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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K, particularly in the section entitled “Item 1A. Risk Factors”.
Company Overview
We are a clinical-stage biopharmaceutical company focused on developing proprietary, innovative and differentiated therapies for the treatment of immuno-inflammatory conditions.
In August 2021, we entered into a transaction with Tay providing us with exclusive worldwide rights to research, develop and commercialize products containing BET inhibitors for the treatment of any disease, disorder or condition in humans. Through our access to this library of new chemical BET inhibitor compounds, we plan to develop product candidates for a diverse set of indications. Based on data generated to date, we have chosen to focus our initial efforts for this platform on select therapeutic areas in immuno-inflammatory disease.
Our lead program is VYN201, a locally administered pan-BD BET inhibitor designed as a “soft” drug to address diseases involving multiple, diverse inflammatory cell signaling pathways while providing low systemic exposure. In preclinical testing, VYN201 produced consistent reductions in pro-inflammatory and disease-related biomarkers and improvements in disease severity across a variety of inflammatory and fibrotic models. In November 2022, we initiated a Phase 1 clinical trial evaluating a topical formulation of VYN201 for the treatment of nonsegmental vitiligo. In the first quarter of 2023, we announced positive preliminary safety and tolerability, pharmacokinetic and hematology data from the Phase 1a portion of the trial . The first nonsegmental vitiligo patient was dosed in the Phase 1b portion of the trial in January 2023, and on October 30, 2023, we announced positive data from the Phase 1b trial, in which significant clinical improvement in F-VASI was observed in the 1% and 2% dose cohorts after 16 weeks of treatment. We have initiated Phase 2b preparatory activities and expect to advance VYN201 into a longer duration Phase 2b trial to evaluate optimal dosing and peak efficacy in patients with active or stable nonsegmental vitiligo in the second quarter of 2024 with top line results from the 24-week double-blind portion of the trial anticipated in mid-2025.
Our second program is VYN202, an oral small molecule BD2-selective BET inhibitor. VYN202 has been designed to achieve potential class-leading selectivity (BD2 vs. BD1), maximum potency versus BD2 and optimal oral bioavailability. By maximizing BD2 selectivity, we believe VYN202 has the potential to be a more conveniently-administered non-biologic treatment option for both acute control and chronic management of immuno-inflammatory indications, where the damaging effects of unrestricted inflammatory signaling activity are common. We submitted an IND for VYN202 to the FDA in December 2023. We recently received correspondence from the FDA informing us that our Phase 1a clinical trial is on hold and requesting that we submit data from an additional nonclinical study. We recently completed the additional nonclinical study which achieved preliminary results consistent with our expectations at the outset of the study. We plan to submit the requested nonclinical information to the FDA by the end of the first quarter of 2024 and, if cleared by the FDA, expect to initiate our Phase 1a single ascending dose/multiple ascending dose trial in healthy volunteers in the second quarter of 2024, with top line results anticipated in the second half of 2024. If the Phase 1a portion of the trial is successfully completed, we plan to initiate Phase 1b trials in subjects with moderate-to-severe plaque psoriasis and moderate-to-severe adult-onset rheumatoid arthritis, with top line results anticipated in the second half of 2025.
We intend to advance our product candidates through clinical development toward regulatory approval. As part of our strategy to maximize the value of our pipeline, we may partner with larger pharmaceutical companies to expand and accelerate the development of our programs and explore therapeutic areas outside of our core focus in immunology.
Sale of Legacy Commercial Business
In January 2022, we entered into an Asset Purchase Agreement with Journey Medical Corporation ("Journey") pursuant to which we sold our Molecule Stabilizing Technology franchise, including our former products AMZEEQ, ZILXI, and FCD105, referred to collectively as the MST Franchise, to Journey. The assets included certain contracts, including license agreements, inventory and intellectual property related to the MST Franchise. We have classified the results of the MST Franchise as discontinued operations in our consolidated statements of operations and cash flows for all periods presented in this Annual Report on Form 10-K.
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We received an upfront payment of $20.0 million at the closing of the sale of the MST franchise and an additional $5.0 million deferred payment in January 2023. 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, as well as certain payments from any licensing or sublicensing of the purchased assets by Journey outside of the United States.
