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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___.
Commission file number 001-38356
VYNE THERAPEUTICS INC.
(Exact name of registrant as specified in its charter)

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

685 Route 202/206, Suite 301A
Bridgewater, New Jersey 08807
(Address of principal executive offices including zip code)
(800) 775-7936
(Registrant’s telephone number, including area code)
520 U.S. Highway 22, Suite 204
Bridgewater, New Jersey 08807
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common Stock, par value $0.0001 |  | VYNE |  | The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer | ☐ |  | Accelerated filer | ☐
Non-accelerated filer | ☒ |  | Smaller reporting company | ☒
|  |  | Emerging growth company | ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of November 1, 2022, there were 58,035,827 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.

Table of contents
TABLE OF CONTENTS

|  | Page
Part I | Financial Information | 5
Item 1. | Unaudited Financial Statements | 5
| Unaudited Condensed Consolidated Balance Sheets | 5
| Unaudited Condensed Consolidated Statements Of Operations | 6
| Unaudited Condensed Consolidated Statements Of Changes In Stockholders' Equity | 7
| Unaudited Condensed Consolidated Statements Of Cash Flows | 9
| Notes to Unaudited Interim Condensed Consolidated Financial Statements | 10
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 32
Item 4. | Controls and Procedures | 32
Part II | Other Information | 33
Item 1. | Legal Proceedings | 33
Item 1A. | Risk Factors | 33
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33
Item 3. | Defaults Upon Senior Securities | 33
Item 4. | Mine Safety Disclosures | 33
Item 5. | Other Information | 33
Item 6. | Exhibits | 36
SIGNATURES | 38

We own or have rights to various copyrights, trademarks, and trade names used in our business in the United States and/or other countries. This report also includes trademarks, service marks and trade names of other companies. Trademarks, service marks and trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are statements that could be deemed forward-looking statements reflecting the current beliefs and expectations of management with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These statements are often identified by the use of words such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” "if," “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” "until," “will,” “would,” and similar expressions or variations.
The following factors, among others, including any described in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q, could cause our future results to differ materially from those expressed in the forward-looking information:
•our ability to successfully execute our business strategy, including our ability to successfully develop our bromodomain and extra-terminal domain ("BET") inhibitor platform for immuno-inflammatory conditions;
•our pursuit of, and ability to successfully identify and execute, strategic transactions;
•our ability to select a lead candidate and exercise our option with respect to an oral BET inhibitor under the terms of the Evaluation and Option Agreement with Tay Therapeutics Limited;
•our ability to raise substantial additional financing to fund our operations and continue as a going concern;
•our ability to enroll patients and successfully complete, and receive favorable results in, clinical trials for our product candidates;
•estimates of our expenses, capital requirements, our needs for additional financing and our ability to obtain additional capital on acceptable terms or at all;
•the timing of commencement of future preclinical studies and clinical trials;
•the potential market size of treatments for any diseases and market adoption of our products, if approved or cleared for commercial use, by physicians and patients;
• risks and uncertainties arising out of the completed divestiture of our commercial business;
•disruptions related to COVID-19 on our ability to initiate and retain patients in our clinical trials and progress preclinical studies and the ability of our suppliers to manufacture and provide materials for our product candidates;
•our ability to create or in-license intellectual property and the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and programs, including the projected terms of patent protection;
•the regulatory approval process for our product candidates, including any delay or failure in obtaining requisite approvals;
•developments and projections relating to our competitors and the markets in which we compete, including competing drugs and therapies, particularly if we are unable to receive exclusivity;
•our ability to comply with various regulations applicable to our business, including continued listing rules imposed by Nasdaq;
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•our ability to successfully challenge intellectual property claimed by others or otherwise protect our intellectual property;
•our intentions and our ability to establish collaborations or obtain additional funding;
•our ability to attract and retain key scientific or management personnel;
•our defense of any future litigation that may be initiated against us;
•our expectations regarding licensing, business transactions and strategic operations; and
•our future financial performance and liquidity.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk Factors” and elsewhere in our Annual Report on Form 10-K as well as our other filings made with the Securities and Exchange Commission ("SEC"). Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
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PART I – FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
VYNE THERAPEUTICS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share and per share data)
(Unaudited)

| September 30 |  | December 31
| 2022 |  | 2021
Assets |  |  |
Current Assets: |  |  |
Cash and cash equivalents | $ | 35,510 |  |  | $ | 42,250 |
Restricted cash | 67 |  |  | 605 |
Trade receivables, net of allowances | 471 |  |  | 7,583 |
Amount due from sale of MST Franchise | 5,000 |  |  | — |
Prepaid expenses and other assets | 2,998 |  |  | 4,565 |
Operating lease right of use assets | — |  |  | 338 |
Discontinued operations - current assets | — |  |  | 7,845 |
Total Current Assets | 44,046 |  |  | 63,186 |
Property and equipment, net | 127 |  |  | 354 |
Non-current prepaid expenses and other assets | 2,735 |  |  | 3,506 |
Total Assets | $ | 46,908 |  |  | $ | 67,046 |
Liabilities and Stockholders’ Equity |  |  |
Current Liabilities: |  |  |
Trade payables | $ | 2,523 |  |  | $ | 6,510 |
Accrued expenses | 2,164 |  |  | 8,593 |
Employee related obligations | 1,944 |  |  | 2,752 |
Liability for employee severance benefits | 208 |  |  | 206 |
Operating lease liabilities | — |  |  | 349 |
Total Liabilities | 6,839 |  |  | 18,410 |
Stockholders' Equity: |  |  |
Preferred stock: $0.0001 par value; 20,000,000 shares authorized at September 30, 2022 and December 31, 2021; no shares issued and outstanding at September 30, 2022 and December 31, 2021 | — |  |  | — |
Common stock: $0.0001 par value; 150,000,000 shares authorized at September 30, 2022 and December 31, 2021; 58,035,827 and 53,577,744 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 6 |  |  | 5 |
Additional paid-in capital | 692,853 |  |  | 688,156 |
Accumulated deficit | (652,790) |  |  | (639,525) |
Total Stockholders' Equity | 40,069 |  |  | 48,636 |
Total Liabilities and Stockholders’ Equity | $ | 46,908 |  |  | $ | 67,046 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VYNE THERAPEUTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except per share data)
(Unaudited)

| Three months ended September 30 |  | Nine months ended September 30
| 2022 |  | 2021 |  | 2022 |  | 2021
Revenues |  |  |  |  |  |  |
Royalty revenues | $ | 167 |  |  | $ | 133 |  |  | $ | 471 |  |  | $ | 658 |
Total Revenues | 167 |  |  | 133 |  |  | 471 |  |  | 658 |
Operating expenses: |  |  |  |  |  |  |
Research and development | 5,546 |  |  | 5,917 |  |  | 14,106 |  |  | 15,219 |
Selling, general and administrative | 3,954 |  |  | 4,983 |  |  | 12,676 |  |  | 15,504 |
Total operating expenses | 9,500 |  |  | 10,900 |  |  | 26,782 |  |  | 30,723 |
Operating loss | (9,333) |  |  | (10,767) |  |  | (26,311) |  |  | (30,065) |
Interest expense | — |  |  | (3,474) |  |  | — |  |  | (5,610) |
Other income (expense) | 78 |  |  | (35) |  |  | 127 |  |  | (161) |
Loss from continuing operations before income taxes | (9,255) |  |  | (14,276) |  |  | (26,184) |  |  | (35,836) |
Income tax expense | — |  |  | — |  |  | — |  |  | — |
Loss from continuing operations | (9,255) |  |  | (14,276) |  |  | (26,184) |  |  | (35,836) |
(Loss) income from discontinued operations, net of income taxes | (204) |  |  | (7,009) |  |  | 12,919 |  |  | (25,923) |
Net loss | $ | (9,459) |  |  | $ | (21,285) |  |  | $ | (13,265) |  |  | $ | (61,759) |
Loss per share from continuing operations, basic and diluted | $ | (0.16) |  |  | $ | (0.27) |  |  | $ | (0.46) |  |  | $ | (0.71) |
(Loss) income per share from discontinued operations, basic and diluted | $ | — |  |  | $ | (0.14) |  |  | $ | 0.23 |  |  | $ | (0.51) |
Loss per share, basic and diluted | $ | (0.16) |  |  | $ | (0.41) |  |  | $ | (0.23) |  |  | $ | (1.22) |
Weighted average shares outstanding - basic and diluted | 57,930 |  |  | 52,028 |  |  | 57,117 |  |  | 50,776 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VYNE THERAPEUTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(U.S. dollars in thousands, except share data)
(Unaudited)

| Common stock |  | Additional paid-in capital |  | Accumulated deficit |  |  |  | Total
| Number of Shares |  | Amounts |  | Amounts
BALANCE AT JANUARY 1, 2021 | 43,205,221 |  |  | $ | 4 |  |  | $ | 603,685 |  |  | $ | (566,196) |  |  |  |  | $ | 37,493 |
CHANGES DURING THE PERIOD: |  |  |  |  |  |  |  |  |  |  |
Net loss | — |  |  | — |  |  | — |  |  | (61,759) |  |  |  |  | (61,759) |
Exercise of options, vesting of restricted stock units and shares issued under employee stock purchase plan | 305,105 |  |  | — |  |  | 393 |  |  | — |  |  |  |  | 393 |
Stock-based compensation | — |  |  | — |  |  | 6,748 |  |  | — |  |  |  |  | 6,748 |
Issuance of common stock under at-the-market offering, net of $998 issuance costs | 4,726,012 |  |  | — |  |  | 29,187 |  |  | — |  |  |  |  | 29,187 |
Issuance of common stock through a registered direct offering, net of $3,177 issuance costs | 5,274,261 |  |  | 1 |  |  | 46,823 |  |  | — |  |  |  |  | 46,824 |
BALANCE AT SEPTEMBER 30, 2021 | 53,510,599 |  |  | $ | 5 |  |  | $ | 686,836 |  |  | $ | (627,955) |  |  |  |  | $ | 58,886 |
BALANCE AT JANUARY 1, 2022 | 53,577,744 |  |  | $ | 5 |  |  | $ | 688,156 |  |  | $ | (639,525) |  |  |  |  | $ | 48,636 |
CHANGES DURING THE PERIOD: |  |  |  |  |  |  |  |  |  |  |
Net loss | — |  |  | — |  |  | — |  |  | (13,265) |  |  |  |  | (13,265) |
Vesting of restricted stock units, net of withholding tax and shares issued under employee stock purchase plan | 202,635 |  |  | — |  |  | (3) |  |  | — |  |  |  |  | (3) |
Stock-based compensation | — |  |  | — |  |  | 3,230 |  |  | — |  |  |  |  | 3,230 |
Issuance of commitment shares in March 2022 | 1,667,593 |  |  | — |  |  | — |  |  | — |  |  |  |  | — |
Issuance of common stock under at-the-market offering, net of $135 in issuance costs | 2,587,855 |  |  | 1 |  |  | 1,470 |  |  | — |  |  |  |  | 1,471 |
BALANCE AT SEPTEMBER 30, 2022 | 58,035,827 |  |  | $ | 6 |  |  | $ | 692,853 |  |  | $ | (652,790) |  |  |  |  | $ | 40,069 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VYNE THERAPEUTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(U.S. dollars in thousands, except share data)
(Unaudited)

