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OFFON

VYNE THERAPEUTICS INC.

(VYNE)
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VYNE THERAPEUTICS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/10/2021 | 08:32am EST

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020, as updated by our Current Report on Form 8-K filed on August 12, 2021. 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 VYNE Therapeutics Inc. The disclosure set forth in this section reflects the Company's 1-for-4 reverse stock split, which was effected on February 12, 2021. Accordingly, all share amounts and per share amounts have been adjusted. Company Overview

Beginning in the second quarter of 2021, we conducted a review of our commercial and research and development portfolio to determine how to optimally deploy capital and drive shareholder value. During the course of this review, we carefully considered the revenues received from the commercialization of AMZEEQ and ZILXI and the associated costs to drive those revenues, the protracted negative impact of the COVID-19 pandemic during the commercial launches of both AMZEEQ and ZILXI, the current payor landscape, as well as the costs to develop each of our pipeline products. During this process, we evaluated several strategic options, including the acquisition of marketed assets, out-licensing our approved products outside of the United States, and possible partnering or co-development relationships with interested parties. Following our review, we determined to initiate a process to explore a possible sale or license of our topical minocycline franchise, including AMZEEQ, ZILXI, FCD105 (the Company's Phase 3 proprietary novel topical combination foam formulation of minocycline and adapalene for the treatment of moderate-to-severe acne vulgaris) and the underlying Molecule Stabilizing Technology platform.

By leveraging our drug development and clinical development capabilities and strong network of discovery and preclinical science partners, we are transitioning our strategic focus to develop therapies for the treatment of immuno-inflammatory conditions and rare skin diseases of high unmet medical need. We expect to continue to invest in FMX114 for the treatment of mild to moderate atopic dermatitis and enrolled the first patient in our Phase 1b/2a proof-of-concept study in October 2021. We expect results from this study early in the first quarter of 2022. In addition, on August 12, 2021, we announced a transaction with In4Derm Limited, a company incorporated and registered in Scotland ("In4Derm"). In4Derm is a spin-out of the University of Dundee's School of Life Sciences which has discovered and is developing proprietary Bromodomain and Extra-Terminal Domain ("BET") inhibitors for the treatment of immunology and oncology conditions. On April 30, 2021, the parties entered into an Evaluation and Option Agreement (the "Option Agreement") pursuant to which In4Derm granted us an exclusive option to obtain exclusive worldwide rights to research, develop and commercialize products containing In4Derm's BET inhibitor compounds, which are new chemical entities, in both topical (the "Topical BETi Option") and oral (the "Oral BETi Option") treatments in all fields for any disease, disorder or condition in humans. On August 6, 2021, we exercised the Topical BETi Option and the parties entered into a License Agreement granting VYNE a worldwide, exclusive license that is sublicensable through multiple tiers to exploit certain of In4Derm's BET inhibitor compounds identified to be suitable for topical administration in all fields. We paid a $1.0 million cash payment to In4Derm upon the execution of the Option Agreement and $0.5 million in connection with the exercise of the Topical BETi Option. Pursuant to the License Agreement, we have agreed to make cash payments to In4Derm upon the achievement of specified clinical development and regulatory approval milestones with respect to each licensed topical product in the U.S. of up to $15.75 million for all indications. In addition, we currently expect to exercise the Oral BETi Option following the selection of a lead candidate for the program. Upon exercise of the exclusive Oral BETi Option, the parties will sign a license agreement (the "Oral License Agreement"), and we will pay In4Derm a $4.0 million cash payment. The Oral License Agreement will include cash payments of up to $43.75 million payable to In4Derm upon the achievement of specified clinical development and regulatory approval milestones with respect to each licensed oral product in the U.S. for all indications. The license agreements also provide for tiered royalty payments of up to 10% of net annual sales across licensed BET inhibitor products by VYNE. In4Derm is entitled to additional milestones upon the achievement of regulatory approvals in certain jurisdictions outside the U.S.

