NOVN Novan, Inc. - 10-K

Item 1A. Risk Factors.

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

Risks Related to Our Current Financial Position and Need for Additional Capital

We have incurred net losses since our inception and anticipate that we will continue to incur net losses for the foreseeable future. We will need significant additional funding to continue our business operations and for the advancement of our product development programs. If we are unable to raise capital when needed, we would be forced to delay, reduce, terminate or eliminate our product development programs or the commercialization efforts for our products and/or delay, defer, or reduce our cash expenditures, or we may need to dissolve and liquidate our assets or seek protection under bankruptcy laws.

We are a commercial-stage medical dermatology company with a limited operating history. Investment in pharmaceutical and biotechnology product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate efficacy or an acceptable safety profile, obtain regulatory approval or become commercially viable. We have a history of losses and have not generated sufficient revenue to result in a profit from product sales. We have incurred losses in each period since inception, and may never achieve or maintain sustained profitability. For the years ended December 31, 2022, and December 31, 2021, we reported a net loss of $31.3 million and $29.7 million, respectively. As of December 31, 2022, and December 31, 2021, we had an accumulated deficit of $310.3 million, and $279.0 million, respectively, and there is substantial doubt about our ability to continue as a going concern.

Even with revenues derived from sales of our marketed products, we expect to continue to incur significant losses for the foreseeable future as we continue to spend substantial amounts on research and development, manufacturing and to commercialize our products and product candidates, if approved. We may also encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Although we recognize revenue from product sales and we continue to earn amounts under our license and collaboration agreements, our revenue and profit potential is unproven and our future operating results are difficult to predict. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Additional financing may not be available to us on acceptable terms, or at all. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

If we are forced to terminate or eliminate our product development programs or pursue other strategic alternatives or corporate transactions, there can be no assurance that such actions would result in any additional stockholder value. If we are forced to wind down our operations, liquidate or seek bankruptcy protection, it is unclear to what extent we would be able to pay our obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to our stockholders, whereby, our stockholders may lose some or all of their investment.

Raising additional capital may cause significant dilution to our existing stockholders, reduce the trading price of our common stock, restrict our operations or require us to relinquish rights to our technologies, products or product candidates.

Until such time as we can generate substantial product revenues, if ever, our ability to continue to operate our business, including our ability to advance our development programs, is dependent upon our ability to access additional capital through other sources, including partnerships, collaborations, licensing, grants or other strategic relationships, and/or through the issuance of debt or equity securities. Any issuance of equity or debt that could be convertible into equity would result in significant dilution to our existing stockholders. Debt financing, if available, involves and may involve agreements that include covenants requiring that we place liens on some or all of our assets or limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, effecting a change in control or declaring dividends. There can be no assurance that we will be able to obtain additional capital on terms acceptable to us, on a timely basis or at all. We currently do not have any committed sources of financing other than our accounts receivable factoring agreement, which requires us to meet certain conditions to utilize and there can be no assurance that we will meet those conditions.

Additionally, we have outstanding and exercisable warrants and options that if exercised may result in dilution to the interests of other stockholders and may reduce the trading price of our common stock. As of December 31, 2022, we had warrants to purchase approximately 5.5 million shares of common stock outstanding and exercisable with a weighted average exercise price of $2.86 per share. In addition, we had outstanding and exercisable options to purchase approximately 0.4 million shares of common stock as of December 31, 2022 with a weighted average exercise price of $18.70 per share.

We have entered into and rely on, and may enter into, engage in and rely on other, strategic relationships and transactions for the further development and commercialization of our products and product candidates and the expansion of our business, and if we are unable to enter into such relationships or transactions on favorable terms or at all, or if such are unsuccessful or if disputes arise between us and our strategic partners, we may be unable to realize the potential economic benefit of those products and product candidates.

We have entered into and rely on, and may enter into, engage in and rely on other, strategic relationships and transactions for the further development and commercialization of our products and product candidates and the expansion of our business, including out-licenses for commercialization of certain of our products and product candidates. In certain potential scenarios, the counterparty(ies) to such a strategic transaction have assumed and may assume responsibility for the planning, execution, or oversight of the clinical development and regulatory requirements for the associated products or product candidates and/or the commercialization of the products or product candidates. If we decide to engage in such a transaction and, as a result, no longer have significant involvement or responsibility for late-stage clinical development activities or commercialization, we would adjust our business strategy, operating plans, resources and capabilities accordingly. Alternatively, we may pursue a transaction in which the counterparty agrees to finance the continued development of one or more products or product candidates in exchange for future milestone or royalty payments.

However, there can be no assurance that we will be able to establish or enter into such arrangements on favorable terms, if at all, or that our current or future arrangements will be successful. If we are unable to establish successful agreements with suitable partners, we would face significant incremental costs, we may be required to limit the scope and number of our products and product candidates we can commercially develop or the territories in which we commercialize them or we might fail to commercialize products or programs for which a suitable collaborator or arrangement cannot be found.

Any strategic relationship or transaction may entail numerous risks, including taking on indebtedness or contingent liabilities; the issuance of equity securities which would result in dilution to our stockholders; assimilation of acquired operations, intellectual property, products and product candidates, including difficulties associated with integrating new personnel; risks and uncertainties associated with the other party to such a transaction, and our inability to generate revenue from acquired intellectual property, technology, products or operations sufficient to meet our objectives or even to offset the associated transaction and maintenance costs. Additionally, our current and future collaboration partners may not dedicate sufficient resources to the development and commercialization of our products and product candidates or may otherwise fail in their development and commercialization due to factors beyond our control. If we breach or fail to comply with any provision of a strategic arrangement, a collaborator may have the right to terminate, in whole or in part, such agreement or to seek damages. Some of our strategic arrangements are complex and involve sharing of certain data, know-how and intellectual property rights amongst the parties. Additionally, collaborators may not accept the transfer of critical methods and processes in order for development and commercialization work for our products and product candidates to take place. Our strategic partners could interpret certain provisions differently than we do, which could lead to unexpected or inadvertent disputes with such partners. Any one of our strategic partners could breach obligations, covenants or restrictions in our agreements, leading us into disputes and potential breaches of our agreements with other parties, which could have direct or indirect financial implications. If a strategic relationship terminates or is otherwise unsuccessful, we may need to identify and establish an alternative arrangement. This may not be possible, or we may not be able to do so on terms which are acceptable to us, in which case, it may be necessary for us to cease the development of the applicable product candidate, or conduct the remaining clinical development or commercialization of any product candidate on our own and with our own funds.

Our process of considering financial and strategic alternatives could adversely affect our business, financial condition, and results of operations.

We from time to time consider various financial and strategic alternatives to deliver value to our stockholders. Such alternatives might include, among other things, strategic acquisitions or in-licenses, out-licensing some or all of our products or product candidates, the sale of some or all of our assets, or a sale of our company, but there can be no assurance that we will be able to enter into such a transaction or transactions on a timely basis or at all or on terms that are favorable to us. We may pursue such alternatives at the same time as we seek to secure additional funding. This process could disrupt and create uncertainty concerning our business, regardless of whether we are able to obtain additional funding or complete any strategic alternatives, and poses other risks to our business, including:

• potential uncertainty in the marketplace concerning our ongoing viability as a business

• the possibility of disruption to our business and operations, including diversion of significant management time and resources towards the pursuit of funding and strategic alternatives

• impairment of our ability to attract and retain key personnel who are necessary to the operation of the business and the development of its product candidates

• restrictions on our business operations and ability to explore other strategic alternatives under any definitive agreement we may enter into as a result of this process; and

• potential future stockholder litigation relating to the strategic process that could prevent or delay the strategic process, and the related costs of such litigation.

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

Amounts under our factoring arrangement are subject to terms that may adversely affect our operations and financial condition.

Our wholly owned subsidiary, EPI Health, entered into a factoring agreement in December 2022. The factoring agreement provides for an up to $15.0 million credit facility which we may draw upon to the extent we have qualifying accounts receivable as defined in the agreement. The lender has the right to demand repayment of advances under the facility if the accounts receivable purchased by the lender remain unpaid after the payment period or if such accounts receivable are disputed, and amounts owed under the agreement are secured by the assets of EPI Health. Novan is not a party to the agreement, but in connection with EPI Health entering into the agreement, Novan guaranteed payment and performance of all obligations of EPI Health to the lender under the agreement pursuant to the terms of a continuing guaranty agreement. If the lender demands repayment and EPI Health fails to make such repayment, or if EPI Health causes or permits any other event of default as defined in the agreement, or fails to comply with covenants set forth in the agreement (including restrictions on incurring other debt under unsecured loans), EPI Health would be subject to additional expenses (and Novan would be responsible if such payments were not made by EPI Health) or possible foreclosure on EPI Health’s assets that secure the obligations under the agreement. Such results could have a material adverse effect on our operations and financial condition.

The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2022, contains an explanatory paragraph regarding going concern, and we will need additional financing to execute our business plan, to fund our operations and to continue as a going concern.

Since inception, we have experienced recurring operating losses and negative cash flows and we expect to continue to generate operating losses and consume significant cash resources in the foreseeable future. These conditions raise substantial doubt about our ability to continue as a going concern without additional financing. As a result, our independent registered public accounting firm included explanatory paragraphs in its report on our 2022 consolidated financial statements, with respect to this uncertainty. Substantial doubt about our ability to continue as a going concern may materially and adversely affect the price per share of our common stock and we may have a more difficult time obtaining financing.

Integrating the EPI Health and legacy Novan businesses is a continuing process that involves risks associated with acquisitions and integrating acquired businesses. Failure to do so effectively may have an adverse effect.

Since our acquisition of EPI Health in March 2022, we have been working to integrate the EPI Health businesses, operations, processes, and systems with our own. Achieving the anticipated benefits of the EPI Health Acquisition depends in significant part upon our ability to integrate the businesses, operations, processes, and systems in an efficient and effective manner. This effort has required the dedication of significant management and external resources and significant expenditures that we expect will continue as we work to complete our integration efforts. Any inability of management to successfully integrate the companies could have a material adverse effect on the business and results of operations of the combined company.

Risks Related to the Development and Regulatory Approval of our Current and Future Product Candidates

We may expend our limited resources to pursue one or more product candidates or indications within our product development strategy, which has and may continue to change over time, and thus fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we intend to focus the work within our Research & Development segment on developing product candidates for specific indications that we identify as most likely to succeed, in terms of their potential both to gain regulatory approval and to achieve commercialization. As a result, we may forego or delay the pursuit of opportunities with other product candidates or in other indications with greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable product candidates. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to the product candidate.

If we do not successfully achieve regulatory approval for any of our product candidates or successfully commercialize them, all of which is a lengthy and expensive process with uncertain timelines and outcomes, we may not be able to continue as a business.

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

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

On June 11, 2021, we announced positive top-line results from the Phase 3 B-SIMPLE4 clinical trial for SB206 for the treatment of molluscum contagiosum; however, we cannot assure you that the results from B-SIMPLE4 will be sufficient for the FDA to approve the NDA submitted for SB206 in January 2023 or that any additional clinical trials we may conduct for any of our other product candidates will achieve results that are sufficient to support an NDA submission for the applicable product candidates or regulatory approval of the product. We also cannot assure you that we will be able to obtain financing sufficient to advance development of one or more of our product candidates. In addition, our ongoing or future preclinical studies may not prove successful in demonstrating proof-of concept, or may show adverse toxicological findings, and even, if successful, may not necessarily predict that subsequent clinical trials will show the requisite safety and efficacy of our product candidates. Moreover, all of our clinical development efforts to date in our Research & Development segment have focused on the development of nitric oxide-based topical therapies. There can be no assurance that the intended or anticipated results from the use of nitric oxide-based therapies will be reaped, and that we, or our existing or potential future commercial partners, will successfully bring our product candidates to market. Because all of our current product candidates are based on nitric oxide and our Nitricil technology, the failure of our Nitricil technology to be safe or efficacious generally will have adverse implications for our entire product candidate pipeline. If, for any reason, our intended use of nitric oxide does not materialize, we may not be able to redeploy our resources to alternative components or raw materials, efficiently or at all.

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

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

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

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

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

• adverse events occurring in clinical studies of our product candidates;

• recruiting suitable patients to participate in a trial;

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

• clinical sites deviating from trial protocol;

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

• adding a sufficient number of clinical trial sites;

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

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

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

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory authorities for a variety of reasons.

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

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

• the patient eligibility criteria defined in the protocol;

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

• the proximity of patients to trial sites;

• the design of the trial;

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

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

• our ability to obtain patient consents; and

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

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

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

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

We currently do not have the ability to independently conduct preclinical studies that comply with the regulatory requirements known as good laboratory practice, or GLP, requirements. We also do not currently have the ability to independently conduct any clinical trials. The FDA and regulatory authorities in other jurisdictions require us to comply with regulations and standards, commonly referred to as good clinical practice, or GCP, requirements for conducting, monitoring, recording and reporting the results of clinical trials, in order to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. We rely on medical institutions, clinical investigators, contract laboratories and other third parties, such as CROs, to conduct GLP-compliant preclinical studies and GCP-compliant clinical trials on our product candidates properly and on time. While we will have agreements governing their activities, we control only certain aspects of their activities and have limited influence over their actual performance. The third parties with whom we contract for execution of our GLP preclinical studies and our GCP clinical trials play a significant role in the conduct of these studies and trials and the subsequent collection and analysis of data. These third parties are not our employees and, except for restrictions imposed by our contracts with such third parties, we have limited ability to control the amount or timing of resources that they devote to our programs. Although we rely on these third parties to conduct our GLP-compliant preclinical studies and GCP-compliant clinical trials, we remain responsible for ensuring that each of our GLP preclinical studies and GCP clinical trials is conducted in accordance with its investigational plan and protocol and applicable laws and regulations, and our reliance on the third parties does not relieve us of our regulatory responsibilities. In addition, if any of our third parties terminate their involvement with us for any reason, we may not be able to enter into similar arrangements with alternative third parties within a short period of time or do so on commercially reasonable terms.

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

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

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

We, any partner with whom we may collaborate in the future, or the FDA may suspend, delay, require modifications to or terminate our clinical trials at any time, for various reasons, including the discovery of serious or unexpected toxicities or other safety issues experienced by trial participants. In addition, adverse events caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of adverse events or unexpected characteristics. To date, patients treated with our product candidates have experienced instances of drug-related cutaneous intolerability observations, including dryness, scaling, burning, erythema, itching, pain or irritation, and adverse events, including irritation and contact dermatitis.

If safety issues or unacceptable adverse events arise in the development of our product candidates, we, the FDA, the IRBs at the institutions in which our trials are conducted, or the DSMB could suspend or terminate our clinical trials or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-related adverse events could also affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. In addition, these adverse events may not be appropriately recognized or managed by the treating medical staff. Any of the foregoing events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and may result in the loss of significant revenues to us, which would materially and adversely affect our results of operations and business.

The regulatory approval processes of the FDA are lengthy, time-consuming and inherently unpredictable, and if we, or a potential future partner, are ultimately unable to obtain regulatory approval for our product candidates on a timely basis or at all, our business will be substantially harmed.

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

Prior to obtaining approval to commercialize a product candidate in the United States or abroad, we or our collaborators must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA or foreign regulatory authorities, that such product candidates are safe and effective for their intended uses. Results from preclinical studies and clinical trials can be interpreted in different ways. Even if we believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. For example, there are multiple methodologies for handling missing data and other statistical considerations to take into account

that the FDA may utilize when analyzing the robustness of any data set during NDA review. The FDA may also require us to conduct additional preclinical studies or clinical trials for our product candidates either prior to or post-approval, or it may object to elements of our clinical development program.

