NVN LIQUIDATION, INC. 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. InMarch 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
•InMarch 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 ofJanuary 5, 2024 .
•For the year ended
•Rhofade (oxymetazoline hydrochloride) - 33% annual growth for the year ended
•Wynzora (calcipotriene and betamethasone dipropionate) - 41,023 total
prescriptions for the year ended
•Minolira (minocycline hydrochloride) - 61% annual growth for the year ended
•In lateDecember 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 theJapan territory. Under the exclusive license agreement, we received an upfront payment of$5.0 million inJanuary 2023 and are entitled to receive a$2.5 million milestone payment at the time of marketing approval inJapan and royalty payments on net sales of the product inJapan . Sato will be responsible for obtaining regulatory approval in 59 --------------------------------------------------------------------------------Japan and will have the right to use ourU.S. dossier for Rhofade held byEPI Health . Sato will also have a right of first negotiation related to Rhofade in certain other countries in theAsia 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 earlyDecember 2022 , we announced that we, throughEPI Health , entered into an accounts receivable-backed factoring agreement with Bay View Funding, a wholly owned subsidiary ofHeritage Bank of Commerce . The new$15.0 million factoring facility provides working capital in an amount that is up to 70% of ourEPI Health subsidiary's gross eligible receivables.
•In
•In
•InMarch 2022 , we announced the acquisition ofEPI Health , a specialty pharmaceutical company focused on theU.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. InJuly 2022 , we announced that we had reached agreement with EveningPost 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 ofDecember 31, 2022 , we had total cash and cash equivalents of$12.3 million and a working capital deficit of$4.0 million . As ofDecember 31, 2022 , we had$48.3 million in remaining availability for sales of our common stock under the Equity Distribution Agreement datedMarch 11, 2022 , or the Equity Distribution Agreement, withOppenheimer & 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. InMarch 2023 , we consummated a registered direct offering with an institutional investor for gross proceeds of approximately$6 million , or theMarch 2023 Registered Direct Offering. See Note 21-"Subsequent Events" to the accompanying consolidated financial statements included in this Annual Report for more information on theMarch 2023 offering. Our inability to obtain significant additional funding on acceptable terms could have a material adverse effect on our business and cause us to alter or reduce our planned operating activities, including, but not limited to delaying, reducing, terminating or eliminating planned product candidate development activities or our preparations for potential commercial launch of SB206 (berdazimer gel, 10.3%), if approved, to conserve our cash and cash equivalents. We may pursue additional capital through equity or debt financings, including potential sales under the Equity Distribution Agreement, or from other sources, including partnerships, collaborations, licensing, grants or other strategic relationships. Alternatively, we may seek to engage in one or more potential transactions, which could include the sale of our company, or the sale, licensing or divestiture of some of our 60 -------------------------------------------------------------------------------- assets, such as a sale of our dermatology platform assets, but there can be no assurance that we will be able to enter into such a transaction or transactions on a timely basis or at all on terms that are favorable to us. If we are unable to obtain significant additional funding on acceptable terms or progress with a strategic transaction, we may instead determine to dissolve and liquidate our assets or seek protection under applicable bankruptcy laws. If we decide to dissolve and liquidate our assets or to seek protection under applicable bankruptcy laws, it is unclear to what extent we would be able to pay our obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to stockholders.
Please refer to "Liquidity and Capital Resources" for further discussion of our current liquidity and our future funding needs.
Supply Chain, Manufacturing and Supplies
We currently rely on third-party suppliers to provide the raw materials that are used by us and our third-party manufacturers in the manufacture of our product candidates and commercial products. We have completed the commissioning of our new facility to support various research and development and cGMP activities, including small-scale manufacturing capabilities for API and drug product associated with our nitric oxide product candidates. We are in the process of, and proceeding with the related preparatory activities associated with, qualifying and validating the manufacturing equipment for use in API production in preparation for the FDA pre-approval inspection in connection with our pending NDA for SB206 (berdazimer gel, 10.3%) as a treatment for molluscum. Please see additional details related to our "Supply Chain" and "Manufacturing and Supplies", as described in the section entitled "Business" in this Annual Report. Financial Overview Since our incorporation in 2006 throughmid-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 , inMarch 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 ofDecember 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 endedDecember 31, 2022 andDecember 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.
