VYNE Therapeutics (US:VYNE)2021-08-12 12:47PART I – FINANCIAL INFORMATION Item 1. Unaudited Condensed Consolidated Financial Statements Presents VYNE Therapeutics Inc.'s unaudited consolidated financial statements and related accounting notes for interim periods ending June 30, 2021 Unaudited Condensed Consolidated Balance Sheets Unaudited consolidated balance sheets detail assets, liabilities, and shareholders' equity changes between December 31, 2020, and June 30, 2021 | Metric (in thousands) | June 30, 2021 | December 31, 2020 | | :-------------------- | :------------ | :---------------- | | Assets | | | | Cash and cash equivalents | $103,406 | $57,563 | | Total Current Assets | $128,426 | $87,259 | | Total Assets | $133,983 | $93,742 | | Liabilities | | | | Total Current Liabilities | $57,620 | $21,453 | | Total Liabilities | $59,090 | $56,249 | | Shareholders' Equity | | | | Total Shareholders' Equity | $74,893 | $37,493 | - Total assets increased by $40.2 million (42.9%) from $93.7 million at December 31, 2020, to $134.0 million at June 30, 2021, primarily driven by an increase in cash and cash equivalents17 - Total liabilities increased by $2.8 million (5.0%) from $56.2 million at December 31, 2020, to $59.1 million at June 30, 2021, mainly due to an increase in current debt17 - Total shareholders' equity significantly increased by $37.4 million (99.7%) from $37.5 million at December 31, 2020, to $74.9 million at June 30, 202117 Unaudited Condensed Consolidated Statements Of Operations Unaudited consolidated statements of operations present revenues, expenses, and net loss for the three and six months ended June 30, 2021 and 2020 | Metric (in thousands, except per share data) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Product sales | $3,963 | $1,483 | $7,852 | $3,233 | | License revenues | — | $10,000 | — | $10,000 | | Royalty revenues | $295 | $205 | $525 | $205 | | Total Revenues | $4,258 | $11,688 | $8,377 | $13,438 | | Cost of goods sold | $795 | $216 | $1,396 | $487 | | Research and development | $6,409 | $13,119 | $12,742 | $29,072 | | Selling, general and administrative | $15,835 | $26,459 | $32,451 | $51,874 | | Goodwill and IPR&D impairments | — | $54,345 | — | $54,345 | | Contingent Stock Right Remeasurement | — | $84,726 | — | $84,726 | | Total Operating Expenses | $22,244 | $178,649 | $45,193 | $220,017 | | Operating Loss | $18,781 | $167,177 | $38,212 | $207,066 | | Net Loss | $19,924 | $167,440 | $40,474 | $207,673 | | Loss per share basic and diluted | $0.39 | $4.83 | $0.81 | $9.17 | - Total revenues decreased significantly for both the three-month and six-month periods ended June 30, 2021, primarily due to the absence of a $10.0 million license revenue recognized in Q2 202019 - Net loss decreased substantially for both periods, from $167.4 million to $19.9 million (three months) and from $207.7 million to $40.5 million (six months), mainly due to the absence of goodwill and IPR&D impairments and contingent stock right remeasurement expenses incurred in 202019 Unaudited Condensed Consolidated Statements Of Comprehensive Loss Unaudited consolidated statements of comprehensive loss present net loss and other comprehensive income/loss for the three and six months ended June 30, 2021 and 2020 | Metric (in thousands) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Loss | $19,924 | $167,440 | $40,474 | $207,673 | | Total Other Comprehensive Loss | — | $(40) | — | $5 | | Total Comprehensive Loss | $19,924 | $167,400 | $40,474 | $207,678 | - Total comprehensive loss decreased significantly in 2021 compared to 2020, mirroring the reduction in net loss, with minimal impact from other comprehensive income/loss items22 Unaudited Condensed Consolidated Statements Of Changes In Stockholders' Equity Unaudited consolidated statements of changes in stockholders' equity detail common stock, additional paid-in capital, and accumulated deficit for the six months ended June 30, 2021 | Metric (in thousands, except share data) | Balance at Jan 1, 2021 | Changes during period | Balance at June 30, 2021 | | :--------------------------------------- | :--------------------- | :-------------------- | :----------------------- | | Common stock (shares) | 43,205,221 | 8,306,624 | 51,511,845 | | Common stock (amounts) | $4 | $1 | $5 | | Additional paid-in capital | $603,685 | $73,570 | $681,558 | | Accumulated deficit | $(566,196) | $(40,474) | $(606,670) | | Total Shareholders' Equity | $37,493 | $37,400 | $74,893 | - Shareholders' equity increased by $37.4 million during the six months ended June 30, 2021, primarily driven by proceeds from common stock