You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the section entitled "Item 1A-Risk Factors". 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 and, accordingly, the historical financial statements presented herein are those of Foamix. Company Overview We are a specialty pharmaceutical company focused on developing proprietary, innovative and differentiated therapies in dermatology and beyond. Our products, AMZEEQ for the treatment of inflammatory lesions of moderate-to-severe acne vulgaris in adults and patients 9 years of age and older, and ZILXI for the treatment of inflammatory lesions of rosacea in adults, are the first topical minocycline products to be approved by the FDA. AMZEEQ and ZILXI were commercially launched in January and October of 2020, respectively, and serve as a springboard for commercializing additional innovative products. In addition, our product pipeline includes FCD105 (minocycline 3% and adapalene 0.3%), our proprietary novel topical combination foam formulation of minocycline and adapalene for the treatment of moderate-to-severe acne vulgaris. FCD105 is a Phase 3-ready asset that we believe has the potential to be a best-in-class treatment for patients with acne. In addition, we recently announced a development program for FMX114, which is a combination topical gel for the potential treatment of mild-to-moderate atopic dermatitis. We plan to conduct a Phase 2a proof-of-concept study for FMX114 in the third quarter of 2021. AMZEEQ and ZILXI utilize our proprietary Molecule Stabilizing Technology (MST)™ platform that is also being used to develop FCD105. Our MST™ proprietary foam platform is designed to optimize the topical delivery of minocycline, an active pharmaceutical ingredient, or API, that was previously available only in oral form despite its prevalent use in dermatology. In addition to the MST platform, 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 and are suitable for multiple application sites across a range of conditions. Key Developments Below is a summary of selected key developments affecting our business that have occurred sinceDecember 31, 2019 : •OnNovember 10, 2019 , Menlo,Foamix and Giants Merger Subsidiary Ltd. , a wholly-owned subsidiary of Menlo ("Merger Sub"), entered into 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 of our subsidiary borrower and granted a first priority security interest in substantially all of our assets for the benefit of the lenders.$35.0 million was outstanding under the Amended and Restated Credit Agreement as ofDecember 31, 2020 , with no availability for additional borrowings. OnAugust 5, 2020 , the parties amended the minimum net revenue covenant contained in the Amended and Restated Credit Agreement and Guaranty following an assessment of the impact of the COVID-19 pandemic on the Company's business. •OnMarch 24, 2020 , we announced thatAndrew Saik joined the Company as our Chief Financial Officer and Treasurer. 74 -------------------------------------------------------------------------------- Table of Contents •OnApril 2, 2020 , we announced that we entered into a settlement and license agreement to resolve the remaining pending patent litigation involving Finacea foam. •InApril 2020 , LEO remedied the supply chain issues related to Finacea and resumed commercial sales. •OnApril 6, 2020 , we announced top line results from the Phase III PN Trials for serlopitant. 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 internally. As such, the Company recorded a full impairment charge related to the IPR&D andGoodwill assets of$49.8 million and$4.5 million , respectively, in its consolidated statement of operations and comprehensive loss for the year endedDecember 31, 2020 . •OnApril 23, 2020 , we announced that we entered into the Cutia License Agreement with respect to our minocycline products and product candidate, 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, ZILXI and, if approved, FCD105 in theGreater China territory. We will supply the finished licensed products to Cutia for clinical and commercial use. We received 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. We will also receive royalties on net sales of any licensed products. •The COVID-19 pandemic has directly impacted our business operations. 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 continue to impact our patients, employees, suppliers, vendors, business partners and distribution channels. Our product sales, particularly during the second and fourth quarters of 2020, were negatively impacted by the pandemic due to a surge in reported cases and restrictions adopted in response thereto. However, 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 and distribution of effective treatments or vaccines, and the resumption of widespread economic activity. A further-extended duration of the pandemic could continue to have a material adverse effect on our product sales for AMZEEQ and 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. •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. ZILXI became available in pharmacies nationwide onOctober 1, 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. The Company anticipates commencing a Phase III program for FCD105 in 2021. •OnJune 9, 2020 , we completed an underwritten public offering of 7,776,875 shares of common stock at a price to the public of$7.40 per share. The net proceeds of the offering were approximately$53.6 million , after deducting underwriting discounts and commissions and other offering expenses. The number of shares sold and purchase price have been adjusted to reflect the Company's 