vyne-20210331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ___ TO ___.

Commission file number 001-38356

VYNE THERAPEUTICS INC.

(Exact name of registrant as specified in its charter)


Delaware						45-3757789
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

520 U.S. Highway 22, Suite 204

Bridgewater, New Jersey 08807

(Address of principal executive offices including zip code)

(800) 775-7936

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange
on which registered

Common Stock, par value $0.0001

VYNE

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of April 29, 2021, there were 51,386,596 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.

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TABLE OF CONTENTS


		Page
Part I	Financial Information	6
Item 1.	Unaudited Financial Statements	6
	Unaudited Condensed Consolidated Balance Sheets	6
	Unaudited Condensed Consolidated Statements Of Operations	7
	Unaudited Condensed Consolidated Statements Of Comprehensive Loss	8
	Unaudited Condensed Consolidated Statements Of Changes In Stockholders' Equity	9
	Unaudited Condensed Consolidated Statements Of Cash Flows	10
	Notes to Unaudited Interim Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39

Part II	Other Information	40
Item 1	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41
SIGNATURES		43

We own or have rights to various copyrights, trademarks, and trade names used in our business in the U.S. and/or other countries, including VYNE™, AMZEEQ®, ZILXI®, Molecule Stabilizing Technology (MST)™ and MST™. This report also includes trademarks, service marks and trade names of other companies. Trademarks, service marks and trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are statements that could be deemed forward-looking statements reflecting the current beliefs and expectations of management with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These statements are often identified by the use of words such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would,” “until,” “if” and similar expressions or variations.

The following factors, among others, including any described in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q, could cause our future results to differ materially from those expressed in the forward-looking information:

•our ability to successfully commercialize AMZEEQ and ZILXI and our other product candidates, if approved;

•disruptions related to COVID-19 or another pandemic, epidemic or outbreak of a contagious disease, on the ability of our suppliers to manufacture and provide materials for our products and product candidates, initiating and retaining patients in our clinical trials, distribution of our products and business sales execution, operating results, liquidity and financial condition;

•the regulatory approval process for our product candidates, including any delay or failure in obtaining requisite approvals;

•the potential market size of treatments for any diseases and market adoption of our products, if approved or cleared for commercial use, by physicians and patients;

•the timing, cost or other aspects of the commercialization of AMZEEQ, ZILXI and our product candidates, if approved;

•our ability to achieve favorable pricing for AMZEEQ, ZILXI and our product candidates, if approved;

•third-party payor reimbursement for AMZEEQ, ZILXI and any future products;

•developments and projections relating to our competitors and our industry, including competing drugs and therapies, particularly if we are unable to receive exclusivity;

•risks related to our indebtedness, including our ability to comply with the covenants in our loan documents;

•the timing of commencement of future non-clinical studies and clinical trials;

•our ability to successfully complete, and receive favorable results in, clinical trials for our product candidates;

•our intentions and our ability to establish collaborations or obtain additional funding;

•the timing or likelihood of regulatory filings and approvals or clearances for our product candidates;

•our ability to comply with various regulations applicable to our business;

•our expectations regarding the commercial supply of AMZEEQ, ZILXI and our product candidates;

•our ability to create intellectual property and the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates, including the projected terms of patent protection;

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•the timing, costs or results of litigation, including litigation to protect our intellectual property, including our ability to successfully challenge intellectual property claimed by others;

•estimates of our expenses, future revenue, capital requirements, our needs for additional financing and our ability to obtain additional capital on acceptable terms or at all;

•our ability to attract and retain key scientific or management personnel;

•our defense of current and any future litigation that may be initiated against us;

•our expectations regarding licensing, business transactions and strategic operations; and

•our future financial performance and liquidity.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk Factors” and elsewhere in our Annual Report on Form 10-K as well as our other filings made with the Securities and Exchange Commission ("SEC"). Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

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PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

VYNE THERAPEUTICS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands, except per share data)

(Unaudited)


	March 31		December 31
	2021		2020
Assets
Current Assets:
Cash and cash equivalents	$	118,516	$	57,563
Restricted cash	855		855