The initial BET inhibitor candidates that the Company plans to develop are VYN201 and VYN202. VYN201 is a pan-bromodomain or pan-BD BET inhibitor. It is a first-in-class "soft" pan-BD BET inhibitor that is designed to mitigate systemic drug exposure and will be developed for topical applications. The Company intends to progress VYN201 into rare dermatological indications where there is significant unmet need due to a lack of indicated treatment options. The Company plans to communicate the initial indication it will be pursuing for VYN201 after the prerequisite non-clinical safety assessments have been completed and enter this program into the clinic in 2022.

The second candidate, VYN202, is an orally-delivered, first-in-class BET inhibitor that is highly selective for Bromodomain 2 ("BD2"). By selectively inhibiting BD2, the Company believes VYN202 could have a more targeted anti-inflammatory effect

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Table of contents with an improved benefit/risk profile. Upon the selection of a lead candidate, VYNE intends to exercise its exclusive option with In4Derm Limited and commence an IND-enabling non-clinical safety program.


As we continue to transition from a commercial organization to one focused on
research and development, we expect to further streamline operations by
continuing to eliminate the vast majority of planned expenditures supporting our
commercial operations. Furthermore, we are in the process of reducing our
workforce by terminating approximately 70 employees, which we expect to be
completed by December 31, 2021. We incurred a one-time charge of $1.0 million in
the three months ended September 30, 2021 in connection with this restructuring
plan, consisting of $0.9 million of employee termination costs, including
severance and other benefits, and retention payments of $0.1 million. We
anticipate incurring an additional charge of $0.3 million related to employee
termination costs, including severance and other benefits during the fourth
quarter of 2021. These charges will be substantially paid out by December 31,
2021. Additional charges of $0.4 million related to retention payments are
anticipated through June 30, 2022.
Key Developments
Below is a summary of selected key developments affecting our business that have
occurred since December 31, 2020:
•From January 1, 2021 through January 25, 2021, the Company issued and sold
2,778,012 shares of common stock at a weighted average price per share of $9.76
for $26.3 million in net proceeds pursuant to a Sales Agreement (the "2019 Sales
Agreement") with Cantor Fitzgerald & Co. ("Cantor Fitzgerald") through an
at-the-market equity offering program under which Cantor Fitzgerald acted as our
sales agent. Effective as of January 25, 2021, the Company terminated the 2019
Sales Agreement.
•On January 21, 2021, the Company announced the execution of a contract with CVS
Caremark ("Caremark"), one of the largest pharmacy benefit managers in the U.S.,
with respect to AMZEEQ and ZILXI. In late March 2021, Caremark informed the
Company that it decided to not include these products, and other new branded
comparator drugs, on its national formulary for 2021. Certain custom plans under
the Caremark umbrella have decided to add the Company's drugs to their
respective formularies.
•On January 28, 2021, the Company completed a registered direct offering of
5,274,261 shares of common stock at a price of $9.48 per share. The net proceeds
of the offering were approximately $46.8 million, after deducting placement
agent fees and other offering expenses.
•On February 1, 2021, we announced that the FDA approved a label update for
AMZEEQ, including new information indicating the low propensity of
Propionibacterium acnes (more commonly known as P. acnes) to develop resistance
to minocycline.
•On February 10, 2021, our Board of Directors approved a one-for-four reverse
stock split of our outstanding shares of common stock. The reverse stock split
was effected on February 12, 2021 at 5:00 p.m. Eastern time. At the effective
time, every four issued and outstanding shares of our common stock were
converted into one share of common stock. No fractional shares were issued in
connection with the reverse stock split, and in lieu thereof, each stockholder
holding fractional shares was entitled to receive a cash payment (without
interest or deduction) from the Company's transfer agent in an amount equal to
such stockholder's respective pro rata share of the total net proceeds from the
Company's transfer agent sale of all fractional shares at the then-prevailing
prices on the open market. In connection with the reverse stock split, the
number of authorized shares of our common stock was also reduced on a
one-for-four basis, from 300 million to 75 million. The par value of each share
of common stock remained unchanged. A proportionate adjustment was also made to
the maximum number of shares issuable under the Company's 2019 Equity Incentive
Plan, 2018 Omnibus Incentive Plan and 2019 Employee Share Purchase Plan.
•On March 1, 2021, we announced development plans for FMX114 for the potential
treatment of mild-to-moderate atopic dermatitis. FMX114 is a fixed combination
of tofacitinib, which is a pan-Janus kinase (JAK) inhibitor, and fingolimod, a
sphingosine 1-phosphate receptor modulator. FMX114 attempts to address both the
source and cause of inflammation in atopic dermatitis and support skin barrier
recovery.
•Tyler Zeronda was appointed as our interim Chief Financial Officer and
Treasurer, effective as of June 18, 2021, following the resignation of Andrew
Saik.
•On July 19, 2021, the Company amended its Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of common stock from
75,000,000 to 150,000,000 shares. The increase in the number of authorized
shares was approved by the holders of a majority of the outstanding shares of
common stock at the Company's annual meeting of stockholders held on July 19,
2021.
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•On August 9, 2021, we initiated a patent infringement suit against Padagis
Israel Pharmaceuticals Ltd. (f/k/a Perrigo Israel Pharmaceuticals Ltd.
("Padagis")) in the United States District Court for the District of Delaware
arising from Padagis's ANDA filing with the FDA. The patent infringement suit
asserts each of the patents related to AMZEEQ listed in the Orange Book (the
"Listed Patents"). As a result, under applicable law, the FDA cannot grant final
approval to Padagis's ANDA before December 30, 2023, or a court decision in