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

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

• unfavorable or ambiguous results from our clinical trials;

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

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

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

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

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

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

• the FDA’s disagreement regarding the formulation, container, dosing delivery device, labeling or the specifications of our product candidates;

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

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

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

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

Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new or modified products from being developed, approved, or commercialized in a timely manner, or at all, which could negatively impact our business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, the ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the FDA have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs or modifications to approved drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

Separately, in response to the COVID-19 pandemic, the FDA postponed most inspections of domestic and foreign manufacturing facilities at various points. Even though the FDA has since resumed standard inspection operations of domestic facilities where feasible, the FDA has continued to monitor and implement changes to its inspectional activities to ensure the safety of its employees and those of the firms it regulates as it adapts to the evolving COVID-19 pandemic, and any resurgence

of the virus or emergence of new variants may lead to further inspectional delays Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

Interim, top-line or preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publicly disclose interim, top-line, or preliminary data from our clinical trials, which are based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a full analyses of all data related to the particular trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the interim, top-line, or preliminary results that we report may differ from future results of the same trials, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Top-line and preliminary data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, top-line and preliminary data should be viewed with caution until the final data are available.

We may also disclose interim data from our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between interim, top-line, or preliminary data and final data could significantly harm our business prospects.

Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and our business in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular drug, product candidate or our business. If the interim, top-line, or preliminary data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for and commercialize our product candidates, our business, operating results, prospects or financial condition may be harmed.

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

We, or any current or potential future partners, may seek regulatory approval of our product candidates from foreign regulatory authorities. Such regulatory authorities may impose additional regulations and guidelines that differ in form and substance from those imposed by their counterparts in the United States and with which we are more familiar. Accordingly, the regulatory approval of our product candidates in those foreign jurisdictions could be delayed, limited or denied altogether. This could limit the scope of or prevent the commercialization of our products in the future and adversely affect our financial performance. Further, in some countries, the pricing of pharmaceutical prescriptions is subject to governmental control, including, for example, Japan. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after coverage and reimbursement have been obtained. Reference pricing used by various countries and parallel distribution or arbitrage between low-priced and high-priced countries can further reduce prices. To obtain reimbursement or pricing approval in some countries, we or our current or potential future partners may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies, which is time-consuming and costly. If coverage and reimbursement of our product candidates are unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed.

Risks Related to the Commercialization of Our Products and Product Candidates, if such Product Candidates Complete Development and Receive Regulatory Approval

Our products face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration.

The pharmaceutical industry and the markets in which our approved products compete are characterized by rapidly advancing technologies, intense competition and a strong emphasis on developing proprietary therapeutics. Numerous companies are engaged in the development, patenting, manufacturing and marketing of healthcare products competitive with those that we are commercializing and developing. We face competition from a number of sources, such as pharmaceutical companies, generic drug companies, biotechnology companies and academic and research institutions, many of which have greater financial resources, marketing capabilities, sales forces, manufacturing capabilities, research and development capabilities, clinical trial expertise, intellectual property portfolios, experience in obtaining patents and regulatory approvals for product candidates and other resources than we do. Some of the companies that offer competing products also have a broad range of other product offerings, large direct sales forces and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts. In addition, certain of our products compete with other products, including OTC treatments, for a share of some patients’ discretionary budgets and for physicians’ attention within their clinical practices. To compete successfully in the marketplace, our approved products must demonstrate that the relative cost, safety and efficacy of such products provide an attractive alternative to existing and other new therapies. Such competition could lead to reduced market share for our products and contribute to downward pressure on the pricing of our products. Any of our product candidates that receive regulatory approval will be subject to the same risks.

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

If we are unable to maintain sales, marketing and distribution capabilities for our products and any future product candidate that receives regulatory approval, either through a commercial partner or internally, we may not be successful in commercializing and generating revenues from those products and product candidates, if approved.

Our ability to generate revenue from product sales and our prospects for profitability are substantially dependent on our and our collaborators’ ability to effectively commercialize our products and expand their utilization. Following our acquisition of EPI Health, we have a sales, marketing and distribution infrastructure to support the commercialization of our products and product candidates, if approved. Our products and any future product candidates that receive regulatory approval depend on this commercial infrastructure, or any commercial or strategic partner with whom we collaborate, to achieve commercial success. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

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

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

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

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

• unforeseen costs and expenses associated with maintaining and potentially expanding an independent sales and marketing organization.

We may enter into arrangements with third parties to perform sales, marketing and distribution services, which could decrease our revenue and our profitability. In addition, we may not be successful in entering into such arrangements with third parties or may be unable to do so on terms that are favorable to us. We may not have adequate control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. In addition, such third parties will be subject to the commercialization risks described above. If we do not maintain sales, marketing and distribution capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing our products and product candidates.

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

Our product revenues are dependent on sales to a few significant wholesale customers and the loss of, or substantial decline in, sales to one of these wholesale customers could have a material adverse effect on our expected future revenues and profitability.

Our product revenues are dependent on sales to a few significant wholesale customers and the loss of, or substantial decline in, sales to one of these wholesale customers could have a material adverse effect on our expected future revenues. Wholesale customers that purchase our products account for a substantial percentage of net sales revenue, and the loss of all or a portion of the sales to any one of these customers could have a material adverse effect on the results of operations generated by product sales. In particular, as of and for the year ended December 31, 2022, one of our wholesaler customers accounted for more than 10% of our annual total gross product revenue at 12%, and three of our wholesaler customers accounted for more than 10% of total accounts receivable at 25%, 13% and 12%, respectively. We expect that a small group of wholesale customers will continue to account for a significant portion of our net product revenues for the foreseeable future. Although we have developed long-standing relationships with our wholesale customers, we generally do not, consistent with industry norms, have advance commitments that require these wholesale customers to buy from us or to purchase a minimum amount of our products. A substantial decrease in sales to any of our wholesale customers could have a material adverse effect on our business and our financial condition and operating results.

Our Rhofade product currently represents a significant portion of our product revenues, and in the future a relatively small group of products may represent a significant portion of our revenues, gross profit, or net earnings from time to time.

Although we sell several approved products and have other product candidates in development, sales of our Rhofade products currently represents a significant portion of our product revenues. For the fiscal year ended December 31, 2022, sales of Rhofade, in the aggregate, represented approximately 73% of our total net product revenues. If the volume or pricing of our largest selling product declines in the future for anything more than a temporary delay, our business, financial condition, results of operations, cash flows, utilization of our accounts receivable-backed factoring agreement and/or share price could be materially adversely affected.

Our products, and any future product candidates that receive regulatory approval, may fail to achieve the broad degree of physician and patient adoption and use necessary for commercial success.

The commercial success of our approved products, and any future product candidates that receive regulatory approval, depends significantly on the broad adoption and use of such products by physicians and patients for approved indications. The degree and rate of physician and patient adoption of our approved products and any future product candidates, if approved, depends on a number of factors, including:

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

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

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

• the cost of treatment with our products and product candidates in relation to alternative treatments and willingness to pay for such products on the part of patients;

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

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

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

• patient satisfaction with the results and administration of our products and any of our product candidates that may be approved and overall treatment experience;

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

• the revenue and profitability that our products and any product candidates that may be approved may offer a physician as compared to alternative therapies;

• the prevalence and severity of adverse events;

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

• any FDA requirement to undertake a REMS;

• the effectiveness of our sales, marketing and distribution efforts;

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

• potential product liability claims.

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

Our relationships with healthcare providers, customers and third-party payors, as well as our general business operations, are subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, and failure to comply with such regulations could expose us to penalties including criminal sanctions, civil penalties, exclusion from government healthcare programs, contractual damages, reputational harm and diminished profits and future earnings.

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

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

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

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

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

• analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; and state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or report marketing expenditures and pricing information.

Efforts to ensure that our internal operations and business arrangements with third parties comply with applicable healthcare laws and regulations involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of

interpretations. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including our relationships with physicians and other healthcare providers, some of whom recommend, purchase or prescribe our products, could be subject to challenge under one or more of such laws.

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

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

If we or other companies developing similar products identify undesirable side effects caused by our or similar products, a number of potentially significant negative consequences could result, including:

• regulatory authorities may withdraw their approval of the product;

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

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

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

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

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

• the product may become less competitive; and

• our reputation may suffer.

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

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

Despite all reasonable efforts to ensure safety, it is possible that we or our distributors will sell products that are defective, to which patients/customers react in an unexpected manner, or which are alleged to have side effects or otherwise not work for the product’s intended purpose. We face an inherent risk of product liability as a result of the commercialization of our products and the clinical testing of our product candidates. This risk exists even though a product is approved for commercial sale by the FDA or an applicable foreign regulatory authority and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Our products and product candidates are designed to affect important bodily functions and processes. Any adverse events, manufacturing defects, misuse or abuse associated with our products or product candidates could result in injury to a patient or even death. We cannot offer any assurance that we will not face product liability suits in the future, nor can we assure you that our insurance coverage will be sufficient to cover our liability under any such cases. In addition, a liability claim may be brought against us even if our products or product candidates merely appear to have caused an injury. Product liability claims may be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products or product candidates, among others. If we cannot successfully defend ourselves against product liability claims we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in circumstances that are materially adverse to our business, including:

• withdrawal of clinical trial participants;

• decreased enrollment rates of clinical trial participants;

• termination of clinical trial sites or entire trial programs;

• the inability to commercialize our product candidates;

• decreased demand for our products and product candidates;

• impairment of our business reputation;

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

• substantial costs of any related litigation or similar disputes;

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

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

• loss of revenue.

We have obtained product liability insurance coverage. Large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated adverse events. Our insurance coverage may not be sufficient to cover all of our product liability related expenses or losses and may not cover us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect us against losses due to product liability, or at all. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash, negatively impact our statement of operations and harm our financial condition.

Our products may become subject to unfavorable third-party coverage or reimbursement policies, which would harm our business.

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

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

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

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

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

Risks Related to Our Operations and Manufacturing

Delays or disruptions in our supply chain and manufacturing of our products and product candidates could adversely affect our sales and marketing efforts and our development and commercialization timelines and result in increased costs or in our breaching our obligations to others.

Our ability to make, move, and sell our products is critical to our success. Historically, we have utilized internal small-scale manufacturing operations to support our research and development efforts. In acquiring EPI Health, we have expanded our product offerings and operations with several existing commercial relationships that supply the products we acquired in the EPI Health Acquisition. With this larger operational business and range of product offerings comes additional opportunity for us as well as corresponding risk in certain areas. Our subsidiary, EPI Health, uses third party contract manufacturers and suppliers to obtain substantially all raw materials, components, and packaging products and to manufacture finished products. Damage or disruption to our supply chain, including third-party manufacturing, assembly or transportation and distribution capabilities, due to weather, including any potential effects of climate change, natural disaster, fire or explosion, terrorism, pandemics (such as the COVID-19 pandemic), strikes, government action, inflation, war or other reasons beyond our control or the control of our suppliers and business partners, could impair our ability to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, particularly where our product is sourced from a single supplier or location, could adversely affect our business or financial results. Any interruption or failure by our suppliers, distributors and other partners to meet their obligations on schedule or in accordance with our expectations, misappropriation of our proprietary information, including trade secrets and know-how, or any termination by these third parties of their arrangements with us, which, in each case, could be the result of one or many factors outside of our control, could delay or prevent the manufacture or commercialization of our products, disrupt our operations or cause reputational harm to our company, particularly with wholesale customers, any or all of which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, except for the terms and conditions specified in our contractual arrangements with our contract manufacturers, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our API or drug products or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for, market and sell our products and product candidates, if approved.

We are required to identify the supplier(s) of all the raw materials for our products in our applications with the FDA. To the extent practicable, we attempt to identify more than one supplier in each drug application. However, some products and raw materials are available only from a single source and, in some of our drug applications, only one supplier of products and raw materials has been identified, even in instances where multiple sources exist. To the extent any difficulties experienced by our suppliers cannot be resolved within a reasonable time and at reasonable cost, or if raw materials for a particular product become unavailable from an approved supplier and we are required to qualify a new supplier with the FDA, our profit margins and market share for the affected product could decrease and our development and sales and marketing efforts could be delayed.

We have never produced at a commercial scale any products that utilize any of our Nitricil NCEs, and any delay or disruptions in the qualification of manufacturing facilities and process or in the manufacture of our (i) APIs, including berdazimer sodium, the API of our SB206 product candidate, or (ii) clinical trial materials or commercial supplies of any approved product candidates utilizing any of our Nitricil NCEs, could adversely affect our development and commercialization timelines and results or result in increased costs or in our breaching our obligations to others.

We have internally manufactured the berdazimer sodium API, one of our Nitricil NCEs that is utilized in our SB206 product candidate, for all of our current clinical stage product candidates, and at this stage, we intend to pursue a dual strategy of identifying and designating a partner to become the primary third-party external supplier of our proprietary berdazimer sodium drug substance to support short-term and long-term manufacturing needs, while continuing internal capabilities to provide optionality and support certain small-scale and short-term manufacturing needs. Any delays or disruptions in our third-party manufacturers’ performance and completion of the required technology transfer of the manufacturing processes and analytical methods for API development and commercial manufacturing under cGMP guidelines and regulations, or our inability to deliver such capabilities internally, could impact the development and commercialization timelines of our product candidates, as well as increase costs. Further, if we do not appropriately coordinate with, project manage, or provide adequate internal expertise, resources and documentation to a third-party API manufacturer, we may not be successful, or may be delayed, in transferring the activities, processes, capabilities and services. For example, in 2021, we entered into development services agreements with third-party full-scale API manufacturers for certain manufacturing process feasibility services including process familiarization, safety assessments, preliminary engineering studies, and initial process and analytical methods determinations. As we have internally manufactured the API necessary to support the NDA submission for SB206, we are now in the process of planning to proceed with a third-party API manufacturer beyond the initial stages noted above to support the commercial launch of SB206, if approved and expect to incur substantial costs associated with technical transfer efforts, capital expenditures, manufacturing capabilities, and ultimately, potential large-scale commercial quantities of our drug substance. If we are not able to successfully complete the stages noted above, we will need to be able to produce sufficient quantities of API

internally in order to support a commercial launch of SB206, if approved. We have a limited number of personnel who have experience in drug substance manufacturing and possess the expertise necessary to manufacture berdazimer sodium.

We believe increased utilization of and reliance upon third-party vendors and strategic partners for the performance of activities, processes and services can ultimately provide enhanced capabilities and operating efficiencies for us and any potential partnerships, collaborations, licensing or other strategic relationships we may enter. However, there can be no assurance that the technology transfer process with any of these potential API manufacturing partners, or with Orion, with whom we have formed a strategic alliance to enable Orion to manufacture our topical nitric oxide-releasing product candidates on our behalf and on behalf of our global strategic partners, will be successful or that it will take place within the time period needed to meet our targeted development and approval timeframes for our product candidates. For instance, we may not be successful in realizing the intended operating efficiencies from these arrangements based on a number of factors, including, among other things, (i) delays or failures, including delays in our ability to transition applicable technology and processes to our vendors or partners, (ii) reduced quality, (iii) delayed receipt of goods or services, (iv) increased and unexpected costs on the part of the third-party vendors or strategic partners, and (v) certain incremental and discrete costs to effect this strategy upon resumption of the manufacturers’ transfer activities. If we are unsuccessful in partnering with third-party manufacturers, we could experience delays in the development and commercialization timelines of our product candidates, as well as increased costs, in connection with shifting a greater portion of manufacturing to our internal resources or entering into new third party manufacturing arrangements.

