You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with the condensed consolidated
financial statements and the notes thereto included elsewhere in this Quarterly
Report on Form 10-Q, our Annual Report on Form 10-K for the year ended
December 31, 2019, our Current Report on Form 8-K/A filed with the SEC on May 7,
2020 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020
filed with the SEC on May 11, 2020. In this Quarterly Report on Form 10-Q,
unless otherwise indicated, all references to the "Company," "we," "us" and
"our" or similar terms refer to Menlo Therapeutics Inc. after giving effect to
the Merger.
Company Overview
We are a specialty pharmaceutical company focused on developing and
commercializing proprietary therapies to address unmet needs in dermatology. On
March 9, 2020, we combined with Foamix Pharmaceuticals Ltd. ("Foamix"). In
January 2020, Foamix (now our wholly-owned subsidiary) launched AMZEEQ®
(minocycline) topical foam, 4% ("AMZEEQ"), a once-daily topical antibiotic for
the treatment of inflammatory lesions of non-nodular moderate-to-severe acne
vulgaris in patients 9 years of age and older. On May 28, 2020, the Food and
Drug Administration ("FDA") approved ZILXI™ (minocycline) topical foam, 1.5%
(formerly FMX103, "ZILXI"), for the treatment of inflammatory lesions of rosacea
in adults. AMZEEQ and ZILXI are the first topical minocycline products approved
by the FDA and serve as a springboard for our potential commercialization of
additional innovative products in dermatology.
AMZEEQ and ZILXI utilize our proprietary Molecule Stabilizing Technology™, or
MST, that we also use in the development of our product candidate FCD105, a
topical foam comprising minocycline and adapalene for the treatment of acne
vulgaris. On June 2, 2020, we announced positive topline results from our Phase
II clinical trial, Study FX2016-40, to evaluate the efficacy and safety of
FCD105. Pending a successful development program, we intend to file a new drug
application ("NDA") for FCD105 under the 505(b)(2) regulatory pathway, which is
the same regulatory pathway we have pursued for AMZEEQ and ZILXI.
In addition to MST™, and our emulsion platform which is a different technology,
we have a number of proprietary delivery platforms in development that enable
topical delivery of other APIs, each having unique pharmacological features and
characteristics designed to keep the API stable when delivered and directed to
the target site. We believe our MST vehicle and other topical delivery platforms
may offer significant advantages over alternative delivery options, including
emulsions, and are suitable for multiple application sites across a range of
conditions. We are also actively pursuing opportunities to out-license our
product and product candidates to third parties for development and
commercialization outside the United States.
Key Developments
Below is a summary of selected key developments affecting our business that have
occurred since December 31, 2019:
•On November 10, 2019, the Company, Foamix and Giants Merger Subsidiary Ltd., a
wholly-owned subsidiary of Menlo ("Merger Sub"), entered into an Agreement and
Plan of Merger (as amended by Amendment No. 1 to the Agreement and Plan of
Merger, dated as of December 4, 2019, the "Merger Agreement"). Pursuant to the
terms of the Merger Agreement, Merger Sub merged with and into Foamix, with
Foamix surviving as a wholly-owned subsidiary of Menlo (the "Merger") on March
9, 2020. Foamix was deemed the "accounting acquirer" in the Merger and the
Merger was accounted for as a reverse acquisition, with Foamix allocating the
purchase price consideration to the tangible and intangible assets acquired and
liabilities assumed from Menlo, and the excess purchase price recorded as
goodwill. In accordance with reverse acquisition accounting, Foamix's
consolidated financial statements are deemed those of the predecessor entity.
•On March 9, 2020, we entered into an Amended and Restated Credit Agreement and
Guaranty, whereby we have guaranteed the indebtedness obligation of Foamix
Pharmaceuticals Inc. and granted a first priority security interest in
substantially all of our assets for the benefit of the lenders. The Amended and
Restated Credit Agreement provides for a senior secured delayed draw term loan
facility in an aggregate principal amount of up to $50.0 million, of which $35.0
million was drawn as of December 31, 2019 and June 30, 2020. On August 5, 2020,
the parties amended the minimum net revenue covenant contained in the Amended
and Restated Credit Agreement and Guaranty as a result of the negative impact of
the COVID-19 pandemic on the Company's product sales of AMZEEQ. See "Part II -
Other Information - Part 5. Other Information."
