UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
 
☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20212022
OR
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO
Commission File Number 001-37880
Novan, Inc.
(Exact name of registrant as specified in its charter) 
Delaware20-4427682
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)
  
4020 Stirrup Creek Drive, Suite 110
Durham,North Carolina27703
(Address of principal executive offices)(Zip Code)
(919) 485-8080
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: 
Title of Each ClassTrading Symbol(s)
Name of Each Exchange on Which Registered 
Common Stock, $0.0001 par valueNOVNThe Nasdaq Stock Market LLC
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer☐ Accelerated filer☐
Non-accelerated filer☒Smaller reporting company☒
 Emerging growth company☒☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☒ 
As of August 5, 2021,1, 2022, there were 18,813,19221,281,613 shares of the registrant’s Common Stock outstanding.


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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
NOVAN, INC.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
June 30, 2021December 31, 2020 June 30, 2022December 31, 2021
ASSETSASSETS  ASSETS  
Current assets:Current assets:  Current assets:  
Cash and cash equivalentsCash and cash equivalents$65,802 $35,879 Cash and cash equivalents$37,302 $47,085 
Contracts and grants receivable63 4,863 
Accounts receivable, netAccounts receivable, net18,217 4,473 
Prepaid insurance629 1,818 
Inventory, netInventory, net1,559 — 
Prepaid expenses and other current assetsPrepaid expenses and other current assets692 1,333 Prepaid expenses and other current assets4,977 2,572 
Other current asset related to leasing arrangement, net1,592 0 
Assets held for sale0 114 
Total current assetsTotal current assets68,778 44,007 Total current assets62,055 54,130 
Restricted cashRestricted cash472 0 Restricted cash583 583 
Intangible assets75 75 
Property and equipment, netProperty and equipment, net14,068 12,201 
Intangible assets, netIntangible assets, net32,406 75 
Other assetsOther assets302 341 Other assets276 278 
Property and equipment, net8,703 2,406 
Right-of-use lease assetsRight-of-use lease assets1,386 0 Right-of-use lease assets1,971 1,693 
GoodwillGoodwill3,033 — 
Total assetsTotal assets$79,716 $46,829 Total assets$114,392 $68,960 
LIABILITIES AND STOCKHOLDERS’ EQUITYLIABILITIES AND STOCKHOLDERS’ EQUITY  LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:Current liabilities:  Current liabilities:  
Accounts payableAccounts payable$1,800 $1,192 Accounts payable$6,756 $2,170 
Accrued compensation800 1,154 
Accrued outside research and development services156 930 
Accrued legal and professional fees239 168 
Other accrued expenses4,224 801 
Accrued expensesAccrued expenses33,428 4,988 
Deferred revenue, current portionDeferred revenue, current portion2,990 2,990 Deferred revenue, current portion2,586 2,586 
Paycheck Protection Program loan, current portion0 478 
Research and development service obligation liability, current portionResearch and development service obligation liability, current portion1,396 987 Research and development service obligation liability, current portion824 1,406 
Contingent consideration liability, current portionContingent consideration liability, current portion433 — 
Operating lease liabilities, current portionOperating lease liabilities, current portion230 — 
Total current liabilitiesTotal current liabilities11,605 8,700 Total current liabilities44,257 11,150 
Deferred revenue, net of current portionDeferred revenue, net of current portion7,087 8,238 Deferred revenue, net of current portion9,372 10,665 
Paycheck Protection Program loan, net of current portion0 478 
Noncurrent operating lease liabilities3,095 0 
Operating lease liabilities, net of current portionOperating lease liabilities, net of current portion3,703 3,613 
Notes payableNotes payable16,500 — 
Research and development service obligation liability, net of current portionResearch and development service obligation liability, net of current portion450 649 Research and development service obligation liability, net of current portion96 142 
Research and development funding arrangement liabilityResearch and development funding arrangement liability25,000 25,000 Research and development funding arrangement liability25,000 25,000 
Contingent consideration liability, net of current portionContingent consideration liability, net of current portion2,886 — 
Other long-term liabilitiesOther long-term liabilities153 787 Other long-term liabilities329 71 
Total liabilitiesTotal liabilities47,390 43,852 Total liabilities102,143 50,641 
Commitments and contingencies (Note 8)00
Commitments and contingencies (Note 10)Commitments and contingencies (Note 10)00
Stockholders’ equityStockholders’ equity  Stockholders’ equity  
Common stock $0.0001 par value; 200,000,000 shares authorized as of June 30, 2021 and December 31, 2020; 18,812,642 and 14,570,959 shares issued as of June 30, 2021 and December 31, 2020, respectively; 18,811,692 and 14,570,009 shares outstanding as of June 30, 2021 and December 31, 2020, respectively2 1 
Common stock $0.0001 par value; 200,000,000 shares authorized as of June 30, 2022 and December 31, 2021; 21,282,563 and 18,816,842 shares issued as of June 30, 2022 and December 31, 2021, respectively; 21,281,613 and 18,815,892 shares outstanding as of June 30, 2022 and December 31, 2021, respectivelyCommon stock $0.0001 par value; 200,000,000 shares authorized as of June 30, 2022 and December 31, 2021; 21,282,563 and 18,816,842 shares issued as of June 30, 2022 and December 31, 2021, respectively; 21,281,613 and 18,815,892 shares outstanding as of June 30, 2022 and December 31, 2021, respectively2 2 
Additional paid-in capitalAdditional paid-in capital296,731 252,408 Additional paid-in capital313,629 297,441 
Treasury stock at cost, 950 shares as of June 30, 2021 and December 31, 2020(155)(155)
Treasury stock at cost, 950 shares as of June 30, 2022 and December 31, 2021Treasury stock at cost, 950 shares as of June 30, 2022 and December 31, 2021(155)(155)
Accumulated deficitAccumulated deficit(264,252)(249,277)Accumulated deficit(301,227)(278,969)
Total stockholders’ equityTotal stockholders’ equity32,326 2,977 Total stockholders’ equity12,249 18,319 
Total liabilities and stockholders’ equityTotal liabilities and stockholders’ equity$79,716 $46,829 Total liabilities and stockholders’ equity$114,392 $68,960 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
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NOVAN, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
(in thousands, except share and per share amounts)
Three Months Ended June 30,Six Months Ended June 30, Three Months Ended June 30,Six Months Ended June 30,
2021202020212020 2022202120222021
License and collaboration revenue$747 $1,100 $1,494 $2,124 
Net product revenuesNet product revenues$5,809 $— $6,526 $— 
License and collaboration revenuesLicense and collaboration revenues344 747 1,518 1,494 
Government research contracts and grants revenueGovernment research contracts and grants revenue0 221 72 410 Government research contracts and grants revenue5 — 41 72 
Total revenueTotal revenue747 1,321 1,566 2,534 Total revenue6,158 747 8,085 1,566 
Operating expenses:Operating expenses:Operating expenses:
Product cost of goods soldProduct cost of goods sold2,612 — 2,818 — 
Research and developmentResearch and development5,257 3,761 11,675 8,677 Research and development3,144 5,257 7,977 11,675 
General and administrative2,431 3,232 5,117 5,739 
Selling, general and administrativeSelling, general and administrative8,594 2,431 18,589 5,117 
Amortization of intangible assetsAmortization of intangible assets548 — 669 — 
Change in fair value of contingent considerationChange in fair value of contingent consideration(454)— (454)— 
Impairment loss on long-lived assetsImpairment loss on long-lived assets114 2,421 114 2,421 Impairment loss on long-lived assets— 114 — 114 
Total operating expensesTotal operating expenses7,802 9,414 16,906 16,837 Total operating expenses14,444 7,802 29,599 16,906 
Operating lossOperating loss(7,055)(8,093)(15,340)(14,303)Operating loss(8,286)(7,055)(21,514)(15,340)
Other income (expense), net:Other income (expense), net:Other income (expense), net:
Interest incomeInterest income3 10 6 45 Interest income14 3 18 6 
Interest expenseInterest expense(608)— (740)— 
Gain on debt extinguishmentGain on debt extinguishment956 0 956 0 Gain on debt extinguishment— 956 — 956 
Other income (expense)Other income (expense)73 (3)(597)5 Other income (expense)2 73 (22)(597)
Total other income (expense), netTotal other income (expense), net1,032 7 365 50 Total other income (expense), net(592)1,032 (744)365 
Net loss and comprehensive lossNet loss and comprehensive loss$(6,023)$(8,086)$(14,975)$(14,253)Net loss and comprehensive loss$(8,878)$(6,023)$(22,258)$(14,975)
Net loss per share, basic and dilutedNet loss per share, basic and diluted$(0.39)$(1.00)$(0.98)$(2.42)Net loss per share, basic and diluted$(0.44)$(0.39)$(1.14)$(0.98)
Weighted-average common shares outstanding, basic and dilutedWeighted-average common shares outstanding, basic and diluted15,570,290 8,060,317 15,288,156 5,882,352 Weighted-average common shares outstanding, basic and diluted20,215,738 15,570,290 19,526,465 15,288,156 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
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NOVAN, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(unaudited)
(in thousands, except share amounts)
Six Months Ended June 30, 2021Six Months Ended June 30, 2022
Additional
Paid-In
Capital
 Treasury
Stock
   Additional
Paid-In
Capital
 Treasury
Stock
  
Common StockAccumulated  Common StockAccumulated 
SharesAmountDeficitTotal SharesAmountDeficitTotal
Balance as of December 31, 202014,570,009 $1 $252,408 $(155)$(249,277)$2,977 
Balance as of December 31, 2021Balance as of December 31, 202118,815,892 $2 $297,441 $(155)$(278,969)$18,319 
Stock-based compensationStock-based compensation— — 36 — — 36 Stock-based compensation— — 381 — — 381 
Exercise of common stock warrants99,651 0 442 — — 442 
Common stock issued pursuant to common stock purchase agreement493,163 1 6,333 — — 6,334 
Exercise of stock options2,492 0 13 — — 13 
Common stock issued pursuant to equity distribution agreement (at-the-market facility)Common stock issued pursuant to equity distribution agreement (at-the-market facility)164,230 — 562 — — 562 
Net lossNet loss— — — — (8,952)(8,952)Net loss— — — — (13,380)(13,380)
Balance as of March 31, 202115,165,315 $2 $259,232 $(155)$(258,229)$850 
Balance as of March 31, 2022Balance as of March 31, 202218,980,122 $2 $298,384 $(155)$(292,349)$5,882 
Stock-based compensationStock-based compensation— — 215 — — 215 Stock-based compensation— — 453 — — 453 
Common stock issued pursuant to public offering, net3,636,364 0 37,236 — — 37,236 
Exercise of common stock warrants3,900 0 19 — — 19 
Exercise of stock options6,150 0 29 — — 29 
Extinguishment of fractional shares resulting from reverse stock split(37)— — — — — 
Common stock and pre-funded warrants issued pursuant to the June 2022 registered direct offering, netCommon stock and pre-funded warrants issued pursuant to the June 2022 registered direct offering, net2,080,696 — 14,020 — — 14,020 
Common stock issued pursuant to equity distribution agreement (at-the-market facility)Common stock issued pursuant to equity distribution agreement (at-the-market facility)220,795 — 772 — — 772 
Net lossNet loss— — — — (6,023)(6,023)Net loss— — — — (8,878)(8,878)
Balance as of June 30, 202118,811,692 $2 $296,731 $(155)$(264,252)$32,326 
Balance as of June 30, 2022Balance as of June 30, 202221,281,613 $2 $313,629 $(155)$(301,227)$12,249 
Six Months Ended June 30, 2020
Additional
Paid-In
Capital
 Treasury
Stock
  
Common StockAccumulated 
SharesAmountDeficitTotal
Balance as of December 31, 20192,673,480 $0 $197,856 $(155)$(219,984)$(22,283)
Six Months Ended June 30, 2021
Additional
Paid-In
Capital
 Treasury
Stock
  
Common StockAccumulated 
SharesAmountDeficitTotal
Balance as of December 31, 2020Balance as of December 31, 202014,570,009 $1 $252,408 $(155)$(249,277)$2,977 
Stock-based compensationStock-based compensation— — 385 — — 385 Stock-based compensation— — 36 — — 36 
Common stock and pre-funded warrants issued pursuant to public offering, net1,549,860 0 5,158 — — 5,158 
Exercise of pre-funded warrants related to public offering433,333 0 0 — — 0 
Common stock and pre-funded warrants issued pursuant to registered direct offering, net1,055,000 1 7,224 — — 7,225 
Exercise of pre-funded warrants related to registered direct offering460,233 0 0 — — 0 
Exercise of common stock warrantsExercise of common stock warrants960,000 0 2,880 — — 2,880 Exercise of common stock warrants99,651 — 442 — — 442 
Common stock issued pursuant to common stock purchase agreementCommon stock issued pursuant to common stock purchase agreement70,000 0 442 — — 442 Common stock issued pursuant to common stock purchase agreement493,163 1 6,333 — — 6,334 
Exercise of stock optionsExercise of stock options2,492 — 13 — — 13 
Net lossNet loss— — — — (6,167)(6,167)Net loss— — — — (8,952)(8,952)
Balance as of March 31, 20207,201,906 $1 $213,945 $(155)$(226,151)$(12,360)
Balance as of March 31, 2021Balance as of March 31, 202115,165,315 $2 $259,232 $(155)$(258,229)$850 
Stock-based compensationStock-based compensation— — 335 — — 335 Stock-based compensation— — 215 — — 215 
Exercise of pre-funded warrants related to registered direct offering345,233 — 0 — — 0 
Exercise of pre-funded warrants related to the March 2020 registered direct offeringExercise of pre-funded warrants related to the March 2020 registered direct offering3,636,364 — 37,236 — — 37,236 
Exercise of common stock warrantsExercise of common stock warrants861,067 0 2,583 — — 2,583 Exercise of common stock warrants3,900 — 19 — — 19 
Common stock issued pursuant to common stock purchase agreementsCommon stock issued pursuant to common stock purchase agreements3,533,999 0 17,491 — — 17,491 Common stock issued pursuant to common stock purchase agreements6,150 — 29 — — 29 
Extinguishment of fractional shares resulting from reverse stock splitExtinguishment of fractional shares resulting from reverse stock split(37)— — — — — 
Net lossNet loss— — — — (8,086)(8,086)Net loss— — — — (6,023)(6,023)
Balance as of June 30, 202011,942,205 $1 $234,354 $(155)$(234,237)$(37)
Balance as of June 30, 2021Balance as of June 30, 202118,811,692 $2 $296,731 $(155)$(264,252)$32,326 
The accompanying notes are an integral part of these condensed consolidated financial statements
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NOVAN, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six Months Ended June 30, Six Months Ended June 30,
20212020 20222021
Cash flow from operating activities:Cash flow from operating activities:  Cash flow from operating activities:  
Net lossNet loss$(14,975)$(14,253)Net loss$(22,258)$(14,975)
Adjustments to reconcile net loss to net cash used in operating activities:Adjustments to reconcile net loss to net cash used in operating activities:Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization138 987 
Depreciation and amortization of property and equipmentDepreciation and amortization of property and equipment344 138 
Impairment loss on long-lived assetsImpairment loss on long-lived assets114 2,421 Impairment loss on long-lived assets— 114 
Amortization of intangible assetsAmortization of intangible assets669 — 
Change in fair value of contingent considerationChange in fair value of contingent consideration(454)— 
Stock-based compensationStock-based compensation(261)691 Stock-based compensation834 (261)
Non-cash cost of shares issued to Aspire Capital as commitment fee0 848 
Foreign currency transaction lossForeign currency transaction loss667 0 Foreign currency transaction loss— 667 
Gain on debt extinguishmentGain on debt extinguishment(956)0 Gain on debt extinguishment— (956)
Loss on disposal and write-offs of property and equipment0 44 
Changes in operating assets and liabilities:Changes in operating assets and liabilities:Changes in operating assets and liabilities:
Contracts and grants receivable4,457 198 
Prepaid insurance, prepaid expenses and other current assets1,830 531 
Accounts receivableAccounts receivable6,339 4,457 
InventoryInventory151 — 
Prepaid expenses and other current assetsPrepaid expenses and other current assets1,287 1,830 
Accounts payableAccounts payable(107)(333)Accounts payable3,921 (107)
Accrued compensation(354)189 
Accrued outside research and development services(774)(545)
Accrued legal and professional fees(28)(358)
Other accrued expenses499 264 
Accrued expensesAccrued expenses855 (657)
Deferred revenueDeferred revenue(1,494)(2,243)Deferred revenue(1,293)(1,494)
Research and development service obligation liabilitiesResearch and development service obligation liabilities210 (1,882)Research and development service obligation liabilities(628)210 
Other long-term assets and liabilitiesOther long-term assets and liabilities45 (349)Other long-term assets and liabilities(111)45 
Net cash used in operating activitiesNet cash used in operating activities(10,989)(13,790)Net cash used in operating activities(10,344)(10,989)
Cash flow from investing activities:Cash flow from investing activities:Cash flow from investing activities:
Purchases of property and equipmentPurchases of property and equipment(2,810)(357)Purchases of property and equipment(2,800)(2,810)
Proceeds from the sale of property and equipment0 15 
Payment for EPI Health AcquisitionPayment for EPI Health Acquisition(11,993)— 
Net cash used in investing activitiesNet cash used in investing activities(2,810)(342)Net cash used in investing activities(14,793)(2,810)
Cash flow from financing activities:Cash flow from financing activities:Cash flow from financing activities:
Proceeds from issuance of common stock and pre-funded warrants, net of underwriting fees and commissionsProceeds from issuance of common stock and pre-funded warrants, net of underwriting fees and commissions37,600 12,577 Proceeds from issuance of common stock and pre-funded warrants, net of underwriting fees and commissions14,220 37,600 
Proceeds from exercise of common stock warrantsProceeds from exercise of common stock warrants461 5,463 Proceeds from exercise of common stock warrants— 461 
Proceeds from Paycheck Protection Program loan0 956 
Proceeds from issuance of common stock under common stock purchase agreementProceeds from issuance of common stock under common stock purchase agreement6,334 17,085 Proceeds from issuance of common stock under common stock purchase agreement— 6,334 
Payments related to public offering costs(243)(178)
Payments of offering costs related to registration statement0 (25)
Proceeds from common stock issued pursuant to equity distribution agreement (at-the-market facility)Proceeds from common stock issued pursuant to equity distribution agreement (at-the-market facility)1,334 — 
Payments related to offering costsPayments related to offering costs(200)(243)
Proceeds from exercise of stock optionsProceeds from exercise of stock options42 0 Proceeds from exercise of stock options— 42 
Net cash provided by financing activitiesNet cash provided by financing activities44,194 35,878 Net cash provided by financing activities15,354 44,194 
Net increase in cash, cash equivalents and restricted cash30,395 21,746 
Net (decrease) increase in cash, cash equivalents and restricted cashNet (decrease) increase in cash, cash equivalents and restricted cash(9,783)30,395 
Cash, cash equivalents and restricted cash as of beginning of periodCash, cash equivalents and restricted cash as of beginning of period35,879 14,251 Cash, cash equivalents and restricted cash as of beginning of period47,668 35,879 
Cash, cash equivalents and restricted cash as of end of periodCash, cash equivalents and restricted cash as of end of period$66,274 $35,997 Cash, cash equivalents and restricted cash as of end of period$37,885 $66,274 
Supplemental disclosure for cash flow information:Supplemental disclosure for cash flow information:
Interest paidInterest paid$339 $— 
Supplemental disclosure of non-cash investing and financing activities:Supplemental disclosure of non-cash investing and financing activities:Supplemental disclosure of non-cash investing and financing activities:
Purchases of property and equipment with accounts payable and accrued expensesPurchases of property and equipment with accounts payable and accrued expenses$4,007 $0 Purchases of property and equipment with accounts payable and accrued expenses$782 $4,007 
Right-of-use assets obtained in exchange for lease liabilitiesRight-of-use assets obtained in exchange for lease liabilities$1,386 $0 Right-of-use assets obtained in exchange for lease liabilities$— $1,386 
Non-cash gain on debt extinguishment from forgiveness of Paycheck Protection Program loanNon-cash gain on debt extinguishment from forgiveness of Paycheck Protection Program loan$956 $0 Non-cash gain on debt extinguishment from forgiveness of Paycheck Protection Program loan$— $956 
Deferred offering costs in accounts payable and accrued expensesDeferred offering costs in accounts payable and accrued expenses$121 $0 Deferred offering costs in accounts payable and accrued expenses$— $121 
Deferred offering costs reclassified to additional paid-in capitalDeferred offering costs reclassified to additional paid-in capital$364 $16 Deferred offering costs reclassified to additional paid-in capital$— $364 
Contingent consideration related to EPI Health AcquisitionContingent consideration related to EPI Health Acquisition$3,773 $— 
Note payable issued for EPI Health AcquisitionNote payable issued for EPI Health Acquisition$16,500 $— 
Reconciliation to condensed consolidated balance sheets:Reconciliation to condensed consolidated balance sheets:Reconciliation to condensed consolidated balance sheets:
Cash and cash equivalentsCash and cash equivalents$65,802 $35,458 Cash and cash equivalents$37,302 $65,802 
Restricted cash included in noncurrent assetsRestricted cash included in noncurrent assets472 539 Restricted cash included in noncurrent assets583 472 
Total cash, cash equivalents and restricted cash shown in the statement of cash flowsTotal cash, cash equivalents and restricted cash shown in the statement of cash flows$66,274 $35,997 Total cash, cash equivalents and restricted cash shown in the statement of cash flows$37,885 $66,274 