Additionally, to date, we and our third-party manufacturers have only manufactured SB206 in limited quantities in batch sizes appropriate for our clinical trials and registration batches to support the NDA, for which batch sizes are a fraction of the size that will be necessary for commercialization. The manufacturing processes for commercial scale are in development and have not been fully tested and the process validation requirement has not yet been satisfied. There are risks associated with scaling up manufacturing to commercial volumes including, among others, cost overruns, technical or other problems with process scale-up, process reproducibility, stability issues, lot consistency and timely availability of raw materials. There is no assurance that our manufacturers will be successful in establishing a larger-scale commercial manufacturing process for SB206, if approved, that achieves our objectives for manufacturing capacity and cost of goods, in a timely manner, or at all.

The continuing effects of the COVID-19 pandemic have had an impact on our operations and could continue, directly or indirectly, to adversely affect our business, results of operations and financial condition.

We may experience disruptions from the continuing effects of the COVID-19 pandemic (and any changes or developments in the pandemic) that could impact our business, results of operations and financial condition, including impacting the supply chain for our products and product candidates, the sales of our products, our clinical trials and our work to develop commercialization plans for SB206. To the extent our suppliers and third-party manufacturers are unable to comply with their obligations under our agreements with them or if supply chain or other disruptions cause them to be unable to deliver or are delayed in delivering raw materials, API or drug products to us due to COVID-19-related effects, our ability to continue our sales, marketing and commercial operations may become impaired, and our ability to pursue regulatory approval, implement our commercialization efforts for SB206, if approved, or advance development of our product candidates may also become impaired.

Changes to our leadership team or operational resources, including our sales team, could prove disruptive to our operations and have adverse consequences for our business and operating results.

From time to time, we undergo changes and transitions among the ranks of senior executives and other senior-level managers, including in connection with the EPI Health Acquisition. Managing transitions with senior executives or other senior-level managers may divert our existing management team’s attention from our core operations, and the recent transitions we have experienced may make it more difficult for us to retain existing employees. In addition, the recent transitions we have experienced have increased our dependency on key members of the senior executive team and other senior-level managers within the organization. We have incurred costs related to transitions in our management team, including severance payments, and have required departing executives to agree to certain obligations in their separation agreements. We also expect to incur recruitment costs related to the hiring of new executives or engaging other operational resources from time to time.

Moreover, recruiting and retaining qualified personnel, including in sales and operational roles, is critical to our success. We have experienced and many continue to experience turnover among our workforce, including within our salesforce, and we may not be able to attract and retain these personnel on acceptable terms given our current financial position, recent market trends, and the competition among numerous pharmaceutical and biotechnology companies for similar personnel. In addition, we rely on consultants and advisors, including commercial, scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategies. Our consultants and advisors may be engaged by companies other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

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

Third parties engaged directly by us or by our API and drug product contract manufacturing organizations, or CMOs, test all of the raw materials and finished API and drug products. It is a regulatory requirement that raw materials are tested and there are a limited number of suppliers for testing these raw materials. There may be a need to assess alternate suppliers to prevent a possible disruption of the supply of these raw materials for the manufacture of API or drug product. Additionally, the analytical equipment used by these third parties must be maintained and operational. Except for the terms established within our, or our CMOs’, contracts with the third parties responsible for testing raw materials and finished API and drug products, we have limited ability to control the process or timing of their testing work. Additionally, if the results do not meet specifications, then obtaining additional raw materials may jeopardize our or the CMOs’ ability to manufacture API and/or drug product, the start or overall conduct of preclinical studies and clinical trials, the timing of regulatory submissions, or the commercialization of our products and product candidates, if approved. We and our CMOs currently engage third parties to perform analytical tests to ensure the API and drug product meets quality specifications. The analytical equipment used by us or our CMOs to perform these tests must be maintained, qualified, calibrated and operational. If there are testing execution delays, equipment problems or if the results of the analytical testing do not meet our quality specifications, then manufacturing additional API or drug product may increase costs and may jeopardize our or the CMOs’ ability to manufacture API and/or drug product, which may cause delays in the start or overall conduct of preclinical studies and clinical trials, the submission of regulatory filings, or the commercialization of our products and product candidates, if approved.

Our business involves the use of hazardous materials and we and our third-party suppliers and manufacturers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

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

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

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

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

We may be adversely affected by the effects of inflation.

Inflation has the potential to adversely affect our liquidity, business, financial condition and results of operations by increasing our overall cost structure. The existence of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, supply shortages, increased costs of labor, components, manufacturing and shipping, as well as weakening exchange rates and other similar effects. As a result of inflation, we have experienced and may continue to experience cost increases. Although we may take measures to mitigate the effects of inflation, if these measures are not effective and if the inflationary pressure is sustained, our business, financial condition, results of operations and liquidity could be negatively affected. Even if such measures are effective, there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost of inflation is incurred.

Risks Related to Government Regulation

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

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

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

• fines, warning letters or holds on clinical trials;

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

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

• injunctions or the imposition of civil or criminal penalties.

The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates.

We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may be subject to enforcement action and we may not achieve or sustain profitability.

The regulatory approvals for our products and any regulatory approvals for our product candidates in the United States are and will be limited to the specific indication authorized by the FDA. If we are found to be in violation of FDA and other regulations restricting the promotion of any approved products for unapproved uses, we could be subject to criminal penalties, substantial fines or other sanctions and damage awards.

The regulatory approvals we have obtained to market our products are limited by an indication statement for the treatment of one or more indications, and we are prohibited from marketing any approved products for uses outside of those for which we have received approval. Similarly, if we obtain regulatory approval for any of our product candidates, such approval will be limited to the specific indication(s) authorized by the FDA.

The regulations relating to the promotion of products for unapproved uses are complex and subject to substantial interpretation by the FDA and other government agencies. Products may not be promoted for uses that are not approved in the labeling by the FDA or EMA. Physicians may, following FDA approval, nevertheless prescribe our products off-label to their patients in a manner that is inconsistent with the approved label. We have implemented compliance and training programs designed to ensure that our sales and marketing practices comply with applicable regulations. Notwithstanding these programs, the FDA or other government agencies may allege or find that our practices constitute prohibited promotion of our products for unapproved uses. We also cannot be sure that our employees will comply with company policies and applicable regulations regarding the promotion of products for unapproved uses, but we may nevertheless be deemed responsible for their marketing activities.

In recent years, a significant number of pharmaceutical and biotechnology companies have been the target of inquiries and investigations by various federal and state regulatory, investigative, prosecutorial and administrative entities in connection with the promotion of products for unapproved uses and other sales practices, including the Department of Justice and various United States Attorneys’ Offices, the Office of Inspector General of the Department of Health and Human Services, the FDA, the Federal Trade Commission and various state Attorneys General offices. These investigations have alleged violations of various federal and state laws and regulations, including claims asserting antitrust violations, violations of the Federal Food, Drug and Cosmetic Act, the False Claims Act, the Prescription Drug Marketing Act, anti-kickback laws and other alleged violations in connection with the promotion of products for unapproved uses, pricing and Medicare and/or Medicaid reimbursement. Many of these investigations originate as “ qui tam ” actions under the False Claims Act. Under the False Claims Act, any individual can bring a claim on behalf of the government alleging that a person or entity has presented a false claim, or caused a false claim to be submitted, to the government for payment. The person bringing a qui tam suit is entitled to a share of any recovery or settlement. Qui tam suits, also commonly referred to as “whistleblower suits,” are often brought by current or former employees. In a qui tam suit, the government must decide whether to intervene and prosecute the case. If it declines, the individual may pursue the case alone.

If the FDA or any other governmental agency initiates an enforcement action against us or if we are the subject of a qui tam suit and it is determined that we violated prohibitions relating to the promotion of products for unapproved uses, we could be subject to warning letters, untitled letters, substantial civil or criminal fines or damage awards and other sanctions such as consent decrees and corporate integrity agreements pursuant to which our activities would be subject to ongoing scrutiny and monitoring to ensure compliance with applicable laws and regulations. Any such fines, awards or other sanctions would have an adverse effect on our revenue, business, financial prospects and reputation.

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

In the United States and some foreign jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell our products and any product candidates for which we obtain marketing approval. In 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, was signed into law. Since its enactment, however, there have been significant ongoing efforts to modify or eliminate the ACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA without specifically ruling on the constitutionality of the ACA. Prior to the Supreme Court’s decision, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through August 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA.

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, resulted in reductions to Medicare payments to providers, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2032, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022, unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. In addition, on March 11, 2021, the American Rescue Plan Act of 2021 was signed into law, which eliminates the statutory Medicaid drug rebate cap, currently set at 100% of a drug’s average manufacturer price, beginning January 1, 2024.

Further, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of prescription drugs. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement

methodologies for products. On August 16, 2022, the Inflation Reduction Act of 2022, or IRA, was into law. Among other things, the IRA requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (first due in 2023), and replaces the Part D coverage gap discount program with a new discounting program (beginning in 2025). The IRA permits the Secretary of the Department of Health and Human Services to implement many of these provisions through guidance, as opposed to regulation, for the initial years. For that and other reasons, it is currently unclear how the IRA will be effectuated.

At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Legally mandated price controls on payment amounts by third-party payors or other restrictions could harm our business, results of operations, financial condition and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce the ultimate demand for our product candidates, if approved, or put pressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects.

We expect that other healthcare reform measures that may be adopted in the future, may, among other things, result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our product candidates, if approved. Adoption of government controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for pharmaceuticals.

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

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

As a United States company, we are subject to United States import and export controls and economic sanctions laws and regulations, and we are required to import and export our API, products and product candidates, technology and services in compliance with those laws and regulations, including the United States Export Administration Regulations, the International Traffic in Arms Regulations, and economic embargo and trade sanction programs administered by the Treasury Department’s Office of Foreign Assets Control. United States economic sanctions and export control laws and regulations prohibit the shipment of certain products and services to countries, governments and persons targeted by United States sanctions. While we are currently taking precautions to prevent doing any business, directly or indirectly, with countries, governments and persons targeted by United States sanctions and to ensure that our product candidates, if approved, are not exported or used by countries, governments and persons targeted by United States sanctions, such measures may be circumvented. Furthermore, if we export our API, products or product candidates, if approved, the exports may require authorizations, including a license, a license exception or other appropriate government authorization. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Failure to comply with export control and sanctions regulations for a particular sale may expose us to government investigations and penalties. If we are found to be in violation of United States sanctions or import or export control laws, it could result in civil and criminal, monetary and non-monetary penalties, including possible incarceration for those individuals responsible for the violations, the loss of export or import privileges and reputational harm.

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

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

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

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

Changes in and failures to comply with United States and foreign privacy and data protection laws, regulations and standards may adversely affect our business, operations and financial performance.

We are subject to or affected by numerous federal, state and foreign laws and regulations, as well as regulatory guidance, governing the collection, use, disclosure, retention, and security of personal data, such as information that we collect about patients and healthcare providers in connection with clinical trials in the United States and abroad. The global data protection landscape is rapidly evolving, and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. This evolution may create uncertainty in our business, affect our or our collaborators’, service providers’ and contractors’ ability to operate in certain jurisdictions or to collect, store, transfer use and share personal information, necessitate the acceptance of more onerous obligations in our contracts, result in liability or impose additional costs on us. The cost of compliance with these laws, regulations and standards is high and is likely to increase in the future. Any failure or perceived failure by us or our collaborators, service providers and contractors to comply with federal, state or foreign laws or regulation, our internal policies and procedures or our contracts governing processing of personal information could result in negative publicity, diversion of management time and effort and proceedings against us by governmental entities or others. In many jurisdictions, enforcement actions and consequences for noncompliance are rising.

In the United States, HIPAA imposes privacy, security and breach reporting obligations with respect to individually identifiable health information upon “covered entities” (health plans, health care clearinghouses and certain health care providers), and their respective business associates, individuals or entities that create, received, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. While we do not believe that we are currently acting as a covered entity or business associate under HIPAA and thus are not directly regulated under HIPAA, any person may be prosecuted under HIPAA’s criminal provisions either directly or under aiding-and-abetting or conspiracy principles. Consequently, depending on the facts and circumstances, we could face substantial criminal penalties if we knowingly receive individually identifiable health information from a HIPAA-covered healthcare provider or research institution that has not satisfied HIPAA’s requirements for disclosure of individually identifiable health information.

Further, even when HIPAA does not apply, according to the Federal Trade Commission or the FTC, failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities.

In addition, certain state laws govern the privacy and security of health-related and other personal information in certain circumstances, many of which may differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. For example, the California Consumer Privacy Act, or the CCPA, went into effect on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that has increased the likelihood of, and risks associated with data breach litigation. Additionally, the California Privacy Rights Act, or the CPRA, generally went into effect in January 2023, and imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data and opt outs for certain uses of sensitive data. It also creates a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. Similar laws have passed in Virginia, Colorado, Connecticut and Utah and have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the United States. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging. In the event that we are subject to or affected by HIPAA, the CCPA, the CPRA or other domestic privacy and data protection laws, any liability from failure to comply with the requirements of these laws could adversely affect our financial condition.

Our operations abroad may also be subject to increased scrutiny or attention from data protection authorities. Many countries in these regions have established or are in the process of establishing privacy and data security legal frameworks with which we, our collaborators, service providers, including our CROs, and contractors must comply. For example, the European Union, or EU, has adopted the EU General Data Protection Regulation, or GDPR, which went into effect in May 2018 and imposes strict requirements for processing the personal data of individuals within the EU and the European Economic Area, or EEA, including clinical trial data. The GDPR has and will continue to increase compliance burdens on us, including by mandating potentially burdensome documentation requirements and granting certain rights to individuals to control how we collect, use, disclose, retain and process personal data about them. Member states of the EEA may impose further obligations relating to the processing of genetic, biometric or health data, which could further add to our compliance costs and limit how we process this information. Further, the GDPR increases the scrutiny of transfers of personal data from clinical trial sites located in the EEA to the United States and other jurisdictions that the European Commission does not recognize as having “adequate” data protection laws; in July 2020, the CJEU, limited how organizations could lawfully transfer personal data from the EEA to the United States by invalidating the EU-US Privacy Shield and imposing further restrictions on use of the standard contractual clauses, which could increase our costs and our ability to efficiently process personal data from the EEA. In March 2022, the US and EU announced a new regulatory regime intended to replace the invalidated regulations; however, this new EU-US Data Privacy Framework has not been implemented beyond an executive order signed by President Biden on October 7, 2022 on Enhancing Safeguards for United States Signals Intelligence Activities. European court and regulatory decisions subsequent to the CJEU decision of July 16, 2020 have taken a restrictive approach to international data transfers. In addition, the GDPR provides for robust regulatory enforcement and fines of up to €20 million or 4% of the annual global revenue of the noncompliant company, whichever is greater. Further, from January 1, 2021, we have had to comply with the GDPR and the UK data protection regime, which imposes separate but similar obligations to those under the GDPR and comparable penalties, including fines of up to the greater of £17.5 million or 4% of global turnover.

Although we work to comply with applicable laws, regulations and standards, our contractual obligations and other legal obligations, these requirements are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another or other legal obligations with which we must comply. Any failure or perceived failure by us or our employees, representatives, contractors, consultants, collaborators, or other third parties to comply with such requirements or adequately address privacy and security concerns, even if unfounded, could result in additional cost and liability to us, damage our reputation, and adversely affect our business and results of operations. As we expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business.