Investment in marketable securities (Note 6)	1,027		1,027

Trade receivables, net of allowances	10,755		15,819

Prepaid and other assets	3,872		4,591
Inventory (Note 7)	8,092		7,404
Total Current Assets	143,117		87,259
Property and equipment, net	529		555
Operating lease right-of-use assets (Note 10)	1,407		1,583
Prepaid and other assets	4,118		4,345
Total Assets	$	149,171	$	93,742

Liabilities and shareholders’ equity
Current Liabilities:
Trade payables	$	3,490	$	4,780
Accrued expenses (Note 4)	13,521		11,452
Employee related obligations	3,787		4,360
Operating lease liabilities (Note 10)	647		757
Other	104		104
Total Current Liabilities	21,549		21,453
Liability for employee severance benefits	206		312
Operating lease liabilities (Note 10)	784		853
Long-term debt (Note 8)	33,274		33,174
Other liabilities	457		457
Total Liabilities	56,270		56,249
Commitments and Contingencies (Note 11)	—		—
Shareholders' Equity:
Preferred stock: $0.0001 par value; 20,000,000 shares authorized at March 31, 2021 and December 31, 2020, respectively; no shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	—		—
Common stock: $0.0001 par value; 75,000,000 shares authorized at March 31, 2021 and December 31, 2020, respectively; 51,386,596 and 43,205,221 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	5		4
Additional paid-in capital	679,642		603,685
Accumulated deficit	(586,746)		(566,196)

Total Shareholders' Equity	92,901		37,493
Total Liabilities and Shareholders’ Equity	$	149,171	$	93,742

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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VYNE THERAPEUTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(U.S. dollars in thousands, except per share data)

(Unaudited)


	Three months ended March 31
		2021		2020
Revenues (Note 4)
Product sales		$	3,889	$	1,750

Royalty revenues		230		—
Total Revenues		4,119		1,750

Cost of goods sold		601		271

Operating Expenses:
Research and development		6,333		15,953
Selling, general and administrative		16,616		25,415


Total Operating Expenses		22,949		41,368
Operating Loss		19,431		39,889
Interest expense		1,062		1,067
Other expense (income), net		57		(723)
Loss Before Income Tax		20,550		40,233
Income tax (benefit) expense		—		—
Net Loss		$	20,550	$	40,233

Loss per share basic and diluted		$	0.42	$	3.79

Weighted average shares outstanding - basic and diluted		48,868		10,627

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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VYNE THERAPEUTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(U.S. dollars in thousands)

(Unaudited)


	Three months ended March 31
		2021		2020
Net Loss		$	20,550	$	40,233
Other Comprehensive Loss:
Net unrealized losses from marketable securities		—		44
Losses on marketable securities reclassified into net loss		—		1

Total Other Comprehensive Loss		—		45
Total Comprehensive Loss		$	20,550	$	40,278

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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VYNE THERAPEUTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(U.S. dollars in thousands, except share data)

(Unaudited)


	Common stock			Additional paid-in capital		Accumulated deficit		Accumulated other comprehensive Income (loss)		Total
	Number of Shares	Amounts		Amounts
BALANCE AT JANUARY 1, 2020	9,120,078	$	1	$	328,156	$	(310,587)	$	5	$	17,575
CHANGES DURING THE PERIOD:
Comprehensive (loss) income	—	—		—		(40,233)		(45)		(40,278)
Exercise of options, vesting of restricted stock units and shares issued under employee stock purchase plan	125,308	—		303		—		—		303
Stock-based compensation	—	—		1,759		—		—		1,759
Deemed dividend to warrants holders due to warrant modifications	—	—		41		(41)		—		—
Classification of stock awards to derivative liability	—	—		(1,632)		—		—		(1,632)
Issuance of stock related to merger	6,129,896	1		91,807		—		—		91,808
BALANCE AT MARCH 31, 2020	15,375,282	$	2	$	420,434	$	(350,861)	$	(40)	$	69,535