| Common stock |  | Additional paid-in capital |  | Accumulated deficit |  |  |  | Total
| Number of Shares |  | Amounts |  | Amounts
BALANCE AT JULY 1, 2021 | 51,511,845 |  |  | $ | 5 |  |  | $ | 681,558 |  |  | $ | (606,670) |  |  |  |  | $ | 74,893 |
CHANGES DURING THE PERIOD: |  |  |  |  |  |  |  |  |  |  |
Net loss | — |  |  | — |  |  | — |  |  | (21,285) |  |  |  |  | (21,285) |
Exercise of options, vesting of restricted stock units and shares issued under employee stock purchase plan | 50,754 |  |  | — |  |  | (10) |  |  | — |  |  |  |  | (10) |
Stock-based compensation | — |  |  | — |  |  | 2,405 |  |  | — |  |  |  |  | 2,405 |
Issuance of common stock under at-the-market offering, net of $184 issuance costs | 1,948,000 |  |  | — |  |  | 2,883 |  |  | — |  |  |  |  | 2,883 |
BALANCE AT SEPTEMBER 30, 2021 | 53,510,599 |  |  | $ | 5 |  |  | $ | 686,836 |  |  | $ | (627,955) |  |  |  |  | $ | 58,886 |
BALANCE AT JULY 1, 2022 | 58,005,616 |  |  | $ | 6 |  |  | $ | 691,682 |  |  | $ | (643,331) |  |  |  |  | $ | 48,357 |
CHANGES DURING THE PERIOD: |  |  |  |  |  |  |  |  |  |  |
Net loss | — |  |  | — |  |  | — |  |  | (9,459) |  |  |  |  | (9,459) |
Vesting of restricted stock units, net of withholding tax and shares issued under employee stock purchase plan | 30,211 |  |  | — |  |  | (3) |  |  | — |  |  |  |  | (3) |
Stock-based compensation | — |  |  | — |  |  | 1,174 |  |  | — |  |  |  |  | 1,174 |
BALANCE AT SEPTEMBER 30, 2022 | 58,035,827 |  |  | $ | 6 |  |  | $ | 692,853 |  |  | $ | (652,790) |  |  |  |  | $ | 40,069 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VYNE THERAPEUTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)

