Item 7. Management’s Discussion and Analysis
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Company was formed through the merger (the "Merger") between Foamix Pharmaceuticals Ltd. ("Foamix") and Menlo Therapeutics Inc. ("Menlo"). 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. The Company changed its name to VYNE Therapeutics Inc. in September 2020.
Company Overview
We are a biopharmaceutical company focused on developing proprietary, innovative and differentiated therapies for the treatment of immuno-inflammatory conditions. Our most advanced product candidate, FMX114, which is in Phase 2a, is being evaluated for the potential treatment of mild-to-moderate AD. We are also in the pre-clinical stages of developing products containing BET inhibitor compounds. Our initial BET inhibitor candidate in development is VYN201, a locally administered pan-BET inhibitor, which we are exploring in various immuno-inflammatory diseases, including skin diseases . In addition, we continue to explore opportunistic transactions that may enhance our pipeline portfolio, as well as support our current operations and fund our future growth.
Beginning in the second quarter of 2021, we conducted a review of our commercial and research and development portfolio to determine how to optimally deploy capital and drive shareholder value. During the course of this review, we carefully considered the revenues received from the commercialization of AMZEEQ (minocycline) topical foam, 4%, and ZILXI (minocycline) topical foam, 1.5%, and the associated costs to drive those revenues, the protracted negative impact of the COVID-19 pandemic during the commercial launches of both AMZEEQ and ZILXI, the payor landscape, as well as the costs to develop each of our pipeline products. During this process, we evaluated several strategic options, including the acquisition of marketed assets, out-licensing our approved products outside of the United States, and possible partnering or co-development relationships with interested parties. Following our review, we determined to initiate a process to divest our topical minocycline franchise, including AMZEEQ, ZILXI, FCD105 (the Company’s former Phase 3 proprietary novel topical combination foam formulation of minocycline and adapalene for the treatment of moderate-to-severe acne vulgaris) and the underlying Molecule Stabilizing Technology platform.
On January 12, 2022, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Journey Medical Corporation ("Journey”) pursuant to which we sold our Molecule Stabilizing Technology franchise, including AMZEEQ, ZILXI, and FCD105 (the “MST Franchise”), to Journey. The assets included certain contracts, including the license agreement with Cutia Therapeutics (HK) Limited (“Cutia”), inventory and intellectual property related to the MST Franchise (together, the “Assets”). Pursuant to the Purchase Agreement, Journey assumed certain liabilities of the MST Franchise including, among others, those arising from VYNE’s patent infringement suit initiated against Padagis Israel Pharmaceuticals Ltd. There were no current or long-term liabilities recorded by the Company which were transferred to the Buyer.
Pursuant to the Purchase Agreement, VYNE received an upfront payment of $20.0 million and will receive an additional $5.0 million on the one-year anniversary of the closing of the transaction. We are also eligible to receive sales milestone payments of up to $450.0 million in the aggregate upon the achievement of specified levels of net sales on a product-by-product basis, beginning with annual net sales exceeding $100.0 million (with products covered in three categories (1) AMZEEQ (and certain modifications), (2) ZILXI (and certain modifications), and (3) FCD105 and other products covered by the patents being transferred, including certain modifications). In addition, we are entitled to receive certain payments from any licensing or sublicensing of the assets by Journey outside of the United States.
As we transitioned from a commercial organization to one focused on research and development, we further streamlined operations by continuing to eliminate the vast majority of planned expenditures supporting our commercial operations. Furthermore, we reduced our workforce of 106 as of December 31, 2020 to 28 as of December 31, 2021 through the termination of approximately 70 employees and through additional attrition. We incurred a one-time charge of $1.6 million in the year ended December 31, 2021 in connection with this restructuring plan, consisting of $1.4 million of employee
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termination costs, including severance and other benefits, and retention payments of $0.2 million. Additional charges of $0.2 million related to retention payments are anticipated through June 30, 2022.