•On March 24, 2020, we announced that Andrew Saik has joined the Company as our
Chief Financial Officer and Treasurer.
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•On April 2, 2020, we announced that we have entered into a settlement and
license agreement to resolve the remaining pending patent litigation involving
Finacea® foam.
•LEO Pharma A/S, or LEO, has remedied the supply chain issues related to Finacea
foam that Foamix previously disclosed in April 2019 and has resumed commercial
sales of Finacea foam.
•On April 6, 2020, we announced top line results from two Phase III clinical
trials evaluating the safety and efficacy of once daily oral serlopitant for the
treatment of pruritus (itch) associated with prurigo nodularis (PN), studies
MTI-105 and MTI-106. Neither study met their respective primary endpoint of
demonstrating statistically significant reduction in pruritus in patients
treated with serlopitant compared to placebo based on a 4-point improvement
responder analysis. We currently do not intend to further pursue the development
of serlopitant, other than to assess and explore opportunities, if any, to
license out and or monetize other aspects of the serlopitant asset. As such, the
Company recorded a full impairment charge related to the IPR&D and Goodwill
assets of $50.3 million and $4.0 million, respectively, in its unaudited
consolidated condensed statement of operations and comprehensive loss for the
three and six months ending June 30, 2020.
•On April 23, 2020, we announced that we entered into a license agreement with
Cutia Therapeutics (HK) Limited ("Cutia") for AMZEEQ® (minocycline) topical
foam, 4% as well as certain of our other topical minocycline product
candidates, once approved, on an exclusive basis in Greater China. Under the
terms of the agreement, Cutia will have an exclusive license to obtain
regulatory approval of and commercialize AMZEEQ® and, if approved in the U.S.,
FMX103 and FCD105 in the Greater China territory. Foamix will supply the
finished licensed products to Cutia for clinical and commercial use. Foamix will
receive an upfront cash payment of $10 million and will be eligible to receive
an additional $1 million payment upon the receipt of marketing approval
in China of the first licensed product. Foamix will also receive royalties on
net sales of any licensed products.
•During the first quarter of 2020, an outbreak of respiratory illness caused by
a strain of novel coronavirus, COVID-19, that began in China spread throughout
the globe. There are many uncertainties regarding the COVID-19 pandemic, and we
are closely monitoring the impact of the pandemic on all aspects of our
business, including how it will impact our patients, employees, suppliers,
vendors, business partners and distribution channels. For the three and six
months ended June 30, 2020, the Company's product sales from AMZEEQ were
negatively impacted due to office closures as a result of the pandemic. We are
unable to predict the impact that COVID-19 will have on our financial position
and operating results in future periods due to numerous uncertainties, including
duration, scope and severity of the pandemic, the actions taken to contain or
mitigate its impact, the impact on governmental programs and budgets, the
development of treatments or vaccines, and the resumption of widespread economic
activity. An extended duration of the pandemic could have a material adverse
effect on our product sales for AMZEEQ, and any future sales of ZILXI. In
addition, any prolonged material disruption of the Company's employees,
suppliers, manufacturing, or customers could further materially negatively
impact our consolidated financial position, consolidated results of operations
and consolidated cash flows. We will continue to assess the evolving impact of
the COVID-19 pandemic and will make adjustments to our operations as necessary.
See "Part II Other Information-Item 1A. Risk Factors-Risks Related to Our
Business and Industry-We face risks related to health epidemics and other
widespread outbreaks of contagious disease, including COVID-19, which have
disrupted, and may continue to significantly disrupt, our operations and impact
our financial results."
•Following the receipt of the results of the Phase 3 clinical trials evaluating
serlopitant for the treatment of PN and the impact of the COVID-19 pandemic, the
Company has revised its operating plan to focus on the commercialization of
AMZEEQ and its other topical minocycline product candidates. In addition, the
revised operating plan reflects prudent resource prioritization and allocation
management, including the rationalization of research and development spend to
focus on existing product candidates.
•On May 28, 2020, the FDA approved ZILXI for the treatment of inflammatory
lesions of rosacea in adults. ZILXI is the first minocycline product of any kind
to be approved by the FDA for use in rosacea. We anticipate having ZILXI
available for prescribing in the fourth quarter of 2020.