61
--------------------------------------------------------------------------------License and Collaboration Revenues
License and collaboration revenues consist of (i) the amortization of certain fixed and variable consideration under the Sato license agreement that was entered into during the first quarter of 2017, as amended inOctober 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, orCloderm 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.
62
--------------------------------------------------------------------------------
The successful development and potential regulatory approval of our product
candidates is highly uncertain. At this time, we cannot reasonably estimate the
nature, timing or costs required to complete the remaining development of our
current product candidates or any future product candidates. This is due to the
numerous risks and uncertainties associated with the development of product
candidates. See the "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 andSEC 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-"
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 theEPI 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 ofEPI Health at a discount rate that captures the risk associated with the liability and also based on a Monte Carlo simulation, wherebyEPI Health's forecasted net sales from theEPI 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 endedJune 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.
63
--------------------------------------------------------------------------------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
The following table sets forth our results of operations for the periods
indicated:
Year Ended December 31,
2022 2021 $ Change % Change
(in thousands, except percentages)
Net product revenues $ 15,796 $ - $ 15,796 *
License and collaboration revenue 7,813 2,822 4,991 177 %
Government research contracts and grants revenue 73 136 (63) (46) %
Total revenue 23,682 2,958 20,724 701 %
Operating expenses:
Cost of goods sold 7,379 - 7,379 *
Research and development 15,990 20,416 (4,426) (22) %
Selling, general and administrative 34,103 12,343 21,760 176 %
Amortization of intangible assets 1,600 - 1,600 *
Change in fair value of contingent consideration (1,160) - (1,160) *
Impairment loss on long-lived assets - 114 (114) (100) %
Total operating expenses 57,912 32,873 25,039 76 %
Operating loss (34,230) (29,915) (4,315) 14 %
Other income (expense), net:
Interest income 53 13 40 308 %
Interest expense (1,452) - (1,452) *
Gain on debt extinguishment 4,340 956 3,384 354 %
Other expense (22) (746) 724 (97) %
Total other income (expense), net 2,919 223 2,696 1209 %
Net loss and comprehensive loss $ (31,311) $ (29,692) $ (1,619) 5 %
* Not meaningful
Net product revenues
The EPI Health Acquisition provided commercial infrastructure to sell a marketed
product portfolio of therapeutic products for skin diseases. Net product
revenues for the year ended December 31, 2022 were $15.8 million , which were all
generated by our Commercial Operations segment.
Net product revenues represent the sales of medical dermatology products
primarily for the treatment of rosacea, plaque psoriasis, acne and dermatoses,
including Rhofade, Wynzora, Minolira and Cloderm. There were no such net product
revenues in the comparative period in 2021.
For additional information regarding our accounting for net product revenues,
see Note 1-"Organization and Significant Accounting Policies" and Note 13-"Net
Product Revenues" to the accompanying consolidated financial statements included
in this Annual Report.
64
--------------------------------------------------------------------------------License and collaboration revenues
License and collaboration revenues were$7.8 million and$2.8 million for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. For the year endedDecember 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 theDecember 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 withPrasco, LLC related to the out-license ofCloderm AG (the "Prasco Agreement"), recorded in the Commercial Operations segment.
For the year ended
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 endedDecember 31, 2022 andDecember 31, 2021 relates to a change in estimate related to the expected duration of the combined SB204 and SB206 development program timeline inJuly 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
Government Research Contracts and Grants Revenue
Government research contracts and grants revenue totaled$0.1 million and$0.1 million for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. These amounts relate to (i) a federal grant from theU.S. Department of Defense's Congressionally Directed Medical Research Programs, and (ii) a federal grant from theNational 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 endedDecember 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 ofDecember 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 endedDecember 31, 2022 , compared to$20.4 million for the year endedDecember 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. 65 -------------------------------------------------------------------------------- The$0.8 million net increase in research and development personnel costs is primarily due to (i) a$0.7 million increase in non-cash compensation expense, including stock based compensation, and (ii) a$0.1 million increase in recurring salary and benefits costs.