Key Developments
Below is a summary of selected key developments affecting our business that have occurred since December 31, 2020:
• From January 1, 2021 through January 25, 2021, the Company sold 2,778,012 shares of common stock at a weighted average price per share of $9.76 for $26.3 million in net proceeds pursuant to a Sales Agreement (the "2019 Sales Agreement") with Cantor Fitzgerald & Co. ("Cantor Fitzgerald") through an at-the-market equity offering program under which Cantor Fitzgerald acted as our sales agent. Effective as of January 25, 2021, the Company terminated the 2019 Sales Agreement.
• On January 28, 2021, the Company completed a registered direct offering of 5,274,261 shares of common stock at a price of $9.48 per share. The net proceeds of the offering were approximately $46.8 million, after deducting placement agent fees and other offering expenses. 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.
• On February 10, 2021, our Board of Directors approved a one-for-four reverse stock split of our outstanding shares of common stock. The reverse stock split was effected on February 12, 2021 at 5:00 p.m. Eastern time. At the effective time, every four issued and outstanding shares of our common stock were converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split, and in lieu thereof, each stockholder holding fractional shares was entitled to receive a cash payment (without interest or deduction) from the Company’s transfer agent in an amount equal to such stockholder’s respective pro rata 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.
• On March 1, 2021, we announced development plans for FMX114 for the potential treatment of mild-to-moderate atopic dermatitis. FMX114 is a fixed combination of tofacitinib, which is a pan-Janus kinase (JAK) inhibitor, and fingolimod, a sphingosine 1-phosphate receptor modulator. FMX114 attempts to address both the source and cause of inflammation in atopic dermatitis and support skin barrier recovery.
• Tyler Zeronda was appointed as our interim Chief Financial Officer and Treasurer, effective as of June 18, 2021, following the resignation of Andrew Saik. Mr. Zeronda was named Chief Financial Officer and Treasurer of the Company on March 14, 2022.
• On July 19, 2021, we amended our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 75,000,000 to 150,000,000 shares. The increase in the number of authorized shares was approved by the holders of a majority of the outstanding shares of common stock at the Company's annual meeting of stockholders held on July 19, 2021.
• On August 11, 2021, the Company prepaid its outstanding indebtedness in addition to a 4% prepayment fee and accrued but unpaid interest. Following the prepayment, the Amended and Restated Credit Agreement and the security interests thereunder were terminated.
• On August 12, 2021, we announced a licensing arrangement with In4Derm, giving us access to their library of novel BET inhibitor compounds.
• On August 12, 2021, we announced that we initiated a process to explore a sale or license of our topical minocycline franchise and the refocusing of our resources on our immuno-inflammatory development programs.
• On August 12, 2021, we entered into a sales agreement with Cantor Fitzgerald & Co. to sell shares of our common stock, from time to time, with aggregate gross sales proceeds of up to $50.0 million through an at-the-market equity offering program under which Cantor Fitzgerald will act as our sales agent. From August 12, 2021 through December 31, 2021, we issued and sold 1,955,313 shares of common stock at a weighted average sales price per share of $1.57 for $2.9 million in net proceeds.
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• On October 19, 2021, we announced that the first patient was enrolled in our Phase 1b/2a clinical trial evaluating FMX114 for the treatment of mild-to-moderate atopic dermatitis. We expect topline results from the study in the second quarter of 2022.
• On October 21, 2021, we announced the formation of a scientific advisory board ("SAB") composed of leading scientists and academics specializing in immunological and inflammatory diseases. The SAB will provide scientific expertise and guidance to the VYNE management team and Board, as the Company progresses its pipeline of innovative treatments for immuno-inflammatory conditions.
• On October 26, 2021, we announced preclinical data showing that our pan-BET inhibitor, VYN201, significantly reduced the expression of several key pro-inflammatory cytokines relevant to Th17-mediated autoimmune diseases in an animal model and an ex vivo human tissue study.
• On January 12, 2022, we entered into the Purchase Agreement with Journey pursuant to which we divested the Assets for $25.0 million and milestone payments of up to $450.0 million in aggregate upon the achievement of specified levels of net sales of the products covered by the Purchase Agreement. Of the $25.0 million, $20.0 million was received at close and $5.0 million is due upon the one-year anniversary of the transaction. This transaction was accounted for in 2022. See discussion in Note 17 to the audited financial statements.