Padagis's favor. VYNE is seeking, among other relief, an order that the
effective date of any FDA approval of Padagis's ANDA be no earlier than the
expiration of the Listed Patents, the latest of which expires on September 8,
2037, and such further and other relief as the court may deem appropriate.
•On August 11, 2021, the Company prepaid its outstanding indebtedness in
addition to a 4% prepayment fee and accrued but unpaid interest. Following the
prepayment, the Amended and Restated Credit Agreement has been terminated and
the security interests thereunder will be terminated. See "Part I-Item 1.
Unaudited Condensed Consolidated Financial Statements-Note 8. Debt."
•On August 12, 2021, we announced a licensing arrangement with In4Derm, giving
us access to their library of novel BET inhibitor compounds. See "-Company
Overview."
•On August 12, 2021, we announced that we initiated a process to explore a sale
or license of our topical minocycline franchise. In addition, we are refocusing
our resources on our immuno-inflammatory development programs, including the
compounds that we licensed from In4Derm. See "-Company Overview."
•On August 12, 2021, we entered into a sales agreement with Cantor Fitzgerald &
Co. to sell shares of our common stock, from time to time, with aggregate gross
sales proceeds of up to $50.0 million through an at-the-market equity offering
program under which Cantor Fitzgerald will act as our sales agent. From August
12, 2021 to September 30, 2021, we issued and sold 1,948,000 shares of common
stock at a weighted average sales price per share of $1.57 for $2.9 million in
net proceeds. See "Part I-Item 1. Unaudited Condensed Consolidated Financial
Statements-Note 9. Share Capital."
•On October 5, 2021, we announced that the first patient was enrolled in Cutia's
Phase 3 study in China evaluating AMZEEQ for the purposes of seeking regulatory
approval in China.
•On October 19, 2021, we announced that the first patient was enrolled in our
Phase 1b/2a clinical trial evaluating FMX114 for the treatment of
mild-to-moderate atopic dermatitis. We expect topline results from the study
early in the first quarter of 2022.
•On October 21, 2021, we announced the formation of a scientific advisory board
("SAB") composed of leading scientists and academics specializing in
immunological and inflammatory diseases. The SAB will provide scientific
expertise and guidance to the VYNE management team and Board, as the Company
progresses its pipeline of innovative treatments for immuno-inflammatory
conditions.
•On October 26, 2021, we announced preclinical data showing that our pan-BET
inhibitor, VYN201, significantly reduced the expression of several key
pro-inflammatory cytokines relevant to Th17-mediated autoimmune diseases in an
animal model and an ex vivo human tissue study.
Financial Overview
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 September 30, 2021, we had
an accumulated deficit of $628.0 million. We recorded net losses of $21.3
million and $24.7 million for the three months ended September 30, 2021 and
2020, respectively.
Our capital resources and business efforts have largely been focused on
activities relating to the commercialization of AMZEEQ and ZILXI and advancing
our product candidates and pipeline. As discussed above, we completed a
strategic review of our business and have determined to explore a possible sale
or license of our minocycline franchise, including AMZEEQ, ZILXI, FCD105 and the
underlying MST platform. We will refocus our resources on our
immuno-inflammatory pipeline and expect to support the continued development of
FMX114 and the BET inhibitor research and development programs. Research and
development activities for these programs, including preclinical and clinical
testing of the Company's drug candidates, will require significant additional
financing. The future viability of the Company is dependent on our ability to
successfully execute our business strategy and develop our drug candidates and
raise additional capital to finance operations. Our failure to raise
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capital as and when needed could have a negative impact on our financial
condition and ability to pursue our business strategies.
Components of Operating Results
Revenues
Our revenue during the periods presented has been comprised of AMZEEQ and ZILXI
product sales and collaboration revenue.
We received FDA approval for AMZEEQ on October 18, 2019 and launched AMZEEQ in
the United States in January 2020. We commercially launched ZILXI on October 1,
2020. We have generated product revenue of $11.8 million for the nine months
ended September 30, 2021. 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 that receive marketing approval.
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 Pharma A/S ("LEO"). In the three months ended March 31, 2020, we did
not receive or become entitled to any royalty payments due to the 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 nine months ended September 30,
2021 we received royalties of $0.7 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.
Additionally, on April 23, 2020, 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, ZILXI and, if approved in
the U.S., FCD105 in the Greater China territory. We will supply the finished
licensed products to Cutia for clinical and commercial use. We received an
upfront cash payment of $10.0 million in 2020 ($6.0 million received in the
three months ended June 30, 2020 and $4.0 million received in the three months
ended September 30, 2020) and will be eligible to receive an additional $1
million payment upon the receipt of marketing approval in China of the first
licensed product. We will also receive royalties on net sales of any licensed
products pursuant to the agreement. There was no license revenue for the nine
months ended September 30, 2021.
Cost of Goods Sold
Cost of goods sold for the nine months ended September 30, 2021 and 2020 were
approximately $2.4 million and $0.9 million, respectively.
Our gross margin percentage of 79% and 86% was favorably impacted during the
nine months ended September 30, 2021 and September 30, 2020, respectively, by
product sales with certain materials produced prior to FDA approval and
therefore expensed in prior periods. If inventory sold during the nine months
ended September 30, 2021 and September 30, 2020 was valued at cost, our gross
margin for the period then ended would have been 78% and 82%, respectively.
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; and
•other costs associated with delivery and manufacturing of product.