The accompanying notes are an integral part of these condensed consolidated financial statements 
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NOVAN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollar values in thousands, except per share data)
Note 1: Organization and Significant Accounting Policies
Business Description and Basis of Presentation
Novan, Inc. (“Novan” and together with its subsidiaries, the “Company”), is a North Carolina-based late clinical-stage biotechnologymedical dermatology company focused primarily on researching, developing and 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 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 leveraging its proprietary nitric oxide based technology platform, NITRICIL™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 generate macromolecular new chemical entitiessell a marketed portfolio of therapeutic products for skin diseases. Subsequent to treat multiple indications inthe acquisition, the Company sells various medical dermatology men’sproducts for the treatments of plaque psoriasis, rosacea, acne and women’s health, infectious diseases, and various other medical conditions with significant unmet needs. dermatoses.
Novan was incorporated in January 2006 under the state laws of Delaware. Its wholly-owned subsidiary,In 2015, Novan Therapeutics, LLC, was organized in 2015as a wholly owned subsidiary under the state laws of North Carolina. OnCarolina; in March 14, 2019, the Company completed registration of a wholly-ownedwholly owned Ireland-based subsidiary, Novan Therapeutics, Limited.Limited; and in March 2022, the Company acquired its wholly owned subsidiary, EPI Health, a South Carolina limited liability company.
See Note 2—“Acquisition of EPI Health” for further information regarding the EPI Health Acquisition. The post-acquisition operating results of EPI Health are reflected within the Company’s condensed consolidated statement of operations and comprehensive loss for the three and six months ended June 30, 2022, specifically from March 11, 2022 through June 30, 2022.
Basis of Presentation
The accompanying condensed 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”). The December 31, 20202021 year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.GAAP for annual financial statements. Additionally, the Company’s independent registered public accounting firm’s report foron the December 31, 20202021 financial statements included an explanatory paragraph indicating that there iswas substantial doubt about the Company’s ability to continue as a going concern.
Basis of Consolidation
The accompanying condensed consolidated financial statements reflect the operations of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Reverse Stock Split
On May 25, 2021, the Company amended its restated certificate of incorporation effecting a 1-for-10 reverse stock split of its outstanding shares of capital stock (the “Reverse Stock Split”). The Reverse Stock Split did not change the number of authorized shares of capital stock of the Company or cause an adjustment to the par value of the Company'sCompany’s capital stock. As a result of the Reverse Stock Split, the Company adjusted (i) the per share exercise price and the number of shares issuable upon the exercise of all outstanding stock options, warrants to purchase shares of common stock and stock appreciation rights, (ii) the share price targets of the Company’s Tangible Stockholder Return Plan and (iii) the number of shares reserved for issuance pursuant to the Company’s equity incentive compensation plans. NaN fractional shares were issued in connection with the Reverse Stock Split. Stockholders who would have otherwise held a fractional share of capital stock received a cash payment for any fractional share resulting from the Reverse Stock Split in an amount equal to such fraction multiplied by the closing sales price of the common stock as reported on the Nasdaq Stock Market on May 25, 2021, the last trading day immediately prior to the effectiveness of the Reverse Stock Split. See Note 10—11—“Stockholders’ Equity (Deficit)Equity” for further information regarding the Reverse Stock Split.
All disclosures of shares and per share data in the condensed consolidated financial statements and related notes have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented, and certain amounts within the condensed consolidated balance sheets and condensed consolidated statements of stockholders’ equity (deficit) were reclassified between common stock and additional paid-in capital.presented.
Liquidity and Operations
Based on the assessment of management’s plan, the Company has concluded that there are no conditions or events, in the aggregate, that raise substantial doubt about the Company’s abilityAbility to continueContinue as a going concern for a period of at least one year from the date the financial statements are issued. 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.Going Concern
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The Company’s condensed consolidated financial statements have been prepared assuming that the Company evaluatedwill continue as a going concern, which contemplates the following in its determination thatrealization of assets and the settlement of liabilities and commitments in the aggregate, there are no conditionsnormal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or eventsthe amounts and classification of liabilities that raise substantial doubt aboutmay result from uncertainty related to the Company’s ability to continue as a going concern:concern.
The Company has evaluated principal conditions and events, in the aggregate, that may raise substantial doubt about its ability to continue as a going concern within one year from the date that these financial statements are issued. The Company identified the following conditions:
•The Company has reported a net loss in all fiscal periods since inception and, as of June 30, 2021,2022, the Company had an accumulated deficit of $264,252.$301,227.
•As of June 30, 2021,2022, the Company had a total cash and cash equivalents balance of $65,802.
•As described in Note 10—Stockholders’ Equity (Deficit), in June 2021 the Company completed a public offering of its common stock pursuant to the Company’s shelf registration statement (the “June 2021 Public Offering”). Net proceeds from the offering were approximately $37,236 after deducting underwriting discounts and commissions and offering expenses of approximately $2,764.
•As described in Note 10—Stockholders’ Equity (Deficit), in July 2020 the Company entered into a common stock purchase agreement (the “July 2020 Aspire CSPA”) with Aspire Capital Fund, LLC (“Aspire Capital”). The July 2020 Aspire CSPA replaced the prior common stock purchase agreement, dated as of June 15, 2020, between the Company and Aspire Capital (the “June 2020 Aspire CSPA”), which was fully utilized. During the six months ended June 30, 2021, the Company received aggregate net proceeds of $6,334 from sales under the July 2020 Aspire CSPA and, as of June 30, 2021, had $12,005 in remaining availability for sales of its common stock under the July 2020 Aspire CSPA.
•As described in Note 10—Stockholders’ Equity (Deficit), in early March 2020 the Company completed a public offering of its common stock (or pre-funded warrants to purchase common stock in lieu thereof) and common warrants to purchase common stock pursuant to the Company’s then effective shelf registration statement (the “March 2020 Public Offering”). Net proceeds from the offering were approximately $5,158 after deducting underwriting discounts and commissions and offering expenses of approximately $791. The Company has also received proceeds from the exercise of common warrants issued in the March 2020 Public Offering of approximately $5,568 through June 30, 2021.
•As described in Note 10—Stockholders’ Equity (Deficit), in late March 2020 the Company completed a registered direct offering of its common stock (or pre-funded warrants to purchase common stock in lieu thereof) pursuant to the Company’s then-effective shelf registration statement (the “March 2020 Registered Direct Offering”). Net proceeds from the offering were approximately $7,225 after deducting fees and commissions and offering expenses of approximately $774.$37,302.
•The Company anticipates that it will continue to generate losses for the foreseeable future, and it expects the losses to increase as it continues the development of, and seeks regulatory approvals for, its product candidates and begins activities to prepare for potential commercialization.commercialization of SB206, if approved.
Management’s•The Company has concluded that the prevailing conditions and ongoing liquidity risks faced by the Company, coupled with its current forecasts, including costs associated with implementing the SB206 prelaunch strategy and commercial preparation, raise substantial doubt about its ability to continue as a going concern.
This evaluation is also based on other relevant conditions 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 balance as of June 30, 2021,2022, as subsequently adjusted by items described in Note 19—“Subsequent Events”, plus expected contractual payments to be received in connectionreceipts associated with existing licensing agreements,product sales from its commercial product portfolio, will provide it with adequate liquidity to fund its planned operating needs intothrough the first quarterend of 2023.2022. Variability in its operating forecast, driven primarily by (i) commercial product sales, (ii) timing of operating expenditures, and (iii) anticipated changes in net working capital, will impact the Company’s cash runway. This operating forecast and related cash projection includes:includes (i) costs through the expected completion of the B-SIMPLE4 Phase 3 trial, including supporting activities; (ii) costs associated with preparing for and seeking U.S. regulatory approval of SB206 as a treatment for molluscum, contagiosum; (iii)including NDA-enabling drug stability studies for SB206, (ii) costs associated with the build-outreadiness and operation of the Company’s new corporate headquarters and manufacturing capability necessary to support small-scale drug substance and drug product manufacturing; (iv)manufacturing, (iii) conducting drug manufacturing capability transfer activities towith external third-party contract manufacturing organizations (“CMOs”),CMOs, (iv) ongoing commercial operations, including a drug delivery device technology enhancement project; (v) developmentsales, marketing, inventory procurement and distribution, and supportive activities, in certain early stage priority therapeutic areas, including infectious diseases (Coronaviridae (COVID-19)); (vi) certain research and development activities primarily related to SB204 as a treatmentits portfolio of therapeutic products for acne vulgaris;skin diseases acquired with the EPI Health Acquisition, and (vii)(v) initial efforts to support potential commercialization of SB206, but excludes: (a) any potential costs associated with other late-stage clinical programs; (b)excludes additional operating costs that could occur between a potential New Drug Application (“NDA”)
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NDA submission for SB206 through NDA approval, including, but not limited to, marketing and commercialization efforts to achieve potential launch of SB206, and (c) proceeds from any potential future sales of common stock under the July 2020 Aspire CSPA. The Company may decide to revise its development and operating plans or the related timing, depending on information it learns through its research and development activities, including regulatory submission efforts related to SB206, potential commercialization strategies, the impact of outside factors such as the COVID-19 pandemic, its ability to enter into strategic arrangements, its ability to access additional capital and its financial priorities.
The Company will need significant additional funding to continue its operating activities, make further advancements in its product development programs and potentially commercialize any of its product candidates beyond those activities currently included in its operating forecast and related cash projection.SB206. The Company does not currently have sufficient funds to commercializecomplete commercialization of any of its product candidates if approved,that are under development, and its funding needs will largely be determined by its commercialization strategy for SB206, subject to NDAthe targeted submission timing for the new drug application (“NDA”) relating to SB206 and the regulatory approval process. The Company’s potential commercialization strategy includes, but is not limited to, securing a commercialization partner, co-commercializing with a partner, or commercializing onprocess and outcome, and the operating performance of its own.commercial product portfolio.
The inability of the Company to generate sufficient net revenues to fund its operations or obtain significant additional funding on acceptable terms, including through the utilization of the remaining amount available under the July 2020 Aspire CSPA, 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, to conserve its cash and cash equivalents. The Company may pursue additional capital through equity or debt financings including potential sales under the July 2020 Aspire CSPA, or from non-dilutive sources, including partnerships, collaborations, licensing, grants or other strategic relationships. The Company’s equity issuances during the year ended December 31, 2020,anticipated expenditure levels may change if it adjusts its current operating plan. Such actions could delay development timelines and the six months ended June 30, 2021, have resulted in significant dilution toa material adverse effect on its existing stockholders. Any future additional issuancesbusiness, results of equity, or debt convertible into equity, would result in further significant dilution to the Company’s existing stockholders. Alternatively, theoperations, financial condition and market valuation.
The Company may seek to engage in one or morealso explore the potential for additional strategic transactions, such as the sale of the Company,strategic acquisitions or salein-licenses, sales or divestituredivestitures of some of its assets, such asor other potential strategic transactions, which could include a sale of its dermatology platform assets, but there can be no assurance thatthe Company. If the Company willwere to pursue such a transaction, it may not be able to enter into such acomplete the transaction or transactions on a timely basis or at all or on
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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 liquidate its assets or seek protection under the bankruptcy laws. If the Company decides to 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.
Business Acquisitions
The Company accounts for business acquisitions using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, Fair Value Measurements (“ASC 820”), as of the acquisition date. For certain assets and liabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the closing date of the acquisition at the then-current market price. Under ASC 805, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) are expensed in the period in which the costs are incurred. The application of the acquisition method of accounting requires the Company to make estimates and assumptions related to the estimated fair values of net assets acquired.
COVID-19
In December 2019, the novel strain of a virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), which causes novel coronavirus disease (“COVID-19”) was reported in China, and in March 2020, the World Health Organization declared it a pandemic. The extent to which COVID-19, and its variant strains, and domestic and global efforts to contain its spread will impact the Company’s business including its operations, preclinical studies, clinical trials, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the pandemic, 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 business could be further adversely affected by the outbreak of COVID-19 and its variants. In particular, COVID-19 impacted the timing of trial initiation of the Company’s B-SIMPLE4 Phase 3 trial,study and whilewas a factor influencing the Company enrolledCompany’s previous adjustment of its targeted SB206 submission timing, currently planned for no later than the end of the fourth quarter of 2022.
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 dosedconcern about the first patient in the trial in September 2020 and announced top-line results in June 2021, the Company continues to assess any further impactsupply of COVID-19medications, (ii) adverse impacts on the Company’s operations.
In addition,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 currentlydue to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems, (iv) the risk of shutdown in countries where the Company relies on third-party suppliersCMOs to provide the raw materials that are used by the Company or its third-party manufacturers in thecommercial manufacture of its products or clinical batch manufacturing of its product candidates. There are a limited number of suppliers forcandidates, (v) the ability to procure raw materials including nitric oxide, thatneeded for the Company uses to manufacture its product candidates. The Company also relies on third-party logistics vendors to transport its raw materials,production of the Company’s active pharmaceutical ingredient (“API”), and drug products through its supply chain. Certain materials, including the Company's 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 with such hazard classifications from time to time, especially in light of the pandemic and related global supply chain constraints, which could adversely impact the timing or cost ofother manufacturing components for the Company’s manufacturing supply chain activities or other associated development activities. The Company continues to assess any further impact of COVID-19 and its variants on its supply chain and related vendors, including in its usage of third-party vendors to supply goods, materials and equipment to build-out its new facility. The Company expects to completeproduct candidates, (vi) the construction of its new facility to support various research and development and cGMP activities, including small-scale manufacturing capabilities for API and drug product, in the second half of 2021.
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Despite disruptions to the Company’s business operations and the business operations ofpossibility that third parties on which the Company relies,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 COVID-19 pandemic, has not significantly impactedwhich could cause the Company to experience delays or the incurrence of additional costs, and (vii) the risk that the COVID-19 pandemic may intensify other risks inherent in the Company’s operating results and financial condition to date. However, at this time, the extent to which COVID-19 and its variants may impact the Company’s financial condition or results of operations in the future is uncertain.business.
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 condensed 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 contingent consideration and contingencies.
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Actual results couldmay differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.
Unaudited Interim Condensed Consolidated Financial Statements
The accompanying interim condensed consolidated financial statements and the related footnote disclosures are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and applicable rules and regulations of the Securities and Exchange Commission’s (“SEC”) Rule 10-01 of Regulation S-X for interim financial information. The condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and in the opinion of management, reflect all adjustments of a normal, recurring nature that are necessary for the fair statement of the Company’s financial position and its results of operations and cash flows. The results of operations for interim periods are not necessarily indicative of the results expected for the full fiscal year or any future period. These interim financial statements should be read in conjunction with the consolidated financial statements and notes set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 filed with the SEC on February 24, 2021.18, 2022.
Reclassifications
Certain amounts in the Company’s consolidated balance sheet as of December 31, 20202021 have been reclassified to conform to the current presentation related to deferred offering costspresentation. Prepaid insurance in the amount of $58 being included with$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 have been reclassified to conform with the current presentation of accrued expenses. See Note 8—“Accrued Expenses” for additional detail regarding these amounts.
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 as of and for the year ended December 31, 2020.2021.
Restricted CashComprehensive Loss
Restricted cashComprehensive 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 three and six months ended June 30, 2022 and 2021, includes funds maintained in a deposit accountcomprehensive loss was equal to secure a letter of credit for the benefit of the TBC Landlord (as defined below). See Note 8—Commitments and Contingencies for further information regarding the letter of credit and the TBC Lease (as defined below).net loss.
Net Loss Per Share
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Basic shares outstanding includes the weighted average effect of the Company’s outstanding pre-funded warrants, the exercise of which requires little or no consideration for the delivery of shares of common stock.
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 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 three and six months ended June 30, 20212022 and June 30, 20202021 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.
 June 30,
 20222021
Warrants to purchase common stock (Note 11)8,716,252 1,274,176 
Stock options outstanding under the 2008 and 2016 Plans (Note 16)982,353 401,525 
Nonvested restricted stock units (Note 16)420,106 — 
Stock appreciation rights outstanding under the 2016 Plan (Note 16)60,000 61,000 
Inducement stock options outstanding (Note 16)1,250 1,250 
 June 30,
 20212020
Warrants to purchase common stock (Note 10)1,274,176 1,402,577 
Stock options outstanding under the 2008 and 2016 Plans (Note 11)401,525 190,035 
Stock appreciation rights outstanding under the 2016 Plan (Note 11)61,000 60,000 
Inducement stock options outstanding (Note 11)1,250 9,400 
Segment and Geographic Information
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 a disaggregated basis for purposes of allocating resources and evaluating financial performance. See Note 18—“Segment Information” for further information on reportable segments.
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SegmentRevenue Recognition
The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). To determine revenue recognition for arrangements that are within the scope of ASC 606, the Company (i) identifies the contract with a customer, (ii) identifies the performance obligations within the contract, (iii) determines the transaction price, (iv) allocates the transaction price to the performance obligations in the contract, and Geographic Information(v) recognizes revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer.
At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within the contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Upon occurrence of a contract modification, the Company conducts an evaluation pursuant to the modification framework in ASC 606 to determine the appropriate revenue recognition. The framework centers around key questions, including (i) whether the modification adds additional goods and services, (ii) whether those goods and services are distinct, and (iii) whether the contract price increases by an amount that reflects the standalone selling price for the new goods or services. The resulting conclusions will determine whether the modification is treated as a separate, standalone contract or if it is combined with the original contract and accounted for in that manner. In addition, some modifications are accounted for on a prospective basis and others on a cumulative catch-up basis.
The Company currently has determinedthe following types of revenue generating arrangements:
Net Product Revenues
Net product revenues encompass sales recognized resulting from transferring control of products to the customer, excluding amounts collected on behalf of third parties and sales taxes. 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 operatesis probable that a significant reversal in 1 segment.the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Product sales are recognized at the point in time when legal transfer of title has occurred, based on shipping terms. The Company uses its proprietary nitric oxide based technology platformrecords a reduction to generate macromolecular new chemical entitiesthe transaction price for estimated chargebacks, rebates, coupons, trade and develops product candidatescash discounts and sales returns. A liability is recognized for expected sales returns, rebates, coupons, trade and cash discounts, chargebacks or other reimbursements to treat multiple indications. The Chief Executive Officer, whocustomers in relation to sales made in the reporting period. Payment terms can differ from contract to contract, but no element of financing is deemed present as the typical payment terms are less than one year. Therefore, the transaction price is not adjusted for the effects of a significant financing component. A receivable is recognized as soon as control over the products is transferred to the customer as this is the Company’s chief operating decision maker, reviews financial information on an aggregate basis for purposespoint in time that the consideration is unconditional because only the passage of allocating resourcestime is required before the payment is due.
Variable consideration relates to sales returns, rebates, coupons, trade and evaluating financial performance.cash discounts, and chargebacks granted to various direct and indirect customers. The Company recognizes provisions at the time of sale and adjusts them if the actual amounts differ from the estimated provisions. The following describes the nature of each deduction and how provisions are estimated:
Chargebacks – The Company has only had limited revenue since its inception, but substantially all revenue was derived from licensing agreements originating in the United States. Substantially all of the Company’s long-lived assets are maintained in the United States.
Although all operations are based in the United States, the Company generated revenue from its licensing partner in Japan of $747, or 100% of total revenue, and $1,494, or approximately 95% of total revenue, during the three and six months ended June 30, 2021, respectively. During the three and six months ended June 30, 2020, the Company generated revenue from its licensing partner in Japan of $1,100, or approximately 83% of total revenue, and $2,124, or 84% of total revenue, respectively.
Recently Issued Accounting Standards
Accounting Pronouncements Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance is intended to improve consistent application of and simplify the accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance. This standard is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual reporting periods,arrangements with early adoption permitted. This ASU was effective for the Company as of January 1, 2021. The adoption of this new accounting guidance did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This guidance is intended to simplify the accounting for certain financial instruments with characteristics of liabilities and equity. This standard is effective for annual reporting periods beginning after December 15, 2021, including interim reporting periods within those annual reporting periods. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The adoption of this new accounting guidance did not have a material impact on the Company’s condensed consolidated financial statements.
Accounting Pronouncements Being evaluated
In May 2021, the FASB issued ASU No. 2021-04, Earnings per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This guidance is intended to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options, such as warrants,various third-party wholesalers that remain equity classified after modification or exchange. This standard is effective for annual reporting periods beginning after December 15, 2021, including interim reporting periods within those annual reporting periods, with early adoption permitted. The Company is currently evaluating the impact of adoption of this ASU but does not expect the adoption of this new standard to have a material impact on the Company’s condensed consolidated financial statements.
Note 2: KNOW Bio, LLC
On December 30, 2015, the Company completed the distribution of 100% of the outstanding member interests of KNOW Bio, LLC (“KNOW Bio”), a former wholly owned subsidiary ofrequire the Company to Novan’s stockholders (the “Distribution”), pursuantissue a credit to which KNOW Bio becamethe wholesaler for the difference between the invoice price to the wholesaler and the customer’s contract price. Provisions for chargebacks involve estimates of the contract prices within multiple contracts with multiple wholesalers. The provisions for chargebacks vary in relation to changes in product mix, pricing and the level of inventory at the wholesalers and, in addition, fluctuate in proportion to an independent privately held company.
KNOW Bio Technology Agreements
In connection withincrease or decrease in sales. Provisions for estimated chargebacks are calculated using the Distribution,historical chargeback experience and expected chargeback levels for new products and anticipated pricing changes. Chargeback provisions are compared to externally obtained distribution channel reports for reasonableness. The Company regularly monitors the provisions for chargebacks and makes adjustments when the Company entered into exclusive license agreementsbelieves that actual chargebacks may differ from estimated provisions.
Rebates – Rebates include managed care services, fee for service and sublicense agreements with KNOW Bio, as described below. The agreements will continueMedicaid rebate programs. Rebates are primarily related to volume-based incentives and are offered to key customers to promote loyalty. Customers receive rebates upon the attainment of a pre-established volume or the attainment of revenue milestones for so long as there is a valid patent claim underspecified period. Since rebates are contractually agreed upon, provisions are estimated based on the respectivespecific terms in each agreement unless earlier terminated,based on historical trends and upon expiration, will continue as perpetual non-exclusive licenses. KNOW Bioexpected sales.
Returns – Returns primarily relate to customer returns of expired products that the customer has the right to terminate each such agreement, for any reason upon 90 days advance written noticereturn up to one year following the Company.product’s expiration date. Such returned products are destroyed and credits and/or refunds are issued to the
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customer for the value of the returns. Accordingly, no returned assets are recorded in connection with those products. The returns provision is estimated by applying a historical return rate to the amounts of revenue estimated to be subject to returns. Revenue subject to returns is estimated based on the lag time from time of sale to date of return. The estimated lag time is developed by analyzing historical experience. Additionally, the Company considers specific factors, such as levels of inventory in the distribution channel, product dating and expiration, size and maturity of launch, entrance of new competitors, changes in formularies or packaging and any changes to customer terms, in determining the overall expected levels of returns.
Prompt pay discounts – Prompt pay discounts are offered to most customers to encourage timely payment. Discounts are estimated at the time of invoice based on historical discounts in relation to sales. Prompt pay discounts are almost always utilized by customers. As a result, the actual discounts typically do not vary significantly from the estimated amount.
Coupons – The Company offers coupons to market participants in order to stimulate product sales. The redemption cost of consumer coupons is based on historical redemption experience by product and value.
Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Shipping and handling costs are accounted for as a fulfillment cost and are recorded as cost of revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Costs incurred to obtain a contract will be expensed as incurred when the amortization period is less than a year.
There can be a lag between the Company’s establishment of an estimate and the timing of the invoicing or claim.The Company believes it has made reasonable estimates for future rebates and claims, however, these estimates involve assumptions pertaining to contractual utilization and performance, and payor mix.If the performance or mix across third-party payors is different from the Company’s estimates, the Company may be required to pay higher or lower total price adjustments and/or chargebacks than it had estimated.
License and Collaboration Revenues
The Company has entered into various types of existing and potential futureagreements that either license the Company’s intellectual property to KNOW Bio.a third party or acquire license rights to intellectual property of a third party, or both.
Agreements where the Company licenses its intellectual property to a third party for development and commercialization in a licensed territory. If the applicable license is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company’s management utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the estimated performance period and the appropriate method of measuring progress during the performance period for purposes of recognizing revenue. The Company re-evaluates the estimated performance period and measure of progress each reporting period and, if necessary, adjusts related revenue recognition accordingly. These arrangements often include milestone as well as royalty or profit-share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements from or payments to the collaboration partner. Because of the risk that products in development will not receive regulatory approval, the Company does not recognize any contingent payments until after regulatory approval has been achieved.
Agreements where the Company acquires licensed rights to, or otherwise accesses, a third party’s intellectual property for commercialization of the third party’s product in a licensed territory. The Company and KNOW Bio enteredalso enters into an exclusive license agreement dated December 29, 2015 (the “KNOW Bio License Agreement”). Pursuantvarious types of arrangements to commercialize products. The Company’s services provided to the terms of the KNOW Bio License Agreement, the Company granted to KNOW Bio exclusive licenses, with the right to sublicense, under certain United States and foreign patents and patent applications that were controlled by the Company as of December 29, 2015 or that became controlled by the Company between that date and December 29, 2018, directed towards nitric-oxide releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds and other nitric oxide-based therapeutics.
Sublicense of UNC and other third party intellectual property to KNOW Bio.  The Company and KNOW Bio also entered into sublicense agreements dated December 29, 2015 (the “KNOW Bio Sublicense Agreements” and together with the KNOW Bio License Agreement, the “Original KNOW Bio Agreements”). Pursuant to the terms of the KNOW Bio Sublicense Agreements, the Company granted to KNOW Bio exclusive sublicenses, with the ability to further sublicense, under certain of the United States and foreign patents and patent applications exclusively licensed to the Company from the University of North Carolina at Chapel Hill (“UNC”) under the Amended, Restated and Consolidated License Agreement dated June 27, 2012, as amended (the “UNC License Agreement”), and another third party directed towards nitric oxide-releasing compositions, to develop and commercialize products utilizing the licensed technology. Under the exclusive sublicense to the UNC patents and applications (the “UNC Sublicense Agreement”), KNOW Bio is subject to the terms and conditions under the UNC License Agreement, including milestone and diligence payment obligations.However, pursuant to the terms of the UNC License Agreement, the Company is directly obligated to pay UNC any future milestones or royalties, including those resulting from actions conducted by the Company’s sublicensees, including KNOW Bio. Therefore, in the event of KNOW Bio non-performance with respect to its obligations under the UNC Sublicense Agreement, the Company would be obligated to make such payments to UNC. KNOW 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 0 milestone or royalty payments required during the six months ended June 30, 2021 and 2020.
Amendments to License and Sublicense Agreements with KNOW Bio
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,arrangements, in exchange for compensation that may take the Oncovirus Field rights,form of cost reimbursements, may include promoting, marketing, selling and distributing the Company paid 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 athird party’s developed drugs, and may also involve 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.
Thelicense rights granted to the parties for use of the other party’s intellectual property while providing defined services under the arrangements. The Company assesses the nature of each such arrangement and the various rights granted and services performed thereunder, and determines the applicable accounting standard, which may include ASC 808, Collaborative Arrangements (“ASC 808”) or ASC 606.
Royalty revenue from licenses provided to the Company’s collaboration partners, which is based on sales to third parties of licensed products and technology, is recorded when the third-party sale occurs and the performance obligation to which some or all of the royalty has been allocated has been satisfied. This royalty revenue is included in license and collaboration revenue 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,accompanying condensed consolidated statements of operations and upon expiration continue on a perpetual non-exclusive basis, and are subject to the termination rights of KNOW Bio andcomprehensive loss.
When the Company performs and incurs marketing and promotional services expense under an arrangement that is determined to be within the scope of ASC 808, and where such services are set forth in the Original KNOW Bio Agreements. In addition,on behalf of a collaboration partner that is not considered a customer under the KNOW Bio Amendments, KNOW Bio may terminate the rights granted toASC 606, the Company recognizes a contra-expense that reflects the value of the cost reimbursement to which the Company is expected to be entitled in the Oncovirus Field without terminating the Original KNOW Bio Agreements.exchange for those services.
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The KNOW Bio Amendments also provideSuch contractually required reimbursements are reported as a mechanism whereby either party can causeliability or an asset within the accompanying condensed consolidated balance sheets based upon the timing of cash receipt from the collaboration partner.
Government research contracts and grants revenue
Under the terms of the contracts and grants awarded, the Company is entitled to receive reimbursement of its allowable direct expenses, allocated overhead, general and administrative expenses and payment of other specified amounts. Revenues from development and support activities under government research contracts and grants are recorded in the period in which the related costs are 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 new chemical entity (“NCE”) coveredresult of noncompliance by the Original KNOW Bio AgreementsCompany 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.
Product Cost of Goods Sold
Product cost of goods sold includes the direct costs attributable to become exclusivethe Company’s product revenue. It includes the cost of the purchased finished goods, shipping and storage costs related to such party by filing an investigational newthe Company’s marketed drug application (“IND”)products, sales based royalty and milestone expenses, and certain third-party intellectual property licensing costs.
Advertising Costs
Promotion, marketing and advertising costs are expensed as incurred. Promotion, marketing and advertising costs for the three and six months ended June 30, 2022, were approximately $1,237 and $1,624, respectively. There were no costs for the three and six months ended June 30, 2021. The costs are included in selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss.
Income Taxes
Deferred tax assets and liabilities are determined based on the NCE. An NCEtemporary 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 did not record a federal or state income tax benefit for the three and six months ended June 30, 2022 or 2021 due to its conclusion that becomes exclusivea full valuation allowance is required against the Company’s deferred tax assets.
The determination of recording or releasing a tax valuation allowance is made, in part, pursuant to a party under this provisionan 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 commercialized byrealized. This assessment requires management to exercise judgment and make estimates with respect to its ability to generate taxable income in future periods.
Restricted Cash
Restricted cash as of June 30, 2022 and December 31, 2021 includes funds maintained in a deposit account to secure a letter of credit for 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 developmentbenefit of the NCE pursuant to termslessor of the KNOW Bio Amendments in orderCompany’s headquarters. See Note 6—“Leases” for further information regarding the letter of credit.
Accounts Receivable, net
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables. An account receivable is considered to maintain such exclusivity; otherwise, such exclusivity will expire.
The termsbe past due if any portion of the KNOW Bio Amendments were negotiated at arms-length and do not providereceivable balance is outstanding beyond the Company with an ability to significantly influence KNOW Bio or its operations.
Note 3: Research and Development Licensesagreed-upon due date.
The Company has entered into various licensing agreements with universitiesrecords 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 other research institutions undersupportable 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 Company receiveschange occurs. No allowance for credit losses was recorded as of June 30, 2022 or December 31, 2021 as all amounts included in accounts receivable are expected to be collected.
Account balances are written off against the rights,allowance after all means of collection have been exhausted and in some cases substantially allthe potential for recovery is considered remote. Recoveries of the rights, of 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 is described in further detail within the subsection below. The counterparties to the Company’s various other licensing agreementsreceivables previously written off 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.
recorded when received. The Company is required to make payments based upon achievement of certain milestones and will be required to make royalty payments baseddoes not charge interest 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. NaN 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 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 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 2033.
Note 4: Licensing Arrangements
Sato License Agreement
Significant Terms
On January 12, 2017, the Company entered into a license agreement, and 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.accounts receivable.
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On October 5, 2018,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.
Inventory, net
The Company maintains inventory consisting of for-sale pharmaceuticals related to its marketed product portfolio. The Company measures inventory using the first-in, first-out method and values inventory at 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 Sato entered intoforecasted demand for its inventory and make estimates regarding future product sales.
Property and Equipment, net
Property and equipment are recorded at cost and depreciated using the second amendment (the “Sato Amendment”) tostraight-line method over their estimated useful lives. Leasehold improvements are amortized over the Sato Agreement (collectively,shorter of the “Amended Sato Agreement”). The Sato Amendment expandedlife of the Sato Agreement tolease 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 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 totenant improvement allowances, which the Company or its designated contract manufacturer would beassesses according to applicable accounting guidance to determine the exclusive supplier to Sato ofappropriate owner, and capitalizes such tenant improvement assets accordingly.
Intangible Assets, net and Goodwill
Intangible assets represent certain identifiable intangible assets, including pharmaceutical product licenses and patents. Amortization for pharmaceutical products licenses is computed using 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.
Under the Amended Sato Agreement, in exchange for the SB204 and SB206 license rights granted to Sato, Sato agreed to pay the Company the following:
•An upfront payment of 1.25 billion Japanese Yen (“JPY”), payable in installments of 0.25 billion JPY, 0.5 billion JPY and 0.5 billion JPY on October 5, 2018, February 14, 2019 and September 13, 2019, respectively. This was in addition to the 1.25 billion JPY (approximately $10,813 USD) paid on January 19, 2017 following the execution of the Sato Agreement on January 12, 2017. On October 23, 2018, the Company received the first installment from the Amended Sato Agreement of 0.25 billion JPY (approximately $2,224 USD). On March 14, 2019, the Company received the second installment payment related to the Amended Sato Agreement of 0.5 billion JPY (approximately $4,460 USD). On November 7, 2019, the Company received the third installment payment related to the Amended Sato Agreement of 0.5 billion JPY (approximately $4,554 USD).
•Up to an aggregate of 1.75 billion JPY (adjusted from 2.75 billion JPY in the Sato Agreement) upon the achievement of various development and regulatory milestones, including (i) a 0.25 billion JPY (approximately $2,162 USD) milestone payment received during the fourth quarter of 2018 following Sato’s initiation of a Phase 1 trial in Japan; and (ii) an aggregate of 1.0 billion JPY that becomes payable upon the earlier occurrence of specified fixed future dates or the achievement of milestone events, of which the Company received a payment of 0.5 billion JPY (approximately $4,572 USD) during the second quarter of 2021.
•Up to an aggregate of 3.9 billion JPY (adjusted from 0.9 billion JPY in the Sato Agreement) upon the achievement of various commercial milestones. 
•A tiered royalty ranging from a mid-single digit to a low-double digit percentage (adjusted from a mid-single digit percentage in the Sato Agreement) of net sales of licensed products in the licensed territory, subject to a reduction in the royalty payments in certain circumstances.
The term of the Amended Sato Agreement (and the period during which Sato must pay royalties under the amended license agreement) expiresstraight-line method based on the twentieth anniversarylesser of the first commercial sale of a licensed product in the licensed field in the licensed territory (adjusted from the tenth anniversary of the first commercial sale in the Sato Agreement). The term of the Amended Sato Agreement may be renewed with respect to a licensed product by mutual written agreement of the parties for additional two-year periods following expiration of the initial term. All other material terms of the Sato Agreement remain unchanged by the Sato Amendment.
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 pertainingagreement 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 SB204the 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, such as goodwill and SB206; (iii) performing certain additional preclinical studiesthe 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 September 30 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 such studiesan 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. Key assumptions used in the annual goodwill impairment test are deemed necessary byhighly judgmental. Any change in these indicators or key assumptions could have a significant negative impact on 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 underCompany’s financial condition, impact the Amended Sato Agreement. Additionally,goodwill impairment analysis or cause the Company has granted Satoto perform a goodwill impairment analysis more frequently than once per year.
Contingent Consideration
Contingent consideration is recorded as a liability and is the optionestimate of the fair value of potential milestone payments related to use the Company’s trademarks in connectionEPI 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 commercializationliability 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 licensed productsEPI Health” for further information regarding purchase consideration.
Contingent consideration is remeasured at each reporting date and any changes in the licensed territoryliability are recorded within the consolidated statement of operations and comprehensive loss. See Note 17—“Fair Value” for no additional consideration, subject to the Company’s approvalfurther information.
Classification of such use.Warrants Issued in Connection with Offerings of Common Stock
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The Amended Sato Agreement may be terminated by (i) Sato without cause upon 120 days’ advance written noticeCompany accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, whether the warrants meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company; (ii) either partyCompany’s own common stock and whether the warrant holders could potentially require “net cash settlement” in the event of the other party’s uncured material breach upon 60 days’ advance written notice; (iii) force majeure; (iv) either party in the event of the other party’s dissolution, liquidation, bankruptcy or insolvency; and (v) the Company immediately upon written notice if Sato challenges the validity, patentability, or enforceability of anya circumstance outside of the Company’s patentscontrol, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance.
For issued or patent applications licensedmodified warrants that meet all of the criteria for equity classification, the warrants are required to Sato underbe recorded as a component of additional paid-in capital at the Amended Sato Agreement. 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 condensed consolidated statements of operations and comprehensive loss.
Related Parties
Members of the Company’s board of directors held 124,497 and 100,497 shares of the Company’s common stock as of June 30, 2022 and December 31, 2021, respectively.
Recently Issued Accounting Standards
Accounting Pronouncements Adopted
In June 2016, the eventFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is designed to 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 termination, 0broader range of reasonable and supportable information to inform credit loss estimates. The adoption of this new accounting guidance, as of January 1, 2022, did not have a material impact on the Company’s condensed consolidated financial statements.
Note 2: Acquisition of EPI Health
On March 11, 2022, the Company completed the EPI Health Acquisition, in which the Company acquired all of the issued and outstanding units of membership interest of EPI Health from EPG for estimated purchase consideration of $35,366. EPI Health is an integrated medical dermatology company providing the Company with a 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, acne and dermatoses.
The portion of the upfront fees received from Sato are refundable.
estimated purchase consideration at closing was $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, (ii) a secured promissory note issued to EPG in the principal amount of $16,500 (the “Seller Note”), and (iii) a $993 payment representing an adjustment for estimated net working capital. See Note 5: Revenue Recognition
Sato Agreement9—“Notes Payable” and Note 19—“Subsequent Events” for additional detail regarding the Seller Note and its related terms.
The Company assessedpurchase agreement entered into in connection with the Sato Agreement in accordance with Topic 606EPI Health Acquisition (the “EPI Heath Purchase Agreement”) included the potential payment of additional consideration totaling up to $23,500 upon achievement of certain milestones, as follows:
a.$1,000, as a one-time cash payment, upon EPG’s performance of transition services and concluded that the contract counterparty, Sato, is a customer withinsuccessful completion of the scope of Topic 606. The Company identified the following promisestransition provided 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 not individually distinct because Sato can only benefit from these licensed intellectual property rights andtransition 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 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.
Amended Sato Agreement
On October 5, 2018,between the Company and Sato entered into the Amended Sato Agreement. The Sato Amendment expanded the Sato Agreement to include SB206,EPG;
b.$3,000, as a one-time payment, payable in cash or the Company’s drug candidate forcommon stock, at the treatmentdiscretion of viral skin infections. The Company assessed the Amended Sato Agreement in accordance with Topic 606 and concluded the contract modification should incorporate the additional goods and services provided for in the Amendment into the existing, partially satisfied single bundled performance obligation that will continue to be delivered to Sato over the remaining development period. This contract modification accounting is concluded to be 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 asupon net sales of certain of EPI Health’s legacy products exceeding $30,000 during the period from April 1, 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 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 June 30, 2021;upon net sales of Wynzora Cream (“Wynzora”) exceeding certain quarterly thresholds or (ii) payable upon specified fixed dates in the future and are not contingent upon clinical or regulatory success in Japan:
•The 1.25 billion JPY (approximately $10,813 USD) original upfront payment received on January 19, 2017 following the executionan annual threshold of the Sato Agreement on January 12, 2017.
•A milestone payment of 0.25 billion JPY (approximately $2,162 USD) received$12,500 during the fourth quarter of 2018 following Sato’s initiation of a Phaseperiod from April 1, trial in Japan.
•The Sato Amendment upfront payment of 1.25 billion JPY, payable in installments of 0.25 billion JPY, 0.5 billion JPY and 0.5 billion JPY on October 5, 2018, February 14, 2019 and September 13, 2019, respectively. On October 23, 2018, the Company received the first installment from the Amended Sato Agreement of 0.25 billion JPY (approximately $2,224 USD). On2022 through March 14, 2019, the Company received the second installment payment related to the Amended Sato Agreement of 0.5 billion JPY (approximately $4,460 USD). On November 7, 2019, the Company received the third installment payment related to the Amended Sato Agreement of 0.5 billion JPY (approximately $4,554 USD).31, 2023;
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•d.An aggregate$5,000, as a one-time payment, payable in cash or the Company’s common stock at the discretion of 1.0 billion JPY in non-contingentthe 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 OTC Switch License Agreement with Bayer.
Certain of the above milestone payments thatwill accelerate and become immediately payable upon certain specified events during the earlier occurrenceapplicable milestone periods, including a sale of specified fixed dates inall or substantially all of the future or the achievementassets with respect to certain of specified milestone events. On May 20, 2021, the Company received one such non-contingent milestone payment in the form of aEPI Health’s legacy products. The EPI Health Purchase Agreement provides that payment of 0.5 billion JPY (approximately $4,572 USD) related to achievementany additional consideration may be made in cash or in shares of a time-based developmental milestone.
The payment terms contained within the Amended Sato Agreement related to upfront, developmental milestone and sales milestone payments are of a short-term nature and, therefore, do not represent a financing component requiring additional consideration.
The following table presents the Company’s contract assets and contract liabilities balances forcommon stock, so long as the periods indicated.
 Contract AssetContract LiabilityNet Deferred Revenue
December 31, 2020$4,843 $16,071 $11,228 
June 30, 2021$4,500 $14,577 $10,077 
 Short-term Deferred RevenueLong-term Deferred RevenueNet Deferred Revenue
December 31, 2020$2,990 $8,238 $11,228 
June 30, 2021$2,990 $7,087 $10,077 
The Company has recordednumber of shares that may be issued pursuant to the SatoEPI Health Purchase Agreement and Amended Sato Agreement transaction price, includingor otherwise in connection with the upfront payments received andEPI Health Acquisition is limited to no more than 19.99% of the unconstrained variable consideration, as deferred revenue (comprisedCompany’s outstanding shares of (i) a contract liability; net of (ii) a contract asset)common stock immediately prior to the closing, unless stockholder approval is obtained to issue more than 19.99%.
The changeEPI Health Acquisition is being accounted for as a business combination using the acquisition method in accordance with ASC 805. Under this method of accounting the net deferred revenue balance duringfair value of the threeconsideration transferred is allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the date of the EPI Health Acquisition. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed is recognized as goodwill.
For the six months ended June 30, 2021 was associated with (i) the recognition of license and collaboration revenue associated with the Company’s performance during the period (continued amortization of deferred revenue); and (ii) the impact of foreign currency exchange rate fluctuations. As of December 31, 2020,2022, the Company had an unconditional right to receive consideration of $4,843, based on a time-based developmental milestone payment that became due and payable as of December 31, 2020. Therefore, as of December 31, 2020, the Company presented this milestone payment in contracts and grants receivable within its condensed consolidated balance sheets. During the three months ended June 30, 2021, the Company received payment of $4,572 related to achievement of this time-based developmental milestone, with the difference between the amount received and the balance presented as of December 31, 2020 being due to foreign currency fluctuations.
During the three and six months ended June 30, 2021, the Company recognized $747 and $1,494, respectively, in license and collaboration revenue under this agreement. During the three and six months ended June 30, 2020, the Company recognized $1,100 and $2,124, respectively, in license and collaboration revenue under this agreement.
During the three and six months ended June 30, 2021, the Company recognized income of $72 and expense of $614, respectively, related to foreign currency adjustmentsincurred costs related to the contract assetEPI Health Acquisition of $4,621 recognized in selling, general and contract receivable, presentedadministrative expenses within other income (expense), net within the accompanying condensed consolidated statements of operations and comprehensive loss.
The Company has concluded thatFrom the above consideration is probableEPI Health Acquisition date through June 30, 2022, $6,751 of not resulting intotal net revenue and a significant revenue reversal and thereforenet loss of $1,192 associated with EPI Health’s operations are included in the transaction pricecondensed consolidated statements of operations and iscomprehensive loss for the six months ended June 30, 2022.
Purchase Consideration
The following table presents the allocation of the estimated purchase consideration to be allocated to the single performance obligation. No other variableestimated fair values of the net assets acquired at the EPI Health Acquisition date.
As of June 30, 2022
Initial cash consideration to Seller$11,000 
Secured promissory note issued to Seller16,500 
Closing date fair value of contingent consideration liability3,773 
Remaining working capital adjustment to be paid3,100 
Working capital adjustment paid at close993 
Total estimated purchase consideration$35,366 
As noted in Note 19—“Subsequent Events,” on July 7, 2022, the Company and EPG agreed to the final net working capital adjustment amount (the “Total Adjustment Amount”), as defined in the EPI Health Purchase Agreement, as part of the post-closing adjustment to the estimated purchase price for the EPI Health Acquisition. The Total Adjustment Amount was determined to be positive and in the amount of $3,100, which was paid to EPG on July 7, 2022. As of March 31, 2022, the Company estimated that the Total Adjustment Amount would be $4,069. Therefore, the Company has reflected a $969 measurement period adjustment to the estimated purchase consideration under the Amended Sato Agreement is probable of not resulting in a significant revenue reversalto be paid as of June 30, 2021 and therefore, is currently fully constrained and excluded2022. This adjustment resulted in a reduction of goodwill from the transaction price.previous preliminary amount of $4,002 to an estimated amount of $3,033 as of June 30, 2022.
The Company evaluatedProvisional Allocation of Purchase Consideration to Estimated Fair Values of Net Assets Acquired
ASC 805 requires, among other things, that the timing of delivery for its performance obligationassets acquired and concluded thatliabilities assumed in a time-based input method is most appropriate because Sato is accessing and benefiting from the intellectual property and technology (the predominant itemsbusiness combination be recognized at their fair values as of the combined performance obligation) ratably overacquisition date. Further, ASC 805 requires any consideration transferred or paid in a business combination in excess of the durationfair value of Sato’s estimated development period in Japan. Although the Company 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 willassets acquired and liabilities assumed should be recognized using a time-based input method that results in straight-line recognition over the Company’s performance period.as goodwill.
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The Company monitors and reassessestotal estimated purchase consideration was provisionally allocated to the estimated performance period for purposesfair values of revenue recognition during each reporting period. During the third quarterassets acquired and liabilities assumed as of 2020, Sato prepared,March 11, 2022 as follows:
Assets acquired and liabilities assumed:
Accounts receivable$20,083 
Inventory1,710 
Prepaid expenses and other current assets3,692 
Property and equipment100 
Intangible assets33,000 
Other assets27 
Right-of-use lease assets400 
Total assets$59,012 
Accounts payable$947 
Accrued expenses24,892 
Operating lease liabilities, current portion208 
Operating lease liabilities, net of current portion342 
Other long-term liabilities290 
Total liabilities$26,679 
Total identifiable net assets acquired$32,333 
Goodwill3,033 
Total estimated purchase consideration$35,366 