| Nine months ended September 30
| 2022 |  | 2021
Cash Flows From Operating Activities: |  |  |
Net loss | (13,265) |  |  | (61,759) |
Adjustments required to reconcile net loss to net cash used in operating activities: |  |  |
Depreciation and amortization | 227 |  |  | 83 |
Changes in accrued liability for employee severance benefits, net of retirement fund profit | 2 |  |  | (108) |
Stock-based compensation | 3,230 |  |  | 6,748 |
Non-cash finance income, net | — |  |  | 1,281 |
Debt prepayment premium | — |  |  | 1,432 |
Gain on the sale of the MST Franchise | (12,918) |  |  | — |
Changes in operating assets and liabilities: |  |  |
Decrease in trade receivables | 8,853 |  |  | 5,262 |
Decrease (increase) in inventory | 97 |  |  | (666) |
Decrease in other non-current assets | — |  |  | 1,217 |
(Decrease) increase in trade payables, accrued expenses and liability for employee related severance benefits | (11,202) |  |  | 167 |
Decrease in operating lease liabilities | (349) |  |  | (6) |
Net cash used in operating activities | (25,325) |  |  | (46,349) |
Cash Flows From Investing Activities: |  |  |
Net proceeds from the sale of the MST Franchise | 16,602 |  |  | — |
Proceeds from the sale and maturity of marketable securities and bank deposits | — |  |  | 1,027 |
Net cash provided by investing activities | 16,602 |  |  | 1,027 |
Cash Flows From Financing Activities: |  |  |
Proceeds related to issuance of common shares through offerings, net of issuance costs | 1,471 |  |  | 76,010 |
Debt repayment | — |  |  | (36,432) |
(Withholdings) proceeds related to issuance of stock for stock-based compensation arrangements, net | (26) |  |  | 237 |
Net cash provided by financing activities | 1,445 |  |  | 39,815 |
Decrease in cash, cash equivalents and restricted cash | (7,278) |  |  | (5,507) |
Cash, cash equivalents and restricted cash at beginning of the period | 42,855 |  |  | 58,418 |
Cash, cash equivalents and restricted cash at end of the period | $ | 35,577 |  |  | $ | 52,911 |
Cash and cash equivalents | $ | 35,510 |  |  | $ | 52,306 |
Restricted cash | 67 |  |  | 605 |
Total cash, cash equivalents and restricted cash shown in statement of cash flows | $ | 35,577 |  |  | $ | 52,911 |
Supplementary information on investing and financing non-cash activities: |  |  |
Issuance of vested shares under employee stock purchase plan | $ | 23 |  |  | $ | 144 |
Amount due from sale of MST Franchise | $ | 5,000 |  |  | $ | — |
Supplemental disclosure of cash flow information: |  |  |
Interest received | $ | 197 |  |  | $ | 15 |
Interest paid | $ | — |  |  | $ | 2,385 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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VYNE Therapeutics Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
NOTE 1 - NATURE OF OPERATIONS
VYNE Therapeutics Inc. ("VYNE" or the "Company") is a biopharmaceutical company focused on developing proprietary, innovative and differentiated therapies for the treatment of immuno-inflammatory conditions. The Company is developing products containing bromodomain and extra-terminal domain ("BET") inhibitor compounds. The Company's initial BET inhibitor candidate in development is VYN201, a locally administered pan-BET inhibitor, which the Company is evaluating in various immuno-inflammatory diseases. The Company expects to initiate its first in-human clinical trial evaluating the safety and efficacy of VYN201 for the treatment of vitiligo in November of 2022.
On August 10, 2022, the Company announced that its Phase 2a clinical trial evaluating the safety and efficacy of FMX114 for mild-to-moderate atopic dermatitis ("AD") did not meet its primary endpoint, which was based on assessments of the absolute and percent change relative to baseline in the atopic dermatitis severity index ("ADSI") scoring assessment at week 4. In the weeks that followed, the Company performed additional analyses which showed that while efficacy results for FMX114 were not statistically significant at week 4, FMX114 was statistically superior to vehicle at weeks 1, 2 and 3 in the Phase 2a trial. Additionally, data received from the two-week open label extension during which both AD lesions of participating patients were treated with FMX114 showed that efficacy results continued to develop beyond week 4 of the study and that the separation of treatment effect for lesions treated with FMX114 as compared to lesions treated with vehicle increased for lesions that had a higher ADSI score at baseline. Accordingly, the Company believes that FMX114 may have an improved overall treatment effect on patients with more severe disease at baseline and that FMX114 may have increased potential to effectively treat patients with more moderate-to-severe AD. In light of these analyses, the Company is currently evaluating its development strategy for FMX114.
The Company is a Delaware corporation, has its principal executive offices in Bridgewater, New Jersey and operates as one business segment.
Strategic Business Review and Sale of the MST Franchise
Beginning in the second quarter of 2021, the Company conducted a review of its commercial and research and development portfolio to determine how to optimally deploy capital and drive shareholder value. During the course of this review, the Company carefully considered the revenues received from the commercialization of AMZEEQ and ZILXI 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 its pipeline products. During this process, the Company evaluated several strategic options including the acquisition of marketed assets, out-licensing its approved products outside of the United States, and possible partnering or co-development relationships with interested parties. Following its review, the Company determined to initiate a process to explore a possible sale or license of its 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 ("MST") platform.
On January 12, 2022, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Journey Medical Corporation ("Journey") pursuant to which the Company sold its MST franchise, including AMZEEQ, ZILXI, and FCD105 (the “MST Franchise”), to Journey. The assets include certain contracts, including the license agreement with Cutia Therapeutics (HK) Limited, 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 the Company'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 Journey.
Pursuant to the Purchase Agreement, the Company received an upfront payment of $20.0 million at the closing of the sale and will receive an additional $5.0 million on the one-year anniversary of the closing of the transaction. The Company is 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, the Company is entitled to receive certain payments from any licensing or sublicensing of the assets by Journey outside of the United States. See "Note 3 - Discontinued Operations" for additional discussion of the disposition.
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In addition, on August 12, 2021, the Company announced a transaction with Tay Therapeutics Limited (formerly known as In4Derm Limited), a company incorporated and registered in Scotland (“Tay”). Tay is a spin-out of the University of Dundee’s School of Life Sciences which has discovered and is developing proprietary BET inhibitors for the treatment of immunology and oncology conditions. On April 30, 2021, the parties entered into an Evaluation and Option Agreement (the “Option Agreement”) pursuant to which Tay granted the Company an exclusive option to obtain exclusive worldwide rights to research, develop and commercialize products containing Tay’s BET inhibitor compounds, which are new chemical entities for treatments in all fields for any disease, disorder or condition in humans.
On August 6, 2021, the Company exercised its option with respect to certain of Tay's pan-BD Inhibitor Compounds ("Topical Option"). Upon exercise of the Topical Option, the parties entered into a License Agreement granting the Company a worldwide, exclusive license that is sublicensable through multiple tiers to exploit certain of Tay’s pan-BD BET inhibitor compounds in all fields. The Company paid a $1.0 million cash payment to Tay upon the execution of the Option Agreement and $0.5 million in connection with entering into the License Agreement. These payments were recorded as a research and development expense in the period paid. Pursuant to the License Agreement, the Company has 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. The License agreement provides for tiered royalty payments of up to 10% of annual net sales on the licensed product.
In addition, the Company currently expects to exercise its option (the "Oral BETi Option") for the oral BET inhibitor compounds (the "Oral BETi Compounds") following the selection of a lead candidate for the program and the completion of certain preclinical evaluations. Under the terms of the initial agreement, the Oral BETi Option was to expire upon the earlier of (i) 14 days following the delivery of an agreed data package and selection of a lead new chemical entity ("NCE") candidate by Tay or (ii) June 30, 2022 (the "Option Term"). On June 15, 2022, the parties 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, the Company paid $386,366 (£300,000) on June 28, 2022 to Tay. In addition, a second payment of $997,407 (£850,000) was paid to Tay on August 29, 2022 following the discovery of potential preclinical candidates. Both payments were recorded as research and development expense.
Upon exercise of the exclusive Oral BETi Option, the parties will sign a license agreement (the “Oral License Agreement”), and the Company will be required to pay Tay a $4.0 million cash payment. The Oral License Agreement will include cash payments of up to $43.75 million payable to Tay 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. The license agreements also provide for tiered royalty payments of up to 10% of net annual sales across licensed BET inhibitor products by the Company. Tay is entitled to additional milestones upon the achievement of regulatory approvals in certain jurisdictions outside the United States.
As the Company transitioned from a commercial organization to one focused on research and development, the Company streamlined operations by eliminating the vast majority of planned expenditures supporting its commercial operations Furthermore, following its decision to divest the MST Franchise, the Company reduced its workforce to approximately 28 employees by the completion of the sale of the MST Franchise. The Company does not expect to incur any material expenses in 2022 as a result of the restructuring plan.
Reverse stock split and recasting of per-share amounts
On February 10, 2021, the Company's Board of Directors approved a one-for-four reverse stock split of its outstanding shares of common stock. The reverse stock split was effected on February 12, 2021, at 5:00 p.m. Eastern time. At the effective time, every four issued and outstanding shares of the Company's common stock were converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split, and in lieu thereof, each stockholder holding fractional shares was entitled to receive a cash payment (without interest or deduction) from the Company's transfer agent in an amount equal to such stockholder's respective pro rata shares of the total net proceeds from the Company's transfer agent sale of all fractional shares at the then-prevailing prices on the open market. In connection with the reverse stock split, the number of authorized shares of the Company's common stock was also reduced on a one-for-four basis, from 300 million shares to 75 million shares. The par value of each share of common stock remained unchanged. A proportionate adjustment was also made to the maximum number of shares issuable under the Company's 2019 Equity Incentive Plan, 2019 Employee Share Purchase Plan and 2018 Omnibus Incentive Plan.
Unless otherwise noted, all common shares and per share amounts contained in the unaudited condensed consolidated financial statements have been retroactively adjusted to reflect the reverse stock split.
Liquidity and Capital Resources
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Since inception, the Company has funded operations primarily through private and public placements of its equity, debt and warrants and through fees, cost reimbursements and payments received from its licensees. The Company 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, the Company no longer generates revenue from the sale of these products. The Company has incurred losses from continuing operations and experienced negative operating cash flows since its inception and anticipates that it will continue to incur losses until such a time when its product candidates, if approved, are commercially successful, if at all. The Company will not generate any revenue from any current or future product candidates unless and until it obtains regulatory approval and commercializes such products. For the nine months ended September 30, 2022, the Company generated a net loss of $13.3 million and used $25.3 million of cash in operations. Net loss was the result of income from discontinued operations of $12.9 million and loss from continuing operations of $26.2 million.
As of September 30, 2022, the Company had cash and cash equivalents, and restricted cash of $35.6 million and an accumulated deficit of $652.8 million. The Company received gross proceeds of $20.0 million from the sale of the MST Franchise in January 2022 and will receive an additional payment of $5.0 million on the one-year anniversary of the sale. The Company had no outstanding debt as of September 30, 2022.
The Company has taken a number of actions to support its operations and meet its liquidity needs. Beginning in the second quarter of 2021, the Company conducted a review of its commercial and research and development portfolio to determine how to optimally deploy capital and drive shareholder value. Following its review, the Company initiated a process to explore a possible sale or license of its MST Franchise, including AMZEEQ, ZILXI, FCD105 and the underlying MST platform and refocus its resources on its immuno-inflammatory development programs. As a result of this decision, the Company restructured its operations and reduced its workforce, which lowered operating costs. In January 2022, the Company sold its MST Franchise.
In March 2022, the Company entered into an equity 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, the Company may sell to Lincoln Park up to $30.0 million of shares of its common stock over the 36-month term of the Equity Purchase Agreement. The Company has not made any sales pursuant to the Equity Purchase Agreement to date.
As described above, the Company refocused its limited resources on its immuno-inflammatory pipeline. Continued research and development activities for these programs, including preclinical and clinical testing of the Company's product candidates, will require significant additional financing. The future viability of the Company and its ability to continue as a going concern is dependent on its ability to raise sufficient working capital through either debt or equity financings to fund its operations and successfully develop commercially viable product candidates. There is no assurance the Company 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), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that its unaudited interim condensed consolidated financial statements are issued. The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's ability to continue as a going concern is expected to be impacted by the outcome of the plans outlined above, including the Company's ability to raise additional capital to fund its operations and the development and results from clinical trials for the BET inhibitor programs. Based on its current plans and assumptions, the Company believes that absent sufficient proceeds received from financing transactions or business development transactions, the Company will not have sufficient cash and cash equivalents to fund its operations beyond one year from the issuance of these financial statements. This assumption does not include proceeds that can be drawn from Lincoln Park. Accordingly, the Company will, over the course of the next twelve months, require significant additional financing to continue its operations and meaningfully advance the development of its product candidates, including potentially selling a significant amount of shares pursuant to the Equity Purchase Agreement. The Company may also employ strategies to further extend its ability to fund its operations including: (1) identification of third-party partners to further develop, obtain marketing approval for and/or commercialize its product candidates, which may generate revenue and/or milestone payments and/or (2) refocusing its resources on research and development programs it chooses to prioritize and reducing spending on other programs by delaying or discontinuing development. In addition, the amount of proceeds the Company may be able to raise pursuant to its existing shelf registration statement on Form S-3 may be limited. As of the filing of this Quarterly Report on Form 10-Q, the Company is subject to the general instructions of Form S-3 known as the "baby shelf rules." Under these instructions, the amount of funds the Company can raise through primary public offerings of securities in any 12-month period using its registration statement on Form S-3 is limited to one-third of the aggregate market value of the shares of its common stock held by non-affiliates of the Company. Therefore, the Company will be limited in the amount of
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proceeds it is able to raise by selling shares of its common stock using its Form S-3 until such time as its public float exceeds $75.0 million. These factors raise substantial doubt about the Company's ability to continue as a going concern. Failure to successfully receive additional financing will require the Company to delay, scale back or otherwise modify its business and its research and development activities and other operations. 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 the Company be unable to continue as a going concern.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
a.Basis of Presentation
The unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial statements. In the opinion of management, the Company has made all necessary adjustments, which include normal recurring adjustments necessary for a fair statement of the Company’s unaudited condensed consolidated financial position, results of operations, cash flow and statement of stockholders' equity for the interim periods presented. Certain information and disclosures normally included in the annual audited consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Certain prior period amounts have been reclassified to conform to current year presentation.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 17, 2022.
The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results expected for the year ending December 31, 2022.
b.Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated upon consolidation.
c.Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and reported amounts of income and expenses during the reporting periods. Significant items subject to such estimates and assumptions include research and development accruals and valuation assumptions for share based compensation. Actual results could differ from the Company’s estimates.
The COVID-19 pandemic and government measures taken in response to the pandemic had a negative impact on the Company's commercial operations in 2021. Access to healthcare providers was limited, which negatively impacted sales and the Company's ability to execute its commercial strategy with respect to AMZEEQ and ZILXI prior to the sale of the assets to Journey in January 2022. 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 September 30, 2022 and through the issuance of the unaudited consolidated financial statements.
d.Restricted Cash
As of September 30, 2022, the Company had restricted cash of $0.1 million. This amount represents bank guarantees for the Company's Israel branch.
e.Inventories
As of December 31, 2021 and January 12, 2022, the date the inventory was sold as part of the sale of the MST Franchise, inventories were stated at the lower of cost and net realizable value with cost determined on a first-in, first-out basis by product. The Company capitalized inventory costs associated with products following regulatory approval when future commercialization was considered probable and the future economic benefit was expected to be realized. The Company periodically reviewed its inventory levels and, if necessary, wrote down inventory that was expected to expire prior to being sold, inventory in excess of expected sales requirements and inventory that failed to meet commercial sale specifications, with a
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corresponding charge to cost of goods sold. There were no material write-downs during the three and nine months ended September 30, 2021 or in the period from December 31, 2021 to January 12, 2022. As a result of the sale of the MST Franchise there were no inventory balances at September 30, 2022.
f.Revenue Recognition
As a result of the disposition of the MST Franchise in January 2022, the Company no longer has any revenue generating products; however, it still receives certain royalty revenues (see Note 3 Discontinued Operations). The Company accounts for its revenue transactions under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. In accordance with ASC Topic 606, the Company recognizes revenues when its customers obtain control of its product for an amount that reflects the consideration it expects to receive from its customers in exchange for that product. To determine revenue recognition for contracts that are determined to be in scope of ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when such performance obligation is satisfied.
The Company’s customers were a limited number of national and select regional wholesalers (the “distributors”) and certain independent and specialty pharmacies (together, the “customers”). These distributors would subsequently resell the product, primarily to retail pharmacies that dispense the product to patients. Net product revenue was typically recognized when customers obtained control of the Company’s products, which occurred at a point in time, typically upon delivery of product to the customers. The Company evaluated the creditworthiness of its customers to determine whether it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur. The Company did not assess whether a contract had a significant financing component if the expectation was such that the period between the transfer of the promised goods to the customer and the receipt of payment would be less than one year. Standard credit terms did not exceed 75 days. The Company expensed incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less or the amount is immaterial. Shipping and handling costs related to the Company’s product sales were included in selling, general and administrative expenses.
The Company’s 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. The Company sold the MST Franchise on January 12, 2022 and, as such, the Company no longer generates revenue from the sale of these products. Product revenue is recorded net of distribution fees, trade discounts, allowances, rebates, copay program coupons, chargebacks, estimated returns and other incentives. These reserves are classified as either reductions of accounts receivable or as current liabilities. The estimates of reserves established for variable consideration reflect current contractual and statutory requirements, known market events and trends, industry data and forecasted customer mix. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net product revenues only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from these estimates. If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which could have an impact on earnings in the period of adjustment.
The Company is entitled to royalty payments with respect to sales of a product developed by a customer in collaboration with the Company. Royalties are recognized as the products developed by a customer in collaboration with the Company are sold.
g.Collaboration arrangements
The Company analyzes its collaboration arrangements to assess whether they are within the scope of ASC Topic 808, Collaborative Arrangements (ASC 808), to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards that are dependent on the commercial success of such activities. To the extent the arrangement is within the scope of ASC 808, the Company will assess whether aspects of the arrangement between it and their collaboration partner are within the scope of other accounting literature.
h.Allowance for doubtful accounts
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An allowance for doubtful accounts is maintained for potential credit losses based on the aging of trade receivables, historical bad debts experience and changes in customer payment patterns. Trade receivable balances are written off against the allowance when it is deemed probable that the receivable will not be collected. Trade receivables, net are stated net of reserves for certain sales allowances and provisions for doubtful accounts. Provisions for doubtful accounts were not material for the three and nine months ended September 30, 2022 or September 30, 2021.
i.Fair value measurement
Fair value is based on the price that would be received from the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data or active market data of similar or identical assets or liabilities.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value. The Company did not have any assets or liabilities which were required to be measured at fair value as of September 30, 2022 or December 31, 2021.
j.Net income (loss) per share
Net income (loss) per share, basic and diluted, is computed on the basis of the net loss from continuing operations for the period divided by the weighted average number of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common stock and of common stock equivalents outstanding when dilutive. Common stock equivalents include outstanding stock options and warrants which are included under the treasury share method when dilutive.
The following stock options, restricted stock units (“RSUs”), warrants and incremental shares to be issued under the employee stock purchase plan (“ESPP”) were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented (share data):