Operating Expenses

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Research and Development Expenses
Our research and development expenses to date relate primarily to the
development of AMZEEQ, ZILXI, serlopitant, FCD105 and FMX114. Our total research
and development expenses for the nine months ended September 30, 2021 and 2020
were approximately $19.7 million and $35.7 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 nine months ended
September 30, 2021 and 2020 were approximately $46.3 million and $71.6 million,
respectively. The decline in these costs is primarily associated with cost
savings measures related to our shift from a commercial organization to a
research and development organization and merger costs incurred during 2020. No
merger related costs were incurred in 2021.
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.
Interest Expense
Interest expense primarily consists of interest expense on our long-term debt.
During the three months ended September 30, 2021, our interest expense also
included prepayment penalties of $1.4 million and the write off of deferred
financing costs of $1.6 million.
Other Expense, net
Other Expense, net primarily consists of gains from interest earned from our
bank deposits, foreign exchange losses and financial income on our marketable
securities and a revaluation of our derivative liability.
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 we generate adequate
revenues for us to reach profitability. As of December 31, 2020, we had federal
and state net operating loss carryforwards of $243.2 million and $66.3 million,
respectively, of which $44.3 million and $66.3 million of these carryforwards
will begin to expire in 2031 for federal and state purposes, respectively. As of
December 31, 2020, we had federal and state research and development tax credit
carryforwards of $6.2 million and $1.2 million,
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respectively. The federal credits begin to expire in 2031 and the California
research credits have no expiration dates. As of December 31, 2020, the company
had $198.9 million in federal and state NOLs with no limited period of use.
There are no significant updates through September 30, 2021.
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 of a corporation 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. State NOLs and tax
credit carryforwards may be subject to similar limitations under state laws. We
believe that certain of our NOLs and tax credit carryforwards may be subject to
limitation under Sections 382 or 383, and potentially, similar limitations under
state law. 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 September 30, 2021 and 2020
Revenue
Revenues totaled $4.1 million and $3.3 million for the three months ended
September 30, 2021 and 2020, respectively. For the three months ended
September 30, 2021, our revenue consisted of $4.0 million of product sales and
$0.1 million of royalty revenue. For the three months ended September 30, 2020,
revenues consisted of $2.9 million of product sales and $0.4 million of royalty
revenue.
The COVID-19 pandemic and government measures taken in response to the pandemic
have had a negative impact on our operations. Access to healthcare providers has
been limited through the third quarter of 2021, which has negatively impacted
sales and the Company's ability to execute its commercial strategy with respect
to AMZEEQ and ZILXI. The length of time and extent to which the COVID-19
pandemic will directly or indirectly impact the Company's business, results of
operations and financial condition and liquidity will depend on future
developments that are highly uncertain, subject to change and will continue to
evolve with geographical re-openings, surges in cases, the emergence of new
strains and the vaccination effort.
In addition, on August 12, 2021, we announced that we commenced a process to
explore a possible sale or license of our topical minocycline franchise. In
connection this announcement, we immediately began reducing expenditures
supporting commercial operations, including terminating commercial employees,
which is expected to be complete by December 31, 2021.
Cost of Goods Sold
Cost of goods sold was $1.0 million and $0.4 million for the three months ended
September 30, 2021 and 2020, respectively. The increase in cost of goods sold is
primarily due to an increase in sales volume.
Our gross margin percentage was 73% for the three months ended September 30,
2021. Our gross margin percentage of 87% for the three months ended
September 30, 2020 was favorably impacted 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 September 30, 2020 was
valued at cost, our gross margin for the period then ended would have been 85%.
The inventory sold during the third quarter of 2021 was valued at cost.
Research and Development Expenses
Our research and development expenses for the three months ended September 30,
2021 were $7.0 million, representing an increase of $0.4 million, or 5.4%,
compared to $6.6 million for the three months ended September 30, 2020.
Employee-related expenses, including stock based compensation, increased by
$1.0 million. Expenditures for FMX114 and our BET inhibitor programs increased
by $1.8 million, including fees due to In4Derm upon the execution of the Option
Agreement and in connection with the exercise of the Topical BETi Option. The
increases were offset by a decrease in clinical trial and manufacturing expenses
due to the completion of FCD105 and serlopitant clinical trials and the product
launches of AMZEEQ and ZILXI during 2020.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the three months ended