The Company determined the Company reviewed, an SB206 Japanese development program timelineestimated fair value of the acquired intangible assets as of the closing date using the income approach. This is a valuation technique that supported a 7.5 year performance period estimate completing inis based on the third quartermarket participant’s expectations of 2024. The SB204 Japanese development plan and program timeline was not presented by Sato and remains under evaluation by the Company and Sato. Currently, the Company understandscash flows that the progressionintangible 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 estimating fair value.
Goodwill was determined on the basis of the Japanese SB204 program could follow the same timeline as the Japanese SB206 program, subject to the natureprovisional fair values of the results of Sato’s comprehensive asset developmental program, including SB206.
In November of 2020, Sato determined its initial Japanese Phase 1 study for SB206 would require an amended design, including potential evaluation of lower dose strengths, to further refine dose tolerability in a subsequent Phase 1 study. Based upon (i) the need for an additional Phase 1 study; (ii) Sato’s estimated comprehensive developmental schedule for SB206, including additional post-Phase 1 clinical trials;assets and (iii) current and future Japanese clinical trial material manufacturing and technical transfer considerations, the Company concluded that a prospective delay in Sato’s overall SB206 Japanese development plan had occurred. The Company estimates the program timeline to be extended by 1.75 years from its previous estimate, and a corresponding extension of the performance period estimate to 9.25 years, completing in the second quarter of 2026.
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 completion of the B-SIMPLE4 Phase 3 trial in the United States, which has been and may be further impacted by the COVID-19 pandemic; (iii) the API and drug product supply chain progression, including the Company’s build-out of further 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.
See Note 14—Subsequent Events regarding the July 2021 update from Sato regarding the estimated combined SB204 and SB206 development program timeline.
In future periods, the Company will lift the variable consideration constraint from each contingent payment when there is 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 completedliabilities identified at the time thatof the constraint is lifted, a cumulative catch-up adjustmentEPI Health Acquisition. The estimated provisional allocation of purchase consideration will be recognizedadjusted, within a period of no more than 12 months from the EPI Health Acquisition date, if these fair values change as a result of circumstances existing at the acquisition date. These measurement period adjustments may arise with regard to amounts recorded as assets and liabilities upon verification of such amounts or upon finalization of the required valuations of intangible assets identified. The amounts of reserves and provisions may also be adjusted as a result of ongoing procedures to identify and measure liabilities, including tax, environmental risks and litigation. The purchase consideration may also be adjusted in connection with finalizing the valuation procedures for the contingent consideration liability and any potential changes in the period. If nofair value of the Seller Note. Any adjustments to amounts may impact the valuation of the consideration or the amounts recorded as goodwill.
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 performanceacquired assets, which could not be individually identified and separately valued. Goodwill is required byprimarily attributable to the acquired commercial platform and infrastructure, including personnel, and expected synergies related to the commercialization of product candidates.
Pro forma Information
The following pro forma information presents the combined results of operations for the three and six months ended June 30, 2022 and 2021, as if the Company had completed the EPI Health Acquisition at the timebeginning of the constraintperiods presented. The pro forma financial information is lifted,provided for comparative purposes only and is not indicative of what actual results would have been had the Company expects to recognize all revenue associated with such milestone paymentsEPI Health Acquisition occurred at the time that the constraint is lifted.
Contract Costs—Amended Sato Agreement
The Company has incurred certain fees and costs in the process of obtaining the Amended Sato Agreement that were payable upon contract execution and, therefore, have been recognized as other assets and amortized as general and administrative expense on a straight-line basis over the same estimated performance period being used to recognize the associated revenue. These fees are associated with the following two arrangements and are described as follows:
•The Company entered into an agreement with a third party to assist the Company in exploring the licensing opportunity that led to the executionbeginning of the Sato Agreement. The Company is obligatedperiods presented, nor does it give effect to paysynergies, cost savings, fair market value adjustments, and other changes expected to result from the third party a low-single-digit percentageEPI Health Acquisition. Accordingly, the pro forma financial results do not purport to be indicative of all upfront and milestone paymentsconsolidated results of operations as of the Company receives from Sato under the Amended Sato Agreement.
•The intellectual property rights granted to Sato under the Amended Sato Agreement include certain intellectual property rights which the Company has licensed from UNC. Under the UNC License Agreement described in Note 3—Research and Development Licenses, the Company is obligated to pay UNC a running royaltydate hereof, for any
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percentage inperiod ended on the low single digits ondate hereof, or for any other future date or period. The pro forma financial information has been calculated after applying the Company’s accounting policies and includes adjustments for transaction-related costs.
Three Months EndedSix Months Ended
June 30, 2022June 30, 2021June 30, 2022June 30, 2021
Total revenue$6,158 $5,022 $12,105 $9,890 
Net loss and comprehensive loss(8,878)(8,705)(23,312)(21,005)
Net loss per share, basic and diluted$(0.44)$(0.56)$(1.19)$(1.37)
Note 3: Inventory, net sales
The major components of licensed products, includinginventory, net, sales that may be generated by Sato. Additionally, the Company is obligated to make payments to UNC that represent the portionwere as follows:
June 30, 2022
Finished goods available for sale$1,571 
Reserve for obsolescence(12)
Inventory, net$1,559 
As part of the Sato upfront and milestone payments thatEPI Health Acquisition, inventory, net, were estimatedmarked to be directly attributable to the UNC intellectual property rights included in the license to Sato.
Performance Obligations under the Amended Sato Agreement
The net amount of existing performance obligations under long-term contracts unsatisfied as of June 30, 2021 was $10,077. The Company expects to recognize approximately 21% 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.
Government Contracts and Grant Revenue
The Company assessed the following federal grants in accordance with Topic 958 and concluded that both represent conditional non-exchange transactions.
In August 2019, the Company received a Phase 1 federal grant of approximately $223 (the “NIH Phase 1 Grant”) from the National Institutes of Health (the “NIH”). The funds are to be used to advance formulation development of a nitric oxide-containing intravaginal gel (WH602) designed to treat high-risk human papilloma virus (“HPV”) infections that can lead to cervical intraepithelial neoplasia (“CIN”). The specific focus is to ensure the nitric oxide delivery from the gel replicates doses of nitric oxide previously demonstrated to be effective against HPV in the Company’s clinical and in vitro studies.
In February 2020, following the successful progression of the NIH Phase 1 Grant, the Company was awarded a Phase 2 federal grant of approximately $997 from the NIH (the “NIH Phase 2 Grant”) that will enable the conduct of IND-enabling toxicology and pharmacology studies and other preclinical activity with respect to WH602. The NIH Phase 2 Grant funds will be received by the Company in the form of periodic cost reimbursements as the underlying research and development activities are performed. The Company was awarded additional funding of $126 in March 2021 and may be eligible to receive additional fundingfair value as part of the NIH Phase 2 Grant, allCompany’s ASC 805 business combination accounting. See Note 2—“Acquisition of which was or will be subject to availability of NIH funds and satisfactory progress of the project. Revenue recognized under the NIH Phase 1 Grant and NIH Phase 2 Grant was $0 and $62 during the three and six months ended June 30, 2021, respectively. Revenue recognized under the NIH Phase 1 Grant and NIH Phase 2 Grant was $5 and $29 during the three and six months ended June 30, 2020, respectively.
In September 2019, the Company received a grant from the United States Department of Defense’s Congressionally Directed Medical Research Programs of approximately $1,113 as part of its Peer Reviewed Cancer Research Program. The grant supports the development of a non-gel formulation product candidate (WH504) designed to treat high-risk HPV infections that can lead to CIN, with well-characterized physical chemical properties suitableEPI Health” for intravaginal administration. In addition, the grant supports the evaluation of the effect of varying concentrations and treatment durations of berdazimer sodium (NVN1000) against HPV-18 in human raft cell culture in vitro studies. Revenue recognized under this grant was $0 and $10 during the three and six months ended June 30, 2021, respectively. Revenue recognized under this grant was $216 and $381 during the three and six months ended June 30, 2020, respectively.additional detail.
Note 6: Research4: Prepaid Expenses and Development ArrangementsOther Current Assets
Royalty and Milestone Payments Purchase Agreement with Reedy Creek Investments LLC
On April 29, 2019,The following table represents the Company entered into a royalty and milestone payments purchase agreement (the “Purchase Agreement”) with Reedy Creek Investments LLC (“Reedy Creek”), pursuant to which Reedy Creek provided funding to the Company in an initial amountcomponents of $25,000, for the Company to use primarily to pursue the development, regulatory approval and commercialization (including through out-license agreementsprepaid expenses and other third-party arrangements) activities for SB206, a topical gel with anti-viral properties being developed for the treatment of 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.
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Pursuant to the Purchase Agreement, the Company will pay Reedy Creek ongoing quarterly payments, calculated based on an applicable percentage per product of any upfront fees, milestone payments, royalty payments or equivalent payments received by the Company pursuant to any out-license agreement for SB204, SB206 or SB414 in the United States, Mexico or Canada, net of any upfront fees, milestone payments, royalty payments or equivalent payments paid by the Company to third parties pursuant to any agreements under which the Company has in-licensed intellectual property with respect to such products in the United States, Mexico or Canada. The applicable percentage used for determining the ongoing quarterly payments, applied to amounts received directly by the Company pursuant to any out-license agreement for each product, ranges from 10% for SB206 to 20% for SB204 and SB414. However, the agreement provides that the applicable percentage for each product will be 25% for fees or milestone payments received by the Company (but not royalty payments received by the Company) until Reedy Creek has received payments under the Purchase Agreement equal to the total funding amount provided by Reedy Creek under the Purchase Agreement. If the Company decides to commercialize any product on its own following regulatory approval, as opposed to commercializing through an out-license agreement or other third-party arrangement, the Company will only be obligated to pay Reedy Creek a low single digits royalty on net sales of such products.
The Company determined that the Reedy Creek Purchase Agreement is within the scope of Accounting Standards Codification (“ASC”) 730-20, Research and Development Arrangements. The Company concluded that there has not been a substantive and genuine transfer of risk related to the Purchase Agreement as (i) Reedy Creek has the opportunity to recover its investment regardless of the outcome of the research and development programs within the scope of the agreement (prior to commercialization of any in scope assets through potential out-licensing agreements and related potential future milestone payments); and (ii) there is a presumption that the Company is obligated to pay Reedy Creek amounts equal to its investment based on the related party relationship at the time the parties entered into the Purchase Agreement. The Purchase Agreement is a broad funding arrangement, due to (i) the multi-asset, or portfolio approach including three developmental assets that are within the scope of the arrangement; and (ii) Reedy Creek’s approximate 5% ownership of the outstanding shares of common stock of the Company at the time of entry into the Purchase Agreement.
As such, the Company determined that the appropriate accounting treatment under ASC 730-20 was to record the initial proceeds of $25,000 as cash and cash equivalents, as the Company had the ability to direct the usage of funds, and a long-term liability within its classified balance sheet. The long-term liability will remain until the Company receives future milestones from other potential third parties, as defined within the Purchase Agreement, of which 25% will be contractually owed to Reedy Creek. If potential future milestone or other payments are received by the Company, and become partly due to Reedy Creek, the corresponding partial repayment to Reedy Creek will result in a ratable reduction of the total long-term obligation to repay the initial purchase price.
Development Funding and Royalties Agreement with Ligand Pharmaceuticals Incorporated
On May 4, 2019, the Company entered into a development funding and royalties agreement (the “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 for the treatment of molluscum.
Pursuant to the 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, for the treatment of 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. In addition, the Funding Agreement also states that if all development of SB206 is ceased prior to the first regulatory approval, the Company must pay to Ligand an amount equal to the purchase price less the amount spent in accordance with the development budget on development activities conducted prior to such cessation.
As such, the Company concluded that the appropriate accounting treatment under ASC 730-20 was to record the initial proceeds of $12,000, as a liability and as restricted cash on its condensed consolidated balance sheet, as the funds could only be used for the progression of SB206.
The Company amortizes 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
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program to a regulatory approval in the United States. The ratable Ligand funding is presented within the accompanying condensed consolidated statements of operations and comprehensive loss within research and development expenses associated with the SB206 program.
The initial restricted cash balance was also reduced ratably during interim reporting periods in 2019 in a manner consistent with the amortization method for the Ligand funding liability balance. As of December 31, 2019, the aggregate amount spent in accordance with the SB206 development budget on SB206 development activities had exceeded the $12,000 purchase price, causing the aforementioned repayment provision provided for in the Funding Agreement to no longer be enforceable.
During the three months ended June 30, 2020, the Company completed a reassessment of the estimated total cost to progress the SB206 program to a potential United States regulatory approval, including consideration of how such estimated costs may potentially be affected by various regulatory, clinical development, and drug manufacturing and supply factors. During this reassessment, the Company concluded that the incremental costs associated with the conduct of the B-SIMPLE4 Phase 3 trial would be excluded from the total cost basis used to amortize the liability because they were not contemplated within the Funding Agreement. The reassessment also concluded that the other projected costs to progress SB206 to a planned regulatory approval in the United States, most of which are regulatory costs associated with the NDA submission process, did not materially change and did not have a material effect on the amortization of the liability.
During the three months ended June 30, 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 has increased from prior periods. Therefore, the Company noted that for the three and six months period ended June 30, 2021, the Company reflected this change in estimate and recorded accretion of the liability associated with the Ligand Funding Agreement. The Company will continue to monitor and adjust its estimated regulatory cost, through approval, as needed.
For the three and six months ended June 30, 2021, the Company recorded research and development expense of $228 and $210, respectively, related to the SB206 developmental program, related to accretion of the Ligand Funding Agreement amount. For the three and six months ended June 30, 2020, the Company recorded $369 and $1,882, respectively, as contra-research and development expense related to the SB206 developmental program, related to amortization of the Ligand Funding Agreement amount.
June 30, 2022December 31, 2021
Inventory and raw material deposits$1,190 $— 
Prepaid service contracts380 — 
Prepaid insurance808 1,697 
Prepaid Prescription Drug User Fee Act (PDUFA) fees462 — 
Product samples969 — 
Other current assets related to leasing arrangement27 109 
Prepaid expenses and other current assets1,141 766 
Total prepaid expenses and other current assets$4,977 $2,572 
Note 7:5: Property and Equipment, Netnet
Property and equipment consisted of the following:
June 30, 2021December 31, 2020June 30, 2022December 31, 2021
Computer equipmentComputer equipment$58 $67 Computer equipment$101 $58 
Furniture and fixturesFurniture and fixtures23 34 Furniture and fixtures99 23 
Laboratory equipmentLaboratory equipment3,808 2,930 Laboratory equipment5,705 4,134 
Office equipmentOffice equipment167 72 Office equipment177 177 
Leasehold improvementsLeasehold improvements6,024 562 Leasehold improvements9,911 9,391 
Property and equipment, grossProperty and equipment, gross10,080 3,665 Property and equipment, gross15,993 13,783 
Less: Accumulated depreciation and amortizationLess: Accumulated depreciation and amortization(1,377)(1,259)Less: Accumulated depreciation and amortization(1,925)(1,582)
Total property and equipment, netTotal property and equipment, net$8,703 $2,406 Total property and equipment, net$14,068 $12,201 
Depreciation and amortization expense was $247 and $344 for the three and six months ended June 30, 2022, respectively, and $81 and $138 for the three and six months ended June 30, 2021, respectively, and $492 and $987 for the three and six months ended June 30, 2020, respectively.
During the second quarter of 2020, the Company met the relevant criteria for reporting certain propertyCorporate and equipment as held for sale on June 29, 2020, and as a result, the Company stopped recording depreciation expense on that date, assessed the property and equipment assets for impairment pursuant to FASB Topic 360, Manufacturing FacilityProperty, Plant, and Equipment,and reclassified the remaining carrying value of the assets held for sale as current assets in its condensed consolidated balance sheets as of June 30, 2020. Certain events and transactions occurred during the third quarter of 2020 that resulted in the disposition of assets and liabilities within the Company’s various disposal and asset groups, including the disposition of all assets and liabilities within the Company’s facility asset group on July 16, 2020 in conjunction with the lease termination transaction described in Note 8—Commitments and Contingencies.
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As of June 30, 2022 and December 31, 2020,2021, the Company had $114construction in progress amounts related to leasehold improvements of disposal group carrying value remaining, which waszero and $7,485, respectively.
See Note 6—“Leases” for details regarding the TBC Lease and the Company’s corporate and manufacturing facility.
Note 6: Leases
The Company leases office space and certain equipment under non-cancelable lease agreements.
In accordance with ASC 842, Leases, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease, if available, otherwise at the Company’s incremental borrowing rate. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred.
In calculating the right-of-use asset and lease liability, the Company elected, and has in practice, historically combined lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.
Office Lease at Triangle Business Center, Durham, North Carolina
On January 18, 2021, the Company entered into a lease with an initial term expiring in 2032, as amended for 19,265 rentable square feet, located in Durham, North Carolina. This lease dated as of January 18, 2021, as amended (the “TBC Lease”), is by and between the Company and Copper II 2020, LLC (the “TBC Landlord”), pursuant to which the Company is leasing space serving as its corporate headquarters and small-scale manufacturing site (the “Premises”) located within the Triangle Business 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 provides that base rent will be 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 will be paid over 4 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 held for sale inon the accompanying condensed consolidated balance sheets. This disposal group
Office Lease at Meeting Street, Charleston, South Carolina
On March 3, 2022 EPI Health entered into a sublease agreement with EPG (the “Meeting Street Lease”) for office space at 174 Meeting Street in Charleston, South Carolina for approximately 6,000 rentable square feet.
The term of the Meeting Street Lease is through September 30, 2024, and related assets consistedEPI Health has the right to terminate the Meeting Street Lease with 60 days’ prior notice. The monthly base rent for the Meeting Street Lease is $20 for months 1-12, inclusive of certain manufacturing
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taxes and laboratory equipmentoperating expenses such as maintenance and insurance. Beginning with month 13 and annually thereafter, the monthly base rent will be increased by 3%.
TBC Lease and Meeting Street Lease
Rent expense, including both short-term and variable lease components associated with the Company’s previous large scale drug manufacturing capability, whichTBC Lease and the Meeting Street Lease, as applicable, was being sold over time through a consignment seller. During$149 and $286 for the second quarter of 2021, the Company assessed the disposal group for recoverabilitythree and determined that the remaining carrying value of the disposal group had no fair value. As a result of this assessment, the Company recorded an impairment charge of $114 during the threesix months ended June 30, 2021.2022, respectively. Rent expense was $111 and $256 for the three and six months ended June 30, 2021, respectively.
The remaining lease term for the TBC Lease and the Meeting Street Lease are 9.36 years and 1.99 years, respectively, as of June 30, 2022. The weighted average discount rate for both leases was 8.35% as of June 30, 2022.
Future net minimum lease payments, net of amounts expected to be received related to the tenant improvement allowance, as of June 30, 2022 were as follows:
Maturity of Lease LiabilitiesOperating Lease
2022$(213)
2023435 
2024816 
2025645 
2026665 
2027 and beyond3,700 
Total future undiscounted lease payments$6,048 
Add: reclassification of discounted net cash inflows to other current assets27 
Less: imputed interest(2,142)
Total reported lease liability$3,933 
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 inflow related to the 2022 fiscal year presented above relates to the expected timing of the remaining balance of the total tenant improvement allowance of $2,450 being funded by the TBC Landlord, which the Company reasonably expects to receive within the next twelve months, partially offset by expected lease payments for the corresponding period.
Components of lease assets and liabilities as of June 30, 2022 were as follows:
June 30, 2022
Assets
Other current assets related to leasing arrangement$27 
Right-of-use lease assets1,971 
Total lease assets$1,998 
Liabilities
Operating lease liabilities, current portion$230 
Operating lease liabilities, net of current portion3,703 
Total lease liabilities$3,933 
During the year ended December 31, 2021, the Company received $1,523 related to payments as part of the total TBC Landlord funded tenant improvement allowance. The effective discounted value of the remaining tenant improvement allowance payments being funded by the TBC Landlord, of the total tenant improvement allowance of $2,450, partially offset by the expected lease payments by the Company within the next twelve months, results in a net balance of $27. This net amount is presented within the condensed consolidated balance sheets within prepaid expenses and other current assets as of June 30, 2022. Furthermore, this amount is also included in long-term lease liabilities within the condensed consolidated balance sheets as of June 30, 2022.
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Note 7: Goodwill and Intangible Assets, net
Goodwill
The Company’s goodwill balance as of June 30, 2022 was $3,033. The entire goodwill balance relates to the EPI Health Acquisition during the six months ended June 30, 2022. None of the goodwill is expected to be deductible for income tax purposes.
Intangible Assets
The following table presents both definite and indefinite lived intangible assets as of June 30, 2022, comprised primarily of acquired product rights related to the EPI Health Acquisition:
Initial Carrying ValueAccumulated AmortizationNet Book ValueRemaining Useful Life (Years)
Rhofade$15,500 $314 $15,186 14.75
Wynzora3,000 61 2,939 14.75
Minolira3,500 71 3,429 14.75
Cloderm6,500 132 6,368 14.75
Nuvail1,000 20 980 14.75
Sitavig3,500 71 3,429 14.75
Website domain75 — 75 — 
Total intangible assets$33,075 $669 $32,406 14.75
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:
2022$1,109 
20232,200 
20242,206 
20252,200 
20262,200 
Thereafter22,416 
Total amortization$32,331 
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Note 8: Accrued Expenses
The following table represents the components of accrued expenses as of June 30, 2022 and December 31, 2021:
June 30, 2022December 31, 2021
Accrued rebates, discounts and chargebacks$14,554 $— 
Accrued returns4,871 — 
Accrued compensation2,296 1,543 
Accrued outside research and development services171 194 
Accrued legal and professional fees508 — 
Accrued royalties903 — 
Accrued working capital adjustment3,100 — 
Accrued construction in process613 1,020 
Accrued SB206 pre-commercial and marketing107 — 
Accrued Wynzora payments due to collaborator426 — 
Accrued MC2 collaboration deposit2,824 — 
Accrued other expenses3,055 2,231 
Total accrued expenses$33,428 $4,988 
Note 9: Notes Payable
Seller Note with Evening Post Group
On March 11, 2022, at the closing of the EPI Health Acquisition, the Company entered into a secured promissory note and security agreement with EPG. The Company entered into the Seller Note with EPG to finance a portion of the Closing Purchase Price related to the EPI Health Acquisition.
The Seller Note has 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 will bear interest at the rate of 5.0% per annum for the first 90 days after the closing date, 15.0% per annum for the following 12 months, and 18.0% per annum for the remainder of the term. The non-amortizing principal of the Seller Note is to be paid in full at maturity and is secured by the membership interests of EPI Health held by the Company. EPI Health is a guarantor of the Seller Note. There is 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 has recorded interest expense using the effective interest method.
During the three and six months ended June 30, 2022, the Company recorded interest expense of $608 and $740, respectively, related to the Seller Note. As of June 30, 2021 and December 31, 2020,2022, the Company had goods and services associated with the planning, design and build-out$401 of its new facility of $710 and $17, respectively,accrued interest included in accounts payable and $3,297 and $365, respectively, included in otherwithin accrued expenses in other current liabilities inon the accompanying condensed consolidated financial statements.balance sheets.
The following table represents future maturities of the Seller Note obligation as of June 30, 2022:
2022$— 
2023— 
202416,500 
Total notes payable$16,500 
See Note 19—“Subsequent Events” for additional detail regarding the Seller Note.
Note 8:10: Commitments and Contingencies
Lease Obligations
The Company leases office space and certain equipment under non-cancelable lease agreements.
In accordance with ASC 842, Leases (Topic 842), arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease, if available, otherwise at the Company’s incremental borrowing rate. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred.
In calculating the right-of-use asset and lease liability, the Company elected, and has in practice, historically combined lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.
Hopson Road Facility Lease
In August 2015, the Company entered into a lease agreement for approximately 51,000 rentable square feet of facility space in Morrisville, North Carolina, commencing in April 2016 (the “Hopson Road Facility Lease”).
On July 16, 2020, the Company entered into a Lease Termination Agreement (the “Termination Agreement”) with Durham Hopson, LLC (as successor-in-interest to Durham Hopson Road, LLC) (the “Landlord”), which provided for the early termination of the Hopson Road Facility Lease, subject to certain conditions. Pursuant to the terms of the Termination Agreement, the Hopson Road Facility Lease was terminated in connection with the Landlord entering into a lease with an unrelated third party (the “New Tenant”) for the premises in the building covered by the Hopson Road Facility Lease (the “New Tenant Lease”), which commenced on July 16, 2020.
In connection with the termination of the Hopson Road Facility Lease pursuant to the Termination Agreement, the Company entered into a sublease agreement, which was effective upon the termination of the Hopson Road Facility Lease and the commencement of the New Tenant Lease, through which the Company began to sublease from the New Tenant approximately 12,000 square feet (reduced to approximately 10,000 square feet after August 31, 2020) in the building that was covered by the Hopson Road Facility Lease (the “Sublease”). The New Tenant and the Landlord entering into the New Tenant Lease was a condition precedent to the effectiveness of the termination of the Hopson Road Facility Lease pursuant to the Termination Agreement, and, in connection with the termination of the Hopson Road Facility Lease, the Landlord consented to the Sublease. The Company decommissioned and physically exited the premises covered by the Sublease during the three months ended March 31, 2021, and the Sublease’s material terms expired on March 31, 2021.
Triangle Business Center Facility Lease
On January 18, 2021, the Company entered into a Lease, dated as of January 18, 2021, as amended as of March 18, 2021 (the “TBC Lease”), by and between the Company and Copper II 2020, LLC (the “TBC Landlord”), pursuant to which the Company is leasing 15,623 rentable square feet located at a new location (the “Premises”). The Premises will serve as the Company’s new corporate headquarters. The Company is building out the Premises to support 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.
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The TBC Lease commenced on January 18, 2021 (the “Lease Commencement Date”). Rent under the TBC Lease commences on the earlier of (i) the date the Company occupies a certain portion of the Premises, as specified in the TBC Lease, for the purposes of conducting business therein, or (ii) nine months after the Lease Commencement Date, provided that the date for purposes of (ii) is subject to extension for any delay in the TBC Landlord’s delivery of the Premises to the Company in accordance with certain specifications set forth in the TBC Lease (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 (and if the Rent Commencement Date does not occur on the first day of a calendar month, the period from the Rent Commencement Date to the first day of the next calendar month shall be included in the first such month for purposes of determining the duration of the term of the TBC Lease). 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 will be approximately $40 for months 1-12. Beginning with month 13 and annually thereafter, the monthly base rent will be increased by 3%. Subject to certain terms, the TBC Lease provides that base rent will be 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 $2,031. The tenant improvement allowance will 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 $472 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 condensed consolidated balance sheets.
Rent expense, including both short-term and variable lease components associated with the Hopson Road Facility Lease and the TBC Lease, as applicable, was $111 and $256 for the three and six months ended June 30, 2021, respectively, and $171 and $395 for the three and six months ended June 30, 2020, respectively.
The weighted average remaining lease term for the TBC Lease and weighted average discount rate for the TBC Lease are 10.50 years and 8.35%, respectively, as of June 30, 2021.
Future net minimum lease payments as of June 30, 2021 were as follows:
Maturity of Lease LiabilitiesOperating Lease
2021$(1,523)
2022(69)
2023493 
2024508 
2025523 
2026 and beyond3,542 
Total future undiscounted lease payments$3,474 
Add: reclassification of discounted net cash inflows to other current assets$1,592 
Less: imputed interest$(1,971)
Total reported lease liability$3,095 
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 inflow related to the 2021 and 2022 fiscal year presented above relates to the expected timing of the tenant improvement allowance of $2,031 being funded by the TBC Landlord, which the Company reasonably expects to receive within the next twelve months, partially offset by expected lease payments for the corresponding period.
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Components of lease assets and liabilities as of June 30, 2021 were as follows:
As of June 30, 2021
Leases
Assets
Other current asset related to leasing arrangement, net$1,592 
Right-of-use lease assets1,386 
Total assets$2,978 
Liabilities
Noncurrent operating lease liabilities$3,095 
Total lease liabilities$3,095 
The effective discounted value of the payments of the tenant improvement allowance of $2,031, being funded by the TBC Landlord, partially offset by the expected lease payments by the Company within the next twelve months, results in a net balance of $1,592, which is presented within the condensed consolidated balance sheets as other current asset related to leasing arrangement, net as of June 30, 2021. Furthermore, this amount is also included in long-term lease liabilities within the condensed consolidated balance sheets as of June 30, 2021.
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. See Legal Proceedings below for further discussion of pending legal claims.
The Company has entered into, and expects to continue to enter into, contracts in the normal course of business with various third parties whothat support its clinical trials, preclinical research studies, development services, and other services related to its developmentcommercial sales and
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marketing activities in addition to potential third-party manufacturers for both the manufacture of ourthe Company’s product candidates.candidates and procurement of its commercial finished good products. 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 offollowing written notice.
ThereIn 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, there have been no material contract terminations as of June 30, 2021.2022.
Also, see Note 11—“Stockholders’ Equity” regarding outstanding common stock warrants and pre-funded warrants.
Contingent Payment Obligations Related to the Purchase of EPI Health
See Note 3—2—“Acquisition of EPI Health” for certain contingent payments related to consideration due to EPG upon achievement of certain milestones by EPI Health.
Contingent Payment Obligations from Historical Acquisitions by EPI Health
EPI Health has in the past acquired certain rights to pharmaceutical products and such arrangements have typically included requirements that EPI Health make certain contingent payments to the applicable seller as discussed below.
Rhofade. On October 10, 2019, EPI Health entered into an agreement whereby it acquired certain assets related to Rhofade (the “Rhofade Acquisition Agreement”). In connection with the Rhofade Acquisition Agreement, EPI Health is required to make the following milestone payments to the seller upon reaching the following net sales thresholds during any calendar year following the closing date, as defined in the Rhofade Acquisition Agreement:
Calendar Year Net Sales ThresholdMilestone Payment
$50,000 $5,000 
$75,000 $5,000 
$100,000 $10,000 
Under the terms of the Rhofade Acquisition Agreement, EPI Health assumed certain liabilities of the prior licensees of the Rhofade product. In particular, EPI Health would also be 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 has not recognized a liability for such Rhofade milestones based on current and historical sales figures and management’s estimates of future sales.
Cloderm. On September 28, 2018, EPI Health entered into an agreement pursuant to which it acquired assets related to the product Cloderm. EPI Health is required to pay a low double-digit royalty once cumulative net sales of Cloderm reach $20,833, until $6,500 of royalty payments have been made by EPI Health.
Minolira. On August 20, 2018, EPI Health entered into an agreement pursuant to which it acquired assets related to the product Minolira. In connection with the agreement, EPI Health is required to make the following milestone payments to the seller upon reaching cumulative net sales thresholds as defined in the acquisition agreement:
Cumulative Net Sales ThresholdMilestone Payment
$10,000 $1,000 
$20,000 $1,000 
Each additional$20,000 $1,500 
See Note 12—“Licensing and Collaboration Arrangements” for certain obligations and contingent payments related to license agreements, including those related to the Company’s commercial product portfolio.
Also see Note 15—“Research and Development LicensesAgreements” for certain obligations regarding the Company’s research and development license agreements.
See Note 6—Research and Development Arrangements regardingagreements, including the Reedy Creek Purchase Agreement with Reedy Creek and the Ligand Funding Agreement with Ligand.Agreement.
See Note 10—Stockholders’ Equity (Deficit) regarding outstanding warrants relatingFor the three and six months ended June 30, 2022, the Company recorded $1,538 and $1,636, respectively of expense related to royalties on net sales and accruals of certain cumulative sales-based milestones related to its commercial product portfolio, described above, including Wynzora residual net sales royalty payments due to the January 2018 Public Offering,collaboration partner. As of June 30, 2022 the March 2020 Public OfferingCompany had (i) accrued royalties of $903 and the March 2020 Registered Direct Offering.accrued Wynzora royalty payments of $426, and (ii) accrued milestones of $329 presented within accrued expenses and other long-term liabilities, respectively, in its condensed consolidated balance sheets.
See Note 14—Subsequent Events regarding a
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Development Services Agreement
In July 2021, the Company entered into a development services agreement with a third-party full-scale API manufacturer.manufacturer for certain manufacturing process feasibility services including process familiarization, safety assessments, preliminary engineering studies, and initial process and analytical methods determination. Following the successful completion of certain preliminary activities with this third-party API manufacturer and other preparatory activities, the Company would then proceed with the third-party API manufacturer beyond the initial stages noted above, in which case the Company expects to incur substantial costs associated with technical transfer efforts, capital expenditures, manufacturing capabilities, and certain quantities of its drug substance.
Legal Proceedings
The Company is not currently a party to any material legal proceedings and is not aware of any claims or actions pending against the Company that the Company believes could have a material adverse effect on the Company’s business, operating results, cash flows or financial statements. In the future, the Company might from time to time become involved in litigation relating to claims arising from its ordinary course of business.
Compensatory Obligations
As partThe Company enters into employment agreements with certain officers and employees. These agreements are in the normal course of a strategic objective to reduce the Company’s costs related to internal resources, facilities,business and infrastructure capabilities, thecontain certain customary Company took actionscontrolled termination provisions which, if triggered, could result in February 2020 to reduce the Company’s internal resources. Employeefuture severance costs associated with this action were $59, which were expensed during the first quarter of 2020.payments.
See Note 11—16—“Stock-Based CompensationCompensation” regarding stock options, and stock appreciation rights.
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See Note 12—Tangible Stockholder Return Plan regardingrights and the Tangible Stockholder Return Plan adopted in August 2018, as amended and restated on May 25, 2021.Plan.
Note 9: Paycheck Protection Program
On April 22, 2020, the Company entered into a promissory note, which was subsequently amended (the “Note”), evidencing an unsecured loan in the amount of approximately $956 made to the Company (the “Loan”) under the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the United States Small Business Administration (the “SBA”). The Loan was made through PNC Bank, National Association. Subject to the terms of the Note, the Loan bears interest at a fixed rate of one percent (1%) per annum.
Under the terms of the CARES Act, PPP loan recipients can 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 the use of loan proceeds for payment of permitted and program-eligible expenses. Interest payable on the Note may 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 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 June 14, 2021, the forgiveness of the principal balance of $956 is presented within the condensed consolidated statements of operations as a gain on debt extinguishment.
Note 10:11: Stockholders’ Equity (Deficit)
Capital Structure
In conjunction with the completion of the Company’s initial public offering in September 2016, the Company amended its restated certificate of incorporation and amended and restated its bylaws. The amendment provided for 210,000,000 authorized shares of capital stock, of which 200,000,000 shares are designated as $0.0001 par value common stock and 10,000,000 shares are designated as $0.0001 par value preferred stock.
At the Company’s Annual Meeting of Stockholders held on July 28, 2020 (the “2020 Annual Meeting”), the Company’s stockholders approved thean amendment to the Restated CertificateCompany’s restated certificate of Incorporationincorporation of the Company to effect a 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 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 condensed consolidated financial statements and related notes give retroactive effect to the Reverse Stock Split.
June 2021 Public Offering
On June 17, 2021, the Company entered into an underwriting agreement with Cantor Fitzgerald & Co., as underwriter, pursuant to which the Company agreed to issue and sell an aggregate of 3,636,364 shares of the Company’s common stock at a price to the public of $11.00 per share, less underwriting discounts and commissions. The Company also granted the underwriter a 30-day option (the “Underwriter Option”) to purchase up to an additional 545,454 shares of common stock at the public offering price, less underwriting discounts and commissions. The June 2021 Public Offering closed on June 21, 2021, and the Underwriter Option expired unexercised in July 2021.

Net proceeds from the June 2021 Public Offering were approximately $37,236 after deducting underwriting discounts and commissions and offering expenses of approximately $2,764. Offering costs were netted against the offering proceeds and recorded to additional paid-in capital.

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Common Stock
The Company’s common stock has a par value of $0.0001 per share and consists of 200,000,000 authorized shares as of June 30, 2022 and December 31, 2021. There were 21,281,613 and 18,815,892 shares of voting common stock outstanding as of June 30, 2022 and December 31, 2021, Public Offering was made pursuant torespectively.
The Company had reserved shares of common stock for future issuance as follows:
 June 30, 2022December 31, 2021
Outstanding warrants to purchase common stock8,716,252 1,274,176 
Outstanding stock options (Note 16)983,603 518,553 
Outstanding stock appreciation rights (Note 16)60,000 60,000 
Nonvested restricted stock units (Note 16)420,106 — 
For possible future issuance under the 2016 Stock Plan (Note 16)328,068 1,213,224 
 10,508,029 3,065,953 
Preferred Stock
The Company’s restated certificate of incorporation provides the Company’s effective shelf registration statement on Form S-3 (No. 333-236583), filedboard of directors with the Securitiesauthority to issue $0.0001 par value preferred stock from time to time in one or more series by adopting a resolution and Exchange Commission (“SEC”)filing a certificate of designations. Voting powers, designations, preferences, dividend rights, conversion rights and declared effective by the SEC on April 10, 2020, including a prospectus contained therein datedliquidation 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 April 10, 2020, as supplemented by a prospectus supplement, dated June 17,30, 2022 and December 31, 2021.
March 2020 Public Offering2022 Equity Distribution Agreement – At-the-Market Facility
On February 27, 2020,March 11, 2022, the Company entered into an underwritingEquity Distribution Agreement (the “Equity Distribution Agreement”) with Oppenheimer & Co. Inc. (“Oppenheimer”). Pursuant to the Equity Distribution Agreement, the Company may from time to time issue and sell to or through Oppenheimer, acting as the Company’s sales agent, shares of the Company’s common stock, par value $0.0001 per share having an aggregate offering price of up to $50,000. Sales of the shares, if any, will be made by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933 (“Securities Act”), or, if expressly authorized by the Company, in privately negotiated transactions. As sales agent, Oppenheimer will offer the shares at prevailing market prices and will use its commercially reasonable efforts, consistent with its sales and trading practices, to sell on the Company’s behalf all of the shares requested to be sold by the Company, subject to the terms and conditions of the Equity Distribution Agreement. The Company or Oppenheimer may suspend the offering of the shares upon proper notice to the other party. The offering of the shares pursuant to the Equity Distribution Agreement will terminate upon the sale of shares in an aggregate offering amount equal to $50,000, or sooner if either the Company or Oppenheimer terminates the Equity Distribution Agreement as permitted by its terms.
The Company will pay Oppenheimer a commission equal to 3.0% of the aggregate gross proceeds from the sale of the 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 compensation will not apply when Oppenheimer acts as principal, in which case the Company may sell the shares to Oppenheimer as principal at a price agreed upon among the parties.
During the six months ended June 30, 2022, the Company sold 385,025 shares of its common stock at an average price of approximately $3.58 per share for total net proceeds of $1,334 under the Equity Distribution Agreement.
In relation to the June 2022 Registered Direct Offering (as defined and described below), the Company agreed not 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 is greater than 50% above the exercise price for the June 2022 Common Warrants.
Outstanding Common Stock Warrants and Pre-funded Warrants
The Company has historically entered into certain equity offerings with underwriters and placement agents, such as the June 2022 Registered Direct Offering, the March 2020 Public Offering, the March 2020 Registered Direct Offering and the January 2018 Offering, that included certain common stock warrant and pre-funded warrant issuances.
The following table presents the Company’s outstanding warrants to purchase common stock and pre-funded warrants for the periods indicated.
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 June 30, 2022December 31, 2021
Exercise
Price Per
Share
 
Warrants to purchase common stock issued in the January 2018 Offering— 999,850 $46.60 
Warrants to purchase common stock issued in the June 2022 Registered Direct Offering5,261,311 — 2.851 
Pre-funded warrants to purchase common stock issued in the June 2022 Registered Direct Offering3,180,615 — 0.01 
Warrants to purchase common stock issued in the March 2020 Public Offering252,417 252,417 3.00 
Underwriter warrants to purchase common stock associated with the March 2020 Public Offering11,304 11,304 3.75 
Placement agent warrants to purchase common stock issued in the March 2020 Registered Direct Offering10,605 10,605 5.375 
 8,716,252 1,274,176 
The weighted average exercise price per share for warrants outstanding and pre-funded as of June 30, 2022 and December 31, 2021 was $1.82 and $37.24, respectively.
June 2022 Registered Direct Offering
On June 9, 2022, the Company entered into a securities purchase agreement with H.C. Wainwright, as underwriter, relatingan institutional investor (the “Purchaser”), pursuant to which the Company agreed to issue and sell to the Purchaser, in a registered direct offering issuancepriced at-the-market under Nasdaq rules (the “June 2022 Registered Direct Offering”) (i) 2,080,696 shares (the “June 2022 Shares”) of the Company’s common stock, and saleaccompanying common stock warrants (the “June 2022 Common Warrants”) to purchase an aggregate of 1,400,0002,080,696 shares of common stock, for a combined price of $2.851 per share and accompanying common warrant, and (ii) pre-funded warrants to purchase 433,3333,180,615 shares of the Company’s common stock (the “CMPO Pre-Funded“June 2022 Pre-funded Warrants”), and accompanying common warrants to purchase up to an aggregate of 1,833,3333,180,615 shares of common stock, (the “firm warrants”). The Company also granted H.C. Wainwright, as underwriter,for a 30-day option to purchase up to 275,000 additional shares of common stock and/or common warrants to purchase up to an aggregate of 275,000 shares of common stock, which H.C. Wainwright partially exercised on March 2, 2020 to purchase 149,860 shares of common stock and common warrants to purchase 275,000 shares of common stock (the “option warrants,” and together with the firm warrants, the “CMPO Common Warrants”). The combined price to the public in this offering for each share of common stock and accompanying common warrants was $3.00, and the combined price to the public in this offering for each$2.841 per pre-funded warrant and accompanying common warrant was $2.999.warrant. The March 2020 PublicJune 2022 Registered Direct Offering closed on March 3, 2020. 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 March 2020 Public Offering.June 13, 2022. Net proceeds from the offering were approximately $5,158$14,020 after deducting underwriting discountsfees and commissions and offering expenses of approximately $791.$948. Offering costs were netted against the offering proceeds and recorded to additional paid-in capital.
DuringAs of June 30, 2022, 3,180,615 June 2022 Pre-funded Warrants and 5,261,311 June 2022 Common Warrants are outstanding.
The Company entered into a placement agent agreement (the “Placement Agent Agreement”) dated as of June 9, 2022, engaging Oppenheimer to act as the first quarter of 2020, allsole placement agent in connection with the June 2022 Registered Direct Offering. Pursuant to the Placement Agent Agreement, the Company agreed to pay Oppenheimer a placement agent fee in cash equal to 5.0% of the CMPO Pre-Funded Warrants were exercised in full, such that there were 0 moregross proceeds from the sale of the CMPO Pre-FundedJune 2022 Shares, the June 2022 Pre-funded Warrants outstanding asand the June 2022 Common Warrants, and to reimburse certain expenses of March 31, 2020. The CMPO Pre-Funded Warrants hadOppenheimer in connection with the June 2022 Registered Direct Offering. Each June 2022 Pre-funded Warrant has an exercise price of $0.001$0.01 per share.
The CMPOJune 2022 Pre-funded Warrants are exercisable immediately upon issuance until all of the June 2022 Pre-funded Warrants are exercised in full. Each June 2022 Common Warrants haveWarrant is immediately exercisable and has an exercise price of $3.00$2.851 per share and will expire five years from the date of issuance. During
The exercise price and the six months ended June 30, 2021, warrant holders exercised 10,000number of shares of common stock purchasable upon the exercise of the CMPOJune 2022 Pre-funded Warrants and June 2022 Common Warrants for total proceedsare subject to adjustment upon the occurrence of approximately $30. From the March 3, 2020 closing datespecific events, including stock dividends, stock splits, reclassifications and combinations of the March 2020 public offering through June 30, 2021, warrant holders exercised a totalCompany’s common stock.
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Table of 1,855,917 of the CMPO Common Warrants for total proceeds of approximately $5,568. There were 252,417 of the CMPO Common Warrants outstanding as of June 30, 2021.Contents
The CMPO UW Warrants have an exercise price of $3.75 per share and expire five years from the date of issuance. During the six months ended June 30, 2021, warrant holders exercised 48,192 of the CMPO UW Warrants for total proceeds of approximately $181. NaN of the CMPO UW Warrants were exercised during 2020. There were 11,304 of the CMPO UW Warrants outstanding as of June 30, 2021.

Common warrants and underwriter warrants. The CMPOJune 2022 Common Warrants and CMPO UW Warrants include certain provisions that establish warrant holder settlement rights that take effect upon the occurrence of certain fundamental transactions. The CMPOJune 2022 Common Warrants and the CMPO UW Warrants define a fundamental transaction to generally include any consolidation, merger or other transaction whereby another entity acquires more than 50% of the Company’s outstanding common stock or the sale of all or substantially all of the Company’s assets. The fundamental transaction provision provides the warrant holders with the option to settle any unexercised warrants for cash in the event of certain fundamental transactions that are within the control of the Company. For any fundamental transaction that is not within the control of the Company, including a fundamental transaction not approved by the Company’s board of directors, the warrant holder will only be entitled to receive from the Company or any successor entity the same type or form of consideration (and in the same proportion) that is being offered and paid to the stockholders of the Company in connection with the fundamental transaction, whether that consideration be in the form of cash, stock or any combination thereof. In the event of any fundamental transaction, and regardless of whether it is within the control of the Company, the settlement amount of the CMPOJune 2022 Common Warrants and the CMPO UW 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 CMPOJune 2022 Common Warrants and the CMPO UW Warrants, including a defined volatility input equal to the greater of the Company’s 100-day historical volatility or 100%.
The CMPOJune 2022 Common Warrants and CMPO UW Warrants also include a separate provision whereby the 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 up to 9.99% if the holder so elects) of the Company’s common stock.
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The Company assessed the CMPOJune 2022 Common Warrants and the CMPO UW Warrants for appropriate equity or liability classification pursuant to the Company’s accounting policy.policy described in Note 1—“Organization and Significant Accounting Policies.” During this assessment, the Company determined (i) the CMPOJune 2022 Common Warrants and the CMPO UW Warrants did not constitute a liability under ASC 480; (ii) the CMPOJune 2022 Common Warrants and the CMPO UW 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 CMPOJune 2022 Common Warrants and the CMPO UW 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 CMPOJune 2022 Common Warrants and the CMPO UW Warrants are indexed to the Company’s common stock; and (vi) the CMPOJune 2022 Common Warrants and the CMPO UW 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 CMPOJune 2022 Common Warrants and the CMPO UW Warrants are freestanding equity-linked derivative instruments that met the criteria for the own-equity scope exception to derivative accounting under ASC 815.equity classification. Accordingly, the CMPOJune 2022 Common Warrants and the CMPO UW Warrants were classified as equity and were accounted for as a component of additional paid-in capital at the time of issuance.

Pre-funded warrantswarrants.. The CMPO Pre-FundedJune 2022 Pre-funded Warrants’ fundamental transaction provision did not provide the warrant holders with the option to settle any unexercised warrants for cash in the event of any fundamental transactions; rather, in all fundamental transaction scenarios, the warrant holder was only entitled to receive from the Company or any successor entity the same type or form of consideration (and in the same proportion) that was being offered and paid to the stockholders of the Company in connection with the fundamental transaction, whether that consideration be in the form of cash, stock or any combination thereof. The CMPO Pre-FundedJune 2022 Pre-funded Warrants also included a separate provision whereby the exercisability of the warrants could be limited if, upon exercise, the warrant holder or any of its affiliates would beneficially own more than 4.99% (or an amount up to 9.99% if the holder so elects) of the Company’s common stock.

The Company assessed the CMPO Pre-FundedJune 2022 Pre-funded Warrants for appropriate equity or liability classification pursuant to the Company’s accounting policy.policy described in Note 1—“Organization and Significant Accounting Policies.” During this assessment, the Company determined the CMPO Pre-FundedJune 2022 Pre-funded Warrants were freestanding instruments that did not meet the definition of a liability pursuant to ASC 480 and did not meet the definition of a derivative pursuant to ASC 815. The CMPO Pre-FundedJune 2022 Pre-funded Warrants were indexed to the Company’s common stock and met all other conditions for equity classification under ASC 480 and ASC 815. Based on the results of this assessment, the Company concluded that the CMPO Pre-FundedJune 2022 Pre-funded Warrants were freestanding equity-linked financial instruments that met the criteria for equity classification under ASC 480 and ASC 815. Accordingly, the CMPO Pre-FundedJune 2022 Pre-funded Warrants were classified as equity and were accounted for as a component of additional paid-in capital at the time of issuance.
March 2020 Public Offering
On February 27, 2020, the Company entered into an underwriting agreement with H.C. Wainwright, as underwriter, relating to the offering, issuance and sale 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
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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 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 three and six months ended June 30, 2022, there were no exercises of CMPO Common Warrants. During the six months ended June 30, 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 June 30, 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 three and six months ended June 30, 2022, there were no exercises of CMPO UW Warrants. During the six months ended June 30, 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 June 30, 2022.
March 2020 Registered Direct Offering
On March 24, 2020, the Company entered into a securities purchase agreement with several institutional and accredited investors, pursuant to which the Company agreed to sell and issue shares of the Company’s common stock and pre-funded warrants in a registered direct offering priced at the market an aggregate of 1,055,000 shares of the Company’s common stock and pre-funded warrants to purchase 805,465 shares of common stock (the “RDO Pre-Funded Warrants”“March 2020 Registered Direct Offering”). The purchase price for each share of common stock was $4.30, and the price for each pre-funded warrant was $4.299. The March 2020 Registered Direct Offering closed on March 26, 2020. At closing, the Company also 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 the pre-funded warrants sold in the March 2020 Registered Direct Offering. Net proceeds from the offering were approximately $7,225 after deducting fees and commissions and offering expenses of approximately $774. Offering costs were netted against the offering proceeds and recorded to additional paid-in capital.
During the first six months of 2020, warrant holders exercised all of the 805,465 of the RDO Pre-Funded Warrants, and NaN of the RDO Pre-Funded Warrants were outstanding as of June 30, 2021. The RDO Pre-Funded Warrants had an exercise price of $0.001 per share.
The RDO PA Warrants have an exercise price of $5.375 per share and expire five years from the date of issuance. NaNDuring the three and six months ended June 30, 2022, there were no exercises of the RDO PA Warrants were exercised during the year ended December 31, 2020.Warrants. During the six months ended June 30, 2021, warrant holders exercised 45,209 of the RDO PA Warrants for total proceeds of approximately $243, and there$243. There were 10,605 of the RDO PA Warrants outstanding as of June 30, 2021.
Placement agent warrants. The RDO PA Warrants contain substantially similar terms as the CMPO UW Warrants, including fundamental transaction settlement provisions. The Company conducted an assessment of the RDO PA Warrants for appropriate equity or liability classification pursuant to the Company’s accounting policy. The Company reached the same
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determinations as described above for the CMPO UW Warrants, and the Company concluded that the RDO PA Warrants are freestanding equity-linked derivative instruments that met the criteria for the own-equity scope exception to derivative accounting under ASC 815. Accordingly, the RDO PA Warrants were classified as equity and were accounted for as a component of additional paid-in capital at the time of issuance.