•On June 2, 2020, we announced positive results from a Phase II clinical trial
evaluating the preliminary safety and efficacy of FCD105 (3% minocycline / 0.3%
adapalene foam), the first ever topical minocycline-based combination product,
for the treatment of moderate-to-severe acne vulgaris. Study FX2016-40 enrolled
447 patients in the United States who were randomized to either FCD105 foam, 3%
minocycline foam, 0.3% adapalene foam, or vehicle foam. We have begun
preparations to conduct an end-of-Phase II meeting with the FDA before the end
of 2020.
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•On June 9, 2020, we completed an underwritten public offering of 31,107,500
shares of common stock at a price to the public of $1.85 per share. The net
proceeds of the offering were approximately $53.6 million, after deducting
underwriting discounts and commissions and other offering expenses. We intend to
use the net proceeds from this offering for (i) a Phase III clinical trial for
FCD105 for the potential treatment of acne vulgaris, (ii) supporting the
commercial launch of ZILXI, (iii) the continued development of our product
candidates and (iv) the remainder, if any, for general corporate purposes.
Financial Overview
Our cash and cash equivalents and investments totaled $100.4 million as
of June 30, 2020. We believe that our cash and cash equivalents and investments,
projected cash flows from revenues and the funds that we are entitled to receive
under our license agreement with Cutia, will provide sufficient resources for
our current ongoing needs through at least the next twelve months from the
issuance of these financial statements, though there may be need for additional
financing activity as a result of the on-going COVID-19 pandemic and as we
continue to grow. See "-Liquidity and Capital Resources" below.
We have incurred net losses since our inception. Until the first quarter of
2020, when we commenced commercial operations, our business activities were
primarily limited to developing product candidates, raising capital and
performing research and development activities. As of June 30, 2020, we had an
accumulated deficit of $518.3 million. We recorded net losses of $167.4 million
and $19.0 million for the three months ended June 30, 2020 and 2019,
respectively, and $207.7 million and $34.2 million for the six months ended
June 30, 2020 and 2019, respectively.
Our capital resources and business efforts are largely focused on activities
relating to the commercialization of AMZEEQ and ZILXI and advancing our product
candidates and pipeline. We expect to continue to incur operating losses until
our products generate adequate commercial revenue to reach profitability. If we
do not successfully commercialize AMZEEQ, ZILXI or any current or future product
candidates, if approved, we may be unable to generate adequate product revenues
to achieve such profitability. We may be required to obtain further funding
through debt or equity offerings or other sources. Adequate additional funding
may not be available to us on acceptable terms, or at all. If we are unable to
raise capital when needed or on acceptable terms, we may be forced to delay,
reduce or eliminate our research and development programs or commercialization
or manufacturing efforts. Additionally, we are closely monitoring ongoing
developments in connection with the COVID-19 pandemic, which may have an adverse
impact on our commercial prospects and projected cash position.
Components of Operating Results
Revenues
To date, we have generated limited revenues from sales of AMZEEQ, ZILXI or any
of our other product candidates.
During 2019, we were engaged in pre-launch sales and marketing planning
activities and other pre-commercialization efforts in order to support the
commercialization of AMZEEQ in the United States. We received FDA approval for
AMZEEQ on October 18, 2019, launched AMZEEQ in the United States in January 2020
and have generated product revenue of $3.2 million for the six months ended June
30, 2020. We expect to commercially launch ZILXI in the fourth quarter of 2020
and we will not commercially launch our other product candidates in the United
States or generate any revenues from sales of any of our product candidates
unless and until we obtain marketing approval. Our ability to generate revenues
from sales will depend on the successful commercialization of our drug products
AMZEEQ and ZILXI and any other product candidates.
Historically, we have generated revenues under development and license
agreements including royalty payments in relation to Finacea, the prescription
foam product that we developed in collaboration with Bayer, which later assigned
it to LEO. In the three months ended March 31, 2020, we did not receive or
become entitled to any royalty payments due to the ongoing suspension of the
manufacturing of Finacea by LEO, following inadequate supply of
quality-compliant batches of the API used in such product. In April 2020, LEO
informed us that it had reestablished the supply of Finacea foam and resumed
commercial sale in the United States. In the three months ended June 30, 2020 we
received royalties of $0.2 million.