issuances totaling $73.1 million, offset by a net loss of $40.5 million25 - The number of common shares outstanding increased by over 8.3 million shares during the first six months of 2021 due to at-the-market and registered direct offerings, and employee stock plans25 Unaudited Condensed Consolidated Statements Of Cash Flows Unaudited consolidated statements of cash flows summarize cash movements from operating, investing, and financing activities for the six months ended June 30, 2021 and 2020 | Metric (in thousands) | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :-------------------- | :----------------------------- | :----------------------------- | | Net Loss | $40,474 | $207,673 | | Net cash used in operating activities | $(28,808) | $(88,070) | | Net cash provided by investing activities | $1,027 | $87,105 | | Net cash provided by financing activities | $73,374 | $53,746 | | Increase in cash, cash equivalents and restricted cash | $45,593 | $52,781 | | Cash, cash equivalents and restricted cash at end of the period | $104,011 | $97,366 | - Net cash used in operating activities decreased significantly from $88.1 million in H1 2020 to $28.8 million in H1 2021, reflecting reduced net losses and operational adjustments31 - Net cash provided by financing activities increased to $73.4 million in H1 2021 from $53.7 million in H1 2020, primarily due to proceeds from common stock offerings31 - Cash, cash equivalents, and restricted cash at the end of the period increased to $104.0 million as of June 30, 2021, from $97.4 million as of June 30, 202031 Notes to Unaudited Interim Condensed Consolidated Financial Statements This section provides detailed notes explaining the company's operations, significant accounting policies, and financial statement components NOTE 1 - NATURE OF OPERATIONS VYNE Therapeutics Inc. is a biopharmaceutical company transitioning its strategic focus to immuno-inflammatory diseases, divesting its topical minocycline products - VYNE is transitioning its strategic focus to immuno-inflammatory diseases, exploring a sale or license of its topical minocycline franchise (AMZEEQ, ZILXI, FCD105, MST platform)3637159 - The company will continue to invest in FMX114 for atopic dermatitis (Phase 2a study expected by end of 2021) and has licensed BETi compounds (VYN201, VYN202) from In4Derm for topical and oral treatments, with clinical entry planned for 202237383940160161162163 - A restructuring plan includes eliminating commercial operations expenditures and terminating approximately 70 employees by December 31, 2021, with an expected one-time charge of $1.5 million to $2.0 million41164 - The company's ability to continue as a going concern is contingent on successfully divesting its minocycline franchise, developing commercially viable drug candidates, and raising additional capital, as current cash flows are insufficient beyond one year from the financial statement issuance5153205206 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES This note outlines the significant accounting policies, including U.S. GAAP basis, consolidation principles, use of estimates, and impact of COVID-19 - The financial statements are prepared under U.S. GAAP, with management making estimates for business combinations, asset impairments, and revenue recognition5457 - The COVID-19 pandemic has negatively impacted sales of AMZEEQ and ZILXI due to limited access to healthcare providers and unfavorable payor decisions, affecting financial condition and liquidity5058185204 - Fair value measurements are categorized into Level 1, 2, or 3 inputs, with Level 3 inputs reflecting unobservable estimates and assumptions72226 - The company adopted ASU 2019-12 (Income Taxes) in Q1 2021 with no material impact and is evaluating ASU 2020-4 (Reference Rate Reform); ASU 2016-13 (Credit Losses) will be adopted effective January 1, 2023, as a smaller reporting company787980 NOTE 3 – BUSINESS COMBINATION This note details the reverse acquisition of Menlo by Foamix on March 9, 2020, including purchase price allocation and contingent stock right remeasurement - The Merger on March 9, 2020, was accounted for as a reverse acquisition, with Foamix as the accounting acquirer, where Foamix shareholders received Menlo common stock and Contingent Stock Rights (CSRs)818284 - Following the failure of Menlo's Phase III PN Trials for serlopitant on April 6, 2020, each CSR converted into 1.2082 additional shares of Menlo common stock, resulting in an effective exchange ratio of 1.8006 shares for each Foamix ordinary share8396 Purchase Price Allocation (March 9, 2020) | Item (in thousands) | Amount | | :------------------ | :----- | | Cash and cash equivalents | $38,641 | | Investment in marketable securities | $22,703 | | In-process research and development | $49,800 | | Goodwill | $4,545 | | Total assets | $117,270 | | Total liabilities | $(5,827) | | Purchase price | $111,443 | - A full impairment charge of $4.5 million for goodwill and $49.8 million for IPR&D was recorded in Q2 2020 due to the discontinuation of serlopitant development9194 - The CSR liability was remeasured to $104.4 million on April 6, 2020, resulting in an $84.7 million expense, and then settled with the issuance of shares98 NOTE 4 – REVENUE RECOGNITION This note details the company's revenue recognition policies under ASC Topic 606, primarily from product sales, license, and royalty revenues - Product sales for Q2 2021 were $4.0 million, up from $1.5 million in Q2 2020, driven by the ZILXI launch and increased AMZEEQ demand; for H1 2021, product sales were $7.9 million, up from $3.2 million in H1 202019100183193194 - License revenue of $10.0 million was recognized in Q2 2020 from an exclusive licensing agreement with Cutia for topical minocycline products in Greater China; no license revenue was recorded in 202119108183184193195 - Royalty revenues were $0.3 million for Q2 2021 (vs. $0.2 million in Q2 2020) and $0.5 million for H1 2021 (vs. $0.2 million in H1 2020)19113183193 - Product revenue is recorded net of provisions for distribution fees, trade discounts, rebates, chargebacks, and estimated returns, which reduced product revenues by $16.2 million (Q2 2021) and $31.8 million (H1 2021)103 NOTE 5 - FAIR VALUE MEASUREMENT This note provides information on the fair value measurement of the company's assets and liabilities, classified by input observability Fair Value Measurement (December 31, 2020) | Item | Level 1 (in thousands) | | :---------------- | :--------------------- | | Marketable securities | $1,027 | - The company sold all its marketable securities during the six months ended June 30, 2021114 NOTE 6 - MARKETABLE SECURITIES This note details the company's marketable securities, primarily Israeli mutual funds, all of which were sold in the first half of 2021 Marketable Securities (in thousands) | Item | June 30, 2021 | December 31, 2020 | | :---------------- | :------------ | :---------------- | | Israeli mutual funds | $— | $1,027 | - The company received $1.0 million from the sale and maturity of marketable securities during the six months ended June 30, 2021, compared to $36.4 million in the same period of 2020117 NOTE 7 – INVENTORY This note provides a breakdown of the company's inventory, stated at the lower of cost and net realizable value, showing an increase in finished goods Inventory (in thousands) | Category | June 30, 2021 | December 31, 2020 | | :------------ | :------------ | :---------------- | | Raw materials | $3,466 | $4,042 | | Work-in-process | $680 | $662 | | Finished goods | $4,133 | $2,700 | | Total | $8,279 | $7,404 | - Total inventory increased by $0.9 million (11.8%) from December 31, 2020, to June 30, 2021, primarily due to an increase in finished goods119 - No inventory write-downs occurred during the three and six months ended June 30, 2021, or June 30, 2020118 NOTE 8 - DEBT This note details the company's debt under the Amended and Restated Credit Agreement, which was fully prepaid and terminated in August 2021 - Outstanding debt under the Amended and Restated Credit Agreement was $35.0 million as of June 30, 2021, and December 31, 2020120 - On August 11, 2021, the company prepaid its entire outstanding indebtedness of approximately $36.5 million, including a 4% prepayment fee and accrued interest, resulting in the termination of the credit agreement123252 - Interest expense for the three and six months ended June 30, 2021, was $1.1 million and $2.1 million, respectively127 NOTE 9 – SHARE CAPITAL This note outlines the company's share capital structure, including authorized stock, recent issuances, warrants, and share-based compensation - The number of authorized common stock shares was increased from 75 million to 150 million on July 19, 2021131 - In January 2021, the company issued 2,778,012 shares of common stock through an at-the-market offering for $26.3 million net proceeds and 5,274,261 shares through a registered direct offering for $46.8 million net proceeds133134 - Warrants to purchase 495,165 shares of common stock (adjusted for reverse stock split and CSR) with an exercise price of $4.64 per share are outstanding and expire on July 29, 2026124137 - Share-based compensation expense was $1.9 million for Q2 2021 and $4.3 million