• On January 19, 2022, we announced findings from the Phase 1b safety portion of the Phase 1b/2a trial evaluating FMX 114.
• On February 28, 2022, we received a notification from Nasdaq that we are not in compliance with the requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2), because the closing bid price of the Company’s common stock was below $1.00 per share for 30 consecutive business days. We have a period of 180 calendar days from the date of notification, or until August 29, 2022, to regain compliance with the minimum bid price requirement. The notification does not impact the listing of the Company’s common stock on the Nasdaq Global Select Market at this time.
• On March 7, 2022, we announced positive preclinical data for VYN201 in a human skin model of vitiligo. In the model, VYN201 reduced the expression of key pro-inflammatory biomarkers relevant to the pathogenesis of vitiligo, and demonstrated marked reduction in melanocyte loss.
• On March 15, 2022, we entered into a purchase agreement (the "Equity Purchase Agreement"), with Lincoln Park Capital Fund, LLC ("Lincoln Park") which provides that, upon the terms and subject to the conditions and limitations set forth therein, we may sell to Lincoln Park, at our discretion, up to $30.0 million of shares of our common stock over the 36-month term of the Equity Purchase Agreement. Upon execution of the Equity Purchase Agreement, we issued 1,667,593 shares of our common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the Equity Purchase Agreement.
Revenues
Our revenue during the periods presented has been primarily comprised of AMZEEQ and ZILXI product sales and collaboration and license revenue.
AMZEEQ and ZILXI were commercially launched in January and October of 2020, respectively. We generated product revenue of $13.8 million for the year ended December 31, 2021. We will not commercially launch our other product candidates in the United States or generate any revenues from sales of any of our product candidates unless and until we obtain marketing approval. We will not generate revenue from the sales of AMZEEQ or ZILXI after January 12, 2022 as a result of the sale of the Assets.
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 ended March 31, 2020, we did not receive or become entitled to any royalty payments due to a suspension of the manufacturing of Finacea by LEO following inadequate supply of quality-compliant batches of the API used in such product. In April 2020, LEO informed us that it had reestablished the supply of Finacea foam and resumed commercial sale in the United States. In the year ended December 31, 2021 we received royalties of $0.9 million. Our rights to royalty payments from the sale of Finacea were not transferred in the sale of the Assets.
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Additionally, on April 23, 2020, we announced that we entered into a licensing agreement with Cutia for our topical minocycline products and product candidate. We received an upfront cash payment of $10 million related to the licensing agreement with Cutia in 2020. The Cutia license agreement was assigned to Journey in connection with the sale of the Assets. Therefore, we will not receive any payments from Cutia going forward.
Cost of Goods Sold
Our gross margin percentage of 75.8% was favorably impacted during the year ended December 31, 2021 by product sales with certain materials produced prior to FDA approval and therefore expensed in prior periods. If inventory sold during the year ended December 31, 2021 was valued at cost, our gross margin for the period then ended would have been 74.6%.
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, FMX114, VYN201 and VYN202. Our total research and development expenses for the year ended December 31, 2021 and 2020 were approximately $25.0 million and $43.5 million, respectively. We charge all research and development expenses to operations as they are incurred. Following the sale of the MST Franchise in January 2022, our research and development will be focused on our BET inhibitor platform and FMX 114.
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;
• 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 ended December 31, 2021 and 2020 were approximately $54.5 million and $89.5 million, respectively. The decline in these costs is primarily associated with cost savings measures related to our shift from a commercial organization to a research and development organization beginning in August 2021. The decrease is also due to severance expenses for Menlo employees, stock based compensation awards, merger expenses and sales and marketing expenses which were incurred in connection with the commercialization of AMZEEQ and ZILXI in 2020 that were not incurred in 2021.
Our selling, general and administrative expenses consist principally of:
• employee-related expenses, including salaries, benefits and related expenses, including share-based compensation expenses;
• costs associated with selling, marketing and shipping and handling costs;
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• legal and professional fees for auditors and other consulting expenses; and
• facility, information technology and depreciation expenses.