Selling, general and administrative expenses
Selling, general and administrative expenses were
The table below sets forth our total selling, general and administrative
expenses incurred for the year ended
Selling, general and
administrative expenses
Year Ended December 31, 2021 $ 12,343
Year Ended December 31, 2022 34,103
Change from prior period $ 21,760
Prior Period Variance Detail
Increase / (Decrease)
EPI Health Acquisition Transaction-related costs $ 4,691
EPI Health commercial sales operations 13,733
SB206 prelaunch and commercial preparation 1,103
Tax and insurance costs 291
Facility and depreciation costs 295
Professional services and other administrative costs 598
Personnel and related benefits 1,049
Change from prior period $ 21,760
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
For additional information regarding the recognition and amortization of our
intangible assets, see Note 7-"
Change in fair value of contingent consideration
For the year endedDecember 31, 2022 , the changes in fair value related to contingent consideration related to the EPI Health Acquisition related primarily to changes in market assumptions, management forecasts and discount rates since the transaction date. For additional information regarding contingent consideration valuation, see Note 19-"Fair Value" to the accompanying consolidated financial statements included in this Annual Report. 66 --------------------------------------------------------------------------------
Impairment loss on long-lived assets
During the second quarter of 2021, we assessed the carrying value of a disposal group classified as assets held for sale in our condensed consolidated balance sheets. The disposal group and related assets consisted of certain manufacturing and laboratory equipment associated with our previous large scale drug manufacturing capability that was being sold over time through a consignment seller. Based on our assessment of the disposal group's recoverability, during the year endedDecember 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 endedDecember 31, 2022 , compared to$0.2 million for the year endedDecember 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 inMarch 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 ofDecember 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 endedDecember 31, 2022 andDecember 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 theEPI 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 ofDecember 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 ofEPI 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. FromJanuary 1, 2021 throughDecember 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 theJune 2022 Registered Direct Offering, (ii)$37.2 million in net proceeds from the sale of common stock in theJune 2021 public offering, (iii)$6.3 million in proceeds from the sale of common stock under our common stock purchase agreements withAspire 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 theMarch 2020 public offering andMarch 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 67 -------------------------------------------------------------------------------- supply arrangements with Sato, totaling$38.1 million , and (iii)$25.0 million and$12.0 million in proceeds from two funding transactions during the second quarter of 2019 withReedy 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 ofDecember 31, 2022 , plus expected receipts associated with product sales from our commercial product portfolio and the proceeds of theMarch 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 seekingU.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. 68 --------------------------------------------------------------------------------
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 withBay View . Pursuant to the Factoring Agreement,EPI Health may sell certain trade accounts receivable toBay View from time to time, with recourse. The factoring facility provides forEPI 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 byBay View multiplied by 70% (which percentages may be adjusted byBay 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, ifBay 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 ofDecember 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.
OnMarch 11, 2022 , we entered into an Equity Distribution Agreement, or the Equity Distribution Agreement, withOppenheimer & 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
See Note 11-"Stockholders' Equity" to the accompanying consolidated financial statements included in this Annual Report for additional information regarding Equity Distribution Agreement.
OnJune 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 theJune 2022 Registered Direct Offering (i) 2,080,696 shares, or theJune 2022 Shares of our common stock, and accompanying common stock warrants, or theJune 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 theJune 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. TheJune 2022 Registered Direct Offering closed onJune 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
We entered into a placement agent agreement, or the "Placement Agent Agreement, dated as ofJune 9, 2022 , engaging Oppenheimer to act as the sole placement agent in connection with theJune 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 theJune 2022 Shares, theJune 2022 Pre-funded Warrants and theJune 2022 Common Warrants, and to reimburse certain expenses of Oppenheimer in connection with theJune 2022 Registered Direct Offering. EachJune 2022 Pre-funded Warrant had an exercise price of$0.01 per share. TheJune 2022 Pre-funded Warrants were exercisable immediately upon issuance until all of theJune 2022 Pre-funded Warrants were exercised in full. EachJune 2022 Common Warrant is immediately exercisable and has an exercise price of$2.851 per share and will expire five years from the date of issuance. 69 -------------------------------------------------------------------------------- The exercise price and the number of shares of common stock purchasable upon the exercise of theJune 2022 Pre-funded Warrants andJune 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 theJune 2022 Registered Direct Offering.
