying value.

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.

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 ~~personnel~~the 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 ~~costs~~to 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 ~~growth~~commercialization of our ~~research~~products. The payment and ~~development activities~~termination 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 inception~~further prepare for commercialization of SB206 following approval.

From January 1, 2021 through December 31, ~~2017,~~2022, we have ~~financed~~raised total equity and debt proceeds of $70.1 million to fund our operations, ~~primarily with $148.7~~including (i) $14.0 million in net proceeds from the ~~issuance and~~ sale of ~~equity securities~~common stock (or pre-funded warrants in lieu thereof) and ~~convertible debt securities, including $44.6~~accompanying 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 initial~~common 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 forms~~offering 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 licensing~~activities primarily on equity financings, while generating additional liquidity and ~~supply arrangements and government~~capital through other sources, including (i) governmental research contracts and ~~grants. We received an upfront payment of approximately $10.8~~grants totaling $12.9 million, ~~following~~(ii) our licensing and

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 first~~second quarter of ~~2017~~2019 with Reedy Creek Investments LLC, or Reedy Creek, and Ligand, respectively.

Going forward, we plan to finance our needs principally from the following:

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 combined~~2022, plus expected receipts associated with ~~the net proceeds~~product sales from our ~~January 2018~~commercial 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 in~~a 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 we~~learn 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 ~~each~~our product development programs and potentially commercialize any of our ~~drug~~product 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~~

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~~ 6—Note 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-K~~a 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 discussion~~any 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 ~~accounting~~factoring 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.

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.

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.

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.

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.

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.

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.

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.

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.

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:

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.

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.

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

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 change~~impacts 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 decreases~~change 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 during~~service 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 research~~partially relate to the continued operations of the Research and ~~development services. The decrease in payables~~Development 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 primarily~~the 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 ~~increases~~a $1.5 million increase in ~~accounts payable and accrued expense balances~~deferred revenue associated with ~~our outside research~~(i) the recognition of license and ~~development activities~~collaboration revenue of $2.8 million associated with the Company’s performance during the period ~~including~~and (ii) a ~~$1.4~~time-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 ~~increase~~net change in ~~accrued outside research~~other long-term assets and ~~development services. The increase~~liabilities.

During the year ended December 31, ~~2015, net cash used in operating activities was $20.8~~2022, 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 ~~laboratory~~property, equipment and ~~leasehold improvements at~~services 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 to~~included 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 primarily~~services associated with ~~laboratory equipment~~the planning, design and ~~our portion~~build-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

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.

During the year ended December 31, ~~2015,~~2022, net cash ~~used in investing~~provided 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 ~~$0.5~~consisted 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 letter~~the 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 in~~provided 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.~~

~~During~~payments of costs related to the ~~year ended~~June 2021 Public Offering.

As of December 31, ~~2016, net~~2022, we had a total cash ~~provided by financing activities was $44.3~~and cash equivalents balance of $12.3 million ~~consisting primarily~~and 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 repurchase~~commercial 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. We~~sales 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 all~~achieve 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-stage~~such product ~~candidates. Based upon our current operating plan, we anticipate that our existing cash and cash equivalents as~~candidate. 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 quarter~~2022, 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 ~~substantial~~significant additional funding to ~~continue~~support our planned and future operating activities and make further advancements in ~~each~~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 ~~drug~~product 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 programs~~well 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-dilutive~~including, 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, ~~including~~such 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 capital~~new funding on terms acceptable to us, on a timely basis, or at all. ~~A failure~~In 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 funds~~significant 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 to~~adjust 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 deficit~~24,722,308 shares of ~~$160.2 million~~common 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 continue~~stock 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.

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:

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 discussion~~December 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 ~~accounting~~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 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 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.

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.

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.

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.

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.

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.

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.

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 party~~third-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-clinical~~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. 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 payment~~are obligated to make payments to UNC ~~in February 2017 representing~~that represent the portion of the Sato upfront ~~payment~~and milestone payments that ~~was~~were 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 ~~that~~which 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 future~~all upfront and milestone payments ~~we may receive~~the 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.

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 become~~became 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 become~~became 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 ~~will~~would 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 IND~~entered 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 ~~FDA~~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 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 at~~Purchase 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 include~~transactions are within our ~~rights described above~~control. 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 ~~development~~fundamental transaction, whether that consideration be in the form of cash, stock or any combination thereof. In the event of any fundamental transaction, and ~~commercialization~~regardless of ~~products for all diagnostic, therapeutic, prophylactic~~whether 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 up~~Analysis—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 be~~accompanying consolidated financial statements included in this Annual Report for additional discussion regarding the ~~Oncovirus Field as a result~~terms of the ~~option exercise will be subject~~warrants.