We may be subject to confidential information theft or misuse, which could harm our business and results of operations. Our information technology systems, or those of any of our CROs, CMOs, other contractors or consultants or potential future collaborators, may fail or suffer security breaches, which could result in a material disruption of our commercial operations or product development programs, expose the Company to liability, affect our reputation and otherwise harm our business, which could materially affect our results.

We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary and other confidential information. Despite the implementation of security measures, our information technology systems and those of our current and any future CROs, CMOs and other contractors, consultants and collaborators are vulnerable to attack and damage from computer viruses and malware (e.g., ransomware), cybersecurity threats, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Attacks upon information technology systems are increasing in their frequency, levels of persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives and expertise. As a result of the COVID-19 pandemic, and continued hybrid working environment, we may also face increased cybersecurity risks due to our reliance on internet technology and the number of our employees who are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period. Even if identified, we may be unable to adequately investigate or remediate incidents or breaches due to attackers increasingly using tools and techniques that are designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence.

We and certain of our service providers are from time to time subject to cyberattacks and security incidents. While we do not believe that we have experienced any significant system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations or result in the unauthorized disclosure of or access to personally identifiable information or health-related information, it could result in a material disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. We could also incur liability, our commercial operations could be disrupted, and the

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

Risks Related to Our Intellectual Property

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

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

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

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

We seek to protect our trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees (including through specific provisions in employment contracts), corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be materially impaired.

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

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

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

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

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

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

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

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

• we may not develop additional proprietary technologies that are patentable.

Risks Related to Our Common Stock

The market price and trading volume of our common stock has fluctuated substantially and may fluctuate widely in the future and the value of an investment in our common stock may decline.

Our stock price has experienced extreme volatility and could vary significantly as a result of many factors. Between December 31, 2021 and March 14, 2023, the last reported sales price of our common stock fluctuated between a high of $4.41 and a low of $0.82. The market price and trading volume of our common stock may continue to fluctuate from time to time as a result of factors outside of our control. There is a potential for rapid and substantial decreases in the price of our common stock, including decreases unrelated to our operating performance or prospects, which could result in substantial losses for our existing stockholders.

In addition, the stock market in general and smaller reporting companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. These broad market and industry fluctuations, including but not limited to those connected with the ongoing military conflict between Russia and Ukraine and trade and monetary sanctions in response to such developments, may negatively impact the price or liquidity of our common stock, regardless of our operating performance. Any actual or perceived negative operational developments or market or industry fluctuations may compound each other’s negative impacts on the price of liquidity of our common stock.

If we fail to meet the requirements for continued listing on the Nasdaq Capital Market, our common stock could be delisted from trading, which would decrease the liquidity of our common stock and impact our ability to raise additional capital .

Although our common stock is currently listed on the Nasdaq Capital Market, an active trading market for our shares may not be sustained. We are required to meet specified requirements to maintain our listing on the Nasdaq Capital Market. If our common stock is delisted and there is no longer an active trading market for our shares, it may, among other things:

• cause difficulty in stockholders selling their shares without depressing the market price for the shares or in selling their shares at all;

• substantially impair our ability to raise additional funds;

• result in a loss of institutional investor interest and fewer financing opportunities for us; and/or

• result in potential breaches of representations or covenants of agreements pursuant to which we made representations or covenants relating to our compliance with applicable listing requirements. Claims related to any such breaches, with or without merit, could result in costly litigation, significant liabilities and diversion of our management’s time and attention and could have a material adverse effect on our financial condition, business and results of operations.

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

We, and certain of our directors and current and former officers, have in the past been named as parties to putative stockholder class action lawsuits and may be subject to litigation or other claims again in the future, and such litigation or other claims could adversely affect us, require significant management time and attention, result in significant legal expenses or damages, and cause our business and financial condition, results of operations to suffer.

Putative stockholder class action lawsuits were filed against us and certain of our current and former directors and officers in 2017. The court dismissed those putative stockholder class actions with prejudice, and we have concluded that these matters are closed. We currently have no other pending litigation against us, but we may face additional claims in the future. If we face similar litigation or other claims again in the future, it could result in substantial costs and a diversion of management’s attention and resources and their ultimate outcomes could have a material adverse effect on our business, financial condition

and results of operations. While we expect insurance to cover certain costs associated with defending such litigation, insurance coverage may be insufficient and could require a diversion of our resources. There also may be adverse publicity associated with litigation or claims made against us and/or our directors and officers that could negatively affect perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable.

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

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions include those establishing (i) a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors, (ii) no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates and (iii) other provisions.

Our restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us and/or our directors, officers, or employees or agents.

Our restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees or agents to us and/or our stockholders; (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law or our amended and restated certificate of incorporation or amended and restated bylaws; or (iv) any action asserting a claim against us governed by the internal affairs doctrine. These choice of forum provisions do not preclude or contract the scope of exclusive federal or concurrent jurisdiction for any actions brought under the Securities Act of 1933, as amended or the Exchange Act. Accordingly, our choice of forum provisions will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations. Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to these provisions. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us and/or our directors, officers or other employees or agents, which may discourage lawsuits against us and our directors, officers and other employees or agents.

If a court were to find the choice of forum provision contained in our restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management and other employees.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

As of December 31, 2022, we had federal and state net operating loss carryforwards, or NOLs, of $104.7 million and $65.1 million, respectively. The NOLs begin to expire in 2029 and 2024 for federal and state tax purposes, respectively. As of December 31, 2022, we had government research and development tax credits of approximately $2.4 million to offset future federal taxes which begin to expire in 2041.

During the course of preparing our consolidated financial statements as of and for the year ended December 31, 2022, we completed an assessment of the available NOL and tax credit carryforwards under Sections 382 and 383, respectively, of the Internal Revenue Code, or the Code. In the past, we have determined that we underwent multiple ownership changes throughout our history as defined under Section 382, including most recently in 2015 and 2020, and we made corresponding adjustments to our financial statements within those periods. If an ownership change, as defined in Section 382, occurs, it results in a Section 382 limitation that applies to all NOLs and tax credits generated prior to the ownership change date that can be used to offset taxable income incurred after the ownership change date. The annual limitation is based on a company’s stock value prior to the ownership change, multiplied by the applicable federal long-term, tax-exempt interest rate. The Company has not experienced a cumulative ownership change since 2020.

In addition, future changes in our stock ownership, as well as other changes that may be outside of our control, could result in additional ownership changes under Section 382. As a result, even if we achieve profitability, we may not be able to use a material portion of our NOLs or tax credit carryforwards. We have recorded a full valuation allowance related to our NOLs and tax credits due to the uncertainty of the ultimate realization of the future benefits of those assets.

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

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

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

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

General Risk Factors

We may be subject to confidential information theft or misuse, which could harm our business and results of operations. Our internal computer systems, or those of any of our existing or potential future collaborators, CROs, CMOs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs or other operations, expose the Company to liability, affect our reputation and otherwise harm our business.

We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary and other confidential information. Despite the implementation of security measures, our internal computer systems and those of our current and any future CROs, CMOs, and other contractors, consultants and collaborators are vulnerable to damage from cyberattacks, “phishing” attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Attacks upon information technology systems are increasing in their frequency, levels of persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives and expertise. The risk of a security breach or disruption, particularly through cyberattacks or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. We may also face increased cybersecurity risks due to our increased reliance on internet technology and hybrid work environments following the onset of the COVID-19 pandemic, which may create additional opportunities for cybercriminals to exploit vulnerabilities. Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period.

If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. In addition, the FDA and comparable foreign regulatory authorities regulate, among other things, the record keeping and storage of data pertaining to approved and potential pharmaceutical products, and we currently store most of our preclinical research data, our clinical data and our manufacturing data at our facilities. In addition, such a breach may require notification to governmental agencies, the media or individuals pursuant to applicable data privacy and security law and regulations. We would also be exposed to a risk of loss, including financial assets or litigation and potential liability, which could materially adversely affect our business, financial condition, results of operations and prospects. We also rely on third parties to manufacture our products and product candidates, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could be subject to material legal claims and incur liability or other negative consequences, including increased cybersecurity protection costs, damage to our reputation, disruption of our internal operations and delays in the further development of and potential commercialization of our product candidates.

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

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

If we are unable to obtain and maintain patent protection for our product candidates or Nitricil compounds, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and product candidates may be impaired.

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

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

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

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

Changes to patent laws in the United States or other countries could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. For example, changes to the United

States patent system have come into force under the Leahy-Smith America Invents Act, or the Leahy-Smith Act, which was signed into law in September 2011. The Leahy-Smith Act included a number of significant changes to United States patent law. Under the Leahy-Smith Act, the United States transitioned in March 2013 to a “first to file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed to submit prior art before the issuance of a patent by the USPTO, and may invoke or participate in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position. While we cannot predict with certainty the impact the Leahy-Smith Act or any potential future changes to the United States or foreign patent systems will have on the operation of our business, the Leahy-Smith Act and such future changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, results of operations, financial condition and prospects. Additionally, the first to file system under the Leahy-Smith Act may incentivize companies like us in the biopharmaceutical industry to file patent applications as soon as possible, and filing applications as soon as possible runs the risk that the application will not have the supporting data to claim the broadest protection possible in the United States or abroad.

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

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

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

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

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

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

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

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

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

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and other foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign national or international patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse or assertion of entity size for payment of reduced fees can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment, unenforceability, or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of patent rights include, but are not limited to, failure to timely file national and regional stage patent applications based on our international patent application, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. Non-compliance events that could result in the unenforceability of patent rights include, but are not limited to, improperly claiming or maintaining small entity or micro entity status. If we or our licensors fail to maintain the patents and patent applications covering our technology platform or product candidates, our competitors might be able to enter the market, which would have an adverse effect on our business.

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

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

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

In Europe, certain members of the European Union have executed an agreement (Agreement on a Unified Patent Court, or the UPCA) to create a European patent with unitary effect (a Unitary Patent) and to form a Unified Patent Court (UPC) system. Once the UPCA enters into force, which will occur on June 1, 2023, a patent owner may elect to receive a Unitary Patent, which will provide patent protection in all UPCA member countries, as an alternative to the current practice of registering and enforcing the patent in individual countries (“classic European patents”). This will be a significant change in European patent practice. In addition, the UPC system will also commence operations on June 1, 2023. The UPCA provides that the UPC system will eventually have sole jurisdiction over classic European patents and Unitary Patents in UPCA member states. However, the UPCA provides for a seven-year transitional period (which may be extended) in which owners of classic European patents will be subject to jurisdiction in both the UPC system and national courts, meaning that patent owners may bring a legal action, or be subject to a legal action, in either the UPC system or a national court. As the UPC is a new court system, there is no precedent for the court, increasing the uncertainty of any litigation. In addition, if a single litigation action

(e.g., an invalidity action) against a patent is successful under the UPC system, then the patent may be revoked in all UPCA member countries, whereas, for a classic European patent, a litigation action is separately brought, and the result effective in, each validated country. Thus, the UPC system, while potentially offering a cheaper streamlined process, has potential disadvantages to patent holders, such as making a European patent vulnerable in all UPCA member countries when challenged.

Geo-political actions in the United States and in foreign countries could increase the uncertainties and costs surrounding the prosecution, maintenance, enforcement, or defense of our owned and/or licensed patents or patent applications or those of any future owned and/or licensed patents or patent applications. For example, the United States and foreign government actions related to Russia’s invasion of Ukraine may limit or prevent filing, prosecution, maintenance, and/or enforcement of patent applications and patents in Russia and/or Ukraine. These actions could result in abandonment or lapse of our owned and/or licensed patents or patent applications, resulting in partial or complete loss of patent rights in Russia. If such an event were to occur, it could have a material adverse effect on our business. In addition, a decree was adopted by the Russian government in March 2022, allowing Russian companies and individuals to exploit inventions owned by patentees from the United States without consent or compensation. Consequently, we may not be able to prevent third parties from practicing our inventions in Russia or from selling or importing products made using our inventions in and into Russia. Accordingly, our competitive position may be impaired, and our business, financial condition, results of operations and prospects may be adversely affected.

We may not be able to protect our intellectual property rights throughout the world, which could impair our business.

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

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

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

In Europe, expected by the end of 2023, European applications will soon have the option, upon grant of a patent, of becoming a Unitary Patent which will be subject to the jurisdiction of the Unitary Patent Court (UPC). This will be a significant change in European patent practice. As the UPC is a new court system, there is no precedent for the court, increasing the uncertainty of any litigation. It is our initial belief that the UPC, while offering a cheaper streamlined process, has potential disadvantages to patent holders, such as making a single European patent vulnerable in all jurisdictions when challenged in a single jurisdiction

Geo-political actions in the United States and in foreign countries could increase the uncertainties and costs surrounding the prosecution or maintenance of our patent applications or those of any current or future licensors and the maintenance, enforcement or defense of our issued patents or those of any current or future licensors. For example, the United States and foreign government actions related to Russia’s invasion of Ukraine may limit or prevent filing, prosecution and maintenance of patent applications in Russia. Government actions may also prevent maintenance of issued patents in Russia. These actions could result in abandonment or lapse of our patents or patent applications, resulting in partial or complete loss of patent rights in Russia. If such an event were to occur, it could have a material adverse effect on our business. In addition, a decree was adopted by the Russian government in March 2022, allowing Russian companies and individuals to exploit inventions owned by patentees from the United States without consent or compensation. Consequently, we would not be able to prevent third parties from practicing our inventions in Russia or from selling or importing products made using our inventions in and into Russia.

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

We may not be able to obtain licenses to third-party intellectual property. Third parties may initiate legal proceedings alleging infringement of their intellectual property rights.

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

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

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

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

Many of our employees were previously employed at other biotechnology or pharmaceutical companies or universities. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these employees or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these claims. In addition, while it is our policy to require our employees and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Our and their assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.

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

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

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

We cannot be certain that the patent or trademark offices of countries outside the United States will not implement new rules that increase costs for drafting, filing, prosecuting and maintaining patents, trademarks and patent and trademark applications or that any such new rules will not restrict our ability to file for patent or trademark protection. For example, we may elect not to seek patent or trademark protection in some jurisdictions or for some product candidates or Nitricil compounds in order to save costs. We may be forced to abandon or return the rights to specific patents or trademark due to a lack of financial resources. In addition, changes in foreign patent or trademark laws along with geo-political actions involving the United States and/or a foreign country may limit or prevent filing, prosecution, maintenance, and/or enforcement of a patent application, patent, or trademark outside the United States.

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

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

Overview

We are a medical dermatology company focused on developing and commercializing innovative therapeutic products for skin diseases. Our goal is to deliver safe and efficacious therapies to patients, including developing product candidates where there are unmet medical needs. We are developing SB206 (berdazimer gel, 10.3%) as a topical prescription gel for the treatment of viral skin infections, with a current focus on molluscum contagiosum, or molluscum.

In March 2022, we completed the EPI Health Acquisition. EPI Health equips us with a commercial infrastructure across sales, marketing, and communications, as well as a dedicated market access and pharmacy relations team, and positions us as a fully integrated dermatology company with a pipeline of development candidates focused primarily on dermatological indications, supported by a commercial platform to market and sell therapeutic products for skin diseases. We promote products for plaque psoriasis, rosacea and acne. We also have a pipeline of potential product candidates using our proprietary nitric oxide-based technology platform, Nitricil, to generate new treatments for multiple indications.

