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)

05/12/2022 | 04:29pm EDT
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 for the period ended March 31, 2022 and our
Annual Report on Form 10-K for the year ended December 31, 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 our 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


We are a biopharmaceutical company focused on developing proprietary, innovative
and differentiated therapies for the treatment of immuno-inflammatory
conditions. Our most advanced product candidate, FMX114, which is in a Phase 2a
clinical trial, is being evaluated for the potential treatment of
mild-to-moderate atopic dermatitis ("AD"). We are also in the preclinical stages
of developing products containing bromodomain and extra-terminal domain ("BET")
inhibitor compounds. Our initial BET inhibitor candidate in development is
VYN201, a locally administered pan-BET inhibitor, which we are exploring in
various immuno-inflammatory diseases, including skin diseases. In addition, we
continue to explore opportunistic transactions that may enhance our pipeline
portfolio, as well as support our current operations and fund our future growth.

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
(minocycline) topical foam, 4%, and ZILXI (minocycline) topical foam, 1.5%, 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 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 divest our topical minocycline franchise, including AMZEEQ, ZILXI,
FCD105 (our former 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 ("MST")
platform.

On January 12, 2022, we entered into an Asset Purchase Agreement (the "Purchase
Agreement") with Journey Medical Corporation ("Journey") pursuant to which we
sold our Molecule Stabilizing Technology franchise, including AMZEEQ, ZILXI, and
FCD105 (the "MST Franchise"), to Journey. The assets included certain contracts,
including the license agreement with Cutia Therapeutics (HK) Limited (the "Cutia
License Agreement"), inventory and intellectual property related to the MST
Franchise (together, the "Assets"). Pursuant to the Purchase Agreement, Journey
assumed certain liabilities of the MST Franchise including, among others, those
arising from our patent infringement suit initiated against Padagis Israel
Pharmaceuticals Ltd. There were no current or long-term liabilities recorded by
us which were transferred to Journey.

Pursuant to the Purchase Agreement, we received an upfront payment of
$20.0 million at the closing of the sale and will receive an additional
$5.0 million on the one-year anniversary of the closing of the transaction. We
are also eligible to receive sales milestone payments of up to $450.0 million in
the aggregate upon the achievement of specified levels of net sales on a
product-by-product basis, beginning with annual net sales exceeding
$100.0 million (with products covered in three categories (1) AMZEEQ (and
certain modifications), (2) ZILXI (and certain modifications), and (3) FCD105
and other products covered by the patents being transferred, including certain
modifications). In addition, we are entitled to receive certain payments from
any licensing or sublicensing of the assets by Journey outside of the United
States.

As we transitioned from a commercial organization to one focused on research and
development, we further streamlined operations by continuing to eliminate the
vast majority of planned expenditures supporting our commercial operations.
Furthermore, we reduced our workforce of 106 as of December 31, 2020 to 28 at
the time of the sale of the MST Franchise.

Key Developments

Below is a summary of selected key developments affecting our business that have occurred since December 31, 2021:


•On January 12, 2022, we entered into the Purchase Agreement with Journey
pursuant to which we divested the Assets for $25.0 million and milestone
payments of up to $450.0 million in aggregate upon the achievement of specified
levels of net sales of the products covered by the Purchase Agreement. Of the
$25.0 million, $20.0 million was received at closing and $5.0 million is due
upon the one-year anniversary of the transaction. This transaction was
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accounted for in 2022. See discussion in "Note 3 - Discontinued Operations" to the unaudited condensed consolidated financial statements.

•On January 19, 2022, we announced preliminary clinical safety, dermal tolerance and pharmacokinetics findings from the Phase 1b safety portion of the Phase 1b/2a trial evaluating FMX114.


•On February 28, 2022, we received a notification from Nasdaq that we are not in
compliance with the requirement to maintain a minimum closing bid price of $1.00
per share, as set forth in Nasdaq Listing Rule 5550(a)(2), because the closing
bid price of our common stock was below $1.00 per share for 30 consecutive
business days. We have a period of 180 calendar days from the date of
notification, or until August 29, 2022, to regain compliance with the minimum
bid price requirement. The notification does not impact the listing of our
common stock on the Nasdaq Global Select Market at this time.