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 supplies~~and with manufacturing related vendors for raw materials, production related equipment, drug product and drug substance stability testing, supportive consultative services, and other ~~services~~products and ~~products~~services 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 carryforwards~~NOLs of approximately ~~of $140.5~~$104.7 million and ~~$142.4~~$65.1 million, respectively. The ~~net operating loss carryforwards~~NOLs begin to expire in ~~2028~~2029 and ~~2023~~2024 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 whether~~experience a cumulative ownership ~~changes exceeding~~change 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 occurred~~occurs in the future which exceeds the Section 382 threshold, ~~a portion of~~ our NOL carryforwards and research and development credits may be ~~limited. If~~subject to additional limitations. Since our net operating loss carryforwards are limited, ~~and~~if 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.

There were no changes in or disagreements with accountants on accounting and financial disclosures.

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 principles~~United 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~~

Significant judgments are used during this process, particularly with ~~either our performance~~respect to ~~achieve~~intangible 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 as~~purchase 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 part~~2—“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-K~~for additional discussion, in addition to Note 19—“Fair Value”, related to the EPI Health Acquisition.

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.

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 awards~~under 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. To~~be 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 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.

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 ~~difference~~carrying 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 reflected~~these 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 of~~circumstances 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 effect~~impairment exists, using a fair value based test. Goodwill is assessed at the ~~time of our IPO, each non-employee director who served on the Board~~reporting 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 stock~~October 1, 2022 and concluded that ~~had an aggregate~~it is not more likely than not that the fair value of ~~$100,000~~our 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 date~~goodwill 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 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 price~~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 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.

Not applicable.

Novan, Inc. (“Novan” and together with its subsidiaries, the “Company”), is a ~~North Carolina-based clinical-stage biotechnology~~medical dermatology company focused on ~~leveraging nitric oxide’s natural antiviral~~developing and ~~immunomodulatory mechanisms~~commercializing 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 ~~action~~viral 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 dermatological~~sell 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 2015~~as 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.

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.

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 flows~~operations 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 Bio~~2022, 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.

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:

This evaluation is also based on other relevant conditions ~~and~~that 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 ~~form~~Company’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 to~~SB206 as a treatment for molluscum, (ii) costs associated with the ~~full development~~readiness and operation of the Company’s new manufacturing capability necessary to support small-scale drug substance and drug product ~~candidates. There can~~manufacturing, (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 acceptable~~determined 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 ~~failure~~inability of the Company to generate sufficient net revenues to fund its operations or obtain ~~sufficient funds~~significant additional funding on acceptable terms ~~when needed~~in 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’s~~its 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 will~~were to pursue such a transaction, it may not be ~~challenged.~~

~~Reverse stock-split~~able 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 ~~amendments~~liquidate its assets or seek protection under the bankruptcy laws. If the Company decides to ~~certificate~~dissolve 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.

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 ~~board~~business, 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 ~~directors~~the 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 amended~~outbreak of COVID-19 and its ~~certificate~~variants. 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 amended~~Company’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 IPO~~commercial manufacture of its ~~common stock. The Company sold an aggregate~~products or clinical batch manufacturing of ~~4,715,000 shares of common stock under~~its product candidates, (v) the ~~registration statement on Form S-1 declared effective by~~ability 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 stock~~active 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 between~~product 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 with~~may 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 by~~could cause the Company ~~of up~~ to ~~a maximum aggregate offering price of $150,000 of~~experience 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 ~~could~~may 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.

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.

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.

Restricted cash ~~of $539~~ as of December 31, ~~2017~~2022 and ~~2016, which consisted of~~December 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 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.

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 represent~~limits and the ~~cost to obtain and register~~Company 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 amortized~~wholesaler customers accounted for more than 10% of its total accounts receivable balance at 25%, 13% and ~~are assessed~~12%, 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 ~~impairment~~additional detail.

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 are recorded at cost and depreciated using the straight-line method over their estimated useful lives as follows:

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

the Company assesses according to applicable accounting guidance to determine the appropriate owner, and capitalizes such tenant improvement assets accordingly.

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.