Pre-funded warrants. The RDO Pre-Funded Warrants contained substantially similar terms as the CMPO Pre-Funded Warrants, including fundamental transaction settlement provisions that did not provide the warrant holders with the option to settle any unexercised warrants for cash in the event of any fundamental transactions; rather, in all fundamental transaction scenarios, the warrant holder was only entitled to receive from the Company or any successor entity the same type or form of consideration (and in the same proportion) that is being offered and paid to the stockholders of the Company in connection with the fundamental transaction, whether that consideration be in the form of cash, stock or any combination thereof. The Company conducted an assessment of the RDO Pre-Funded Warrants for appropriate equity or liability classification pursuant to the Company’s accounting policy. The Company reached the same determinations as described above for the CMPO Pre-Funded Warrants, and the Company concluded that the RDO Pre-Funded Warrants were freestanding equity-linked financial instruments that met the criteria for equity classification under ASC 480 and ASC 815. Accordingly, the RDO Pre-Funded Warrants were classified as equity and were accounted for as a component of additional paid-in capital at the time of issuance.2022.
January 2018 Offering
OnThere were no exercises of warrants issued in the Company’s public offering that closed on January 9, 2018 the Company completed a public offering of its common stock and warrants pursuant to the Company’s then-effective shelf registration statement (the “January 2018 Offering”), pursuant to which it sold an aggregate of 1,000,000 shares of common stock during the three and warrants to purchase up to 1,000,000 shares of the Company’s common stock at a public offering price of $38.00 per share of common stock and accompanying warrant. The warrant exercise price is $46.60 per share and will expire four years from the date of issuance. Based on the results of the Company’s assessment of the warrants for appropriate equity or liability classification, the Company determined that the warrants issued in connection with the January 2018 Offering are freestanding equity-linked derivative instruments that met the criteria for the own-equity scope exception to derivative accounting under ASC 815. Accordingly, such warrants were classified as equity and were accounted for as a component of additional paid-in capital at the time of issuance.
six months ended June 30, 2022. During the six months ended June 30, 2021, warrant holders exercised 150 of the warrants issued in the January 2018 Offering. There were 0 exercises ofOn January 9, 2022, the remaining 999,850 outstanding warrants issued inrelated to the January 2018 Offering during the six months ended June 30, 2020.
The following table presents outstanding warrants to purchase the Company’s common stock for the periods indicated.
 June 30, 2021December 31, 2020
Exercise
Price Per
Share
 
Warrants to purchase common stock issued in the January 2018 Offering999,850 1,000,000 $46.60 
Warrants to purchase common stock issued in the March 2020 Public Offering252,417 262,417 3.00 
Underwriter warrants to purchase common stock associated with the March 2020 Public Offering11,304 59,496 3.75 
Placement agent warrants to purchase common stock issued in the March 2020 Registered Direct Offering10,605 55,814 5.375 
 1,274,176 1,377,727 
The weighted average exercise price per share for warrants outstanding as of June 30, 2021 and December 31, 2020 was $37.24 and $34.77, respectively.expired without being exercised.
July 2020 Aspire Common Stock Purchase Agreement
On July 21, 2020, the Company entered into the JulyCommon Stock Purchase Agreement (the “July 2020 CSPA”) with Aspire CSPA,Capital Fund, LLC (“Aspire”), which providesprovided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital iswas 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 Capital 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 Capital 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 in the accompanying condensed consolidated statements of operations and comprehensive loss.expenses. The
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July 2020 Aspire CSPA replaced the June 2020 Aspire CSPA,Common Stock Purchase Agreement, which was terminated under the terms of the July 2020 Aspire CSPA.
Concurrently with entering intoOn March 9, 2022, the Company provided notice to Aspire electing to terminate the July 2020 Aspire CSPA the Company also entered into a registration rights agreement with Aspire Capital, in which the Company agreed to file with the SEC one or more registration statements,effective as necessary, and to the extent permissible and subject to certain exceptions, to register under the Securities Act of 1933, as amended, the sale of the shares of the Company’s common stock that may be issued to Aspire Capital underMarch 10, 2022. By its terms, the July 2020 Aspire CSPA. On July 23, 2020, the Company filed with the SEC a prospectus supplement to the Company’s effective shelf Registration Statement on Form S-3 (File No. 333-236583) registering all of the shares of common stock that may be offered to Aspire Capital from time to time.
Under the terms of the July 2020 Aspire CSPA on any trading day selected by the Company, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice (each, a “July 2020 Purchase Notice”), directing Aspire Capital (as principal) to purchase up to 30,000 shares of the Company’s common stock per business day, up to an aggregate of $30,000 (including the initial purchase shares) of the Company’s common stock in the aggregate at a per share price (the “July 2020 Purchase Price”) equal to the lesser of (i) the lowest sale price of the Company’s common stock on the purchase date; or (ii) the arithmetic average of the three (3) lowest closing sale prices for the Company’s common stock during the ten (10) consecutive trading days ending on the trading day immediately preceding the purchase date. The aggregate purchase price payable by Aspire Capital on any one purchase date may not exceed $500, unless otherwise mutually agreed. The parties may mutually agree to increase the number of shares of the Company’s common stock that may be purchased per trading day pursuant to the terms of the July 2020 Aspire CSPA to up to 200,000 shares.
In addition, on any date on which the Company submits a July 2020 Purchase Notice to Aspire Capital in an amount equal to 30,000 shares, the Company also has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “July 2020 VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of the Company’s common stock traded on its principal market on the next trading day (the “July 2020 VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such July 2020 VWAP Purchase Notice isgenerally 97% of the volume-weighted average price for the Company’s common stock traded on its principal market on the July 2020 VWAP Purchase Date.
The July 2020 Purchase Price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the July 2020 Purchase Price. The Company may deliver multiple July 2020 Purchase Notices and July 2020 VWAP Purchase Notices to Aspire Capital from time to time during the term of the July 2020 Aspire CSPA, so long as the most recent purchase has been completed.
The July 2020 Aspire CSPA provides that the Company and Aspire Capital shall not effect any sales under the July 2020 Aspire CSPA on any purchase date where the closing sale price of the Company’s common stock is less than $0.15. There are no trading volume requirements or restrictions under the July 2020 Aspire CSPA, and the Company will control the timing and amount of sales of the Company’s common stock to Aspire Capital. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the July 2020 Aspire CSPA. There are no limitations on use of proceeds, financial or business covenants, restrictions on future financing transactions, rights of first refusal, participation rights, penalties or liquidated damages in the July 2020 Aspire CSPA. The July 2020 Aspire CSPA maycould be terminated by the Company at any time, at its discretion, without any penalty or additional cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of
During the Company’s common stock during any time prior to the termination of the July 2020 Aspire CSPA.Any proceeds the Company receives under the July 2020 Aspire CSPA are expected to be used for working capital and general corporate purposes.
The July 2020 Aspire CSPA provides that the number of shares that may be sold pursuant to the July 2020 Aspire CSPA will be limited to 2,543,364 shares (the “July 2020 Exchange Cap”), which represents 19.99% of the Company’s outstanding shares of common stock on July 21, 2020, unless stockholder approval or an exception pursuant to the rules of the Company’s principal market, currently the Nasdaq Capital Market, is obtained to issue more than 19.99%. This limitation will not apply if, at any time the July 2020 Exchange Cap is reached and at all times thereafter, the average price paid for all shares issued under the July 2020 Aspire CSPA is equal to or greater than $5.907, which is the arithmetic average of the five closing sale prices of the Company’s common stock immediately preceding the execution of the July 2020 Aspire CSPA. The Company is not required or permitted to issue any sharessix months ended June 30, 2022, there were no sales of common stock under the July 2020 Aspire CSPA if such issuance would breach its obligations under the rules or regulations of the Nasdaq Capital Market. The Company may, in its sole discretion, determine
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whether to obtain stockholder approval to issue more than 19.99% of its outstanding shares of Common Stock hereunder if such issuance would require stockholder approval under the rules or regulations of the Nasdaq Capital Market.
CSPA. During the six months ended June 30, 2021, the Company sold 493,163 shares of its common stock at an average price of $12.84$1.28 for total proceeds of $6,334. From
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Note 12: Licensing and Collaboration Arrangements
SB204 and SB206 Agreements
The Company has entered into a license agreement, as subsequently amended, with Sato Pharmaceutical Co., Ltd. (“Sato”), relating to SB204, its drug candidate for the inceptiontreatment of acne vulgaris, and SB206, its drug candidate for the treatment of viral skin infections (the “Sato Agreement”). Pursuant to the 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 JulyAPI 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 or SB206 outside of Japan.
The term of the Sato Agreement (and the period during which Sato must pay royalties under the amended license agreement) expires on the twentieth anniversary of the first commercial sale of a licensed product in the licensed field in the licensed territory (adjusted from the tenth anniversary of the first commercial sale in the Sato Agreement). The term of the Sato Agreement may be renewed with respect to a licensed product by mutual written agreement of the parties for additional two-year periods following expiration of the initial term. All other material terms of the Sato Agreement remain unchanged by the Sato Amendment.
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 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 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 Sato Agreement may be terminated by (i) Sato without cause upon 120 days’ advance written notice to the Company, (ii) either party in the event of the other party’s uncured material breach upon 60 days’ advance written notice, (iii) force majeure, (iv) either party in the event of the other party’s dissolution, liquidation, bankruptcy or insolvency, and (v) the Company immediately upon written notice if Sato challenges the validity, patentability, or enforceability of any of the Company’s patents or patent applications licensed to Sato under the Sato Agreement. In the event of a termination, no portion of the upfront fees received from Sato are refundable.
Wynzora Agreements
Effective as of January 1, 2022, EPI Health entered into an amended and restated promotion and collaboration agreement with MC2 Therapeutics Limited (“MC2”), relating to the commercialization of Wynzora for treatment of plaque psoriasis in adults in the United States (the “MC2 Agreement”). Pursuant to the MC2 Agreement, which sets forth the collaborative efforts between EPI Health and MC2 to commercialize and promote Wynzora with MC2 in the United States, MC2 granted EPI Health an exclusive right and license under MC2’s intellectual property rights to sell, or detail (as defined in the MC2 Agreement), and engage in certain commercialization activities with respect to Wynzora in the United States.
In exchange for the provision of promotional and commercialization activities, under the terms of the MC2 Agreement, EPI Health is entitled to receive:
•Reimbursement for all incremental costs incurred by the Company for the promotion and commercialization of Wynzora, including the incremental portion of the Company’s personnel and commercial operating costs. The supply price of Wynzora product inventory is also considered to be an incremental cost that is reimbursed by MC2.
•A commercialization fee equivalent to a percentage of net sales ranging from the mid-teens for net sales less than or equal to $65,000 to the upper single digits for annual net sales greater than $105,000. EPI Health collects this commercialization fee by retaining its portion of the Wynzora product net sales it collects from its customers, with the
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remainder of the net sales being remitted by EPI Health to MC2 periodically in the form of a royalty payment, pursuant to the MC2 Agreement.
•A contingent incentive fee equal to 5% of the first $30,000 in net sales of Wynzora sold in the United States by EPI Health in each of the 2022 and 2023 calendar years; provided that such incentive fee shall not exceed $1,500 each year and such incentive fee shall not be credited to EPI Health until the royalty payments paid to MC2 surpass the amount of certain commercialization payments made previously by MC2.
The term of the MC2 Agreement runs until the seventh anniversary of the first commercial sale of Wynzora (as defined in the MC2 Agreement) or June 30, 2028, whichever is earlier. Either party may terminate the MC2 Agreement for the other party’s material uncured breach or the bankruptcy or insolvency of the other party. MC2 may terminate the MC2 Agreement under certain scenarios, including for convenience with twelve months’ advance notice to EPI Health, provided that the termination is not effective unless MC2 pays any unpaid historical liabilities related to commercialization of Wynzora owed by MC2. In the case of such termination, MC2 is also required to make an additional sunset payment to EPI Health, paid in installments over the twenty-four month period following termination. EPI Health may terminate the MC2 Agreement for convenience with twelve months’ advance notice to MC2 provided that the termination is not effective unless the Company provides MC2 with a guarantee of the payment of any outstanding royalty payments, to the extent such royalty payments owed by EPI Health exceed any unpaid historical liabilities related to commercialization of Wynzora owed by MC2.
Rhofade Agreements
In connection with the Rhofade Acquisition Agreement that is described in Note 10—“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 duty to certain other parties to use commercially reasonable efforts to commercialize the Rhofade product based on historical acquisition agreements for Rhofade that were assumed by EPI Health.
The Aspect Agreement expires upon the last-to-expire of patent claims made under the assigned and licensed patents under the Aspect Agreement. Aspect may terminate the agreement upon a material breach by EPI Health after providing an opportunity to cure. Upon such termination by Aspect, EPI Health will cease all development and commercialization of Rhofade and EPI Health will assign and convey to Aspect its entire right, title and interest in and to the assigned intellectual property transferred under the Aspect Agreement.
Additionally, under the Aspect Agreement, the Rhofade Acquisition Agreement and the other historical acquisitions related to Rhofade, 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 2 abbreviated new drug application (“ANDA”) settlement agreements that EPI Health entered into in connection with Rhofade in 2021, EPI Health granted 2 ANDA filers a license to launch their own generic product for the treatment of erythema in rosacea. The actual timing of the launch of such generic products is uncertain because the launch dates of such products under the settlement agreements are subject to acceleration under certain circumstances. In the absence of any circumstances triggering acceleration, the earliest launch of such a generic product would be in the third quarter of 2026.
Minolira Agreements
In connection with the Minolira acquisition that is described in Note 10—“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.
Cloderm Agreements
In connection with the Cloderm acquisition that is described in Note 10—“Commitments and Contingencies,” on September 28, 2018, EPI Health entered into a distribution and supply agreement with Prasco, LLC (“Prasco”), whereby EPI Health has agreed to supply and Prasco has the right to purchase, distribute and sell an authorized generic (“AG”) version of the Cloderm product in the United States. Prasco is required to pay EPI Health the supply price for the products, along with an amount equal to net sales of the product, minus an amount for certain fees and expenses of Prasco initially equal to the low double digits of net sales of such product, which is retained by Prasco. The agreement will continue, on a product-by-product basis, for an initial five-year term from the first commercial sale of such product, which will automatically renew for an additional one-year term
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unless either party elects not to renew. The agreement may be terminated for convenience by EPI Health upon nine months’ written notice. Prasco may terminate with respect to a specific product based, among other factors, on a failure by EPI Health to deliver launch quantities. Either party may terminate immediately upon the occurrence of certain regulatory matters or based on a force majeure event.
Sitavig Agreements
On February 21, 2020, Aspire CSPA,EPI Health entered into an agreement with Vectans Pharma (“Vectans”) in which the parties terminated an existing license agreement dated March 17, 2014 which granted EPI Health the exclusive right to develop and commercialize a prescription Sitavig product in the United States and Canada, and instead provided that EPI Health would purchase outright certain intellectual property (and license other intellectual property) related to the prescription Sitavig Rx product in the United States and Canada (the “Vectans Agreement”).
At the time it entered into the Vectans Agreement, EPI Health also entered into an OTC Switch License Agreement (the “OTC License Agreement”) with Bayer Healthcare LLC (“Bayer”). Under the OTC License Agreement, EPI Health granted to Bayer an exclusive and sublicensable license to develop and commercialize an OTC product in the United States and Canada.
Under the OTC License Agreement, Bayer has agreed to pay EPI Health various regulatory milestone payments upon the achievement of such regulatory milestones equaling a maximum aggregate amount of $9,500, along with various commercial milestone payments upon the achievement of such commercial milestones equaling a maximum aggregate amount of $20,000. Under the Vectans Agreement, EPI Health is required to pay Vectans various milestone and royalty payments in amounts ranging from 32% ‐ 50% of the amounts paid by Bayer to EPI Health pursuant to the OTC License Agreement, and the Company will also be required to pay a portion of such milestone payments to EPG under the EPI Health Purchase Agreement.
Bayer has also agreed to pay to EPI Health a tiered royalty ranging from a mid-single digit to a low-double digit percentage of net sales of licensed products in the licensed territory, subject to a reduction in the royalty payments in certain circumstances.
Bayer is responsible for funding the development and commercial costs for the OTC product in the United States and Canada. The Company is obligated to perform certain oversight, review and supporting activities for Bayer, including (i) maintaining existing EPI Health patents related to the Sitavig product, and (ii) participating in a joint committee that oversees, reviews and approves development and commercialization activities under the OTC License Agreement.
The OTC License Agreement expires on the tenth anniversary of the first commercial sale of an OTC product on a country-by-country basis. The OTC License Agreement may be terminated by (i) Bayer without cause upon nine months’ advance written notice to EPI Health, (ii) either party in the event of the other party’s uncured material breach upon 60 days’ advance written notice, (iii) either party, upon three months’ notice, in the event Bayer provides EPI Health with notice that Bayer has elected to permanently discontinue development of the OTC product in the United States and Canada, and (iv) either party in the event of the other party’s dissolution, liquidation, bankruptcy or insolvency. On the tenth anniversary of the first commercial sale of the OTC product on a country-by-country basis, assuming Bayer is not in breach and the OTC License Agreement has not been terminated, Bayer will have an irrevocable, royalty-free license to commercialize the OTC product without any further obligations to EPI Health.
Nuvail Agreements
On November 7, 2021, a predecessor of EPI Health entered into an exclusive license agreement with Chesson Laboratory Associates, Inc. (“Chesson”), as subsequently amended, for the sale of Nuvail, and pursuant to such agreement, EPI Health serves as an exclusive distributor of this product in the United States. Pursuant to the Nuvail license agreement, EPI Health is required to pay a tiered royalty up to a low double digit percentage of net sales of Nuvail, subject to a minimum annual royalty payment. The initial term of the license agreement expired in 2021 and was automatically extended for an additional five year renewal period. The license agreement may be terminated by either party for material breach. Chesson may terminate the license agreement early for convenience upon 12 months’ notice but is required to pay a termination fee based on a multiple of trailing twelve months gross sales.
UNC Agreements
The Amended, Restated and Consolidated License Agreement dated June 27, 2012, as amended, with the University of North Carolina at Chapel Hill (“UNC,” and such agreement, the “UNC License Agreement”) provides the Company with an exclusive license to issued patents and pending applications directed to the Company’s library of Nitricil compounds, including patents issued in the United States, Japan and Australia, with claims intended to cover NVN1000, the new chemical entity (“NCE”) for the Company’s current product candidates. The UNC License Agreement requires the Company to pay UNC up to $425 in regulatory and commercial milestones on a licensed product by licensed product basis and a running royalty percentage in the low single digits on net sales of licensed products. Licensed products include any products being developed by the Company or by its sublicensees.
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Unless earlier terminated by the Company at its election, or if the Company materially breaches the agreement or becomes bankrupt, the UNC License Agreement remains in effect on a country by country and licensed product by licensed product basis until the expiration of the last to expire issued patent covering such licensed product in the applicable country. The projected date of expiration of the last to expire of the patents issued under the UNC License Agreement is 2036.
Other Research and Development Agreements
The Company has entered into various licensing agreements with universities and other research institutions under which the Company receives the rights, and in some cases substantially all of the rights, of the inventors, assignees or co-assignees to produce and market technology protected by certain patents and patent applications. In addition to the UNC License Agreement, which is the Company’s primary license agreement, the counterparties to the Company’s various other licensing agreements are the University of Akron Research Foundation, Hospital for Special Surgery, Strakan International S.a.r.l., which is a licensee of the University of Aberdeen, KIPAX AB and KNOW Bio.
The Company is required to make payments based upon achievement of certain milestones and will be required to make royalty payments based on a percentage of future sales of covered products or a percentage of sublicensing revenue. As future royalty payments are directly related to future revenues (either sales or sublicensing), future commitments cannot be determined. No accrual for future payments under these agreements has been recorded, as the Company cannot estimate if, when or in what amount payments may become due.
KNOW Bio Agreements
On December 30, 2015, the Company completed the distribution of 100% of the outstanding membership interests of KNOW Bio, LLC (“KNOW Bio”), a former wholly owned subsidiary of the Company, to Novan’s stockholders (the “Distribution”), pursuant to which KNOW Bio became an independent privately held company. In connection with the Distribution, the Company entered into exclusive license agreements and sublicense agreements with KNOW Bio, as described below. The agreements will continue for so long as there is a valid patent claim under the respective agreement, unless earlier terminated, and upon expiration, will continue as perpetual non-exclusive licenses. KNOW Bio has the right to terminate each such agreement, for any reason upon 90 days advance written notice to the Company.
License of existing and potential future intellectual property to KNOW Bio. The Company and KNOW Bio entered into an exclusive license agreement dated December 29, 2015 (the “KNOW Bio License Agreement”). Pursuant to the terms of the KNOW Bio License Agreement, the Company granted to KNOW Bio exclusive licenses, with the right to sublicense, under certain United States and foreign patents and patent applications that were controlled by the Company as of December 29, 2015 or that became controlled by the Company between that date and December 29, 2018, directed towards nitric-oxide releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds and other nitric oxide-based therapeutics.
Sublicense of UNC and other third party intellectual property to KNOW Bio. The Company and KNOW Bio also entered into sublicense agreements dated December 29, 2015 (the “KNOW Bio Sublicense Agreements” and together with the KNOW Bio License Agreement, the “Original KNOW Bio Agreements”). Pursuant to the terms of the KNOW Bio Sublicense Agreements, the Company granted to KNOW Bio exclusive sublicenses, with the ability to further sublicense, under certain of the United States and foreign patents and patent applications exclusively licensed to the Company from UNC under the UNC License Agreement, and another third party directed towards nitric oxide-releasing compositions, to develop and commercialize products utilizing the licensed technology. Under the exclusive sublicense to the UNC patents and applications (the “UNC Sublicense Agreement”), KNOW Bio is subject to the terms and conditions under the UNC License Agreement, including milestone and diligence payment obligations.However, pursuant to the terms of the UNC License Agreement, the Company is directly obligated to pay UNC any future milestones or royalties, including those resulting from actions conducted by the Company’s sublicensees, including KNOW Bio. Therefore, in the event of KNOW Bio non-performance with respect to its obligations under the UNC Sublicense Agreement, the Company would be obligated to make such payments to UNC. KNOW 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 three and six months ended June 30, 2022 and 2021.
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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.
Note 13: Net Product Revenues
The Company has the following actively promoted products that generate net product revenues:
Rhofade (oxymetazoline hydrochloride cream, 1%), or Rhofade, is an alpha1A adrenoceptor agonist indicated for the topical treatment of persistent facial erythema associated with rosacea in adults.
Wynzora (calcipotriene and betamethasone dipropionate cream), or Wynzora, is a combination of calcipotriene, a vitamin D analog, and betamethasone dipropionate, a corticosteroid, indicated for the topical treatment of plaque psoriasis in patients 18 years of age or older.
Minolira (biphasic minocycline hydrochloride immediate release/extended release 105 mg and 135 mg tablets), or Minolira, is indicated to treat inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 years of age and older.
Cloderm (clocortoline pivalate cream 0.1%), or Cloderm, is indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid-responsive dermatoses.
The post-acquisition operating results of EPI Health are reflected within the Company’s condensed consolidated statement of operations and comprehensive loss for the three and six months ended June 30, 2022, specifically from March 11, 2022 through June 30, 2022. Net product revenues are summarized as follows:
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Three Months EndedSix Months Ended
June 30, 2022June 30, 2022
Total Net Product RevenuesPercentage of Net Product RevenuesTotal Net Product RevenuesPercentage of Net Product Revenues
Rhofade$4,253 73.2 %$5,091 78.0 %
Wynzora650 11.2 %650 10.0 %
Minolira312 5.4 %390 6.0 %
Cloderm197 3.4 %239 3.7 %
Other397 6.8 %156 2.4 %
Net product revenues$5,809 100.0 %$6,526 100.0 %
For the period March 11, 2022 through June 30, 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.
As of June 30, 2022, three of the Company’s customers accounted for more than 10% of its total accounts receivable balance at 20%, 15% and 13%, respectively.
For the three and six months ended June 30, 2022, one of the Company’s customers accounted for more than 10% of its total gross product revenues, at 11%, for both periods respectively.
Note 14: License and Collaboration Revenues
The Company has the following actively promoted product that generates license and collaboration revenues:
Cloderm AG (clocortoline pivalate cream 0.1%), or Cloderm AG, is indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid-responsive dermatoses.
The post-acquisition operating results of EPI Health are reflected within the Company’s condensed consolidated statement of operations for the three and six months ended June 30, 2022, specifically from March 11, 2022 through June 30, 2022. License and collaboration revenues are summarized as follows:
Three Months EndedSix Months Ended
June 30, 2022June 30, 2022
Total License and Collaboration RevenuesPercentage of License and Collaboration RevenuesTotal License and Collaboration RevenuesPercentage of License and Collaboration Revenues
Sato Agreement - SB206 and SB204$647 188.1 %$1,293 85.2 %
Prasco Agreement - Cloderm AG110 32.0 %225 14.8 %
Other(413)(120.1)%— — %
License and collaboration revenues$344 100.0 %$1,518 100.0 %
Sato Agreement
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 not individually distinct because Sato can only benefit from these licensed intellectual property rights and 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 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.
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Sato Amendment
On October 5, 2018, the Company and Sato entered into the second amendment to the Sato Agreement (the “Sato Amendment”). The Sato Amendment expanded the Sato Agreement to include SB206, the Company’s drug candidate for the treatment of viral skin infections. The Company assessed the Sato Agreement in accordance with ASC 606 and concluded the contract modification should incorporate the additional goods and services provided for in the Sato Amendment into the existing, partially satisfied single bundled performance obligation that will continue to be delivered to Sato over the remaining development period. The Company determined that this contract modification accounting is appropriate as the additional goods and services conveyed under the Sato Amendment were determined to not be distinct from the single performance obligation, and the additional consideration provided did not reflect the standalone selling price of those additional goods and services. As such, the Company recorded a cumulative adjustment as of the amendment execution date to reflect revenue that would have been recognized cumulatively for the partially completed bundled performance obligation.
The Company concluded that the following elements of consideration would be included in the transaction price as they were (i) received prior to June 30, 2022, or (ii) payable upon specified fixed dates and were not contingent upon clinical or regulatory success in Japan:
•The 1.25 billion JPY (approximately $10,813 USD) original upfront payment received on January 19, 2017 following the execution of the Sato Agreement on January 12, 2017.
•A milestone payment of 0.25 billion JPY (approximately $2,162 USD) received during the fourth quarter of 2018 following Sato’s initiation of a Phase 1 trial in Japan.
•The Sato Amendment upfront payment of 1.25 billion JPY, payable in installments of 0.25 billion JPY, 0.5 billion JPY and 0.5 billion JPY on October 5, 2018, February 14, 2019 and September 13, 2019, respectively. On October 23, 2018, the Company received the first installment from the Sato Agreement of 0.25 billion JPY (approximately $2,224 USD). On March 14, 2019, the Company received the second installment payment related to the Sato Agreement of 0.5 billion JPY (approximately $4,460 USD). On November 7, 2019, the Company received the third installment payment related to the Sato Agreement of 0.5 billion JPY (approximately $4,554 USD).
•An aggregate of 1.0 billion JPY in non-contingent milestone payments that become payable upon the earlier occurrence of specified fixed dates in the future or the achievement of specified milestone events. On May 20, 2021, the Company received one such non-contingent milestone payment in the form of a payment of 0.5 billion JPY (approximately $4,572 USD) related to achievement of a time-based developmental milestone. On February 28, 2022, the Company received the remaining time-based milestone payment of 0.5 billion JPY (approximately $4,323 USD).
The Company concluded that the following elements of consideration would not be included in the transaction price as they are contingent upon clinical or regulatory success in Japan:
•Up to an aggregate of 0.5 billion JPY upon the achievement of various development and regulatory milestones.
•Up to an aggregate of 3.9 billion JPY upon the achievement of various commercial milestones. 
•A tiered royalty ranging from a mid-single digit to a low-double digit percentage (adjusted from a mid-single digit percentage in the Sato Agreement) of net sales of licensed products in the licensed territory, subject to a reduction in the royalty payments in certain circumstances.
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The payment terms contained within the Sato Agreement related to upfront, developmental milestone and sales milestone payments are of a short-term nature and, therefore, do not represent a financing component requiring additional consideration.
The following tables present the Company’s contract assets, contract liabilities and deferred revenue balances for the dates indicated.
 Contract AssetContract LiabilityNet Deferred Revenue
December 31, 2021$— $13,251 $13,251 
June 30, 2022$— $11,958 $11,958 
 Short-term Deferred RevenueLong-term Deferred RevenueNet Deferred Revenue
December 31, 2021$2,586 $10,665 $13,251 
June 30, 2022$2,586 $9,372 $11,958 
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 (comprised of (i) a contract liability, net of (ii) a contract asset).
The change in the net deferred revenue balance during the three and six months ended June 30, 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 three and six months ended June 30, 2022, the Company recognized $647 and $1,293, respectively, in license and collaboration revenue under the Sato Agreement. During the three and six months ended June 30, 2021, the Company recognized $747 and $1,494, respectively, in license and collaboration revenue under the Sato Agreement. The Company has sold 2,221,039 sharesconcluded 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 June 30, 2022 and therefore, is currently fully constrained and excluded from the transaction price.
The Company evaluated the timing of delivery for 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 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. The Company currently estimates a 10-year performance period, completing in the third quarter of 2024, 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 submission in the United States, which has been and may be further impacted by the COVID-19 pandemic, (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.
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If the duration of the combined SB204 and SB206 development program timeline is further affected by the establishment of or subsequent adjustments to, as applicable, the mutually agreed upon SB204 and SB206 development plan in the Japan territory, the Company will adjust its estimated performance period for revenue recognition purposes accordingly, as needed.
In future periods, the Company would lift the variable consideration constraint from each contingent payment if there were no longer a probable likelihood of significant revenue reversal. When the constraint is lifted from a milestone payment, the Company will recognize the incremental transaction price using the same time-based input method that is being used to recognize the revenue, which results in straight-line recognition over the performance period. If the Company’s performance is not yet completed at the time that the constraint is lifted, a cumulative catch-up adjustment will be recognized in the period. If no other performance is required by the Company at the time the constraint is lifted, the Company expects to recognize all revenue associated with such milestone payments at the time that the constraint is lifted.
Performance Obligations under the Sato Agreement
The net amount of existing performance obligations associated with the Sato Agreement unsatisfied as of June 30, 2022 was $11,958. The Company expects to recognize approximately 22% 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.
MC2 Agreement
The Company assessed the MC2 Agreement and determined it is a collaboration arrangement within the scope of ASC 808. Per the MC2 agreement, the Company proposes a commercialization plan and incremental cost budget annually, which is developed in consultation with and subject to the approval of MC2. The Company is required to use commercially reasonable efforts to perform its commercialization activities in accordance with the commercialization plan.
The Company and MC2 work collaboratively in promoting and commercializing Wynzora by performing their respective promotional and commercialization responsibilities, as established within the MC2 Agreement. For instance, 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 except for the regulatory responsibilities assigned to the Company under the terms of 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 each of the three and six months ended June 30, 2022, the Company recognized contra-expenses of $3,163 under this agreement. The accrued deposit liability related to the receipt of advance payments from MC2 for future incremental costs was $2,824 as of June 30, 2022, which is presented within accrued expenses in the accompanying condensed 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 common stockpromise 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
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inventory, at which point it can direct the inventory to any End Customer that submits an average price of $8.10 per share, including 555,555 shares of its common stock at $9.00 whichenforceable purchase order issued under an active, stand-alone agreement between the Company agreedand the End Customer.
With respect to sellits performance obligations to Aspire Capitalthe 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” and Note 13—“Net Product Revenues.”
Note 15: Research and Development Agreements
Royalty and Milestone Payments Purchase Agreement with Reedy Creek Investments LLC
On April 29, 2019, the Company entered into a royalty and milestone payments purchase agreement (the “Reedy Creek Purchase Agreement”) with Reedy Creek Investments LLC (“Reedy Creek”), pursuant to which Reedy Creek provided funding to the Company in an amount of $25,000 for the Company to use primarily to pursue the development, regulatory approval and commercialization activities (including through out-license agreements and other third-party arrangements) for SB206, a topical gel with anti-viral properties being developed as a treatment for molluscum, and advancing programmatically such activities with respect to SB204, a once-daily, topical monotherapy being developed for the treatment of acne vulgaris, and SB414, a topical cream-based product candidate being developed for the treatment of atopic dermatitis. If the Company successfully commercializes any such product following regulatory approval, the Company will be obligated to pay Reedy Creek a low single digit royalty on net sales of such products in the United States, Mexico or Canada.
The Company determined that the Reedy Creek Purchase Agreement is within the scope of ASC 730-20, Research and Development Arrangements (“ASC 730-20”), and that there has not been a substantive and genuine transfer of risk related to the Reedy Creek Purchase Agreement. As such, the Company determined that the appropriate accounting treatment under ASC 730-20 was to record the proceeds of $25,000 as cash and cash equivalents, as the Company had the ability to direct the usage of funds, and a long-term liability within its classified balance sheet.
Development Funding and Royalties Agreement with Ligand Pharmaceuticals Incorporated
On May 4, 2019, the Company entered into a development funding and royalties agreement (the “Ligand Funding Agreement”) with Ligand Pharmaceuticals Incorporated (“Ligand”), pursuant to which Ligand provided funding to the Company of $12,000, for the Company to use to pursue the development and regulatory approval of SB206, a topical gel with anti-viral properties being developed as a treatment for molluscum.
Pursuant to the Ligand Funding Agreement, the Company will pay Ligand up to $20,000 in milestone payments upon executionthe 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 July 2020 Aspire CSPA, for total proceedsdirect 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 condensed consolidated statements of $17,995. Asoperations and comprehensive loss within research and development expenses associated with the SB206 program.
For the three and six months ended June 30, 2022, the Company recorded contra-research and development expense related to the SB206 developmental program of $331 and $628, respectively, related to amortization of the Ligand Funding Agreement amount. For the three and six months ended June 30, 2021, the Company had $12,005 in remaining availability for sales of its common stock under the July 2020 Aspire CSPA.
In additionrecorded research and development expense related to the limitations noted above, pursuantSB206 developmental program of $228 and $210, respectively, related to the underwriting agreement relating to the June 2021 Public Offering, the Company is prohibited from issuing securities, including under the July 2020 Aspire CSPA, for a period until the 60th day after the dateaccretion of the underwriting agreement (other than under certain circumstances set forth in the underwriting agreement).Ligand Funding Agreement amount.
Common Stock
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The Company’s common stock has a par value of $0.0001 per share and consists of 200,000,000 authorized shares as of June 30, 2021 and December 31, 2020. There were 18,811,692 and 14,570,009 shares of voting common stock outstanding as of June 30, 2021 and December 31, 2020, respectively.
The Company had reserved shares of common stock for future issuance as follows:
 June 30, 2021December 31, 2020
Outstanding warrants to purchase common stock1,274,176 1,377,727 
Outstanding stock options (Note 11)402,775 199,199 
Outstanding stock appreciation rights (Note 11)61,000 61,000 
For possible future issuance under the 2016 Stock Plan (Note 11)1,332,285 52,378 
 3,070,236 1,690,304 
Preferred Stock
The Company’s 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 0 shares outstanding as of June 30, 2021 and December 31, 2020.
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Note 11:16: Stock-Based Compensation
2016 StockIncentive Award Plan
During the three and six months ended June 30, 2022 and 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 outstanding and exercisable stock options remain subject to the terms ofgranted under the Company’s 2008 Stock Plan (the “2008 Plan”), which is the predecessor to the 2016 Plan and became inactive upon adoption of the 2016 Plan effective September 20, 2016.2016, remain outstanding and exercisable.
On July 31, 2019,Restricted Stock Units
The Company accounts for restricted stock units (“RSUs”) based on their estimated fair values on the Company’s stockholders approved an amendmentdate 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 2016 Plan, to increaseRSUs is recognized on a straight-line basis over the numberrequisite service period, net of shares reserved under the 2016 Plan by 100,000 and to increase the award limit on the maximum aggregate number of shares of the Company’s common stock that may be granted to any one person during any calendar year from 250,000 to 1,000,000 shares of the Company’s common stock. All other materialestimated forfeitures.
The terms of the 2016 Plan otherwise remain unchanged.
AtRSUs, including the Company’s Annual Meetingvesting provisions, are determined by the board of Stockholders held on May 4, 2021,directors. Each RSU represents the Company’s stockholders approved an amendmentcontingent right to the 2016 Plan (“the 2016 Plan Amendment”), to increase the aggregate numberreceive one share of sharescommon stock of the Company’s common stock authorizedCompany. The RSUs granted typically cliff vest after a one-year period for issuance thereunder by 1,500,000 shares. This amendment was approved bygrants to directors and a two-year period for grants to employees, provided that the Company’s board of directors on March 10, 2021.
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The approval by the Company’s stockholdersgrantee remains a director, employee or consultant of the 2016 Plan Amendment was contingent uponCompany as of such vesting date.
For 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 previouslythree and six months ended June 30, 2022, 216,606 and 209,500 RSUs were granted to directors and employees, respectively. There were no RSU grants for 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,three and thus, the 2016 Plan Amendment became effective on May 25,six months ended June 30, 2021.
Stock Appreciation Rights
EffectiveThe 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 (the “Amended and Restated Stafford Employment Agreement”). On January 6, 2020, following the releasewhich provided for a grant of top-line results of the Company’s Phase 3 molluscum clinical program as provided in the Amended and Restated Stafford Employment Agreement, 60,000 stock appreciation rights (“SARs”) were granted to Ms. StaffordSARs 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 (the “Staffordterm. These SAR Award”). The Stafford SAR Award was granted on a contingent basis and would have been considered irrevocably forfeited and voidedawards were vested in full if sufficient sharesas of the Company’s common stock were not available under the 2016 Plan or if the Company 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. Such shares became available under the 2016 Plan on February 1, 2020, and the SARs were no longer considered granted on a contingent basis and were classified as equity-based awards. The Stafford SAR Award vests quarterly and will vest in full on December 31, 2021, subject to Ms. Stafford’s continuous service as an employee or consultant of the Company through the vesting period.2021.
On August 18, 2020, the Company granted 1,000 SARs to a consultant of the Company with an exercise price of $5.31 per share (the fair market value of the Company’s common stock on the grant date) with a ten year term.
As of June 30, 2021, there were a total of 61,000 SARs outstanding, 46,000 of which were exercisable.
Stock Compensation Expense
During the three and six months ended June 30, 2021, the Company recorded stock-based compensation expense, including fair value adjustments of the Tangible Stockholder Return Plan, as follows:
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
Stock options$186 $306 $193 $629 
Stock appreciation rights29 29 58 91 
Tangible Stockholder Return Plan (Note 12)(556)84 (512)(29)
Total$(341)$419 $(261)$691 
Total stock-based compensation expense included in the accompanying condensed consolidated statements of operations and comprehensive loss is as follows:
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
Research and development$(260)$303 $(312)$511 
General and administrative(81)116 51 180 
Total$(341)$419 $(261)$691 
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Stock option activity for the six months ended June 30, 2021 is as follows:
 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, 2020199,199 $30.71 
Options granted238,735 10.02 
Options forfeited(26,517)28.34 
Options exercised(8,642)4.78 
Options outstanding as of June 30, 2021402,775 $19.16 8.47$359 
As of June 30, 2021, there were a total of 402,775 stock options outstanding and there were 1,332,285 shares available for future issuance under the 2016 Plan.
Note 12: Tangible Stockholder Return Plan
Performance Plan
On August 2, 2018, the Company’s board of directors approved and established the Tangible Stockholder Return Plan, which iswas a performance-based long-term incentive plan (the “Performance Plan”). The Performance Plan was effective immediately upon approval and expiresexpired on March 1, 2022. The Performance Plan coverscovered 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 the Performance Plan iswas the potential achievement of 2 share price goals for the Company’s common stock, which if achieved, would representcould have represented measurable increases in stockholder value. The Performance Plan was adjusted on May 25, 2021 as a result of the 1-for-10 Reverse Stock Split, which correspondingly adjusted the two share price goals.
The Performance Plan is tiered, with 2 separate tranches, each of which has a distinct share price target (measured as the average publicly traded share price ofexpired on March 1, 2022. As the Company’s common stock onprice did not reach the Nasdaq stock exchange for a 30 consecutive trading day period) that will, if achieved, trigger a distinct fixed bonus pool. As adjusted for the Reverse Stock Split, the share price target for the first tranche and related bonus pool are $111.70 per share and $25,000, respectively. As adjusted for the Reverse Stock Split, the share price target for the second tranche and related bonus pool are $254.50 per share and $50,000, respectively. The compensation committee has discretion to distribute the bonus pool related to each tranche among eligible participants by establishing individual minimum bonus amounts before, as well as by distributing the remainder of the applicable pool after, the achievement of each tranche specific share price target. Otherwise, if the Company does not achieve one or both related share price targets as defined,necessary to trigger a payment, no portion of the bonus pools will be paid.
The Performance Plan provides for the distinct fixed bonus pools to be paid in the form of cash. However, the compensation committee has discretion to pay any bonus duepayments were made under the Performance Plan into any participants during the form of cash, shares of the Company’s common stock or a combination thereof, provided that the Company’s stockholders have approved the reservation of shares of the Company’s common stock for such payment.
The Performance Plan permits the compensation committee to make bonus awards subject to varying payment terms, including awards that vest and are payable immediately upon achieving an applicable share price target as well as awards that pay over an extended period (either with or without ongoing employment requirements). The Performance Plan contemplates that no bonus award payments will be delayed beyond 24 months for named executive officers or more than 12 months for all other participants.  
For purposes of determining whether a share price target has been met, the share price targets will be adjusted in the event of any stock splits, cash dividends, stock dividends, combinations, reorganizations, reclassifications or similar events. In the event of a change in control, as defined in the Performance Plan duringwas effective.
Stock Compensation Expense
During the termthree and six months ended June 30, 2022 and 2021, the Company recorded stock-based compensation expense as follows:
 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Stock options$365 $186 $746 $193 
Restricted stock units88 — 88 — 
Stock appreciation rights— 29 — 58 
Tangible Stockholder Return Plan— (556)— (512)
Total$453 $(341)$834 $(261)
Total stock-based compensation expense included in the accompanying condensed consolidated statements of the Performance Plan, a performance bonus pool will become dueoperations and payable to participants on a pro-rata basis,comprehensive loss is as calculated and determined by the compensation committee based on the Company’s progress toward the share price target as of the date of the change in control and subject to adjustment by the compensation committee as permitted under the Performance Plan.
The Company has concluded that the Performance Plan is within the scope of ASC718, Compensation—Stock Compensation as the underlying plan obligations are based on the potential attainment of certain market share price targets of the Company’s common stock. Any awards under the Performance Plan would be payable, at the discretion of the Company’s compensationfollows:
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committee following
 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Research and development$120 $(260)$193 $(312)
Selling, general and administrative333 (81)641 51 
Total$453 $(341)$834 $(261)
2016 Plan Award Activity
Stock option activity for the achievementsix months ended June 30, 2022 is as follows:
 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, 2021518,553 $15.48 
Options granted470,700 3.30 
Options forfeited(5,650)12.86 
Options exercised— — 
Options outstanding as of June 30, 2022983,603 $9.66 8.93$— 
RSU activity for the six months ended June 30, 2022 is as follows:
 Shares
Subject to
Outstanding
RSUs		Weighted-
Average
Grant Date Fair Value
Nonvested RSUs outstanding as of December 31, 2021— $— 
RSUs granted426,106 2.87 
RSUs forfeited(6,000)2.98 
RSUs vested— — 
Nonvested RSUs outstanding as of June 30, 2022420,106 $2.87 
As of June 30, 2022, there were a total of 983,603 stock options, 420,106 RSUs and 60,000 SARs outstanding; and there were 328,068 shares available for future issuance under the applicable share price target, in cash, shares of2016 Plan.
Note 17: Fair Value
The Company has contingent consideration associated with the Company’s common stock, orEPI Health Acquisition that is required to be measured at fair value on a combination thereof, provided that, prior to any payment in common stock,recurring basis, presented within the Company’s stockholders have approved the reservation of shares of the Company’s common stock for such payment.
ASC 718 requires that a liability-based award should be classified as a liability on the Company’s accompanying condensed consolidated balance sheets as both current and long-term liabilities, beginning as of March 11, 2022.
ASC 820-10, Fair Value Measurement Disclosure, requires use of a three-tiered hierarchy, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the amountCompany’s own assumptions, consistent with reasonably available assumptions made by other market participants.
For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of compensation cost recognized should beobservable 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 fair valueeconomic and competitive environment, the characteristics of the liability. When a liability-based award includes both a service and market condition, the market condition is taken into account when determining the appropriate method to estimate fair value and the compensation cost is amortized over the estimated service period. Therefore, theasset or liability associated with the Performance Plan obligation is recorded within other long-term liabilities on the accompanying condensed consolidated balance sheets at the estimated fair value on the date of issuance and is re-valued each subsequent reporting period end. The Company recognizes stock-based compensation expense within operating expenses in the accompanying condensed consolidated statements of operations and comprehensive loss, including adjustments to the fair value of the liability-based award, on a straight-line basis over the requisite service period.
The fair value of obligations under the Performance Plan are 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. Expected stock price volatility is based on the Company’s actual historical volatility over a historical period equal to the expected remaining life of the plan, adjusted for certain market considerations 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 of the underlying common stock is the published closing market price on the Company’s principal market, which is currently the Nasdaq Capital Market, as of each reporting date, as adjusted for significant results, as necessary (if applicable). The risk-free interest rate is based on the United States Treasury yield curve in effect on the date of valuation equalmeasurements to the remaining expected life of the plan. The dividend yield percentage is 0 because the Company does not currently pay dividends, nor does it intend to do so during the expected term of the plan. The expected life of bonus awards under the Performance Plan is assumed to be equivalent to the remaining contractual term based on the estimated service period including the service inception date of the plan participants and the contractual end of the Performance Plan.
See Note 11—Stock-Based Compensation regarding compensatory expense andrecord fair value adjustments related to the Performance Plan.certain assets and liabilities and to determine fair value disclosures.
Note 13: Related Party Transactions
MembersThe carrying values of the Company’s board of directors held 100,497accounts receivable, prepaid expenses and 110,474 shares of the Company’s common stockother current assets, accounts payable, and certain accrued expenses as of June 30, 20212022 and December 31, 2020, respectively.  
Health Decisions
On October 25, 2018, the Company announced a foundational collaboration with Health Decisions, Inc. (“Health Decisions”). Health Decisions, which was acquired by Premier Research in July of 2021 is a full-service contract research organization specializing in clinical studies of therapeutics for women’s health indications. The Company’s Chairman, President and Chief Executive Officer, Paula Brown Stafford, was a stockholder and previously served on the board of directors of Health Decisions.
Reedy Creek
Reedy Creek beneficially owned greater than 5% of the Company’s outstanding common stock and held approximately 395,000 warrants, all of which were acquired during the January 2018 Offering, and, accordingly, was a related party of the Company at the time the Company entered into the Purchase Agreement with Reedy Creek, described in Note 6—Research and Development Arrangements. The Purchase Agreement with Reedy Creek was evaluated and approved pursuantapproximate their fair values due to the Company’s existing related party transactions policy. Based solely on information reported in a Schedule 13D/A filed with the SEC on June 24, 2021, Reedy Creek is no longer a greater than 5% stockholdershort-term nature of the Company.
2020 Registered Direct Offering
Sabby Volatility Warrant Master Fund, Ltd. (“Sabby”), while a greater than 5% stockholder of the Company, purchased 620,000 shares of common stock and pre-funded warrants to purchase up to 260,233 shares of common stock for approximately $3,800 in the March 2020 Registered Direct Offering described in Note 10—Stockholders’ Equity (Deficit). Sabby’s participation in the March 2020 Registered Direct Offering was evaluated and approved pursuant to the Company’s existing related party transactions policy. Based solely on information reported in a Schedule 13G/A filed with the SEC on January 5,these items.
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2021, Sabby no longer heldThe Company’s notes payable balance, which is comprised of the balance on the Seller Note, also approximates fair value as of June 30, 2022, as the effective interest rate on the notes payable approximates the rates available to the Company as of this date.
The Company’s contingent consideration liability is measured on a recurring basis using level 3 inputs. The estimated fair value of the contingent consideration related to the EPI Health Acquisition requires significant management judgment and estimation, is calculated using 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 is 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.
The following table summarizes the change in fair value, as determined by Level 3 inputs for the contingent consideration liabilities for the three months ended June 30, 2022:

Balance at March 31, 2022$3,773 
Change in fair value(454)
Balance at June 30, 2022$3,319 
Contingent consideration liability, current portion$433 
Contingent consideration liability, net of current portion2,886 
Balance at June 30, 2022$3,319 

The following tables present the significant inputs and valuation methodologies used for the Company’s fair value of the contingent consideration liabilities, in addition to EPI Health’s forecasted net sales from the EPI Health legacy products:
Transition Services AgreementSitavig Milestones (Regulatory)
Valuation methodologyProbability-WeightedProbability-Weighted
Term0.51.59
Payment term0.751.84
Adjusted discount rate16.52 %16.48 %
First Sales Based Legacy MilestoneWynzora MilestoneSecond Sales Based Legacy MilestoneSitavig Milestones (Commercial)
Valuation methodologyMonte CarloMonte CarloMonte CarloMonte Carlo
Risk-adjusted discount rates (minimum)5.09%5.09%5.09%6.73%
Risk-adjusted discount rates (maximum)6.79%6.38%6.79%6.84%
Net sales volatility (per annum)14.0%13.0%14.0%14.0%
Credit spread (continuous)15.57%12.76%15.57%13.79%
For both the three and six months ended June 30, 2022, there was $454 of changes in fair value related to contingent consideration related to the EPI Health Acquisition recorded in the accompanying condensed consolidated statements of operations and comprehensive loss related primarily to changes in market assumptions and discount rates since the transaction date. The estimated fair value of the contingent consideration as of June 30, 2022 is $3,319, of which $433 and $2,886 is recognized as a current liability and long-term liability, respectively, in the accompanying condensed consolidated balance sheets.
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 condensed 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 common stock or pre-funded warrantscontingent consideration liabilities as of June 30, 2022:
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ClassificationEarnout Period
Transition Services AgreementCurrent portion11-Mar-2022 to 10-Mar-2023
First Sales Based Legacy MilestoneCurrent portion1-Apr-2022 to 31-Mar-2023
Wynzora MilestoneNon-current portion1-Apr-2022 to 31-Mar-2023
Second Sales Based Legacy MilestoneNon-current portion1-Apr-2023 to 31-Mar-2026
Sitavig MilestonesNon-current portion1-Feb-2024 to 30-Apr-2034
See Note 2—“Acquisition of EPI Health” for additional detail regarding contingent consideration related to purchase sharesthe transaction.
Note 18: Segment Information
The Company has determined that it operates in 2 segments, which represent (i) the promotion of commercial products for the treatment of medical dermatological conditions (the “Commercial Operations” segment), and (ii) research and development activities related to the Company’s nitric oxide-based technology to develop product candidates (the “Research and Development Operations” segment).
•The Commercial Operations segment consists of the Company’s common stock.portfolio of commercial products.
Joseph Moglia,•The Research and Development Operations segment consists of multiple drug product candidates under clinical development.
Costs associated with the development of SB206 are currently included in the Research and Development Operations segment. There are no significant inter-segment sales. The Company evaluates the 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:
Three Months EndedSix Months Ended
June 30, 2022June 30, 2022
Revenue
Commercial operations$5,506 $6,751 
Research and Development operations652 1,334 
Total revenue$6,158 $8,085 
Net loss
Commercial operations$(466)$(1,192)
Research and Development operations(8,412)(21,066)
Net loss and comprehensive loss$(8,878)$(22,258)
As of
June 30, 2022
Assets
Commercial operations$59,003 
Research and Development operations55,389 
Total assets$114,392 
The net revenues attributed to the Commercial Operations segment are primarily derived from the sale of the Company’s commercial products, and the net revenues attributed to the Research and Development Operations segment are primarily derived from the arrangement with the Company’s licensing partner in Japan for SB206 and SB204. Drug development and potential commercialization costs are included in the Research and Development Operations segment. Total assets by reporting segment are not reviewed by the CODM when evaluating the reporting segments’ performance, however, the Commercial Operations segment includes the acquired assets associated with the EPI Health Acquisition and changes in such assets, while a greater than 5% stockholderthe Research and Development Operations segment is comprised of the assets associated with the historical business of the Company purchased 100,000 shares of common stock for $430 in the March 2020 Registered Direct Offering described in Note 10—Stockholders’ Equity (Deficit). Mr. Moglia’s participation in the March 2020 Registered Direct Offering was evaluated and approved pursuantrelated to the Company’s existing related party transactions policy. Based solely on information reportedproduct candidates that are in a Schedule 13D/A filed withdevelopment.
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Substantially all revenue was derived from product sales or from licensing agreements originating in the SEC on January 27, 2021, Mr. Moglia is no longer a greater than 5% stockholderUnited States. All of the Company.Company’s long-lived assets are maintained in the United States.
Although all of the Company’s operations are based in, and all net product revenue is generated from, sales in the United States, the revenue generated from its licensing partner in Japan was $647 and $1,293, or 11% and 16% of total revenue, during the three and six months ended June 30, 2022, respectively, which was attributed to the Research and Development Operations segment. During the three and six months ended June 30, 2021, the Company generated revenue from its licensing partner in Japan of $747 and $1,494, or 100% and 95% of total revenue, respectively. Prior to the quarter ended March 31, 2022, the Company operated in only 1 segment, which was the Research and Development Operations segment.
Note 14:19: Subsequent Events
Amended Sato AgreementRemaining Working Capital Adjustment
As discussed in Note 5—Revenue Recognition,On July 7, 2022, the Company monitors and reassessesEPG agreed to the estimated performance period for purposes of revenue recognition under the Amended Sato Agreement during each reporting period. The Company previously estimated the performance period to be 9.25 years, completing in the second quarter of 2026. 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 includes evaluation of lower dose strengths, including potential further refinement in a subsequent dose tolerability study. AsTotal Adjustment Amount as part of the communication regarding these Phase 1 studies, Sato also communicated an updated comprehensive timelinepost-closing adjustment to the estimated purchase price for the Japanese SB206 program.EPI Health Acquisition. The updated timeline assumes that the 12% formulation is appropriate to proceed for development in Japan, and isTotal Adjustment Amount was determined to be reassessedpositive and in the amount of $3,100, which was paid to EPG on July 7, 2022.
As of March 31, 2022, the Company’s estimated amount of the Total Adjustment Amount was $4,069, however, a favorable adjustment was determined in July 2022 based upon the final agreed upon amount with EPG.
Seller Note with Evening Post Group
On July 13, 2022,the Company reached agreement with EPG regarding payment and termination of the Seller Note. Upon the Company’s payment to EPG of $10,000, or an approximate 39% discount on the findingsoriginal principal amount of the Phase 1 study.Seller Note, the Seller Note and all related security agreements were terminated.
Based upon (i)Pursuant to the expected timingterms of the additional Phase 1 study, including a subsequent dose tolerability study; (ii) Sato’s estimated comprehensive developmental scheduleSeller Note, there was no penalty for SB206, including additional post-Phase 1 clinical trials; and (iii) current and future Japanese clinical trial material manufacturing and technical transfer considerations, includingrepaying the manufacturing site for drug product,Seller Note prior to the Company concluded that a prospective delay in Sato’s overall SB206 Japanese development plan had occurred. The Company estimates the program timeline to be extended by 0.75 years from its previous estimate, and a corresponding extensionend of the performance period estimate to 10 years, completing interm. In connection with the first quarter of 2027. The Company understands that the progressionrepayment of the Japanese SB204 program could followSeller Note, the same timelineguaranty agreement between EPG and EPI Health, dated March 11, 2022, was terminated as of July 13, 2022. Accordingly, the Japanese SB206 program, subjectliens on the membership interests and assets of EPI Health were also terminated such that no obligations with respect to the nature ofSeller Note and related securities agreement or the results of Sato’s comprehensive asset developmental program, including SB206.
The change in estimate related to the expected duration of the combined SB204 and SB206 development program timeline that occurred in July 2021 will result in a prospective decrease of $34 in monthly license and collaboration revenue, as compared to amounts that would have been recorded under the previous timeline.
Based on the timing of this change in estimate, beginning in the third quarter of 2021, the Company will recognize a lower amount of license and collaboration revenue, as compared to the first and second quarter of 2021. Prospective periods will reflect the impact of this change in estimate that occurred in July 2021, as compared to the previous timeline, based on the current timeline and the effective difference in monthly revenue recognized under the Amended Sato Agreement.
If the duration of the combined SB204 and SB206 development program timeline is further affected by the establishment or subsequent adjustments, as applicable, to 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.
Development Services Agreement
As previously disclosed, upon successful completion of required technology transfer, the Company intends for a new third-party API manufacturer to be able to manufacture berdazimer sodium in compliance with established manufacturing processes, applicable regulatory guidelines and as appropriate for potential large-scale commercial quantities.underlying loan remain outstanding.
In July 2021, the Company entered into a development services agreement with a third-party full-scale API manufacturer for certain manufacturing process feasibility services including process familiarization, safety assessments, preliminary engineering studies, and initial process and analytical methods determination. Following the successful completion of certain preliminary activities with this third-party API manufacturer and other preparatory activities, the Company would then proceed with the third-party API manufacturer beyond the initial stages noted above, in which case the Company would incur substantial costs associated with technical transfer efforts, capital expenditures, manufacturing capabilities, and certain quantities of its drug substance.

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto for the year ended December 31, 20202021 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 24, 202118, 2022 (referred to herein as our Annual Report).
In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. AllAct concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition. Any statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. TheseIn some cases, you can identify forward-looking statements are often identified by the use of wordsterminology such as “believe,” “assume,” “contemplate,” “continue,” “due,” “goal,” “objective,” “plan,” “seek,” “target,” “expect,” “believe,” “anticipate,” “intend,” “positioned,” “may,” “will,” “would,” “could,” “should,” “potential,” “predict,” “project,” “estimate,” or “estimate,“continue,” and other similar expressions that are predictions of or variations. Theseindicate future events and future trends, or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. In addition, statements such as “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. The forward-looking statements and opinions contained in this Quarterly Report on Form 10-Q are based on the beliefs and assumptions of management based onupon information currently available to management. Forward-lookingus as of the date hereof and, while we believe such information forms a reasonable basis for such statements, involve knownsuch information may be limited or incomplete, and unknown risks, uncertainties and other factorsour statements should not be read to indicate that may cause our actual results, performancewe have conducted an exhaustive inquiry into, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.review of, all potentially available relevant information. Except as may be required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
These forward-looking statements are subject to numerous risks, including, without limitation, the following:
•We have incurred net losses since our incorporation and anticipate that we will continue to incur net losses for the foreseeable future.
•In March 2022, we acquired EPI Health, LLC, or EPI Health, and such acquisition, the EPI Health Acquisition. EPI Health derives revenue from the sale of branded medical dermatology products. Achieving the anticipated benefits of the EPI Health Acquisition will depend in significant part upon us integrating the EPI Health businesses, operations, processes and systems in an efficient and effective manner, including potential synergies and the ability to successfully commercialize the product portfolio acquired.
•We will need significant additional funding to continue our commercial operating activities and for the advancement of our product development programs, including potential commercialization efforts for SB206, beyond what is currently included in our operating forecast and related cash projection. As of June 30, 2021,2022, we had an accumulated deficit of $264.3$301.2 million. If we are unable to raise capital when needed, we would be forced to delay, reduce, terminate or eliminate our product development programs, or our current and future commercialization efforts.
•Raising additional capital, including through the issuance of shares of our common stock to Aspire Capital Fund, LLC, or Aspire Capital, pursuant tothrough the common stock purchase agreement that we entered intoMarch 11, 2022 Equity Distribution Agreement with Aspire Capital on July 21, 2020, or the July 2020 Aspire CSPA,Oppenheimer & Co. Inc., may reduce the trading price of our common stock. Our equity issuances during the year ended December 31, 2020 and the six months ended June 30, 2021, have resulted in significant dilution to our existing stockholders. Any future additional issuances of equity, or debt convertible into equity, may result in significant dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies, product candidates or product candidates.commercial products.
•The price of our common stock may be volatile and fluctuate significantly, which could result in substantial losses for our existing stockholders.
•WeOur revenue is dependent upon sales of our medical dermatology products, and any setbacks relating to the sale of such commercial products could impair our operating results, including if our competitors develop treatments for our commercial portfolio’s target indications or more effectively execute their commercialization strategies, which could limit our commercial opportunity and profitability.
•Our products and product candidates may pose safety issues, cause adverse events, have entered into and rely on, and may enter into and rely onside effects or have other strategic relationshipsproperties that could delay or prevent the regulatory approval for the further development and commercialization of our product candidates, and if we are unable to enter into such relationships on favorable termslimit the commercial profile of an approved label or at all, or if such relationships are unsuccessful, if disputes arise between us and our strategic partners or if we fail to trigger contingent payments under such strategic relationships, we may be unable to realize the potential economic benefit of those product candidates.result in significant negative consequences.
•Our product candidates, if approved, and our commercial products may face significant competition, and our failure to effectively compete may prevent us from achieving significant market penetration or share. We specializeface, and will continue to face, competition in the development and marketing of products from academic institutions, government
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agencies, research institutions and biotechnology and pharmaceutical companies, including specialty and other large pharmaceutical companies, and over-the-counter, or OTC, companies and generic manufacturers. The dermatology competitive landscape is highly fragmented, with many mid-size and smaller companies competing in the prescription sector. To successfully compete for business with managed care and pharmacy benefits management organizations, we must often demonstrate that our products offer not only medical benefits, but also cost advantages as compared with other forms of care.
•Our research and development activities relate solely into developing nitric oxide-based therapeutics to treat a range of diseases with significant unmet needs, and if we do not successfully achieve regulatory approval for any of our product candidates or successfully commercialize them, we may not be able to continue as a business.
•Clinical drug development involves a lengthy and expensive process with uncertain timelines and outcomes, and results of earlier studies and trials may not be predictive of future trial results. The results of any further development activities may not be sufficient to support a new drug application, or NDA, submission for or regulatory approval of any of our product candidates, or regulatory approval of our product candidates.
•Ongoing or future product development activities may not be successful, including in that our preclinical studies may not prove successful in demonstratingdemonstrate proof-of concept or may show adverse toxicological findings, and our clinical trials may not show the requisite safety and efficacy of our product candidates. The regulatory approval processes of the Food and Drug Administration, or FDA, are lengthy, time-consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates on a timely basis or at all, our business will be substantially harmed.
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•Delays or disruptions in the qualification of manufacturing facilities and processes or in the manufacture of our (i) active pharmaceutical ingredients, or APIs, including NVN1000berdazimer sodium or any other NITRICIL™NITRICIL new chemical entities, or NCEs, or (ii) clinical trial materials orand commercial supplies of any approved product candidates,products, whether by us or any third-party manufacturer with whom we contract, including any delays in the upfit of our new facility under the TBC Lease (as defined below) or in the transfer of technology to third-party manufacturers, could adversely affect our development and commercialization timelines and result in increased costs of our development programs or in our breaching our obligations to others.
•We currently rely on third-party suppliers to provide the raw materials, finished goods and equipment that are used by us orand our third-party manufacturers in the manufacture of our product candidates.candidates and commercial products. There are a limited number of suppliers for raw materials, including nitric oxide, that we useand the equipment used to manufacture our product candidates. In addition, weAny delay or disruption, especially in light of current global supply chain constraints, could adversely impact the timing or cost of our manufacturing activities or other associated development and commercialization activities.
•We currently rely on third-party logistics vendors to transport our raw materials, API, drug product and drugcommercial products through our supply chain. Certain materials, including our API for our products in development, have designated hazard classifications that limit available transportation modes or quantities. Third-party logistics vendors may choose to delay or defer transportation of materials with such hazard classifications from time to time, which could adversely impact the timing or cost of our manufacturing supply chain activities or other associated development and commercialization activities.
•Many factors could cause production or distribution interruptions with the manufacture and distribution of any of our products and product candidates, including human error, natural disasters, pandemics, labor disputes, acts of terrorism or war, equipment malfunctions, or raw material shortages. If weour commercial distribution partners are not able to satisfy our requirements within the expected timeframe, or are unable to establishprovide us with accurate or timely information and data, including inventories and sales, marketingserious adverse events, and/or product complaints, our business may be at risk. In addition, if specialty pharmacy services, including our third-party call center services, which provide patient support and financial services, prescription intake and distribution, capabilities forreimbursement adjudication, and ongoing compliance support, is not effectively managed, the continuance of our sales of our commercial products or our product candidates, if approved, may be delayed or any future product candidate that receives regulatory approval, either through a commercial partner or internally, wecompromised. Finally, our third-party manufacturers may not be successful in commercializing and generating potential revenues from thoseable to manufacture the materials required for our products or product candidates if approved.at a cost or in quantities necessary to make them commercially viable.
•Delay or terminationWe continue to assess global supply chain constraints, including any further impact of planned clinical trials for our product candidates, including as a result of disruptions caused by the COVID-19 pandemic would result in unplanned expenses and adverselythe military conflict between Ukraine and Russia, on our suppliers and vendors. Any delay could impact available inventories of our remaining developmental activitiescommercial products and potential commercial prospects with respect to, andour ability to generate potential revenues from, such product candidates.meet demand. .
•We rely on third parties to conduct some of our preclinical studies, clinical trials, stability and our clinical trials.analytical testing, and regulatory activities. If these third parties do not successfully carry out their contractual duties or meet expected
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deadlines, or are adversely impacted by the COVID-19 pandemic, we may be unable to obtain regulatory approval for or commercialize any of our product candidates as planned or at all.
•If we encounter difficulties or delays enrolling patients in our clinical trials, our clinical development activities would be delayed or otherwise adversely affected.
•We may expend our limited resources to pursue one or more product candidates or indications within our product development strategy, which has changedhave entered into and rely on, and may continueenter into and rely on other, strategic relationships for the further development and commercialization of our products and product candidates. If we are unable to change over time,enter into such relationships on favorable terms or at all, or if such relationships are unsuccessful, if disputes arise between us and our strategic partners or if we fail to capitalize on product candidates or indications thattrigger contingent payments under such strategic relationships, we may be more profitable or for which there is a greater likelihoodunable to realize the potential economic benefit of success.
•Ourour products and product candidates may pose safety issues, cause adverse events, have side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following marketing approval, if any.
•Our product candidates, if approved, will face significant competition, and our failure to effectively compete may prevent us from achieving significant market penetration.candidates.
•Changes to our leadership team or operational resources, including with the EPI Health Acquisition and integration, could prove disruptive to our operations and have adverse consequences for our business and operating results.
•If we are unable to obtain and maintain patent protection for our product candidates and commercial products, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology, and product candidates and commercial products may be impaired.
•The ongoing military conflict between Russia and Ukraine has created additional volatile market conditions and uncertainties in the global economy, including increased cybersecurity risks.
•As a result of our operating losses and negative cash flows from operations, the report of our independent registered public accounting firm on our December 31, 20202021 financial statements included an explanatory paragraph indicating that there iswas substantial doubt about our ability to continue as a going concern.
•We may not be able to achieve the objectives or successfully execute our strategy described in the sections entitled “Priority“Business Updates,” “Commercial Portfolio,” “Research and Development Pipeline,Portfolio,” “Pipeline Expansion Opportunities,”“Supply Chain” and “Manufacturing and Supplies,” “Business Updates” and “Corporate Updates”Supplies” below.
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For a further discussion of risks that could cause or contribute to differences between actual results and those implied by forward-looking statements, see the “Risk Factors” section in our Annual Report and in this Quarterly Report on Form 10-Q.
Novan®Novan is a registered trademark of our company in the United States. This Quarterly Report on Form 10-Q also includes trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, our trademarks and trade names referred to in this Quarterly Report on Form 10-Q generally appear without any “™” or “®” symbol, but those references arethe absence of such symbols is not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of any applicable licensor, to these trademarks and trade names.
Overview
Novan, Inc. is a medical dermatology company primarily focused on researching, 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 late clinical-stage biotechnologytopical prescription gel for the treatment of viral skin infections, with a current focus on molluscum contagiosum. We recently 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 relation teams, and positions us as a fully integrated dermatology company with a pipeline of development candidates focused primarily on leveragingdermatological indications supported by a commercial platform to market and sell therapeutic products for skin diseases.
Following the acquisition, we employ approximately 100 staff, including sales personnel currently covering 42 territories. Through our acquisition of EPI Health, we promote products for plaque psoriasis, rosacea, acne and dermatoses, which we refer to as our Commercial Operations segment. We also have a pipeline of potential product candidates using our proprietary nitric oxide-based technology platform, NITRICIL, to generate new treatments for multiple indications, which we refer to as our 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 18—Segment Information” to the accompanying condensed consolidated financial statements for certain financial information related to our reportable segments.
Business Updates
We continue to prepare for a regulatory submission and potential approval of SB206 as a treatment for molluscum. The timing of the targeted NDA submission is dependent upon preparatory activities and data accumulation related to the NDA submission including conducting customary drug substance and drug product stability protocols, and regulatory and quality documentation compilation related to our preclinical CMC data related to the B-SIMPLE trials, and our drug manufacturing and related processes.
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We are continuing to progress the prelaunch strategy and commercial preparations for SB206, if approved.We believe the addition of the EPI Health commercial infrastructure across the sales, marketing, and communications functions, in addition to the fully dedicated market access and pharmacy relation teams, will benefit the commercial launch of SB206, if approved. We continue to execute on the integration and combination of our companies.
Working Capital and Additional Capital Needs
We will continue to need additional funding to support our planned and future operating activities and make further advancements in our product development programs beyond what is currently included in our operating forecast and related cash projection. We do not currently have sufficient funds to complete commercialization of any of our product candidates that are under development, and our funding needs will largely be determined by our commercialization strategy for SB206 (berdazimer gel, 10.3%), subject to the NDA submission timing and the regulatory approval process and outcome. We are pursuing a broad range of financing options that could be used to extend the Company’s cash runway beyond the fourth quarter of 2022 and submission of the Company’s NDA for its lead product candidate, SB206, including, among other things, to further prepare for commercialization of SB206 following approval.
Further advancement of our molluscum program, including through the potential NDA submission of SB206, or advancement of any other early-stage or late-stage clinical program across our platform, has been and may be further impacted by the COVID-19 pandemic and is subject to our ability to secure additional capital. Sources of additional capital may potentially include (i) debt or equity financings, such as through sales of common stock, or (ii) non-dilutive sources, such as partnerships, collaborations, licensing, grants or other strategic relationships. Any issuance of equity, or debt convertible into equity, would result in further significant dilution to our existing stockholders.
In addition to the regulatory progression of SB206, including implementing prelaunch strategy and commercial preparation, subject to obtaining additional financing or strategic partnering, we may progress (a) SB204, a topical monotherapy for the treatment of acne, by commencing a pivotal Phase 3 study, or (b) SB019, as a potential intranasal treatment option for COVID-19 or other respiratory infections.
As of June 30, 2022, we had total cash and cash equivalents of $37.3 million and positive working capital of $17.8 million. As discussed in “Corporate Updates,” the Company used a portion of its cash and cash equivalents in July 2022 to pay off and terminate the Seller Note issued in connection with the EPI Health Acquisition, as well as satisfy its obligations under the post-closing purchase price adjustment required in connection with the EPI Health Acquisition.
As of June 30, 2022, we had $48.6 million in remaining availability for sales of our common stock under the Equity Distribution Agreement dated March 11, 2022, 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 our common stock to or through Oppenheimer, acting as our sales agent, in at-the-market transactions. As described below, related to the June 2022 Registered Direct Offering, we agreed not to issue any additional securities in any variable rate transaction, including under the Equity Distribution Agreement, for a period of 6 months following June 13, 2022, unless certain thresholds are met following September 11, 2022. See “Note 11—Stockholders’ Equity” to the accompanying condensed consolidated financial statements for more information on the Equity Distribution Agreement.
We will need significant additional funding to continue our operating activities and make further advancements in our product development programs beyond what is currently included in our operating forecast and related cash projection. Please refer to “Liquidity and Capital Resources” for further discussion of our current liquidity and our future funding needs.
COVID-19 Overview
We have continued to closely monitor and rapidly respond to the ongoing impact of the COVID-19 pandemic on our employees, our community and our business operations. We have been able to resume normal operations in most areas of our business but have adopted a series of precautionary measures and plan to continue to adjust as the circumstances warrant.
The timetable for development of our product candidates has been impacted and may face further disruption and our business could be further adversely affected by the outbreak of COVID-19 and its variants. In particular, COVID-19 impacted the timing of trial initiation of our B-SIMPLE4 Phase 3 trial. In addition, certain factors from the COVID-19 pandemic may delay or otherwise adversely affect our generation of product revenues from our portfolio of therapeutic products for skin diseases, as well as adversely impact our business generally. Therefore, we continue to assess any potential further impact of COVID-19 on our operations.
Commercial Portfolio
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. EPI
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Health’s current portfolio includes six branded prescription drugs. EPI Health actively promotes four medical dermatological products in the United States and derives 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, acne, and dermatoses. The branded and promoted product portfolio currently includes Wynzora, Rhofade, Minolira, and Cloderm.
The following summarizes the complete EPI Health product portfolio:
Wynzora Cream (calcipotriene and betamethasone dipropionate cream), or Wynzora, is a combination of calcipotriene, a vitamin D analog, and betamethasone dipropionate, a corticosteroid, indicated for the topical treatment of plaque psoriasis in patients 18 years of age or older. EPI Health entered into a collaboration agreement with MC2 Therapeutics, or MC2, in August 2020, as amended effective January 1, 2022, for the commercialization of Wynzora in the United States, or the MC2 Agreement. Under the MC2 Agreement, MC2 retains full ownership of Wynzora. In particular, EPI Health utilizes its commercial infrastructure to promote and sell Wynzora in return for retaining a share of net sales of Wynzora in the United States. The portion of net sales EPI Health retains varies depending on the aggregate annual net sales of the product, and ranges from a percentage in the mid-teens to a mid-single digit percentage as net sales reach certain thresholds. Additionally, MC2 also pays for certain incremental costs incurred by EPI Health in commercialization activities according to a budget to be agreed annually between EPI Health and MC2. The term of the MC2 Agreement expires in June 2028, unless earlier terminated by either party under certain conditions.
Rhofade (oxymetazoline hydrochloride cream, 1%), or Rhofade, is an alpha1A adrenoceptor agonist indicated for the topical treatment of persistent facial erythema associated with rosacea in adults. EPI Health acquired the rights to Rhofade in October 2019. In connection with that acquisition and other historical acquisitions related to Rhofade, EPI Health is required to make certain milestone payments based on future net sales of Rhofade along with paying a combined royalty on net sales of Rhofade and related products initially in the low double digits, which rate may increase based on the thresholds of net sales achieved by EPI Health.
Minolira (biphasic minocycline hydrochloride immediate release/extended release 105 mg and 135 mg tablets), or Minolira, is indicated to treat inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 years of age and older. EPI Health acquired the rights to Minolira in the United States in August 2018. In connection with that acquisition, EPI Health is required to pay certain milestones based on future sales of Minolira.
Cloderm (clocortoline pivalate cream 0.1%), or Cloderm, is indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid-responsive dermatoses. EPI Health acquired the rights to Cloderm in September 2018. In connection with that acquisition, EPI Health is required to pay minimum royalty payments on net sales of Cloderm, subject to meeting certain net sales milestones.
Sitavig (acyclovir 50mg buccal tablets), or Sitavig, is indicated for the treatment of recurrent herpes labialis (cold sores) in immunocompetent adults. EPI Health is party to a license agreement with Vectans Pharma, or Vectans, for the rights to commercialize Sitavig in the United States and Canada.
Nuvail (poly-ureaurethane 16% nail solution), or Nuvail, is indicated for managing signs and symptoms of nail dystrophy, i.e. nail splitting or nail fragility, for intact or damaged nails. EPI Health is party to a license agreement for the sale of Nuvail and serves as an exclusive distributor of this product in the United States.
Research and Development Portfolio
Our proprietary technology platform leverages nitric oxide’s naturally occurring anti-viral, anti-bacterial, anti-fungal, and immunomodulatory mechanisms of action and our proprietary nitric oxide-based technology platform, NITRICIL™, to generate macromolecular NCEs to treat a range of diseases with significant unmet needs. Nitric oxide plays a vital role in the natural immune system response against microbial pathogens and is a critical regulator of inflammation. Our ability to harness nitric oxide and its multiple mechanisms of action has enabled us to create a platform with the potential to generate differentiated product candidates.
The two key components of our nitric oxide platform are our proprietary Nitricil technology, which drives the creation of macromolecular NCEs and our formulation science, both of which we use to tune our product candidates for specific indications. 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 have advanced strategic development programs in the field ofclinical-stage dermatology while also further expanding the platform into men’s and women’s health, infectious diseases, and various other medical conditions with significant unmet needs. This decision was based on the connection between the multi-factorial pathologies of diseases in these areas and the demonstrable anti-microbial, anti-viral and anti-inflammatory properties of Novan’s nitric oxide technology. Our vision is to become the world’s leader in nitric oxide-based science, technology, and clinical translation in support of delivering safe and efficacious therapies.
We have clinical-stage dermatologyanti-infective drug candidates with multi-factorial (SB204), anti-viral (SB206), anti-fungal (SB208), and anti-inflammatory (SB414) mechanisms of action. We have also introduced SB207 as a possible anti-viral product candidate for the treatment of external genital warts.warts (SB207). We have conducted or are currently conducting preclinical work on NCEs, including berdazimer sodium, and formulations for the potential treatment of (i) coronavirus indications,respiratory infections, including SARS-CoV-2, the virus that causes COVID-19 (SB019);, (ii) antimicrobial indications for the adjacent companion animal health
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market (NVN4100);, (iii) cervical intraepithelial neoplasia caused by high-risk human papilloma virus, or HPV, in the men’s and women’s health field (WH504 and WH602);, and (iv) inflammatory disorders; and (v) diseases in the gastroenterological, or GI, field.disorders.
We are currently focusing our efforts and resources on our priority development pipeline candidates, which includes our SB206 clinical development program for the treatment of molluscum contagiosum, including the completion of the B-SIMPLE4 Phase 3 trial and preparing for and seeking regulatory approval of SB206, in addition to our preclinical development program in the area of infectious diseases (Coronaviridae (COVID-19)).
Business Updates
During 2021, ourOur primary programmatic focus has beenis on our molluscum contagiosum, or molluscum, (SB206) program,product candidate, SB206, and we intend to continue to focus our near term clinical-stage development efforts on this program. Following the positive top-line results from the B-SIMPLE4 trial announced on June 11, 2021, weWe are targeting submitting a potential NDA filingsubmission of SB206 for molluscum no later than the thirdend of the fourth quarter of 2022.
Thus, we are preparing for regulatory submission efforts and potential approval of SB206 as a treatment for molluscum. The timing of the targeted NDA submission is dependent upon: (i) completion of the B-SIMPLE 4 trial through Week 24 related to the final safety profile data (no additional efficacy data was obtained at this follow-up visit); (ii) completion of our new manufacturing facility to have the infrastructure and capability necessary to produce cGMP API registration batches; (iii) completion of technical transfer activities to our drug product contract manufacturing organization, or CMO, and preparing the necessary registration batches of drug product; (iv) preparatory activities related to the NDA submission including drug substance and drug product stability data accumulation; and (v) regulatory and quality documentation compilation related to our preclinical, clinical and chemistry, manufacturing and control, or CMC, data related to the B-SIMPLE trials, and our drug manufacturing and related processes.
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We are also continuing to evaluate potential commercialization strategies for SB206, subject to the NDA submission timing and the regulatory approval process including, but not limited to, securing a commercialization partner, co-commercializing with a partner, or commercializing on our own.
Further advancement of our molluscum (SB206) program beyond the potential NDA filing of SB206 for molluscum, or advancement of any other late-stage clinical program across our platform, has been and may be further impacted by the COVID-19 pandemic and is subject to our ability to secure additional capital. Sources of additional capital may potentially include (i) equity or debt financings, including through sales under the July 2020 Aspire CSPA; or (ii) non-dilutive sources, such as partnerships, collaborations, licensing, grants or other strategic relationships. Our equity issuances during the year ended December 31, 2020, and the six months ended June 30, 2021, have resulted in significant dilution to our existing stockholders. Any issuance of equity, or debt convertible into equity, would result in further significant dilution to our existing stockholders.
Working Capital and Additional Capital Needs
As of June 30, 2021, we had a total cash and cash equivalents balance of $65.8 million and positive working capital of $57.2 million. As of June 30, 2021, we had $12.0 million in remaining availability for sales of our common stock under the July 2020 Aspire CSPA.
We believe that our existing cash and cash equivalents balance as of June 30, 2021, plus expected contractual payments to be received in connection with existing licensing agreements, will provide us with adequate liquidity to fund our planned operating needs into the first quarter of 2023. This operating forecast and related cash projection includes: (i) costs through the expected completion of the B-SIMPLE4 Phase 3 trial, including supporting activities; (ii) costs associated with preparing for and seeking U.S. regulatory approval of SB206 as a treatment for molluscum; (iii) costs associated with the build-out of our new corporate headquarters and manufacturing capability necessary to support small-scale drug substance and drug product manufacturing; (iv) conducting drug manufacturing capability transfer activities to external third-party CMOs, including a drug delivery device technology enhancement project; (v) development activities in certain early stage priority therapeutic areas, including infectious diseases (Coronaviridae (COVID-19)); (vi) certain research and development activities primarily related to SB204 as a treatment for acne vulgaris; and (vii) initial efforts to support potential commercialization of SB206, but excludes: (a) any potential costs associated with other late-stage clinical programs; (b) operating costs that could occur between a potential NDA submission for SB206 through NDA approval, including marketing and commercialization efforts to achieve potential launch of SB206, and (c) proceeds from any potential future sales of common stock under the July 2020 Aspire CSPA. We may decide to revise our development and operating plans or the related timing, depending on information we learn through our research and development activities, including regulatory submission 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 significant additional funding to continue our operating activities and make further advancements in our product development programs beyond what is currently included in our operating forecast and related cash projection. Please refer to “Liquidity and Capital Resources” for further discussion of our current liquidity and our future funding needs.
COVID-19 Overview
While certain COVID-19 vaccines have been approved and are now available for use in the United States and certain other countries, we are unable to predict how widely utilized the vaccines will be, whether they will be effective in preventing the spread of COVID-19 (including its variant strains), and when or if normal economic activity and business operations will resume. Despite significant declines in the number of new cases during 2021, COVID-19 cases have recently started to rise across the country. Vaccine resistance, coupled with the emergence of fast-spreading variants have introduced renewed uncertainty into whether additional measures will be implemented to combat the spread of COVID-19 including in the locations where we do business. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, disrupted clinical trials and created significant volatility in and disruption of financial markets. The full extent of the pandemic, related business and travel restrictions and changes to behavior intended to reduce its spread remain uncertain as the pandemic and the potential impact of variants of the virus that causes COVID-19 continue to evolve globally.
We have continued to closely monitor and rapidly respond to the ongoing impact of the COVID-19 pandemic on our employees, our community and our business operations. We have worked to continue our critical business functions, including continued operation of our clinical development efforts, and we have adopted a series of precautionary measures and will continue to do so as the circumstances warrant, including increased sanitization of our facilities, use of personal protective
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equipment, as appropriate, and physical distancing practices to help protect our employees’ health and safety as they continue to advance important research related to our product candidates.
The timetable for development of our product candidates has been impacted and may face further disruption and our business could be further adversely affected by the outbreak of COVID-19 and its variants. In particular, COVID-19 impacted the timing of trial initiation of our B-SIMPLE4 Phase 3 trial, and, while we enrolled and dosed the first patient in the trial in September 2020 and announced top-line results in June 2021, we continue to assess any further impact of COVID-19 on our operations.
Despite disruptions to our business operations and the business operations of third parties on which we rely, the COVID-19 pandemic has not significantly impacted our operating results and financial condition to date. Although it is not possible at this time to estimate the entirety of the impact that the COVID-19 pandemic has had or will have on our business, operations and employees, our CMOs, our contract research organizations, or CROs, our partners, our collaborators in clinical research, and our contractors, suppliers and vendors supporting our ongoing facility build-out and cGMP manufacturing capability project, any continued spread of COVID-19 and its variants, measures taken by governments, actions taken to protect employees from the pandemic, and the broad impact of the pandemic on all business activities and financial markets may materially and adversely affect our business, results of operations and financial condition and stock price. Please refer to “Results of Operations” for further discussion of these items. Due to numerous uncertainties surrounding the COVID-19 pandemic, we are unable to predict the nature and extent of the future impacts that the pandemic will have on our financial condition and operating results. These uncertainties include, among other things, the ultimate severity and duration of the pandemic, including the efficacy or availability of a treatment or vaccine for COVID-19 and its variants; governmental, business or other actions that have been, or will be, taken in response to the pandemic, including continued restrictions on travel and mobility, business closures and operating restrictions and imposition of social distancing measures; impacts of the pandemic on the conduct of our clinical trials, including with respect to availability of investigators and clinical trial sites, patients’ ability to complete the necessary visits and clinical trial site operations, and monitoring of clinical trial data; impacts of the pandemic on regulatory authorities; and impacts of the pandemic on the United States and global economies more broadly. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, our financial condition or our results of operations, see the “Risk Factors” section in our Annual Report.
Supply Chain
We currently rely on third-party suppliers to provide the raw materials that are used by us or our third-party manufacturers in the manufacture of our product candidates. There are a limited number of suppliers for raw materials, including nitric oxide, that we use to manufacture our product candidates. 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 with such hazard classifications from time to time, especially in light of the pandemic and related global supply chain constraints, which could adversely impact the timing or cost of our manufacturing supply chain activities or other associated development activities. We continue to assess any further impact of COVID-19 on our supply chain and related vendors, including in our usage of third-party vendors to supply goods, materials and equipment to build-out our new facility. We expect to complete the construction of our new facility to support various research and development and cGMP activities, including small-scale manufacturing capabilities for API and drug product, in the second half of 2021.
Priority Development Pipeline
SB206, a Topical Anti-viral Treatment for Molluscum Contagiosum (a Viral Skin Infections (Molluscum Contagiosum)Infection)
We are developing SB206 (12% berdazimer sodium, 10.3% berdazimer) as a topical gel with anti-viral properties for the treatment of viral skin infections, with a current focus on molluscum contagiosum. Molluscum is a contagious skin infection caused by the molluscipoxvirus that affects up to six million people in the United States annually. The greatest incidence is in children aged one to 14 years. The average time to resolution is 13 months,months; however, 13% of children experience lesions that may not resolve in 24 months. There is no FDA-approved prescription drug treatment for molluscum. More than half of patients diagnosed with the infection are untreated. The majority of patients in the United States that receive treatment are treated with potentially painful procedures and the remaining are often prescribed products indicated for the treatment of external genital warts.
As discussed below, the 12% dose of berdazimer sodium, our drug substance (NVN1000), being used in the development of SB206 for molluscum is comprised of 10.3% berdazimer and 1.7% sodium. We refer to 12% berdazimer sodium, or 10.3% berdazimer, interchangeably.
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Based on theFollowing positive results of our initial Phasephase 3 trialsB-SIMPLE4 trial for SB206, (referred to as B-SIMPLE1 and B-SIMPLE2), announced in January 2020,April 2022, we held a Type Cpre-NDA meeting with the FDA, on April 1, 2020 seeking feedback on our proposaland subsequently received written minutes related to conduct one additional, well-controlled pivotal study of SB206 to support a future NDA.this interaction. Based on feedback, the FDAinformation provided guidance indicating that the FDA would consider one additional pivotal trial, the B-SIMPLE4 Phase 3 trial, that, if successful, could be supported by the previously completed B-SIMPLE2 trial for a future NDA submission. In addition, the FDA provided guidance with regard to both the study design for the B-SIMPLE4 Phase 3 trial and expectations for a future NDA submission.
B-SIMPLE4 was designed as a multi-center, randomized, double-blind, vehicle-controlled study to evaluate the efficacy and safety of SB206 12% once daily that exceeded its enrollment target by randomizing 891 total patients (1:1 active:vehicle randomization), ages 6 months and above, with molluscum, across 55 clinical sites. Patients were treated once-daily with SB206 12% or Vehicle Gel for a minimum of 4 weeks and up to 12 weeks to all treatable lesions (baseline and new). There were visits at Screening/Baseline, Week 2, Week 4, Week 8 and Week 12, and a safety follow-up at Week 24. As part of B-SIMPLE4’s study design,our consideration thereof, we also implemented additional patient and caregiver training and patient engagement efforts and offered decentralized visit capabilities for conducting visits during the COVID-19 pandemic. The primary endpoint for B-SIMPLE4 was the proportion of patients achieving complete clearance of all treatable molluscum lesions at Week 12.

