License and Collaboration Revenues

9 Months Ended

Sep. 30, 2022

Revenue Recognition and Deferred Revenue [Abstract]

License and Collaboration Revenues

Net Product Revenues

The Company has the following commercial products that generate net product revenues:

Rhofade (oxymetazoline hydrochloride cream, 1%), or Rhofade, is an alpha1A adrenoceptor agonist indicated for the topical treatment of persistent facial erythema associated with rosacea in adults.

Wynzora (calcipotriene and betamethasone dipropionate cream), or Wynzora, is a combination of calcipotriene, a vitamin D analog, and betamethasone dipropionate, a corticosteroid, indicated for the topical treatment of plaque psoriasis in patients 18 years of age or older.

Minolira (biphasic minocycline hydrochloride immediate release/extended release 105 mg and 135 mg tablets), or Minolira, is indicated to treat inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 years of age and older.

Cloderm (clocortoline pivalate cream 0.1%), or Cloderm, is indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid-responsive dermatoses.

The post-acquisition operating results of EPI Health are reflected within the Company’s condensed consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2022, specifically from March 11, 2022 through September 30, 2022. Net product revenues are summarized as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2022				September 30, 2022
	Total Net Product Revenues		Percentage of Net Product Revenues		Total Net Product Revenues		Percentage of Net Product Revenues
Rhofade	$	3,475	75.5	%	$	8,566	77.0	%
Wynzora	411		8.9	%	1,061		9.5	%
Minolira	374		8.1	%	764		6.9	%
Cloderm	148		3.2	%	387		3.5	%
Other	197		4.3	%	353		3.2	%
Net product revenues	$	4,605	100.0	%	$	11,131	100.0	%

For the period March 11, 2022 through September 30, 2022, the Company recorded adjustments for certain commercial products for accruals that were assumed as of the EPI Health Acquisition date within the Other category in the table above.

As of September 30, 2022, three of the Company’s wholesaler customers accounted for more than 10% of its total accounts receivable balance at 24%, 12% and 15%, respectively.

For the three and nine months ended September 30, 2022, one of the Company’s wholesaler customers accounted for more than 10% of its total gross product revenues, at 11% and 12%, respectively.

License and Collaboration Revenues

The Company has the following commercial product that generates license and collaboration revenues:

Cloderm AG (clocortoline pivalate cream 0.1%), or Cloderm AG, is indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid-responsive dermatoses.

The post-acquisition operating results of EPI Health are reflected within the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2022, specifically from March 11, 2022 through September 30, 2022. License and collaboration revenues are summarized as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2022				September 30, 2022
	Total License and Collaboration Revenues		Percentage of License and Collaboration Revenues		Total License and Collaboration Revenues		Percentage of License and Collaboration Revenues
Sato Agreement - SB206 and SB204	$	646	131.3	%	$	1,939	96.5	%
Prasco Agreement - Cloderm AG	(154)		(31.3)	%	71		3.5	%
License and collaboration revenues	$	492	100.0	%	$	2,010	100.0	%

Sato Agreement

The Company assessed the Sato Agreement in accordance with ASC 606 and concluded that the contract counterparty, Sato, is a customer within the scope of ASC 606. The Company identified the following promises under the Sato Agreement (i) the grant of the intellectual property license to Sato, (ii) the obligation to participate in a joint committee that oversees, reviews, and approves Sato’s research and development activities and provides advisory support during Sato’s development process, (iii) the obligation to manufacture and supply Sato with all quantities of licensed product required for development activities in Japan, and (iv) the stand-ready obligation to perform any necessary repeat preclinical studies, up to $1,000 in cost. The Company determined that these promises were not individually distinct because Sato can only benefit from these licensed intellectual property rights and services when bundled together; they do not have individual benefit or utility to Sato. As a result, all promises have been combined into a single performance obligation.