| September 30,
| 2022 |  | 2021
Outstanding stock options, RSUs and shares under the ESPP | 5,850,390 |  |  | 5,303,135 |
Warrants | 495,165 |  |  | 495,165 |

k.Discontinued operations
The Company accounted for the sale of the MST Franchise in accordance with ASC 205, Discontinued Operations, and ASU No. 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity. The Company followed the held-for-sale criteria as defined in ASC 360 Property, Plant and Equipment 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 unaudited condensed consolidated balance sheets for the periods presented. Non-cash items presented in the statement of cash flows and related to discontinued operations are presented in Note 3 - Discontinued Operations. 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.
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Due to the sale of the MST Franchise during the first quarter of 2022, in accordance with ASC 205, the Company has classified the results of the MST Franchise as discontinued operations in its unaudited condensed consolidated statements of operations and cash flows for all periods presented, see Note 3, Discontinued Operations. All disposed assets and liabilities associated with the MST Franchise were therefore classified as assets and liabilities of discontinued operations in the Company's unaudited condensed consolidated balance sheets for the periods presented. All amounts included in the notes to the unaudited condensed consolidated financial statements relate to continuing operations unless otherwise noted.
l.Newly issued and recently adopted accounting pronouncements
Recent Accounting Guidance Issued:
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), which requires companies to measure credit losses of financial instruments, including customer accounts receivable, utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Subsequent to the issuance of ASU 2016-13, the FASB issued several additional ASUs to clarify implementation guidance, provide narrow-scope improvements and provide additional disclosure guidance. As a smaller reporting company, the Company will adopt ASU 2016-13 effective January 1, 2023 or at such time where it is no longer a smaller reporting company. Currently, the Company does not expect the adoption of the new standard to have a material impact to the consolidated financial statements.
NOTE 3 – DISCONTINUED OPERATIONS
On January 12, 2022, the Company entered into the Purchase Agreement with Journey pursuant to which the Company sold its MST Franchise to Journey. The Company has determined that the sale of the MST Franchise represents a strategic shift that had a major effect on the business and therefore the MST Franchise met the criteria for classification as discontinued operations at March 31, 2022. Accordingly the MST Franchise is reported as discontinued operations in accordance with ASC 205-20, Discontinued Operations. Amounts applicable to prior years have been recast to conform to the discontinued operations presentation. The Company recognized a gain on the sale of the MST Franchise upon closing.
The following table presents the combined results of discontinued operations of the MST Franchise:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(in thousands) |  | 2022 |  | 2021 |  | 2022 |  | 2021
Product sales |  | $ | — |  |  | $ | 3,953 |  |  | $ | 106 |  |  | $ | 11,805 |
Cost of goods sold |  | — |  |  | 1,049 |  |  | 80 |  |  | 2,445 |
Operating expenses: |  |  |  |  |  |  |  |
Research and development |  | — |  |  | 1,064 |  |  | — |  |  | 4,503 |
Selling, general and administrative |  | 117 |  |  | 8,849 |  |  | 25 |  |  | 30,780 |
Total operating expenses |  | 117 |  |  | 9,913 |  |  | 25 |  |  | 35,283 |
Income (loss) from discontinued operations |  | (117) |  |  | (7,009) |  |  | 1 |  |  | (25,923) |
(Loss) gain on the sale of the MST Franchise |  | (87) |  |  | — |  |  | 12,918 |  |  | — |
Income (loss) from discontinued operations, before income taxes |  | (204) |  |  | (7,009) |  |  | 12,919 |  |  | (25,923) |
Income tax expense |  | — |  |  | — |  |  | — |  |  | — |
Net income (loss) from discontinued operations |  | $ | (204) |  |  | $ | (7,009) |  |  | $ | 12,919 |  |  | $ | (25,923) |

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The following table presents the carrying amounts of the classes of assets and liabilities related to the discontinued operations of the MST Franchise as of September 30, 2022 and December 31, 2021:

(in thousands) | September 30, 2022 |  | December 31, 2021
Current assets: |  |  |
Inventory | $ | — |  |  | $ | 7,291 |
Prepaid expenses and other assets | — |  |  | 554 |
Total current assets of discontinued operations | $ | — |  |  | $ | 7,845 |

The following table presents non-cash items related to discontinued operations, which are included in the Company's unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2022 and 2021:

(in thousands) | Nine months ended September 30, 2022 |  | Nine months ended September 30, 2021
Cash Flows From Operating Activities: |  |  |
Stock-based compensation (income) expense* | $ | (352) |  |  | $ | 1,079 |
Gain on the sale of the MST Franchise | (12,918) |  |  | — |
Total non-cash items of discontinued operations | $ | (13,270) |  |  | $ | 1,079 |
Supplemental disclosure of cash flow information: |  |  |
Amount due from sale of MST Franchise | $ | 5,000 |  |  | $ | — |

*Income from stock-based compensation is related to forfeitures.
The following table presents the gain on the sale of the MST Franchise:

(in thousands) |  | Nine months ended September 30, 2022
Cash proceeds |  | $ | 20,000 |
Proceeds to be paid in January 2023 |  | 5,000
|  | 25,000 |
Less transaction costs |  | (4,334)
Less book value of sold assets |  | (7,748)
Gain on sale, before income taxes |  | 12,918
Income tax expense |  | — |
Gain on sale net of tax |  | $ | 12,918 |

In accordance with ASC 205-20, only expenses specifically identifiable and related to a business to be disposed may be presented in discontinued operations. As such, the research and development, marketing, selling and general and administrative expenses in discontinued operations include corporate costs incurred directly to solely support the MST Franchise.
The milestone payment for sales of ZILXI, AMZEEQ and FCD105 represent contingent consideration. Contingent consideration has been accounted for as a gain contingency in accordance with ASC 450, Contingencies, and will be recognized in earnings in the period when realizable.
NOTE 4 – SHARE CAPITAL
Common stock and preferred stock
As of September 30, 2022, the Company's Certificate of Incorporation, as amended, authorizes the Company to issue 150,000,000 shares of common stock and 20,000,000 shares of preferred stock, par value $0.0001 per share. There were no shares of preferred stock issued and outstanding as of September 30, 2022 and December 31, 2021.
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Shares of preferred stock may be issued from time to time in one or more series. The voting powers (if any), preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions of any series of preferred stock will be set forth in a Certificate of Designation filed pursuant to the Delaware General Corporation Law, as determined by the Company's Board of Directors.
Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when and if declared by the board of directors, subject to the prior rights of holders of all classes of preferred stock outstanding. The Company has never declared any dividends on common stock.
Issuance of common stock
On February 1, 2019, the Company entered into a Sales Agreement (the "2019 Sales Agreement") with Cantor Fitzgerald & Co. ("Cantor Fitzgerald") to sell shares of the Company's common stock, from time to time, with aggregate gross sales proceeds of up to $50.0 million through an at-the-market ("ATM") equity offering program under which Cantor Fitzgerald acted as the Company's sales agent. Cantor Fitzgerald was entitled to compensation for its services equal to up to 3.0% of the gross proceeds of any shares of common stock sold under the 2019 Sales Agreement. From January 1, 2021 through January 25, 2021, the Company issued and sold 2,778,012 shares of common stock at a weighted average price per share of $9.76 pursuant to the 2019 Sales Agreement for $26.3 million in net proceeds. Effective as of January 25, 2021, the Company terminated the 2019 Sales Agreement.
On January 26, 2021, the Company entered into a Securities Purchase Agreement with certain institutional and accredited investors for the sale of an aggregate of 5,274,261 shares of common stock of the Company, at a purchase price of $9.48 per share in a registered direct offering. The offering was completed on January 28, 2021 and the Company received approximately $46.8 million in net proceeds, after deducting placement agent fees and other offering expenses.
On August 12, 2021, the Company entered into a Sales Agreement (the "2021 Sales Agreement") with Cantor Fitzgerald to sell shares of the Company's 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 the Company's sales agent. Cantor Fitzgerald is entitled to compensation for its services equal to up to 3.0% of the gross proceeds of any shares of common stock sold under the 2021 Sales Agreement. During the three months ended September 30, 2021, the Company issued and sold 1,948,000 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. During the nine months ended September 30, 2022, the Company issued and sold 2,587,855 shares of common stock at a weighted average per share price of $0.62 pursuant to the 2021 Sales Agreement for $1.5 million in net proceeds.
On March 15, 2022, the Company entered into the Equity Purchase Agreement, with Lincoln Park which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell to Lincoln Park, at the Company's discretion, up to $30.0 million of shares of its common stock over the 36-month term of the Equity Purchase Agreement. Upon execution of the Equity Purchase Agreement, the Company issued 1,667,593 shares of its common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the Equity Purchase Agreement. The issuance of these shares were specific incremental costs directly attributable to the proposed offering. The commitment shares were valued at $0.9 million and recorded as an addition to equity for the issuance of common stock and treated as a reduction to equity as a cost of capital to be raised under the Equity Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s common stock. The Equity Purchase Agreement may be terminated by the Company at any time, at its sole discretion, without any additional cost or penalty. As of September 30, 2022, the Company had not sold any shares of its common stock to Lincoln Park under the Equity Purchase Agreement.
Warrants
As of September 30, 2022, the Company had equity-classified warrants to purchase an aggregate of 495,165 shares of the Company’s common stock outstanding, with an exercise price of $4.27. The exercise price will be adjusted in the event of issuances of common stock at a price lower than the exercise price of the warrants then in effect (the “Down Round Feature”). During the nine months ended September 30, 2022 and 2021, the Down Round Feature was triggered due to the price per share received from the issuance of common stock. The Company calculated the value of the effect of Down Round Feature measured as the difference between the warrants’ fair value, using the Black-Scholes-Merton option-pricing model, before and after the Down Round Feature was triggered using the original exercise price and the new exercise price. The difference in fair value of the effect of the Down Round Feature was immaterial and had no impact on net loss per share in the periods presented. The exercise price will continue to be adjusted in the event the Company issues additional shares of common stock below the current exercise price, in accordance with the terms of the warrants.
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NOTE 5 – SHARE BASED COMPENSATION
Equity incentive plans:
As of September 30, 2022, 916,535 shares remain issuable under the 2019 Equity Incentive Plan (the "2019 Plan"). In addition, the Company maintains the 2018 Omnibus Incentive Plan (the "2018 Plan"). In January 2022, the number of shares reserved under the 2018 Plan automatically increased by 750,000 shares of common stock pursuant to the terms of the 2018 Plan. As of September 30, 2022, 220,357 shares remain issuable under the 2018 Plan.
Employee Share Purchase Plan:
The Company also has an Employee Share Purchase Plan ("ESPP") pursuant to which qualified employees (as defined in the ESPP) may elect to purchase designated shares of the Company’s common stock at a price equal to 85% of the lesser of the fair market value of the common stock at the beginning or end of each semi-annual share purchase period (“Purchase Period”). Employees are permitted to purchase the number of shares purchasable with up to 15% of the earnings paid (as such term is defined in the ESPP) to each of the participating employees during the Purchase Period, subject to certain limitations under Section 423 of the U.S. Internal Revenue Code.
As of September 30, 2022, 2,165,534 shares remain available for grant under the ESPP.
There were 66,673 shares of common stock purchased by employees pursuant to the ESPP during the nine months ended September 30, 2022. There were 42,989 shares of common stock purchased by employees pursuant to the ESPP during the nine months ended September 30, 2021.
Options and RSUs granted to employees and directors:
In the nine months ended September 30, 2022, the Company granted options and RSUs as follows:

| Nine months ended September 30, 2022 |  |
| Award amount |  | Exercise price range |  | Vesting period |  | Expiration
Employees and Directors: |  |  |  |  |  |  |
Options | 879,503 |  |  | $0.31 - $0.61 |  | 1 year - 4 years |  | 10 years
RSUs | 726,102 |  |  | — |  |  | 4 years |  | — |

The fair value of options and RSUs granted to employees and directors during the nine months ended September 30, 2022 and the nine months ended September 30, 2021 was $0.8 million and $9.4 million, respectively.
The fair value of RSUs granted is based on the share price on the grant date.
The fair value of options granted was computed using the Black-Scholes model. The underlying data used for computing the fair value of the options are as follows:

| Nine months ended September 30
| 2022 |  | 2021
Dividend yield | 0 | % |  | 0 | %
Expected volatility | 73.70% - 74.40% |  | 68.38% - 69.38%
Risk-free interest rate | 2.20% - 2.92% |  | 0.50% - 1.29%
Expected term | 6 years |  | 6 years

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Stock-based compensation expense (income) is reflected in the unaudited condensed consolidated statements of operations as follows:

| Three months ended September 30 |  | Nine months ended September 30
(in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Research and development expenses | $ | 355 |  |  | $ | 435 |  |  | $ | 977 |  |  | $ | 1,335 |
Selling, general and administrative | 819 |  |  | 1,662 |  |  | 2,605 |  |  | 4,334 |
Discontinued operations* | — |  |  | 308 |  |  | (352) |  |  | 1,079 |
Total | $ | 1,174 |  |  | $ | 2,405 |  |  | $ | 3,230 |  |  | $ | 6,748 |