BALANCE AT JANUARY 1, 2021	43,205,221	$	4	$	603,685	$	(566,196)	$	—	$	37,493
CHANGES DURING THE PERIOD:
Comprehensive loss	—	—		—		(20,550)		—		(20,550)
Exercise of options and vesting of restricted stock units	129,102	—		388		—		—		388
Stock-based compensation	—	—		2,442		—		—		2,442
Issuance of common stock under at-the-market offering, net of $814 issuance costs	2,778,012	—		26,304		—		—		26,304
Issuance of common stock through a registered direct offering, net of $3,177 issuance costs	5,274,261	1		46,823		—		—		46,824
BALANCE AT MARCH 31, 2021	51,386,596	$	5	$	679,642	$	(586,746)	$	—	$	92,901

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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VYNE THERAPEUTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

(Unaudited)


	Three months ended March 31
	2021		2020
Cash Flows From Operating Activities:
Net Loss	$	20,550	$	40,233
Adjustments required to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	27		93



Changes in marketable securities and bank deposits, net	—		(153)
Changes in accrued liability for employee severance benefits, net of retirement fund profit	(108)		(13)
Stock-based compensation	2,442		1,759
Non-cash finance income, net	(66)		(347)
Changes in operating assets and liabilities, net of effects of businesses acquired:
Decrease (increase) in trade receivables, prepaid and other assets	5,783		(9,297)
Decrease (increase) in other non-current assets	404		(3,027)
Increase in accounts payable and accruals	205		856
Increase in inventory	(688)		(1,849)
Net cash used in operating activities	(12,551)		(52,211)
Cash Flows From Investing Activities:
Purchase of fixed assets	—		(42)



Cash acquired through merger	—		38,641
Proceeds from sale and maturity of marketable securities	—		27,381
Net cash provided by investing activities	—		65,980
Cash Flows From Financing Activities:
Proceeds related to issuance of common shares through offerings, net of issuance costs	73,127		—

Proceeds related to issuance of stock for stock-based compensation arrangements, net	376		140
Net cash provided by financing activities	73,503		140
Increase in cash, cash equivalents and restricted cash	60,952		13,909
Effect of exchange rate on cash, cash equivalents and restricted cash	1		(37)
Cash, cash equivalents and restricted cash at beginning of the period	58,418		44,584
Cash, cash equivalents and restricted cash at end of the period	$	119,371	$	58,456
Cash and cash equivalents	$	118,516	$	57,601
Restricted cash	855		855
Total cash, cash equivalents and restricted cash shown in statement of cash flows	$	119,371	$	58,456
Supplementary information on investing and financing activities not involving cash flows:
Cashless exercise of warrants and restricted stock units	*		*
Issuance of shares under employee stock purchase plan	$	—	$	163
Additions to operating lease right of use assets	$	—	$	287
Additions to operating lease liabilities	$	—	$	287

Supplemental disclosure of cash flow information:
Interest received	$	5	$	177
Interest paid	$	963	$	973

Fair value of assets acquired	$	—	$	117,270
Less liabilities assumed	—		5,827
Net acquired (See “Note 3- Business combination”)	—		111,443
Less cash acquired	—		38,641
Merger net of cash acquired	$	—	$	72,802

*Represents an amount less than one thousand

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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VYNE Therapeutics Inc.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

NOTE 1 - NATURE OF OPERATIONS

VYNE Therapeutics Inc. (formerly known as Menlo Therapeutics Inc. ("Menlo"), "VYNE" or the "Company") is a specialty pharmaceutical company focused on developing and commercializing proprietary, innovative and differentiated therapies in dermatology and other therapeutic areas. The Company is a Delaware corporation, has its principal executive offices in Bridgewater, New Jersey and operates as one business segment.

Reverse Merger

On November 10, 2019, Menlo, Foamix Pharmaceuticals Ltd. (“Foamix”) and Giants Merger Subsidiary Ltd. (“Merger Sub”), a wholly-owned subsidiary of Menlo, entered into an Agreement and Plan of Merger (as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated as of December 4, 2019, the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into Foamix, with Foamix surviving as a wholly-owned subsidiary of Menlo (the “Merger”) on March 9, 2020 (the “Effective Date”).