1-for-4 reverse stock split. See below for additional discussion about the reverse stock split. •OnSeptember 4, 2020 , we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of theState of Delaware to change our corporate name to "VYNE Therapeutics Inc. " •Effective as ofSeptember 10, 2020 , Mr.Patrick G. LePore joined our Board.Mr. LePore has more than 40 years of experience in the pharmaceutical industry, in both private and public sectors, and with board and operational experience in each. He previously served as Chairman, Chief Executive Officer and President ofPar Pharmaceutical Companies, Inc. 75 -------------------------------------------------------------------------------- Table of Contents •OnOctober 1, 2020 , ZILXI became available in pharmacies nationwide, and onOctober 7, 2020 , we announced that Express Scripts, one of the nation's leading pharmacy benefit managers (PBMs), has elected to cover ZILXI on Express Scripts' National Preferred, Flex, and Basic commercial formularies, representing millions of additional covered lives in theU.S. that follow these formularies. •During the fourth quarter of 2020, the Company expanded its distribution model with respect to AMZEEQ and ZILXI to include independent and specialty pharmacies in an effort to further reduce barriers for patients to initiate and maintain therapy. •VYNE was added to the Nasdaq Biotechnology Index effective as ofDecember 21, 2020 . •During the three months endedDecember 31, 2020 , the Company issued and sold 1,175,000 shares of common stock at a weighted average price per share of$7.00 for$8.0 million in net proceeds pursuant to a Sales Agreement withCantor Fitzgerald & Co. ("Cantor Fitzgerald") through an at-the-market equity offering program under whichCantor Fitzgerald acted as our sale agent. In addition, fromJanuary 1, 2021 throughJanuary 25, 2021 , the Company issued and sold an additional 2,778,012 shares of common stock at a weighted average price per share of$9.76 for$26.3 million in net proceeds. Effective as ofJanuary 25, 2021 , the Company terminated the Sales Agreement and will not make any additional sales thereunder. The number of shares sold and purchase prices have been adjusted to reflect the Company's 1-for-4 reverse stock split. See below for additional discussion about the reverse stock split. •OnJanuary 21, 2021 , the Company announced the execution of a contract with one of the largest pharmacy benefit managers in theU.S. with respect to AMZEEQ and ZILXI. •OnJanuary 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$46.7 million , after deducting placement agent fees and other offering expenses. The number of shares sold and purchase price have been adjusted to reflect the Company's 1-for-4 reverse stock split. See below for additional discussion about the reverse stock split. •OnFebruary 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. •OnFebruary 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 onFebruary 12, 2021 at5:00 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 shares 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. •OnMarch 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. Revenues Our revenue during the periods presented has been primarily comprised of AMZEEQ and ZILXI product sales and collaboration and license revenue. 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 . AMZEEQ and ZILXI were commercially launched in January and October of 2020, respectively. We have generated product revenue of$10.2 million for the year endedDecember 31, 2020 . 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 76 -------------------------------------------------------------------------------- Table of Contents revenues from sales will depend on the successful commercialization of 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. 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 year endedDecember 31, 2020 we received royalties of$0.8 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, as described in "Key Developments," onApril 23, 2020 , we announced that we entered into a licensing agreement with Cutia for our other topical minocycline products and product candidate, if 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, ZILXI and, if approved in theU.S. , FCD105 in theGreater China territory. We will supply the finished licensed products to Cutia for clinical and commercial use. We received 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. We will also receive royalties on net sales of any licensed products pursuant to the agreement. In the year endedDecember 31, 2020 , we recognized license revenue of$10.0 million . Cost of Goods Sold Cost of goods sold was$1.4 million for the year endedDecember 31, 2020 . There was no cost of goods sold in the year endedDecember 31, 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 86% was favorably impacted during the year endedDecember 31, 2020 by product sales with certain materials produced prior to FDA approval and therefore expensed in prior periods. If inventory sold during the year endedDecember 31, 2020 was valued at cost, our gross margin for the period then ended would have been 83%. 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 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 year endedDecember 31, 2020 and 2019 were approximately$43.5 million and$51.2 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; 77 -------------------------------------------------------------------------------- Table of Contents •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 year endedDecember 31, 2020 and 2019 were approximately$89.5 million and$45.1 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 and ZILXI. 