Further advancement of our molluscum program, including through the potential approval of SB206, advancement of any other early-stage or late-stage clinical program across our platform, and continuing our commercial operations until they are profitable, are all subject to our ability to secure additional capital. Sources of additional capital may potentially include (i) debt or equity financings, such as through sales of common stock, or (ii) other sources, such as partnerships, collaborations, licensing, grants or other strategic relationships. Any issuance of equity, or debt convertible into equity, would result in further significant dilution to our existing stockholders.

Please see additional details related to our “Commercial Portfolio” and “Research and Development Portfolio”, as described in the section entitled “Business” in this Annual Report.

Business Updates

• In March 2023, we announced that the FDA completed its filing review of our NDA submitted in early January seeking marketing approval for berdazimer gel, 10.3% (SB206) for the topical treatment of molluscum contagiosum, or molluscum. The FDA determined our application was sufficiently complete, no filing review issues were identified, the substantive review process had commenced, and we were assigned a Prescription Drug User Fee Act goal date of January 5, 2024.

• For the year ended December 31, 2022, we demonstrated growth in total prescriptions for our actively marketed portfolio:

◦ Rhofade (oxymetazoline hydrochloride) - 33% annual growth for the year ended December 31, 2022 with 156,664 total prescriptions.

◦ Wynzora (calcipotriene and betamethasone dipropionate) - 41,023 total prescriptions for the year ended December 31, 2022, as the product was launched in the third quarter of 2021.

◦ Minolira (minocycline hydrochloride) - 61% annual growth for the year ended December 31, 2022 with 40,641 total prescriptions.

• In late December 2022, we announced that we had entered into an exclusive license agreement with Sato granting Sato the right to develop, manufacture and market Rhofade (oxymetazoline hydrochloride 1% cream) for rosacea in the Japan territory. Under the exclusive license agreement, we received an upfront payment of $5.0 million in January 2023 and are entitled to receive a $2.5 million milestone payment at the time of marketing approval in Japan and royalty payments on net sales of the product in Japan. Sato will be responsible for obtaining regulatory approval in

Japan and will have the right to use our U.S. dossier for Rhofade held by EPI Health. Sato will also have a right of first negotiation related to Rhofade in certain other countries in the Asia Pacific region. A portion of the amounts of the upfront and milestone payments are payable by us to a third party under contractual obligations related to Rhofade.

• In early December 2022, we announced that we, through EPI Health, entered into an accounts receivable-backed factoring agreement with Bay View Funding, a wholly owned subsidiary of Heritage Bank of Commerce. The new $15.0 million factoring facility provides working capital in an amount that is up to 70% of our EPI Health subsidiary’s gross eligible receivables.

• In July 2022, we announced the publication of positive efficacy and safety data from our completed B-SIMPLE 4 pivotal Phase 3 clinical study evaluating berdazimer gel, 10.3% for the treatment of molluscum in the peer-reviewed journal, JAMA Dermatology .

• In June 2022, we announced the closing of a $15.0 million registered direct offering priced at-the-market under Nasdaq rules with an institutional investor.

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

Working Capital and Additional Capital Needs

We will continue to need additional funding to support our planned and future operating activities, to support our commercial operations until they are profitable and make further advancements in our product development programs beyond what is currently included in our operating forecast and related cash projection. We do not currently have sufficient funds to complete commercialization of any of our product candidates that are under development, and our funding needs will largely be determined by our commercialization strategy for SB206 (berdazimer gel, 10.3%), subject to the regulatory approval process and outcome. We are pursuing a broad range of financing options that could be used to extend our cash runway and further prepare for commercialization of SB206 following approval.

Further advancement of our molluscum program, advancement of any other early-stage or late-stage clinical program across our platform, and supporting our commercial operations until they are profitable are subject to our ability to secure additional capital. Sources of additional capital may potentially include (i) debt or equity financings, such as through sales of common stock, or (ii) other sources, such as partnerships, collaborations, licensing, grants or other strategic relationships. Any issuance of equity, or debt convertible into equity, would result in further significant dilution to our existing stockholders.

In addition to the regulatory progression of SB206, including implementing prelaunch strategy and commercial preparation, subject to obtaining additional financing or strategic partnering, we may progress (a) SB204, a topical monotherapy for the treatment of acne, by commencing a pivotal Phase 3 study, or (b) SB019, as a potential intranasal treatment option for respiratory infections.

As of December 31, 2022, we had total cash and cash equivalents of $12.3 million and a working capital deficit of $4.0 million. As of December 31, 2022, we had $48.3 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, subject to certain limitations. See Note 11—“Stockholders' Equity” to the accompanying consolidated financial statements included in this Annual Report for more information on the Equity Distribution Agreement. In March 2023, we consummated a registered direct offering with an institutional investor for gross proceeds of approximately $6 million, or the March 2023 Registered Direct Offering. See Note 21—“Subsequent Events” to the accompanying consolidated financial statements included in this Annual Report for more information on the March 2023 offering.

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

assets, such as a sale of our dermatology platform assets, but there can be no assurance that we will be able to enter into such a transaction or transactions on a timely basis or at all on terms that are favorable to us.

If we are unable to obtain significant additional funding on acceptable terms or progress with a strategic transaction, we may instead determine to dissolve and liquidate our assets or seek protection under applicable bankruptcy laws. If we decide to dissolve and liquidate our assets or to seek protection under applicable bankruptcy laws, it is unclear to what extent we would be able to pay our obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to stockholders.

Please refer to “Liquidity and Capital Resources” for further discussion of our current liquidity and our future funding needs.

Supply Chain, Manufacturing and Supplies

We currently rely on third-party suppliers to provide the raw materials that are used by us and our third-party manufacturers in the manufacture of our product candidates and commercial products.

We have completed the commissioning of our new facility to support various research and development and cGMP activities, including small-scale manufacturing capabilities for API and drug product associated with our nitric oxide product candidates. We are in the process of, and proceeding with the related preparatory activities associated with, qualifying and validating the manufacturing equipment for use in API production in preparation for the FDA pre-approval inspection in connection with our pending NDA for SB206 (berdazimer gel, 10.3%) as a treatment for molluscum.

Please see additional details related to our “Supply Chain” and “Manufacturing and Supplies”, as described in the section entitled “Business” in this Annual Report.

Financial Overview

Since our incorporation in 2006 through mid-March 2022, we 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. With the acquisition of a commercial entity, EPI Health, in March 2022, we have expanded our business into marketing and sales efforts with a portfolio of therapeutic products for skin diseases.

To date, we have focused our funding activities primarily on equity raises and strategic relationships. However, other historical forms of funding have included payments received from licensing and supply arrangements, as well as government research contracts.

As of December 31, 2022, we had an accumulated deficit of $310.3 million, and there is substantial doubt about our ability to continue as a going concern. We incurred net losses of $31.3 million and $29.7 million in the years ended December 31, 2022 and December 31, 2021, respectively. We expect to continue to incur substantial losses in the future as we conduct our planned operating activities.

Please refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report 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 and acne, including Rhofade, Wynzora and Minolira.

For additional information regarding our accounting for net product revenues, see Note 1—“Organization and Significant Accounting Policies” and Note 13—“Net Product Revenues” to the accompanying consolidated financial statements.

License and Collaboration Revenues

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

For additional information regarding our accounting for license and collaboration revenues, see Note 1—“Organization and Significant Accounting Policies” and Note 14—“License and Collaboration Revenues” to the accompanying consolidated financial statements.

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.

Cost of Goods Sold

Cost of goods sold includes all costs directly incurred to produce net revenues from our marketed portfolio of medical dermatology products. Cost of goods sold primarily consist of (i) costs to procure, ship, handle and warehouse our marketed drug products, and (ii) royalty and milestone expenses incurred in connection with the various license, collaboration and asset purchase agreements underlying our marketed portfolio of medical dermatology products.

Research and Development Expenses

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

• 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;

• 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.

We expect that for the foreseeable future, the substantial majority of our research and development efforts will be focused on (i) technical transfer and supportive manufacturing activities by our drug product CMO, (ii) operational testing and validation activities related to the NDA pre-inspection process, and (iii) regulatory and quality documentation compilation related to our CMC data, and our drug manufacturing and related processes.

We also expect to incur substantial costs in 2023 associated with our research and development personnel, and manufacturing capability costs related to the infrastructure necessary to support small-scale drug substance and drug product manufacturing operations at our 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 updates related to SB206, potential SB206 commercialization strategies, the impact of outside factors such as the COVID-19 pandemic, our ability to enter into strategic arrangements, our ability to access additional capital and our financial priorities.

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 Annual Report for a discussion of the risks and uncertainties associated with our research and development projects.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of salaries and related costs, including stock-based compensation expenses, for personnel in our commercial, field sales, marketing, market access, medical affairs, regulatory, finance, corporate development and other functions. Other selling, general and administrative expenses include advertising, promotion, travel, consulting, market research costs, prelaunch strategy costs, medical affairs, and commercial costs, including commercial preparation activities for our lead product candidate, SB206, allocated depreciation and facility-related costs, legal costs of pursuing patent protection of our intellectual property, insurance coverage and professional services fees for auditing, tax, general legal, business development, litigation defense and other corporate and administrative services.

We expect to continue to incur substantial selling, general and administrative expenses in 2023 in support of our commercial product portfolio and the prelaunch strategy and commercial preparation activities for SB206. We may decide to revise our plans or the related timing associated with our commercial product portfolio, and prelaunch strategy and commercial preparation activities for SB206, depending on information we learn through our regulatory submission updates and potential SB206 commercialization strategies.

We also expect to continue to incur substantial selling, general and administrative expenses in 2023 in support of our operating activities and as necessary to operate in a public company environment. These expenses 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.

Amortization of Intangible Assets

Amortization of intangible assets is associated with the amortization of definite lived intangible assets acquired as part of the EPI Health Acquisition.

For additional information regarding the recognition and amortization of our intangible assets, see Note 7—“Goodwill and Intangible Assets, net” to the accompanying consolidated financial statements.

Change in Fair Value of Contingent Consideration

Contingent consideration is recorded as a liability and is the estimate of the fair value of potential milestone payments related to the EPI Health Acquisition. The estimated fair value of contingent consideration was determined based on a probability-weighted valuation model that measures the present value of the probable cash payments based upon the future milestone events of EPI Health at a discount rate that captures the risk associated with the liability and also based on a Monte Carlo simulation, whereby EPI Health’s forecasted net sales from the EPI Health legacy products were simulated over the measurement period to calculate the contingent consideration. 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.

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

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 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 Sato 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 and extinguishment of our note payable related to the EPI Health Acquisition, and (v) other miscellaneous income and expenses.

Financial Information About Segments

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 currently evaluate certain items at the segment level, including certain selling, general and administrative expenses that result from shared infrastructure, certain expenses associated with litigation and other legal matters, public company costs (e.g. investor relations), board of directors and principal executive officers, and other like shared expenses.

See Note 20—“Segment Information” in the accompanying consolidated financial statements included in this Annual Report for more information about our reportable segments.

Results of Operations

Comparison of the Years Ended December 31, 2022 and December 31, 2021

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

Year Ended December 31,

$ Change

% Change

(in thousands, except percentages)

Net product revenues

License and collaboration revenue

Government research contracts and grants revenue

Total revenue

Operating expenses:

Cost of goods sold

Research and development

Selling, general and administrative

Amortization of intangible assets

Change in fair value of contingent consideration

Impairment loss on long-lived assets

Total operating expenses

Operating loss

Other income (expense), net:

Interest income

Interest expense

Gain on debt extinguishment

Other expense

Total other income (expense), net

Net loss and comprehensive loss

* Not meaningful

Net product revenues

The EPI Health Acquisition provided commercial infrastructure to sell a marketed product portfolio of therapeutic products for skin diseases. Net product revenues for the year ended December 31, 2022 were $15.8 million, which were all generated by our Commercial Operations segment.

Net product revenues represent the sales of medical dermatology products primarily for the treatment of rosacea, plaque psoriasis, acne and dermatoses, including Rhofade, Wynzora, Minolira and Cloderm. There were no such net product revenues in the comparative period in 2021.

For additional information regarding our accounting for net product revenues, see Note 1—“Organization and Significant Accounting Policies” and Note 13—“Net Product Revenues” to the accompanying consolidated financial statements included in this Annual Report.

License and collaboration revenues

License and collaboration revenues were $7.8 million and $2.8 million for the years ended December 31, 2022 and December 31, 2021, respectively. For the year ended December 31, 2022, license and collaboration revenue was comprised of amounts related to (i) the Amended Sato Agreement, related to the Japanese territory out-license of SB206 and SB204, of $2.6 million, recorded in the Research and Development Operations segment, (ii) $5.0 million related to the December 2022 Sato Rhofade Agreement and the related upfront payment, recorded in the Commercial Operations segment, and (iii) $0.2 million related to the distribution and supply agreement with Prasco, LLC related to the out-license of Cloderm AG (the “Prasco Agreement”), recorded in the Commercial Operations segment.

For the year ended December 31, 2021 license and collaboration revenue was comprised solely of amounts related to the Amended Sato Agreement.

The Amended Sato Agreement and the related revenue recognized is associated with our performance during the period and the related amortization of the non-refundable upfront and expected milestone payments under that agreement. A change in revenue recognized for the years ended December 31, 2022 and December 31, 2021 relates to a change in estimate related to the expected duration of the combined SB204 and SB206 development program timeline in July 2021. This most recent change in estimate resulted in a program timeline extension of the performance period estimate to 10 years, completing in the first quarter of 2027.

The material terms of the Amended Sato Agreement and the December 2022 Sato Rhofade Agreement and related revenue recognition are described in Note 14—“License and Collaboration Revenues” to the accompanying consolidated financial statements included in this Annual Report.

Government Research Contracts and Grants Revenue

Government research contracts and grants revenue totaled $0.1 million and $0.1 million for the years ended December 31, 2022 and December 31, 2021, respectively. These amounts relate to (i) a federal grant from the U.S. Department of Defense’s Congressionally Directed Medical Research Programs, and (ii) a federal grant from the National Institute of Health for certain nitric oxide based anti-viral therapies and their related development.

Cost of goods sold

Cost of goods sold of $7.4 million for the year ended December 31, 2022 is recorded by our Commercial Operations segment and includes all costs directly incurred to produce net product revenues from our marketed portfolio of medical dermatology products. Cost of goods sold primarily consist of (i) costs to procure, ship, handle and warehouse our marketed drug products, and (ii) royalty and milestone expenses incurred in connection with the various license, collaboration and asset purchase agreements underlying our marketed portfolio of medical dermatology products.

As part of the Sato Rhofade Agreement and third-party obligations related to our Rhofade agreements, we accrued 25% of the upfront payment due to us, resulting in an accrued milestone expense of $1.25 million within cost of goods sold as of December 31, 2022.

For additional information regarding our accounting for cost of goods sold, see Note 1—“Organization and Significant Accounting Policies”, Note 12—“License and Collaboration Agreements”, Note 13—“Net Product Revenues” and Note 14—“License and Collaboration Revenues” to the accompanying consolidated financial statements included in this Annual Report.

Research and development expenses

Our Research and Development Operations segment incurred the substantial majority of our research and development expenses, which were $16.0 million for the year ended December 31, 2022, compared to $20.4 million for the year ended December 31, 2021. The net decrease of $4.4 million, or 22%, was primarily related to a $4.6 million net decrease in the SB206 program, partially offset by a $0.2 million increase in other research and development expenses.