For accounting purposes, the Merger is treated as a “reverse acquisition” under generally accepted accounting principles in the United States (“U.S. GAAP”) and Foamix is considered the accounting acquirer. Accordingly, upon consummation of the Merger, the historical financial statements of Foamix became the Company’s historical financial statements, and the historical financial statements of Foamix are included in the comparative prior periods. See “Note 3 – Business Combination” for more information on the Merger.

Reverse stock split and recasting of per-share amounts

On February 10, 2021, the Company's Board of Directors approved a one-for-four reverse stock split of its 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 the Company's 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 the Company's common stock was also reduced on a one-for-four basis, from 300 million shares to 75 million shares. 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.

Unless otherwise noted, all common shares and per share amounts contained in the unaudited interim condensed consolidated financial statements have been retroactively adjusted to reflect the reverse stock split.

Products, Product Candidates and Licenses

In January 2020, the Company launched AMZEEQ® (minocycline) topical foam, 4% (“AMZEEQ”), a once-daily topical antibiotic for the treatment of inflammatory lesions of non-nodular moderate-to-severe acne vulgaris in patients 9 years of age and older. On May 28, 2020, the U.S. Food and Drug Administration (the "FDA") approved ZILXI® (minocycline) topical foam, 1.5% ("ZILXI"), for the treatment of inflammatory lesions of rosacea in adults. ZILXI became available in pharmacies nationwide in October 2020. AMZEEQ and ZILXI are the first topical minocycline products approved by the FDA for any condition.

AMZEEQ and ZILXI utilize the Company’s proprietary Molecule Stabilizing Technology (MST)™ that is also being used in the development of the Company’s product candidate FCD105, a topical foam comprising minocycline and adapalene for the treatment of acne vulgaris. On June 2, 2020, the Company 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. The Company held an end-of-Phase II meeting with the FDA in the fourth quarter of 2020 and may commence a Phase III program in the next 12 to 18 months based upon the Company's results of operations, which depend on numerous factors, including the COVID-19 pandemic and recent payor formulary decisions. In addition, the Company recently announced a development program for FMX114, which is a

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combination topical gel for the potential treatment of mild-to-moderate atopic dermatitis. The Company plans to conduct a Phase 2a proof-of-concept study for FMX114 in the third quarter of 2021.

Additionally, the Company was developing serlopitant, a small molecule inhibitor of the neurokinin 1 receptor, or NK1-R, given as a once-daily, oral tablet, for the treatment of pruritus, or itch, associated with various conditions including prurigo nodularis, or PN. On April 6, 2020, the Company announced top line results from two Phase III clinical trials evaluating the safety and efficacy of once-daily oral serlopitant for the treatment of pruritus (itch) associated with PN, studies MTI-105 and MTI-106. Neither study met their respective primary endpoint of demonstrating statistically significant reduction in pruritus in patients treated with serlopitant compared to placebo based on a 4-point improvement responder analysis. The Company does not currently intend to further pursue the development of serlopitant. As a result, in the second quarter of 2020, the Company recorded a full impairment charge related to the IPR&D and Goodwill assets in its unaudited condensed consolidated statement of operations and comprehensive loss. See "Note 3 - Business Combination" for more information.

The Company is actively pursuing opportunities to out-license its products and product candidates to third parties for development and commercialization outside the United States and entered into a license agreement with Cutia Therapeutics (HK) Limited (“Cutia”) in April 2020. See "Note 4 - Revenue Recognition." The Company has also licensed certain technology under development and licensing agreements to various pharmaceutical companies for development of certain products combining the Company’s foam technology with the licensee’s proprietary drugs.

Liquidity and Capital Resources

The Company launched AMZEEQ in the United States in January 2020 and commenced generating product revenues in the first quarter of 2020. The Company’s activities prior to the commercial launch of AMZEEQ had primarily consisted of developing product candidates, raising capital and performing research and development activities. Since inception, the Company has incurred losses and negative cash flows from operations. For the three months ended March 31, 2021, the Company incurred a net loss of $20.6 million and used $12.6 million of cash in operations. As of March 31, 2021, the Company had cash, cash equivalents, restricted cash and investments of $120.4 million and an accumulated deficit of $586.7 million. The Company's outstanding debt at March 31, 2021 was $35.0 million.