•On March 7, 2022, we announced positive preclinical data for VYN201 in a human skin model of vitiligo. In the model, VYN201 reduced the expression of key pro-inflammatory biomarkers relevant to the pathogenesis of vitiligo, and demonstrated marked reduction in melanocyte loss.


•On March 15, 2022, we entered into a purchase agreement (the "Equity Purchase
Agreement"), with Lincoln Park which provides that, upon the terms and subject
to the conditions and limitations set forth therein, we may sell to Lincoln
Park, at our discretion, up to $30.0 million of shares of our common stock over
the 36-month term of the Equity Purchase Agreement. Upon execution of the Equity
Purchase Agreement, we issued 1,667,593 shares of our common stock to Lincoln
Park as commitment shares in accordance with the closing conditions contained
within the Equity Purchase Agreement. We have not sold any shares of our common
stock to Lincoln Park under the Equity Purchase Agreement to date.

•On March 30, 2022, we announced positive preclinical data for an intra-articular injection of VYN201 in an in vivo model of rheumatoid arthritis.


•On April 7, 2022, we announced positive phase 1b efficacy data for FMX114 from
our Phase 1b/2a trial for the treatment of mild-to-moderate AD. At week 2,
FMX114 demonstrated a statistically significant reduction in both absolute and
percent change in mean Atopic Dermatitis Severity Index score compared to
vehicle.

Financial Overview


We have incurred net losses since our inception. Except from the first quarter
of 2020 until January 2022, when we conducted commercial operations, our
business activities have been primarily limited to developing product
candidates, raising capital and performing research and development activities.
As of March 31, 2022, we had an accumulated deficit of $634.9 million. We
recorded net income of $4.7 million and net loss of $20.6 million for the three
months ended March 31, 2022 and 2021, respectively. The net income for the three
months ended March 31, 2022 was driven by an approximate $13.0 million gain on
the sale of the MST Franchise offset by loss from continuing operations of $8.7
million.

Prior to the sale of the MST Franchise, our capital resources and business
efforts were largely focused on activities relating to the commercialization of
AMZEEQ and ZILXI and advancing our product candidates and pipeline. As discussed
above, we completed the sale of the Assets in January 2022. Going forward, we
will focus our resources on our immuno-inflammatory pipeline. Research and
development activities for these programs, including preclinical and clinical
testing of our product candidates, will require significant additional
financing. Our future viability is dependent on our ability to successfully
execute our business strategy and develop our product candidates and raise
additional capital to finance operations. Our failure to raise 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 royalty revenue.


AMZEEQ and ZILXI were commercially launched in January and October of 2020,
respectively. 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. We will not generate
revenue from the sales of AMZEEQ or ZILXI after January 12, 2022 as a result of
the sale of the Assets. Product sales has been reclassified to discontinued
operations for all periods presented.
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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 each of the three months ended March 31, 2022
and 2021 we received royalties of $0.2 million.

Cost of Goods Sold

Cost of goods sold consists of direct and indirect costs to procure and manufacture AMZEEQ and ZILXI and primarily consist 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.


Prior to receiving FDA approval, these costs for AMZEEQ and ZILXI were expensed
as research and development expenses. We began capitalizing inventory costs for
AMZEEQ and ZILXI after receipt of FDA approval. As a result of the sale of the
MST Franchise, cost of goods sold have been reclassified to discontinued
operations for all periods presented.

Operating Expenses

Research and Development Expenses


Our research and development expenses relate primarily to the development of
FMX114, VYN201 and VYN202. We charge all research and development expenses to
operations as they are incurred. Following the sale of the MST Franchise in
January 2022, our research and development will be focused on our BET inhibitor
platform and FMX114. As a result of the sale of the MST Franchise in January
2022, research and development expenses related to the MST Franchise have been
reclassified to discontinued operations for all periods presented.