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.

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.

The Company elected the practical expedient to ~~capitalize~~not separate non-lease components from the ~~fair value~~lease components. Fixed lease payments on operating leases are recognized over the expected term of the ~~building~~lease on a straight-line basis. Variable lease expenses that are not considered fixed are expensed as ~~well~~incurred. 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 whether~~uses its incremental borrowing rate based on the ~~circumstances qualify for sales recognition under the sale-leaseback accounting guidance. If~~information available at the lease ~~meets the sale-leaseback criteria, the Company will remove the asset and related financial obligation from the balance sheet and evaluate~~commencement 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 as~~payments 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.

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~~

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 milestone~~determines those that are performance obligations and ~~royalty payments. Such arrangements include multiple elements, including~~assesses whether each promised good or service is distinct. The Company then recognizes as revenue the ~~sale~~amount of ~~licenses and~~ the

transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company currently has the following types of revenue generating arrangements:

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.

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:

Royalty revenue from licenses provided to the ~~milestone. A milestone payment~~Company’s collaboration partners, which is ~~considered substantive if it: (i)~~based on sales to third parties of licensed products and technology, is ~~commensurate with either~~recorded based on the ~~Company’s performance to achieve~~later of when the ~~milestone~~third-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 to~~which some or all of the ~~deliverables~~royalty 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 deferred~~collaboration revenue in the accompanying ~~balance sheets. See Note 4~~—~~Collaboration Arrangements for further information~~consolidated statements of operations and ~~accounting considerations related to licensing arrangements revenue recognition.~~

~~Revenue Recognition—Research and Development Services~~

~~During 2017,~~comprehensive loss.

When the Company ~~entered into~~performs 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 as~~determined to be within the scope of ASC 808, and ~~during~~where 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 all~~Company recognizes a contra-expense that reflects the value of the ~~following conditions~~cost reimbursement to which the Company is expected to be entitled in exchange for those services.

Such contractually required reimbursements are ~~met: (i) persuasive evidence~~reported 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) fees~~cash receipt from the collaboration partner.

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 recognized~~recorded in the period in which the ~~services~~related costs are ~~performed.~~

~~During~~incurred. 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 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.

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 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 ~~cost~~costs 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.

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 account~~considering development progress data received from outside service providers and discussions with applicable Company and service provider personnel.

~~Share-Based~~

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.

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.

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:

See Note 19—“Fair Value” for additional detail regarding the fair value of certain balances reflected within the accompanying consolidated financial statements.

The Company applies the fair value method of accounting for ~~share-based~~stock-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 ~~statement~~accompanying 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-based~~stock-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-based~~stock-based compensation awards.

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. ~~Due~~The 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.

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-employees~~liability-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.

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 the~~did not record a federal or state income tax benefit ~~from an uncertain tax position only if it is more likely than not that~~for 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 any~~2022 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 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, 2016~~2022 and ~~2015,~~December 31, 2021, comprehensive loss was equal to net loss.

Basic net loss per share attributable to common stockholders is ~~calculated~~computed by dividing the net loss attributable to common stockholders by the weighted average number of shares ~~outstanding during the period, without consideration for~~of common stock ~~equivalents.~~ outstanding for the period.

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 ~~antidilutive~~anti-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, 2016~~2022 and ~~2015~~December 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,
	2022	2021
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 aggregate~~a 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 revenue~~Company’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 ~~March~~June 2016, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU~~Accounting Standards Update (“ASU”) No. ~~2016-09,~~ ~~Compensation—Stock Compensation~~2016-13, Financial Instruments-Credit Losses (Topic ~~718)~~326): ~~Improvements~~Measurement 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 aspects~~adoption of ~~the~~this 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 standard~~2022, did not have a material impact on ~~its~~the Company’s consolidated financial statements.

~~In October 2016,~~

Note 2: Acquisition of EPI Health

On March 11, 2022, the ~~FASB~~Company 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 amends~~and 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 how~~Company with a ~~reporting entity that is~~commercial 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 interests~~secured promissory note issued to EPG in the ~~entity held through~~principal 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 are~~agreed 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 ~~January~~the Company, upon net sales of certain of EPI Health’s legacy products exceeding $30,000 during the period from April 1, ~~2017. Adoption~~2022 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 ~~FASB~~fair value of the consideration transferred is allocated to the assets acquired and ~~the International Accounting Standards Board issued a converged standard~~liabilities 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 part~~EPI Health Acquisition. Any excess of the ~~Company’s adoption efforts, management has completed an assessment~~purchase 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 that~~liabilities 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% in~~goodwill.