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. Other Income, net Other Income, net primarily consists of gains from interest earned from our bank deposits, 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 AMZEEQ, ZILXI or any other product, if approved in the future, generates adequate revenues for us to reach profitability. As ofDecember 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 starting in 2031 through 2040 for federal and state purposes, respectively. As ofDecember 31, 2020 , we had federal and state research and development tax credit carryforwards of$6.6 million and$1.2 million , respectively. The federal credits begin to expire in 2031 and theCalifornia research credits have no expiration dates. As ofDecember 31, 2020 , the Company had$198.9 million in federal and state NOLs with no limited period of use. InDecember 2020 , the Company began liquidation proceedings of its Israeli subsidiary,VYNE Pharmaceuticals Ltd. , to align with its business strategy. As a result thereof, the Company's intellectual property was assigned to theU.S. parent company and we recognized a$163.0 million taxable gain for Israeli income tax purposes. However, the taxable gain was fully offset by net operating loss carryforwards, resulting in no income tax expense to the Company. 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 78 -------------------------------------------------------------------------------- Table of Contents 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 for the Year EndedDecember 31, 2020 andDecember 31, 2019 Summary of Operations Year Ended December 31, (in millions, except %) 2020 2019 Variance Revenues $ 21.0$ 0.4 $ 20.6 4,638.8 % Cost of goods sold 1.4 - 1.4 100.0 % Research and development expenses 43.5 51.2 (7.7) (15.0) % Selling, general and administrative expenses 89.5 45.1 44.4 98.5 %Goodwill and in-process research & development impairments 54.3 - 54.3 100.0 % CSR Remeasurement 84.7 - 84.7 100.0 % Interest expense 4.4 0.9 3.5 376.7 % Other income, net (1.1) (1.4) 0.3 (22.9) % Taxes on income (0.3) (0.2) (0.1) 46.6 % Net loss 255.6 95.2 160.4 168.5 % Revenues Revenues totaled$21.0 million and$0.4 million for the years endedDecember 31, 2020 and 2019, respectively. For the year endedDecember 31, 2020 , our revenue consisted of$10.2 million of product sales, primarily associated with AMZEEQ and ZILXI, which were launched inJanuary 2020 andOctober 2020 , respectively,$10.0 million of license revenue, and$0.8 million of royalty revenue. For the year endedDecember 31, 2019 , revenues consisted solely of royalty revenues. The increase in license revenue for the year endedDecember 31, 2020 as compared to license revenue for the year endedDecember 31, 2019 is due to the upfront payment received under the Cutia License Agreement for the marketing and sale of our topical minocycline products inGreater China . Circumstances surrounding the COVID-19 pandemic have negatively impacted our ability to execute our commercial strategy with respect to AMZEEQ and ZILXI. For example, our product sales, particularly during the second and fourth quarters of 2020, were negatively impacted by restrictions put in place in response to the pandemic. Specifically, many healthcare providers suspended access to their office for pharmaceutical sales representatives. In addition, many patients have chosen not to visit or contact their healthcare providers which has limited new patient access and conversion. 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 will depend on future developments that are highly uncertain, subject to change and will continue to evolve with geographical re-openings, virus waves and the distribution of vaccines and treatment options. An extended duration of the COVID-19 pandemic could continue to negatively impact sales of AMZEEQ and ZILXI. Cost of Goods Sold Cost of goods sold was$1.4 million for the year endedDecember 31, 2020 . There was no cost of goods sold in the year endedDecember 31, 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 86% was favorably impacted during the year endedDecember 31, 2020 by product sales with certain materials produced prior to FDA approval and therefore expensed in prior periods. If inventory sold during the year endedDecember 31, 2020 was valued at cost, our gross margin for the period then ended would have been 83%. 79 -------------------------------------------------------------------------------- Table of Contents Research and development expenses Our research and development expenses for the year endedDecember 31, 2020 were$43.5 million , representing a decrease of$7.7 million , or 15.0%, compared to$51.2 million for the year endedDecember 31, 2019 . Clinical and manufacturing expense for AMZEEQ and ZILXI decreased as both products were commercialized in 2020. Clinical trials for FCD105 concluded inApril 2020 resulting in a decrease in expense during the second half of the year. This was offset by an increase in clinical costs related to serlopitant and employee-related expenses of$12.4 million , including$3.8 million related to severance expenses payable to our former employees, and stock based compensation of$3.1 million . Selling, general and administrative expenses Our selling, general and administrative expenses for the year endedDecember 31, 2020 were$89.5 million , representing an increase of$44.4 million , or 98%, compared to$45.1 million for the year endedDecember 31, 2019 . Employee-related expenses increased primarily due to the expansion of our employee base, including