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

The $0.2 million increase in other research and development expenses was primarily driven by (i) a $0.8 million net increase in research and development personnel costs, and (ii) a $0.4 million net increase in research and development facility operating expenses, partly offset by a $1.0 million net decrease in preclinical development activity costs, including the SB019 program, and research and development facility operating expenses.

The $0.8 million net increase in research and development personnel costs is primarily due to (i) a $0.7 million increase in non-cash compensation expense, including stock based compensation, and (ii) a $0.1 million increase in recurring salary and benefits costs.

Selling, general and administrative expenses

Selling, general and administrative expenses were $34.1 million for the year ended December 31, 2022, compared to $12.3 million during the year ended December 31, 2021.

The table below sets forth our total selling, general and administrative expenses incurred for the year ended December 31, 2022 and December 31, 2021 and the primary drivers of the fluctuations from the prior period:

Selling, general and administrative expenses

Year Ended December 31, 2021

Year Ended December 31, 2022

Change from prior period

Prior Period Variance Detail

Increase / (Decrease)

EPI Health Acquisition Transaction-related costs

EPI Health commercial sales operations

SB206 prelaunch and commercial preparation

Tax and insurance costs

Facility and depreciation costs

Professional services and other administrative costs

Personnel and related benefits

Change from prior period

The $4.7 million of 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 $13.7 million of selling, general and administrative expenses incurred to support the conduct of EPI Health’s commercial sales operations included (i) $6.9 million of recurring salary, incentive compensation and benefits costs, (ii) $1.4 million of advertising and promotion costs, (iii) $3.8 million of administrative costs related to third-party consultants for regulatory services, external third-party data services and other service providers that support the commercial sales and operations teams, and (iv) $1.6 million of travel and expense related costs.

The $1.0 million increase in general and administrative personnel and related costs includes (i) a $0.9 million increase in non-cash compensation expense associated with stock based compensation, and (ii) a $0.1 million increase in recurring salary and benefits costs between the two comparative periods.

Amortization of intangible assets

Amortization of intangible assets of $1.6 million for the year ended December 31, 2022 is associated with the amortization of definite lived intangible assets acquired as part of the EPI Health Acquisition.

For additional information regarding the recognition and amortization of our intangible assets, see Note 7—“Goodwill and Intangible Assets, net” to the accompanying consolidated financial statements included in this Annual Report.

Change in fair value of contingent consideration

For the year ended December 31, 2022, the changes in fair value related to contingent consideration related to the EPI Health Acquisition related primarily to changes in market assumptions, management forecasts and discount rates since the transaction date. For additional information regarding contingent consideration valuation, see Note 19—“Fair Value” to the accompanying consolidated financial statements included in this Annual Report.

Impairment loss on long-lived assets

During the second quarter of 2021, we assessed the carrying value of a disposal group classified as assets held for sale in our condensed consolidated balance sheets. The disposal group and related assets consisted of certain manufacturing and laboratory equipment associated with our previous large scale drug manufacturing capability that was being sold over time through a consignment seller. Based on our assessment of the disposal group’s recoverability, during the year ended December 31, 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, net was $2.9 million for the year ended December 31, 2022, compared to $0.2 million for the year ended December 31, 2021. This change was primarily due to a $4.3 million gain on debt extinguishment recognized in connection with the termination of the Seller Note during the third quarter of 2022, partially offset by $1.4 million of interest expense related to the Seller Note issued in March 2022 in connection with the EPI Health Acquisition.

Total other income, net in the comparative 2021 period is primarily comprised of a $1.0 million gain on extinguishment of debt related to the forgiveness of our PPP loan in 2021, partially offset by $0.7 million of other expense related to the impact of foreign currency exchange rate fluctuations for certain time-based milestones related to the Amended Sato Agreement.

For additional information regarding the Seller Note and the accounting for its termination, see Note 10—“Notes Payable” to the accompanying consolidated financial statements included in this Annual Report.

Liquidity and Capital Resources

As of December 31, 2022, we had an accumulated deficit of $310.3 million. We incurred net losses of $31.3 million and $29.7 million for the years ended December 31, 2022 and December 31, 2021, respectively, and there is substantial doubt about our ability to continue as a going concern. Despite revenues generated from the sales of commercial products acquired during the EPI Health Acquisition, we anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we further commercialize our existing commercial products and continue the development of, and seek regulatory approvals for, our product candidates and potentially begin commercialization activities for our product candidates that are currently under development. We are subject to all of the risks inherent in the commercialization of drug products, such as risks related to competition, supply issues or issues that may impact use of our commercial drug products, and in the development of new pharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The sales of our commercial products will decrease over time if and when they face generic competition or if other risks materialize, and we do not expect to generate revenue from product sales for our clinical-stage product candidates unless and until we obtain regulatory approval from the FDA for such product candidates. We will continue to incur significant expenses related to the commercialization of our commercial products, and if we obtain regulatory approval for any of our product candidates, we and/or our commercial partners and commercial solutions providers would expect to incur significant expenses related to product sales, marketing, manufacturing and distribution.

As of December 31, 2022, we had total cash and cash equivalents of $12.3 million and a working capital deficit of $4.0 million. As discussed below, we used a portion of our cash and cash equivalents to pay off and terminate the Seller Note issued in connection with the EPI Health Acquisition, as well as to fund the EPI Health Acquisition. With the payment and termination of the Seller Note for a reduced amount of principal, we have removed certain previously existing liabilities and eliminated the need to make cash payments to service the interest on the Seller Note going forward. This allows us to use our cash for development of our product candidates and to support the 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 and to further prepare for commercialization of SB206 following approval.

From January 1, 2021 through December 31, 2022, we have raised total equity and debt proceeds of $70.1 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, (iii) $6.3 million in proceeds from the sale of common stock under our common stock purchase agreements with Aspire Capital, (iv) $1.7 million from our Equity Distribution Agreement, (v) a net of $10.3 million from our accounts receivable factoring facility, (vi) an additional $0.5 million of proceeds associated with exercises of common stock warrants issued as part of the March 2020 public offering and March 2020 registered direct offering and (vii) less than $0.1 million of proceeds from the exercise of stock options.

To date, we have focused our funding activities primarily on equity financings, while generating additional liquidity and capital through other sources, including (i) governmental research contracts and grants totaling $12.9 million, (ii) our licensing and

supply arrangements with Sato, totaling $38.1 million, and (iii) $25.0 million and $12.0 million in proceeds from two funding transactions during the second quarter of 2019 with Reedy Creek Investments LLC, or Reedy Creek, and Ligand, respectively.

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

• equity and/or debt financing, including but not limited to sales under the Equity Distribution Agreement, with certain limitations as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Requirements”;

• revenues from product sales;

• payments under existing out-license and distribution arrangements for 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 as of December 31, 2022, plus expected receipts associated with product sales from our commercial product portfolio and the proceeds of the March 2023 Registered Direct Offering, will provide us with adequate liquidity to fund our planned operating needs into the latter part of the second quarter of 2023. Variability in our operating forecast, driven primarily by (i) commercial product sales, (ii) timing of operating expenditures, and (iii) unanticipated changes in net working capital, will impact our cash runway. This operating forecast and related cash projection includes (i) costs associated with preparing for and seeking U.S. regulatory approval of SB206 as a treatment for molluscum (ii) costs associated with the readiness and operation of our new manufacturing capability necessary to support small-scale drug substance and drug product manufacturing, (iii) conducting drug manufacturing activities with external third-party CMOs, (iv) ongoing commercial operations, including sales, marketing, inventory procurement and distribution, and supportive activities, related to our portfolio of therapeutic products for skin diseases acquired with the EPI Health Acquisition, and (v) initial efforts to support potential commercialization of SB206, but excludes additional operating costs that could occur between the NDA submission for SB206 through NDA approval, including, but not limited to, marketing and commercialization efforts to achieve potential launch of SB206. We may decide to revise our development and operating plans or the related timing, depending on information we learn through our research and development activities, including regulatory efforts related to SB206, potential commercialization strategies, the impact of outside factors such as the COVID-19 pandemic, our ability to enter into strategic arrangements, our ability to access additional capital and our financial priorities.

We will need 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 before the end of the second quarter of 2023. There can be no assurance that we will be able to obtain additional capital or financing on terms acceptable to us, on a timely basis or at all.

Our inability to obtain significant additional funding on acceptable terms could have a material adverse effect on our business and cause us to alter or reduce our planned operating activities, including, but not limited to delaying, reducing, terminating or eliminating planned product candidate development activities, furloughing employees or reducing the size of the workforce, to conserve our cash and cash equivalents. We may pursue additional capital through equity or debt financings, including potential sales under the Equity Distribution Agreement, or from other sources, including partnerships, collaborations, licensing, grants or other strategic relationships. Alternatively, we may seek to engage in one or more potential transactions, which could include the sale of our company, or the sale, licensing or divestiture of some of our assets, such as a sale of our dermatology platform assets, but there can be no assurance that we will be able to enter into such a transaction or transactions on a timely basis or at all on terms that are favorable to us.

If we are unable to obtain significant additional funding on acceptable terms or progress with a strategic transaction, we may instead determine to dissolve and liquidate our assets or seek protection under applicable bankruptcy laws. If we decide to dissolve and liquidate our assets or to seek protection under applicable bankruptcy laws, it is unclear to what extent we would be able to pay our obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to stockholders.

Our cash and cash equivalents are held in a variety of interest-bearing instruments, including money market accounts. Cash in excess of immediate requirements is invested with a view toward liquidity and capital preservation, and we seek to minimize the potential effects of concentration and degrees of risk.

Factoring Arrangement

As discussed further in Note 9—“Commitments and Contingencies” to the accompanying consolidated financial statements included in this Annual Report, EPI Health entered into an accounts receivable-backed factoring agreement with Bay View. Pursuant to the Factoring Agreement, EPI Health may sell certain trade accounts receivable to Bay View from time to time, with recourse. The factoring facility provides for EPI Health to have access to the lesser of (i) $15.0 million, or the Maximum Credit, or (ii) the sum of all undisputed receivables purchased by Bay View multiplied by 70% (which percentages may be adjusted by Bay View in its sole discretion), less any reserved funds. Upon receipt of any advance, EPI Health will have sold and assigned all of its rights in such receivables and all proceeds thereof. EPI Health factors the accounts receivable on a recourse basis. Therefore, if Bay View cannot collect the factored accounts receivable from the customer, EPI Health must refund the advance amount remitted to it for any uncollected accounts receivable from the customer.

As of December 31, 2022, $10.3 million of advances were outstanding under the factoring facility. The proceeds of the factoring will be used to fund general working capital needs. We have been and will be charged a financing and factoring fee in connection with the Factoring Agreement, and the extent to which we can utilize the Factoring Agreement is limited to the Maximum Credit and dependent on the extent to which we generate qualifying accounts receivable.

March 2022 Equity Distribution Agreement – At-the-Market Facility

On March 11, 2022, we entered into an Equity Distribution Agreement, or the Equity Distribution Agreement, with Oppenheimer & Co. Inc., or Oppenheimer. Pursuant to the Equity Distribution Agreement, we may from time to time issue and sell to or through Oppenheimer, acting as our sales agent, shares of our common stock, par value $0.0001 per share having an aggregate offering price of up to $50.0 million. Sales of the shares, if any, will be made by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act, or, if expressly authorized by us, in privately negotiated transactions. As sales agent, Oppenheimer will offer the shares at prevailing market prices and will use its commercially reasonable efforts, consistent with its sales and trading practices, to sell on our behalf all of the shares requested to be sold by us, subject to the terms and conditions of the Equity Distribution Agreement. We or Oppenheimer may suspend the offering of the shares upon proper notice to the other party. The offering of the shares pursuant to the Equity Distribution Agreement will terminate upon the sale of shares in an aggregate offering amount equal to $50.0 million, or sooner if either we or Oppenheimer terminate the Equity Distribution Agreement as permitted by its terms. We will pay Oppenheimer a commission in connection with sales under the Equity Distribution Agreement, and the extent to which we can utilize the Equity Distribution Agreement is limited by factors such as market conditions and the terms of the Equity Distribution Agreement.

During the year ended December 31, 2022, we sold 645,105 shares of our common stock at an average price of approximately $2.66 per share for total net proceeds of $1.7 million under the Equity Distribution Agreement.

See Note 11—“Stockholders' Equity” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding Equity Distribution Agreement.

June 2022 Registered Direct Offering

On June 9, 2022, we entered into a securities purchase agreement with an institutional investor, or the Purchaser, pursuant to which we agreed to issue and sell to the Purchaser, in a registered direct offering priced at-the-market under Nasdaq rules, or the June 2022 Registered Direct Offering (i) 2,080,696 shares, or the June 2022 Shares of our common stock, and accompanying common stock warrants, or the June 2022 Common Warrants, to purchase an aggregate of 2,080,696 shares of common stock, for a combined price of $2.851 per share and accompanying common warrant, and (ii) pre-funded warrants to purchase 3,180,615 shares of our common stock, or the June 2022 Pre-funded Warrants, and accompanying common warrants to purchase 3,180,615 shares of common stock, for a combined price of $2.841 per pre-funded warrant and accompanying common warrant. The June 2022 Registered Direct Offering closed on June 13, 2022. Net proceeds from the offering were approximately $14.0 million after deducting fees and commissions and offering expenses of approximately $0.9 million. Offering costs were netted against the offering proceeds and recorded to additional paid-in capital.

As of December 31, 2022, no June 2022 Pre-funded Warrants and 5,261,311 June 2022 Common Warrants are outstanding.

We entered into a placement agent agreement, or the “Placement Agent Agreement, dated as of June 9, 2022, engaging Oppenheimer to act as the sole placement agent in connection with the June 2022 Registered Direct Offering. Pursuant to the Placement Agent Agreement, we agreed to pay Oppenheimer a placement agent fee in cash equal to 5.0% of the gross proceeds from the sale of the June 2022 Shares, the June 2022 Pre-funded Warrants and the June 2022 Common Warrants, and to reimburse certain expenses of Oppenheimer in connection with the June 2022 Registered Direct Offering. Each June 2022 Pre-funded Warrant had an exercise price of $0.01 per share. The June 2022 Pre-funded Warrants were exercisable immediately upon issuance until all of the June 2022 Pre-funded Warrants were exercised in full. Each June 2022 Common Warrant is immediately exercisable and has an exercise price of $2.851 per share and will expire five years from the date of issuance.

The exercise price and the number of shares of common stock purchasable upon the exercise of the June 2022 Pre-funded Warrants and June 2022 Common Warrants are subject to adjustment upon the occurrence of specific events, including stock dividends, stock splits, reclassifications and combinations of the Company’s common stock.

See Note 11—“Stockholders' Equity” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding the June 2022 Registered Direct Offering.

EPI Health

Acquisition

On March 11, 2022, we completed the acquisition of EPI Health, a commercial-stage pharmaceutical company founded in 2017 that focuses on the commercialization of medical dermatology pharmaceutical products for the treatment of skin conditions. Following the EPI Health Acquisition, our current portfolio includes six branded prescription drugs, and we actively promote three medical dermatological products in the U.S. and derive revenue from the sale of these branded products through pharmaceutical wholesalers as well as direct to pharmacies. These prescription dermatology therapies are targeted to patients with plaque psoriasis, rosacea and acne. The branded and promoted product portfolio currently includes Wynzora, Rhofade and Minolira.

At closing, we paid or committed to pay non-contingent consideration totaling $27.5 million, as adjusted for cash, indebtedness, net working capital estimates and other contractually defined adjustments. The purchase price consisted of (i) $11.0 million paid in cash, (ii) a secured promissory note issued to EPG in the principal amount of $16.5 million, or the Seller Note, and (iii) a $1.0 million payment representing an adjustment for estimated net working capital.