Acquisition
OnMarch 11, 2022 , we completed the acquisition ofEPI 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 theU.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
See Note 2-"Acquisition of
Seller Note Payment and Termination
OnJuly 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 betweenEPG and EPI Health , datedMarch 11, 2022 , was terminated as ofJuly 13, 2022 . Accordingly, the liens on the membership interests and assets ofEPI 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
Working Capital Adjustment Payment
OnJuly 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 onJuly 7, 2022 .
See Note 2-"Acquisition of
Licensing Arrangements
Sato Rhofade Agreement
InDecember 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 ofEPI Health's intellectual property rights to develop, manufacture and market Rhofade (oxymetazoline hydrochloride cream, 1%) for the treatment of rosacea inJapan , 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 theAsia-Pacific region . 70 -------------------------------------------------------------------------------- In exchange for the license granted to Sato, Sato agreed to pay us the following: (i) an upfront payment of$5.0 million ; and (ii) a milestone payment of$2.5 million upon receipt of marketing approval of Rhofade for rosacea in theJapan 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 ofJanuary 1, 2022 ,EPI Health entered into an amended and restated promotion and collaboration agreement withMC2 Therapeutics Limited , or MC2, relating to the commercialization of Wynzora for treatment of plaque psoriasis in adults inthe United States , or the MC2 Agreement. Pursuant to the MC2 Agreement, which sets forth the collaborative efforts betweenEPI Health and MC2 to commercialize and promote Wynzora with MC2 inthe United States , MC2 grantedEPI 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 inthe 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 inthe United States byEPI 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) orJune 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, wherebyEPI Health licenses certain intellectual property fromAspect 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 byEPI Health . The material terms of the Rhofade Agreements and related revenue recognition are described in Note 12-"License and Collaboration Agreements" to the accompanying consolidated financial statements included in this Annual Report. 71 --------------------------------------------------------------------------------
Cash Flows
The following table sets forth our cash flows for the periods indicated:
Year Ended December 31,
2022 2021
(in thousands)
Net cash (used in) provided by:
Operating activities $ (30,882) $ (24,777)
Investing activities (18,859) (7,527)
Financing activities 16,019 44,093
Net increase in cash, cash equivalents and restricted cash $ (33,722) $ 11,789 During the year endedDecember 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 acquiredEPI Health business, which comprises the Commercial Operations segment. See Note 2-"Acquisition ofEPI Health " to the accompanying consolidated financial statements for additional detail regarding theEPI Acquisition Health and the related impacts of the opening balances related to the EPI Health Acquisition. During the year endedDecember 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 ofDecember 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.
During the year endedDecember 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 inDurham, North Carolina , offset by$0.5 million of payments received related to the landlord funded tenant improvement allowance. See Note 2-"Acquisition ofEPI Health " to the accompanying consolidated financial statements for additional detail regarding the EPI Health Acquisition. During the year endedDecember 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 inDurham, North Carolina , offset by payments received related to the landlord funded tenant improvement allowance. As ofDecember 31, 2021 , we also had goods and services associated with the planning, design and 72 --------------------------------------------------------------------------------
build-out of our new facility of
Net Cash Provided by Financing Activities
During the year endedDecember 31, 2022 , net cash provided by financing activities was$16.0 million and consisted primarily of (i) net proceeds from theJune 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 inMarch 2022 of$1.7 million , offset by the repayment and termination of the Seller Note for$10.0 million . During the year endedDecember 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 theJune 2021 Public Offering, (ii)$6.3 million of proceeds from the sale of our common stock pursuant to theJuly 2020 Aspire CSPA, (iii)$0.5 million of proceeds from the exercise of common warrants associated with theMarch 2020 Public Offering andMarch 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 theJune 2021 Public Offering.
