You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2020 . In this Quarterly Report on Form 10-Q, unless otherwise indicated, all references to the "Company," "we," "us" and "our" or similar terms refer toVYNE Therapeutics Inc. The disclosure set forth in this section reflects the Company's 1-for-4 reverse stock split, which was effected onFebruary 12, 2021 . Accordingly, all share amounts and per share amounts have been adjusted. Company Overview We are a specialty pharmaceutical company focused on developing proprietary, innovative and differentiated therapies in dermatology and beyond. Our products, AMZEEQ® (minocycline) topical foam, 4% ("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® (minocycline) topical foam, 1.5% ("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. Our product pipeline includes FCD105 (minocycline 3% and adapalene 0.3%) ("FCD105"), 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. We may commence a Phase 3 program in the next twelve to eighteen months based upon our results of operations, which depend on numerous factors, including the impact of the COVID-19 pandemic and recent payor formulary decisions. 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 initiate a Phase 2a proof-of-concept study for FMX114 in the third quarter of 2021 and anticipate topline results prior to the end of 2021. AMZEEQ and ZILXI utilize our proprietary Molecule Stabilizing Technology (MST)™ delivery system 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 ("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 vehicles 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, 2020 : •FromJanuary 1, 2021 throughJanuary 25, 2021 , the Company issued and sold 2,778,012 shares of common stock at a weighted average price per share of$9.76 for$26.3 million in net proceeds pursuant to a Sales Agreement (the "Sales Agreement") withCantor Fitzgerald & Co. ("Cantor Fitzgerald") through an at-the-market equity offering program under whichCantor Fitzgerald acted as our sales agent. Effective as ofJanuary 25, 2021 , the Company terminated the Sales Agreement and will not make any additional sales thereunder. •OnJanuary 21, 2021 , the Company announced the execution of a contract with CVS Caremark ("Caremark"), one of the largest pharmacy benefit managers in theU.S. , with respect to AMZEEQ and ZILXI. In lateMarch 2021 , Caremark informed the Company that it decided to not include these products, and other new branded comparator drugs, on its national formulary for 2021. Certain custom plans under the Caremark umbrella have decided to add the Company's drugs to their respective formularies. This could have an unfavorable pricing impact in the future. •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. •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. 28
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Table of contents •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 share of the total net proceeds from the Company's transfer agent sale of all fractional shares at the then-prevailing prices on the open market. In connection with the reverse stock split, the number of authorized shares of our common stock was also reduced on a one-for-four basis, from 300 million to 75 million. The par value of each share of common stock remained unchanged. A proportionate adjustment was also made to the maximum number of shares issuable under the Company's 2019 Equity Incentive Plan, 2018 Omnibus Incentive Plan and 2019 Employee Share Purchase Plan. •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. Financial Overview Our cash, cash equivalents, restricted cash and investments totaled$120.4 million as ofMarch 31, 2021 . We believe that our cash and cash equivalents and investments and projected cash flows from revenues will provide sufficient resources for our current ongoing needs throughDecember 31, 2022 . However, the Company may seek additional financing in order to achieve its longer-term strategic plans. See "-Liquidity and Capital Resources" below. We have incurred net losses since our inception. Until the first quarter of 2020, when we commenced commercial operations, our business activities were primarily limited to developing product candidates, raising capital and performing research and development activities. As ofMarch 31, 2021 , we had an accumulated deficit of$586.7 million . We recorded net losses of$20.6 million and$40.2 million for the three months endedMarch 31, 2021 and 2020, respectively. Our capital resources and business efforts are largely focused on activities relating to the commercialization of AMZEEQ and ZILXI and advancing our product candidates and pipeline. We expect to continue to incur operating losses until our products generate adequate commercial revenue to reach profitability. If we do not successfully commercialize AMZEEQ, ZILXI or any current or future product candidates, if approved, we may be unable to generate adequate product revenues to achieve such profitability. We may be required to obtain further funding through debt or equity offerings or other sources. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on acceptable terms, we may be forced to delay, reduce or eliminate our research and development programs or commercialization or manufacturing efforts. Additionally, we are closely monitoring ongoing developments in connection with the COVID-19 pandemic, which may have an adverse impact on our commercial prospects and projected cash position. Components of Operating Results Revenues Our revenue during the periods presented has been comprised of AMZEEQ and ZILXI product sales and collaboration revenue. We received FDA approval for AMZEEQ onOctober 18, 2019 and launched AMZEEQ inthe United States inJanuary 2020 . We commercially launched ZILXI onOctober 1, 2020 . We have generated product revenue of$3.9 million for the three months endedMarch 31, 2021 . We will not commercially launch our other product candidates inthe United States or generate any revenues from sales of any of our product candidates unless and until we obtain marketing approval. Our ability to generate revenues from sales will depend on the successful commercialization of our drug products AMZEEQ and ZILXI and any other product candidates 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 toLeo Pharma A/S ("LEO"). In the three months endedMarch 31, 2020 , we did not receive or become entitled to any royalty payments due to the suspension of the manufacturing of Finacea by LEO, following inadequate supply of quality-compliant batches of the API used in such product. InApril 2020 , LEO informed us that it had reestablished the supply of Finacea foam and resumed commercial sale inthe United States . In the three months endedMarch 31, 2021 we received royalties of$0.2 million . 29
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Table of contents 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, onApril 23, 2020 , we entered into a licensing agreement with Cutia for AMZEEQ as well as certain of our other topical minocycline product candidates, once approved, on an exclusive basis 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 in 2020 ($6.0 million received in the three months endedJune 30, 2020 and$4.0 million received in the three months endedSeptember 30, 2020 ) 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. There was no license revenue for the three months endedMarch 31, 2021 . Cost of Goods Sold Cost of goods sold for the three months endedMarch 31, 2021 and 2020 were approximately$0.6 million and$0.3 million , respectively. Our gross margin percentage of 85% was favorably impacted during the three months endedMarch 31, 2021 andMarch 31, 2020 by product sales with certain materials produced prior to FDA approval and therefore expensed in prior periods. If inventory sold during the three months endedMarch 31, 2021 andMarch 31, 2020 was valued at cost, our gross margin for the period then ended would have been 81% and 79%, respectively. Cost of goods sold expenses consist primarily of: •third party expenses incurred in manufacturing product for sale; •transportation costs incurred in shipping manufacturing materials between third parties; and •other costs associated with delivery and manufacturing of product. Operating Expenses Research and Development Expenses Our research and development expenses to date relate primarily to the development of AMZEEQ, ZILXI, serlopitant, FCD105 and FMX 114. Our total research and development expenses for the three months endedMarch 31, 2021 and 2020 were approximately$6.3 million and$16.0 million , respectively. We charge all research and development expenses to operations as they are incurred. Research and development expenses consist primarily of: •employee-related expenses, including salaries, benefits and related expenses, including share-based compensation expenses; •expenses incurred under agreements with third parties, including subcontractors, suppliers and consultants that conduct regulatory activities, clinical trials and preclinical studies; •expenses incurred to acquire, develop and manufacture clinical trial materials; •facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other operating costs; •costs associated with the creation, development and protection of intellectual property; •other costs associated with preclinical and clinical activities and regulatory operations; and •materials and manufacturing costs related to commercial production prior to FDA approval. 30
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Table of contents Selling, General and Administrative Expenses Our selling, general and administrative expenses for the three months endedMarch 31, 2021 and 2020 were approximately$16.6 million and$25.4 million , respectively. 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 Expense, net Other Expense, 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 in 2031 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. There are no significant updates throughMarch 31, 2021 . NOLs and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of our company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. State NOLs and tax credit carryforwards may be subject to similar limitations under state laws. We have not determined if we have experienced Section 382 ownership changes in the past and if a portion of our net operating loss and tax credit carryforwards are subject to an annual limitation under Sections 382 or 383. We may have experienced ownership changes in the past, including in connection to our initial public offering ("IPO"), and as a result of the Merger and/or subsequent shifts in our stock ownership, some of which may be outside of our control. As a result, even if we earn net taxable income, our ability to use the NOL and tax credit carryforwards may be materially limited, which could harm our future operating results by effectively increasing our future tax obligations. Results of Operations Comparison of the Three-Month Periods EndedMarch 31, 2021 and 2020 Revenue Revenues totaled$4.1 million and$1.8 million for the three months endedMarch 31, 2021 and 2020, respectively. For the three months endedMarch 31, 2021 , our revenue consisted of$3.9 million of product sales, and$0.2 million of royalty revenue. For the three months endedMarch 31, 2020 , revenues consisted solely of$1.8 million of product sales. The increase in product sales is due to the ZILXI product launch inOctober 2020 and an increase in demand for AMZEEQ. 31