The Sato Agreement also provides that the two parties agree to negotiate in good faith the terms of a commercial supply agreement pursuant to which the Company or a third-party manufacturer would be the exclusive supplier to Sato of the API for the commercial manufacture of licensed products in the licensed territory. The Company concluded this obligation to negotiate the terms of a commercial supply agreement does not create (i) a legally enforceable obligation under which the Company may have to perform and supply Sato with API for commercial manufacturing, or (ii) a material right because the incremental commercial supply fee consideration framework in the Sato Agreement is representative of a stand-alone selling price for the supply of API and does not represent a discount. Therefore, this contract provision is not considered to be a promise to deliver goods or services and is not a performance obligation or part of the combined single performance obligation described above.

Sato Amendment

On October 5, 2018, the Company and Sato entered into the second amendment to the Sato Agreement (the “Sato Amendment”). The Sato Amendment expanded the Sato Agreement to include SB206, the Company’s drug candidate for the treatment of viral skin infections. The Company assessed the Sato Agreement in accordance with ASC 606 and concluded the contract modification should incorporate the additional goods and services provided for in the Sato Amendment into the existing, partially satisfied single bundled performance obligation that will continue to be delivered to Sato over the remaining development period. The Company determined that this contract modification accounting is appropriate as the additional goods and services conveyed under the Sato Amendment were determined to not be distinct from the single performance obligation, and the additional consideration provided did not reflect the standalone selling price of those additional goods and services. As such, the Company recorded a cumulative adjustment as of the amendment execution date to reflect revenue that would have been recognized cumulatively for the partially completed bundled performance obligation.

The Company concluded that the following elements of consideration would be included in the transaction price as they were (i) received prior to September 30, 2022, or (ii) payable upon specified fixed dates and were not contingent upon clinical or regulatory success in Japan:

•The 1.25 billion JPY (approximately $10,813 USD) original upfront payment received on January 19, 2017 following the execution of the Sato Agreement on January 12, 2017.

•A milestone payment of 0.25 billion JPY (approximately $2,162 USD) received during the fourth quarter of 2018 following Sato’s initiation of a Phase 1 trial in Japan.

•The Sato Amendment upfront payment of 1.25 billion JPY, payable in installments of 0.25 billion JPY, 0.5 billion JPY and 0.5 billion JPY on October 5, 2018, February 14, 2019 and September 13, 2019, respectively. On October 23, 2018, the Company received the first installment from the Sato Agreement of 0.25 billion JPY (approximately $2,224 USD). On March 14, 2019, the Company received the second installment payment related to the Sato Agreement of 0.5 billion JPY (approximately $4,460 USD). On November 7, 2019, the Company received the third installment payment related to the Sato Agreement of 0.5 billion JPY (approximately $4,554 USD).

•An aggregate of 1.0 billion JPY in non-contingent milestone payments that become payable upon the earlier occurrence of specified fixed dates in the future or the achievement of specified milestone events. On May 20, 2021,

the Company received one such non-contingent milestone payment in the form of a payment of 0.5 billion JPY (approximately $4,572 USD) related to achievement of a time-based developmental milestone. On February 28, 2022, the Company received the remaining time-based milestone payment of 0.5 billion JPY (approximately $4,323 USD).

The Company concluded that the following elements of consideration would not be included in the transaction price as they are contingent upon clinical or regulatory success in Japan:

•Up to an aggregate of 0.5 billion JPY upon the achievement of various development and regulatory milestones.

•Up to an aggregate of 3.9 billion JPY upon the achievement of various commercial milestones. 

•A tiered royalty ranging from a mid-single digit to a low-double digit percentage (adjusted from a mid-single digit percentage in the Sato Agreement) of net sales of licensed products in the licensed territory, subject to a reduction in the royalty payments in certain circumstances.

The payment terms contained within the Sato Agreement related to upfront, developmental milestone and sales milestone payments are of a short-term nature and, therefore, do not represent a financing component requiring additional consideration.

The following tables present the Company’s contract assets, contract liabilities and deferred revenue balances for the dates indicated.