Capital Requirements
As ofDecember 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 ofDecember 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 theMarch 2023 Registered Direct Offering. In particular, we agreed not to issue any additional securities for 45 days after closing of theMarch 2023 Registered Direct Offering and not to make any sales under the Equity Distribution Agreement for 60 days after closing of theMarch 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 endedDecember 31, 2022 andDecember 31, 2021 , as well as theMarch 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 ofDecember 31, 2022 , we had 24,722,308 shares of common stock outstanding. In addition, as ofDecember 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 ofDecember 31, 2022 . 73 -------------------------------------------------------------------------------- We have based our projections of operating capital requirements on assumptions that may prove to be incorrect, and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount or timing of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
•market acceptance of approved products and successful commercialization of such products by either us or our partners;
•our decision to expand our internal commercialization capabilities;
•the initiation, progress, timing, costs, results, and evaluation of results of trials for our clinical-stage product candidates, including trials conducted by us or potential future partners;
•the progress, timing, costs and results of development and preclinical study activities relating to other potential applications of our nitric oxide platform;
•the number and characteristics of product candidates that we pursue;
•the achievement of milestones that would require payment and whether such milestone payments are paid in cash or shares of our common stock, including those set forth in "Note 10-Commitments and Contingencies" to the accompanying condensed consolidated financial statements;
•our ability to enter into strategic relationships 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
•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,
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. 74 -------------------------------------------------------------------------------- The factoring facility is for an initial term of 12 months and will renew on a year to year basis thereafter, unless terminated in accordance with the Factoring Agreement.EPI Health may terminate the facility at any time upon 60 days prior written notice and payment toBay 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
See Note 2-"Acquisition of
Contingent Payment Obligations from Historical Acquisitions by
EPI Health has in the past acquired certain rights to pharmaceutical products and such arrangements have typically included requirements thatEPI Health make certain contingent payments to the applicable seller as discussed below. Rhofade. OnOctober 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 $ 50,000,000$ 5,000,000 $ 75,000,000$ 5,000,000 $ 100,000,000$ 10,000,000 Under the terms of the Rhofade Acquisition Agreement,EPI Health assumed certain liabilities of the prior licensees of the product Rhofade. In particular, we are required to pay certain earnout payments pursuant to historic acquisition agreements for Rhofade upon the achievement of net sales thresholds higher than those set forth above. However, we have not recognized a liability for such Rhofade milestones based on current and historical sales figures and management's estimates of future sales. Cloderm. OnSeptember 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$6.5 million of royalty payments. Minolira. OnAugust 20, 2018 ,EPI Health entered into an agreement pursuant to which it acquired assets related to the product Minolira. In connection with the agreement, we are required to make the following milestone payments to the seller upon reaching cumulative net sales thresholds as defined in the acquisition agreement: Cumulative Net Sales Threshold Milestone Payment$ 10,000,000 $ 1,000,000 $ 20,000,000 $ 1,000,000 Each additional$ 20,000,000 $ 1,500,000
See Note 12-"License and Collaboration Agreements", Note 13-"Net Product Revenues" and Note 14-"License and Collaboration Revenues" for certain obligations and contingent payments related to license agreements, including those related to our commercial product portfolio.
Facility Leasing Transactions
InJanuary 2021 we entered into a new lease agreement, pursuant to which we leased space located inDurham, North Carolina to serve as the Company's new corporate headquarters and support various cGMP activities, as described in the section entitled "Business-Manufacturing and Supplies" in this Annual Report. See the section entitled "Properties" in this Annual Report and Note 6-"Leases" to the accompanying consolidated financial statements included in this Annual Report for additional information regarding our facility lease. 75 --------------------------------------------------------------------------------
Amended Sato Agreement
Pursuant to the Amended Sato Agreement, we are obligated to supply Sato with all quantities of licensed products required by Sato for their development activities inJapan . 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 theU.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 inOctober 2017 , we re-acquired from KNOW Bio exclusive, worldwide rights under certainUnited 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 onDecember 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
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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
InApril 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 ourJune 2022 Registered Direct Offering,March 2020 Public Offering, andMarch 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
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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
Net Operating Loss and Research and Development Tax Credit Carryforwards
As ofDecember 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 ofDecember 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 endedDecember 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 endedDecember 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.
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--------------------------------------------------------------------------------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 withUnited 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
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
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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
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.
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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 ofEPI 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.
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