We initiated the B-SIMPLE4 trial in August 2020, the first patient was enrolled and dosed in September 2020, the trial completed patient enrollment during the first quarter of 2021 and the final patient completed their last Week-12 visit in late April 2021. We announced positive top-line efficacy and safety results on June 11, 2021. In the B-SIMPLE4 trial, 32.4% of patients experienced total clearance at Week 12 and 43.5% experienced total clearance or one remaining lesion at Week 12. B-SIMPLE4 achieved statistical significance for the primary endpoint with a p-value less than 0.0001. B-SIMPLE4 also achieved statistical significance for all secondary endpoints. P-value is a conventional statistical method for measuring the statistical significance of clinical results. A p-value of less than 0.050 is generally considered to represent statistical significance, meaning there is less than five percent likelihood that the observed results occurred by chance. Consistent with results from our Phase 2 and earlier Phase 3 studies, the B-SIMPLE4 trial was found to be safe and well tolerated. We announced the B-SIMPLE4 trial’s last patient visit in late July 2021 and the final safety profile through Week 24 is targeted to be released in the third quarter of 2021. Based on these results, we believe that SB206, if approved, can provide a powerful treatment option to shorten the duration of molluscum. We are currently targeting submitting a potential NDA filingsubmission of SB206 for molluscum no later than the thirdend of the fourth quarter of 2022 and are preparing for regulatory submission effortsfiling and potential approval of SB206 as a treatment for molluscum.
Amended SB204, for the Treatment of Acne Vulgaris
SB204 is a product candidate designed as a once-daily, topical monotherapy for the treatment of acne vulgaris, a multi-factorial disease with multiple aspects of the disease pathology (immunomodulatory and anti-bacterial). Acne vulgaris is the most common skin condition in the United States. The disease ranges in severity from mild to severe cystic acne and causes both physical and psychological effects, including permanent scarring, anxiety, depression and poor self-esteem. Acne is a multi-factorial disease with several mechanistic contributors to the disease pathology, often requiring multiple treatments that address more than one of the major causes of acne pathogenesis. Localized nitric oxide delivery may provide immunomodulatory (anti-inflammatory) and anti-bacterial mechanisms of action from a single active ingredient. We believe that acne continues to be characterized as an unmet medical need due to the difficulty of balancing efficacy, systemic safety and cutaneous tolerability, as well as the growing concerns with anti-bacterial resistance with existing therapies. In our SB204 clinical development program, topical application of SB204 has been well-tolerated with no significant safety concerns identified. In maximal-use pharmacokinetic trials that we have conducted in adult and pediatric patients with acne vulgaris, we observed no detectable systemic exposure from SB204 following its topical application.
Based on the positive pivotal Phase 3 results in the SB206 molluscum development program, we believe we can optimize the trial design of a pivotal Phase 3 study for SB204 that has the potential to serve as a second pivotal trial to support an NDA submission. As such, our intention is to progress SB204 by commencing a pivotal Phase 3 study, subject to obtaining additional financing or strategic partnering.
Sato Agreement
In 2018,January 2017, we licensed rights to Sato Pharmaceutical Co., Ltd., or Sato, to develop, use, and sell SB204 in certain topical dosage forms in Japan for the treatment of acne vulgaris, and to manufacture the finished form of SB204 for sale in Japan. In 2018, we licensed rights to Sato to develop, use, and sell SB206 in certain topical dosage forms in Japan for the treatment of viral skin infections, and to manufacture the finished form of SB206 for sale in Japan, which are in addition to the rights granted to Sato related to SB204 for the treatment of acne vulgaris.Japan. The significant terms and the related accounting considerations of our licensing arrangement with Sato are further described in “Note 4—Licensing Arrangements”14—License and Collaboration Revenues” to the accompanying condensed consolidated financial statements.
In April 2020, Sato informed us For further information regarding the current status of its intention to progress the SB206 development program in Japan with a Phase 1 clinical trial given the observed treatment benefit and favorable safety profile in the B-SIMPLE program. In November of 2020, Sato determined its initial Japanese Phase 1 study for SB206 would require an amended design, including potential evaluation of lower dose strengths, to further refine dose tolerability in a subsequent Phase 1 study. In the fourth quarter of 2020 we concluded that a prospective delay in Sato’s overall SB206 development plan had occurred and we estimated the program timeline to be extended by 1.75 years from our previous estimate, and a corresponding extension of the performance period estimate to 9.25 years, completing in the second quarter of 2026.
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 includes evaluation of 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 updated timeline assumes that the 12% formulation is appropriate to proceed for development in Japan, and is to be reassessed based on the findings of the Phase 1 study. The details of this development are further described inSB204 programs see “Note 14—Subsequent Events” to the accompanying condensed consolidated financial statements.
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Based upon (i) the expected timing of the additional Phase 1 study, including a subsequent dose tolerability study; (ii) Sato’s estimated comprehensive developmental schedule for SB206, including additional post-Phase 1 clinical trials;12—Licensing and (iii) current and future Japanese clinical trial material manufacturing and technical transfer considerations, including the manufacturing site for drug product, we concluded that a prospective delay in Sato’s overall SB206 Japanese development plan had occurred in July 2021. We estimate the program timeline to be extended by 0.75 years from our previous estimate, and a corresponding extension of the performance period estimate to 10 years, completing in the first quarter of 2027. We understand 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. This 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 details of this development are further described in “Note 5—Revenue Recognition”Collaboration Arrangements” to the accompanying condensed consolidated financial statements.
SB019, an intranasal treatment optionIntranasal Treatment Option for Coronaviridae (COVID-19)COVID-19 or Other Respiratory Infections
We continue to explore the use of our proprietary Nitricil technology to progress SB019, a potential intranasal treatment option for COVID-19 or other respiratory infections, targeting the reduction of viral shedding and transmission. Nitric oxide has generally demonstrated the ability to inhibit viral replication of viruses within the Coronaviridae family, and we have an extensive body of in vitro and in vivo data demonstrating the efficacy of our proprietary technology for other anti-viral indications. Based on the scientific literature and data available to-date related to berdazimer sodium and SB206, we believe
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that nitric oxide may inhibit viral replication by disrupting protein function critical for viral replication and infection through generation of reactive intermediates.
In October 2020, we announcedBased on the positive in vitro results showing the potential efficacy of our Nitricil platform technology, berdazimer sodium (NVN1000), as an anti-viral against SARS-CoV-2, the virus that causes COVID-19. To evaluate the ability of our Nitricil platform technology as a potential nasal treatment option for COVID-19, we initiated in vitro assessments targeting the reduction of viral burden in differentiated normal human bronchial epithelial cells. The studies were conducted at the Institute for Antiviral Research at Utah State University,preclinical and these results demonstrate the first instance of anclinical data demonstrating anti-viral effect from a nitric oxide-based medicine in a 3-D tissue model that has similar structure to the human airway epithelium. The results from the in vitro assessment of concentrations as low as 0.75 mg/mL demonstrated that berdazimer sodium reduced 90% of virus after repeat dosing, once daily.
In December 2020, we entered into a Master Services Agreement with Catalent, Inc., a leading global provider of integrated services, delivery technologies and manufacturing solutions, relating to our COVID-19 program. This agreement includes work to support CMC activities and development of an intranasal formulation of berdazimer sodium for use in that program.
To further evaluateagainst multiple viruses, as well as the potentialpublic health need to reduce breakthrough infections and transmission of COVID-19 and on our Nitricil platform technology as an intranasal treatment option for COVID-19, we initiated preliminary preclinical in vivo studies to evaluate the efficacy of berdazimer sodium in reducing viral burden in infected animals and to deter viral transmission to uninfected animals. On June 10, 2021, we announced positive results from two separate studies that independently demonstrated the ability of berdazimer sodium to prevent progression of infection into the lungs after transmission, significantly limiting severity of disease in this model. The intranasal treatment was well-tolerated during these studies, and no treatment-related adverse effects were observed. Further preclinical dose-range finding studies are being conducted to inform potential human clinical trial design and dosing regimen, including a GLP 14-day repeat dose intranasal study in canines targeted to start in the third quarter of 2021.

We plan to submit a request tointeractions with the FDA, to determine an appropriate path to bring a new potential treatment option to patients as quickly as possible. Wewe are evaluatingexpanding our strategy to submit an INDpreclinical work for the purposes of advancing SB019 subjectproduct candidate. This includes performing additional preclinical and formulation work, including investigating potential other respiratory infections that could be treated with SB019. As such, our intention is to regulatory guidance, successful completion of IND-enabling toxicologyprogress SB019’s preclinical development, however, we will not commence potential clinical studies andwithout obtaining additional financing or strategic partnering.
Companion Animal Health
We have initiated exploratory work to evaluate our new chemical entity, NVN4100, as a potential product candidate for antimicrobial indications in companion animal health. On June 7, 2021, we announced positive proof-of-concept in vitro results and informative in vivo results with NVN4100. Based on the results to date and the availability of funding, we intend to conduct additional studies and formulation work with NVN4100 to build a robust data set and engage with potential collaborators and strategic partners moving forward.
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Pipeline Expansion Opportunities
SB204,Our pipeline expansion opportunities are as follows:
SB414, for the Treatment of Acne VulgarisInflammatory Skin Diseases, including Atopic Dermatitis and Psoriasis
SB204SB414 is a product candidate designed as a once-daily, topical monotherapycream for the treatment of acne vulgaris,inflammatory skin diseases, with a multi-factorial disease with multiple aspects of the disease pathology (anti-inflammatory and anti-bacterial). In the second quarter of 2018, we conducted a Type C meeting to further discuss the path forward for our SB204 product candidate and possible Phase 3 programs forfocus on the treatment of acne vulgaris with the FDA, as well as the potential for proceeding with a more narrowly defined patient segmentation. In that meeting, our focus centered specifically on the severe patient population. In the third quarter of 2018, the FDA provided feedback on two paths forward for the acne indication, confirming the need for one additional pivotal trial for moderate-to-severe acne patients prior to an NDA submission.
We have completed our clinical development plan for this additional trial,atopic dermatitis and further advancement of thispsoriasis. The SB414 program is contemplated and iscurrently on hold with further advancement subject to obtaining additional financing or strategic partnering.
In January 2017, we licensed rights to Sato to develop, use, and sell SB204 in certain topical dosage forms in Japan for the treatment of acne vulgaris, and to manufacture the finished form of SB204 for sale in Japan. The significant terms and the related accounting considerations of our licensing arrangement with Sato are further described in “Note 4—Licensing Arrangements” to the accompanying condensed consolidated financial statements. For further information regarding the current status of the Japanese SB204 program see “Note 5—Revenue Recognition” to the accompanying condensed consolidated financial statements.
SB208, for the Treatment of Athlete’s Foot (Tinea Pedis) and Fungal Nail Infections (Onychomycosis)
SB208 is a product candidate designed as a topical broad-spectrum anti-fungal gel for the potential treatment of fungal infections of the skin and nails, including athlete’s foot (tinea pedis) and fungal nail infections (onychomycosis). Studies suggest that both the nail plate, interdigital space and surrounding cutaneous tissue may serve as an overlooked reservoir of dermatophytes, perpetuating reinfection and coinfection of tinea pedis and onychomycosis. Additionally, studies have demonstrated enhanced efficacy when tinea pedis and onychomycosis are treated concurrently, suggesting that an effective topical treatment, suitable for simultaneous application to the nail plate and skin, may lead to lower rates of recurrence and enhanced efficacy.
We conducted a Phase 2 proof-of-concept trial in patients with clinical signs and symptoms of tinea pedis and announced top-line results in the second quarter of 2017. SB208 demonstrated a statistically significant effect compared to vehicle in (i) the primary endpoint of achieving negative fungal culture at day 14; and (ii) the secondary endpoint of achieving mycological cure at day 14 (mycological cure is defined by having a negative laboratory culture and negative fungal clinical diagnosis). At the end of a 4-week post treatment follow-up period, mycological cure was maintained at day 42 in both dose groups.
We conducted a Phase 1, single-center, double-blinded, randomized clinical trial in 32 adult females to evaluate the rate of fingernail growth associated with SB208 16% cream and the local tolerability of the gel when used over the course of 29 days. SB208 16% cream demonstrated a statistically significant greater mean daily nail growth rate for the treatment period when compared to the same patient’s own growth rate in the run-in period and was well tolerated by patients.
The SB208 program is currently on hold with further advancement subject to obtaining additional financing or strategic partnering.
SB414, for the Treatment of Inflammatory Skin Diseases, including Atopic Dermatitis and Psoriasis
SB414 is a product candidate designed as a topical cream-based gel for the treatment of inflammatory skin diseases, with a focus on the treatment of atopic dermatitis and psoriasis. In 2018, we completed two complementary Phase 1b clinical trials with SB414 in patients with atopic dermatitis and psoriasis. The design of these complementary trials was to evaluate the safety, tolerability and pharmacokinetics of SB414. The trials were also designed to assess overall and specific target engagement through a reduction of key inflammatory biomarkers, also known as pharmacodynamic assessment.
Atopic Dermatitis
We initiated a Phase 1b trial with SB414 in adults with mild-to-moderate atopic dermatitis in December 2017. In the Phase 1b trial, 48 adults with mild-to-moderate atopic dermatitis with up to 30% body surface area at baseline, were randomized to receive one of 2% SB414 cream, 6% SB414 cream, or vehicle, twice daily for two weeks. In the complementary Phase 1b trial for mild-to-moderate chronic plaque psoriasis, 36 adults received SB414 6% cream or vehicle twice daily for four weeks.
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We received and analyzed the preliminary top-line results from the Phase 1b clinical trials during the second and third quarters of 2018. In the atopic dermatitis trial, biomarkers from the Th2, Th17 and Th22 inflammatory pathways known to be highly relevant and indicative of atopic dermatitis, including Interleukin-13, or IL-13, IL-4R, IL-5, IL-17A and IL-22, were downregulated after two weeks of treatment with SB414 2%. The changes in Th2 and Th22 biomarkers and clinical efficacy assessed as the percent change in Eczema Area Severity Index scores were highly correlated in the SB414 2% group. Additionally, the proportion of patients achieving a greater than or equal to 3-point improvement on the pruritus (itch) numeric rating scale after two weeks of treatment was greater for patients treated with SB414 2% compared to patients treated with vehicle.
The 2% or 6% doses of SB414 in the trial did not result in any serious adverse events, and SB414 2% was more tolerable with no patients discontinuing treatment in the trial due to application site reactions. SB414 at the 6% dose was not consistently effective in reducing biomarkers across both the atopic dermatitis and psoriasis trials. This lack of consistent biomarker movement could potentially be explained by the increased irritation score experienced by patients treated with SB414 6%. Additionally, SB414 6% showed detectable systemic exposure in a subset of patients, which cleared in nearly all affected patients within 12 hours, in both the atopic dermatitis and psoriasis trials. Given the successful downregulation of key biomarkers, favorable tolerability and lack of systemic exposure with SB414 2%, we conducted non-clinical studies and completed our Phase 2 clinical development plan during 2019 to support a potential future Phase 2 clinical program launch. The SB414 program is currently on hold with further advancement subject to obtaining additional financing or strategic partnering.
Psoriasis
We initiated clinical development of SB414, our first use of our nitric oxide platform in the field of immunology by dosing the first patient in October 2017 in a Phase 1b clinical trial to evaluate SB414 in a cream for the treatment of psoriasis. Earlier in 2017, we presented mechanistic evidence for SB414, demonstrating a statistically significant reduction in composite psoriasis scores and an inhibition of IL-17A and IL-17F in an animal model.
In the Phase 1b trial for mild-to-moderate chronic plaque psoriasis, 36 adults received SB414 6% cream or vehicle twice daily for four weeks. We received and analyzed the preliminary top-line results from this Phase 1b clinical trial during the second and third quarters of 2018. SB414 at the 6% dose did not result in any serious adverse events, but SB414 at the 6% dose was not consistently effective in reducing biomarkers across the trial. This lack of consistent biomarker movement could potentially be explained by the increased irritation score experienced by patients treated with SB414 6%. Additionally, SB414 6% showed detectable systemic exposure in a subset of patients, which cleared in nearly all affected patients within 12 hours. Based on the results of the Phase 1b trial in psoriasis, we will potentially explore the use of lower doses of SB414 in psoriasis, subject to obtaining additional financing or strategic partnering.
SB207, for the Treatment of External Genital Warts
Genital warts are among the world’s most common sexually transmitted diseases. We have previously evaluated SB206’s anti-viral activity in a Phase 2 randomized, double-blinded, vehicle-controlled clinical trial in 107 patients withagainst genital warts caused by HPV. We announced top-line results from this Phase 2 clinical trial in the fourth quarter of 2016. SB206 demonstrated statistically significant results in the clearance of external genital and perianal warts. Once-daily treatment arms were generally well-tolerated, including the most effective dose, SB206 12% once-daily. With the full results from this Phase 2 trial made available, a Type B meeting was held with the FDA in the second quarter of 2017 with minutes received shortly thereafter.
In response to our identification of targeted viral opportunities of high unmet need where we believe our nitric oxide releasing technology could provide clinical benefit to patients, we developed SB207, a new anti-viral product candidate for the treatment of external genital warts. The SB207 product candidate incorporates our existing drug substance, berdazimer sodium (NVN1000), including the nitric oxide release profile of SB206, in a new formulation specifically tailored for external genital warts. Following the FDA’s December 2019 feedback from a pre-IND meeting request with the FDA, we have determined that furtherFurther advancement of SB207 is subject to further evaluation of clinical plans and developmental timelines, as well as obtaining additional financing or strategic partnering.
Advancement in Men’s and Women’s Health
In February 2020, following the successful progression of a Phase 1 grant received in August 2019, we wereWe have been awarded a Phase 2 federal grantgrants of approximately $1.0$1.3 million from the National InstituteInstitutes of Health, or NIH, thatand approximately $1.1 million from the U.S. Department of Defense’s, or DoD, Congressionally Directed Medical Research Programs, or CDMRP. These grants will enable the conduct of IND-enabling toxicology and pharmacology studies and other preclinical activity of a nitric oxide containing intravaginal gel (WH602) designed to treat high-risk HPV infections that can lead to cervical intraepithelial neoplasias, or CIN. In March 2021, we were awarded additional funding of $0.1 million as part of this Phase 2 grant.CIN, and a non-gel formulation product candidate (WH504). Under the terms of the aforementioned NIH
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grant,these grants, we are entitled to receive the grant funds in the form of periodic reimbursements of our allowable direct expenses, allocated overhead, general and administrative expenses and payment of other specified amounts.
ThisCompanion Animal Health
We have initiated exploratory work to evaluate our new chemical entity, NVN4100, as a potential product candidate for antimicrobial indications in additioncompanion animal health. This program is currently on hold, pending the engagement of potential collaborators or strategic partners to a non-gelprogress this asset, including the conduct of additional studies and formulation work.
Supply Chain
We continue to assess the impact of COVID-19 on our supply chain and related vendors and global supply chain constraints across various industries, including interruption of, or delays in receiving, supplies of raw materials, API, drug product candidate (WH504) supported by a federal grantor finished goods from third-party manufacturers due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems. We are also continuing to evaluate the U.S. Departmentimpacts of Defense’s, or DoD, Congressionally Directed Medical Research Programs, or CDMRP, currently in development, together representCOVID-19 and global supply chain constraints on our new facility. We have completed the corecommissioning of our Men’snew facility to support various research and Women’s Health business unit. This unit has continueddevelopment and cGMP activities, including small-scale manufacturing capabilities for API and drug product. 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.
We currently rely on third-party suppliers to be supported through a collaboration with Health Decisions, Inc., or Health Decisions, a Premier Research company.
Advancementprovide the raw materials that are used by us and our third-party manufacturers in GI Disorders
In January 2019, we announced the addition of GI diseases as a therapeutic focus area as partmanufacture of our overall scienceproduct candidates and business strategy. This decision was based on the connection between the multi-factorial pathologiescommercial products. There are a limited number of GI diseases and the demonstrable anti-microbial and anti-inflammatory properties of Novan’ssuppliers for raw materials, including nitric oxide, technology. Nitric oxide producedthat we use to manufacture our product candidates. 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
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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 the GI tract regulates manypandemic and related global supply chain constraints, which could adversely impact the timing or cost of its functions including the secretion of mucous for protection against physical, chemical, and microbial injury, perfusion of blood through the GI tissue, mitigation of white blood cell adherence to GI tissue to protect from injury and the healing and repair of ulcers. We believe that our initial expansion into GI will require minimal investment due to our ability to leverage current technology, experience and assets.