For the year ended December 31, ~~2017 as a result of adoption of~~2022 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 accounting~~Company incurred costs related to ~~leases by requiring lessees to recognize a lease liability~~the 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 results~~estimated 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 which~~estimated fair value of purchase consideration is then allocated to the ~~Company receives the rights, and in some cases substantially all~~estimated fair values of the ~~rights, of~~net 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 payment~~table under the ~~Sato Agreement that was estimated~~section 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 with~~Net Assets Acquired.


	As of March 11, 2022		Measurement Period Adjustments			As of June 30, 2022		Measurement Period Adjustments			As of September 30, 2022		Measurement Period Adjustments		As of December 31, 2022
Initial cash consideration to Seller	$	11,000	$	—		$	11,000	$	—		$	11,000	$	—	$	11,000
Secured promissory note issued to Seller	16,500		—			16,500		(3,195)		(B)	13,305		—		13,305
Closing date fair value of contingent consideration liability	3,773		—			3,773		(125)		(C)	3,648		—		3,648
Remaining working capital adjustment to be paid	4,069		(969)		(A)	3,100		—			3,100		—		3,100
Working capital adjustment paid at close	993		—			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 back~~EPG agreed to the ~~Company. There were no milestone or royalty payments required during~~final 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 Agreement~~estimated 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. Pursuant~~in 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 ~~terms~~estimated 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 obtained~~estimated 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 commercialization~~reduction 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 not~~2022, the Company continued to ~~execute this option. This option expired, unexercised on~~conduct 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 exchange~~2022. 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 granted~~Company’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 achievement~~the 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, regulatory~~the 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. Pursuant~~termination during the third quarter of 2022.

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.

The total estimated purchase consideration was allocated to the ~~terms~~estimated fair values of the ~~Sato Agreement, Sato was required to pay~~assets acquired and liabilities assumed as of March 11, 2022 as follows:

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 during~~estimating 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.

The following pro forma information presents the combined results of operations for the year ended December 31, ~~2017~~2022 and December 31, 2021, as ~~compared to~~if the ~~revenue that~~Company 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 using~~had the ~~previously estimated performance~~EPI 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 affect~~pro forma financial information has been calculated after applying the ~~total amount~~Company’s accounting policies and includes adjustments for transaction-related costs.

The major components of ~~revenue expected to be recognized over the term~~inventory, net, were as follows:

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 considered~~EPI 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. As~~Company’s ASC 805 business combination accounting. See Note 2—“Acquisition of ~~December 31, 2017, no amounts have been recognized~~EPI Health” for additional detail.

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:

Property and equipment consisted of the following:

Depreciation and amortization expense was ~~$1,423, $757~~$1,178 and ~~$631~~$344 for the years ended December 31, ~~2017, 2016~~2022 and ~~2015,~~2021, respectively.

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.

The Company leases office space and certain equipment under non-cancelable lease agreements.

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.

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

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.

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.

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.

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:

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:

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:

The following table represents the components of accounts payable as of December 31, 2022 and December 31, 2021:

The following table represents the components of accrued expenses as of December 31, 2022 and December 31, 2021:

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.

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 agreement~~Bay 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 feet~~EPI 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.

In connection with the factoring facility, ~~space~~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 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 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 Company~~2022.

See Note 11—“Stockholders' Equity” regarding outstanding common stock warrants.

See Note 12—“License and ~~certain of its current~~Collaboration 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 acquired~~Collaboration Revenues” regarding the Company’s ~~securities (1) pursuant or traceable to~~license 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, the~~Funding Agreement with Ligand.

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.

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.

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.

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.

Under the terms of ~~two former~~the 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 ~~officers~~has not recognized a liability for such Rhofade milestones based on current and historical sales figures and management’s estimates of future sales.

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.

On March ~~and May~~11, 2022, at the closing of ~~2017, respectively,~~the EPI Health Acquisition, the Company entered into ~~separation~~a secured promissory note and ~~general release agreements~~security agreement with ~~both individuals that included separation benefits consistent~~EPG. The Company entered into the Seller Note with EPG to finance a portion of the ~~Company’s obligations under their previously existing employment agreements~~Closing 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 severance~~non-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 during~~using the effective interest method.