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Table of contents The COVID-19 pandemic and government measures taken in response to the pandemic have had a significant impact on our 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 our sales force continue to be disrupted 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 the Amended and Restated Credit Agreement. Cost of Goods Sold Cost of goods sold was$0.6 million and$0.3 million for the three months endedMarch 31, 2021 and 2020, respectively. The increase in cost of goods sold is primarily due to an increase in sales volume. Our gross margin percentage of 85% for both the three months endedMarch 31, 2021 andMarch 31, 2020 was favorably impacted by product sales with certain materials produced prior to FDA approval and therefore expensed in prior periods. If inventory sold during the three months endedMarch 31, 2021 andMarch 31, 2020 was valued at cost, our gross margin for the period then ended would have been 81% and 79%, respectively. Research and Development Expenses Our research and development expenses for the three months endedMarch 31, 2021 were$6.3 million , representing a decrease of$9.6 million , or 60.3%, compared to$16.0 million for the three months endedMarch 31, 2020 . Employee-related expenses decreased$5.2 million primarily due to severance costs incurred in 2020 due to the Merger. Clinical trial and manufacturing expenses decreased with the completion of FCD 105 and serlopitant clinical trials and the product launches of AMZEEQ and ZILXI during 2020. Selling, General and Administrative Expenses Our selling, general and administrative expenses for the three months endedMarch 31, 2021 were$16.6 million , representing a decrease of$8.8 million , or 34.6%, compared to$25.4 million for the three months endedMarch 31, 2020 . Employee-related expenses decreased by$6.1 million primarily due to severance costs incurred in 2020 due to the Merger. Professional services spend decreased as these expenses were incurred in 2020 as a result of the Merger. Interest Expense Interest expense for the three months endedMarch 31, 2021 andMarch 31, 2020 was$1.1 million . Other Expense (Income), net Other expense (income), net for the three months endedMarch 31, 2021 was$0.1 million of expense as compared with$0.7 million of income for the three months endedMarch 31, 2020 . Income Taxes There was no income tax (benefit) expense for the three months endedMarch 31, 2021 andMarch 31, 2020 . Liquidity and Capital Resources Since inception, we have funded operations primarily through private and public placements of our equity, debt, warrants and through fees, cost reimbursements and royalties received from our licensees. We commenced generating product revenues related to sales of AMZEEQ in the first quarter of 2020. ZILXI became available in pharmacies nationwide onOctober 1, 2020 . We have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses until such a time when our product and product candidates, if approved, are commercially successful, if at all. We will not generate any revenue from any current or future product candidates unless and until we obtain regulatory approval and commercialize such products. As ofMarch 31, 2021 , we had cash, cash equivalents, restricted cash and investments of$120.4 million . Our cash, cash equivalents, restricted cash and investments are held in money market accounts and marketable securities. 32
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Table of contentsVYNE Pharmaceuticals Inc. , aDelaware corporation and a subsidiary of the Company (the "Borrower"), Foamix 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 (the "Credit Agreement"). We have guaranteed the indebtedness obligation of the Borrower under the Credit Agreement and in connection with the Credit Agreement also granted a first priority security interest in substantially all of our assets for the benefit of the lenders. The Credit Agreement provides for a senior secured delayed draw term loan facility in an aggregate principal amount of up to$50.0 million , and as ofMarch 31, 2021 , approximately$35.0 million was drawn under the Credit Agreement. We did not, and do not expect to, incur the remaining$15.0 million under the Credit Agreement. Prior to the Merger, the Company was focused on the development and commercialization of serlopitant for pruritic conditions. Following the receipt of the results of the Phase 3 clinical trials evaluating serlopitant for the treatment of PN and the impact of the COVID-19 pandemic, the Company has revised its operating plan to focus on the commercialization of AMZEEQ and its other topical minocycline product candidates. In addition, the revised operating plan reflects prudent resource prioritization and allocation management, including the rationalization of research and development spend to focus on existing product candidates. 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 ofMarch 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. However, the Company may seek additional financing in order to achieve its longer-term strategic plans. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. See "Note 1 - Nature of Operations." 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. OnAugust 5, 2020 , the Company and its lenders amended the minimum net revenue covenant in the Amended and Restated Credit Agreement following an assessment of the impact of the pandemic on the Company's revenue. See "Note 8 - Long-Term Debt." 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. Summary Statement of Cash Flows The following table summarizes our statement of cash flows for the three months endedMarch 31, 2021 and 2020:
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