for H1 2021, a decrease from $10.8 million and $12.5 million in the respective 2020 periods149 NOTE 10 – OPERATING LEASE This note details the company's operating lease agreements for corporate offices and vehicles, with total lease liabilities of $1.2 million as of June 30, 2021 Maturities of Lease Liabilities (in thousands) | Year | Amount | | :--- | :----- | | 2021 | $458 | | 2022 | $761 | | 2023 | $151 | | Total lease payments | $1,370 | | Less imputed interest | $124 | | Total lease liability | $1,246 | - As of June 30, 2021, the company had a $0.6 million lien on its cash to secure lease agreements153 NOTE 11 – COMMITMENTS AND CONTINGENCIES This note addresses legal proceedings, specifically a patent infringement suit initiated against Padagis regarding a generic AMZEEQ, delaying FDA approval - On June 30, 2021, the company received a Paragraph IV certification notice from Padagis Israel Pharmaceuticals Ltd. for a generic version of AMZEEQ, alleging patent invalidity or non-infringement155238 - VYNE initiated a patent infringement suit against Padagis on August 9, 2021, which legally prevents FDA approval of the generic ANDA before December 30, 2023, or a court decision156239 - The company intends to vigorously defend its intellectual property rights, with the latest patent expiring on September 8, 2037157240 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operational results, highlighting a strategic shift to immuno-inflammatory disease pipeline development and associated financial challenges Company Overview VYNE is transitioning its strategic focus from commercializing minocycline products to developing therapies for immuno-inflammatory diseases - VYNE is transitioning its strategic focus from commercializing AMZEEQ and ZILXI to developing therapies for immuno-inflammatory diseases, including FMX114 and BETi compounds (VYN201, VYN202)159160161162163 - The company is exploring a sale or license of its topical minocycline franchise and plans to reduce its workforce by approximately 70 employees by December 31, 2021, incurring a one-time charge of $1.5 million to $2.0 million159164 Key Developments This section outlines significant corporate and financial developments, including capital raises, formulary decisions, stock splits, and legal actions - In January 2021, the company raised $26.3 million and $46.7 million net proceeds from at-the-market and registered direct common stock offerings, respectively165 - CVS Caremark decided not to include AMZEEQ and ZILXI on its national formulary for 2021, potentially impacting future pricing165 - A one-for-four reverse stock split was effected on February 12, 2021, reducing authorized shares from 300 million to 75 million, later increased to 150 million on July 19, 2021165 - The company initiated a patent infringement suit against Padagis on August 9, 2021, regarding a generic AMZEEQ, which delays FDA approval of the generic until at least December 30, 2023165 - On August 11, 2021, the company prepaid its $35.0 million outstanding debt, including a 4% premium, totaling approximately $36.5 million, terminating the credit agreement165 Financial Overview The company incurred significant net losses and an accumulated deficit, necessitating substantial additional financing for its strategic shift to pipeline development - The company incurred net losses of $19.9 million and $167.4 million for the three months ended June 30, 2021 and 2020, respectively, and an accumulated deficit of $606.7 million as of June 30, 2021167 - The strategic shift to immuno-inflammatory pipeline development requires significant additional financing, and the company's future viability depends on successful execution and capital raising168 Components of Operating Results This section analyzes the individual components contributing to the company's operating results, including revenues, cost of goods sold, and various operating expenses Revenues Revenues primarily consist of product sales and royalties, with no license revenue recorded in the current period compared to a significant amount in the prior year - Product sales for the six months ended June 30, 2021, were $7.9 million, primarily from AMZEEQ and ZILXI, compared to $3.2 million in the prior year170193 - Royalty revenues for the six months ended June 30, 2021, were $0.5 million, up from $0.2 million in the prior year171193 - No license revenue was recorded for the six months ended June 30, 2021, compared to $10.0 million in the prior year from the Cutia agreement173193 Cost of Goods Sold Cost of goods sold increased due to higher sales volume, while gross margin percentage