See Note 2—“Acquisition of EPI Health” for additional detail regarding the Seller Note as it relates to ~~reduce operating expenditures~~the EPI Health purchase consideration and ~~preserve cash~~its estimated fair value and measurement period adjustments.

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 expensed~~the 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 paid~~2021 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.

In conjunction with the completion of the ~~IPO~~Company’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 ~~provides~~provided for 210,000,000 authorized shares of capital stock, of which 200,000,000 shares ~~have been~~are designated as $0.0001 par value common stock and 10,000,000 shares ~~have been~~are 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 such~~effect 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 adjustment~~combined 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 Conversion~~Reverse Stock Split.

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 consent~~sale of the ~~holders~~shares 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 ~~could~~may 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 ~~take~~to 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.

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 decrease~~common stock warrant and pre-funded warrant issuances.

The following table presents the Company’s outstanding warrants to purchase common stock for the periods indicated.

The June 2022 Common Warrants also include a separate provision whereby the ~~per share~~exercisability 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 distribution~~up 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

On February 27, 2020, the ~~original purchase price or the per share amount on~~Company 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. Prior~~underwriter, relating to the ~~IPO, in September 2016, the Company’s board of directors~~offering, 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.

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

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.

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.

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.

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:

In April 2016, the Company repurchased ~~9,500~~950 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’s~~accompanying consolidated balance ~~sheet~~sheets as of December 31, ~~2017~~2022 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.

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, ~~2017~~2022 and ~~2016.~~

~~Common Stock~~

~~Authorized, Issued~~December 31, 2021.

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:

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.

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 value~~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 ~~$0.0001 per~~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, 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.

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.

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.

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

trailing twelve months gross sales. EPI Health is not currently actively promoting this product as part of its commercial portfolio.

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.

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.

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.

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.

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:

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.

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 ~~consists~~except for the regulatory responsibilities assigned to the Company under the terms of ~~200,000,000 authorized shares~~the 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

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”.

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.

On January 12, 2017, the Company entered into a license agreement, and ~~2016. There~~related 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.

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 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 ~~16,005,408~~not individually distinct because Sato can only benefit from these licensed intellectual property rights and ~~15,939,992 shares~~services 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 outstanding~~a 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.

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 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:

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 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, ~~2017~~2022 and ~~2016, respectively.~~

therefore, is currently fully constrained and excluded from the transaction price.

The Company ~~had reserved shares~~evaluated the timing of ~~common stock~~delivery 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 ~~adopted~~concluded 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

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.

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.

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.

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.

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.

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.

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.

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 adopted~~predecessor 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 the~~effective September 20, 2016, ~~Plan. All awards granted on~~remain 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 under~~authorized for issuance thereunder by 1,500,000 shares. This amendment was approved by the ~~2016 Plan~~Company’s board of directors on March 10, 2021. The approval by ~~an additional 1,200,000 shares. All other material terms~~the 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 ~~1,023,378~~241,801 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 be~~based 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.

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.

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.

On August 2, 2018, the Company’s board of directors approved and established the ~~acceleration~~Tangible 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 unvested~~the 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.

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 options~~2022, there were ~~vested pursuant to this option acceleration and the Company recognized $1,312~~a total of ~~additional compensation expense.~~

1,250 Inducement Grants outstanding.

During the years ended December 31, ~~2017, 2016~~2022 and ~~2015,~~December 31, 2021, the Company recorded employee ~~share-based~~stock-based compensation expense, ~~from continuing operations~~including fair value adjustments of ~~$3,758, $1,573 and $1,974, respectively.~~ the Tangible Stockholder Return Plan, as follows:

Total ~~share-based~~stock-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:

The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model, ~~using~~and the following weighted average assumptions:

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.

RSU activity for the year ended December 31, 2022 is as follows:

There was no income tax benefit recognized for the years ended December 31, ~~2017, 2016~~2022 and ~~2015~~December 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.

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.

The reasons for the difference between actual income tax benefit for the years ended December 31, ~~2017, 2016~~2022 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:

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.

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, ~~2017,~~2022, the Company had federal and state ~~net operating loss~~NOL carryforwards of ~~$140,508~~$104,745 and ~~$142,388,~~$65,061, respectively. The ~~net operating loss carryforwards~~NOLs begin to expire in ~~2028~~2029 and ~~2023~~2024 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 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.

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:

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:

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:

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:

See Note 2—“Acquisition of EPI Health” for additional detail regarding contingent consideration related to the transaction.