We may become entitled to additional contingent payments in the future, subject
to achievement of the applicable clinical results by our other licensees.
However, in light of the current phase of development and associated milestone
schedules under these agreements, we do not expect to receive significant
payments in the near term, if at all. We are also entitled to additional
royalties from net sales or net profits generated by other products to be
developed under these agreements, if they are successfully commercialized. In
those development and license agreements in which royalties are based on net
sales, their rate ranges from 3% to 8.5%, and in the agreement in which
royalties are based on net profits, their rate is 6%.
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Additionally, as described in "Key Developments," on April 23, 2020, we
announced that we entered into a licensing agreement with Cutia for AMZEEQ as
well as certain of our other topical minocycline product candidates, once
approved, on an exclusive basis in Greater China. Under the terms of the
agreement, Cutia will have an exclusive license to obtain regulatory approval of
and commercialize AMZEEQ and, if approved in the U.S., FMX103 and FCD105 in
the Greater China territory. Foamix will supply the finished licensed products
to Cutia for clinical and commercial use. Foamix will receive an upfront cash
payment of $10 million and will be eligible to receive an additional $1
million payment upon the receipt of marketing approval in China of the first
licensed product. Foamix will also receive royalties on net sales of any
licensed products. In the six months ended June 30, 2020 we recognized license
revenue of $10.0 million.
Cost of Goods Sold
Cost of goods sold was $0.5 million for the six months ended June 30, 2020.
There was no cost of goods sold in the six months ended June 30, 2019 because
the revenues in that period consisted solely of royalties, which do not bear
related cost of goods sold.
Our gross margin percentage of 85% was favorably impacted during the six months
ended June 30, 2020 by product sales with certain materials produced prior to
FDA approval and therefore expensed in prior periods. If inventory sold during
the six months ended June 30, 2020 was valued at cost, our gross margin for the
period then ended would have been 81%.
Cost of goods sold expenses consist primarily of:
•third party expenses incurred in manufacturing product for sale;
•transportation costs incurred in shipping manufacturing materials between third
parties.
•other costs associated with delivery and manufacturing of product.
Operating Expenses
Research and Development Expenses
Our research and development expenses to date relate primarily to the
development of AMZEEQ, ZILXI and FCD105. Our total research and development
expenses for the six months ended June 30, 2020 and 2019 were approximately
$29.1 million and $23.4 million, respectively. We charge all research and
development expenses to operations as they are incurred.
Research and development expenses consist primarily of:
•employee-related expenses, including salaries, benefits and related expenses,
including share-based compensation expenses;
•expenses incurred under agreements with third parties, including
subcontractors, suppliers and consultants that conduct regulatory activities,
clinical trials and preclinical studies;
•expenses incurred to acquire, develop and manufacture clinical trial materials;
•facilities, depreciation and other expenses, which include direct and allocated
expenses for rent and maintenance of facilities, insurance, and other operating
costs;
•costs associated with the creation, development and protection of intellectual
property;
•other costs associated with preclinical and clinical activities and regulatory
operations; and
•materials and manufacturing costs related to commercial production prior to FDA
approval.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the six months ended
June 30, 2020 and 2019 were approximately $51.9 million and $12.1 million,
respectively. This increase was primarily associated with the expansion of our
employee base, including sales force, to support the growth of our operations,
severance expenses for Menlo employees, stock based compensation awards, merger
expenses and sales and marketing expenses incurred in connection with the
commercialization of AMZEEQ.
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Our selling, general and administrative expenses consist principally of:
•employee-related expenses, including salaries, benefits and related expenses,
including share-based compensation expenses;
•costs associated with selling, marketing and shipping and handling costs;
•legal and professional fees for auditors and other consulting expenses; and
•facility, information technology and depreciation expenses.
Financial Income and Expenses
Financial income primarily consist of gains from interest earned from our bank
deposits, financial income on our marketable securities and a revaluation of our
derivative liability. Financial expenses primarily consist of interest expense
on our long-term debt.
Income Taxes and Net Operating Loss Carryforwards
We have incurred significant net operating losses ("NOLs") since our inception.