Known Trends, Events and Uncertainties
Business and Macroeconomic Conditions
Uncertainty in the global economy presents significant risks to our business. We are subject to continuing risks and uncertainties in connection with the current macroeconomic environment, including inflation, interest rates, financial market volatility and uncertainty, the impact of war or military conflict, including the wars in Ukraine and the Middle East, rising tensions between China and Taiwan and the response thereto, public health pandemics, and supply chain disruptions. Adverse effects of these large macroeconomic conditions have been prevalent in many of the areas where we, our CROs, suppliers or third-party business partners conduct business and as a result, we have experienced disruptions and may continue to experience more pronounced disruptions in our operations. In addition, financial markets have experienced a period of high volatility due to these macroeconomic factors. The persistence of this volatility may impact our ability to engage in capital market activities and adequately fund our operations. As of the filing date of this Annual Report on Form 10-K, the extent to which these macroeconomic events and conditions may impact our financial condition, results of operations or liquidity is uncertain. The effect of these macroeconomic events and conditions may not be fully reflected in our results of operations and overall financial performance until future periods. See Part I, Item 1A “Risk Factors” for further discussion of the possible impact of these macroeconomic conditions on our business.
Collaboration Arrangements
Agreements with Tay Therapeutics
Evaluation and Option Agreement
In April 2021, we entered into the Option Agreement with Tay granting us an exclusive option to obtain certain exclusive worldwide rights to research, develop and commercialize products containing Tay’s BET inhibitor compounds for the treatment of any disease, disorder or condition in humans. Pursuant to the Option Agreement, we agreed to use commercially reasonable efforts to stabilize, develop and manufacture a product with a pan-BD BET inhibitor as its active ingredient and Tay agreed to provide a mutually agreed data package and select an NCE development candidate from its Oral BETi Compounds. We paid a $1.0 million non-refundable cash payment to Tay upon execution of the Option Agreement, 50% of which was to be used by Tay in the development of the Oral BETi Compounds.
Under the terms of the Option Agreement, the Oral Option was to expire on June 30, 2022 (the "Option Term"), but in June 2022, we and Tay entered into a Letter Agreement (the “Letter Agreement”) to extend the Option Term to February 28, 2023. Pursuant to the terms of the Letter Agreement, we paid Tay $386,366 (£300,000) on June 28, 2022 to extend the Option Term. In addition, on August 29, 2022, we made a second payment to Tay of $997,407 (£850,000) pursuant to the terms of the Letter Agreement following the discovery of potential Oral BETi Compounds for further development. Both payments were recorded as research and development expense. On February 27, 2023, the parties entered into an additional Letter Agreement (the "Second Letter Agreement") pursuant to which the Option Term was extended to April 30, 2023. As consideration for the extension of the Option Term, we paid Tay $250,000 upon the execution of the Second Letter Agreement. Per the terms of the Second Letter Agreement, this fee was to be deducted from the upfront fee paid by us to Tay following our exercise of the Oral Option, as described below.
License for Locally Administered Pan-BD BET Inhibitor Program (VYN201)
In August 2021, we exercised our option with respect to the VYN201 program and entered into the VYN201 License Agreement granting us a worldwide, exclusive license that is sublicensable through multiple tiers to exploit certain of Tay’s pan-BD BET inhibitor compounds in all fields. We have the sole responsibility for development, regulatory, marketing and commercialization activities to be conducted for the licensed products at our sole cost and discretion. We are required to use commercially reasonable efforts to develop and, if approved, commercialize such products. Pursuant to the VYN201 License Agreement, a joint development committee consisting of one representative from each party reviews the progress of the development plan for the licensed products. Pursuant to the VYN201 License Agreement, we may develop a product that contains or incorporates a specific BET inhibitor, whether alone or in combination with other active ingredients, in any form, formulation, presentation, or dosage, and for any mode of administration.