Interest Expense
Interest expense primarily consisted of interest expense on our long-term debt. During the year ended December 31, 2021, interest expense also included prepayment penalties of $1.4 million and the write off of deferred financing costs of $1.6 million. As a result of the prepayment of our indebtedness outstanding under the Amended and Restated Credit Agreement in August 2021, we do not expect to incur material interest expense going forward.
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 of December 31, 2021, we had federal and state net operating loss carryforwards of $315.0 million and $105.6 million, respectively, of which $44.3 million and $105.6 million of these carryforwards will begin to expire starting in 2031 through 2040 for federal and state purposes, respectively. As of December 31, 2021, we had federal and state research and development tax credit carryforwards of $6.7 million and $1.2 million, respectively. The federal credits begin to expire in 2031 and the California research credits have no expiration dates. As of December 31, 2021, the Company had $270.7 million in federal and state NOLs with no limited period of use.
In December 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 the U.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 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.
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Results of Operations for the Years Ended December 31, 2021 and December 31, 2020
Summary of Operations
Year Ended December 31,
(in millions, except %) 2021 2020 Variance
Revenues $ 14.8 $ 21.0 $ (6.2) (29.7) %
Cost of goods sold 3.3 1.4 2.0 140.5 %
Operating Expenses
Research and development expenses 25.0 43.5 (18.6) (42.7) %
Selling, general and administrative expenses 54.5 89.5 (35.1) (39.2) %
Goodwill and in-process research & development impairments — 54.3 (54.3) (100.0) %
CSR Remeasurement — 84.7 (84.7) (100.0) %
Total Operating Expenses 79.4 272.1 (192.7) (70.8) %
Operating Loss 68.0 252.5 (184.5) (73.1) %
Interest expense 5.6 4.4 1.2 27.8 %
Other expense (income), net 0.1 (1.1) 1.2 (112.2) %
Loss before income tax 73.8 255.8 (182.0) (71.1) %
Taxes on income (0.4) (0.3) (0.2) 73.6 %
Net loss 73.3 255.5 (182.2) (71.3) %
Revenues
Revenues totaled $14.8 million and $21.0 million for the years ended December 31, 2021 and 2020, respectively. For the year ended December 31, 2021, our revenue consisted of $13.8 million of product sales, and $0.9 million of royalty revenue. For the year ended December 31, 2020, our revenues consisted of $10.2 million of product sales, $10.0 million of license revenue, and $0.8 million of royalty revenue.
We divested our minocycline business on January 12, 2022. As a result of the sale, we will not generate revenue from the sales of AMZEEQ or ZILXI following such date. In addition, the Cutia License Agreement was assigned to Journey in connection with the sale. Therefore, we will not be entitled to payments under the Cutia License Agreement going forward.
The decrease in license revenue for the year ended December 31, 2021 as compared to license revenue for the year ended December 31, 2020 is due to the upfront payment received in 2020 under the Cutia License Agreement for the marketing and sale of the topical minocycline products in Greater China. No similar payments were received in 2021.
Cost of Goods Sold
Cost of goods sold was $3.3 million and $1.4 million for the years ended December 31, 2021 and 2020, respectively. The increase in cost of goods sold was primarily due to an increase in sales volume. Our gross margin percentage was 75.8% and 86.4% for the years ended December 31, 2021 and December 31, 2020, respectively, was favorably impacted by product sales with certain materials produced prior to FDA approval and therefore expensed in prior periods. If inventory sold during the year ended December 31, 2021 and December 31, 2020 was valued at cost, our gross margin for the period then ended would have been 74.6% and 82.5%.
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Research and development expenses
Our research and development expenses for the year ended December 31, 2021 were $25.0 million, representing a decrease of $18.6 million, or 42.7%, compared to $43.5 million for the year ended December 31, 2020. The decrease was primarily driven by a $11.2 million decrease in employee related expenses due to severance payments made in 2020 to former Menlo employees, a $11.8 million decrease in clinical and manufacturing expenses due to the completion of the FCD105 and serlopitant trials and a $2.0 decrease in depreciation expense related to a write off of fixed assets during the fourth quarter of 2020. These decreases are offset by $6.5 million of increased clinical costs related to FMX114 and the BET inhibitor assets licensed from In4Derm.