We expect to continue to incur NOLs until such a time when AMZEEQ, ZILXI or any
other product, if approved in the future, generates adequate revenues for us to
reach profitability. As of December 31, 2019, we had federal and state net
operating loss carryforwards of $165.8 million and $17.6 million, respectively,
of which $44.3 million and $16.8 million of these carryforwards will begin to
expire in 2031 for federal and state purposes, respectively. As of December 31,
2019, we had federal and state research and development tax credit carryforwards
of $7.1 million and $2.1 million, respectively. The federal credits begin to
expire in 2031 and the California research credits have no expiration dates. As
of December 31, 2019, Foamix had foreign NOL carryforwards of $224.4 million,
which are available solely to offset taxable income of our foreign subsidiary,
subject to any applicable limitations under foreign law and $27.3 million in
federal and state NOLs with no limited period of use.
NOLs and tax credit carryforwards are subject to review and possible adjustment
by the Internal Revenue Service and may become subject to an annual limitation
in the event of certain cumulative changes in the ownership interest of
significant stockholders over a three-year period in excess of 50%, as defined
under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended.
This could limit the amount of tax attributes that can be utilized annually to
offset future taxable income or tax liabilities. The amount of the annual
limitation is determined based on the value of our company immediately prior to
the ownership change. Subsequent ownership changes may further affect the
limitation in future years. State NOLs and tax credit carryforwards may be
subject to similar limitations under state laws. We have not determined if we
have experienced Section 382 ownership changes in the past and if a portion of
our net operating loss and tax credit carryforwards are subject to an annual
limitation under Sections 382 or 383. We may have experienced ownership changes
in the past, including in connection to our initial public offering ("IPO"), and
as a result of the Merger and/or subsequent shifts in our stock ownership, some
of which may be outside of our control. As a result, even if we earn net taxable
income, our ability to use the NOL and tax credit carryforwards may be
materially limited, which could harm our future operating results by effectively
increasing our future tax obligations.
Results of Operations
Comparison of the Three-Month Periods Ended June 30, 2020 and 2019
Revenue
Revenues totaled $11.7 million for the three months ended June 30, 2020. There
were no revenues for the three months ended June 30, 2019. For the three months
ended June 30, 2020, $1.5 million revenues were generated from product sales of
AMZEEQ, which was launched in January 2020, $10.0 million came from the upfront
payment associated with the Cutia license agreement and $0.2 million of royalty
revenue.
The lack of supply of Finacea resulted in no royalty revenues from the sale of
Finacea for the three months ended March 31, 2020. In April 2020, LEO informed
us that it had reestablished the supply of Finacea foam and resumed commercial
sales in the United States. For the three months ended June 30, 2020 we
recognized royalty revenue of $0.2 million, compared to $0.3 million for three
months ended June 30, 2019.
The increase in license revenue for the three months ended June 30, 2020 as
compared to license revenue for the three months ended June 30, 2019 is due to
the upfront cash payment paid to us under the licensing agreement with Cutia for
the sale and marketing of AMZEEQ in China.
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As a result of the COVID-19 pandemic, we suspended the vast majority of our
in-person interactions by our customer-facing professionals in healthcare
settings and have engaged with these customers remotely as we seek to continue
to support healthcare professionals and patient care. During the second quarter
of 2020, we began limited in-person customer meetings and interactions in
certain regions, consistent with local government mandates. However, during the
three months ended June 30, 2020, the Company's product sales for AMZEEQ were
negatively impacted by office closures. The length of time and extent to which
the COVID-19 pandemic will directly or indirectly impact our business, results
of operations and financial condition will depend on future developments that
are highly uncertain, subject to change and difficult to predict. An extended
duration of the COVID-19 pandemic could continue to negatively impact sales of
AMZEEQ, and any future sales of ZILXI.
Cost of Goods Sold
Cost of goods sold was $0.2 million for the three months ended June 30, 2020.
There was no cost of goods sold in the three months ended June 30, 2019 because
the revenues in that period consisted solely of royalties, which do not bear
related cost of goods sold.
Our gross margin percentage of 85% was favorably impacted during the three
months ended June 30, 2020 by product sales with certain materials produced
prior to FDA approval and therefore expensed in prior periods. If inventory sold
during the three months ended June 30, 2020 was valued at cost, our gross margin
for the period then ended would have been 80%.