If the Company does not successfully commercialize AMZEEQ, ZILXI or any of its future product candidates, it may be unable to achieve profitability. Accordingly, the Company may be required to obtain further funding through public or private debt or equity offerings, or other arrangements. Adequate additional funding may not be available to the Company on acceptable terms, or at all. If the Company is unable to raise capital when needed or on acceptable terms, it may be forced to delay, reduce or eliminate its research and development programs or commercialization and manufacturing efforts.

As a result of recent unfavorable payor formulary decisions, coupled with continued uncertainties surrounding the impact of COVID-19, the Company’s current projections indicate that it may not be in compliance with certain revenue covenants in each of the subsequent periods of 2021. The Company believes that its existing cash, cash equivalents and investments as of March 31, 2021 and projected cash flows from revenues will provide sufficient resources to fund its current ongoing needs, including all potential debt obligations, for at least the next twelve months from the issuance of these financial statements. Additionally, the Company is monitoring its results of operations in light of recent unfavorable payor formulary decisions and the continued impact of the COVID-19 pandemic. However, the amounts and timing of the Company's actual expenditures may vary significantly depending on numerous factors, including the impact of COVID-19 pandemic, the Company's ability to successfully commercialize AMZEEQ and ZILXI, the Company’s ability to satisfy the minimum net revenue covenants in the Amended and Restated Credit Agreement (See “Note 8 - Long-Term Debt” for additional information), and any unforeseen cash needs. In addition, the Company may seek to restructure its current debt arrangements, obtain additional financing and reduce discretionary spending in order to achieve its longer-term strategic plans. There is no assurance the Company will be successful in restructuring its debt arrangements, obtaining additional financing on acceptable terms or in implementing these other other actions.

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than expected, which could have a material adverse effect on its financial results and liquidity as well as hinder its ability to satisfy certain covenants contained in the Amended and Restated Credit Agreement.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

a.Basis of Presentation

The unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial statements. In the opinion of management, the Company has made all necessary adjustments, which include normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position, results of operations, cash flow and statement of stockholders' equity for the interim periods presented. Certain information and disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Certain prior period amounts have been reclassified to conform to current year presentation.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 4, 2021.

The results for the three months ended March 31, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021.

b.Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated upon consolidation.

c.Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of income and expenses during the reporting periods. Significant items subject to such estimates and assumptions include accounting for business combinations, impairments of goodwill and intangible assets and revenue recognition. Actual results could differ from the Company’s estimates.

The COVID-19 pandemic and government measures taken in response to the pandemic have had a significant impact on the Company's operations. Access to healthcare providers has been limited, which has dampened sales and negatively impacted the Company's ability to execute its commercial strategy with respect to AMZEEQ and ZILXI. Access to healthcare providers has remained limited through the first quarter of 2021. 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 and the vaccination effort. If the activities of the Company's sales force continue to be disrupted or patients elect not to visit their healthcare providers during the pandemic, the Company may continue to generate less revenue than expected, which would have a material adverse effect on its financial results and liquidity as well as hinder its ability to satisfy certain covenants contained in the Amended and Restated Credit Agreement. 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 of March 31, 2021 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. In 2020, the Company recorded impairments of goodwill and certain indefinite-lived intangible assets; however, these were unrelated to the impact of COVID-19 (See "Note 3 - Business Combination" for more information). The Company’s future 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.

d.Business Acquisition

The Company’s unaudited interim condensed consolidated financial statements include the operations of an acquired business after the completion of the acquisition. The Company accounts for acquired businesses using the acquisition method of

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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 of In-Process Research and Development and Goodwill be 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.

The Company is required to measure certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, the Company uses fair value in the initial recognition of net assets acquired in a business combination and when measuring impairment losses. The Company estimates fair value using an exit price approach, which requires, among other things, that Company 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, the Company 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).