remained favorable due to previously expensed materials - Cost of goods sold increased to $1.4 million for H1 2021 from $0.5 million for H1 2020, primarily due to increased sales volume174196 - Gross margin percentage was 82% for H1 2021 and 85% for H1 2020, favorably impacted by expensed materials produced prior to FDA approval175197 Operating Expenses Research and development and selling, general and administrative expenses significantly decreased in H1 2021 due to reduced employee-related costs and merger-related professional services - Research and development expenses decreased by $16.3 million (56.2%) to $12.7 million for H1 2021, mainly due to reduced employee-related expenses (severance costs in 2020) and completion of clinical trials176198 - Selling, general and administrative expenses decreased by $19.4 million (37.4%) to $32.5 million for H1 2021, primarily due to lower employee-related expenses (severance costs in 2020) and professional services related to the Merger179199 Interest Expense Interest expense remained consistent for both the first half of 2021 and 2020 - Interest expense remained consistent at $2.1 million for both H1 2021 and H1 2020200 Other Expense, net Other expense, net shifted from income in H1 2020 to an expense in H1 2021, primarily due to a decrease in gains on derivative liabilities - Other expense, net was $0.1 million expense for H1 2021, compared to $1.3 million income for H1 2020, primarily due to a decrease in gains on derivative liabilities201 Income Taxes and Net Operating Loss Carryforwards No income tax expense was recorded in H1 2021, and the company holds significant federal and state net operating loss carryforwards subject to potential limitations - No income tax expense was recorded for H1 2021, compared to a $0.3 million benefit for H1 2020202 - As of December 31, 2020, the company had federal NOL carryforwards of $243.2 million and state NOLs of $66.3 million, with $198.9 million in federal and state NOLs having no limited period of use181 - NOLs and tax credits may be subject to annual limitations due to ownership changes under Sections 382 and 383 of the Internal Revenue Code182 Results of Operations This section provides a comparative analysis of the company's financial performance for the three-month and six-month periods ended June 30, 2021 and 2020 Comparison of the Three-Month Periods Ended June 30, 2021 and 2020 Total revenues significantly decreased due to the absence of license revenue, while net loss substantially improved due to lower operating expenses Key Financials (Three Months Ended June 30) | Metric (in thousands) | 2021 | 2020 | Change ($) | Change (%) | | :-------------------- | :------ | :------- | :--------- | :--------- | | Total Revenues | $4,258 | $11,688 | $(7,430) | -63.6% | | Product sales | $3,963 | $1,483 | $2,480 | 167.2% | | License revenues | — | $10,000 | $(10,000) | -100.0% | | R&D Expenses | $6,409 | $13,119 | $(6,710) | -51.1% | | SG&A Expenses | $15,835 | $26,459 | $(10,624) | -40.2% |\ | Net Loss | $19,924 | $167,440 | $(147,516) | -88.1% | - The significant decrease in total revenues was primarily due to the absence of the $10.0 million license revenue from the Cutia agreement in 2020184 - Net loss decreased substantially due to lower R&D and SG&A expenses, which were impacted by severance costs and merger-related professional services in 2020188189 Comparison of the Six-Month Periods Ended June 30, 2021 and 2020 Total revenues decreased due to the absence of license revenue, while net loss significantly improved due to reduced operating expenses Key Financials (Six Months Ended June 30) | Metric (in thousands) | 2021 | 2020 | Change ($) | Change (%) | | :-------------------- | :------ | :------- | :--------- | :--------- | | Total Revenues | $8,377 | $13,438 | $(5,061) | -37.7% | | Product sales | $7,852 | $3,233 | $4,619 | 142.9% | | License revenues | — | $10,000 | $(10,000) | -100.0% | | R&D Expenses | $12,742 | $29,072 | $(16,330) | -56.2% | | SG&A Expenses | $32,451 | $51,874 | $(19,423) | -37.4% | | Net Loss | $40,474 | $207,673 | $(167,199) | -80.5% | - The decrease in total revenues for H1 2021 was primarily due to the absence of the $10.0 million license revenue from 2020195 - Net loss decreased substantially due to lower R&D and SG&A expenses, which were impacted by severance costs and merger-related professional services in 2020198199 Liquidity and Capital Resources The company's liquidity is supported by cash and recent financing, but substantial doubt exists about its going concern ability without additional funding or asset divestiture - As of June 30, 