The purchase agreement entered into in connection with the EPI Health Acquisition, or the EPI Heath Purchase Agreement, included the potential payment of additional contingent consideration totaling up to $23.0 million upon achievement of certain milestones.

See Note 2—“Acquisition of EPI Health” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding the acquisition of EPI Health.

Seller Note Payment and Termination

On July 13, 2022, we reached agreement with EPG regarding payment and termination of the outstanding $16.5 million Seller Note related to the EPI Health Acquisition. We achieved this termination by a payment of $10.0 million, or an approximate 39% discount on the original principal amount of the Seller Note. In addition to saving $6.5 million of principal with this termination, we also avoided paying interest over the previous term of the Seller Note of approximately $4.6 million.

Pursuant to the terms of the Seller Note, there was no penalty for repaying the Seller Note prior to the end of the term. In connection with the repayment of the Seller Note, the guaranty agreement between EPG and EPI Health, dated March 11, 2022, was terminated as of July 13, 2022. Accordingly, the liens on the membership interests and assets of EPI Health were also terminated such that no obligations with respect to the Seller Note and related securities agreement or the underlying loan remain outstanding.

See Note 2—“Acquisition of EPI Health” and Note 10—“Notes Payable” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding the acquisition of EPI Health and the Seller Note.

Working Capital Adjustment Payment

On July 7, 2022, we and EPG agreed to the final net working capital adjustment amount as part of the post-closing adjustment to the estimated purchase price for the EPI Health Acquisition. The total adjustment amount was positive and in the amount of $3.1 million, which was paid to EPG on July 7, 2022.

See Note 2—“Acquisition of EPI Health” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding the acquisition of EPI Health.

Licensing Arrangements

Sato Rhofade Agreement

In December 2022, we entered into a license agreement with Sato in which they were granted an exclusive, royalty-bearing, non-transferable right and license under certain of EPI Health's intellectual property rights to develop, manufacture and market Rhofade (oxymetazoline hydrochloride cream, 1%) for the treatment of rosacea in Japan, or the Sato Rhofade Agreement. In addition, per the Sato Rhofade Agreement, during a specified time period, Sato has an exclusive option to negotiate the terms under which its license would be expanded to include certain other countries in the Asia-Pacific region.

In exchange for the license granted to Sato, Sato agreed to pay us the following: (i) an upfront payment of $5.0 million; and (ii) a milestone payment of $2.5 million upon receipt of marketing approval of Rhofade for rosacea in the Japan territory. Sato also agreed to pay tiered royalty payments on net sales of the licensed product ranging over time from a percentage of net sales in the mid-teens to a percentage of net sales in the low single digits.

In addition, we are required to pay 25% of the upfront and milestone payment amounts to a third party under existing contractual obligations related to Rhofade and will also be required to pay a portion of the royalty amounts received under the Sato Rhofade Agreement to third parties, after which we will retain net royalties in the low single digits.

For additional information about the Sato Rhofade Agreement, please refer to Note 14—“License and Collaboration Revenues” to the accompanying consolidated financial statements included in this Annual Report.

Wynzora Agreement

Effective as of January 1, 2022, EPI Health entered into an amended and restated promotion and collaboration agreement with MC2 Therapeutics Limited, or MC2, relating to the commercialization of Wynzora for treatment of plaque psoriasis in adults in the United States, or the MC2 Agreement. Pursuant to the MC2 Agreement, which sets forth the collaborative efforts between EPI Health and MC2 to commercialize and promote Wynzora with MC2 in the United States, MC2 granted EPI Health an exclusive right and license under MC2’s intellectual property rights to sell, or detail (as defined in the MC2 Agreement), and engage in certain commercialization activities with respect to Wynzora in the United States.

In exchange for the provision of promotional and commercialization activities, under the terms of the MC2 Agreement, we are entitled to receive:

• Reimbursement for all incremental costs incurred by us for the promotion and commercialization of Wynzora, including the incremental portion of our personnel and commercial operating costs. The supply price of Wynzora product inventory is also considered to be an incremental cost that is reimbursed by MC2.

• A commercialization fee equivalent to a percentage of net sales ranging from the mid-teens for net sales less than or equal to $65.0 million to the upper single digits for annual net sales greater than $105.0 million. We collect this commercialization fee by retaining our portion of the Wynzora product net sales we collect from our customers, with the remainder of the net sales being remitted by us to MC2 periodically in the form of a royalty payment, pursuant to the MC2 Agreement.

• A contingent incentive fee equal to 5% of the first $30.0 million in net sales of Wynzora sold in the United States by EPI Health in each of the 2022 and 2023 calendar years; provided that such incentive fee shall not exceed $1.5 million each year and such incentive fee shall not be credited to us until the royalty payments paid to MC2 surpass the amount of certain commercialization payments made previously by MC2.

The term of the MC2 Agreement runs until the seventh anniversary of the first commercial sale of Wynzora (as defined in the MC2 Agreement) or June 30, 2028, whichever is earlier. Either party may terminate the MC2 Agreement for the other party’s material uncured breach or the bankruptcy or insolvency of the other party. MC2 may terminate the MC2 Agreement under certain scenarios, including for convenience with twelve months’ advance notice to us, provided that the termination is not effective unless MC2 pays any unpaid historical liabilities related to commercialization of Wynzora owed by MC2. In the case of such termination, MC2 is also required to make an additional sunset payment to us, paid in installments over the 24 month period following termination. We may terminate the MC2 Agreement for convenience with twelve months’ advance notice to MC2 provided that the termination is not effective unless we provide MC2 with a guarantee of the payment of any outstanding royalty payments, to the extent such royalty payments owed by us exceeds any unpaid historical liabilities related to commercialization of Wynzora owed by MC2.

For additional information about the Wynzora and MC2 Agreement, please refer to Note 13—“Net Product Revenues” to the accompanying consolidated financial statements included in this Annual Report.

Rhofade Agreements

As described in Note 9—“Commitments and Contingencies” to the accompanying consolidated financial statements included in this Annual Report, EPI Health acquired rights to that certain Assignment and License Agreement, whereby EPI Health licenses certain intellectual property from Aspect Pharmaceuticals, LLC, or Aspect and such agreement, the Aspect Agreement. Under the terms of the Aspect Agreement, EPI Health, as successor-in-interest, has exclusive rights to, and is required to use commercially reasonable efforts to, commercialize the Rhofade product. EPI Health also has a duty to certain other parties to use commercially reasonable efforts to commercialize the Rhofade product based on historical acquisition agreements for Rhofade that were assumed by EPI Health.

The material terms of the Rhofade Agreements and related revenue recognition are described in Note 12—“License and Collaboration Agreements” to the accompanying consolidated financial statements included in this Annual Report.

Cash Flows

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

Year Ended December 31,

(in thousands)

Net cash (used in) provided by:

Operating activities

Investing activities

Financing activities

Net increase in cash, cash equivalents and restricted cash

Net Cash Used in Operating Activities

During the year ended December 31, 2022, net cash used in operating activities was $30.9 million and consisted primarily of a net loss of $31.3 million, with adjustments for non-cash amounts related primarily to (i) stock-based compensation expense of $1.9 million, (ii) amortization of definite lived intangible assets acquired in the EPI Health Acquisition of $1.6 million, (iii) $1.2 million of depreciation and amortization of property and equipment expense, (iv) a $1.2 million change in fair value of contingent consideration, (v) $4.3 million related to a gain on the extinguishment of the Seller Note, (vi) $0.6 million accretion of debt discount, (vii) a $0.1 million loss on disposal of equipment and (viii) a $0.6 million change in cash related to changes in other operating assets and liabilities. The favorable impacts to cash related to changes in assets and liabilities was primarily due to (i) a $2.3 million change in accounts receivable, (ii) a change in accounts payable of $11.0 million, and (iii) a change in prepaid expenses and other current assets of $0.5 million. The unfavorable impacts to cash related to changes in (i) deferred revenue of $2.6 million, (ii) research and development service obligation of $1.0 million, (iii) accrued expenses of $9.4 million, and (iv) a change in other long-term assets and liabilities of $0.2 million. The change in operating assets and liabilities and related changes from the prior period 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 consolidated financial statements for additional detail regarding the EPI Acquisition Health and the related impacts of the opening balances related to the EPI Health Acquisition.

During the year ended December 31, 2021, net cash used in operating activities was $24.8 million and consisted primarily of a net loss of $29.7 million, with adjustments for non-cash amounts related primarily to (i) depreciation expense of $0.3 million, (ii) impairment of long-lived assets of $0.1 million, (iii) a foreign currency transaction loss of $0.8 million related to fair value adjustments for payments received and to be received under the Amended Sato Agreement, (iv) stock-based compensation expense of $0.3 million, (v) a $1.0 million gain on debt extinguishment related to forgiveness of the PPP loan, and (vii) a $4.3 million favorable change in cash related to changes in other operating assets and liabilities. The favorable net change in cash related to changes in assets and liabilities was primarily due to a $1.5 million increase in deferred revenue associated with (i) the recognition of license and collaboration revenue of $2.8 million associated with the Company’s performance during the period and (ii) a time-based developmental milestone payment that became due and payable as of December 31, 2021 of $4.3 million, a $0.7 million decrease in prepaid insurance, prepaid expenses and other current assets primarily related to a decrease in certain prepaid service contracts, a $1.3 million increase in accrued expenses, which included a $0.7 million increase related to goods and services associated with the planning, design and build-out of our new facility, a $0.5 million increase in accounts payable, and a $0.3 million net change in other long-term assets and liabilities.

Net Cash Used in Investing Activities

During the year ended December 31, 2022, the $18.9 million of net cash used in investing activities was primarily related to (i) cash used in connection with the EPI Health Acquisition of $15.1 million, and (ii) $4.3 million in cash used for purchases of property, equipment and services associated with the build-out of our corporate headquarters and small-scale manufacturing facility in Durham, North Carolina, offset by $0.5 million of payments received related to the landlord funded tenant improvement allowance. See Note 2—“Acquisition of EPI Health” to the accompanying consolidated financial statements for additional detail regarding the EPI Health Acquisition.

During the year ended December 31, 2021, the $7.5 million of net cash used in investing activities included 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, offset by payments received related to the landlord funded tenant improvement allowance. As of December 31, 2021, we also had goods and services associated with the planning, design and

build-out of our new facility of $1.5 million included in accounts payable and other accrued expenses in the accompanying balance sheets, which we settled through cash payments during the first half of 2022.

Net Cash Provided by Financing Activities

During the year ended December 31, 2022, net cash provided by financing activities was $16.0 million and consisted primarily of (i) net proceeds from the June 2022 Registered Direct Offering of $14.1 million, (ii) net proceeds from our factoring arrangement of $10.3 million and (iii) proceeds from the sale of our common stock pursuant to the Equity Distribution Agreement entered into in March 2022 of $1.7 million, offset by the repayment and termination of the Seller Note for $10.0 million.

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

Capital Requirements

As of December 31, 2022, we had a total cash and cash equivalents balance of $12.3 million and a working capital deficit of $4.0 million. While we currently generate revenue from our commercial portfolio of products, we do not believe that such revenues will be sufficient to fund the operating expenses of our business. To date, we have not generated any revenue from product sales of our product candidates, and we do not know when, or if, we will generate any such revenue from our product candidates. 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 of such product candidate. As of December 31, 2022, we had an accumulated deficit of $310.3 million.

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 regulatory approval process and outcome.

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, if approved, 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 but not limited to potential sales using the remaining availability under the Equity Distribution Agreement, or (ii) other sources, such as partnerships, collaborations, 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, we agreed to certain limitations on our ability to raise funds in the short-term through equity financings in connection with the March 2023 Registered Direct Offering. In particular, we agreed not to issue any additional securities for 45 days after closing of the March 2023 Registered Direct Offering and not to make any sales under the Equity Distribution Agreement for 60 days after closing of the March 2023 Registered Direct Offering.

Our inability to obtain 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, furloughing employees or reducing the size of the workforce, 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 or commercialization-related timelines and have a material adverse effect on our business, results of operations, financial condition and market valuation. We are also exploring the potential for alternative transactions, such as strategic acquisitions or in-licenses, sales, out-licenses or divestitures of some of our assets, or other potential strategic transactions, which could include a sale of the company. If we were to pursue such a transaction, we may not be able to complete the transaction on a timely basis or at all or on terms that are favorable to us.

Our equity issuances during the years ended December 31, 2022 and December 31, 2021, as well as the March 2023 Registered Direct Offering, have resulted in significant dilution to our existing stockholders. Any future additional issuances of equity, or debt that could be convertible into equity, would result in further significant dilution to our existing stockholders.

As of December 31, 2022, we had 24,722,308 shares of common stock outstanding. In addition, as of December 31, 2022, we had reserved 7,327,414 shares of common stock for future issuance related to (i) outstanding warrants to purchase common stock, (ii) outstanding stock options and stock appreciation rights, (iii) nonvested restricted stock units, and (iv) future issuances under the 2016 Incentive Award Plan. Our common stock consists of 200,000,000 authorized shares as of December 31, 2022.

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

• 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;

• 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, SB206 and Rhofade in Japan;

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

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

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

• defending against intellectual property related claims;

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

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

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

• revenue received from commercial sales of our existing medical dermatology products.

Contractual Obligations and Contingent Liabilities

Factoring Arrangement

As discussed in Note 9—“Commitments and Contingencies” to the accompanying consolidated financial statements included in this Annual Report, EPI Health entered into the Factoring Agreement with Bay View on December 1, 2022.

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

The factoring facility is for an initial term of 12 months and will renew on a year to year basis thereafter, unless terminated in accordance with the Factoring Agreement. EPI Health may terminate the facility at any time upon 60 days prior written notice and payment to Bay View of an early termination fee equal to 0.25% of the Maximum Credit multiplied by the number of months remaining in the term.

Compensatory Obligations

The Company enters into employment agreements with certain officers and employees. These agreements are in the normal course of business and contain certain customary Company controlled termination provisions which, if triggered, could result in future severance payments.

See Note 16—“Stock Based Compensation” regarding Stock Appreciation Rights, Restricted Stock Units and Stock Options.

Contingent Payment Obligations Related to the Purchase of EPI Health

See Note 2—“Acquisition of EPI Health” for certain contingent payments related to consideration due to EPG upon achievement of certain milestones by EPI Health.

Contingent Payment Obligations from Historical Acquisitions by EPI Health

EPI Health has in the past acquired certain rights to pharmaceutical products and such arrangements have typically included requirements that EPI Health make certain contingent payments to the applicable seller as discussed below.

Rhofade. On October 10, 2019, EPI Health entered into an agreement whereby it acquired certain assets related to Rhofade, or the Rhofade Acquisition Agreement. In connection with the Rhofade Acquisition Agreement, we are required to make the following milestone payments to the seller upon reaching the following net sales thresholds during any calendar year following the closing date, as defined in the Rhofade Acquisition Agreement:

Calendar Year Net Sales Threshold

Milestone Payment

Under the terms of the Rhofade Acquisition Agreement, EPI Health assumed certain liabilities of the prior licensees of the product Rhofade. In particular, we are required to pay certain earnout payments pursuant to historic acquisition agreements for Rhofade upon the achievement of net sales thresholds higher than those set forth above. However, we have not recognized a liability for such Rhofade milestones based on current and historical sales figures and management’s estimates of future sales.