	Contract Asset		Contract Liability		Net Deferred Revenue
December 31, 2021	$	—	$	13,251	$	13,251
September 30, 2022	$	—	$	11,312	$	11,312
	Short-term Deferred Revenue		Long-term Deferred Revenue		Net Deferred Revenue
December 31, 2021	$	2,586	$	10,665	$	13,251
September 30, 2022	$	2,586	$	8,726	$	11,312

The Company has recorded the Sato Agreement (both the initial agreement and as amended by the Sato Amendment) transaction price, including the upfront payments received and the unconstrained variable consideration, as deferred revenue (comprised of (i) a contract liability, net of (ii) a contract asset).

The change in the net deferred revenue balance during the three and nine months ended September 30, 2022 was associated with the recognition of license and collaboration revenue associated with the Company’s performance during the period (continued amortization of deferred revenue).

During the three and nine months ended September 30, 2022, the Company recognized $646 and $1,939, respectively, in license and collaboration revenue under the Sato Agreement. During the three and nine months ended September 30, 2021, the Company recognized $680 and $2,174, respectively, in license and collaboration revenue under the Sato Agreement. The Company has concluded that the above consideration is probable of not resulting in a significant revenue reversal and therefore included in the transaction price and is allocated to the single performance obligation. No other variable consideration under the Sato Agreement is probable of not resulting in a significant revenue reversal as of September 30, 2022 and therefore, is currently fully constrained and excluded from the transaction price.

The Company evaluated the timing of delivery for its performance obligation and concluded that a time-based input method is most appropriate because Sato is accessing and benefiting from the intellectual property and technology (the predominant items of the combined performance obligation) ratably over the duration of Sato’s estimated development period in Japan. Although the Company concluded that the intellectual property is functional rather than symbolic, the services provided under the performance obligation are provided over time. Therefore, the allocated transaction price will be recognized using a time-based input method that results in straight-line recognition over the Company’s performance period.

The Company monitors and reassesses the estimated performance period for purposes of revenue recognition during each reporting period. The Company currently estimates a 10-year performance period, completing in the third quarter of 2024, based upon a Sato-prepared SB206 Japanese development program timeline. The SB204 Japanese development plan and program timeline has not been presented by Sato and remains under evaluation by the Company and Sato. Currently, the

Company understands that the progression of the Japanese SB204 program could follow the same timeline as the Japanese SB206 program, subject to the nature of the results of Sato’s comprehensive asset developmental program, including SB206.

The estimated timeline remains subject to prospective reassessment and adjustment based upon Sato’s interaction with the Japanese regulatory authorities and other developmental and timing considerations. The combined SB204 and SB206 development program timeline in Japan is continuously reevaluated by Sato and the Company, and may potentially be further affected by various factors, including (i) the analyses, assessments and decisions made by the joint development committee and the applicable regulatory authorities, which will influence and establish the combined SB204 and SB206 Japan development program plan, (ii) the remaining timeline and progression of the SB206 NDA submission in the United States, which has been and may be further impacted by the COVID-19 pandemic, (iii) the API and drug product supply chain progression, including the Company’s in-house drug manufacturing capabilities, (iv) the Company’s manufacturing technology transfer projects with third-party CMOs, and (v) a drug delivery device technology enhancement project with a technology manufacturing vendor.

If the duration of the combined SB204 and SB206 development program timeline is further affected by the establishment of or subsequent adjustments to, as applicable, the mutually agreed upon SB204 and SB206 development plan in the Japan territory, the Company will adjust its estimated performance period for revenue recognition purposes accordingly, as needed.

In future periods, the Company would lift the variable consideration constraint from each contingent payment if there were no longer a probable likelihood of significant revenue reversal. When the constraint is lifted from a milestone payment, the Company will recognize the incremental transaction price using the same time-based input method that is being used to recognize the revenue, which results in straight-line recognition over the performance period. If the Company’s performance is not yet completed at the time that the constraint is lifted, a cumulative catch-up adjustment will be recognized in the period. If no other performance is required by the Company at the time the constraint is lifted, the Company expects to recognize all revenue associated with such milestone payments at the time that the constraint is lifted.