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).

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.

Segment revenue, net and comprehensive loss and total assets were as follows:

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 from~~for 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.

None.

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 file~~it files or ~~submit~~submits 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 ~~forms~~forms. Disclosure controls and ~~(ii)~~procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to ~~our~~a company’s management, including ~~our~~its 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. ~~Our~~Based upon such evaluation, our principal executive ~~officer~~ and ~~principal~~ financial ~~officer~~officers 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.

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 of~~2022.

As we are a non-accelerated filer, our independent registered public accounting firm ~~regarding internal control over financial reporting due~~is not required to ~~a transition period established by the rules of the SEC for newly public companies. We are~~issue 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 of~~report on our 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.

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 ~~were~~have 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’s~~our internal control over financial reporting.

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.

Not applicable.

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.

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.

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.

For information regarding Mrs. Stafford, please refer to “Directors,” above.

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 with~~the rules of the SEC ~~within 120 days after~~implementing Section 407 of the ~~end~~Sarbanes-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 for~~audit committee can read and understand fundamental financial statements in accordance with applicable SEC and Nasdaq requirements. To arrive at these determinations, our ~~2018 Annual Meeting~~board of ~~Stockholders (the “Proxy Statement”), under~~directors has examined each audit committee member’s scope of experience and the ~~captions “Executive Officers~~nature of his experience in the ~~Company,” “Proposal 1—Election~~corporate finance sector.

We have adopted a ~~code~~Code of ~~business conduct~~Business Conduct and ~~ethics~~Ethics 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 our~~Our Code of Business Conduct and Ethics is available on the “Corporate Governance” page of the “Investor Relations” section of our website, at ~~www.novan.com~~which 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.

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.

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:

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.

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.

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:

Each named executive officer’s employment agreement provided for certain cash bonuses for the year ended December 31, 2022, as described below:

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.

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.

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.

All of our full-time employees, including our named executive officers, are eligible to participate in our health and welfare plans, including:

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.

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.

The following table provides information regarding outstanding equity awards held by our named executive officers as of December 31, 2022.

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.

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 reference~~Section 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 Statement~~Company 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.

(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.

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

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 “Executive~~Company’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.

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.

The following table sets forth information concerning the compensation of our directors, other than Mrs. Stafford, for the year ended December 31, 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.

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

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.

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.

Applicable percentages are based on 28,015,371 shares outstanding on March 16, 2023, adjusted as required by ~~this item~~rules promulgated by the SEC.

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 reference~~or from the ~~Proxy Statement, under~~related person or entities in which the ~~captions “Corporate Governance”~~related person has a material interest, indebtedness, guarantees of indebtedness and ~~“Certain~~employment 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.

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.

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.

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.

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.

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.

~~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 Carolina	27703
(Address of principal executive offices)			(Zip Code)


Title of ~~each class~~ Each Class	Trading Symbol(s)	Name of ~~each exchange~~Each Exchange on ~~which registered~~ Which Registered
Common Stock, $0.0001 ~~per share~~ par value	NOVN	The Nasdaq ~~Global~~Stock Market LLC

	~~Page~~
~~PART I~~			Page
~~Item 1.~~ PART I		~~Business~~	4
Item 1.		Business	6
Item 1A.		Risk Factors	23 27
Item 1B.		Unresolved Staff Comments	59 57
Item 2.		Properties	59 57
Item 3.		Legal Proceedings	59 57
Item 4.		Mine Safety Disclosures	59 57

PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	60 58
Item 6.		~~Selected Financial Data~~[Reserved]	62 58
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	63 59
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk	83 81
Item 8.		Financial Statements and Supplementary Data	84 82
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~115~~ 136
Item 9A.		Controls and Procedures	~~115~~ 136
Item 9B.		Other Information	~~115~~ 137
Item 9C.		Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	137
~~PART III~~
PART III
Item 10.		Directors, Executive Officers and Corporate Governance	~~116~~ 138
Item 11.		Executive Compensation	~~116~~ 141
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~116~~ 149
Item 13.		Certain Relationships and Related Transactions, and Director Independence	~~116~~ 151
Item 14.		Principal ~~Accounting~~Accountant Fees and Services	~~116~~ 152

PART IV
Item 15.		Exhibits and Financial Statement Schedules	~~117~~ 154
Item 16.		Form 10-K Summary	~~122~~ 160
		Signatures	~~123~~
	161