Research and Development Expenses
Our research and development expenses for the three months ended June 30, 2020
were $13.1 million, representing an increase of $0.6 million, or 4%, compared to
$12.6 million for the three months ended June 30, 2019. Employee-related
expenses increased by $4.5 million, of which $3.0 million related to stock based
compensation. In addition, clinical and manufacturing costs related to
serlopitant increased by $4.1 million which was acquired in the merger, offset
by a decrease of $8.0 million related to clinical and manufacturing expenses for
AMZEEQ and ZILXI.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the three months ended
June 30, 2020 were $26.5 million, representing an increase of $19.7 million, or
289%, compared to $6.8 million for the three months ended June 30, 2019.
Employee-related expenses increased by $11.9 million, consisting of $3.7 million
primarily due to the expansion of our employee base, including sales force, to
support the growth of our operations and $7.7 million of stock based
compensation. We incurred $3.4 million expenses relating to the Merger included
in selling, general and administrative expenses. Sales and marketing expenses
increased by $4.4 million related to the commercialization of AMZEEQ.
Goodwill and in-process research & development impairments
Goodwill and in-process research & development impairments for the three months
ended June 30, 2020 were $54.3 million. There were no impairments for the three
months ended June 30, 2019. In the three months ended June 30, 2020, we recorded
impairments of $4.0 million for Goodwill and $50.3 million for in process
research and development due to the failed clinical trials for serlopitant for
the treatment of prurigo nodularis.
CSR Remeasurement
Contingent Stock Right Remeasurement for the three months ended June 30, 2020
was $84.7 million. For the three months ended June 30, 2020 we incurred $84.7
million of expense due to the remeasurement of the CSR to fair value which was
driven by the result of the failed serlopitant trials. At the time of the
merger, Foamix and Menlo entered into a contingent stock right agreement that
called for the issuance of additional Menlo common stock to legacy Foamix
shareholders upon negative data from both phase III serlopitant trials. Since
the trials did not meet the milestones outlined per the agreement, the
contingent stock rights were remeasured during the three months ended June 30,
2020, resulting in an expense of $84.7 million.
Finance Income and Expenses
Finance expenses and income are as follows:
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                                                                     Three months ended June 30
                                                                      2020                  2019
                                                                   (in thousands of U.S. dollars)
Interest on bank deposits                                       $           3           $     (162)
Finance gains on derivative liabilities                                  (533)                   -
Other income                                                                8                    -

Gain from marketable securities, net                                      (42)                (306)
Total income                                                             (564)                (468)
Other expenses                                                             16                    5
Foreign exchange loss                                                       -                   97
Finance expenses on loans interest and discount                         1,070                    -
Total expenses                                                  $       1,086           $      102


Income Taxes
Our tax benefit for the three months ended June 30, 2020 was $0.3 million.
During the three months ended June 30, 2019 we had no tax expenses.
Net Loss
Our net loss for the three months ended June 30, 2020 was $167.4 million, as
compared to $19.0 million for the three months ended June 30, 2019, representing
an increase of $148.4 million, or 782%. The increase was primarily due to
Goodwill impairment, In process research and development impairment, and
Contingent Stock Right Remeasurement as a result of the failed clinical trials
for serlopitant.
Comparison of the Six-Month Periods Ended June 30, 2020 and 2019
Revenue
Revenues totaled $13.4 million and $0.3 million for the six months ended
June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020,
$3.2 million of revenues were generated from product sales of AMZEEQ, which was
launched in January 2020, $10.0 million of license revenue, and $0.2 million of
royalty revenue. For the six months ended June 30, 2019, revenues consisted
solely of royalty revenues.
The increase in license revenue for the six months ended June 30, 2020 as
compared to license revenue for the six months ended June 30, 2019 is due to the
upfront payment received under the Cutia license agreement for the marketing and
sale of AMZEEQ in China.
As a result of the COVID-19 pandemic, we suspended the vast majority of our
in-person interactions by our customer-facing professionals in healthcare
settings and have engaged with these customers remotely as we seek to continue
to support healthcare professionals and patient care. During the second quarter
of 2020, we began limited in-person customer meetings and interactions in
certain regions, consistent with local government mandates. However, during the
six months ended June 30, 2020, the Company's product sales for AMZEEQ were
negatively impacted by office closures. The length of time and extent to which
the COVID-19 pandemic will directly or indirectly impact our business, results
of operations and financial condition will depend on future developments that
are highly uncertain, subject to change and difficult to predict. An extended
duration of the COVID-19 pandemic could continue to negatively impact sales of
AMZEEQ, and any future sales of ZILXI.