Performance Obligations under the Sato Agreement

The net amount of existing performance obligations associated with the Sato Agreement unsatisfied as of September 30, 2022 was $11,312. The Company expects to recognize approximately 23% of the remaining performance obligations as revenue over the next 12 months, and the balance thereafter. The Company applied the practical expedient and does not disclose information about variable consideration related to sales-based or usage-based royalties promised in exchange for a license of intellectual property.

MC2 Agreement

The Company assessed the MC2 Agreement and determined it is a collaboration arrangement within the scope of ASC 808. Per the MC2 agreement, the Company proposes a commercialization plan and incremental cost budget annually, which is developed in consultation with and subject to the approval of MC2. The Company is required to use commercially reasonable efforts to perform its commercialization activities in accordance with the commercialization plan.

The Company and MC2 work collaboratively in promoting and commercializing Wynzora by performing their respective promotional and commercialization responsibilities, as established within the MC2 Agreement. Pursuant to the MC2 Agreement, MC2 is responsible for leading the overall strategy of messaging for the promotional materials for Wynzora and the Company is responsible for generating such promotional materials and executing all field promotional and sales activities via the Company’s existing commercial sales force. MC2 is responsible for the manufacturing of Wynzora via a third-party contract manufacturer, and subject to MC2’s obligation to supply product under the supply terms, the Company purchases product inventory from MC2 (and its third-party contract manufacturer) by periodically placing firm purchase orders and then taking title, physical possession and control of the product inventory. The Company then fulfills orders and distributes Wynzora to the Company’s wholesale, distributor and other pharmacy customers. The parties share regulatory responsibilities, and except for the regulatory responsibilities assigned to the Company under the terms of the MC2 Agreement, MC2 is responsible for maintaining the NDA for Wynzora and all remaining regulatory activities. The MC2 Agreement also establishes a joint steering committee, which monitors and oversees the development, promotion, commercialization, and manufacturing of Wynzora, coordinates the collaborative activities of the parties and resolves disputes.

MC2 pays advance payments to the Company on a quarterly basis, prior to the beginning of each calendar quarter, for incremental costs expected to be incurred by the Company during such calendar quarter for the promotion and commercialization of Wynzora, including (i) promotional campaigns and related services performed by third parties, (ii) a portion of the Company’s personnel and commercial operating costs, and (iii) the supply price of Wynzora product inventory. The Company records an accrued deposit liability within accrued expenses on its balance sheets upon receipt of an advance payment for promotional and commercialization services not yet performed or incurred by the Company. As such services are performed and qualifying incremental expenses are incurred, the Company recognizes a contra-expense pursuant to the Company’s accounting policy described in Note 1—“Organization and Significant Accounting Policies.”

During each of the three and nine months ended September 30, 2022, the Company recognized contra-expenses of $2,918 and $6,081 under this agreement. The accrued deposit liability related to the receipt of advance payments from MC2 for future incremental costs was $2,799 as of September 30, 2022, which is presented within accrued expenses in the accompanying condensed consolidated balance sheets.

The Company also identified the wholesalers, distributors and other pharmacies (collectively referred to as “End Customers”) who purchase Wynzora from the Company to be customers pursuant to ASC 606. When more than one party is involved in providing goods or services to the End Customer, ASC 606 requires an entity to determine whether it is a principal or an agent in such transactions by evaluating the nature of its promise to the End Customer. Control of the specified good or service prior to transfer of control to the customer is the determining factor when assessing whether an entity is a principal or an agent. The Company determined it is a principal in this arrangement because it takes title and physical possession of the Wynzora product inventory, at which point it can direct the inventory to any End Customer that submits an enforceable purchase order issued under an active, stand-alone agreement between the Company and the End Customer.

With respect to its performance obligations to the End Customers and associated revenue recognition, the Company recognizes all Wynzora revenues pursuant to its accounting policies for net product revenues as described further in Note 1—“Organization and Significant Accounting Policies” and Note 13—“Net Product Revenues.”