September 30, 2021 were $13.8 million, representing a decrease of $5.9 million,
or 30.0%, compared to $19.8 million for the three months ended September 30,
2020. Employee-related expenses decreased by $2.0 million primarily due to lower
headcount in 2021. Commercial operations and
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marketing expenditures decreased by $2.5 million as a result of the strategic
shift of the business announced in August 2021. The balance of the decrease is
primarily due to corporate costs incurred during 2020 following the Merger that
were eliminated or reduced in 2021.
Interest Expense
Interest expense for the three months ended September 30, 2021 and September 30,
2020 was $3.5 million and $1.1 million, respectively. The increase is primarily
attributable to the prepayment penalty of $1.4 million associated with the
prepayment of outstanding debt and the write off of deferred financing costs of
$1.6 million, offset by the elimination of ongoing interest expense and deferred
cost amortization after the debt was paid off on August 11, 2021.
Other Expense (Income), net
Other expense (income), net for the three months ended September 30, 2021 was
$35.0 thousand of expense as compared with $0.1 million of income for the three
months ended September 30, 2020.
Income Taxes
During the three months ended September 30, 2021 there was no income tax
expense. Income tax expense for the three months ended September 30, 2020 was
$1.0 thousand.
Comparison of the Nine-Month Periods Ended September 30, 2021 and 2020
Revenue
Revenues totaled $12.5 million and $16.7 million for the nine months ended
September 30, 2021 and 2020, respectively. For the nine months ended
September 30, 2021, our revenue consisted of $11.8 million of product sales and
$0.7 million of royalty revenue. For the nine months ended September 30, 2020,
revenues consisted of $6.1 million of product sales, $0.6 million of royalty
revenue and $10.0 million of license revenue.
The increase in product sales is due to the ZILXI product launch in October 2020
and an increase in demand for AMZEEQ. The decrease in license revenue for the
nine months ended September 30, 2021 as compared to license revenue for the nine
months ended September 30, 2020 is due to the upfront cash payment received in
2020 under the licensing agreement with Cutia for the sale and marketing of our
topical minocycline products in China.
Cost of Goods Sold
Cost of goods sold was $2.4 million and $0.9 million for the nine months ended
September 30, 2021 and 2020, respectively. The increase in cost of goods sold is
primarily due to an increase in sales volume.
Our gross margin percentage of 79% and 86% for the nine months ended
September 30, 2021 and September 30, 2020, respectively, was favorably impacted
by product sales with certain materials produced prior to FDA approval and
therefore expensed in prior periods. If inventory sold during the nine months
ended September 30, 2021 and September 30, 2020 was valued at cost, our gross
margin for the period then ended would have been 78% and 82%, respectively.
Research and Development Expenses
Our research and development expenses for the nine months ended September 30,
2021 were $19.7 million, representing a decrease of $16.0 million, or 44.7%,
compared to $35.7 million for the nine months ended September 30, 2020.
Employee-related expenses, including stock based compensation, decreased $9.2
million primarily due to severance costs incurred in 2020 related to the Merger.
Clinical trial and manufacturing expenses decreased by $10.4 million with the
completion of FCD105 and serlopitant clinical trials and the product launches of
AMZEEQ and ZILXI during 2020. The decreases were offset by approximately
$4.0 million of increased expenditures related to FMX114 and our BET inhibitor
programs, including fees due to In4Derm upon the execution of the Option
Agreement and in connection with the exercise of the Topical BETi Option.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the nine months ended
September 30, 2021 were $46.3 million, representing a decrease of $25.4 million,
or 35.4%, compared to $71.6 million for the nine months ended September 30,
2020. Employee-related expenses, including stock based compensation, decreased
by $16.2 million primarily due to severance costs incurred in 2020 due to the
Merger. Professional service and corporate costs decreased by approximately
$13.2 million as
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certain of these expenses were eliminated or reduced in 2021 following the
Merger. Commercial related expenditures associated with the launches of AMZEEQ
and ZILXI increased by approximately $4.0 million.
Interest Expense
Interest expense for the nine months ended September 30, 2021 and September 30,
2020 was $5.6 million and $3.2 million, respectively. The increase is primarily
attributable to the prepayment penalty of $1.4 million associated with the
prepayment of outstanding debt and the write off of deferred financing costs of
$1.6 million offset by the elimination of ongoing interest expense and deferred
cost amortization after the debt was paid off on August 11, 2021.
Other Expense (Income), net
Other expense (income), net for the nine months ended September 30, 2021 was
$0.2 million of expense as compared with $1.1 million of income for the nine
months ended September 30, 2020. Other income decreased primarily due to gains
on derivative liabilities and marketable securities in 2020. No such gains
occurred in 2021.
Income Taxes
During the nine months ended September 30, 2021 there was no income tax expense.
Income tax benefit for the nine months ended September 30, 2020 was $0.3
million.
Liquidity and Capital Resources