*Income from stock based compensation is related to forfeitures.
NOTE 6 – OPERATING LEASES
Operating lease agreements
As of September 30, 2022, the Company had operating leases for its corporate offices. The properties primarily related to the Company’s principal executive office in Bridgewater, New Jersey and office space in Israel.
On March 13, 2019, the Company signed an amendment to the original lease agreement for its principal executive office in Bridgewater, New Jersey (the “Lease Amendment”). The Lease Amendment included an extension of the lease period of the 10,000 square feet previously leased under the original agreement (the “Original Space”) and an addition of 4,639 square feet (the “Additional Space”). The Company entered the Additional Space following a period of preparation by the lessor completed during September 2019 (the “Commencement Date”). The term included in the Lease Amendment expired on September 30, 2022.
Pursuant to the Lease Amendment, the Company recognized an additional right of use asset and liability in the amount of $0.7 million. The Additional Space was considered a new lease agreement and was recognized as a right of use asset and liability, in the amount of $0.3 million, on the Commencement Date. The lease liability matured on September 30, 2022.
In November 2022, the Company 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. In addition, the Company signed a Lease Agreement (the “Master Lease”) to lease the Leased Premises following the termination of the Sublease through September 30, 2025.
The lease agreement for the office space in Israel is a one year lease that expires in December 2022. Given the short-term nature of the lease term, the Company did not recognize a right-of-use asset and liability.
As of December 31, 2021, the Company had a lien in the amount of $0.6 million related to a letter of credit on the Company’s cash in respect of bank guarantees granted in order to secure the lease agreements. In April 2022, the lien was released and the Company received the $0.6 million back due to the release. This amount was presented as restricted cash in the Company's unaudited condensed consolidated balance sheet as of December 31, 2021.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
The Company may periodically become subject to legal proceedings and claims arising in connection with its business. As of September 30, 2022, no claims or actions are pending against the Company that, in the opinion of management, are likely to have a material adverse effect on the Company.
NOTE 8 – SUBSEQUENT EVENTS
On November 11, 2022, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Mutual Fund Series Trust, on behalf of AlphaCentric LifeSci Healthcare Fund (the “Purchaser”), pursuant to which the Company issued on November 14, 2022 (the “Closing Date”), in a private placement transaction (the “Transaction”), an aggregate of 3,000 shares of Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred”), for an aggregate subscription amount equal to $300,000.
The Purchase Agreement requires that the Company convene, no later than January 31, 2023 (excluding adjournments and assuming no review of the Company’s proxy statement by the Securities and Exchange Commission), an annual meeting or
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special meeting of stockholders for the purpose of presenting to the Company’s stockholders a proposal (the “Proposal”) to approve a reverse stock split of its outstanding Common Stock (the “Reverse Stock Split”), with the recommendation of the Board of Directors that the Proposal be approved, and that the Company use reasonable best efforts to obtain approval of the Proposal.
Additionally, the Purchase Agreement contains customary representations, warranties and agreements of the Company and the Purchaser, and customary indemnification rights and obligations of the parties. Pursuant to the Purchase Agreement, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (the “Certificate of Designation”) with the Secretary of State of Delaware designating the rights, preferences and limitations of the Series A Preferred. The Certificate of Designation provides, among other things, that except as otherwise provided in the Certificate of Designation or as otherwise required by law, the Series A Preferred will have no voting rights (other than the right to vote as a class on certain matters as provided in the Certificate of Designation). However, pursuant to the Certificate of Designation, each share of Series A Preferred entitles the holder thereof (i) to vote on the Proposal and any proposal to adjourn any meeting of stockholders called for the purpose of voting on the Proposal, and (ii) to 1,000,000 votes per share of Series A Preferred on the Proposal and any such adjournment proposal. The Series A Preferred shall, except as required by law, vote together with the Common Stock (and other issued and outstanding shares of preferred stock entitled to vote), as a single class; provided, however, that such shares of Series A Preferred shall, to the extent cast on the Proposal or any such adjournment proposal, be automatically and without further action of the holders thereof voted in the same proportion as the shares of Common Stock (excluding abstentions and any shares of Common Stock that are not voted) and any other issued and outstanding shares of preferred stock of the Company entitled to vote (other than the Series A Preferred or shares of such other preferred stock, if any, not voted) are voted on the Proposal.
The shares of Series A Preferred are convertible at the option of the holder, at a conversion price of $0.26 per share (subject in certain circumstances to adjustments), into shares of the Company’s common stock, at any time and from time to time from and after 15 business days following the earlier of (i) the date of the approval of the Proposal or (ii) the date the Company otherwise satisfies the Nasdaq listing requirements.
The Company has the right to redeem the Series A Preferred at any time during the 15 business days following the approval of the Proposal (the "Company Redemption Period") at 120% of the stated value. Each holder of Series A Preferred will have the right to require the Company to redeem all or a portion of the Series A Preferred held by such holder following the expiration of the Company Redemption Period at 130% of the stated value. In addition, the Company will automatically redeem all of the Series A Preferred within five business days following a delisting event as specified in the Certificate of Designation at 130% of the stated value.
See "Part II. Item 5. Other Information" for additional information regarding the Transaction.
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Item 2. 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 unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the period ended September 30, 2022 and our Annual Report on Form 10-K for the year ended December 31, 2021. In this Quarterly Report on Form 10-Q, unless otherwise indicated, all references to the “Company,” “we,” “us” and “our” or similar terms refer to VYNE Therapeutics Inc. The disclosure set forth in this section reflects our 1-for-4 reverse stock split, which was effected on February 12, 2021. Accordingly, all share amounts and per share amounts have been adjusted.
Company Overview
We are a biopharmaceutical company focused on developing proprietary, innovative and differentiated therapies for the treatment of immuno-inflammatory conditions. We are developing products containing bromodomain and extra-terminal domain ("BET") inhibitor compounds. Our initial BET inhibitor candidate in development is VYN201, a locally administered pan-BET inhibitor, which we are evaluating in various immuno-inflammatory diseases, including skin diseases. We expect to initiate our first in-human clinical trial evaluating the safety and efficacy of VYN201 for the treatment of vitiligo in November of 2022.
On August 10, 2022, we announced that our Phase 2a clinical trial evaluating the safety and efficacy of FMX114 for mild-to-moderate AD did not meet its primary endpoint, which was based on assessments of the absolute and percent change relative to baseline in the ADSI scoring assessment at week 4. In the weeks that followed, we performed additional analyses which showed that while efficacy results for FMX114 were not statistically significant at week 4, FMX114 was statistically superior to vehicle at weeks 1, 2 and 3 in the Phase 2a trial. Additionally, data received from the two-week open label extension during which both AD lesions of participating patients were treated with FMX114 showed that efficacy results continued to develop beyond week 4 of the study and that the separation of treatment effect for lesions treated with FMX114 as compared to lesions treated with vehicle increased for lesions that had a higher ADSI score at baseline. Accordingly, we believe that FMX114 may have an improved overall treatment effect on patients with more severe disease at baseline and that FMX114 may have increased potential to effectively treat patients with more moderate-to-severe AD. In light of these analyses, we are currently evaluating our development strategy for FMX114.
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 (our 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 ("MST") 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 MST 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 (the “Cutia License Agreement”), 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 our patent infringement suit initiated against Padagis Israel Pharmaceuticals Ltd. There were no current or long-term liabilities recorded by us which were transferred to Journey.
Pursuant to the Purchase Agreement, we received an upfront payment of $20.0 million at the closing of the sale 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 at the time of the sale of the MST Franchise.
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Key Developments
Below is a summary of selected key developments affecting our business that have occurred since June 30, 2022:
•On August 10, 2022, we announced that our Phase 2a clinical trial evaluating the safety and efficacy of FMX114 for mild-to-moderate AD did not meet its primary endpoint, which was based on assessments of the absolute and percent change relative to baseline in the ADSI scoring assessment at week 4. In the weeks that followed, we performed additional analyses which showed that while efficacy results for FMX114 were not statistically significant at week 4, FMX114 was statistically superior to vehicle at weeks 1, 2 and 3 in the Phase 2a trial. Additionally, data received from the two-week open label extension during which both AD lesions of participating patients were treated with FMX114 showed that efficacy results continued to develop beyond week 4 of the study and that the separation of treatment effect for lesions treated with FMX114 as compared to lesions treated with vehicle increased for lesions that had a higher ADSI score at baseline. Accordingly, we believe that FMX114 may have an improved overall treatment effect on patients with more severe disease at baseline and that FMX114 may have increased potential to effectively treat patients with more moderate-to-severe AD. In light of these analyses, we are currently evaluating our development strategy for FMX114.
•On August 29, 2022, we paid Tay $997,407 (£850,000) following Tay’s delivery of Oral BETi Compounds meeting the required molecular profile. The parties will continue development of the lead candidates for the VYN202 program and we currently anticipate exercising our exclusive option with respect to the Oral BETi Compounds prior to its expiration on February 28, 2023.
•On August 30, 2022, we received a notice (the “Extension Notice”) from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) informing us that Nasdaq granted us an additional 180 calendar days, or until February 27, 2023, to regain compliance with the minimum closing bid price requirement for continued listing on the Nasdaq Capital Market under Nasdaq Marketplace Rule 5550(a)(2) (the “Rule”). In connection with the Extension Notice, the listing of our common stock was transferred from the Nasdaq Global Select Market to the Nasdaq Capital Market, effective as of August 31, 2022. The Extension Notice had no other immediate effect on the listing of our common stock.
•We filed our U.S. IND for our Phase 1a/b clinical trial evaluating VYN201 for the treatment of vitiligo in October 2022 and expect to enroll our first patient in November 2022. We anticipate top line proof-of-concept data in vitiligo patients in the first half of 2023.
Financial Overview
We have incurred net losses since our inception. Except from the first quarter of 2020 until January 2022, when we conducted commercial operations, our business activities have been primarily limited to developing product candidates, raising capital and performing research and development activities. As of September 30, 2022, we had an accumulated deficit of $652.8 million. We recorded a net loss of $13.3 million and $61.8 million for the nine months ended September 30, 2022 and 2021, respectively. The net loss for the nine months ended September 30, 2022 was driven by loss from continuing operations of $26.2 million offset by an approximate $12.9 million of income from discontinued operations.
Prior to the sale of the MST Franchise, our capital resources and business efforts were largely focused on activities relating to the commercialization of AMZEEQ and ZILXI and advancing our product candidates and pipeline. As discussed above, we completed the sale of the MST Franchise in January 2022. Going forward, we will focus our resources on our immuno-inflammatory pipeline. Research and development activities for these programs, including preclinical and clinical testing of our product candidates, will require significant additional financing. Our future viability is dependent on our ability to successfully execute our business strategy and develop our product candidates and raise additional capital to finance operations. Our failure to raise capital as and when needed could have a negative impact on our financial condition and ability to pursue our business strategies.
Components of Operating Results
Revenues
Our revenue during the periods presented has been comprised of AMZEEQ and ZILXI product sales and royalty revenue.
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AMZEEQ and ZILXI were commercially launched in January and October of 2020, respectively. 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. Product sales have been reclassified to discontinued operations for all periods presented.
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 Pharma A/S ("LEO"). In each of the nine months ended September 30, 2022 and 2021 we received royalties of $0.5 million and $0.7 million, respectively.
Cost of Goods Sold
Cost of goods sold consists of direct and indirect costs to procure and manufacture AMZEEQ and ZILXI and primarily consist 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.
Prior to receiving FDA approval, these costs for AMZEEQ and ZILXI were expensed as research and development expenses. We began capitalizing inventory costs for AMZEEQ and ZILXI after receipt of FDA approval. As a result of the sale of the MST Franchise, cost of goods sold have been reclassified to discontinued operations for all periods presented.
Operating Expenses
Research and Development Expenses
Our research and development expenses relate primarily to the development of FMX114, VYN201 and VYN202. 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 immuno-inflammatory pipeline. As a result of the sale of the MST Franchise in January 2022, research and development expenses related to the MST Franchise have been reclassified to discontinued operations for all periods presented.
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 preclinical study and 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.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist principally of:
•employee-related expenses, including salaries, benefits and related expenses, including share-based compensation expenses;
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•legal and professional fees for auditors and other consulting expenses; and
•facility, information technology and depreciation expenses.
As a result of the sale of the MST Franchise in January 2022, selling, general and administrative expenses related to the MST Franchise have been reclassified to discontinued operations for all periods presented.
Interest expense
Interest expense is typically comprised of interest on bank debt. No interest was incurred during the three or nine months ended September 30, 2022.
Other Expense, net
Other expense, net primarily consists of foreign exchange 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, 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, we had $270.7 million in federal and state NOLs with no limited period of use. There are no significant updates through September 30, 2022.
NOLs and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and Section 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. State NOLs and tax credit carryforwards may be subject to similar limitations under state laws. We believe that certain of our NOLs and tax credit carryforwards may be subject to limitation under Sections 382 or 383, and potentially, similar limitations under state law. 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 Ended September 30, 2022 and 2021
Summary of Operations
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| Three Months Ended September 30, |  | Increase/(Decrease) |  | Increase/(Decrease)
(in thousands) | 2022 |  | 2021 |  | $ |  | %
Revenues |  |  |  |  |  |  |
Royalty revenues | $ | 167 |  |  | $ | 133 |  |  | $ | 34 |  |  | 25.6 | %
Total revenues | 167 |  |  | 133 |  |  | 34 |  |  | 25.6 | %
Operating expenses: |  |  |  |  |  |  |
Research and development | 5,546 |  |  | 5,917 |  |  | (371) |  |  | (6.3) | %
Selling, general and administrative | 3,954 |  |  | 4,983 |  |  | (1,029) |  |  | (20.7) | %
Total operating expenses | 9,500 |  |  | 10,900 |  |  | (1,400) |  |  | (12.8) | %
Operating loss | (9,333) |  |  | (10,767) |  |  | (1,434) |  |  | (13.3) | %
Interest expense | — |  |  | (3,474) |  |  | (3,474) |  |  | (100.0) | %
Other income (expense) | 78 |  |  | (35) |  |  | 113 |  |  | 322.9 | %
Loss from continuing operations before income taxes | (9,255) |  |  | (14,276) |  |  | (5,021) |  |  | (35.2) | %
Income tax expense | — |  |  | — |  |  | — |  |  | — | %
Loss from continuing operations | (9,255) |  |  | (14,276) |  |  | (5,021) |  |  | (35.2) | %
Loss from discontinued operations | (204) |  |  | (7,009) |  |  | (6,805) |  |  | (97.1) | %
Net loss | $ | (9,459) |  |  | $ | (21,285) |  |  | $ | (11,826) |  |  | (55.6) | %

Revenue
Revenues totaled $0.2 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, consisting of royalty revenue.
We divested our MST Franchise 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.
Research and Development Expenses
Our research and development expenses for the three months ended September 30, 2022 were $5.5 million, representing a decrease of $0.4 million, or 6.3%, compared to $5.9 million for the three months ended September 30, 2021. The decrease is primarily driven by a decrease in employee-related expenses of $1.3 million and a reduction of other R&D related activities of $0.3 million, partially offset by the option extension payment for the Oral BETi of $1.0 million and increased spending on VYN201 of $0.2 million.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the three months ended September 30, 2022 were $4.0 million, representing a decrease of $1.0 million, or 20.7%, compared to $5.0 million for the three months ended September 30, 2021. The decrease is primarily driven by a reduction of $0.6 million in consulting expenses and decreased employee-related expenses of $0.4 million.
Interest Expense
No interest expense was incurred in the three months ended September 30, 2022. In the three months ended September 30, 2021, $3.5 million of interest expense was incurred. The decrease is attributable to the payment of all outstanding debt on August 11, 2021.
Other Income (Expense)
Other income for the three months ended September 30, 2022 was $78.0 thousand as compared with other expense of $35.0 thousand for the three months ended September 30, 2021.
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Comparison of the Nine-Month Periods Ended September 30, 2022 and 2021
Summary of Operations

| Nine Months Ended September 30, |  | Increase/(Decrease) |  | Increase/(Decrease)
(in thousands) | 2022 |  | 2021 |  | $ |  | %
Revenues |  |  |  |  |  |  |
Royalty revenues | $ | 471 |  |  | $ | 658 |  |  | $ | (187) |  |  | (28.4) | %
Total revenues | 471 |  |  | 658 |  |  | (187) |  |  | (28.4) | %
Operating expenses: |  |  |  |  |  |  |
Research and development | 14,106 |  |  | 15,219 |  |  | (1,113) |  |  | (7.3) | %
Selling, general and administrative | 12,676 |  |  | 15,504 |  |  | (2,828) |  |  | (18.2) | %
Total operating expenses | 26,782 |  |  | 30,723 |  |  | (3,941) |  |  | (12.8) | %
Operating loss | (26,311) |  |  | (30,065) |  |  | (3,754) |  |  | (12.5) | %
Interest expense | — |  |  | (5,610) |  |  | (5,610) |  |  | (100.0) | %
Other income (expense) | 127 |  |  | (161) |  |  | 288 |  |  | 178.9 | %
Loss from continuing operations before income taxes | (26,184) |  |  | (35,836) |  |  | (9,652) |  |  | (26.9) | %
Income tax expense | — |  |  | — |  |  | — |  |  | — | %
Loss from continuing operations | (26,184) |  |  | (35,836) |  |  | (9,652) |  |  | (26.9) | %
Income (loss) from discontinued operations | 12,919 |  |  | (25,923) |  |  | 38,842 |  |  | 149.8 | %
Net loss | $ | (13,265) |  |  | $ | (61,759) |  |  | $ | (48,494) |  |  | (78.5) | %