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 preclinical study and 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 consist principally of:

•employee-related expenses, including salaries, benefits and related expenses, including share-based compensation expenses;

•legal and professional fees for auditors and other consulting expenses; and

•facility, information technology and depreciation expenses.


As a result of the sale of the MST Franchise in January 2022, selling, general
and administrative expenses related to the MST Franchise have been reclassified
to discontinued operations for all periods presented.

Interest expense

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Interest expense is typically comprised of interest on bank debt. No interest was incurred during the three months ended March 31, 2022.

Other Expense, net

Other expense, net primarily consists of foreign exchange losses.

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, 2021, we had federal
and state net operating loss carryforwards of $315.0 million and $105.6 million,
respectively, of which $44.3 million and $105.6 million of these carryforwards
will begin to expire starting in 2031 through 2040 for federal and state
purposes, respectively. As of December 31, 2021, we had federal and state
research and development tax credit carryforwards of $6.7 million and
$1.2 million, respectively. The federal credits begin to expire in 2031 and the
California research credits have no expiration dates. As of December 31, 2021,
we had $270.7 million in federal and state NOLs with no limited period of use.
There are no significant updates through March 31, 2022.

NOLs and tax credit carryforwards are subject to review and possible adjustment
by the Internal Revenue Service and Section 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.



















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Results of Operations

Comparison of the Three-Month Periods Ended March 31, 2022 and 2021

Summary of operations

                                          Three months ended March 31,
                                             2022                 2021                         Variance
Revenues
Royalty revenues                       $         178          $     230          $      (52)                 (22.6) %
Total revenues                                   178                230                 (52)                 (22.6) %

Operating expenses:
Research and development                       4,452              4,255                 197                    4.6  %
Selling, general and administrative            4,417              5,732              (1,315)                 (22.9) %
Total operating expenses                       8,869              9,987              (1,118)                 (11.2) %
Operating loss                                (8,691)            (9,757)              1,066                  (10.9) %
Interest expense                                   -             (1,062)              1,062                 (100.0) %
Other expense                                     (3)               (57)                 54                  (94.7) %
Loss from continuing operations before
income taxes                                  (8,694)           (10,876)              2,182                  (20.1) %
Income tax expense                                 -                  -                   -                      -  %
Loss from continuing operations               (8,694)           (10,876)              2,182                  (20.1) %
Income (loss) from discontinued
operations                                    13,364             (9,674)             23,038                 (238.1) %
Net income (loss)                      $       4,670          $ (20,550)         $   25,220                 (122.7) %


Revenue

Revenues totaled $0.2 million for each of the three months ended March 31, 2022 and 2021, consisting of royalty revenue.


We divested our minocycline business on January 12, 2022. As a result of the
sale, we will not generate revenue from the sales of AMZEEQ or ZILXI following
such date. In addition, the Cutia License Agreement was assigned to Journey in
connection with the sale. Therefore, we will not be entitled to payments under
the Cutia License Agreement going forward.

Research and Development Expenses


Our research and development expenses for the three months ended March 31, 2022
were $4.5 million, representing an increase of $0.2 million, or 4.6%, compared
to $4.3 million for the three months ended March 31, 2021. The increase relates
to $1.7 million of increased expenditures for VYN201, partially offset by
$0.6 million decrease in expenses associated with FMX114, a $0.7 million
decrease in employee related expenses and a decrease in other research and
development costs.

Selling, General and Administrative Expenses


Our selling, general and administrative expenses for the three months ended
March 31, 2022 were $4.4 million, representing a decrease of $1.3 million, or
22.9%, compared to $5.7 million for the three months ended March 31, 2021. The
decrease primarily relates to a decrease of $0.8 million associated with lower
headcount in 2022. The balance of the decrease was due to lower professional
fees.

Interest Expense

No interest expense was incurred in the three months ended March 31, 2022. In
the three months ended March 31, 2021, $1.1 million of interest expense was
incurred. The decrease is attributable to the payment of all outstanding debt on
August 11, 2021.


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Other Expense

Other expense for the three months ended March 31, 2022 was $3.0 thousand as compared with $57.0 thousand for the three months ended March 31, 2021.