2021, the company had $104.0 million in cash, cash equivalents, restricted cash, and investments203 - The company prepaid its $35.0 million outstanding debt on August 11, 2021, for approximately $36.5 million, terminating the credit agreement203205 - The COVID-19 pandemic and unfavorable payor decisions have negatively impacted sales of AMZEEQ and ZILXI, impairing revenue generation and liquidity204 - The company's ability to continue as a going concern is in substantial doubt, as it will require significant additional financing beyond one year from the financial statement issuance to fund operations, especially for its new R&D focus205206 Summary Statement of Cash Flows This section provides a summary of cash flows from operating, investing, and financing activities for the six months ended June 30, 2021 and 2020 Summary Cash Flows (Six Months Ended June 30) | Activity (in thousands) | 2021 | 2020 | | :---------------------- | :-------- | :-------- | | Operating activities | $(28,808) | $(88,070) | | Investing activities | $1,027 | $87,105 | | Financing activities | $73,374 | $53,746 | Cash Used in Operating Activities Net cash used in operating activities significantly decreased in H1 2021 due to increased revenues and reduced merger-related costs - Net cash used in operating activities decreased to $28.8 million in H1 2021 from $88.1 million in H1 2020, driven by increased revenues from AMZEEQ and ZILXI launches and reduced Merger-related costs209 Cash Used in (Provided by) Investing Activities Net cash provided by investing activities significantly decreased in H1 2021, primarily due to cash acquired through the Merger and reduced marketable securities investments in 2020 - Net cash provided by investing activities decreased significantly to $1.0 million in H1 2021 from $87.1 million in H1 2020, primarily due to cash acquired through the Merger and a decrease in marketable securities investments in 2020210 Cash Provided by Financing Activities Net cash provided by financing activities increased in H1 2021, mainly due to proceeds from common stock offerings - Net cash provided by financing activities increased to $73.4 million in H1 2021 from $53.7 million in H1 2020, mainly due to proceeds from common stock offerings in January 2021211 Cash and Funding Sources Liquidity in H1 2021 stemmed from common stock offerings and product sales, while H1 2020 liquidity primarily came from cash and investments acquired in the Merger - Liquidity sources in H1 2021 included proceeds from common stock offerings and sales of AMZEEQ and ZILXI212 - Liquidity sources in H1 2020 primarily consisted of cash and investments acquired in the Merger212 Funding Requirements Future funding requirements depend on asset divestiture, cost reductions, pipeline progress, and regulatory/IP expenses, potentially necessitating additional capital through equity, debt, or collaborations - Future funding requirements depend on proceeds from the potential sale/license of the minocycline franchise, reduction of commercialization costs, progress of pipeline candidates (FMX114, VYN201, VYN202), regulatory approval costs, and intellectual property expenses214 - The company may need additional capital sooner than planned through equity, debt, or strategic collaborations, which could result in dilution or debt covenants214 Critical Accounting Policies, Significant Judgments and Use of Estimates Financial statement preparation requires significant estimates and judgments, particularly for business combinations, asset impairments, and revenue recognition, with ongoing COVID-19 impact assessments - The preparation of financial statements requires significant estimates and assumptions, particularly for business combinations, asset impairments, and revenue recognition215216 - The COVID-19 pandemic has negatively impacted operations and sales, requiring ongoing assessment of accounting matters like allowances, inventory, impairments, and revenue recognition219 - Revenue recognition follows a five-step model under ASC 606, involving identification of performance obligations, transaction price, allocation, and recognition upon satisfaction220221222 - Business acquisitions are accounted for using the acquisition method, recognizing acquired assets and liabilities at fair value, with complex judgments and estimates involved223224225226 - Long-lived assets are reviewed for impairment indicators throughout the year, with indefinite-lived intangible assets tested annually227 - The company has no material off-balance sheet arrangements and indemnifies officers and directors, with the fair value of these rights deemed