Selling, general and administrative expenses
Our selling, general and administrative expenses for the year ended December 31, 2021 were $54.5 million, representing a decrease of $35.1 million, or 39.2%, compared to $89.5 million for the year ended December 31, 2020. The decrease was driven by a $21.0 million reduction in employee related expenses in 2021 as compared to 2020, including $8.2 million of incremental stock based compensation related to the conversion of the Contingent Stock Rights ("CSRs") issued as part of the Merger in 2020 that was not incurred in 2021. The decrease in employee related expenses was also due to a reduction in workforce in 2021 resulting from the decision to divest the minocycline franchise. Corporate and professional costs decreased by approximately $14.1 million including a decrease of approximately $10.1 million for costs which were eliminated or reduced in 2021 following the Merger.
Goodwill and in-process research & development impairments
During 2020, we recorded goodwill and in-process research & development impairments of $54.3 million of which $4.5 million was recorded for goodwill 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. No impairments were recorded in the year ended December 31, 2021.
Contingent Stock Right Remeasurement
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 in the year ended December 31, 2020. No such expense occurred in the year ended December 31, 2021.
Interest Expense
Interest expense for the year ended December 31, 2021 was $5.6 million, representing an increase of $1.2 million, or 27.8%, compared to $4.4 million for the year ended December 31, 2020. The increase is primarily attributable to the prepayment penalty of $1.4 million associated with the prepayment of our outstanding debt and the write off of deferred financing costs of $1.6 million, offset by the elimination of ongoing interest expense and deferred financing cost amortization.
Other expense (income), net
Other expense (income), net for the year ended December 31, 2021 was $0.1 million, representing a decrease of $1.2 million, or 112%, compared to $(1.1) million for the year ended December 31, 2020. The decrease is primarily due to gains on derivative liabilities and marketable securities in 2020. No such gains occurred in 2021.
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 in January 2020 and October 2020, respectively. AMZEEQ and ZILXI were sold as part of the sale of the MST Franchise on January 12, 2022 and, as such, we will no longer be generating revenue from the sale of these products. We have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses until such a time when our product candidates, if approved, are commercially successful, if at all. We will not generate any revenue from any current or future product candidates unless and until we obtain regulatory
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approval and commercialize such products. For the year ended December 31, 2021, we incurred a net loss of $73.3 million and used $56.4 million of cash in operations.
As of December 31, 2021, we had cash and cash equivalents of $42.9 million. Our cash and cash equivalents are held in money market accounts. We also received proceeds of $20.0 million from the sale of the MST Franchise in January 2022 and will receive an additional $5.0 million payment on the one year anniversary of the sale.
Following the sale of the MST Franchise, we are refocusing our limited resources on our drug development programs. Research and development activities for these programs, including preclinical and clinical testing of our drug candidates, will require significant additional financing. The future viability of the Company and our ability to continue as a going concern is dependent on our ability to raise sufficient working capital through either debt or equity financing to fund our operations and successfully develop commercially viable drug candidates. There is no assurance we will be able to achieve these objectives under acceptable terms or at all.
In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), we have evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that our audited consolidated financial statements are issued. The accompanying audited consolidated financial statements have been prepared assuming that we will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is expected to be impacted by the outcome of the plans outlined above, including our ability to raise additional capital to fund our operations, positive results from clinical trials for FMX114, and the successful development and positive results from clinical trials for the BET inhibitor programs. Based on our current plans and assumptions, we believe that absent sufficient proceeds received from equity transactions, financing transactions or business development transactions, we will not have sufficient cash and cash equivalents to fund our operations beyond one year from the issuance of these financial statements. Accordingly, we will, over the course of the next twelve months, require significant additional financing to continue our operations. These factors therefore, raise substantial doubt about our ability to continue as a going concern. Failure to successfully receive additional financing will require us to delay, scale back or otherwise modify our business and our research and development activities and other operations. See "Item1A. Risk Factors—Other Risks Related to Our Business and Financial Operations—We will need substantial additional funding to fund our operations, and there is substantial doubt about our ability to continue as a going concern. We could also be forced to delay, reduce or terminate our research and development activities which would have a material adverse effect on our financial condition." The accompanying financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern.