Income Taxes

During the three months ended March 31, 2022 and March 31, 2021 there were no material income tax expenses.

Liquidity and Capital Resources


Since inception, we have funded operations primarily through private and public
placements of our equity, debt and warrants and through fees, cost
reimbursements and payments received from our licensees. We commenced generating
product revenues related to sales of AMZEEQ and ZILXI in January 2020 and
October 2020, respectively. AMZEEQ and ZILXI were sold as part of the sale of
the MST Franchise on January 12, 2022 and, as such, we will no longer generate
revenue from the sale of these products. 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 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 commercializes such products. For the three months ended
March 31, 2022, we generated net income of $4.7 million and used $10.0 million
of cash in operations. The net income was comprised of $13.4 million of income
from discontinued operations and $8.7 million loss from continuing operations.

As of March 31, 2022, we had cash, cash equivalents and restricted cash of $51.1
million and an accumulated deficit of $634.9 million. We received proceeds of
$20.0 million from the sale of the MST Franchise in January 2022 and will
receive an additional payment of $5.0 million on the one-year anniversary of the
sale. We had no outstanding debt as of March 31, 2022.

We have taken a number of actions to support our operations and meet our
liquidity needs. 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. Following our review, we
initiated a process to explore a possible sale or license of our MST Franchise,
including AMZEEQ, ZILXI, FCD105 and the underlying Molecule Stabilizing
Technology platform and refocus our resources on our immuno-inflammatory
development programs. As a result of this decision, we restructured our
operations and reduced our workforce, which lowered operating costs. In January
2022, we sold our MST Franchise. In addition, in March 2022, we entered into the
Equity Purchase Agreement with Lincoln Park Capital which provides that, upon
the terms and subject to the conditions and limitations set forth therein, we
may sell to Lincoln Park up to $30.0 million of shares of common stock over the
36-month term of the Equity Purchase Agreement.

As described above, following the sale of the MST Franchise, we refocused our
limited resources on our immuno-inflammatory pipeline. Research and development
activities for these programs, including preclinical and clinical testing of our
product candidates, will require significant additional financing. Our future
viability and our ability to continue as a going concern is dependent on our
ability to raise sufficient working capital through either debt or equity
financings to fund our operations and successfully develop commercially viable
product candidates. There is no assurance the 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 we will
continue as a going concern and contemplate the realization of 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 our ability to raise additional capital to fund
our operations, results from clinical trials for FMX114, and the development and
results from clinical trials for the BET inhibitor programs. Based on our
current plans and assumptions, we believe that absent sufficient proceeds
received from equity transactions, financing transactions or business
development transactions, we will not have sufficient cash and cash equivalents
to fund our operations beyond one year from the issuance of the accompanying
unaudited condensed consolidated financial statements. This assumption does not
include proceeds that can be drawn from Lincoln Park under the Equity Purchase
Agreement. Accordingly, we will, over the course of the next twelve months,
require significant additional financing to continue our operations, including
potentially selling a significant amount of shares pursuant to the Equity
Purchase Agreement. In addition, the amount of proceeds we may be able to raise
pursuant to our existing shelf registration statement on Form S-3 may be
limited. As of the filing of this Quarterly Report on Form 10-Q, we are subject
to the general instructions of Form S-3 known as
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the "baby shelf rules." Under these instructions, the amount of funds we can
raise through primary public offerings of securities in any 12-month period
using our registration statement on Form S-3 is limited to one-third of the
aggregate market value of the shares of our common stock held by our
non-affiliates. Therefore, we will be limited in the amount of proceeds we are
able to raise by selling shares of our common stock using our Form S-3 until
such time as our public float exceeds $75 million. These factors raise
substantial doubt about our ability to continue as a going concern. Failure to
successfully receive additional financing will require us to delay, scale back
or otherwise modify our business and our research and development activities and
other operations. The accompanying financial statements do not include any
adjustments related to the recoverability and classification of assets or the
amounts and classification of liabilities or any other adjustments that might be
necessary should we be unable to continue as a going concern.

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