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

The Company reviews all of its long-lived assets for impairment indicators throughout the year. Impairment testing is performed for indefinite-lived intangible assets annually (or sooner if warranted) and for all other long-lived assets whenever impairment indicators are present. When necessary, the Company records charges for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of these assets.

e.Revenue Recognition

The Company accounts for its revenue transactions under FASB ASC Topic 606, Revenue from Contracts with Customers. In accordance with ASC Topic 606, the Company recognizes revenues when its customers obtain control of its product for an amount that reflects the consideration it expects to receive from its customers in exchange for that product. To determine revenue recognition for contracts that are determined to be in scope of ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when such performance obligation is satisfied.

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The Company’s customers include a limited number of national and select regional wholesalers (the “distributors”) and certain independent and specialty pharmacies (together, the “customers”). These distributors subsequently resell the product, primarily to retail pharmacies that dispense the product to patients. Net product revenue is typically recognized when customers obtain control of the Company’s products, which occurs at a point in time, typically upon delivery of product to the customers. The Company evaluates the creditworthiness of its customers to determine whether it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur. The Company does not assess whether a contract has a significant financing component if the expectation is such that the period between the transfer of the promised goods to the customer and the receipt of payment will be less than one year. Standard credit terms do not exceed 75 days. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less or the amount is immaterial. Shipping and handling costs related to the Company’s product sales are included in selling, general and administrative expenses.

The Company’s net product revenues through March 31, 2021 were primarily generated through sales of AMZEEQ, which was approved by the FDA in October 2019 and was commercially launched in the United States in January 2020, and ZILXI, which was approved by the FDA in May 2020 and was commercially launched in the United States in October 2020. Product revenue is recorded net of distribution fees, trade discounts, allowances, rebates, copay program coupons, chargebacks, estimated returns and other incentives. These reserves are classified as either reductions of accounts receivable or as current liabilities. The estimates of reserves established for variable consideration reflect current contractual and statutory requirements, known market events and trends, industry data and forecasted customer mix. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net product revenues only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from these estimates. If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which could have an impact on earnings in the period of adjustment. See “Note 4 – Revenue Recognition” for more information.

On April 23, 2020, the Company announced that it entered into a license agreement with Cutia for our minocycline products and product candidate, if 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. The Company will supply the finished licensed products to Cutia for clinical and commercial use. The Company 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 $1.0 million payment upon the receipt of marketing approval in China of the first licensed product. The Company will also receive royalties on net sales of any licensed products. The license is determined to be a distinct performance obligation of the arrangement, therefore the Company recognized the revenues from the upfront license fee when the license was transferred to the licensee and the licensee was able to use and benefit from the license. See "Note 4 - Revenue Recognition" for more information.

f.Allowance for credit losses

An allowance for doubtful accounts is maintained for potential credit losses based on the aging of trade receivables, historical bad debts experience and changes in customer payment patterns. Trade receivable balances are written off against the allowance when it is deemed probable that the receivable will not be collected. Trade receivables, net are stated net of reserves for certain sales allowances and provisions for doubtful accounts. Provisions for doubtful accounts were not material for the three months ended March 31, 2021 and March 31, 2020.

g.Derivative instruments

The Company recognizes all derivative instruments as either assets or liabilities in the unaudited condensed consolidated balance sheet at their respective fair values. All gains and losses associated with derivatives are reported as other expense (income), net in the accompanying condensed consolidated statements of operations. As of March 31, 2021 and March 31, 2020, the Company had no derivative instruments.

h.Fair value measurement

Fair value is based on the price that would be received from the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described as follows:

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Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data or active market data of similar or identical assets or liabilities.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.

i.Loss per share

Net loss per share, basic and diluted, is computed on the basis of the net loss for the period divided by the weighted average number of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common stock and of common stock equivalents outstanding when dilutive. Common stock equivalents include outstanding stock options and warrants which are included under the treasury share method when dilutive.

The calculation of the weighted-average number of common stock outstanding during the period in which the reverse merger occurs was based on:

a.The number of common stock outstanding from the beginning of that period to the merge date was computed on the basis of the weighted-average number of common stock of the legal acquiree (accounting acquirer) outstanding during the period multiplied by the exchange ratio established in the merger agreement

b.The number of common outstanding common stock outstanding from the merge date to the end of that period was the actual number of common stock of the legal acquirer (the accounting acquiree) outstanding during that period.