In January 2020, we launched AMZEEQ in the United States and commenced generating product revenues in the first quarter of 2020. We also launched ZILXI in the United States in October 2020 and commenced generating revenues in the fourth quarter of 2020. Our activities prior to the commercial launches of AMZEEQ and ZILXI primarily consisted of raising capital, developing product candidates, and performing research and development activities. Since inception, we have incurred recurring losses and negative cash flows from operations. As of September 30, 2021, we had cash, cash equivalents and restricted cash of $52.9 million and an accumulated deficit of $628.0 million. On August 11, 2021, we prepaid the entirety of our outstanding indebtedness, including a prepayment premium and accrued but unpaid interest, for a total amount of approximately $36.5 million. We had no outstanding debt as of September 30, 2021. The COVID-19 pandemic and government measures taken in response to the pandemic have had a negative impact on our operations. Access to healthcare providers has been limited, which has negatively impacted sales and our ability to execute our commercial strategy with respect to AMZEEQ and ZILXI. In addition, the commercial launches of both AMZEEQ and ZILXI have been negatively impacted by unfavorable payor decisions in March 2021 on product pricing. These conditions have impaired our ability to generate revenue consistent with internal forecasts, which has had a negative impact on our financial condition and liquidity. Following discussions with our lenders regarding the revenue targets included in the Amended and Restated Credit Agreement, the revenue expected to be generated for the trailing twelve month period ended June 30, 2021 and the strategic transition discussed above, we determined to prepay our outstanding indebtedness in addition to a 4% prepayment fee and accrued but unpaid interest in the total amount of approximately $36.5 million on August 11, 2021. Following the prepayment, the Amended and Restated Credit Agreement and the security interests thereunder were terminated. See "Part I-Item 1. Unaudited Condensed Consolidated Financial Statements-Note 1. Nature of Operations-Liquidity and Capital Resources and -Note 8. Debt."