Capital Resources
Overview
To date, we have financed our operations primarily through private and public placements of our common stock, debt and warrants and through the sale of our products, fees, cost reimbursements and payments received from our licensees.
Cash flows
The following table summarizes our statement of cash flows for the years ended December 31, 2021 and 2020:
Year Ended December 31,
2021 2020
Net cash (used in) / provided by: (in thousands)
Operating activities $ (56,367) $ (137,082)
Investing activities 1,027 89,107
Financing activities $ 39,777 $ 61,808
Net cash used in operating activities
During the year ended December 31, 2021, net cash used in operating activities was $56.4 million and primarily reflected our net loss of $73.3 million offset by non-cash charges of $8.1 million in stock based compensation and $1.4 million in deferred finance charge write-offs and $4.8 million of net increase in assets and liabilities.
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During the year ended December 31, 2020, net cash used in operating activities was $137.1 million and primarily reflected our net loss of $255.6 million, partially offset by non-cash charges of $54.3 million of impairments, $84.7 million of remeasurement of CSRs, share-based compensation of 18.1 million and the loss on the disposal of fixed assets of 2.1 million. The remainder of the cash used in operations is driven by net decrease in assets and liabilities.
Net cash provided by investing activities
During the year ended December 31, 2021, net cash provided by investing activities was $1.0 million and was comprised of proceeds from the sale and maturity of marketable securities.
During the year ended December 31, 2020, net cash provided by investing activities was $89.1 million and was primarily comprised of cash acquired through the Merger of $38.6 million and proceeds from the sale and maturity of marketable securities and bank deposits of $50.6 million.
Net cash provided by financing activities
During the year ended December 31, 2021, net cash provided by financing activities was $39.8 million and was primarily attributable to $76.0 million of cash from the issuance of common stock offset by $36.4 million from the prepayment of debt repayment.
During the year ended December 31, 2020, net cash provided by financing activities was $61.8 million and was primarily the result of proceeds from the issuance of common stock.
Cash and funding sources
Our sources of funding in the year ended December 31, 2021 totaled $76.0 million and consisted primarily of $29.2 million net proceeds from our at-the-market program and $46.8 million net proceeds from our registered direct public offering completed in January 2021.
On January 28, 2021, the Company completed a registered direct offering of 5,274,261 shares of common stock at a price of $9.48 per share for $46.8 million in net proceeds, as adjusted for the Company's 1-for-4 reverse stock split.
From January 1, 2021 through January 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. From August 12, 2021 through December 31,2021, the Company issued and sold 1,955,313 shares of common stock at a weighted average per share price of $1.57 pursuant to the Sales Agreement for $2.9 million in net proceeds.
Our sources of funding in the year ended December 31, 2020 totaled $100.3 million and consisted primarily of $38.6 million of cash and investments acquired in the Merger, $53.6 million of proceeds from an underwritten public offering of common stock completed in June 2020, and $8.0 million of proceeds from our at-the-market program during the fourth quarter of 2020.
We have no ongoing material financial commitments (such as lines of credit) that may affect our liquidity over the next five years.
Contractual Obligations
Our significant non-cancelable contractual obligations as of December 31, 2021 consisted of:
• Obligations under lease commitments (see Note 10)
• Open purchase commitments of $3.9 million
Funding requirements
Our present and future funding requirements will depend on many factors, including, but not limited to the following:
• costs associated with the research and development of drug candidates;
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• 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;
• terms and timing of any acquisitions, collaborations or other arrangements;
• 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.
For more information as to the risks associated with our future funding needs, see “Item 1A—Risk Factors” included herein.
Off-Balance Sheet Arrangements
As of December 31, 2021, 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 in the 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 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 impact on worldwide macroeconomic conditions; the speed of the anticipated recovery; and governmental and business reactions to the pandemic. 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 December 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. 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.
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
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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 of In-Process Research and Development and Goodwill 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).
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
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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.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide quantitative or qualitative disclosures about market risk.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
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VYNE THERAPEUTICS INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2021
INDEX