	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	)

	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

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

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

	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


	Selling, general and administrative expenses
Year Ended December 31, 2021	$	12,343
Year Ended December 31, 2022	34,103
Change from prior period	$	21,760

	Prior Period Variance Detail Increase / (Decrease)
EPI Health Acquisition Transaction-related costs	$	4,691
EPI Health commercial sales operations	13,733
SB206 prelaunch and commercial preparation	1,103
Tax and insurance costs	291
Facility and depreciation costs	295
Professional services and other administrative costs	598
Personnel and related benefits	1,049
Change from prior period	$	21,760


Calendar Year Net Sales Threshold		Milestone Payment
$	50,000,000	$	5,000,000
$	75,000,000	$	5,000,000
$	100,000,000	$	10,000,000


Cumulative Net Sales Threshold				Milestone Payment
$	10,000,000			$	1,000,000
$	20,000,000			$	1,000,000
Each additional		$	20,000,000	$	1,500,000


Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Raleigh, NC; PCAOB ID #243)						85 83

Consolidated Balance Sheets as of December 31, ~~2017~~202 2 and ~~2016~~202 1						86 85

Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, ~~2017, 2016~~202 2 and ~~2015~~202 1						87 86

Consolidated Statements of ~~Convertible Preferred Stock and~~ Stockholders’ Equity ~~(Deficit)~~ for the Years ended December 31, ~~2017, 2016~~202 2 and ~~2015~~202 1						88 87

Consolidated Statements of Cash Flows for the Years ended December 31, ~~2017, 2016~~202 2 and ~~2015~~202 1						89 88

Notes to Consolidated Financial Statements						90 89

	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 Stock							Accumulated
	Shares	Amount						Deficit		Total










Balance as of December 31, 2020	14,570,009	$	1	$	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, net	3,636,364	—		37,236		—		—		37,236
Exercise of common stock warrants	103,551	—		461		—		—		461
Common stock issued pursuant to common stock purchase agreements	493,163	1		6,333		—		—		6,334
Exercise of stock options	12,842	—		62		—		—		62
Net loss	—	—		—		—		(29,692)		(29,692)
Balance as of December 31, 2021	18,815,892	$	2	$	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, net	2,080,696	—		14,020		—		—		14,020
Exercise of pre-funded warrants related to the June 2022 registered direct offering	3,180,615	—		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, 2022	24,722,308	$	2	$	315,038	$	(155)	$	(310,280)	$	4,605

	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	)


	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)


	December 31, 2022
Finished goods available for sale	$	2,037
Reserve for obsolescence	(841)
Inventory, net	$	1,196


	December 31, 2022		December 31, 2021
Inventory and raw material deposits	$	1,280	$	—
Prepaid service contracts	121		—
Prepaid insurance	1,341		1,697
Prepaid Prescription Drug User Fee Act (PDUFA) fees	1,182		—
Product samples	1,362		—
Other current assets related to leasing arrangement	—		109
Prepaid expenses and other current assets	521		766
Total prepaid expenses and other current assets	$	5,807	$	2,572


Maturity of Lease Liabilities	Operating Leases
2023	$	229
2024	626
2025	645
2026	665
2027	685
2028 and beyond	3,016
Total future undiscounted lease payments	$	5,866

Less: imputed interest	(1,936)
Total reported lease liability	$	3,930


	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 portion	3,739
Total lease liabilities	$	3,930


	Initial Carrying Value		Accumulated Amortization		Net Book Value		Remaining Useful Life (Years)
Rhofade	$	15,500	$	835	$	14,665	14.25
Wynzora	2,000		108		1,892		14.25
Minolira	8,500		458		8,042		14.25
Cloderm	1,000		54		946		14.25
Sitavig	2,000		145		1,855		13.94
Website domain	75		—		75
Total intangible assets	$	29,075	$	1,600	$	27,475


2023	$	1,935
2024	1,941
2025	1,935
2026	1,935
2027	1,935
Thereafter	17,719
Total amortization	$	27,400


	December 31, 2022		December 31, 2021
Rebates, coupons, discounts and chargebacks	$	9,509	$	—
Finished goods inventory	721		—
Construction in process	—		451
Outside research and development services	721		140
Facility service providers	—		87
Legal and professional fees	530		193
SB206 regulatory activities	422		417
SB206 pre-commercial and marketing	153		682
Other payables	1,633		200
Total accounts payable	$	13,689	$	2,170