The following average stock options, restricted stock units (“RSUs”), warrants and incremental shares to be issued under the employee stock purchase plan (“ESPP”) were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented (share data):


	Three months ended March 31
		2021	2020
Outstanding stock options, RSUs and shares under the ESPP		5,321,517	1,252,794
Warrants		495,165	162,910

In addition to the above, the CSR was excluded from the calculation of the 2020 diluted net loss per share because its effect would have been anti-dilutive for the periods presented. On April 6, 2020, the Company announced that each of Menlo’s Phase III PN Trials (study MTI-105 and study MTI-106) did not meet their respective primary endpoint of demonstrating statistically significant reduction in pruritus in patients treated with serlopitant compared to placebo based upon a 4-point improvement responder analysis. Each CSR was converted into 1.2082 shares of Menlo common stock, resulting in an effective exchange ratio (the "Exchange Ratio") in the Merger of 1.8006 shares of Menlo common stock for each Foamix ordinary share. The conversion of the CSR also affected the Exchange Ratio of the pre-Merger Foamix equity awards and warrants outstanding as of March 9, 2020. See "Note 3 - Business Combination" for more information.

j.Newly issued and recently adopted accounting pronouncements

Recent Accounting Guidance Issued:

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which clarifies and simplifies certain aspects of the accounting for income taxes. The standard is effective for years beginning after December 15, 2020, and interim periods beginning after December 15, 2020. This guidance became effective during the first quarter of 2021. The adoption of the new standard did not have a material impact to the Company's consolidated financial statements.

In March 2020, the FASB issued Accounting Standards Update No. 2020-4, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (ASU 2020-4), which provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying generally accepted

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accounting principles to contracts, hedging relationships, and other transactions impacted by reference rate reform. The provisions of ASU 2020-4 apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions of ASU 2020-4 are optional and are effective from March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-4 on its consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), which requires companies to measure credit losses of financial instruments, including customer accounts receivable, utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Subsequent to the issuance of ASU 2016-13, the FASB issued several additional Accounting Standard Updates to clarify implementation guidance, provide narrow-scope improvements and provide additional disclosure guidance. As a smaller reporting company, the Company will adopt ASU 2016-13 effective January 1, 2023 or at such time where it is no longer a smaller reporting company.

NOTE 3 – BUSINESS COMBINATION

On November 10, 2019, Menlo entered into the Merger Agreement with Foamix, and Merger Sub, a direct and wholly-owned Israeli subsidiary of Menlo. On March 9, 2020, the Merger was completed and Foamix is now a wholly-owned subsidiary of the Company.

On the Effective Date, each ordinary share of Foamix was exchanged for 0.5924 shares of common stock of Menlo. In addition, on the Effective Date, Foamix shareholders received one contingent stock right (a “CSR”) for each Foamix ordinary share held by them. The CSRs were issued pursuant to the Contingent Stock Rights Agreement (the “CSR Agreement”), dated as of March 9, 2020, by and between Menlo and American Stock Transfer & Trust Company, LLC, and represented the non-transferable contractual right to receive shares of common stock of Menlo depending on the results of Menlo’s phase III clinical trials evaluating the safety and efficacy of once daily oral serlopitant for the treatment of prurigo nodularis (the “Phase III PN Trials”).

On April 6, 2020, the Company announced that each of Menlo’s Phase III PN Trials (study MTI-105 and study MTI-106) did not meet their respective primary endpoint of demonstrating statistically significant reduction in pruritus in patients treated with serlopitant compared to placebo based upon a 4-point improvement responder analysis. Accordingly, on April 6, 2020, pursuant to the terms of the CSR Agreement, each CSR was converted into 1.2082 additional shares of Menlo common stock, resulting in an effective Exchange Ratio in the Merger of 1.8006 shares of Menlo common stock for each Foamix ordinary share. The CSR conversion resulted in the issuance and delivery of 74,544,413 additional shares of Menlo common stock underlying the CSRs, adjusted retrospectively to 18,636,103 shares of common stock upon the reverse stock split effective February 12, 2021. Following the conversion of the CSRs, pre-Merger Foamix shareholders and pre-Merger Menlo stockholders owned approximately 82% and 18% of post-Merger Menlo, respectively, each calculated on a fully diluted basis.