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We made a $0.5 million cash payment to Tay in 2021 in connection with entering into the VYN201 License Agreement. Pursuant to the VYN201 License Agreement, we agreed to make cash payments to Tay upon the achievement of specified clinical development and regulatory approval milestones with respect to each licensed topical product in the United States of up to $15.75 million for all indications. Tay is entitled to additional milestone payments upon the achievement of regulatory approvals in certain non-U.S. jurisdictions. In addition, with respect to any products we commercialize under the VYN201 License Agreement, we will pay tiered royalties to Tay on net sales of such licensed products by us, our affiliates, or sublicensees, of 5%, 7.5% and 10% based on tiered annual net sales bands subject to specified reductions. We are obligated to pay royalties until the latest of (1) the tenth anniversary of the first commercial sale of the relevant licensed product, (2) the expiration of the last valid claim of the licensed patent rights covering such licensed product in such country and (3) the expiration of regulatory exclusivity for the relevant licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis.
License for Selective BET Inhibitor Program (VYN202)
On April 28, 2023, we exercised the Oral Option with respect to the VYN202 program and entered into the VYN202 License Agreement with Tay granting us a worldwide, exclusive license that is sublicensable through multiple tiers to exploit certain of Tay’s Oral BETi Compounds in all fields. We have the sole responsibility for development, regulatory, marketing and commercialization activities to be conducted for the licensed products at our sole cost and discretion, and shall use commercially reasonable efforts to develop and, if approved, commercialize such products. We may sublicense our rights to a third party without Tay’s consent. Pursuant to the VYN202 License Agreement, a joint development committee consisting of one representative from each party reviews the progress of the development plan for the licensed products.
We made a cash payment of $3.75 million, after deducting the $250,000 fee paid to extend the Option Term in February 2023, to Tay in connection with entering into the VYN202 License Agreement. This payment was recorded as a research and development expense in the period paid. Pursuant to the terms of the VYN202 License Agreement, we agreed to make cash payments to Tay of up to $43.75 million upon the achievement of specified clinical development and regulatory approval milestones with respect to each licensed oral product in the United States for all indications. Tay is entitled to additional milestone payments upon the achievement of regulatory approvals in certain non-U.S. jurisdictions. In addition, with respect to any products we commercialize under the VYN202 License Agreement, we will pay tiered royalties to Tay on net sales of such licensed products by us, our affiliates, or sublicensees, of 5%, 7.5% and 10% based on tiered annual net sales bands subject to specified reductions. We are obligated to pay royalties until the latest of (1) the tenth anniversary of the first commercial sale of the relevant licensed product, (2) the expiration of the last valid claim of the licensed patent rights covering such licensed product in such country and (3) the expiration of regulatory exclusivity for the relevant licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis.
Components of Results of Operations
Revenues
Historically, we have generated revenues under development and license agreements, including royalty payments from sales of Finacea foam. We previously licensed the rights to Finacea to LEO Pharma A/S ("LEO Pharma"). This license was not part of the sale of our commercial business to Journey. Royalty revenues for the years ended December 31, 2023 and 2022 were $0.4 million and $0.5 million, respectively, from LEO Pharma in connection with sales of Finacea.
Operating Expenses
Research and development expenses
Our research and development expenses relate primarily to the development of VYN201 and VYN202, as well as FMX114, a product candidate which we are no longer actively developing. We charge all research and development expenses to operations as they are incurred.
Our total research and development expenses for the years ended December 31, 2023 and 2022 were $16.3 million and $18.4 million, respectively.
Research and development expenses consist primarily of:
• employee-related expenses, including salaries, benefits and related expenses, including share-based compensation expenses, for research and development personnel;
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• 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.
General and administrative expenses
Our general and administrative expenses for the years ended December 31, 2023 and 2022 were $13.4 million and $16.4 million, respectively.
Our general and administrative expenses consist principally of:
• employee-related expenses, including salaries, benefits and related expenses, including share-based compensation expenses;
• legal and professional fees for auditors and other consulting expenses; and
• facility, information technology and depreciation expenses.
Other Income, net
Other income, net primarily consists of interest earned on our cash and cash equivalents and marketable securities as well as foreign exchange rate gains and losses.