	December 31, 2022		December 31, 2021
Accrued rebates, coupons, discounts and chargebacks	$	8,671	$	—
Accrued returns	3,011		—
Accrued compensation	937		1,543
Accrued outside research and development services	410		194
Accrued legal and professional fees	542		427
Accrued royalties	675		—
Accrued milestones	1,250		—
Accrued construction in process	—		1,020
Accrued insurance	747		—

Accrued SB206 regulatory activities	165		—
Accrued Wynzora payments due to collaborator	532		—
Accrued MC2 collaboration deposit	1,149		—
Accrued other expenses	535		1,804
Total accrued expenses	$	18,624	$	4,988

	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


Calendar Year Net Sales Threshold		Milestone Payment
$	50,000	$	5,000
$	75,000	$	5,000
$	100,000	$	10,000


	December 31,		Exercise Price Per Share
	2022	2021
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 Offering	5,261,311	—	2.851
Warrants to purchase common stock issued in the March 2020 Public Offering	252,417	252,417	3.00
Underwriter warrants to purchase common stock associated with the March 2020 Public Offering	11,304	11,304	3.75
Placement agent warrants to purchase common stock issued in the March 2020 Registered Direct Offering	10,605	10,605	5.375
	5,535,637	1,274,176


	Year Ended
	December 31, 2022
	Total Net Product Revenues		Percentage of Net Product Revenues
Rhofade	$	11,488	72.7	%
Wynzora	1,640		10.4	%
Minolira	1,572		10.0	%
Cloderm	505		3.2	%
Other	591		3.7	%
Net product revenues	$	15,796	100.0	%


	Year Ended
	December 31, 2022
	Total License and Collaboration Revenues		Percentage of License and Collaboration Revenues
Sato Agreement - SB206 and SB204	$	2,586	33.1	%

Sato Rhofade Agreement	5,000		64.0	%
Prasco Agreement - Cloderm AG	227		2.9	%

License and collaboration revenues	$	7,813	100.0	%


	Contract Asset		Contract Liability		Net Deferred Revenue
December 31, 2021	$	—	$	13,251	$	13,251

December 31, 2022	$	—	$	10,665	$	10,665

	Short-term Deferred Revenue		Long-term Deferred Revenue		Net Deferred Revenue
December 31, 2021	$	2,586	$	10,665	$	13,251

December 31, 2022	$	2,586	$	8,079	$	10,665


	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, 2020	52,378	199,199	$	30.71
Additional shares reserved under plan	1,500,000	—

SARs forfeited	1,000	—
Options granted	(385,885)	385,885	8.82
Options forfeited	45,731	(53,689)	26.72
Options exercised	—	(12,842)	4.74
Options outstanding as of December 31, 2021	1,213,224	518,553	$	15.48
RSUs granted	(479,606)	—
RSUs forfeited	22,200	—
Options granted	(543,300)	543,300	3.25
Options forfeited	29,283	(29,283)	4.92

Options outstanding as of December 31, 2022	241,801	1,032,570	$	9.34	8.47	$	—

Vested and expected to vest as of December 31, 2021		470,773	$	16.24	8.67	$	2
Exercisable as of December 31, 2021		200,638	$	26.59	7.46	$	2

Vested and expected to vest as of December 31, 2022		943,355	$	9.82	8.42	$	—
Exercisable as of December 31, 2022		352,915	$	18.70	7.38	$	—


	Shares Subject to Outstanding RSUs	Weighted- Average Grant Date Fair Value
Nonvested RSUs outstanding as of December 31, 2021	—	$	—
RSUs granted	479,606	2.87
RSUs forfeited	(22,200)	2.98
RSUs vested	—	—
Nonvested RSUs outstanding as of December 31, 2022	457,406	$	2.86


Balance at March 31, 2022	$	3,773
Change in fair value	(454)
Balance at June 30, 2022	$	3,319
Change in fair value	186
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 portion	2,037
Balance at December 31, 2022	$	2,488


	Transition Services Agreement		Sitavig Milestone (Regulatory)
Valuation methodology	Probability-Weighted		Probability-Weighted
Term	0.81		1.89
Payment term	1.05		2.14
Adjusted discount rate	12.11	%	13.15	%

Computer and office equipment

Furniture and fixtures

Laboratory equipment

~~Building asset under facility lease~~

~~25 years~~