sales force to support the growth of our operations. As result of the merger, we incurred$4.7 million of severance expense,$7.7 million of additional selling, general and administrative expenses, and$9.9 million of stock based compensation. Sales and marketing expenses increased due to the commercialization of AMZEEQ and ZILXI.Goodwill and in-process research & development impairmentsGoodwill and in-process research & development impairments for the year endedDecember 31, 2020 were$54.3 million . There were no impairments for the year endedDecember 31, 2019 . In the year endedDecember 31, 2020 , we recorded impairments of$4.5 million forGoodwill and$49.8 million for in process research and development due to the failed clinical trials for serlopitant for the treatment of pruritus associated with prurigo nodularis. CSR Remeasurement Contingent Stock Right Remeasurement for the year endedDecember 31, 2020 was$84.7 million . For the year endedDecember 31, 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 Phase III PN Trials. At the time of the merger transaction with Foamix, we entered into a contingent stock right agreement that called for the issuance of additional shares of our common stock to legacy Foamix shareholders upon negative data from the Phase III PN Trials. Since the trials did not meet the milestones outlined per the agreement, the contingent stock rights were remeasured, resulting in an expense of$84.7 million for the year endedDecember 31, 2020 . Interest Expense Interest expense for the year endedDecember 31, 2020 was$4.4 million , representing an increase of$3.5 million , or 377%, compared to$0.9 million for the year endedDecember 31, 2019 . The increase was primarily attributable to an increase in the average long-term debt outstanding during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 due to the Company entering into a credit agreement inJuly 2019 . Other Income, net Other Income, net for the year endedDecember 31, 2020 was$1.1 million , representing a decrease of$0.3 million , or 23%, compared to$1.4 million for the year endedDecember 31, 2019 . Other Income, net decreased primarily due to a$1.0 million decrease in gains from marketable securities, a$0.5 million decrease in interest on bank deposits offset by$1.0 million of gains on derivative liabilities. Taxes on income Our tax benefit for the year endedDecember 31, 2020 was$0.3 million , representing an increase of$0.1 million , or 47%, compared to$0.2 million for the year endedDecember 31, 2019 . Liquidity 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 inJanuary 2020 andOctober 2020 , respectively. 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 products and product candidates, if approved, are commercially successful, if at all. We will not generate any 80 -------------------------------------------------------------------------------- Table of Contents revenue from any current or future product candidates unless and until we obtain regulatory approval and commercialize such products.VYNE Pharmaceuticals Inc. , aDelaware corporation (the "Borrower"),VYNE Pharmaceuticals Ltd. and the Company, 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 (as amended, the "Amended and Restated Credit Agreement"). We have guaranteed the indebtedness obligation of the Borrower under the Amended and Restated Credit Agreement and also granted a first priority security interest in substantially all of our assets for the benefit of the lenders. As ofDecember 31, 2020 , approximately$35.0 million was drawn under the Amended and Restated Credit Agreement with no availability for additional borrowings thereunder. In addition, the parties entered into Amendment No. 1 to Amended and Restated Credit Agreement (the "Amendment") onAugust 5, 2020 . The Amendment provided for a covenant "holiday" with respect to the minimum net revenue covenant such that the compliance with such covenant commenced with the fiscal quarter ending onDecember 31, 2020 , rather thanSeptember 30, 2020 . Accordingly, as of the last day of each fiscal quarter commencing with the fiscal quarter endingDecember 31, 2020 , the Company must generate consolidated net product revenue for the trailing 12-month period in amounts set forth in the Amendment, which range from$6.0 million for the fiscal quarter endingDecember 31, 2020 to$97.0 million for the fiscal quarter endingJune 30, 2024 . 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 year endedDecember 31, 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 III PN Trials and the impact of the COVID-19 pandemic, the Company revised its operating plan to focus on the commercialization of AMZEEQ, ZILXI and its other 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. As ofDecember 31, 2020 , we had cash, cash equivalents, restricted cash and investments of$59.4 million . Our cash, cash equivalents and investments are held in money market accounts and marketable securities. We believe that our existing cash and investments as ofDecember 31, 2020 , the net proceeds received from the registered direct offering and the "at-the-market" offerings inJanuary 2021 of$73.0 million and projected cash flows from revenues will provide sufficient resources for our operating expense and capital requirements through the end of 2022. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the impact of the COVID-19 pandemic, our ability to successfully commercialize AMZEEQ and ZILXI, and any unforeseen cash needs. In addition, the Company may seek additional financing in order to achieve its longer-term strategic plans. The COVID-19 pandemic has had a significant impact, both direct and indirect, on global businesses and commerce, including our own operations. For example, our product sales for AMZEEQ and ZILXI have been negatively impacted by office closures as a result of the pandemic. Even as our customers' offices began to reopen, our access to healthcare providers remained limited which dampened sales and negatively impacted our ability to execute our commercial strategy with respect to AMZEEQ and similarly impacted sales of ZILXI, which we launched onOctober 1, 2020 . The future progression of the outbreak and its effects on our business and operations are uncertain. Many patients have chosen not to visit or contact their healthcare providers regarding their skin conditions, which has limited new patient access and conversion. In response to the outbreak, we have taken certain steps to safeguard our employees, healthcare professionals and our other partners. For example, beginning in the first quarter of 2020, our sales force and marketing team were removed from the field and adopted remote and virtual sales activities, including tele-detailing, web-based speaker programs and virtual product education sessions, as needed, in order to meet patients' needs. In addition, there was a surge in COVID-19 cases in the fourth quarter of 2020 that prompted several regions to re-institute restrictions, which continued to negatively impact our sales force's ability to access healthcare providers. No assurance can be made that remote sales tactics will be as effective as those used prior to the outbreak of COVID-19. If the activities of our sales force continue to be disrupted due to the pandemic or patients elect not to visit their healthcare providers during the pandemic, we may continue to generate less revenue than expected, which would have a material adverse effect on our financial results and liquidity as well as hinder our ability to satisfy certain covenants contained in our Amended and Restated Credit Agreement. The future progression of the outbreak and its effects on our business and operations are uncertain. Capital Resources 81 -------------------------------------------------------------------------------- Table of Contents Overview To date, we have financed our operations primarily through private and public placements of our common stock, debt and warrants and through fees, cost reimbursements and payments received from our licensees. Cash flows The following table summarizes our statement of cash flows for the years endedDecember 31, 2020 and 2019: Year Ended December 31, 2020 2019 Net cash (used in) / provided by: (in thousands) Operating activities$ (137,082) $ (73,394) Investing activities 89,107 41,869 Financing activities$ 61,808 $ 47,950 Net cash used in operating activities Net cash used in operating activities was$137.1 million in the year endedDecember 31, 2020 , compared to$73.4 million in the year endedDecember 31, 2019 . The increase of$63.7 million in the net cash used in operating activities in the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 was attributable primarily to the growth in operations and the Merger. Net cash provided by investing activities Net cash provided by investing activities was$89.1 million in the year endedDecember 31, 2020 , compared to$41.9 million used in in the year endedDecember 31, 2019 . The increase of$47.2 million in the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 was attributable primarily to the cash acquired through the Merger partially offset by a decrease in investments in bank deposits and marketable securities. Net cash provided by financing activities Net cash provided by financing activities was$61.8 million in the year endedDecember 31, 2020 , compared to$48.0 million in the year endedDecember 31, 2019 . The increase of$13.9 million in net cash provided by financing activities in the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 was attributable primarily to an increase in share offerings in the year endedDecember 31, 2020 . Cash and funding sources The table below summarizes our main sources of financing for the years endedDecember 31, 2020 and 2019: Proceeds from our Proceeds from Proceeds Cash acquired Proceeds from underwritten Proceeds from our loans and from through the at-the-market public direct public issuance issuance of Merger offerings(1) offerings(1) offerings(1) of warrant (1) common stock Total (in thousands of U.S. dollars) 2020$ 38,641 $ 7,993 53,646 $ - $ - $ -$ 100,280 2019 $ - $ - $ -$ 13,714 $ 33,903 $ 333 $ 47,950 __________________________ (1) Net of issuance costs. Our sources of funding in the year endedDecember 31, 2020 totaled$100.3 million and consisted primarily of$38.6 million cash and investments acquired in the Merger,$53.6 million proceeds from an underwritten public offering of common stock completed inJune 2020 , and$8.0 million proceeds from our at-the-market program during the fourth quarter of 2020. 