Income Taxes and Net Operating Loss Carryforwards
We have incurred significant net operating losses (“NOLs”) since our inception. We expect to continue to incur NOLs until such a time when we generate adequate revenues for us to reach profitability. As of December 31, 2023, we had federal and state net operating loss carryforwards of $331.1 million and $41.7 million, respectively, of which $44.3 million will begin to expire in 2031 for federal and $21.3 million will begin to expire in 2040 for state purposes. As of December 31, 2023, we had federal research and development tax credit carryforwards of $6.9 million which will begin to expire in 2031. We have no state research and development tax credit carryforwards. As of December 31, 2023, we had $307.2 million in federal and state NOLs with no limited period of use.
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 completed a 382 study through December 31, 2023, however, w e may have experienced ownership changes in the past, including in connection with the 2020 merger between Menlo Therapeutics (our predecessor company) and Foamix Pharmaceuticals Ltd. Our private placement transaction in November 2023 also likely resulted in an ownership change for purposes of Section 382. We may experience ownership changes in the future as a result of the 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, 2023 and December 31, 2022
Year Ended December 31, Increase/(Decrease) Increase/(Decrease)
(in thousands, except %) 2023 2022 $ %
Revenues
Royalty revenues $ 424 $ 477 $ (53) (11.1) %
Total revenues 424 $ 477 (53) (11.1) %
Operating Expenses
Research and development 16,307 18,385 (2,078) (11.3) %
General and administrative 13,375 16,387 (3,012) (18.4) %
Total operating expenses 29,682 34,772 (5,090) (14.6) %
Operating loss (29,258) (34,295) (5,037) (14.7) %
Other income, net 1,386 363 1,023 281.8 %
Loss from continuing operations before income taxes (27,872) (33,932) (6,060) (17.9) %
Income tax expense — 13 (13) *
Loss from continuing operations (27,872) (33,945) (6,073) (17.9) %
Income (loss) from discontinued operations, net of income taxes (580) 10,735 (11,315) (105.4) %
Net loss (28,452) (23,210) 5,242 22.6 %
*percentage not meaningful
Revenues
Revenues totaled $0.4 million and $0.5 million for the years ended December 31, 2023 and 2022, respectively, consisting of royalty revenue from our royalty agreement with LEO Pharma.
Research and development expenses
Our research and development expenses for the year ended December 31, 2023 were $16.3 million, representing a decrease of $2.1 million, or 11.3%, compared to $18.4 million for the year ended December 31, 2022. The decrease was primarily due to lower employee-related expenses of $3.8 million and decreased spending for FMX114 and VYN201 of $2.7 million and $2.2 million, respectively . The decrease was partially offset by increased expenses for VYN202 of $6.7 million, including $4.0 million paid in connection with entering into the VYN202 License Agreement.
General and administrative expenses
Our general and administrative expenses for the year ended December 31, 2023 were $13.4 million, representing a decrease of $3.0 million, or 18.4%, compared to $16.4 million for the year ended December 31, 2022. The decrease was primarily driven by lower rent and corporate insurance costs of $1.6 million and decreased consulting and professional fees of $1.1 million.
Other Income, net
Other income, net for the years ended December 31, 2023 and December 31, 2022 was $1.4 million and $0.4 million, respectively, primarily related to interest income earned on cash, cash equivalents and marketable securities.
Income (loss) from discontinued operations, net of income taxes
Due to the sale of the MST Franchise during the first quarter of 2022, in accordance with ASC 205, Discontinued Operations, we have classified the results of the MST Franchise as discontinued operations in our consolidated statements of operations for all periods presented. See "Note 4, Discontinued Operations" in the consolidated financial statements.
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Liquidity and Capital Resources
As of December 31, 2023, we had cash, cash equivalents, restricted cash and marketable securities of $93.3 million and an accumulated deficit of $691.3 million. We had no outstanding debt as of December 31, 2023. For the year ended December 31, 2023, we incurred a net loss of $28.5 million and used $25.3 million of cash in operations. The net loss was comprised of a $27.9 million loss from continuing operations and a $0.6 million loss from discontinued operations. We have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses until such a time when our product candidates, if approved, are commercially successful, if at all. We will not generate any revenue from any current or future product candidates unless and until we obtain regulatory approval and commercialize such products.