Cost of Goods Sold
Cost of goods sold was $0.5 million for the six months ended June 30, 2020.
There was no cost of goods sold in the six months ended June 30, 2019 because
the revenues in that period consisted solely of royalties, which do not bear
related cost of goods sold.
Our gross margin percentage of 85% was favorably impacted during the six months
ended June 30, 2020 by product sales with certain materials produced prior to
FDA approval and therefore expensed in prior periods. If inventory sold during
the six months ended June 30, 2020 was valued at cost, our gross margin for the
period then ended would have been 80%.
Research and Development Expenses
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Our research and development expenses for the six months ended June 30, 2020
were $29.1 million, representing an increase of $5.7 million, or 24%, compared
to $23.4 million for the six months ended June 30, 2019. Employee-related
expenses increased by $8.4 million, including $3.8 million related to severance
expenses payable to Menlo employees, and stock based compensation of $3.6
million. In addition, clinical and manufacturing costs related to serlopitant
increased by $7.4 million which was acquired in the Merger, offset by a decrease
of $10.1 million related to clinical and manufacturing expenses for AMZEEQ and
ZILXI.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the six months ended
June 30, 2020 were $51.9 million, representing an increase of $39.7 million, or
327%, compared to $12.1 million for the six months ended June 30, 2019.
Employee-related expenses increased by $13.9 million consisting of $9.6 million
primarily due to the expansion of our employee base, including sales force, to
support the growth of our operations and $4.3 million related to severance
expenses payable to Menlo employees. We incurred $8.9 million of employee award
stock compensation. Sales and marketing expenses increased by $9.3 million
related to the commercialization of AMZEEQ. We incurred $7.7 million expenses
relating to the merger included in selling, general and administrative expenses.
Goodwill and in-process research & development impairments
Goodwill and in-process research & development impairments for the six months
ended June 30, 2020 were $54.3 million. There were no impairments for the six
months ended June 30, 2019. In the six months ended June 30, 2020, we recorded
impairments of $4.0 million for Goodwill and $50.3 million for in process
research and development due to the failed clinical trials for serlopitant for
the treatment of prurigo nodularis.
CSR Remeasurement
Contingent Stock Right Remeasurement for the six months ended June 30, 2020 was
$84.7 million. For the six months ended June 30, 2020 we incurred $84.7 million
of expense due to the remeasurement of the CSR to fair value which was driven by
the result of the failed serlopitant trials. At the time of the merger, Foamix
and Menlo entered into a contingent stock right agreement that called for the
issuance of additional Menlo common stock to legacy Foamix shareholders upon
negative data from both Phase III serlopitant trials. Since the trials did not
meet the milestones outlined per the agreement, the contingent stock rights were
remeasured during the six months ended June 30, 2020, resulting in an expense of
$84.7 million.
Finance Income and Expenses
In the six months ended June 30, 2020 and 2019, our financial income was
primarily attributable to gains from marketable securities, interest earned on
our bank deposits and revaluation of our derivative liability. Our financial
expenses included interest expense on our long-term debt.
Finance expenses and income are as follows:
                                                                      Six months ended June 30,
                                                                      2020                  2019
                                                                   (in thousands of U.S. dollars)
Interest on bank deposits                                       $        (29)          $      (341)
Finance gains on derivative liabilities                                 (975)                    -
Other income                                                             (17)                    -
Foreign exchange gains                                                   (71)                    -
Gain from marketable securities, net                                    (200)                 (663)
Total income                                                          (1,292)               (1,004)
Other expenses                                                            21                     9
Foreign exchange loss                                                      -                   125
Finance expenses on loans interest and discount                        2,137                     -
Total expenses                                                  $      2,158           $       134


Income Taxes
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Our tax benefit for the six months ended June 30, 2020 was $0.3 million,
representing an increase of $0.1 million, or 47%, compared to $0.2 million for
the six months ended June 30, 2019.
Net Loss
Our net loss for the six months ended June 30, 2020 was $207.7 million, as
compared to $34.2 million for the six months ended June 30, 2019, representing
an increase of $173.5 million, or 507%. The increase was primarily due to an
increase in expenses incurred in connection with our commercial launch of
AMZEEQ, Merger expenses and severance expenses for Menlo employees, Goodwill
impairment, In process research and development impairment, and Contingent Stock
Right Remeasurement.