82 -------------------------------------------------------------------------------- Table of Contents Our sources of financing in the year endedDecember 31, 2019 totaled$49.6 million and consisted primarily of$33.9 million of net proceeds from the first two tranches of the Term Loan and$13.7 million of net proceeds from the registered offering under the Purchase Agreement. FromJanuary 1, 2021 throughJanuary 25, 2021 , the Company issued and sold an additional 2,778,012 shares of common stock at a weighted average price per share of$9.76 for$26.3 million in net proceeds, as adjusted for the Company's 1-for-4 reverse stock split, in "at-the-market" offerings pursuant to the Sales Agreement. OnJanuary 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 for$46.7 million in net proceeds, as adjusted for the Company's 1-for-4 reverse stock split. We have no ongoing material financial commitments (such as lines of credit) that may affect our liquidity over the next five years other than our commitments under the Amended and Restated Credit Agreement. Contractual Obligations Our significant non-cancelable contractual obligations as ofDecember 31, 2020 are summarized in the following table: Payments due by period Less than 1 Total year 1-3 years 3-5 years More than 5 years Other (in thousands of U.S. dollars) Operating lease obligations(1)$ 1,825 $ 913 $ 912 $ - $ - $ - Long-term debt-principal(2) 35,000 - 35,000 - - - Long-term debt-interest(2) 13,589 3,903 9,686 - - - Liability for employee severance benefits(3) 312 - - - - 312 Purchase Obligation (4) 2,390 2,390 - - - - Total$ 53,116 $ 7,206 $ 45,598 $ - $ -$ 312
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(1) Operating lease obligations consist of lease of our facilities and lease of vehicles. (2 )As ofDecember 31, 2020 , there was$35 million outstanding under our Amended and Restated Credit Agreement, which matures onJuly 29, 2024 and bears interest of 8.25% plus the greater of the one-month LIBOR and 2.75%. Refer to Note 12 to our consolidated financial statements included elsewhere in this report for further information. (3) The liability is considered long term, however we cannot estimate the exact period in which they will be paid. (4) Purchase obligations primarily include non-cancelable commitments under our contract manufacturing agreements. Funding requirements Our present and future funding requirements will depend on many factors, including, inter alia: •the amount of revenues, if any, we may derive either directly or in the form of royalty payments from future sales of our drug products AMZEEQ and ZILXI and any other pipeline product that is commercialized; •selling, marketing and patent-related activities undertaken in connection with the commercialization of AMZEEQ, ZILXI and any other product candidates, as well as costs involved in the development of an effective sales and marketing organization; •the progress, timing and completion of preclinical testing and clinical trials for pipeline product candidates, including FCD105 and FMX114; •the time and costs involved in obtaining regulatory approval for our other pipeline product candidates and any delays we may encounter as a result of evolving regulatory requirements or adverse results with respect to any of these product candidates; •the efforts necessary to institute post-approval regulatory compliance requirements for AMZEEQ and ZILXI; •terms and timing of any acquisitions, collaborations or other arrangements; 83 -------------------------------------------------------------------------------- Table of Contents •the number of potential new products we identify and decide to develop; and •the costs involved in filing and prosecuting patent applications and obtaining, maintaining and enforcing patents or defending against claims or infringements raised by third parties, and license royalties or other amounts we may be required to pay to obtain rights to third party intellectual property rights. Our operating plan may change as a result of many factors currently unknown to us, and any such change may affect our funding requirements. We may therefore need to seek additional capital sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations or additional license arrangements. Such financings may result in dilution to stockholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business. Our capital expenditures for 2020 and 2019 amounted to$0.1 million and$1.1 million , respectively. During 2019, these expenditures were primarily related to laboratory equipment, computers and leasehold improvements. For more information as to the risks associated with our future funding needs, see "Item 1A - Risk Factors-Risks Related to Our Business and Industry-We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts" included herein. Off-Balance Sheet Arrangements As ofDecember 31, 2020 , we did not have any off-balance sheet arrangements. Critical Accounting Policies and Significant Judgments and Estimates We prepare our consolidated financial statements in accordance with generally accepted accounting principles inthe United States . The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. While our significant accounting policies are more fully described in Note 2, "Significant Accounting Policies," to the consolidated financial statements included in "Financial Statements and Supplementary Data" of this Annual Report, we believe that the following accounting policies are the most critical to assist shareholders and investors reading the consolidated financial statements in fully understanding and evaluating our financial condition and results of operations. These policies relate to the more significant areas involving management's judgments and estimates and that require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. COVID-19 The extent to which the COVID-19 pandemic continues to impact the Company's business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of the pandemic; the extent to which patients and our sales representatives are able to access healthcare provider offices; the impact on worldwide macroeconomic conditions, including interest rates, employment rates and health insurance coverage; the speed of the anticipated recovery; and governmental and business reactions to the pandemic. The