For accounting purposes, the Merger is treated as a “reverse acquisition” under U.S. GAAP and Foamix is considered the accounting acquirer. Accordingly, upon consummation of the Merger, the historical financial statements of Foamix became the Company’s historical financial statements, and the historical financial statements of Foamix are included in the comparative prior periods.

Under reverse acquisition accounting, the U.S. dollar amount for common stock in the financial statements is based on the value and number of shares issued by Menlo (reflecting the legal structure of Menlo as the legal acquirer) on the Merger date plus subsequent shares issued by the Company. The amounts in additional paid-in capital represent that of Foamix and include the fair value of shares deemed for accounting purposes to have been issued by Foamix on the merger date and the fair value of the Menlo equity awards included in the purchase price calculation. The Foamix additional paid-in capital was also adjusted for the difference between the number of common stock and the historical number of shares of Foamix’s ordinary shares.

During the three months ended March 31, 2020, the Company incurred transaction costs of approximately $11.7 million, which are recorded in the condensed consolidated statements of operations and comprehensive income. This amount includes $8.1 million of severance benefits for employees terminated after the Effective Date.

Purchase Price

The following is the Merger Consideration (as defined in the Merger Agreement) was transferred to effect the Merger:

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(in thousands)	Total
Deemed (for accounting purposes only) issuance of Foamix shares to Menlo stockholders	$	123,757
Deemed (for accounting purposes only) conversion of Menlo equity awards	7,322
Total consideration*	$	131,079

* This amount reflects total consideration prior to reduction in respect of the CSRs (which had a fair value of $19.6 million as of the Merger Date) that were issued to Foamix shareholders and that reduced the Menlo stockholders’ relative ownership in the combined company. If the effect of the CSRs is included, the total consideration deemed paid by Foamix, as the accounting acquirer, to Menlo stockholders and equity award holders in the Merger would be reduced to approximately $111.4 million, as shown in the purchase price allocation table below.

Based on Foamix’s closing share price of $2.99 as of March 9, 2020, the Merger Consideration under reverse acquisition accounting was approximately $131.1 million, consisting of $123.8 million for the deemed (for accounting purposes only) issuance of 41.4 million Foamix shares assuming that no upwards adjustment was made to the Exchange Ratio relating to the CSR, and $7.3 million for the fair value of Menlo equity awards deemed (for accounting purposes only) to be converted into Foamix equity awards. The converted stock options represent the fair value of such options attributable to service prior to the Merger date using the Foamix closing share price of $2.99 as of March 9, 2020 as an input to the Black Scholes valuation model to determine the fair value of the options.

Purchase Price Allocation

The Company completed its analysis of the allocation of the purchase price to the fair values of assets acquired and liabilities assumed as follows:


(in thousands)	March 9, 2020
Cash and cash equivalents	$	38,641
Investment in marketable securities	22,703
Prepaid expenses and other current assets	1,581
In-process research and development	49,800
Goodwill	4,545
Total assets	117,270
Current liabilities	(5,827)
Total liabilities	(5,827)
Purchase price*	$	111,443

* Reflects reduction in the purchase price deemed paid to Menlo stockholders in the Merger on the assumption that the CSRs, in an aggregate value of $19.6 million, convert into additional shares of the combined company for the Foamix shareholders, thereby resulting in a lower percentage of the combined company’s outstanding shares being owned by Menlo stockholders following the Merger.

Goodwill

Goodwill is recorded with the acquisition of a business and is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at least annually. None of the Goodwill recognized is expected to be deductible for income tax purposes. The purchase price of the transaction and the excess purchase price over the fair value of the identifiable net assets acquired, are calculated as follows:


(in thousands)	March 9, 2020
Purchase price	$	111,443
Less: fair value of net assets acquired, including other identifiable intangibles	(106,898)
Goodwill

SEC Form 10-Q filed by VYNE Therapeutics Inc.