Liquidity and Capital Resources
Since inception, we have funded operations primarily through private and public
placements of our equity, debt, warrants and through fees, cost reimbursements
and royalties received from our licensees. We commenced generating product
revenues related to sales of AMZEEQ in the first quarter of 2020. We have
incurred losses and experienced negative operating cash flows since our
inception and anticipate that we will continue to incur losses until such a time
when our product and product candidates, if approved, are commercially
successful, if at all. We will not generate any revenue from any current or
future product candidates unless and until we obtain regulatory approval and
commercialize such products.
As of June 30, 2020, we had cash, cash equivalents and investments of $100.4
million. Our cash, cash equivalents and investments are held in money market
accounts and marketable securities.
Foamix Pharmaceuticals Inc., a Delaware corporation (the "Borrower"), Foamix and
Menlo, each as a guarantor, the lenders party thereto, and Perceptive Credit
Holdings II, LP, as administrative agent for the lenders, entered into an
Amended and Restated Credit Agreement and Guaranty, dated as of March 9, 2020
(the "Credit Agreement"). We have guaranteed the indebtedness obligation of the
Borrower under the Credit Agreement and in connection with the Credit Agreement
also granted a first priority security interest in substantially all of our
assets for the benefit of the lenders. The Credit Agreement provides for a
senior secured delayed draw term loan facility in an aggregate principal amount
of up to $50.0 million, and as of June 30, 2020, approximately $35.0 million was
drawn under the Credit Agreement. The Borrower will be permitted to borrow an
additional $15 million before September 30, 2020 provided that the Borrower
achieves certain revenue targets set forth in the Credit Agreement.
We have incurred significant transaction-related expenses in connection with
negotiating and completing the Merger. Transaction-related expenses, which
include legal, accounting and financial advisor fees and other service provider
costs, were approximately $21.8 million. We incurred $11.7 million of these
costs during the six months ended June 30, 2020 in our statements of operations
and comprehensive loss, and we do not expect to incur any additional significant
costs relating to the Merger in future periods.
Prior to the Merger, the Company was focused on the development and
commercialization of serlopitant for pruritic conditions. Following the receipt
of the results of the Phase 3 clinical trials evaluating serlopitant for the
treatment of PN and the impact of the COVID-19 pandemic, the Company has revised
its operating plan to focus on the commercialization of AMZEEQ and its other
topical minocycline product candidates. In addition, the revised operating plan
reflects prudent resource prioritization and allocation management, including
the rationalization of research and development spend to focus on existing
product candidates.
We believe that our cash and cash equivalents and investments, projected cash
flows from revenues and the funds that we are entitled to receive under our
license agreement with Cutia, will provide sufficient resources for our current
ongoing needs through at least the next twelve months from the issuance of these
financial statements, though there may be need for additional financing activity
as a result of the on-going COVID-19 pandemic and as we continue to grow. We
have based this estimate on assumptions that may prove to be wrong, and we could
use our capital resources sooner than we currently expect.
As a result of the COVID-19 pandemic, we suspended the vast majority of our
in-person interactions by our customer-facing professionals in healthcare
settings and have engaged with these customers remotely as we seek to continue
to support healthcare professionals and patient care. During the second quarter
of 2020, we began limited in-person customer meetings and interactions in
certain regions, consistent with local government mandates. However, during the
three and six months ended June 30, 2020, the Company's product sales for AMZEEQ
were negatively impacted by office closures. As a result of the negative impact
on the Company's product sales, the Company and its lenders amended the minimum
net revenue covenant in the Amended and Restated Credit Agreement. See "Part
II-Other Information-Part 5. Other Information." The length of time and extent
to which the COVID-19 pandemic will directly or indirectly impact our business,
results of operations and financial
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condition will depend on future developments that are highly uncertain, subject
to change and difficult to predict. An extended duration of the COVID-19
pandemic could continue to negatively impact sales of AMZEEQ, and any future
sales of ZILXI, and have a material adverse effect on our liquidity.
Summary Statement of Cash Flows
The following table summarizes our statement of cash flows for the six months
ended June 30, 2020 and 2019:

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