Revenue
Revenues totaled $0.5 million and $0.7 million for the nine months ended September 30, 2022 and 2021, respectively, consisting of royalty revenue.
We divested our MST Franchise 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.
Research and Development Expenses
Our research and development expenses for the nine months ended September 30, 2022 were $14.1 million, representing a decrease of $1.1 million, or 7.3%, compared to $15.2 million for the nine months ended September 30, 2021. The decrease is primarily driven by a decrease in employee-related expenses of $2.5 million, reduced spending on FMX114 of $1.0 million and other research and development costs of $0.7 million, partially offset by increased spending on VYN201 of $1.7 million and the payments to extend the Option Term with respect to the Oral BETi Option totaling $1.4 million.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the nine months ended September 30, 2022 were $12.7 million, representing a decrease of $2.8 million, or 18.2%, compared to $15.5 million for the nine months ended September 30, 2021. The decrease was primarily related to lower employee-related expenses of $1.9 million and lower consulting expenses of $0.9 million.
Interest Expense
No interest expense was incurred in the nine months ended September 30, 2022. In the nine months ended September 30, 2021, $5.6 million of interest expense was incurred. The decrease is attributable to the payment of all outstanding debt on August 11, 2021.
Other Income (Expense)
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Other income for the nine months ended September 30, 2022 was $0.1 million as compared with $0.2 million of other expense for the nine months ended September 30, 2021.
Liquidity and Capital Resources
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 generate 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 approval and commercializes such products. For the nine months ended September 30, 2022, we generated net loss of $13.3 million and used $25.3 million of cash in operations. The net loss was comprised of $12.9 million of income from discontinued operations and $26.2 million loss from continuing operations.
As of September 30, 2022, we had cash and cash equivalents, and restricted cash of $35.6 million and an accumulated deficit of $652.8 million. We received proceeds of $20.0 million from the sale of the MST Franchise in January 2022 and will receive an additional payment of $5.0 million on the one-year anniversary of the sale. We had no outstanding debt as of September 30, 2022.
We have taken a number of actions to support our operations and meet our liquidity needs. 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. Following our review, we initiated a process to explore a possible sale or license of our MST Franchise, including AMZEEQ, ZILXI, FCD105 and the underlying MST platform and refocus our resources on our immuno-inflammatory development programs. As a result of this decision, we restructured our operations and reduced our workforce, which lowered operating costs. In January 2022, we sold our MST Franchise. In addition, in March 2022, we entered into the Equity Purchase Agreement with Lincoln Park Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, we may sell to Lincoln Park up to $30.0 million of shares of common stock over the 36-month term of the Equity Purchase Agreement. As of September 30, 2022, no shares have been sold under the Equity Purchase Agreement.
As described above, following the sale of the MST Franchise, we refocused our limited resources on our immuno-inflammatory pipeline. Continued research and development activities for these programs, including preclinical and clinical testing of our product candidates, will require significant additional financing. Our future viability and our ability to continue as a going concern is dependent on our ability to raise sufficient working capital through either debt or equity financings to fund our operations and successfully develop commercially viable product candidates. There is no assurance the 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 unaudited condensed consolidated financial statements are issued. The accompanying unaudited condensed consolidated financial statements have been prepared assuming 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 and the development and 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 the accompanying unaudited condensed consolidated financial statements. This assumption does not include proceeds that can be drawn from Lincoln Park under the Equity Purchase Agreement. Accordingly, we will, over the course of the next twelve months, require significant additional financing to continue our operations and meaningfully advance the development of our product candidates, including potentially selling a significant amount of shares pursuant to the Equity Purchase Agreement. We may also employ strategies to further extend our ability to fund our operations including: (1) identification of third-party partners to further develop, obtain marketing approval for and/or commercialize our product candidates, which may generate revenue and/or milestone payments and/or (2) refocusing our resources on research and development programs we choose to prioritize and reducing spending on other programs by delaying or discontinuing development. In addition, the amount of proceeds we may be able to raise pursuant to our existing shelf registration statement on Form S-3 may be limited. As of the filing of this Quarterly Report on Form 10-Q, we are subject to the general instructions of Form S-3 known as the "baby shelf rules." Under these instructions, the amount of funds we can raise through primary public offerings of securities in any 12-
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month period using our registration statement on Form S-3 is limited to one-third of the aggregate market value of the shares of our common stock held by our non-affiliates. Therefore, we will be limited in the amount of proceeds we are able to raise by selling shares of our common stock using our Form S-3 until such time as our public float exceeds $75 million. These factors 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. 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.
Summary Statement of Cash Flows
The following table summarizes our statement of cash flows for the nine months ended September 30, 2022 and 2021:

| Nine months ended September 30
(in thousands) | 2022 |  | 2021
Net cash (used in) / provided by: |  |  |
Operating activities | $ | (25,325) |  |  | $ | (46,349) |
Investing activities | $ | 16,602 |  |  | $ | 1,027 |
Financing activities | $ | 1,445 |  |  | $ | 39,815 |