On October 27, 2023, we entered into a securities purchase agreement with certain institutional and other accredited investors (collectively, the “Purchasers”), pursuant to which we agreed to sell and issue to the Purchasers in a private placement transaction (the “Private Placement”) (i) 10,652,543 shares of our common stock and (ii) with respect to certain Purchasers, pre-funded warrants to purchase 28,614,437 shares of common stock in lieu of shares (the “Pre-Funded Warrants”). The purchase price per share of common stock was $2.245 per share (the “Stock Purchase Price”) and the purchase price for the Pre-Funded Warrants was the Stock Purchase Price minus $0.0001 per Pre-Funded Warrant. On November 1, 2023, we received gross proceeds of $88.2 million from the Private Placement, before deducting fees to the placement agent and offering expenses payable by us. Net proceeds, after deducting those fees and expenses, were $82.7 million.
If our available cash, cash equivalents, restricted cash and marketable securities are insufficient to satisfy our liquidity requirements, we may need to raise additional capital to fund our operations. No assurance can be given as to whether additional needed financing will be available on terms acceptable to us, if at all. If sufficient funds on acceptable terms are not available when needed, we may be required to suspend or forego certain planned activities. Failure to manage discretionary spending or raise additional financing, as needed, would adversely impact our ability to achieve our intended business objectives and have an adverse effect on our results of operations and future prospects.
We believe our existing cash, cash equivalents, restricted cash and marketable securities are sufficient to fund our operating and capital expenditure requirements for a period of at least 12 months from the date of issuance of the audited consolidated financial statements included in this Annual Report on Form 10-K.
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2023 and 2022:
Year Ended December 31,
2023 2022
Net cash (used in) / provided by: (in thousands)
Operating activities $ (25,341) $ (29,200)
Investing activities (57,354) 15,667
Financing activities 82,394 1,653
Net cash used in operating activities
During the year ended December 31, 2023, net cash used in operating activities was $25.3 million and primarily reflected our net loss of $28.5 million adjusted for non-cash items of $3.1 million primarily related to stock-based compensation expense. The remainder of the cash used in operations was driven by net changes in assets and liabilities.
During the year ended December 31, 2022, net cash used in operating activities was $29.2 million and primarily reflected our net loss of $23.2 million adjusted for the gain on the sale of the MST Franchise of $12.9 million and non-cash items of $4.7 million related to stock-based compensation expense, depreciation and loss from sale and disposal of property and fixed assets. The remainder of the cash used in operations was driven by net decrease in assets and liabilities.
Net cash provided by investing activities
During the year ended December 31, 2023, net cash used in investing activities was driven by the purchase of marketable securities of $62.4 million following the receipt of proceeds from the Private Placement, partially offset by the receipt of the deferred payment from Journey in January 2023 of $5.0 million in connection with the sale of the MST Franchise.
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During the year ended December 31, 2022, net cash provided by investing activities was $15.7 million and was primarily the result of net proceeds from the disposition of the MST Franchise.
Net cash provided by financing activities
During the year ended December 31, 2023, net cash provided by financing activities was $82.4 million and consisted primarily of net proceeds of $82.7 million from the Private Placement and $0.2 million of proceeds received from sales of common stock under our at-the-market equity offering program, partially offset by $0.4 million paid for the redemption of previously outstanding convertible preferred stock.
During the year ended December 31, 2022, net cash provided by financing activities was $1.7 million and was primarily attributable to the issuance of common stock under our at-the-market equity offering program and the issuance of the convertible preferred stock that was subsequently redeemed.
Cash and Funding Sources
Our sources of funding in the year ended December 31, 2023 totaled $87.8 million and consisted primarily of $82.7 million in net proceeds from the Private Placement, $5.0 million in proceeds from the deferred payment from the sale of the MST Franchise and $0.2 million in net proceeds from the issuance of common stock pursuant to our at-the-market offering program.
Our sources of funding in the year ended December 31, 2022 totaled $17.3 million and consisted primarily of $15.7 million in net proceeds from the sale of the MST Franchise and $1.5 million in net proceeds from the issuance of common stock pursuant to our at-the-market offering program.
We have no ongoing material financial commitments (such as lines of credit) that may affect our liquidity over the next five years.