Cloderm. On September 28, 2018, EPI Health entered into an agreement pursuant to which it acquired assets related to the product Cloderm. We are required to pay a low double-digit royalty once cumulative net sales of Cloderm reach $20.8 million, until we have made $6.5 million of royalty payments.

Minolira. On August 20, 2018, EPI Health entered into an agreement pursuant to which it acquired assets related to the product Minolira. In connection with the agreement, we are required to make the following milestone payments to the seller upon reaching cumulative net sales thresholds as defined in the acquisition agreement:

Cumulative Net Sales Threshold

Milestone Payment

Each additional

See Note 12—“License and Collaboration Agreements”, Note 13—“Net Product Revenues” and Note 14—“License and Collaboration Revenues” for certain obligations and contingent payments related to license agreements, including those related to our commercial product portfolio.

Facility Leasing Transactions

In January 2021 we entered into a new lease agreement, pursuant to which we leased space located in Durham, North Carolina to serve as the Company’s new corporate headquarters and support various cGMP activities, as described in the section entitled “Business—Manufacturing and Supplies” in this Annual Report.

See the section entitled “Properties” in this Annual Report and Note 6—“Leases” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding our facility lease.

Amended Sato Agreement

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

The intellectual property rights granted to Sato under the Amended Sato Agreement include certain intellectual property rights which we have licensed from UNC. Under our license agreement with UNC described in Note 12—“License and Collaboration Agreements” to the accompanying consolidated financial statements included in this Annual Report, we are obligated to pay UNC a running royalty percentage in the low single digits on net sales of licensed products, including net sales that may be generated by Sato. Additionally, we are obligated to make payments to UNC that represent the portion of the Sato upfront and milestone payments that were estimated to be directly attributable to the UNC intellectual property rights included in the license to Sato.

We had also previously entered into an agreement with a third party to assist us in exploring the licensing opportunity which led to the execution of the Sato Agreement. We are obligated to pay the third party a low-single-digit percentage of all upfront and milestone payments the Company receives from Sato under the Amended Sato Agreement.

See Note 12—“License and Collaboration Agreements” to the accompanying consolidated financial statements included in this Annual Report for additional information on the Amended Sato Agreement.

Amendments to Sublicense Agreements with KNOW Bio

Pursuant to the terms of the amendments to the KNOW Bio Agreements that we entered into in October 2017, we re-acquired from KNOW Bio exclusive, worldwide rights under certain United States and foreign patents and patent applications controlled by us as of the execution date of the KNOW Bio Agreements, and patents and patent applications which became controlled by us during the three years immediately following the execution date of the KNOW Bio Agreements, directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics, to develop and commercialize products for all diagnostic, therapeutic, prophylactic and palliative uses for any disease, condition or disorder caused by certain oncoviruses, or the Oncovirus Field. KNOW Bio also granted to us an exclusive license, with the right to sublicense, under any patents and patent applications which became controlled by KNOW Bio during the three years immediately following the execution date of the KNOW Bio Agreements and directed towards nitric oxide-releasing compositions and methods of manufacturing thereof, including methods of manufacturing Nitricil compounds, and other nitric oxide-based therapeutics, but not towards medical devices, to develop and commercialize products for use in the Oncovirus Field. Additionally, KNOW Bio agreed that KNOW Bio would not commercialize any products in the Oncovirus Field during the first three years following the execution date of the KNOW Bio Agreements. The three-year period in which new patents and patent applications are added to the exclusive license and the three-year term of the commercialization non-compete both expired on December 29, 2018.

In addition to the $0.3 million non-refundable upfront payment we made upon execution of the KNOW Bio Amendments, we are obligated to make the following contingent payments in exchange for the rights granted to us in the Oncovirus Field:

For products that incorporate a certain nitric oxide-releasing composition specified in the KNOW Bio Amendments and (i) are covered by KNOW Bio patents or (ii) materially use or incorporate know-how of KNOW Bio or us related to such composition that is created during the three years immediately following the execution date of the KNOW Bio Agreements, or the Covered Products, we must make the following payments to KNOW Bio:

o    A milestone payment upon the first time each Covered Product is approved by the FDA for marketing in the Oncovirus Field;

o    A royalty in the low single digits on net sales of Covered Products in the Oncovirus Field until the later of the expiration of the KNOW Bio patents covering the applicable Covered Product or the expiration of regulatory exclusivity on the applicable Covered Product; and

o    In the event we sublicense the rights to a Covered Product to a third party in the Oncovirus Field, the Company must pay KNOW Bio a low double-digit percentage of any clinical development or NDA approval milestones we receive from the sublicensee for the Covered Product in the Oncovirus Field.

Nitricil is not the nitric oxide-releasing composition specified in the KNOW Bio Amendments as the subject of the foregoing payments. As such, products based on Nitricil are not subject to the foregoing milestone, royalty and sublicensing payment obligations.

The rights granted to us in the Oncovirus Field in the KNOW Bio Amendments continue for so long as there is a valid patent claim under the KNOW Bio Agreements, and upon expiration continue on a perpetual non-exclusive basis, and are subject to the termination rights of KNOW Bio and us that are set forth in the KNOW Bio Agreements. In addition, under the KNOW Bio Amendments, KNOW Bio may terminate the rights granted to the Company in the Oncovirus Field without terminating the Original KNOW Bio Agreements.

See Note 12—“License and Collaboration Agreements” to the accompanying consolidated financial statements included in this Annual Report for additional information on the sublicense agreement with KNOW Bio.

Royalty and Milestone Payments Purchase Agreement with Reedy Creek Investments LLC

In April 2019, we entered into the Purchase Agreement with Reedy Creek pursuant to which Reedy Creek provided us funding and we are obligated to pay Reedy Creek certain ongoing quarterly payments. See the section entitled “Management’s Discussion & Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report and Note 15—“Research and Development Agreements” to the accompanying consolidated financial statements included in this Annual Report for additional information related to the Purchase Agreement.

Development Funding and Royalties Agreement with Ligand Pharmaceuticals Incorporated

In 2019, we entered into the Funding Agreement with Ligand, pursuant to which Ligand provided us funding and we are obligated to pay Ligand up to $20.0 million in milestone payments. See the section entitled “Management’s Discussion & Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report and Note 15—“Research and Development Agreements” to the accompanying consolidated financial statements included in this Annual Report for additional information related to the Funding Agreement.

Warrants

In our June 2022 Registered Direct Offering, March 2020 Public Offering, and March 2020 Registered Direct Offering, we issued warrants to purchase shares of our common stock. The warrants provide each warrant holder with the right to require net cash settlement of the warrants upon the occurrence of certain fundamental transactions, provided that such 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%.

See the section entitled “Management’s Discussion and Analysis—Critical Accounting Policies and Use of Estimates—Classification of Warrants and Pre-Funded Warrants Issued in Connection with Offerings of Common Stock” in this Annual Report and Note 11—“Stockholders' Equity” to the accompanying consolidated financial statements included in this Annual Report for additional discussion regarding the terms of the warrants.

Drug Product Manufacturing

We have established a strategic alliance with Orion, a Finnish full-scale pharmaceutical company with broad experience in drug manufacturing. The alliance enables Orion to manufacture our topical nitric oxide-releasing product candidates on our behalf and on the behalf of our global strategic partners. We have executed a master contract manufacturing agreement to enable technology transfer and manufacturing of clinical trial materials for future clinical trials with our topical product candidates.

We enter into various statements of work, under the master contract manufacturing agreement, that govern certain workflows and deliverables, including production of drug product and other manufacturing related services. These statements of work

generally provide for termination on notice, and, therefore, we believe that our non-cancelable obligations under these statements of work are not material.

Other

We enter into contracts in the normal course of business, including, but not limited to, with clinical research organizations for clinical trials, clinical supply manufacturing, and preclinical research studies, and with manufacturing related vendors for raw materials, production related equipment, drug product and drug substance stability testing, supportive consultative services, and other products and services for operating purposes. These contracts generally provide for termination on notice, and, therefore, we believe that our non-cancelable obligations under these agreements are not material.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

Net Operating Loss and Research and Development Tax Credit Carryforwards

As of December 31, 2022, we had federal and state NOLs of approximately $104.7 million and $65.1 million, respectively. The NOLs begin to expire in 2029 and 2024 for federal and state tax purposes, respectively. Certain of our federal and state net operating losses have an indefinite carryforward. We have research and development tax credits of approximately $2.4 million to offset future federal taxes. These credits begin to expire in 2041.

We record a valuation allowance to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that we will not recognize some or all of the deferred tax assets. We have had a history of net losses since inception, and, as a result, we have established a 100% valuation allowance of $39.8 million for our net deferred tax assets as of December 31, 2022. If circumstances change and we determine that we will be able to realize some or all of these net deferred tax assets in the future, we will record an adjustment to the valuation allowance.

The Tax Reform Act of 1986 contains provisions which limit the ability to utilize the net operating loss carryforwards and general business credits, including the research and development credit in the case of certain events including significant changes in ownership interests. In accordance with Section 382 of the Code, a change in equity ownership of greater than 50% within a three-year period results in an annual limitation on our ability to utilize our NOL carryforwards created during the tax periods prior to the change in ownership.

During the course of preparing the Company’s consolidated financial statements as of and for the year ended December 31 2021, the Company completed an analysis under Sections 382 and 383 of the Code of its historical NOL and tax credit carryforward amounts. If an ownership change, as defined in Section 382, occurs, it results in a Section 382 limitation that applies to all NOLs and tax credits generated prior to the ownership change date that can be used to offset taxable income incurred after the ownership change date. The annual limitation is based on a company’s stock value prior to the ownership change, multiplied by the applicable federal long-term, tax-exempt interest rate. As a result, a portion of the prior year net operating loss and tax credit carryforwards were determined to be limited. The Company did not experience a cumulative ownership change that would result in a Section 382 limitation during the year ended December 31, 2022.

See Note 17—“Income Taxes” to the accompanying consolidated financial statements included in this Annual Report for further details. If an additional change in equity ownership occurs in the future which exceeds the Section 382 threshold, our NOL carryforwards and research and development credits may be subject to additional limitations. Since our net operating loss carryforwards are limited, if we have taxable income which exceeds the permissible yearly net operating loss carryforwards, we would incur a federal income tax liability even though net operating loss carryforwards would be available in future years.

Recent Accounting Pronouncements

Recently issued accounting pronouncements that we have adopted or are currently evaluating are described in detail within “Note 1—“Organization and Significant Accounting Policies”” to the accompanying consolidated financial statements included in this Annual Report.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Significant estimates made by us include provisions for product returns, coupons, rebates, chargebacks, trade and cash discounts, allowances and distribution fees paid to certain wholesalers, inventory net realizable value, useful lives of amortizable intangible assets, stock-based compensation, accrued expenses, valuation of assets and liabilities in business combinations, developmental timelines related to licensed products, valuation of contingent consideration and contingencies. Actual results may differ materially and adversely from these estimates.

Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions. To the extent there are material differences between the estimates and actual results, our future results of operations will be affected.

While our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this Annual Report, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements and understanding and evaluating our reported financial results.

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 consolidated financial statements included in this Annual Report for additional discussion, in addition to Note 19—“Fair Value”, related to the EPI Health Acquisition.

Revenue Recognition

We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers, or ASC 606. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we (i) identify the contract with a customer, (ii) identify the performance obligations within the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations within the contract, and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.

Net Product Revenues

Net product revenues encompass sales resulting from transferring control of products to customers, excluding amounts collected on behalf of other third parties. The amount of revenue recognized is the amount allocated to the satisfied performance obligation taking into account variable consideration. The estimated amount of variable consideration is included in the 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 100 days. Therefore, the transaction price is not adjusted for the effects of a significant financing component. A receivable is recognized as soon as control over the products is transferred to the customer as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.

Variable consideration relates to 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.

There can be a significant lag between our establishment of an estimate and the timing of the invoicing or claim. We believe we have made reasonable estimates for future rebates and claims, however, these estimates involve assumptions pertaining to contractual utilization and performance, and payor mix. If the performance or mix across third-party payors is different from our estimates, we may be required to pay higher or lower total price adjustments and/or chargebacks than we had estimated.

See Note 1—“Organization and Significant Accounting Policies” and Note 13—“Net Product Revenues” to the accompanying consolidated financial statements included in this Annual Report for additional discussion.

License and Collaboration Revenues

We have entered into various types of agreements that either license our intellectual property to a third party, acquire license rights to intellectual property of a third party, or both.

Agreements where we license our intellectual property to a third party for development and commercialization in a licensed territory. If the applicable license is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use 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 regulatory approval becomes probable. Future sales-based royalties are not recorded until the subsequent sale occurs.

Agreements where we acquire license rights to, or otherwise access, a third party’s intellectual property for commercialization of the third party’s product in a licensed territory. We also enter into various types of arrangements to commercialize products. Our services provided to the third party under such arrangements, in exchange for compensation that may take the form of cost reimbursements, may include promoting, marketing, selling and distributing the third party’s developed drugs, and may also involve certain license rights granted to the parties for use of the other party’s intellectual property while providing defined services under the arrangements. We assess the nature of each such arrangement and the various rights granted and services performed thereunder.

Royalty revenue from licenses provided to our collaboration partners, which is based on sales to third parties of licensed products and technology, is based on the later of when the third-party sale occurs or the performance obligation to which some or all of the royalty has been allocated has been satisfied.

When we perform and incur marketing and promotional services expense 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 consolidated balance sheets based upon the timing of cash receipt from the collaboration partner.

See Note 14—“License and Collaboration Revenues” to the accompanying consolidated financial statements included in this Annual Report for additional discussion.

Intangible Assets and Goodwill

Intangible assets represent identifiable intangible assets including product rights consisting of pharmaceutical product licenses and patents. Amortization for pharmaceutical products licenses is computed using the straight-line method based on the lesser of the term or the useful life of the license. Amortization for pharmaceutical patents is computed using the straight-line method based on the useful life of the patent.

Definite-lived intangible assets are reviewed for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. In the event impairment indicators are present or if other circumstances indicate that an impairment might exist, we compare the future undiscounted cash flows directly associated with the asset or asset group to the carrying amount of the asset group being evaluated for impairment. If those estimated cash flows are less than the carrying amount of the asset group, an impairment loss is recognized. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Considerable judgment is necessary to estimate the fair value of these assets, accordingly, actual results may vary significantly from such estimates.

Indefinite-lived intangible assets, including goodwill, are not amortized. We test the carrying amounts of goodwill for recoverability on an annual basis at October 1 or when events or changes in circumstances indicate evidence that a potential impairment exists, using a fair value based test. Goodwill is assessed at the reporting unit level. We performed a qualitative assessment as of October 1, 2022 and concluded that it is not more likely than not that the fair value of our reporting unit was less than its carrying amount. A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows, a sustained, significant decline in our stock price and market capitalization, a significant adverse change in legal factors or in the business climate, adverse assessment or action by a regulator, and unanticipated competition. Any change in these indicators could have a significant negative impact on our financial condition, impact the goodwill impairment analysis or cause us to perform a goodwill impairment analysis more frequently than once per year.

See Note 7—“Goodwill and Intangible Assets, net” to the accompanying consolidated financial statements included in this Annual Report for additional discussion regarding intangible assets and goodwill related to the EPI Health Acquisition.

Contingent Consideration

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 consolidated statements of operations and comprehensive loss until settlement.

See Note 2—“Acquisition of EPI Health” to the accompanying consolidated financial statements included in this Annual Report for additional discussion regarding purchase consideration, including contingent consideration related to the EPI Health Acquisition.