Company's product sales for 2020, particularly during the second and fourth quarters, were negatively impacted by office closures and our sales force's limited ability to access healthcare providers. No assurance can be given that such office closures will not occur again in future periods, and if such closures do occur, or any other circumstance arises such that patients or our sales representatives are restricted in their ability to connect with healthcare providers, our product sales would be negatively impacted. In addition, the Company further assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as ofDecember 31, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, the Company's allowance for doubtful accounts and credit losses, inventory and related reserves, impairments of long-lived assets and revenue recognition. The Company recorded impairments of goodwill and certain indefinite-lived intangibles; however, these impairments were unrelated to the impact of COVID-19 (See "Note 3 - Business Combination" for more information). The Company's future 84 -------------------------------------------------------------------------------- Table of Contents assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company's consolidated financial statements in future reporting periods. Revenue Recognition We record revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). For the Collaboration Agreement under ASC 606, we identify the performance obligations, determine the transaction price, allocate the contract transaction price to the performance obligations, and recognize the revenue when (or as) the performance obligation is satisfied. We identify the performance obligations included within the agreement and evaluate which performance obligations are distinct. Upfront payments for licenses are evaluated to determine if the license is capable of being distinct from the obligations to participate on certain development and/or commercialization committees with the collaboration partners and supply manufactured drug product for clinical trials. For performance obligations that are satisfied over time, we utilize the input method and revenue is recognized by consistently applying a method of measuring progress toward complete satisfaction of that performance obligation. We periodically review our estimated periods of performance based on the progress under each arrangement and account for the impact of any changes in estimated periods of performance on a prospective basis. Milestone payments are a form of variable consideration as the payments are contingent upon achievement of a substantive event. Milestone payments are estimated and included in the transaction price when we determine that it is probable that there will not be a significant reversal of cumulative revenue recognized in future periods. Business Acquisition Our financial statements include the operations of an acquired business after the completion of the acquisition. We account for acquired businesses using the acquisition method of accounting, which requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that the fair value ofIn-Process Research and Development andGoodwill is recorded on the balance sheet. Transaction costs are expensed as incurred. Amounts recorded in connection with an acquisition can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. We are required to measure certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value in the initial recognition of net assets acquired in a business combination and when measuring impairment losses. We estimate fair value using an exit price approach, which requires, among other things, that we determine the price that would be received to sell an asset or paid to transfer a liability in an orderly market. The determination of an exit price is considered from the perspective of market participants, considering the highest and best use of non-financial assets and, for liabilities, assuming that the risk of non-performance will be the same before and after the transfer. When estimating fair value, depending on the nature and complexity of the asset or liability, we may use one or all of the following techniques: •Income approach, which is based on the present value of a future stream of net cash flows. •Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities. •Cost approach, which is based on the cost to acquire or construct comparable assets, less an allowance for functional and/or economic obsolescence. Our fair value methodologies depend on the following types of inputs: •Quoted prices for identical assets or liabilities in active markets (Level 1 inputs). •Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (Level 2 inputs). •Unobservable inputs that reflect estimates and assumptions (Level 3 inputs). 85
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Table of Contents A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. Asset Impairment We review all of our long-lived assets for impairment indicators throughout the year. We perform impairment testing for indefinite-lived intangible assets annually and for all other long-lived assets whenever impairment indicators are present. When necessary, we record charges for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of these assets. Recently Issued Accounting Pronouncements Certain recently issued accounting pronouncements are discussed in Note 2, "Significant Accounting Policies," to the consolidated financial statements included in "Financial Statements and Supplementary Data" of this Annual Report.
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