In the fourth quarter of 2019, we received results from our CRO partner demonstrating statistically significant improvements in disease activity (i.e., reduced disease activity index scores) with berdazimer sodium (NVN1000) as compared to vehicle in a dextran sulfate sodium (DSS)-induced acute colitis mouse model. We intend to generate additional data through preclinical activity, focused on efficacy and mechanisms of action, while also performing additional work to advance oral formulationmanufacturing supply chain activities or other associated development upon securing funding.activities.
Manufacturing and Supplies
We have adopted a strategy of engaging with, utilizing and relying on third parties through partnerships, collaborations, licensing or other strategic relationships that includes utilization of and an increased reliance upon third-party vendors and strategic partners for the performance of activities, processes and services that (i) do not typically result in the generation of significant new intellectual property;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 own internal resources, including our manufacturing capabilities.
Drug SubstanceManufacturing and Supply of Commercial Products
Upon successful completionWe currently rely upon contract manufacturers to produce our commercialized products related to EPI Health’s 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 and may have other priorities that could affect their ability to perform their supply obligations to us satisfactorily and on a timely basis. Both of these occurrences would be beyond our control. We expect to similarly rely on contract manufacturing relationships for any products that we may acquire in the required technology transfer, we intendfuture.
Preparatory Work for a new third-party API manufacturer to be able to manufactureProduct Candidates in Development
For our product candidates that are currently in development, which generally use the drug substance berdazimer sodium in complianceas the API, we have adopted a dual approach of working with establishedthird parties and developing certain focused internal manufacturing processes, applicable regulatory guidelines and as appropriate for potential large-scale commercial quantities.
In June 2019,capabilities. With third parties, we established an operating and business relationshipare conducting manufacturing process feasibility studies with a third-party full-scale API manufacturer with the goal being for this third-party API manufacturerthat, if successfully completed, could lead to become the primary external supplier of our proprietary berdazimer sodium (NVN1000) drug substance. We executed a master contract manufacturing agreement, which included the process and analytical method transfer necessary to advance thefull-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 substancemanufacturing, to enable technology transfer and manufacturing of clinical trial materials for future clinical trials with our topical product candidates, and potentially for commercial purposes on a global basis if any of our product candidates are approved.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.
Based on the results of the B-SIMPLE1 and B-SIMPLE2 clinical trials in January 2020, during the first quarter of 2020, at our request, this third-party API manufacturer reduced certain near-term activities and extended certain timelines in an effort to reduce our near-term cash utilization at that time. We resumed technical transfer efforts with this API manufacturer in April 2020. Through January 2021, we remained engaged in technical transfer efforts with this third-party API manufacturer. However, in February 2021, based on progress to date, including timing considerations relating to top-line results for the B-SIMPLE4 Phase 3 trial, we terminated our existing work orders related to technical transfer activities with this third-party API manufacturer. While the master services agreement remains in place with this third-party API manufacturer for potential longer term needs,Internally, we have been in active discussions with other third-party full-scale API manufacturers.
We recently entered into a development services agreement with a third-party full-scale API manufacturer for certain manufacturing process feasibility services including process familiarization, safety assessments, preliminary engineering studies, and initial process and analytical methods determination.
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Following the successful completion of such preliminary activities with this third-party API manufacturer and other preparatory activities, we would then proceed with the third-party API manufacturer beyond the initial stages noted above, in which case we would incur substantial costs associated with technical transfer efforts, capital expenditures, manufacturing capabilities, and ultimately, potential large-scale commercial quantities of our drug substance.
Internal Capability
We manufactured the API necessary for the B-SIMPLE4 Phase 3 trial using the internal manufacturing capabilities at our former facility. In addition, we currently have an inventory of API that allows usalso worked to continue certain preclinical and/or developmental activities.
With the B-SIMPLE4 Phase 3 trial positive top-line efficacy results, we are targeting a potential NDA filing of SB206 for molluscum no later than the third quarter of 2022. In order to ensure that we have the API necessary to enable the SB206 NDA submission on our targeted timeline, we are preparingcomplete commissioning our new facility to have the infrastructure necessary to produce cGMP API registration batches, among other manufacturing capabilities. We are in the process of building out our new facility, which we expect to complete in the second half of 2021, to support various research and development and cGMP activities, including the production of cGMP API registration batches necessary to support the SB206 NDA filingsubmission as well as other small-scale manufacturing capabilities for API and drug product. The anticipated additionalWhile we have more control over our internal manufacturing capabilities include the abilityas compared to act asour relationships with third parties, we do face risks associated with operating a supportive, or potentially primary, component of, or as a back up to, elements of a potential future commercialmanufacturing facility, including supply chain matters, which have impacted and may further impact the ability to produce limited quantities of clinical trial materials. We believe the new facility, once completed, will have the capability to support our planned potential NDA submission for SB206 and potential commercial launch quantities of API for SB206. The timing of our efforts to submit an NDA and to have a third-party full-scale API manufacturer ready for production are expected to inform our future decisions on the expected duration and utilization level of the capabilitiesvalidation of our new facility.
We expect to continue to work toward completion of technical transfer activities with a third-party full-scale API manufacturer to providefacility, and the API needed for commercial supply of drug substance, if any ofinherent limitations that come from our product candidates are approved. We believe this strategy of increasing utilization of and reliance upon third-party vendors and strategic partners for the performance of activities, processes and services can ultimately provide enhanced capabilities and operating efficiencies for us or any of our potential partnerships, collaborations, licensing or other strategic relationships. At the same time, we are attempting to balance the need to have internal capabilities being limited to allow flexibility for the progression of our product development programs on our targeted timelines.
Drug Product
On October 15, 2018, we established a strategic alliance with Orion Corporation, or 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 behalf of our global strategic partners. We have executed a master contractsmall-scale manufacturing agreement to enable technology transfer and manufacturing of clinical trial materials for future clinical trials with our topical product candidates. We are engaged in the transfer of technology for the manufacture of both SB204 and SB206, and, upon completion, we intend for Orion to be able to manufacture the drug product, or the finished dosage form of the gel, in accordance with our established manufacturing processes, in compliance with applicable regulatory guidelines and as appropriate for clinical trials. A completed manufacturing technology transfer to Orion will enable the manufacture of multiple assets for supply of clinical trial materials and, potentially, commercial quantities if any of our product candidates are approved. Importantly, this alliance is being structured to support major global markets in which we and our partners pursue regulatory approvals for our product candidates.
Based on the results of the B-SIMPLE1 and B-SIMPLE2 clinical trials in January 2020, during the first quarter of 2020, at our request, Orion reduced certain near-term activities and extended certain timelines in an effort to reduce our near-term cash utilization at that time. We resumed technical transfer efforts with Orion during the third quarter of 2020. We will continue to work toward completion of technical transfer activities to provide the necessary regulatory registration batches of drug product for our planned NDA filing of SB206 for molluscum, and if any of our product candidates are approved, commercial supply of drug product.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 programs, beyond what is currently included in our operating forecast and related cash projection, as described below in “Liquiditythe section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources”.Resources.”
Corporate Updates
June 2022 Registered Direct Offering
On June 9, 2022, we entered into a securities purchase agreement with an institutional investor, 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 of common stock, (ii) 3,180,615 pre-funded warrants, and (iii) 5,261,311 common stock warrants. The June 2022 Registered Direct Offering closed on June 13, 2022 and net proceeds from the offering were approximately $14.0 million after deducting fees and commissions and offering expenses. We intend to use those funds solely to support development of our product candidates, including SB206, and for other corporate purposes.
Working Capital Adjustment Payment
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Corporate Updates
June 2021 Public Offering
On June 17, 2021,July 7, 2022, we entered into an underwriting agreement with Cantor Fitzgerald & Co. relatingand Evening Post Group, LLC, or EPG, agreed to the offering, issuance and salefinal net working capital adjustment amount as part of 3,636,364 shares of common stock. We also granted Cantor Fitzgerald & Co., as underwriter, a 30-day option to purchase up to 545,454 additional shares of common stock, which was not exercised. The June 2021 Public Offering closed on June 21, 2021.
Net proceeds from the June 2021 Public Offering were approximately $37.2 million after deducting underwriting discounts and commissions and offering expenses of approximately $2.8 million.
See “Note 10—Stockholders’ Equity (Deficit)”post-closing adjustment to the accompanying condensed consolidated financial statementsestimated purchase price for additional information regarding the June 2021 Public Offering.
Reverse Stock Split
As previously disclosed, on July 28, 2020, our stockholders approved a proposal to amend our restated certificate of incorporation to effect a reverse stock split of our common stock at a ratio of not less than one-for-twoEPI Health Acquisition. The total adjustment amount was positive and not more than one-for-fifteen, with such ratio and the implementation and timing of such reverse stock split to be determined by our board of directors in its sole discretion. On May 18, 2021, our board of directors approved a one-for-ten reverse stock split of our issued and outstanding common stock, or the Reverse Stock Split. On May 24, 2021, we filed with the Secretary of State of the State of Delaware a Certificate of Amendment to our Restated Certificate of Incorporation in order to effect the Reverse Stock Split, or the Charter Amendment. The Reverse Stock Split became effective at 5:00 pm Eastern Time on May 25, 2021. Pursuant to the Charter Amendment, on the effective date thereof, each outstanding ten (10) shares of common stock combined into and became one (1) share of common stock and the number of our issued and outstanding shares of common stock was reduced to 15,170,678. The new CUSIP number for our common stock is 66988N205.
All references to numbers of shares of common stock and per-share information in this Quarterly Report on Form 10-Q have been adjusted retroactively, as appropriate, to reflect the Reverse Stock Split.
Paycheck Protection Program
On April 22, 2020, we entered into a promissory note for an unsecured loan in the amount of approximately $1.0$3.1 million, underwhich was paid to EPG on July 7, 2022.
JAMA Dermatology Publication
On July 13, 2022, we announced the Paycheck Protection Program, or PPP. The PPP was established underpublication of the Coronavirus Aid, Relief,positive efficacy and Economic Security Actsafety data from our completed B-SIMPLE 4 pivotal Phase 3 clinical study evaluating berdazimer gel, 10.3% for the treatment of molluscum in the peer-reviewed journal, JAMA Dermatology.
Seller Note Payment and is administered byTermination
On July 13, 2022, we reached agreement with EPG regarding payment and termination of the U.S. Small Business Administration. The loanoutstanding $16.5 million Seller Note related to the Company underEPI Health Acquisition. We achieved this termination by a payment of $10.0 million, or an approximate 39% discount on the PPP was made through PNC Bank, National Association. We previously applied for and during the second quarter of 2021 received notification of forgivenessoriginal principal amount of the entire loan balance, including any accrued interest.
Russell Microcap® Index
On June 24, 2021,Seller Note. In addition to saving $6.5 million of principal with this termination, we announced that as partwill also avoid paying interest over the previous term of the annual reconstitutionSeller Note of the Russell stock indexes, we were selectedapproximately $4.6 million.
Pursuant to join the Russell Microcap® Index, effective after the U.S. market close on June 25, 2021, according to the list of additions published by FTSE Russell as of June 4, 2021. Russell Indexes are widely used by investment managers and institutional investors for index funds and as benchmarks for active investment strategies, and our inclusion on this index may allow us greater access and visibility to institutional investors and investment managers as we continue to progress our pipeline portfolio.
Triangle Business Center Facility Lease
On January 18, 2021, we entered into a Lease dated as of January 18, 2021, as amended as of March 18, 2021, or the TBC Lease, by and between us and Copper II 2020, LLC, pursuant to which we are leasing 15,623 rentable square feet located at a new location, or the Premises. The Premises serves as our new corporate headquarters. We are building out the Premises to support 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 component of, or as a back up to, elements of a potential future commercial supply chain. See “Note 8—Commitments and Contingencies” to the accompanying condensed consolidated financial statements for a further discussion of the terms of the TBC Lease.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.
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With the payment and termination of the Seller Note for a reduced amount of principal as described above, we removed that previously existing liability 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 commercialization of our products, although we will need to secure additional funding prior to commercializing any of our product candidates currently in development.
TableSee the section entitled “Management’s Discussion and Analysis of ContentsFinancial Condition and Results of Operations—Liquidity and Capital Resources” for additional detail.
Financial Overview
Since our 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 inWith the acquisition of a single operating segment. commercial entity, EPI Health, we have expanded our operations 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 financings, while generating additional liquidityraises and capital throughstrategic relationships. However, other sources, includinghistorical forms of funding have included payments received from licensing and supply arrangements, strategic arrangements andas well as government research contracts.
We have never generated revenue from product sales and have incurred net losses in each year since our incorporation.inception. As of June 30, 2021,2022, we had an accumulated deficit of $264.3$301.2 million, and wethere is substantial doubt about our ability to continue as a going concern. We incurred net losses of $6.0$22.3 million and $15.0 million duringfor the three and six months ended June 30, 2021, respectively,2022 and $8.1 million and $14.3 million during the three and six months ended June 30, 2020,2021, respectively. We expect to continue to incur substantial losses in the future as we conduct our planned operating activities. We do not expect to generate revenue from product sales unless and until we obtain regulatory approval from the FDA for our clinical-stage product candidates. If we obtain regulatory approval for any of our product candidates, we and/or our commercial partners would expect to incuractivities, including incurring significant expenses related to product candidate development, commercial product sales, marketing, manufacturing and distribution.
Please refer to “Liquiditythe section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for further discussion of our current liquidity and our future funding needs.
Components of our Results of Operations
Revenue
Net Product Revenues
The EPI Health Acquisition has provided our company with a commercial infrastructure to sell a marketed product 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, acne and dermatoses, including Rhofade, Wynzora, Minolira and Cloderm.
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 condensed consolidated financial statements.
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License and Collaboration Revenues
License and collaboration revenuerevenues consists 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 Amended Sato Agreement, that (i)either has been received to date in the form of upfront and milestone payments;payments or (ii) are future, non-contingent milestone payments that become payable upon the earlier occurrence of specified fixed dates in the future or are contingent milestone payments that become payable upon the achievement of specified milestone events.events, and (ii) a distribution and supply agreement related to an out-license of Cloderm AG.
In November of 2020, Sato determined its initial Japanese Phase 1 studyFor additional information regarding our accounting for SB206 would require an amended design, including potential evaluation of lower dose strengths, to further refine dose tolerability in a subsequent Phase 1 study. Based upon (i) the need for an additional Phase 1 study; (ii) Sato’s estimated comprehensive developmental schedule for SB206 including additional post-Phase 1 clinical trials;license and (iii) currentcollaboration revenues, see “Note 1—Organization and future Japanese clinical trial material manufacturing and technical transfer considerations, we concluded that a prospective delay in Sato’s overall SB206 development plan had occurred. We estimated the program timeline to be extended by 1.75 years from our previous estimate, and a corresponding extension of the performance period estimate to 9.25 years, completing in the second quarter of 2026.
The material terms of the Amended Sato Agreement and related revenue recognition are described in “Note 4—Licensing Arrangements”Significant Accounting Policies” and “Note 5—Revenue Recognition”14—License and Collaboration Revenues” to the accompanying condensed consolidated financial statements.
Also, see “Note 14—Subsequent Events” to the accompanying condensed consolidated financial statements regarding the July 2021 update from Sato regarding the estimated combined SB204 and SB206 development program timeline.
Government Research Contracts and Grants Revenue
Government research contracts and grant revenue relates to the research and development of our nitric oxide platform for preclinical advancement of NCEs and formulations related to potential treatments for illnesses in the women’s health field. Revenue related to conditional government contracts and grants is recognized when qualifying expenses are incurred.
Product Cost of Goods Sold
Product cost of goods sold includes all costs directly incurred to produce net product revenues from our marketed portfolio of medical dermatology products. Product cost of goods sold primarily consist of (i) costs to procure, ship, handle and warehouse our marketed drug products, and (ii) royalty expenses incurred in connection with the various license, collaboration and asset purchase agreements underlying our marketed portfolio of medical dermatology products.
Research and Development Expenses
Since our incorporation, we have focused our resources on our researchResearch and development activities includinginclude conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. Research and development expenses, including those paid to third parties for which there is no alternative use, are expensed as they are incurred. Research and development expenses include:
•external research and development expenses incurred under agreements with clinical research organizations, or CROs, investigative sites and consultants to conduct our clinical trials and preclinical studies;
•costs to acquire, develop and manufacture supplies for clinical trials and preclinical studies at our facilities;
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•costs to establish drug substance and drug product manufacturing capabilities with external contract manufacturing organizations, or CMOs, and to enhance drug delivery device technologies through partnerships with technology manufacturing vendors;
•legal and other professional fees related to compliance with FDA requirements;
•licensing fees and milestone payments incurred under license agreements;
•salaries and related costs, including stock-based compensation, for personnel in our research and development functions; and
•facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, utilities, equipment and other supplies.
From our incorporation through June 30, 2021, we have incurred approximately $193.6 million in research and development expenses to develop, expand or otherwise improve our nitric oxide platform and resulting product candidates. This amount is net of $10.2 million of aggregate contra-research and development expense representing amortization of the liability related to the $12.0 million of funding received from Ligand Pharmaceuticals Incorporated, or Ligand, to pursue the development and regulatory approval of SB206. For the three and six months ended June 30, 2021, we recognized accretion, or a decrease in contra-research and development expense of $0.2 million and $0.2 million, respectively. For the three and six months ended June 30, 2020, we recognized amortization, or an increase in contra-research and development expense of $0.4 million and $1.9 million, respectively. For a description of the methodology and assumptions used to recognize the ratable amortization of this liability, as well as other information about the development funding and royalties agreement, or the Funding Agreement, with Ligand, please see “Note 6—Research and Development Arrangements”to the accompanying condensed consolidated financial statements.
For the six months ended June 30, 2021 and 2020, our total research and development expense was $11.7 million and $8.7 million, respectively. During the first six months of 2021, our major clinical development activities were primarily associated with the continued conduct of our current SB206 Phase 3 clinical program. The total external clinical program expense related to the SB206 program was $6.7 million and $1.5 million for the six months ended June 30, 2021 and 2020, respectively.
In addition, other research and development expenses were $5.0 million and $6.9 million for the six months ended June 30, 2021 and 2020, respectively. Other research and development expenses include: (i) all preclinical program and development costs, including WH504, WH602 and SB019; (ii) manufacturing capability and campaign costs; (iii) external costs to establish drug substance and drug product manufacturing capabilities at third-party CMOs; (iv) facility and infrastructure costs; and (v) costs related to all research and development salaries and related personnel costs.
Our plan and timelines for further clinical development of SB206 have been and may be further impacted by the COVID-19 pandemic. We expect that for the foreseeable future, the substantial majority of our research and development efforts will be focused on:on (i) technical transfer and supportive manufacturing activities by our drug product CMO, (ii) preparatory activities and data accumulation related to the expected completion ofNDA submission including conducting customary drug substance and drug product stability protocols, and (iii) regulatory and quality documentation compilation related to our preclinical CMC data related to the B-SIMPLE4 Phase 3 trial, including supporting activities; (ii) preparing forB-SIMPLE trials, and seeking regulatory approval of SB206 as a treatment for molluscum; (iii) conductingour drug manufacturing capability transfer activities to external third-party CMOs, including a drug delivery device technology enhancement project; (iv) development activities in certain early stage priority therapeutic areas, including infectious diseases (Coronaviridae (COVID-19)); and (v) certain research and development activities primarily related to SB204 as a treatment for acne vulgaris. processes.
We also expect to incur substantial costs in 2021the second half of 2022 associated with our research and development personnel, and certain manufacturing capability costs related to the infrastructure build-out necessary to support small-scale drug substance and drug product manufacturing operations at our new corporate headquarters, including capital costs subject to depreciation and various ongoing operating costs. We may decide to revise our development and operating plans or the related timing, depending on information we learn through our research and development activities, including regulatory submission efforts related to SB206, potential SB206 commercialization strategies, the impact of outside factors such as the COVID-19 pandemic, our ability to enter into strategic arrangements, our ability to access additional capital and our financial priorities.
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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 “Risk Factors” section in this Quarterly Report and also within our Annual Report for a discussion of the risks and uncertainties associated with our research and development projects.
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Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of salaries and related costs, including stock-based compensation expenses for personnel in our executive,commercial, field sales, marketing, market access, medical affairs, regulatory, finance, 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 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 2021the second half of 2022 in support of our commercial product portfolio acquired with the EPI Health Acquisition 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 process and potential SB206 commercialization strategies.
We also expect to continue to incur substantial selling, general and administrative expenses in the second half of 2022 in support of our operating activities and as necessary to operate in a public company environment. Significant general and administrative expenses associated with operations in a public company environment include legal, accounting, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, directors’ and officers’ liability insurance premiums and investor relations activities.
Impairment loss on long-livedAmortization of Intangible Assets
Amortization of intangible assets is associated with the amortization of definite lived intangible assets acquired as part of the EPI Health Acquisition.
As of June 29, 2020, we evaluated allFor additional information regarding the recognition and amortization of our long-livedintangible assets, for potential held for sale classification,see “Note 7—Goodwill and assessed our remaining long-lived assets classified as held and used for potential impairment pursuantIntangible Assets, net” to ouraccounting policies described in “Note 1—Organization and Significant Accounting Policies” to our auditedthe accompanying condensed consolidated financial statements containedstatements.
Change in our Annual Report. This evaluationFair Value of Contingent Consideration
Contingent consideration is recorded as a liability and assessment was triggered byis the decommissioningestimate of our large scale drug manufacturing capability at our former Morrisville, North Carolina facility and by preparatory actions taken in connection with the planned lease termination transaction for the facility that was executed in July 2020. In connection with this evaluation and impairment assessment, during the three months ended June 30, 2020, we recognized an impairment loss on long-lived assets that represented the carrying value in excess of fair value of assets held and used orpotential milestone payments related to the carrying value in excess ofEPI Health Acquisition. The estimated fair value less costof 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 sell for assets held for sale.calculate the contingent 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.
Impairment Loss on Long-lived Assets
During the second quarter of 2021, we assessed the carrying value of a disposal group classified as assets held for sale in the accompanying 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 three months ended June 30, 2021, we recognized an impairment loss on long-lived assets that represented the full write off of its remaining carrying value.
Other Income (Expense), net
Other income (expense), net consists primarily of (i) foreign currency adjustments related to the contract asset and contract receivables related to the Amended Sato Agreement;Agreement, (ii) interest expense on 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; (iii) interest income earned on cashloan, and cash equivalents; and (iv)(v) other miscellaneous income and expenses.
Financial Information About Segments
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Management evaluates performance of the 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 evaluate the following items at the segment level:
•Selling, general and administrative expenses that result from shared infrastructure, including 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.
•Operating expenses within selling, general and administrative expenses that result from the impact of corporate initiatives. Corporate initiatives primarily include integration, restructuring, acquisition and other shared costs.
•Other select revenues and operating expenses including research and development expenses, amortization, and asset sales and impairments, net, as not all such information has been accounted for at the segment level, or such information has not been used by all segments.
See “Note 18—Segment Information” in the accompanying condensed consolidated financial statements included in this Quarterly Report for more information about our reportable segments.
Results of Operations
Comparison of Three Months Ended June 30, 20212022 and 20202021
The following table sets forth our results of operations for the periods indicated:indicated, including information related to our Commercial Operations and Research and Development Operations segments:
Three Months Ended June 30,   Three Months Ended June 30,  
20212020$ Change% Change 20222021$ Change% Change
(in thousands, except percentages) (in thousands, except percentages)
License and collaboration revenue$747 $1,100 $(353)(32)%
Net product revenuesNet product revenues$5,809 $— $5,809 *
License and collaboration revenuesLicense and collaboration revenues344 747 (403)(54)%
Government research contracts and grants revenueGovernment research contracts and grants revenue— 221 (221)(100)%Government research contracts and grants revenue5 — 5 *
Total revenueTotal revenue747 1,321 (574)(43)%Total revenue6,158 747 5,411 724 %
Operating expenses:Operating expenses:Operating expenses:
Product cost of goods soldProduct cost of goods sold2,612 — 2,612 *
Research and developmentResearch and development5,257 3,761 1,496 40 %Research and development3,144 5,257 (2,113)(40)%
General and administrative2,431 3,232 (801)(25)%
Selling, general and administrativeSelling, general and administrative8,594 2,431 6,163 254 %
Amortization of intangible assetsAmortization of intangible assets548 — 548 *
Change in fair value of contingent considerationChange in fair value of contingent consideration(454)— (454)*
Impairment loss on long-lived assetsImpairment loss on long-lived assets114 2,421 (2,307)(95)%Impairment loss on long-lived assets— 114 (114)(100)%
Total operating expensesTotal operating expenses7,802 9,414 (1,612)(17)%Total operating expenses14,444 7,802 6,642 85 %
Operating lossOperating loss(7,055)(8,093)1,038 (13)%Operating loss(8,286)(7,055)(1,231)17 %
Other income (expense), net:Other income (expense), net:Other income (expense), net:
Interest incomeInterest income3 10 (7)(70)%Interest income14 3 11 367 %
Interest expenseInterest expense(608)— (608)*
Gain on debt extinguishmentGain on debt extinguishment— 956 (956)(100)%
Other income (expense)Other income (expense)2 73 (71)(97)%
Total other income ( expense), netTotal other income ( expense), net(592)1,032 (1,624)(157)%
Net lossNet loss$(8,878)$(6,023)$(2,855)47 %
Gain on debt extinguishment956 — 956 100 %
Other (expense) income73 (3)76 *
Total other income (expense), net1,032 7 1,025 *
Net loss and comprehensive loss$(6,023)$(8,086)$2,063 (26)%
* Not meaningful
RevenueNet product revenues
The EPI Health Acquisition has provided the Company with a commercial infrastructure to sell a marketed product portfolio of therapeutic products for skin diseases. Net product revenues for the three months ended June 30, 2022 were $5.8 million, which were all generated by our Commercial Operations segment.
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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 condensed consolidated financial statements.
License and collaboration revenue of $0.7revenues
License and collaboration revenues were $0.3 million and $1.1$0.7 million for the three months ended June 30, 2022 and 2021, respectively. License and 2020,collaboration revenue is comprised of amounts related to (i) the Sato Agreement, related to the Japanese territory out-license of SB206 and SB204, recorded in the Research and Development Operations segment, and (ii) a distribution and supply agreement with Prasco, LLC related to out-license of Cloderm AG (the “Prasco Agreement”), all recorded in the Commercial Operations segment.
For the three months ended June 30, 2022 and 2021, we recognized $0.6 million and $0.7 million, respectively was associated withunder the Sato Agreement for our performance during the periodperiods and the related amortization of the non-refundable upfront and expected milestone payments under the Amended Sato Agreement. During the three months ended June 30, 2022, we recognized revenues of $0.1 million associated with the Prasco Agreement.
Government research contractsFor additional information regarding our accounting for license and grants revenue totaled $0.2collaboration revenues, see “Note 1—Organization and Significant Accounting Policies” and “Note 14—License and Collaboration Revenues” to the accompanying condensed consolidated financial statements.
Product cost of goods sold
Product cost of goods sold of $2.6 million for the three months ended June 30, 2020. There was no government research contracts2022 is recorded by our Commercial Operations segment and grants revenue recognized forincludes all costs directly incurred to produce net product revenues from our marketed portfolio of medical dermatology products. Product cost of goods sold primarily consist of (i) costs to procure, ship, handle and warehouse our marketed drug products, and (ii) royalty expenses incurred in connection with the three months ended June 30, 2021. For the three months ended June 30, 2020, we recognized revenuevarious license, collaboration and asset purchase agreements underlying our marketed portfolio of $0.2 million related to the grant we received in September 2019 from the DoD’s CDMRP as part of its Peer Reviewed Cancer Research Program.medical dermatology products.
For additional information regarding our accounting for revenue-generating contracts and agreements,cost of goods sold, see “Note 5—Revenue Recognition”1—Organization and Significant Accounting Policies,” “Note 13—Net Product Revenues,” and “Note 14—License and Collaboration Revenues” to the accompanying condensed consolidated financial statements.
Research and development expenses
Our Research and Development Operations segment incurred the substantial majority of our research and development expenses, which were $3.1 million for the three months ended June 30, 2022, compared to $5.3 million for the three months ended June 30, 2021, compared to $3.8 million for the three months ended June 30, 2020.2021. The net increasedecrease of $1.5$2.1 million, or 40%, was primarily related to (i) a $1.9$2.2 million net increasedecrease in the SB206 program, partially offset by (ii) a $0.4$0.1 million decreaseincrease in other research and development expenses.
InThe $2.2 million net decrease in the SB206 program we experiencedwas primarily driven by (i) a $1.3$1.9 million increasedecrease in gross clinical trial costs incurredprimarily due to the ongoing conduct, active enrollment and treatment phase activities of the B-SIMPLE4 Phase 3 trial that was ongoing during the second quarter of 2021, compared to relatively lower cost of B-SIMPLE 1 and B-SIMPLE 2 Phase 3 trial wind down activities during the comparative period in 2020, and (ii) a $0.6 million decreaseincrease in contra-research and development expense from the ratable amortization (or accretion, as was recognized during the second quarter of 2021 comparative period) of the development funding and royalties agreement with Ligand Pharmaceuticals, Inc., or the Ligand Funding Agreement, with Ligand liability, which represents Ligand’s contribution to specified clinical development and regulatory activities for SB206 as a treatment for the treatmentmolluscum, partly offset by a (iii) a $0.3 million increase in regulatory consulting services, stability and other analytical testing services, and CMC consulting services and materials in support of molluscum. Theour planned SB206 clinical development activities conducted during the comparative period in 2020, including but not limited to the B-SIMPLE 1 and B-SIMPLE 2 Phase 3 trials, were eligible for Ligand contribution and associated amortized contra-research and development expense recognition, but the B-SIMPLE 4 Phase 3 trial conducted during the current period in 2021 was not eligible for Ligand contributions and therefore no contra-research and development expense was recognized against the gross B-SIMPLE 4 trial costs. During the three months ended June 30, 2021, we recorded a
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$0.2 million reduction to contra-research and development expense related to the Ligand SB206 developmental program, related to accretion of the Funding Agreement with Ligand liability, based on our reassessment of the estimated total cost to progress the SB206 program to a potential United States regulatory approval. Further information regarding our reassessment of the SB206 program is described in “Note 6—Research and Development Arrangements”to the accompanying condensed consolidated financial statements.NDA submission.
The $0.4$0.1 million decreaseincrease in other research and development expenses was primarily due todriven by (i) a $0.4 million decreasenet increase in research and development personnel costs;costs, partly offset by (ii) a $0.4 million decrease in rent and depreciation expense following the reduction of our footprint within our Morrisville, North Carolina facility after the lease termination completed in the third quarter of 2020; (iii) $0.2 million of discrete facility decommissioning costs incurred in the second quarter of 2020 associated with our former Morrisville, North Carolina facility; and (iv) a $0.2 million decrease in our preclinical, grant-funded WH602 and WH604 programs; partially offset by (iv) a $0.2 million net increase in external drug manufacturing technology transfer projects ongoing with our contract manufacturing partners; (v) a $0.2 million increase in facility-related costs primarily associated with our 2021 facility relocation and new manufacturing capability preparation efforts; (vi) $0.3 million costs incurred during the second quarter of 2021 related to our in vitro and in vivo studies to evaluate our SB019 product candidate as an intranasal treatment option for COVID-19;COVID-19 and (vii) less thanother respiratory infections and (iii) a $0.1 million costs incurred during the second quarter of 2021 associated with exploratory work to evaluate our new chemical entity, NVN4100, as a potential product candidate for antimicrobial indicationsnet decrease in companion animal health.research and development facility operating expenses.
The $0.4 million net decreaseincrease in research and development personnel costs is primarily due to (i) a $0.4$0.5 million decreaseincrease in non-cash compensation expense, related to the change in the fair value of our Tangible Stockholder Return Plan, or our Performance Plan, liability, which is a performance-based long-term incentive plan;including stock-based compensation, partly offset by (ii) a $0.2 million decrease in non-cash compensation expense associated with stock option compensation; and (iii) a $0.2$0.1 million decrease in recurring salary and benefits costs due to a reduced number of research and development personnel between the two comparative periods, partially offset by (iv) a $0.3 million increase in bonus expense related to a success bonus paid to employees following the announcement of the positive top-line results of our B-SIMPLE 4 study.costs.
GeneralSelling, general and administrative expenses
GeneralSelling, general and administrative expenses were $8.6 million for the three months ended June 30, 2022, compared to $2.4 million for the three months ended June 30, 2021, compared to $3.2 million2021.
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The table below sets forth our total selling, general and administrative expenses incurred for the three months ended June 30, 2020. 2022 and 2021 and the primary drivers of the fluctuations from the prior period:
Selling, general and administrative expenses
Three months ended June 30, 2022$8,594 
Three months ended June 30, 20212,431 
Change from prior period$6,163
Prior Period Variance Detail
Increase / (Decrease)
EPI Health Acquisition Transaction-related costs$600 
EPI Health commercial sales operations3,256 
SB206 prelaunch and commercial preparation1,151 
Tax and insurance costs124 
Consulting and other administrative costs331 
Personnel and related benefits701 
Change from prior period$6,163
The net $0.8$0.6 million decreaseof transaction-related expenditures incurred in connection with the EPI Health Acquisition included (i) transaction-related fees paid to legal, regulatory, intellectual property, information technology, valuation and accounting consultants and specialists, and (ii) integration-related expenditures associated with transition services, information technology systems, integration project management and continued valuation and accounting consultants and specialists.
The $3.3 million of selling, general and administrative expenses forincurred to support the three months ended June 30, 2021 was primarily due to a $0.8conduct of EPI Health’s commercial sales operations included (i) $2.0 million non-cash expense recognized in the second quarter of 2020recurring salary, incentive compensation and benefits costs, (ii) $0.2 million of advertising and promotion costs, (iii) $0.7 million of administrative costs related to third-party consultants for regulatory services, external third-party data services and data providers that support the issuancecommercial sales team with market and analytical data, and (iv) $0.4 million of commitment shares in consideration for entering into the June 2020 Aspire CSPA. In addition we experienced (i) a $0.3travel and expense related costs.
The $0.7 million increase in insurance premium expenses associated with our directors’ and officers’ liability policies, (ii) a $0.1 million net increase in general and administrative personnel and related costs partially offset by a (iii) $0.2 million decrease in other administrative expenses, and (iv) a $0.1 million decrease in rent and depreciation expense following the reduction of our footprint within our Morrisville, North Carolina facility after the lease termination completed in the third quarter of 2020.
The $0.1 million net increase in general and administrative personnel and related costs is primarily due toincluded (i) a $0.3 million increase in cash-basednon-cash compensation expenses, primarily due to $0.2 million in increased bonus expense related toassociated with stock based compensation, and (ii) a success bonus paid to employees following the announcement of the positive top-line results of our B-SIMPLE 4 study and a $0.1$0.4 million increase in recurring salary and benefits costs partially offset by (ii) a $0.2 million decrease in non-cash compensation expenses associated with a $0.1 million increase in stock-based incentive compensation expense that was offset by a $0.3 million decrease inbetween the fair valuetwo comparative periods, including new corporate positions, such as the Chief Operating Officer and the Chief Commercial Officer.
Amortization of our Performance Plan liability.
Impairment loss on long-livedintangible assets
AsAmortization of June 29, 2020, we evaluated allintangible assets of our long-lived assets for potential held for sale classification, and assessed our remaining long-lived assets classified as held and used for potential impairment pursuant to our accounting policies. Our evaluation resulted in a $2.4$0.5 million non-cash impairment loss on long-lived assets for the three months ended June 30, 2020 comprised2022 is associated with the amortization of (i) a $0.9 million impairment charge recognized ondefinite lived intangible assets acquired as part of the leasehold improvements affixedEPI Health Acquisition.
For additional information regarding the recognition and amortization of our intangible assets, see “Note 7—Goodwill and Intangible Assets, net” to the Morrisville, North Carolina facility; (ii) a $0.2 million impairment charge recognizedaccompanying condensed consolidated financial statements.
Change in fair value of contingent consideration
For the three months ended June 30, 2022, the changes in fair value related to contingent consideration related to the EPI Health Acquisition related primarily to changes in market assumptions and discount rates since the transaction date.
Impairment loss on furniture and equipment sold to our landlord’s new tenant pursuant to a bill of sale; (iii) a $0.8 million impairment charge recognized on certain manufacturing and laboratory equipment that we intended to sell through a consignment seller; and (iv) a $0.5 million impairment charge recognized on equipment and other property not directly associated with our continuing research and development and pilot scale drug manufacturing capabilities.
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long-lived assets
During the second quarter of 2021, we assessed the carrying value of a disposal group classified as assets held for sale in the accompanyingour 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 three months ended June 30, 2021, we recognized a $0.1 million non-cash impairment loss on long-lived assets that represented the full write off of its remaining carrying value.
Other income (expense), net
Other (expense) income,Total other expense, net was $1.0$0.6 million income for the three months ended June 30, 2021, and was negligible2022, compared to $1.0 million other income, net for the three months ended June 30, 2020. During2021. Total other expense, net in the second quartercurrent period is primarily comprised of $0.6 million of interest expense related to the Seller Note issued in March 2022 in connection with the EPI Health Acquisition. Total other
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income, net in the comparative 2021 we experiencedperiod is primarily comprised of a $1.0 million gain on extinguishment of debt extinguishment related to the forgiveness of our PPP loan in June 2021. We also experienced approximately $0.1 million of other income related
For additional information regarding the Seller Note, see “Note 9—Notes Payable” and “Note 19—Subsequent Events” to the impact of foreign currency exchange rate fluctuations for certain time-based milestones related to the Amended Sato Agreement.accompanying condensed consolidated financial statements.
Comparison of Six Months Ended June 30, 20212022 and 20202021
The following table sets forth our results of operations for the periods indicated:indicated, including information related to our Commercial Operations and Research and Development Operations segments:
Six Months Ended June 30,   Six Months Ended June 30,  
20212020$ Change% Change 20222021$ Change% Change
(in thousands, except percentages) (in thousands, except percentages)
License and collaboration revenue$1,494 $2,124 $(630)(30)%
Net product revenuesNet product revenues$6,526 $— $6,526 *
License and collaboration revenuesLicense and collaboration revenues1,518 1,494 24 2 %
Government research contracts and grants revenueGovernment research contracts and grants revenue72 410 (338)(82)%Government research contracts and grants revenue41 72 (31)(43)%
Total revenueTotal revenue1,566 2,534 (968)(38)%Total revenue8,085 1,566 6,519 416 %
Operating expenses:Operating expenses:Operating expenses:
Product cost of goods soldProduct cost of goods sold2,818 — 2,818 *
Research and developmentResearch and development11,675 8,677 2,998 35 %Research and development7,977 11,675 (3,698)(32)%
General and administrative5,117 5,739 (622)(11)%
Selling, general and administrativeSelling, general and administrative18,589 5,117 13,472 263 %
Amortization of intangible assetsAmortization of intangible assets669 — 669 *
Change in fair value of contingent considerationChange in fair value of contingent consideration(454)— (454)*
Impairment loss on long-lived assetsImpairment loss on long-lived assets114 2,421 (2,307)(95)%Impairment loss on long-lived assets— 114 (114)(100)%
Total operating expensesTotal operating expenses16,906 16,837 69 — %Total operating expenses29,599 16,906 12,693 75 %
Operating lossOperating loss(15,340)(14,303)(1,037)7 %Operating loss(21,514)(15,340)(6,174)40 %
Other income (expense), net:Other income (expense), net:Other income (expense), net:
Interest incomeInterest income6 45 (39)(87)%Interest income18 6 12 200 %
Interest expenseInterest expense(740)— (740)*
Gain on debt extinguishmentGain on debt extinguishment956 — 956 100 %Gain on debt extinguishment— 956 (956)(100)%
Other (expense) income(597)5 (602)*
Total other income (expense), net365 50 315 *
Other income (expense)Other income (expense)(22)(597)575 (96)%
Total other income ( expense), netTotal other income ( expense), net(744)365 (1,109)(304)%
Net lossNet loss$(14,975)$(14,253)$(722)5 %Net loss$(22,258)$(14,975)$(7,283)49 %
Revenue* Not meaningful
Net product revenues
The EPI Health Acquisition has provided the Company with a commercial infrastructure to sell a marketed product portfolio of therapeutic products for skin diseases. The post-acquisition net product revenues of EPI Health, specifically from March 11, 2022 through June 30, 2022, are reflected within our condensed consolidated statement of operations for the six months ended June 30, 2022. Net product revenues for the six months ended June 30, 2022 were $6.5 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 condensed consolidated financial statements.
License and collaboration revenue ofrevenues
License and collaboration revenues were $1.5 million and $2.1$1.5 million for the six months ended June 30, 2022 and 2021, respectively. License and 2020,collaboration revenue is comprised of amounts related to (i) the Sato Agreement, related to the Japanese territory out-license of SB206 and SB204, recorded in the Research and Development Operations segment, and (ii) the Prasco Agreement, related to out-license of Cloderm AG, all recorded in the Commercial Operations segment.
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For the six months ended June 30, 2022 and 2021, we recognized $1.3 million and $1.5 million, respectively was associated withunder the Sato Agreement for our performance during the periodperiods and the related amortization of the non-refundable upfront and expected milestone payments under the Amended Sato Agreement. During the six months ended June 30, 2022, we recognized revenues of $0.2 million associated with the Prasco Agreement.
Government research contractsFor additional information regarding our accounting for license and grants revenue totaled $0.1 millioncollaboration revenues, see “Note 1—Organization and $0.4Significant Accounting Policies” and “Note 14—License and Collaboration Revenues” to the accompanying condensed consolidated financial statements.
Product cost of goods sold
Product cost of goods sold of $2.8 million for the six months ended June 30, 20212022 is recorded by our Commercial Operations segment and 2020, respectively. Forincludes all costs directly incurred to produce net product revenues from our marketed portfolio of medical dermatology products. Product cost of goods sold primarily consist of (i) costs to procure, ship, handle and warehouse our marketed drug products, and (ii) royalty expenses incurred in connection with the six months ended June 30, 2021various license, collaboration and 2020, we recognized revenueasset purchase agreements underlying our marketed portfolio of less than $0.1 million and $0.4 million, respectively, related to the grant we received in September 2019 from the DoD’s CDMRP as part of its Peer Reviewed Cancer Research Program and $0.1 million and less than $0.1 million, respectively, related to the grant we received in February 2020 from the NIH.medical dermatology products.
For additional information regarding our accounting for revenue-generating contracts and agreements,cost of goods sold, see “Note 5—Revenue Recognition”1—Organization and Significant Accounting Policies,” “Note 13—Net Product Revenues,” and “Note 14—License and Collaboration Revenues” to the accompanying condensed consolidated financial statements.
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Research and development expenses
Our Research and Development Operations segment incurred the substantial majority of our research and development expenses, which were $8.0 million for the six months ended June 30, 2022, compared to $11.7 million for the six months ended June 30, 2021, compared to $8.7 million for the six months ended June 30, 2020.2021. The net increasedecrease of $3.0$3.7 million, or 35%32%, was primarily related to (i) a $5.2$4.6 million net increasedecrease in the SB206 program;program, partially offset by (ii) a $1.9$0.9 million decreaseincrease in other research and development expenses; and (iii) a $0.2 million decrease in our SB414 program.expenses.
In the SB206 program, we experienced (i) a $3.1$5.6 million increasedecrease in gross clinical trial costs incurred primarily due to the ongoing conduct, active enrollment and treatment phase activities of the B-SIMPLE4 Phase 3 trial that was ongoing during the first six months of 2021 compared to the relatively lower cost of B-SIMPLE 1 and B-SIMPLE 2 Phase 3 trial wind down activities during the comparative period, in 2020, and (ii) a $2.1$0.8 million decreaseincrease in contra-research and development expense from the ratable amortization (or accretion, as was recognized during the second quarter of 2021) of the Ligand Funding Agreement liability, which represents Ligand’s contribution to specified clinical development and regulatory activities for SB206 as a treatment for the treatmentmolluscum, partly offset by (iii) a $1.8 million increase in regulatory consulting services, stability and other analytical testing services, and CMC consulting services and materials in support of molluscum. our planned SB206 NDA submission.
The SB206 clinical development activities conducted during the comparative period in 2020, including but not limited to the B-SIMPLE 1 and B-SIMPLE 2 Phase 3 trials, were eligible for Ligand contribution and associated amortized contra-research and development expense recognition, but the B-SIMPLE 4 Phase 3 trial conducted during the current period in 2021 was not eligible for Ligand contributions and therefore no contra-research and development expense was recognized against the gross B-SIMPLE 4 trial costs. During the six months ended June 30, 2021, we recorded a $0.2$0.9 million reduction to contra-research and development expense related to the Ligand SB206 developmental program, related to accretion of the Funding Agreement with Ligand liability, based on our reassessment of the estimated total cost to progress the SB206 program to a potential United States regulatory approval. Further information regarding our reassessment of the SB206 program is described in “Note 6—Research and Development Arrangements”to the accompanying condensed consolidated financial statements.
The $1.9 million decreaseincrease in other research and development expenses was primarily driven by (i) a $1.4$1.0 million net decreaseincrease in research and development personnel costs;costs, partly offset by (ii) a $0.8 million decrease in rent and depreciation expense following the reduction of our footprint within our Morrisville, North Carolina facility after the lease termination completed in the third quarter of 2020; (iii) $0.2 million of discrete facility decommissioning costs incurred in the second quarter of 2020 associated with our former Morrisville, North Carolina facility; (iv) a $0.4 million decrease in our preclinical, grant-funded WH602 and WH604 programs; and (v) a $0.1 million net decrease in materialpreclinical development activity costs associated with manufacturing, partially offset by (vi) a $0.4and research and development facility operating expenses. The $1.0 million net increase in external drug manufacturing technology transfer projects ongoing with our contract manufacturing partners; (vii) $0.5 million costs incurred during the first six months of 2021 related to our in vitro and in vivo studies to evaluate our SB2019 product candidate as an intranasal treatment option for COVID-19; and (viii) $0.1 million costs incurred during the first six months of 2021 associated with exploratory work to evaluate our new chemical entity, NVN4100, as a potential product candidate for antimicrobial indications in companion animal health.
The $1.4 million net decrease in research and development personnel costs is primarily due to (i) a $0.4$0.5 million decreaseincrease in non-cash compensation expense, related to the change in the fair value of our Tangible Stockholder Return Plan;including stock based compensation, and (ii) a $0.4$0.5 million decrease in non-cash compensation expense associated with stock option compensation; (iii) a $0.4 million decrease in discrete severance charges and retention incentive compensation associated with business realignment and personnel reduction actions taken during the first quarter of 2020; and (iv) a $0.2 million decreaseincrease in recurring salary and benefits costs due to a reduced number of research and development personnel between the two comparative periods. We also experienced a $0.1 million decrease in bonus expense, primarily related to a $0.3 million success bonus paid to employees following the announcement of the positive top-line results of our B-SIMPLE 4 study, which was offset by a reduction in 2021 performance bonus expense due to a reduced number of research and development personnel between the two comparative periods.costs.
GeneralSelling, general and administrative expenses
GeneralSelling, general and administrative expenses were $18.6 million for the six months ended June 30, 2022, compared to $5.1 million for the six months ended June 30, 2021, compared to $5.7 million2021.
The table below sets forth our total selling, general and administrative expenses incurred for the six months ended June 30, 2020. The decrease2022 and 2021 and the primary drivers of approximately $0.6 million, or 11%, was primarily due to a $0.8 million non-cash expense recognized in the second quarter of 2020 related tofluctuations from the issuance of commitment shares in consideration for entering into the June 2020 Aspire CSPA. In addition we experienced (i) a $0.6 million increase in insurance premium expenses associated with our directors’ and officers’ liability policies, partially offset by (ii) a $0.3 million decrease in rent and depreciation expense following the reduction of our footprint within our Morrisville, North Carolina facility after the lease termination completed in the third quarter of 2020, (iii) a $0.1 million decrease in other administrative expenses, and (iv) a $0.1 million net decrease in general and administrative personnel and related costsprior period:
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Selling, general and administrative expenses
Six months ended June 30, 2022$18,589 
Six months ended June 30, 20215,117 
Change from prior period$13,472
Prior Period Variance Detail
Increase / (Decrease)
EPI Health Acquisition Transaction-related costs$4,621 
EPI Health commercial sales operations4,899 
SB206 prelaunch and commercial preparation1,863 
Tax and insurance costs389 
Consulting and other administrative costs682 
Personnel and related benefits1,018 
Change from prior period$13,472
The $0.1$4.6 million net decreaseof transaction- and integration-related expenditures incurred in connection with the 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 $4.9 million of selling, general and administrative expenses incurred to support the conduct of EPI Health’s commercial sales operations included (i) $2.8 million of recurring salary, incentive compensation and benefits costs, (ii) $0.6 million of advertising and promotion costs, (iii) $1.0 million of administrative costs related to third-party consultants for regulatory services, external third-party data services and data providers that support the commercial sales team with market and analytical data, and (iv) $0.5 million of travel and expense related costs.
The $1.0 million increase in general and administrative personnel and related costs is primarily due toincludes (i) a $0.1$0.5 million decreaseincrease in non-cash compensation expenses related to the change in the fair value of our Performance Plan liability, which was partially offset byexpense associated with stock based compensation, and (ii) a $0.1$0.5 million increase in cash-based compensation expenses, primarily due to a $0.2 increase in bonus expense related to a success bonus paid to employees following the announcement of the positive top-line results of our B-SIMPLE 4 study, partially offset by a $0.1 million decrease in recurring salary and benefits costs.costs between the two comparative periods, including new corporate positions, such as the Chief Operating Officer and the Chief Commercial Officer.
Impairment loss on long-livedAmortization of intangible assets
AsAmortization of June 29, 2020, we evaluated allintangible assets of our long-lived assets for potential held for sale classification, and assessed our remaining long-lived assets classified as held and used for potential impairment pursuant to our accounting policies. Our evaluation resulted in a $2.4$0.7 million non-cash impairment loss on long-lived assets for the six months ended June 30, 2020,2022 is associated with the amortization of definite lived intangible assets acquired as described above.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 the accompanying condensed consolidated financial statements.
Change in fair value of contingent consideration
For the six months ended June 30, 2022, the changes in fair value related to contingent consideration related to the EPI Health Acquisition related primarily to changes in market assumptions and discount rates since the transaction date.
Impairment loss on long-lived assets
During the second quarter of 2021, we assessed the carrying value of a disposal group classified as assets held for sale in the accompanyingour 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 sixthree months ended June 30, 2021, we recognized a $0.1 million non-cash impairment loss on long-lived assets that represented the full write off of its remaining carrying value.
Other income (expense), net
Other income (expense),Total other expense, net was $0.4$0.7 million income for the six months ended June 30, 2021,2022, compared to $0.1$0.4 million other income, net for the six months ended June 30, 2020. During2021. Total other expense, net in the second quartercurrent period is primarily comprised of $0.7 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 we experiencedperiod is primarily comprised of a $1.0 million gain on extinguishment of debt extinguishment related to
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the forgiveness of our PPP loan in June 2021. This gain was2021, partially offset by $0.6 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, see “Note 9—Notes Payable” and “Note 19—Subsequent Events” to the accompanying condensed consolidated financial statements.
Liquidity and Capital Resources
As of June 30, 2021,2022, we had an accumulated deficit of $264.3$301.2 million. We incurred net losses of $6.0$22.3 million and $15.0 million duringfor the three and six months ended June 30, 2022 and 2021, respectively, and $8.1 million and $14.3 millionthere is substantial doubt about our ability to continue as a going concern. Despite revenues generated from the sales of commercial products acquired during the three and six months ended June 30, 2020, respectively. WeEPI 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.activities for our product candidates that are currently under development. We are subject to all of the risks inherent in 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. WeThe 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 our clinical-stagesuch product candidates. IfWe will continue to incur significant expenses related 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 June 30, 2021,2022, we had total cash and cash equivalents of $65.8$37.3 million and positive working capital of $57.2$17.8 million. As of June 30, 2021,discussed in “Corporate Updates,” we had $12.0 million in remaining availability for salesused a portion of our common stockcash and cash equivalents to pay off and terminate the Seller Note issued in connection with the EPI Health Acquisition, as well as satisfy our obligations under the July 2020 Aspire CSPA, subjectpost-closing purchase price adjustment required in connection with 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 certain limitations.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 commercialization of our products. The payment and 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 beyond the fourth quarter of 2022 and submission of our NDA for our lead product candidate, SB206, and be used to further prepare for commercialization of SB206 following approval.
From January 1, 20192020 through June 30, 2021,2022, we have raised total equity and debt proceeds of $97.7$112.2 million to fund our operations, including (i) $14.0 million in net proceeds from the sale of common stock (or pre-funded warrants in lieu thereof) and 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, (as defined below); (ii)(iii) $5.2 million in net proceeds from the sale of common stock (or pre-funded warrants in lieu thereof) and accompanying common warrants in the March 2020 Public Offering (as defined below); (iii)public offering, (iv) $7.2 million in net proceeds from the sale of common stock (or pre-funded warrants in lieu thereof) in the March 2020 Registered Direct Offering (as defined below); (iv)registered direct offering, (v) an additional $6.0 million of proceeds associated with exercises through June 30, 2021 of common stock warrants issued as part of the March 2020 Public Offeringpublic offering and March 2020 Registered Direct Offering; (v) $41.0registered direct offering, (vi) $40.3 million in proceeds from the sale of common stock under our August 2019 and June 2020 common stock purchase agreements with Aspire Capital, (vii) $1.3 million from our Equity Distribution Agreement, and the July 2020 Aspire CSPA; and (vi)(viii) less than $0.1 million of proceeds from the exercise of stock options. We also obtained a loan under the Paycheck Protection Program, or PPP, (as defined below) of approximately $1.0 million in April 2020 to support certain qualified expenses, including payroll and rental expense, which is described below.expense. The PPP loan was forgiven in June 2021.
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To date, we have focused our funding activities primarily on equity financings, while generating additional liquidity and capital through other sources, including:including (i) governmental research contracts and grants totaling $12.9 million;million, (ii) our licensing and supply arrangements with Sato, totaling $28.8 million;$33.1 million, and (iii) $25.0 million and $12.0 million in proceeds from two funding transactions during the second quarter of 2019 with Reedy Creek Investments LLC, or Reedy Creek, and Ligand, respectively,respectively.
Going forward, we plan to finance our needs principally from the following:
•equity and/or debt financing, including but not limited to sales under the Equity Distribution Agreement, with certain limitations as described below.in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Requirements”;
•revenues from product sales;
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•payments under existing out-license and distribution arrangements for our product candidates and commercial products; and
•payments under current or future collaboration and licensing agreements with strategic partners.
We believe that our existing cash and cash equivalents balance as of June 30, 2021,2022, as subsequently adjusted by items described in “Corporate Updates”, plus expected contractual payments to be received in connectionreceipts associated with existing licensing agreements,product sales from our commercial product portfolio, will provide us with adequate liquidity to fund our planned operating needs intothrough the first quarterend of 2023.2022. Variability in our operating forecast, driven primarily by (i) commercial product sales, (ii) timing of operating expenditures, and (iii) anticipated changes in net working capital, will impact our cash runway. This operating forecast and related cash projection includes:includes (i) costs through the expected completion of the B-SIMPLE4 Phase 3 trial, including supporting activities; (ii) costs associated with preparing for and seeking U.S. regulatory approval of SB206 as a treatment for molluscum; (iii)molluscum, including NDA-enabling drug stability studies for SB206, (ii) costs associated with the build-outreadiness and operation of our new corporate headquarters and manufacturing capability necessary to support small-scale drug substance and drug product manufacturing; (iv)manufacturing, (iii) conducting drug manufacturing capability transfer activities towith external third-party CMOs, (iv) ongoing commercial operations, including a drug delivery device technology enhancement project; (v) developmentsales, marketing, inventory procurement and distribution, and supportive activities, in certain early stage priority therapeutic areas, including infectious diseases (Coronaviridae (COVID-19)); (vi) certain research and development activities primarily related to SB204 as a treatmentour portfolio of therapeutic products for acne vulgaris;skin diseases acquired with the EPI Health Acquisition, and (vii)(v) initial efforts to support potential commercialization of SB206, but excludes: (a) any potential costs associated with other late-stage clinical programs; (b)excludes additional operating costs that could occur between a potential NDA submission for SB206 through NDA approval, including, but not limited to, marketing and commercialization efforts to achieve potential launch of SB206, and (c) proceeds from any potential future sales of common stock under the July 2020 Aspire CSPA.SB206. We may decide to revise our development and operating plans or the related timing, depending on information we learn through our research and development activities, including regulatory submission 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 significant additional funding to continue our operating activities, make further advancements in our product development programs and potentially commercialize any of our 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 bybefore the firstend of the fourth quarter of 2023.2022. 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.
We do not currently have sufficient funds to complete commercialization of any of our product candidates, and our funding needs will largely be determined by our commercialization strategy for SB206, subject to the NDA submission timing and the regulatory approval process and outcome. Our potential commercialization strategy includes, but is not limited to, securing a commercialization partner, co-commercializing with a partner, or commercializing on our own. The inability of us 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, to conserve our cash and cash equivalents. We may pursue additional capital through equity or debt financings, including potential sales under the July 2020 Aspire CSPA,Equity Distribution Agreement, or from non-dilutive 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 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.
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.
Purchase Agreements with Aspire Capital
Prior Aspire Common Stock Purchase Agreements
On August 30, 2019, we entered into a common stock purchase agreement with Aspire Capital, or the 2019 Aspire CSPA, and on June 15, 2020, we entered into a common stock purchase agreement with Aspire Capital, or the June 2020 Aspire CSPA, which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $25.0 million and $20.0 million, respectively, of shares of our common stock at our request from time to time during the 30-month term of each agreement. The June 2020 Aspire CSPA replaced the 2019 Aspire CSPA, which was terminated under the terms of the June 2020 Aspire CSPA. On July 21, 2020, the June 2020 Aspire CSPA was replaced by the July 2020 Aspire CSPA described below.
From the inception through the termination of the 2019 Aspire CSPA, we sold 486,571 shares of common stock at an average price of $6.22 per share under such agreement. These amounts, combined with the 34,562 shares issued as part of the
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commitment fee related to the agreement’s execution, resulted in a total of 521,133 shares issued to Aspire Capital under that agreement as of June 30, 2021. From the inception through the termination of the June 2020 Aspire CSPA, we sold 3,776,428 shares of common stock at an average price of $5.30 per share under that agreement. These amounts, combined with the 144,927 shares issued as part of the commitment fee related to the agreement’s execution, resulted in a total of 3,921,355 shares issued to Aspire Capital under the agreement, which was fully utilized prior to entry into the July 2020 Aspire CSPA. The 2019 Aspire CSPA and June 2020 Aspire CSPA had substantially similar terms to the July 2020 Aspire CSPA.
July 2020 Aspire Common Stock Purchase Agreement
On July 21, 2020, we entered into the July 2020 Aspire CSPA, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of shares of our common stock at our request from time to time during the 30-month term of the agreement. Upon execution of the July 2020 Aspire CSPA, we agreed to sell to Aspire Capital 555,555 shares of our common stock at $9.00 per share for proceeds of $5.0 million. In addition, as consideration for entering into the July 2020 Aspire CSPA, we issued to Aspire Capital 100,000 shares of our common stock as a commitment fee.
Concurrently with entering into the July 2020 Aspire CSPA, we also entered into a registration rights agreement with Aspire Capital, in which we agreed to file one or more registration statements, as permissible and necessary to register under the Securities Act of 1933, as amended, registering the sale of the shares of our common stock that have been and may be issued to Aspire Capital under the July 2020 Aspire CSPA. On July 23, 2020, we filed with the SEC a prospectus supplement to our effective shelf Registration Statement on Form S-3 (File No. 333-236583) registering all of the shares of common stock that may be offered to Aspire Capital from time to time under the July 2020 Aspire CSPA.
Under the terms of the July 2020 Aspire CSPA, on any trading day we select, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice, or the Purchase Notice, directing Aspire Capital (as principal) to purchase up to 30,000 shares of our common stock per business day, up to an aggregate of $30.0 million of our common stock, at a per share price equal to the lesser of (i) the lowest sale price of our common stock on the purchase date; or (ii) the arithmetic average of the three lowest closing sale prices for our common stock during the ten consecutive trading days ending on the trading day immediately preceding the purchase date. The aggregate purchase price payable by Aspire Capital on any one purchase date may not exceed $0.5 million, unless otherwise mutually agreed. The parties may mutually agree to increase the number of shares of our common stock that may be purchased per trading day pursuant to the terms of the July 2020 Aspire CSPA to up to 200,000 shares.
In addition, on any date on which we submit a Purchase Notice in an amount equal to 30,000 shares, we can also, in our sole discretion, present Aspire Capital with a volume-weighted average price purchase notice, or a VWAP Purchase Notice, directing Aspire Capital to purchase an amount of our common stock equal to up to 30% of the aggregate shares of our common stock traded on our principal market on the next trading day, or the VWAP Purchase Date, subject to a maximum number of shares determined by us. The purchase price per share pursuant to such VWAP Purchase Notice isgenerally 97% of the volume-weighted average price for our common stock traded on our principal market on the VWAP Purchase Date.
Under the terms of the July 2020 Aspire CSPA, the number of shares that may be sold to Aspire Capital is limited to 2,543,364 shares, or the Exchange Cap, which represents 19.99% of our outstanding shares of common stock on July 21, 2020, unless stockholder approval or an exception pursuant to the rules of our principal market, currently the Nasdaq Capital Market, is obtained to issue more than 19.99%. This limitation will not apply if, at any time the Exchange Cap is reached and at all times thereafter, the average price paid for all shares issued under the July 2020 Aspire CSPA is equal to or greater than $5.907, which is the arithmetic average of the five closing sale prices of our common stock immediately preceding the execution of the July 2020 Aspire CSPA. The July 2020 Aspire CSPA provides that we and Aspire Capital shall not effect any sales under the July 2020 Aspire CSPA on any purchase date where the closing sale price of our common stock is less than $0.15.
There are no trading volume requirements or restrictions under the July 2020 Aspire CSPA, and we control the timing and amount of sales of our common stock to Aspire Capital. Aspire Capital has no right to require any sales by us, but is obligated to make purchases from us as we may direct in accordance with the July 2020 Aspire CSPA. There are no limitations on use of proceeds, financial or business covenants, restrictions on future financing transactions, rights of first refusal, participation rights, penalties or liquidated damages in the July 2020 Aspire CSPA. The July 2020 Aspire CSPA may be terminated by us at any time, at our discretion, without any penalty or additional cost to us. Any proceeds we receive under the July 2020 Aspire CSPA are expected to be used for the advancement of our research and development programs and for general corporate purposes, capital expenditures and working capital.
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As of June 30, 2021, we have sold 2,221,039 shares of our common stock at an average price of $8.10 per share under the July 2020 Aspire CSPA for total proceeds of $18.0 million. These amounts, combined with the 100,000 shares issued as part of the commitment fee related to the agreement’s execution, resulted in a total of 2,321,039 shares issued to Aspire Capital under the agreement as of June 30, 2021. As of June 30, 2021, there was $12.0 million of remaining availability for sales of common stock under the July 2020 Aspire CSPA.
In addition to the limitations noted above, pursuant to the underwriting agreement relating to the June 2021 Public Offering, we are prohibited from issuing securities, including under the July 2020 Aspire CSPA, for a period until the 60th day after the date of the underwriting agreement (other than under certain circumstances set forth in the underwriting agreement).
See “Note 10—Stockholders’ Equity (Deficit)” to the accompanying condensed consolidated financial statements for additional information regarding the July 2020 Aspire CSPA.
Paycheck Protection Program
On April 22, 2020, and as subsequently amended, we entered into the Note for an unsecured loan of approximately $1.0 million made to us, or the Loan, under the Paycheck Protection Program, or the PPP. The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and is administered by the United States Small Business Administration, or the SBA. The Loan was made through PNC Bank, National Association. Subject to the terms of the Note, the Loan bore interest at a fixed rate of one percent (1%) per annum. Under the terms of the CARES Act, PPP loan recipients can 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 the use of loan proceeds for payment of permitted and program-eligible expenses. Interest payable on the Note may be forgiven only if the SBA agrees to pay such interest on the forgiven principal amount of the Note. We previously applied for and during the second quarter of 2021 received notification of forgiveness of the entire loan balance, including any accrued interest.
See “Note 9—Paycheck Protection Program” to the accompanying condensed consolidated financial statements for additional information regarding the Loan.
Equity Offerings
June 2021 Public Offering
On June 17, 2021, we entered into an underwriting agreement with Cantor Fitzgerald & Co. relating to the offering, issuance and sale of 3,636,364 shares of common stock. We also granted Cantor Fitzgerald & Co., as underwriter, a 30-day option to purchase up to 545,454 additional shares of common stock, which was not exercised. The June 2021 Public Offering closed on June 21, 2021.
Net proceeds from the June 2021 Public Offering were approximately $37.2 million after deducting underwriting discounts and commissions and offering expenses of approximately $2.8 million.
See “Note 10—Stockholders’ Equity (Deficit)” to the accompanying condensed consolidated financial statements for additional information regarding the June 2021 Public Offering.
March 2020 Registered Direct Offering
On March 24, 2020, we entered into a securities purchase agreement with several institutional and accredited investors, pursuant to which we agreed to sell and issue in a registered direct offering priced at-the-market under Nasdaq rules, or the March 2020 Registered Direct Offering, an aggregate of 1,055,000 shares of our common stock and pre-funded warrants to purchase 805,465 shares of common stock. The March 2020 Registered Direct Offering closed on March 26, 2020. At closing, we also issued to H.C. Wainwright, as placement agent, warrants to purchase an aggregate of up to 55,814 shares of common stock representing 3.0% of the aggregate number of shares of common stock and shares of common stock underlying the pre-funded warrants sold in this offering.
Net proceeds from the March 2020 Registered Direct Offering were approximately $7.2 million after deducting the fees and commissions and offering expenses of approximately $0.8 million.