As discussed above, we completed a strategic review of our business and initiated a process to explore a sale or license of our minocycline franchise, including AMZEEQ, ZILXI, FCD105 and the underlying MST platform. We are refocusing our resources on our immuno-inflammatory pipeline and intend to continue to support the FMX114 and the BET inhibitor development programs. Research and development activities for these programs, including preclinical and clinical testing of our drug candidates, will require significant additional financing. Our future viability is dependent on our ability to successfully pivot to a research and development business strategy and develop commercially viable drug candidates and raise additional capital to finance our operations. Our ability to continue as a going concern is contingent on our ability to sell or license the minocycline franchise, develop future commercially viable products and/or to raise sufficient working capital through either debt or equity financing. There is no assurance we will be able to achieve these objectives under acceptable terms or at all.

In accordance with Accounting Standards Update ("ASU") 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (Subtopic 205-40), we have evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that our unaudited condensed consolidated financial statements are issued. The accompanying unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern and contemplate the realization of

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assets and the satisfaction of liabilities in the normal course of business. Our
ability to continue as a going concern is expected to be impacted by the outcome
of the plans outlined above, including the successful sale or license of the
minocycline franchise, positive results from clinical trials for FMX114, and the
successful development and positive results from clinical trials for the BET
inhibitor programs. We do not have sufficient cash and cash equivalents to fund
our operations beyond one year from the issuance of our September 30, 2021
financial statements. Based on our plans to conduct a Phase 2b clinical trial
for FMX114 (assuming positive results in the Phase 2a study) and progress both
the topical and oral BET inhibitor programs into the clinic in 2022, we
currently believe we has sufficient cash and cash equivalents to fund operations
through the end of the second quarter of 2022. This assumes that operating
expenses will be significantly reduced in connection with the disposition of the
minocycline franchise and projected clinical trial costs. This excludes
potential proceeds received from a sale or license of the minocycline franchise,
business development transactions or financing transactions which are all beyond
our control. As such, we will, over the course of the next twelve months,
require significant additional financing to continue our operations. Each of
these factors are subject to uncertainty, and therefore, raise substantial doubt
about our ability to continue as a going concern. Failure to successfully
complete a sale or license of the minocycline franchise, develop the above noted
assets, and receive additional financing will require us to delay, scale back or
otherwise modify our business and our research and development activities and
other operations.
Summary Statement of Cash Flows
The following table summarizes our statement of cash flows for the nine months
ended September 30, 2021 and 2020:

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