Cash Used in Operating Activities
During the nine months ended September 30, 2022, net cash used in operating activities was $25.3 million and primarily reflected our net loss of $13.3 million adjusted for the gain on the sale of the MST Franchise of $12.9 million and stock-based compensation of $3.2 million. The remainder of the cash used in operations is driven by net change in operating assets and liabilities.
During the nine months ended September 30, 2021, net cash used in operations was $46.3 million and primarily reflected our net loss of $61.8 million, partially offset by non-cash stock-based compensation charges of $6.7 million and debt prepayment premium of $1.4 million. The remainder of the cash used in operations was driven by a net change in operating assets and liabilities.
Cash Provided by Investing Activities
In the nine months ended September 30, 2022, net cash provided by investing activities was $16.6 million and was the result of net proceeds from the disposition of the MST Franchise.
In the nine months ended September 30, 2021, net cash provided by investing activities was $1.0 million and was the result of a decrease in investments in bank deposits and marketable securities.
Cash Provided by Financing Activities
In the nine months ended September 30, 2022, $1.4 million was provided by financing activities and was primarily attributable to the issuance of common stock.
In the nine months ended September 30, 2021, $39.8 million was provided by financing activities and was primarily attributable to the issuance of $76.0 million of common stock in January 2021, partially offset by the debt repayment of $36.4 million.
Cash and Funding Sources
Our sources of liquidity in the nine months ended September 30, 2022 consisted primarily of proceeds from the sale of the MST Franchise and proceeds from the issuance of common stock pursuant to our at-the-market offering facility.
Our sources of liquidity in the nine months ended September 30, 2021 consisted primarily of proceeds from the issuance of common stock pursuant to our at-the-market offering facility and the registered direct offering in January 2021 and sales of AMZEEQ and ZILXI.
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We have no ongoing material financial commitments (such as lines of credit) that may affect our liquidity over the next five years.
Funding Requirements
Our present and future funding requirements will depend on many factors, including, among other things:
•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
•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 and in our Annual Report on Form 10-K for the year ended December 31, 2021.
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our condensed unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Our critical accounting policies are described in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 17, 2022.
While our significant accounting policies are described in the Notes to our financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results. These policies relate to the more significant areas involving management’s judgments and estimates and they 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 the Collaboration Agreement 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.
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
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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.
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 condensed consolidated statements of operations. Assets and liabilities are also reclassified into separate line items on the related condensed 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 oncology business as discontinued operations in our condensed consolidated statements of operations and cash flows for all periods presented, see Note 3, Discontinued Operations in the unaudited condensed 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 unaudited condensed consolidated balance sheets for the periods presented. All amounts included in the notes to the unaudited condensed consolidated financial statements relate to continuing operations unless otherwise noted.
Off-Balance Sheet Arrangements
We are not party to any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
JOBS Act Accounting Election
The Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
Recently Issued and Adopted Accounting Pronouncements
See “Newly Issued and Recently Adopted Accounting Pronouncements” in Note 2, “Significant Accounting Policies” in the Notes to Unaudited Interim Condensed Consolidated Financial Statements for a discussion of recently adopted accounting pronouncements and accounting pronouncements not yet adopted, and their expected impact on our financial position and results of operations.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and Item 10 of Regulation S-K. As such, we are not required to provide the information set forth in this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive and financial officers, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2022 our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the nine months ended September 30, 2022 identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
We may periodically become subject to legal proceedings and claims arising in connection with its business. As of September 30, 2022, no claims or actions are pending against us that, in the opinion in management, are likely to have a material adverse effect on us.
1A. Risk Factors.
Information about our risk factors is contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 17, 2022. As of September 30, 2022, there have been no material changes in our risk factors from those disclosed in Item 1A of our Annual Report on Form 10-K and subsequent reports, except as set forth below.
Risks Related to our Liquidity
We will need substantial additional funding to fund our operations, and we may not be able to continue as a going concern if we are unable to do so. 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.
Developing biopharmaceutical products, including conducting preclinical studies and clinical trials, is an expensive and highly uncertain process that takes years to complete. As of September 30, 2022, we had approximately $35.6 million in cash and cash equivalents, and restricted cash, as well as negative cash flows from operating activities. We do not have sufficient cash and cash equivalents to fund our anticipated level of operations as they become due during the twelve months following the date of issuance of the unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2022. The aforementioned factors raise substantial doubt about our ability to continue as a going concern. See “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for further discussion regarding our liquidity. We may not be able to raise adequate proceeds from financing or business development transactions. Accordingly, additional funds may not be obtained for our ongoing operations and we may not succeed in our future operations. Unless we are able to raise additional capital to finance our operations, our long-term business plans may not be accomplished, and we may be forced to cease, reduce, or delay operations. Furthermore, if we issue equity or debt securities to raise additional funds, its existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of its existing stockholders. If we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to its potential products or proprietary technologies, or grant licenses on terms that are not favorable to us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Entry into a Material Definitive Agreement.
Securities Purchase Agreement
On November 11, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Mutual Fund Series Trust, on behalf of AlphaCentric LifeSci Healthcare Fund (the “Purchaser”), pursuant to which the Company issued on November 14, 2022 (the “Closing Date”), in a private placement transaction (the “Transaction”), an aggregate of
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3,000 shares of Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred”), for an aggregate subscription amount equal to $300,000.
On November 14, 2022, the Company filed a preliminary proxy statement with the Securities and Exchange Commission (the “SEC” or the “Commission”) relating to its upcoming special meeting of stockholders (the “Special Meeting”). As disclosed in the preliminary proxy statement, the item to be considered by the Company’s stockholders at the Special Meeting is a proposal to adopt and approve a proposed amendment to the Company’s Amended and Restated Certificate of Incorporation and authorize the Board of Directors of the Company (the “Board”), in its sole discretion, to effect a reverse stock split of the outstanding shares of Common Stock at any time on or before the one year anniversary of the Special Meeting, at a reverse stock split ratio ranging from 1-for-10 to 1-for-25, as determined by the Board at a later date. The Purchase Agreement requires that the Company convene, no later than January 31, 2023 (excluding adjournments and assuming no review of the Company’s proxy statement by the SEC), an annual meeting or special meeting of stockholders for the purpose of presenting to the Company’s stockholders a proposal (the “Proposal”) to approve a reverse stock split of its outstanding Common Stock (the “Reverse Stock Split”), with the recommendation of the Board that the Proposal be approved, and that the Company use reasonable best efforts to obtain approval of the Proposal.
Pursuant to the Purchase Agreement, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (the “Certificate of Designation”) with the Secretary of State of Delaware designating the rights, preferences and limitations of the Series A Preferred. The Certificate of Designation provides, among other things, that except as otherwise provided in the Certificate of Designation or as otherwise required by law, the Series A Preferred will have no voting rights (other than the right to vote as a class on certain matters as provided in the Certificate of Designation). However, pursuant to the Certificate of Designation, each share of Series A Preferred entitles the holder thereof (i) to vote on the Proposal and any proposal to adjourn any meeting of stockholders called for the purpose of voting on the Proposal, and (ii) to 1,000,000 votes per share of Series A Preferred on the Proposal and any such adjournment proposal. The Series A Preferred shall, except as required by law, vote together with the Common Stock (and other issued and outstanding shares of preferred stock entitled to vote), as a single class; provided, however, that such shares of Series A Preferred shall, to the extent cast on the Proposal or any such adjournment proposal, be automatically and without further action of the holders thereof voted in the same proportion as the shares of Common Stock (excluding abstentions and any shares of Common Stock that are not voted) and any other issued and outstanding shares of preferred stock of the Company entitled to vote (other than the Series A Preferred or shares of such other preferred stock, if any, not voted) are voted on the Proposal. The Purchaser has agreed in the Purchase Agreement to vote the shares of Series A Preferred purchased in the Transaction in favor of the Proposal, in the manner and to the extent set forth in the Certificate of Designation, in a manner that “mirrors” the proportions on which the shares of Common Stock (excluding abstentions and any shares of Common Stock that are not voted) and any other issued and outstanding shares of preferred stock of the Company entitled to vote (excluding the Series A Preferred and shares of such other preferred stock, if any, not voted) are voted on the Proposal.
The Purchase Agreement contains customary representations, warranties and agreements of the Company and the Purchaser, and customary indemnification rights and obligations of the parties.
The Company expects to use the net proceeds from the Transaction for general corporate purposes, which may include without limitation working capital, capital expenditures, research and development expenditures, regulatory affairs expenditures, clinical trial expenditures, acquisitions of or investments in new companies, technologies or products, and payment of indebtedness or obligations.
The representations, warranties and covenants contained in the Purchase Agreement were made solely for the benefit of the parties to the Purchase Agreement and may be subject to limitations agreed upon by the contracting parties. Accordingly, the Purchase Agreement is filed as an exhibit to this Quarterly Report on Form 10-Q to provide investors with information regarding the terms of the Purchase Agreement, and not to provide investors with any other factual information regarding the Company or its business, and should be read in conjunction with the disclosures in the Company’s periodic reports and other filings with the Commission.
Certificate of Designation
On November 14, 2022, the Company filed the Certificate of Designation with the Secretary of State of the State of Delaware designating 3,000 shares out of the authorized but unissued shares of its preferred stock as Series A Preferred with a stated par value of $0.0001 per share. The Series A Preferred will be entitled to customary dividends and distributions when and if paid on shares of the Common Stock and will be entitled to the voting rights discussed above. The Series A Preferred will have preference over the Common Stock with respect to distribution of assets or available proceeds, as applicable, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or any other deemed liquidation event.
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Each share of Series A Preferred is convertible at the option of the holder, at any time and from time to time from and after 15 business days following the earlier of (i) the date of the approval of the Proposal or (ii) the date the Company otherwise satisfies the Nasdaq listing requirements, in each case, into that number of shares of Common Stock (subject to the Beneficial Ownership Limitation and the Exchange Cap described therein) determined by dividing the stated value of such share of Series A Preferred by the Conversion Price then in effect, rounded down to the nearest whole share (with cash paid in lieu of any fractional shares). The “Conversion Price” for the Series A Preferred equals the lesser of (i) the closing sale price of the Common Stock on the trading day immediately prior to the Closing Date and (ii) the average of the closing sale prices for the Common Stock on the five trading days immediately prior to the Closing Date, subject to adjustment as provided in the Certificate of Designation; provided, that the Conversion Price may not fall below the par value per share of the Common Stock and may not exceed $0.35 per share. The Conversion Price is subject to adjustment as set forth in the Certificate of Designation for stock dividends, stock splits, reverse stock splits, and similar events. Upon conversion, the shares of Series A Preferred shall resume the status of authorized but unissued shares of preferred stock of the Company.
At any time during the 15 business days following the approval of the Proposal (the “Company Redemption Period”), the Company may, with prior notice to the holders of the Series A Preferred specified in the Certificate of Designation, redeem all or a portion of the Series A Preferred held by such holders at any time at 120% of the stated value; provided, however, that a Company redemption request shall not be effective if received by a holder of Series A Preferred before the date of the approval of the Proposal. Each holder of Series A Preferred will have the right, with the prior notice to the Company as specified in the Certificate of Designation, to require the Company to redeem all or a portion of the Series A Preferred held by such holder following the expiration of the Company Redemption Period at 130% of the stated value. In addition, the Company will automatically redeem all of the Series A Preferred within five business days following a delisting event as specified in the Certificate of Designation at 130% of the stated value.
Registration Rights Agreement
Pursuant to a Registration Rights Agreement entered into with the Purchaser, the Company has agreed to file a registration statement with the SEC by the 30th day after stockholder approval of the Proposal if all Series A Preferred have not been fully redeemed, and to use commercially reasonable efforts to have the registration statement declared effective by, and to remain continuously effective for, the time periods set forth in the Registration Rights Agreement. The Company agreed to indemnify the other party and certain affiliates against certain liabilities related to the registration statement or violation of federal securities laws in connection with the Company’s performance of its obligations under the Registration Rights Agreement.
The foregoing summaries of the Purchase Agreement, the Registration Rights Agreement and the Certificate of Designation do not purport to be a complete description of the rights, preferences, privileges and obligations of the parties thereunder and are subject to, and qualified in their entirety by, forms of such documents attached as Exhibits 10.1, 10.2 and 3.1(b), respectively, to this Quarterly Report on Form 10-Q, which are incorporated herein by reference.
Amendments to Articles of Incorporation or Bylaws.
On November 10, 2022, the Board of Directors of the Company approved amendments to the Company’s Amended and Restated Bylaws (the “Bylaws”), effective immediately. The amendments, among other things, modified the provisions for determining the presence of a quorum at all meetings of stockholders, to provide that the presence, in person, by remote communication, if applicable, or by proxy, of both (i) the holders of at least one-third in voting power of the capital stock issued and outstanding and entitled to vote at the meeting, and (ii) the holders of at least one-third of all issued and outstanding shares of common stock entitled to vote at the meeting, will constitute a quorum at all meetings of the stockholders for the transaction of business. Prior to the amendments, the presence, in person, by remote communication, if applicable, or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote, would constitute a quorum for the transaction of business.
The foregoing brief description of the Company’s amended Bylaws is qualified in its entirety by the full text of the Bylaws, as amended, filed as Exhibit 3.2 to this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
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Item 6. Exhibits.
The following documents are filed, or furnished as applicable, as part of this Quarterly Report on Form 10-Q:
Exhibit Index

Exhibit Number |  |  |  | Incorporated by Reference |  | Filed
| Exhibit Description |  | Form |  | Date |  | Number |  | Herewith
3.1(a) |  | Amended and Restated Certificate of Incorporation. |  | 10-K |  | 3/17/2022 |  | 3.1 |  |
3.1(b) |  | Certificate of Designation of Preferences, Rights, and Limitations of Series A Convertible Preferred Stock. |  |  |  |  |  |  |  | X
3.2 |  | Amended and Restated Bylaws. |  |  |  |  |  |  |  | X
10.1 |  | Securities Purchase Agreement, dated November 11, 2022, between VYNE Therapeutics Inc. and Mutual Fund Series Trust, on behalf of Alpha C entric Lifesci Healthcare Fund. |  |  |  |  |  |  |  | X
10.2 |  | Registration Rights Agreement, dated November 11, 2022, between VYNE Therapeutics Inc. and Mutual Fund Series Trust, on behalf of Alpha C entric Lifesci Healthcare Fund. |  |  |  |  |  |  |  | X
31.1 |  | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). |  |  |  |  |  |  |  | X
31.2 |  | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). |  |  |  |  |  |  |  | X
32.1* |  | Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350). |  |  |  |  |  |  |  | X
32.2* |  | Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350). |  |  |  |  |  |  |  | X
101.INS |  | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |  |  |  |  |  |  |  | X
101.SCH |  | XBRL Taxonomy Extension Schema Document. |  |  |  |  |  |  |  | X
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document. |  |  |  |  |  |  |  | X
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document. |  |  |  |  |  |  |  | X
101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document. |  |  |  |  |  |  |  | X

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101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document. |  |  |  |  |  |  |  | X
104 |  | The cover page of VYNE Therapeutics Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL (included within Exhibit 101 attachments). |  |  |  |  |  |  |  |

_______________________________________________________
* The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of VYNE Therapeutics Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 14, 2022

| VYNE Therapeutics Inc.
| By: | /s/ David Domzalski
|  | David Domzalski President and Chief Executive Officer
|  | (Principal Executive Officer)
| By: | /s/ Tyler Zeronda
|  | Tyler Zeronda Chief Financial Officer and Treasurer
|  | (Principal Financial Officer and Principal Accounting Officer)

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