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 endedDecember 31, 2019 , our Current Report on Form 8-K/A filed with theSEC onMay 7, 2020 and our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 filed with theSEC onMay 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 toMenlo 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. OnMarch 9, 2020 , we combined withFoamix Pharmaceuticals Ltd. ("Foamix"). InJanuary 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. OnMay 28, 2020 , theFood 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. OnJune 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 outsidethe United States . Key Developments Below is a summary of selected key developments affecting our business that have occurred sinceDecember 31, 2019 : •OnNovember 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 ofDecember 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") onMarch 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. •OnMarch 9, 2020 , we entered into an Amended and Restated Credit Agreement and Guaranty, whereby we have guaranteed the indebtedness obligation ofFoamix 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 ofDecember 31, 2019 andJune 30, 2020 . OnAugust 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." •OnMarch 24, 2020 , we announced thatAndrew Saik has joined the Company as our Chief Financial Officer and Treasurer. 32
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Table of contents •OnApril 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 inApril 2019 and has resumed commercial sales of Finacea foam. •OnApril 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 andGoodwill 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 endingJune 30, 2020 . •OnApril 23, 2020 , we announced that we entered into a license agreement withCutia 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 inGreater 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 theU.S. , FMX103 and FCD105 in theGreater 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 inChina 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 inChina 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 endedJune 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. •OnMay 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. •OnJune 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 inthe 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. 33
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Table of contents •OnJune 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 ofJune 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 ofJune 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 endedJune 30, 2020 and 2019, respectively, and$207.7 million and$34.2 million for the six months endedJune 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 inthe United States . We received FDA approval for AMZEEQ onOctober 18, 2019 , launched AMZEEQ inthe United States inJanuary 2020 and have generated product revenue of$3.2 million for the six months endedJune 30, 2020 . We expect to commercially launch ZILXI in the fourth quarter of 2020 and we will not commercially launch our other product candidates inthe 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 endedMarch 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. InApril 2020 , LEO informed us that it had reestablished the supply of Finacea foam and resumed commercial sale inthe United States . In the three months endedJune 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%. 34
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Table of contents Additionally, as described in "Key Developments," onApril 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 inGreater 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 theU.S. , FMX103 and FCD105 in theGreater 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 inChina of the first licensed product. Foamix will also receive royalties on net sales of any licensed products. In the six months endedJune 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 endedJune 30, 2020 . There was no cost of goods sold in the six months endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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. 35
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Table of contents 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 ofDecember 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 ofDecember 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 theCalifornia research credits have no expiration dates. As ofDecember 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 EndedJune 30, 2020 and 2019 Revenue Revenues totaled$11.7 million for the three months endedJune 30, 2020 . There were no revenues for the three months endedJune 30, 2019 . For the three months endedJune 30, 2020 ,$1.5 million revenues were generated from product sales of AMZEEQ, which was launched inJanuary 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 endedMarch 31, 2020 . InApril 2020 , LEO informed us that it had reestablished the supply of Finacea foam and resumed commercial sales inthe United States . For the three months endedJune 30, 2020 we recognized royalty revenue of$0.2 million , compared to$0.3 million for three months endedJune 30, 2019 . The increase in license revenue for the three months endedJune 30, 2020 as compared to license revenue for the three months endedJune 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 inChina . 36
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Table of contents 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 endedJune 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 endedJune 30, 2020 . There was no cost of goods sold in the three months endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2020 were$13.1 million , representing an increase of$0.6 million , or 4%, compared to$12.6 million for the three months endedJune 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 endedJune 30, 2020 were$26.5 million , representing an increase of$19.7 million , or 289%, compared to$6.8 million for the three months endedJune 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 impairmentsGoodwill and in-process research & development impairments for the three months endedJune 30, 2020 were$54.3 million . There were no impairments for the three months endedJune 30, 2019 . In the three months endedJune 30, 2020 , we recorded impairments of$4.0 million forGoodwill 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 endedJune 30, 2020 was$84.7 million . For the three months endedJune 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 endedJune 30, 2020 , resulting in an expense of$84.7 million . Finance Income and Expenses Finance expenses and income are as follows: 37
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Table of contents 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 endedJune 30, 2020 was$0.3 million . During the three months endedJune 30, 2019 we had no tax expenses. Net Loss Our net loss for the three months endedJune 30, 2020 was$167.4 million , as compared to$19.0 million for the three months endedJune 30, 2019 , representing an increase of$148.4 million , or 782%. The increase was primarily due toGoodwill 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 EndedJune 30, 2020 and 2019 Revenue Revenues totaled$13.4 million and$0.3 million for the six months endedJune 30, 2020 and 2019, respectively. For the six months endedJune 30, 2020 ,$3.2 million of revenues were generated from product sales of AMZEEQ, which was launched inJanuary 2020 ,$10.0 million of license revenue, and$0.2 million of royalty revenue. For the six months endedJune 30, 2019 , revenues consisted solely of royalty revenues. The increase in license revenue for the six months endedJune 30, 2020 as compared to license revenue for the six months endedJune 30, 2019 is due to the upfront payment received under the Cutia license agreement for the marketing and sale of AMZEEQ inChina . 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 endedJune 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 endedJune 30, 2020 . There was no cost of goods sold in the six months endedJune 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 endedJune 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 endedJune 30, 2020 was valued at cost, our gross margin for the period then ended would have been 80%. Research and Development Expenses 38
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Table of contents Our research and development expenses for the six months endedJune 30, 2020 were$29.1 million , representing an increase of$5.7 million , or 24%, compared to$23.4 million for the six months endedJune 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 endedJune 30, 2020 were$51.9 million , representing an increase of$39.7 million , or 327%, compared to$12.1 million for the six months endedJune 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 impairmentsGoodwill and in-process research & development impairments for the six months endedJune 30, 2020 were$54.3 million . There were no impairments for the six months endedJune 30, 2019 . In the six months endedJune 30, 2020 , we recorded impairments of$4.0 million forGoodwill 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 endedJune 30, 2020 was$84.7 million . For the six months endedJune 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 endedJune 30, 2020 , resulting in an expense of$84.7 million . Finance Income and Expenses In the six months endedJune 30, 2020 and 2019, our financial income was primarily attributable to gains from marketable securities, interest earned on our bank deposits and revaluation of our derivative liability. Our financial expenses included interest expense on our long-term debt. Finance expenses and income are as follows: Six months ended June 30, 2020 2019 (in thousands of U.S. dollars) Interest on bank deposits$ (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 39
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Table of contents Our tax benefit for the six months endedJune 30, 2020 was$0.3 million , representing an increase of$0.1 million , or 47%, compared to$0.2 million for the six months endedJune 30, 2019 . Net Loss Our net loss for the six months endedJune 30, 2020 was$207.7 million , as compared to$34.2 million for the six months endedJune 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 ofJune 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. , aDelaware corporation (the "Borrower"), Foamix and Menlo, each as a guarantor, the lenders party thereto, andPerceptive Credit Holdings II, LP , as administrative agent for the lenders, entered into an Amended and Restated Credit Agreement and Guaranty, dated as ofMarch 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 ofJune 30, 2020 , approximately$35.0 million was drawn under the Credit Agreement. The Borrower will be permitted to borrow an additional$15 million beforeSeptember 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 endedJune 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 endedJune 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 40
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Table of contents 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 endedJune 30, 2020 and 2019:
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