Contractual Obligations
Lease Commitments:
In November 2022, we transitioned to a smaller corporate headquarters and signed a Sublease Agreement (the “Sublease”) to sublease approximately 5,755 square feet of office space (the “Leased Premises”) in Bridgewater, New Jersey through September 30, 2023. We signed a Lease Agreement (the “Master Lease”) to lease the Leased Premises following the termination of the Sublease through September 30, 202 5. We have aggregate operating lease obligations of $0.2 million through that date.
R&D Commitments:
We enter into contracts in the normal course of business with CROs, contract manufacturing organizations and other service providers for clinical trials, preclinical studies and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
Funding Requirements
Our present and future funding requirements will depend on a number of factors, including the following:
• costs associated with the research and development of product candidates;
• 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
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• 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, 2023, we did not have any off-balance sheet arrangements.
Cybersecurity
For a description of the risks from cybersecurity threats that may materially affect us and how they may do so, see our risk factors under Part 1. Item 1A. Risk Factors in this Annual Report on Form 10-K, including "If our information technology systems or those third parties upon which we rely or our data, are or were compromised, we could experience adverse consequences resulting from such compromise, including but not limited to regulatory investigations or actions, litigation, fines and penalties, disruptions of our business operations, reputational harm, loss of revenue or profits and other adverse consequences.”
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 this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical to assist stockholders 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.
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 collaboration agreements under ASC 606 we identify the contract, we identify the performance obligations, determine the transaction price, allocate the contract transaction price to the performance obligations, and recognize the revenue when (or as) the performance obligation is satisfied.
Royalty Revenues and Collaboration Agreements
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.
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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.
Product sales, Product Sales Provisions and Product Returns
As a result of the disposition of the MST Franchise in January 2022, we no longer have any revenue generating products. See Note 4, “Discontinued Operations.” Our net product revenues were 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.
Our customers were a limited number of national and select regional wholesalers (the “distributors”) and certain independent and specialty pharmacies (together, the “customers”). Net product revenue was typically recognized when customers obtained control of our products, which occurred at a point in time, typically upon delivery of product to the customers. Product revenue was recorded net of distribution fees, trade discounts, allowances, rebates, copay program coupons, chargebacks, estimated returns and other incentives. These deductions represented estimates of the related obligations and, as such, knowledge and judgment were required when estimating the impact of these revenue deductions on gross sales for a reporting period. Consistent with industry practice, customers were generally allowed to return products within a specified period of time before and after its expiration date. We estimated the amount of product that would be returned and deducted these estimated amounts from gross revenue at the time the revenue was recognized. T he information utilized to estimate the returns provision included: (i) actual return history (ii) historical return industry information regarding rates for comparable pharmaceutical products and product portfolios , (iii) external data with respect to inventory levels in the wholesale distribution channel, (iv) external data with respect to prescription demand for products and (v) remaining shelf lives of products at the date of sale.
Discontinued Operations
We accounted for the sale of the MST Franchise in accordance with Accounting Standards Codification, ASC, 205 Discontinued Operations and Accounting Standards Update, ASU, No. 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity . We followed the held-for-sale criteria as defined in ASC 360 and ASC 205. ASC 205 requires that a component of an entity that has been disposed of or is classified as held for sale and has operations and cash flows that can be clearly distinguished from the rest of the entity be reported as assets held for sale and discontinued operations. In the period a component of an entity has been disposed of or classified as held for sale, the results of operations for the periods presented are reclassified into separate line items in the consolidated statements of operations. Assets and liabilities are also reclassified into separate line items on the related consolidated balance sheets for the periods presented. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations and financial results be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations.
Due to the sale of the MST Franchise during the first quarter of 2022, in accordance with ASC 205, Discontinued Operations , we have classified the results of the MST Franchise as discontinued operations in our consolidated statements of operations and cash flows for all periods presented, see Note 4, Discontinued Operations in the consolidated financial statements. All disposed assets and liabilities associated with our MST Franchise were therefore classified as assets and liabilities of discontinued operations in our consolidated balance sheets for the periods presented. All amounts included in the notes to the consolidated financial statements relate to continuing operations unless otherwise noted.
Recently Issued Accounting Pronouncements
Certain recently issued accounting pronouncements are discussed in Note 2, “Significant Accounting Policies,” to the consolidated financial statements included in this Annual Report on Form 10-K.
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.
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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VYNE THERAPEUTICS INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2023
INDEX