See “Note 10—Stockholders’ Equity (Deficit)” to the accompanying condensed consolidated financial statements for additional information regarding the March 2020 Registered Direct Offering.
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March 2020 Public Offering
On February 27, 2020, we entered into an underwriting agreement with H.C. Wainwright relating to the offering, issuance and sale of 1,400,000 shares of common stock, pre-funded warrants to purchase 433,333 shares of common stock, and accompanying common warrants to purchase up to an aggregate of 1,833,333 shares of common stock, or, collectively, the March 2020 Public Offering. We also granted H.C. Wainwright, as underwriter, a 30-day option to purchase up to 275,000 additional shares of common stock and/or common warrants to purchase up to an aggregate of 275,000 shares of common stock, which H.C. Wainwright partially exercised on March 2, 2020 to purchase 149,860 shares of common stock and common warrants to purchase 275,000 shares of common stock. The March 2020 Public Offering closed on March 3, 2020. At closing, we also issued to designees of H.C. Wainwright, as underwriter, warrants to purchase an aggregate of up to 59,496 shares of common stock 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 this offering.
Net proceeds from the March 2020 Public Offering were approximately $5.2 million after deducting underwriting discounts and commissions and offering expenses of approximately $0.8 million. As of June 30, 2021, 1,855,917 common warrants issued as part of the March 2020 Public Offering have been exercised for an additional $5.6 million of proceeds associated with this offering.
See “Note 10—Stockholders’ Equity (Deficit)” to the accompanying condensed consolidated financial statements for additional information regarding the March 2020 Public Offering.
Research and Development Arrangements
Royalty and Milestone Payments Purchase Agreement with Reedy Creek Investments LLC
On April 29, 2019, we entered into a royalty and milestone payments purchase agreement, or the Purchase Agreement, with Reedy Creek, pursuant to which Reedy Creek provided us funding in an initial amount of $25.0 million for us to use primarily to pursue the development, regulatory approval and commercialization (including through out-license agreements and other third-party arrangements) activities for SB206, for the treatment of molluscum, and advancing programmatically other activities with respect to SB414, for atopic dermatitis, and SB204, for acne.
Pursuant to the Purchase Agreement, we will pay Reedy Creek ongoing quarterly payments, calculated based on an applicable percentage per product of any upfront fees, milestone payments, royalty payments or equivalent payments received by us pursuant to any out-license agreement for the products in the United States, Mexico or Canada, net of any upfront fees, milestone payments, royalty payments or equivalent payments paid by us to third parties pursuant to any agreements under which we have in-licensed intellectual property with respect to the products.
The applicable percentage used for determining the ongoing quarterly payments, applied to amounts received directly by us pursuant to any out-license agreement for each product, ranges from 10% for SB206 to 20% for SB414 and SB204. However, the agreement provides that the applicable percentage for each product will be 25% for fees or milestone payments received by us (but not royalty payments received by us) until Reedy Creek has received payments under the Purchase Agreement equal to the total funding amount provided by Reedy Creek under the Purchase Agreement. If we decide to commercialize any product on our own following regulatory approval, as opposed to commercializing through an out-license agreement or other third-party arrangement, we will only be obligated to pay Reedy Creek a low single digits royalty on net sales of the products.
See “Note 6—Research and Development Arrangements” to the accompanying condensed consolidated financial statements for additional information related to the Purchase Agreement.
Development Funding and Royalties Agreement with Ligand Pharmaceuticals Incorporated
On May 4, 2019, we entered into the Funding Agreement with Ligand, pursuant to which Ligand provided us funding of $12.0 million, which we used to pursue the development and regulatory approval of SB206, for the treatment of molluscum.
Pursuant to the Funding Agreement, we will pay Ligand up to $20.0 million in milestone payments upon the achievement by us of certain regulatory and commercial milestones associated with SB206 or any product that incorporates or uses NVN1000, the API for our clinical stage product candidates, for the treatment of molluscum. In addition to the milestone payments, we will pay Ligand tiered royalties ranging from 7% to 10% based on annual aggregate net sales of the products in the United States, Mexico or Canada.
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See “Note 6—Research and Development Arrangements” to the accompanying condensed consolidated financial statements for additional information related to the Funding Agreement.
Licensing Arrangements
Expansion of Partnership with Sato in Japanese Territory
On October 5, 2018, we and Sato entered into the second amendment to the initial license agreement dated January 12, 2017, or the Sato Amendment. The initial license agreement had focused on the development and commercialization of SB204 for the treatment of acne vulgaris in Japan. The Sato Amendment also provides Sato with the exclusive rights to develop and commercialize SB206 and related dosage forms for the treatment of viral skin infections, including but not limited to molluscum contagiosum and external genital warts, in Japan. We have received approximately $28.8 million from Sato beginning January 2017 through June 30, 2021 under the Amended Sato Agreement, including (i) a $10.8 million upfront payment received following the execution of the agreement in January 2017; (ii) a $2.2 million payment related to the initiation of a Phase 1 trial in Japan in the third quarter of 2018; (iii) $11.2 million of installment payments received following the execution of the Sato Amendment; and (iv) a $4.6 million payment related to a time-based developmental milestone received in the second quarter of 2021. In addition to the upfront payment paid in three installments in 2018 and 2019 that we received from Sato under the terms of the Sato Amendment, the Sato Amendment also provides for an aggregate of 1.0 billion JPY in additional non-contingent milestone payments that become payable upon the earlier occurrence of specified fixed dates in the future or the achievement of specified milestone events, of which we received 0.5 billion JPY in the second quarter of 2021.
See “Note 4—Licensing Arrangements” and “Note 5—Revenue Recognition” to the accompanying condensed consolidated financial statements regarding the Amended Sato Agreement.
Cash Flows
The following table sets forth our cash flows for the periods indicated:
Six Months Ended June 30, Six Months Ended June 30,
20212020 20222021
(in thousands) (in thousands)
Net cash (used in) provided by:Net cash (used in) provided by:  Net cash (used in) provided by:  
Operating activitiesOperating activities$(10,989)$(13,790)Operating activities$(10,344)$(10,989)
Investing activitiesInvesting activities(2,810)(342)Investing activities(14,793)(2,810)
Financing activitiesFinancing activities44,194 35,878 Financing activities15,354 44,194 
Net increase in cash, cash equivalents and restricted cash$30,395 $21,746 
Net (decrease) increase in cash, cash equivalents and restricted cashNet (decrease) increase in cash, cash equivalents and restricted cash$(9,783)$30,395 
Net Cash Used in Operating Activities
During the six months ended June 30, 2022, net cash used in operating activities was $10.3 million and consisted primarily of a net loss of $22.3 million, with adjustments for non-cash amounts related primarily to (i) stock-based compensation expense of $0.8 million, (ii) amortization of definite lived intangible assets acquired from EPI Health of $0.7 million, (iii) $0.3 million of
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depreciation and amortization of property and equipment expense, (iv) $0.5 million change in fair value of contingent consideration, and (v) a $10.5 million change in cash related to changes in other operating assets and liabilities. The favorable impacts to cash related to changes in assets and liabilities was primarily due to (i) a $6.3 million change in accounts receivable, (ii) a change in accounts payable of $3.9 million, (iii) a change in accrued expenses of $0.9 million and (iv) a change in prepaid expenses and other current assets of $1.3 million. The unfavorable impacts to cash related to changes in deferred revenue of $1.3 million and research and development service obligation of $0.6 million. The change in operating assets and liabilities and related changes from the prior period partially relate to the continued operations of the Research and 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 condensed consolidated financial statements for additional detail regarding the purchase of EPI Health and the related impacts of the opening balances related to the EPI Health Acquisition.
During the six months ended June 30, 2021, net cash used in operating activities was $11.0 million and consisted primarily of a net loss of $15.0 million, with adjustments for non-cash amounts related primarily to (i) depreciation expense of $0.1 million; (ii) impairment of long-lived assets of $0.1 million; (iii) a net favorable adjustment to stock-based compensation of $0.3 million, caused by fair market value adjustments to the Tangible Stockholder Return Plan; (iv) a foreign currency transaction loss of $0.7 million related to fair value adjustments for payments received and to be received under the Amended Sato Agreement; (v) a $1.0 million gain on debt extinguishment related to forgiveness of the PPP loan; and (vi) a $4.3 million favorable change in cash related to changes in other operating assets and liabilities. The favorable change in cash related to changes in assets and liabilities was primarily due to (i) a $4.5 million decrease in contracts and grantsaccounts receivable primarily related to receipt of a $4.6 million time-based developmental milestone payment; (ii) a $1.8 million decrease in prepaid insurance, prepaid expenses and other current assets primarily related to the amortization of prepaid service contracts and directors and officers insurance premiums; (iii) a $0.5 million increase in other accrued expenses; and (iv)(iii) a $0.2 million increase in research and development service obligation liabilities related to the accretion of the liability associated with Ligand. These increases in cash were partially offset by (i) a $1.5 million decrease in deferred revenue associated with our performance under, and revenue recognition of, the Amended Sato Agreement during the first six months of 2021; (ii) a $0.8$0.7 million decrease in accrued outside research and development services primary related to services related to the SB206 Phase 3 development program;expenses; and (iii) a $0.4$0.1 million decrease in accrued compensation primarily related to the payment of 2020 performance bonusesaccounts payable.
Net Cash Used in March 2021.Investing Activities
During the six months ended June 30, 2020,2022, the $14.8 million of net cash used in operatinginvesting activities was $13.8 million and consisted primarily of a net loss of $14.3 million, with adjustments for non-cash amounts related primarily to depreciation expense of $1.0 million,
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impairment of long-lived assets of $2.4 million, stock-based compensation expense of $0.7 million, stock issuance cost of $0.8 million related to commitment shares for the June 2020 Aspire CSPA, a loss on disposal of equipment of less than $0.1 million, and a $4.5 million net decrease in other operating assets and liabilities. The net decrease in assets and liabilities was primarily due to (i) a $1.9 million decrease in research and development service obligation liabilities related to the amortization of the liability associated with Ligand; (ii) a $2.2 million decrease in deferred revenue associated with our performance under, and revenue recognition of, the Amended Sato Agreement during the first six months of 2020; (iii) $0.4 million decrease in accrued legal and professional fees; (iv) a $0.5 million decrease in accrued outside research and development services; and (v) a $0.3 million decrease in accounts payable. These decreases were partially offset by (i) a $0.2 million increase in accrued compensation, a $0.2 million decrease in contracts and grants receivable and a $0.5 million decrease in prepaid expenses and other current assets. The changes in accounts payable and accrued outside research and development services balances during the second quarter of 2020 were primarily related to timing(i) cash used in connection with the EPI Health Acquisition of invoice receipts$12.0 million, and payments(ii) $2.8 million in cash used for purchases of property, equipment and services associated with the SB206 Phase 3 development program.
Net Cash Usedbuild-out of our corporate headquarters and small-scale manufacturing facility in Investing ActivitiesDurham, North Carolina. See “Note 2—Acquisition of EPI Health” to the accompanying condensed consolidated financial statements for additional detail regarding the purchase of EPI Health.
During the six months ended June 30, 2021, the $2.8 million of net cash used in investing activities was primarily related to purchases of property, equipment and services associated with the planning, design and build-out of our new corporate headquarters and small-scale manufacturing facility in Durham, North Carolina.
Net Cash Provided by Financing Activities
During the six months ended June 30, 2020, the $0.3 million of2022, net cash used in investingprovided by financing activities was $15.4 million and consisted primarily relatedof (i) net proceeds from the June 2022 Registered Direct Offering of $14.0 million, and (ii) proceeds from the sale of our common stock pursuant to installment payments made to a drug delivery device technology manufacturing vendorthe Equity Distribution Agreement entered into in connection with an ongoing drug delivery device technology enhancement project.
Net Cash Provided by Financing ActivitiesMarch 2022 of $1.3 million.
During the six months ended June 30, 2021, net cash provided by financing activities was $44.2 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; and (iv) less than $0.1 million of proceeds from the exercise of stock options.
During the six months ended June 30, 2020, net cash provided by financing activities was $35.9 million and consisted primarily of (i) $5.3 million of proceeds, net of underwriting fees, from closing of our March 2020 Public Offering; (ii) $5.5 million of proceeds from the exercise of common warrants associated with the March 2020 Public Offering; (iii) $7.3 million of proceeds, net of placement agent fees, from our March 2020 Registered Direct Offering; (iv) $1.0 million from the entry into a promissory note for an unsecured loan under the PPP; and (v) $17.1 million of proceeds from the sale of our common stock pursuant to the 2019 Aspire CSPA and the June 2020 Aspire CSPA. These financing cash inflows were partially offset by $0.2 million of other offering costs, including legal and professional fees, directly associated with the March 2020 Public Offering, March 2020 Registered Direct Offering and the February 2020 shelf registration statement filing.
Capital Requirements
As of June 30, 2021,2022, we had a total cash and cash equivalents balance of $65.8$37.3 million and positive working capital of $57.2$17.8 million. While we currently generate revenue from our commercial portfolio of products acquired in the EPI Health Acquisition, we do not believe that such revenues will be sufficient to fund operations of the business, specifically the development of our product candidates.To date, we have not generated any revenue from product sales. Wesales of our product candidates, and we do not know when, or if, we will generate any revenue from product sales.such revenue. We do not expect to generate revenue from product sales of our product candidates unless, and until, we obtain regulatory approval of one of our current or future product candidates and achieve successful commercialization by a strategic partner or by ourselves.of such product candidate. As of June 30, 2021,2022, we had an accumulated deficit of $264.3$301.2 million.
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We will need significant additional funding to support our planned and future operating activities and make further advancements in our product development programs beyond what is currently included in our operating forecast and related cash projection. We do not currently have sufficient funds to complete commercialization of any of our product candidates, and our funding needs will largely be determined by our commercialization strategy for SB206, subject to the NDA submission timing and the regulatory approval process and outcome. Our potential commercialization strategy includes, but is not limited to, securing a commercialization partner, co-commercializing with a partner, or commercializing on our own.
Our ability to continue to operate our business, including our ability to advance development programs unrelated to SB206, as well as our ability to progress SB206 for molluscum subsequent to an NDA filing,submission, is dependent upon future sales of our commercial products along with our ability to access additional sources of capital, including, but not limited to (i) equity or debt financings, including throughbut not limited to potential sales using the remaining availability under the July 2020 Aspire CSPA;Equity Distribution Agreement, or (ii) non-dilutive sources, such as partnerships, collaborations,
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licensing, grants or other strategic relationships. There can be no assurance that we will be able to obtain new funding on terms acceptable to us, on a timely basis, or at all. In addition, there are certain limitations on the usage of the Equity Distribution Agreement related to the Registered Direct Offering closed in June 2022. In relation to the June 2022 Registered Direct Offering, we agreed not 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 is greater than 50% above the exercise price for the June 2022 Common Warrants.
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, to conserve our cash and cash equivalents. Our anticipated expenditure levels may change if we adjust our current operating plan. Such actions could delay development 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 or divestitures of some of our assets, or other potential strategic transactions, including thewhich could include a sale of the Company.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 year ended December 31, 20202021 and the six months ended June 30, 2021,2022 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 June 30, 2021,2022, we had 18,811,69221,281,613 shares of common stock outstanding. In addition, as of June 30, 2021,2022, we had reserved 3,070,23610,508,029 shares of common stock for future issuance related to (i) outstanding warrants to purchase common stock;stock, (ii) outstanding stock options and stock appreciation rights;rights, (iii) nonvested restricted stock units, and (iii)(iv) future issuanceissuances under the 2016 Incentive Award Plan. Our common stock consists of 200,000,000 authorized shares as of June 30, 2021.2022.
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:
•market acceptance of approved products and successful commercialization of such products by either us or our partners;
•our decision to expand our internal commercialization capabilities;
•the initiation, progress, timing, costs, results, and evaluation of results of trials for our clinical-stage product candidates, including trials conducted by us or potential future partners;
•the progress, timing, costs and results of development and preclinical study activities relating to other potential applications of our nitric oxide platform;
•the number and characteristics of product candidates that we pursue;
•the achievement of milestones that would require payment and whether such milestone payments are paid in cash or shares of our common stock, including those set forth in “Note 10—Commitments and Contingencies” to the accompanying condensed consolidated financial statements;
•our ability to enter into strategic relationships to support the continued development of certain product candidates and the success of those arrangements;
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•our success in optimizing the size and capability of our new manufacturing facility and related processes to meet our strategic objectives;
•our success in the technical transfer of methods and processes related to our drug substance and drug product manufacturing with our current and/or potential future contract manufacturing partners;
•the outcome, timing and costs of seeking regulatory approvals;
•the occurrence and timing of potential development and regulatory milestones achieved by Sato, our licensee for SB204 and SB206 in Japan;
•the terms and timing of any future collaborations, licensing, consulting, financing or other arrangements that we may enter into;
•the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;
•the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights;
•defending against intellectual property related claims;
•the costs associated with any potential future securities litigation, and the outcome of that litigation;
•the extent to which we in-license or acquire other products and technologies; and
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•subject to receipt of marketing approval, revenue received from commercial sales or out licensing of our product candidates.candidates; and
•revenue received from commercial sales of our existing medical dermatology products.
Contractual Obligations and Contingent Liabilities
During the three and six months ended June 30, 2022, there were no material changes to our commitments under contractual obligations, other than those related to the EPI Health Acquisition. The EPI Health Acquisition is described in “Note 2—Acquisition of EPI Health” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. Also, see “Note 19—Subsequent Events” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional detail regarding certain matters related to contractual obligations that occurred subsequent to June 30, 2022.
Our significant accounting policies are more fully described in “Note 1—Organization and Significant Accounting Policies” to the accompanying condensed consolidated financial statements, including those related to the EPI Health Acquisition, and as described within the condensed consolidated financial statement footnotes within this Quarterly Report on Form 10-Q.
Except for items described in note “Note 8—1—Organization and Significant Accounting Policies,” “Note 2—Acquisition of EPI Health,” “Note 10—Commitments and Contingencies” and the forgiveness of the Loan we received under the PPP as described in “Note 9—Paycheck Protection Program”12—Licensing and Collaboration Arrangements” to the accompanying condensed consolidated financial statements, there were no material changes during the three and six months ended June 30, 20212022 in our commitments under contractual obligations, as disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report.
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.
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; and (iii) 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.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these condensed 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 condensed 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.
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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, classification of warrants 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.
OurWhile our significant accounting policies are more fully described in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our condensed consolidated financial statements and understanding and evaluating our reported financial results.
Business Acquisitions
Business acquisitions are accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification, or ASC, 805, Business Combinations, or ASC 805. ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, Fair Value Measurements, as of the acquisition date. For certain assets and liabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the closing date of the acquisition at the then-current market price. Under ASC 805, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) are expensed in the period in which the costs are incurred. The application of the acquisition method of accounting requires us to make estimates and assumptions related to the estimated fair values of net assets acquired.
Significant judgments are used during this process, particularly with respect to 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 purchase price allocation to intangible assets and goodwill has a significant impact on future operating results.
See “Note 2—Acquisition of EPI Health” to the accompanying condensed consolidated financial statements included in this Quarterly Report for additional discussion, in addition to “Note 17—Fair Value,” related to the EPI Health Acquisition.
Revenue Recognition
We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers, or ASC 606. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we (i) identify the contract with a customer, (ii) identify the performance obligations within the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations within the contract, and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.
Net Product Revenues
Net product revenues encompass sales recognized resulting from transferring control of products to customers, excluding amounts collected on behalf of other third parties and sales taxes. The amount of revenue recognized is the amount allocated to the satisfied performance obligation taking into account variable consideration. The estimated amount of variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Product sales are recognized at the point in time when a product is delivered and legal transfer of title has occurred. We record a reduction of the transaction price for estimated chargebacks, rebates, coupons, discounts and returns. A liability is recognized for expected sales returns, rebates, coupons, trade and cash discounts, chargebacks or other reimbursements to customers in relation to sales made in the reporting period. Payment terms can differ from contract to contract, but no element of financing is deemed present based on the fact that typical payment terms are less than one year. Therefore, the transaction price is not adjusted for the effects of a significant financing component. A receivable is recognized as soon as control over the products is transferred to the customer as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.
Variable consideration relates to sales returns, rebates, coupons, trade and cash discounts, and chargebacks granted to various direct and indirect customers. We recognize provisions at the time of sale and adjust them if the actual amounts differ from the estimated provisions.
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There can be a significant lag between our establishment of an estimate and the timing of the invoicing or claim. We believe we have made reasonable estimates for future rebates and claims, however, these estimates involve assumptions pertaining to contractual utilization and performance, and payor mix. If the performance or mix across third-party payors is different from our estimates, we may be required to pay higher or lower total price adjustments and/or chargebacks than we had estimated.
See “Note 1—Organization and Significant Accounting Policies ” and “Note 13—Net Product Revenues” to the accompanying condensed consolidated financial statements included in this Quarterly Report for additional discussion.
License and Collaboration Revenues
We have entered into various types of agreements that either license our intellectual property to a third party, acquire license rights to intellectual property of a third party, or both.
Agreements where we license our intellectual property to a third party for development and commercialization in a licensed territory. If the applicable license is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the estimated performance period and the appropriate method of measuring progress during the performance period for purposes of recognizing revenue. We re-evaluate the estimated performance period and measure of progress each reporting period and, if necessary, adjust related revenue recognition accordingly. These arrangements often include milestone as well as royalty or profit-share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements from or payments to the collaboration partner. Because of the risk that products in development will not receive regulatory approval, we do not recognize any contingent payments until after regulatory approval has been achieved.
Agreements where we acquire license rights to, or otherwise access, a third party’s intellectual property for commercialization of the third party’s product in a licensed territory. Wealso enter into various types of arrangements to commercialize products. Our services provided to the third party under such arrangements, in exchange for compensation that may take the form of cost reimbursements, may include promoting, marketing, selling and distributing the third party’s developed drugs, and may also involve certain license rights granted to the parties for use of the other party’s intellectual property while providing defined services under the arrangements. We assess the nature of each such arrangement and the various rights granted and services performed thereunder.
Royalty revenue from licenses provided to our collaboration partners, which is based on sales to third parties of licensed products and technology, is recorded when the third-party sale occurs and 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 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 be entitled in exchange for those services. Such contractually required reimbursements are reported as a liability or an asset within the accompanying condensed consolidated balance sheets based upon the timing of cash receipt from the collaboration partner.
See “Note 14—License and Collaboration Revenues” to the accompanying condensed consolidated financial statements included in this Quarterly Report for additional discussion.
Classification of Warrants and Pre-Funded Warrants Issued in Connection with Offerings of Common Stock Warrants. In our June 2022 Registered Direct Offering, March 2020 Public Offering, March 2020 Registered Direct Offering, and January 2018 Offering we issued warrants to purchase shares of our common stock. We assessed the warrants for appropriate equity or liability classification pursuant to our accounting policies described in “Note 1—Organization and Significant Accounting Policies” to the accompanying condensed consolidated financial statements. 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 transactions are within our 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 same proportion) that is being offered and paid to our common stockholders in connection with the fundamental transaction, whether that consideration be in the form of cash, stock or any combination thereof. In the event of any fundamental transaction, and regardless of whether it is within 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%.
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Pre-Funded Warrants. In the June 2022 Registered Direct Offering, March 2020 Public Offering and March 2020 Registered Direct Offering, we also issued pre-funded warrants to purchase shares of our common stock. We assessed the pre-funded warrants for appropriate equity or liability classification pursuant to our accounting policy described in “Note 1—Organization and Significant Accounting Policies” to the accompanying condensed consolidated financial statements. The pre-funded warrants did not provide each warrant holder with the option to settle any unexercised warrants for cash in the event of any fundamental transactions. In all fundamental transaction scenarios, the warrant holder was only entitled to receive from us or any successor entity the same type or form of consideration (and in the same proportion) that was being offered and paid to our stockholders in connection with the fundamental transaction, whether that consideration be in the form of cash, stock or any combination thereof. The pre-funded warrants also included a separate provision whereby the exercisability of the warrants was limited if, upon exercise, the warrant holder or any of its affiliates would have beneficially owned more than 4.99% (or an amount up to 9.99% if the holder so elects) of our common stock.
See “Note 11—Stockholders’ Equity” to the accompanying condensed consolidated financial statements included in this Quarterly Report for additional discussion regarding the terms of the pre-funded warrants and the applicable accounting treatment.
Accounts Receivable
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.
As needed, we record an allowance for credit losses, which includes a provision for expected losses based on Form 10-Qhistorical 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, and a specific reserve for accounts deemed at risk. The allowance is our estimate for accounts receivable as of the balance sheet date that ultimately will not be collected. Any changes in “Note 1—Organizationthe allowance are reflected in the results of operations in the period in which the change occurs. We write off accounts receivable and Significant Accounting Policies”the related allowance recorded previously when it becomes probable, based upon customer facts and circumstances, that such amounts will not 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. We do not charge interest on accounts receivable.
Inventory
We maintain inventory consisting of for-sale pharmaceuticals related to our auditedmarketed product portfolio. We measure inventory using the first-in, first out-method and value inventory at the lower of cost or net realizable value. Net realizable value represents the estimated selling price for inventories less all estimated costs to sell.
We perform an analysis and record 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 us to analyze the aging of and forecasted demand for our inventory and make estimates regarding future product sales.
Intangible Assets and Goodwill
Intangible assets represent identifiable intangible assets including 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 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 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, such as goodwill, are not amortized. We test the carrying amounts of goodwill for recoverability on an annual basis at September 30 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
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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. Key assumptions used in the annual goodwill impairment test are highly judgmental. Any change in these indicators or key assumptions could have a significant negative impact on our financial condition, impact the goodwill impairment analysis or cause us to perform a goodwill impairment analysis more frequently than once per year.
See “Note 7—Goodwill and Intangible Asset, net” to the accompanying condensed consolidated financial statements containedincluded in this Quarterly Report for additional discussion regarding intangible assets and goodwill related to the EPI Health Acquisition.
Accrued Expenses
As part 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 Annual Report. Duringfinancial statements based on facts and circumstances known to us. We periodically confirm the six months ended June 30, 2021, there were no materialaccuracy of our estimates with the service providers and make adjustments if necessary.
See “Note 8—Accrued Expenses” to the accompanying condensed consolidated financial statements included in this Quarterly Report for additional detail.
Contingent Consideration
Contingent consideration is recorded as a liability and is the estimate of the fair value of potential milestone payments related to business acquisitions. The estimated fair value of contingent consideration is determined based on a probability-weighted valuation model that measures the present value of the probable cash payments based upon the future milestone events of EPI Health at 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 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 condensed consolidated statements of operations and comprehensive loss until settlement.
See “Note 2—Acquisition of EPI Health” to the accompanying condensed consolidated financial statements included in this Quarterly Report for additional discussion regarding purchase consideration, including contingent consideration related to the EPI Health Acquisition.
Reedy Creek Purchase Agreement
We have previously determined that the Royalty and Milestone Payments Purchase Agreement with Reedy Creek, or the Reedy Creek Purchase Agreement, is within the scope of ASC 730-20, Research and Development Arrangements, or ASC 730-20. We concluded that there has not been a substantive and genuine transfer of risk related to the Reedy Creek Purchase Agreement as (i) Reedy Creek has the opportunity to recover its investment regardless of the outcome of the research and development programs within the scope of the agreement (prior to commercialization of any in scope assets through potential out-licensing agreements and related potential future milestone payments), and (ii) there is a presumption that we are obligated to pay Reedy Creek amounts equal to its investment based on the related party relationship at the time the parties entered into the Reedy Creek Purchase Agreement. The Reedy Creek Purchase Agreement is a broad funding arrangement, due to (i) the multi-asset, or portfolio approach including three developmental assets that are within the scope of the arrangement, and (ii) Reedy Creek’s approximate 5% ownership of our criticaloutstanding shares of common stock at the time of entry into the Reedy Creek Purchase Agreement.
As such, we have determined that the appropriate accounting policies.treatment under ASC 730-20 was to record the initial proceeds of $25.0 million as cash and cash equivalents, as we had the ability to direct the usage of funds, and a long-term liability within our classified balance sheet. The long-term liability will remain until we receive future milestones from other potential third parties, as defined within the Reedy Creek Purchase Agreement, of which 25% will be contractually owed to Reedy Creek. If potential future milestones are received by us, and become partly due to Reedy Creek, the corresponding partial repayment to Reedy Creek will result in a ratable reduction of the total long-term obligation to repay the initial purchase price.
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See “Note 15—Research and Development Agreements” to the accompanying condensed consolidated financial statements included in this Quarterly Report for additional discussion regarding the applicable accounting treatment of the Reedy Creek Purchase Agreement.
Ligand Funding Agreement
We have previously 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. In addition, the Ligand Funding Agreement also states that if all development of SB206 is ceased prior to the first regulatory approval, we must pay to Ligand an amount equal to the purchase price less the amount spent in accordance with the development budget on development activities conducted prior to such cessation. As such, we concluded that the appropriate accounting treatment under ASC 730-20 was to record the initial proceeds of $12.0 million, as a liability and as restricted cash on our consolidated balance sheet, as the funds could only be used for the progression of SB206.
We amortize the liability ratably during each reporting period, based on the Ligand funding as a percentage of the total direct costs we incur 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 has been presented within our accompanying consolidated statements of operations and comprehensive loss as an offset to research and development expenses associated with the SB206 program.
However, because the aggregate amount spent in accordance with the SB206 development budget on SB206 development activities had exceeded the $12.0 million purchase price, we reported no restricted cash balance related to the Ligand Funding Agreement, as of December 31, 2021 in our consolidated balance sheet.
See “Note 15—Research and Development Agreements” to the accompanying condensed consolidated financial statements included in this Quarterly Report for additional discussion regarding the applicable accounting treatment of the Ligand Funding Agreement.
Determination of the Fair Value of Stock-based Compensation Grants
We record the fair value of stock options, restricted stock units 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 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, (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:
•We have based our estimate of expected volatility, in part, on the historical volatility of a group of similar companies that are publicly traded, in addition to our own historical volatility. We are transitioning to using our historical volatility as a sufficient amount of historical information regarding the volatility of our own stock price becomes available. We 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 in selecting the similar companies. We compute the historical volatility data using the daily closing prices during the equivalent period of the calculated expected term of our stock-based awards.
•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 United States 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.
We estimate the fair value of restricted stock units awarded to employees and non-employees based on their estimated fair values on the date of grant. The fair value of restricted stock units is estimated based on the closing price of the underlying common stock on the date of grant.
We estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from estimates. We use historical data to estimate pre-vesting option and restricted stock unit forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from our estimates, the difference 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.
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See “Note 16—Stock-Based Compensation” to the accompanying condensed consolidated financial statements included in this Quarterly Report for additional discussion regarding stock based compensation awards.
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 condensed consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk 
Not applicable.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers toWe maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under theour Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controlsforms and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’sour management, including its principalour chief executive officer and principal financial officers, as appropriate, to allow for 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.
As of June 30, 2021, our management, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our principal executive and financial officers have concluded that our disclosure controls and procedures were effective as of such date at the reasonable assurance level. Our management recognizeswe recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving theirthe desired control objectives, and management necessarily appliesis required to apply its judgment in evaluating the cost benefitcost-benefit relationship of possible controls and procedures.
(b)As required by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive and financial officers concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022.
We closed the EPI Health Acquisition on March 11, 2022, and EPI Health’s total assets and revenues constituted 51.6% and 83.5%, respectively, of our consolidated total assets (including goodwill and intangible assets, net) and revenues as shown on our condensed consolidated financial statements as of and for the six months ended June 30, 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 June 30, 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.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, 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, if any, within the Company have been detected.
Changes in Internal Controls 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. This process may result in additions or changes to our internal control over financial reporting.
There havehas been no changesother change in our internal control over financial reporting (as definedidentified in connection with the evaluation required by paragraph (d) of Rules 13a-15(f) and 15d-15(f) of13a-15 or 15d-15 under the Exchange Act)Act that occurred during the three months ended June 30, 2021our most recent fiscal quarter that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any material legal proceedings and are not aware of any claims or actions pending 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 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our Annual Report, except as follows:
We cannot assure youRisks related to the EPI Health Acquisition
Integrating the EPI Health and legacy Novan businesses requires that we will realizemanagement balance the interests of integration and managing the day-to-day business of the combined company, and failure to do so effectively may have an adverse effect.
Achieving the anticipated benefits from our recent reverse stock split.
On May 25, 2021, we effected a one-for-ten Reverse Stock Split of our issued and outstanding shares of our common stock, which we anticipated would resultthe EPI Health Acquisition depends in benefits such as enhancingsignificant part upon our ability to raise capitalintegrate the EPI Health businesses, operations, processes, and systems in an efficient and effective manner. The integration of operations following the EPI Health Acquisition requires the dedication of significant management and external resources, which requires that management attend to fundand balance both integration efforts and the day-to-day business of the combined company and has required significant expenditures that are reflected in the accompanying condensed consolidated financial statements. Any inability of management to successfully and timely integrate the companies could have a material adverse effect on the business and results of operations of the combined company.
EPI Health may have liabilities that are not known to us.
EPI Health may have liabilities that we failed, or were unable, to discover in the course of performing our operations, improvingdue diligence investigations in connection with the marketabilityEPI Health Acquisition. We may learn additional information about EPI Health that materially and adversely affects us and EPI Health, such as unknown or contingent liabilities and liabilities related to compliance with applicable laws. Moreover, EPI Health may be subject to audits, reviews, inquiries, investigations, and claims of non-compliance and litigation by federal and state regulatory agencies which could result in liabilities or other sanctions. Any such liabilities or sanctions, individually or in the aggregate, could have an adverse effect on our common stockbusiness, financial condition, and increasingresults of operations.
We have made certain assumptions relating to the appealEPI Health Acquisition that may prove to be materially inaccurate.
We have made certain assumptions relating to the EPI Health Acquisition that may prove to be inaccurate, including as the result of our stockthe potential failure to realize the expected benefits of the EPI Health Acquisition, failure to realize expected revenue growth rates, higher than expected operating and transaction costs, as well as general economic and business conditions that could adversely affect the combined company.
The EPI Health Acquisition involves substantial costs.
We have incurred, and expect to continue to incur, a broader rangenumber of investors.non-recurring costs associated with the EPI Health Acquisition. The substantial majority of the non-recurring expenses have consisted of transaction costs related to the EPI Health Acquisition. We have and will also continue to incur transaction fees and costs related to formulating and implementing integration plans, including system consolidation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred relating to the EPI Health Acquisition and integration. Although we believe that a higher market price of our common stock may help generate greater or broader investor interest, we cannot assure youanticipate that the Reverse Stock Split will result in a share price that will attract new investors, including institutional investors, as some investors, analystselimination of duplicative costs and the realization of other stock market participants have negative perceptions of reverse stock splits. In addition, there can be no assurance thatefficiencies and synergies related to the market price of our common stock will satisfy the investing requirements of those investors. As a result, the trading liquidity of our common stockintegration should allow us to offset integration-related costs over time, this net benefit may not necessarily improve. Also, it is not uncommon for the market price of a company’s common stock to declinebe achieved in the period following a reverse stock split. If the market price ofnear term, or at all.
Risks Relating to our common stock declines further, the percentage decline may be greater than would have occurred in the absence of the ReverseCommon Stock Split.
The market price and trading volume of our common stock has fluctuated substantiallysubstantially. The market price and trading volume of our common stock may fluctuate widely in the future and the value of an investment in our common stock may decline.
Our stock price has experienced extreme volatility and could vary significantly as a result of many factors. Between January 1, 2021 and August 4, 2021,July 22, 2022, the last reported sales price of our common stock fluctuated between a high of $25.50 and a low of $7.48. The foregoing stock prices have been adjusted to give effect to the Reverse Stock Split.$2.29. 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. For example, the trading price of our common shares increased significantly in June 2021, which we believe was attributable to general market conditions and recognition of our recently announcedannouncement of top-line results of our B-SIMPLE4 study of SB206 for theas a potential treatment offor molluscum contagiosum, and has since declined. 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.
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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.
Risks Relating to Technology
We may be subject to confidential information theft or misuse, which could harm our business and results of operations. Our internal computer systems, or those of any of our existing or potential future collaborators, CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs, expose the Company to liability, affect our reputation and otherwise harm our business.
We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary and other confidential information. Despite the implementation of security measures, our internal computer systems and those of our current and any future CROs, CMOs, and other contractors, consultants and collaborators are vulnerable to damage from cyberattacks, “phishing” attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Attacks upon information technology systems are increasing in their frequency, levels of persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives and expertise, including in the context of global conflicts, such as the war in Ukraine. 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. As a result of the COVID-19 pandemic, we may also face increased cybersecurity risks due to our increased 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.
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 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Other Information
Amendment to Employment Agreement with John M. Gay
Effective as of August 11, 2021, we entered into a first amendment to the employment agreement, effective as of September 23, 2020, with John M. Gay, our Chief Financial Officer, or the Employment Agreement, to increase severance pay from 6-months to 12-months of Mr. Gay’s base salary and extend the "Regular Severance Period" (as defined in the Employment Agreement) from 6-months to 12-months in connection with the termination of Mr. Gay’s employment by us without “cause” or by him for “good reason” not in connection with a "change in control” (each as defined in the Employment Agreement). We also approved a one-time bonus for Mr. Gay of $35,000.Not applicable.
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Item 6. Exhibits
The following exhibits are being filed herewith or are being incorporated by reference and are numbered in accordance with Item 601 of Regulation S-K:
  INCORPORATED BY REFERENCE   INCORPORATED BY REFERENCE
EXHIBIT NO.EXHIBIT NO.DESCRIPTIONFiled HerewithFORMFile No.ExhibitFiling DateEXHIBIT NO.DESCRIPTIONFiled HerewithFORMFile No.ExhibitFiling Date
3.18-K001-378803.1May 25, 2021
4.14.1Form of June 2022 Common Warrant.8-K001-378804.1June 10, 2022
4.24.2Form of June 2022 Pre-Funded Warrant.8-K001-378804.2June 10, 2022
10.110.18-K001-3788010.1May 25, 202110.1Placement Agent Agreement, dated June 9, 2022, by and between the Company and Oppenheimer & Co. Inc.8-K001-3788010.1June 10, 2022
10.210.28-K001-3788010.2May 25, 202110.2Form of Securities Purchase Agreement, dated June 9, 2022, by and between the Company and the purchaser identified therein.8-K001-3788010.2June 10, 2022
10.3X
31.131.1X    31.1X    
31.231.2X    31.2X    
32.132.1X    32.1X    
32.232.2X    32.2X    
101.INS101.INSInline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.    101.INSInline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.    
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Novan, Inc.
By:/s/ Paula Brown Stafford
 Paula Brown Stafford
 Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ John M. Gay
John M. Gay
Chief Financial Officer
(Principal Financial Officer)
 
/s/ Andrew J. Novak
Andrew J. Novak
Vice President, Accounting and Business Operations
(Principal Accounting Officer)

Date: August 12, 202111, 2022

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