minimal228229 - The company has opted out of the JOBS Act extended transition period for new accounting standards, irrevocably choosing to comply as required when adopted230 Item 3. Quantitative and Qualitative Disclosures About Market Risk VYNE Therapeutics Inc. is exempt from providing quantitative and qualitative disclosures about market risk as a smaller reporting company - VYNE Therapeutics Inc. is exempt from providing market risk disclosures as a smaller reporting company233 Item 4. Controls and Procedures Management evaluated the effectiveness of the company's disclosure controls and procedures, concluding they were effective with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated as effective at a reasonable assurance level as of June 30, 2021234 - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2021235 PART II – OTHER INFORMATION Item 1. Legal Proceedings No material adverse legal proceedings were pending as of June 30, 2021, though a patent infringement suit was initiated against Padagis regarding a generic AMZEEQ - No material adverse legal claims were pending against the company as of June 30, 2021237 - A patent infringement suit was filed against Padagis on August 9, 2021, concerning a generic AMZEEQ, which will delay FDA approval of the generic until at least December 30, 2023238239 Item 1A. Risk Factors This section updates risk factors related to the company's strategic shift, including divestiture uncertainty, funding requirements, going concern doubts, and intellectual property litigation Risks Related to our Business Strategy The decision to divest commercial assets and refocus on early-stage pipeline development presents significant risks, including transaction uncertainty and potential negative impacts on the business - The decision to sell or license the commercial business (AMZEEQ, ZILXI) may not result in a successful transaction or create shareholder value, potentially impacting business, financial condition, and stock price241242 - The divestiture process is time-consuming, disruptive, and could incur substantial expenses, negatively affecting key personnel retention and diverting management's attention243 - The company's future is dependent on the successful, but uncertain and expensive, development of early-stage drug candidates like FMX114 and BETi platform compounds244 Risks Related to our Liquidity The company requires substantial additional funding to continue operations, and an inability to raise capital could lead to R&D delays or termination, raising going concern doubts - The company requires substantial additional funding to continue operations, and its inability to raise capital could lead to delays, reductions, or termination of R&D activities, raising substantial doubt about its ability to continue as a going concern245 - Issuing equity or debt for funding may dilute stockholders or impose restrictive covenants, while collaborations might require relinquishing valuable rights245 Risks Related to our Intellectual Property The ongoing patent infringement suit against Padagis for generic AMZEEQ poses substantial costs and risks, including potential patent invalidation or narrow interpretation - The company faces substantial costs and management distraction from the patent infringement suit against Padagis regarding a generic AMZEEQ, which could result in patent invalidation or narrow interpretation246247 - An adverse outcome in litigation could put the company's patents at risk and negatively affect its development and commercialization efforts247 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds occurred during the reporting period - No unregistered sales of equity securities or use of proceeds occurred during the reporting period248 Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - No defaults upon senior securities were reported249 Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable to VYNE Therapeutics Inc.250 Item 5. Other Information This section details the company's restructuring plan, including asset divestiture and workforce reduction, and the prepayment of its outstanding indebtedness Restructuring Plan The company initiated a restructuring plan to divest its minocycline franchise, reduce commercial operating expenses, and implement a workforce reduction - The company initiated a restructuring plan to explore a sale or license of its minocycline franchise and significantly reduce commercial operating expenses251 - The plan includes terminating approximately 70 employees by December 31, 2021, with an expected one-time charge of $1.5 million to $2.0 million251 Prepayment of Indebtedness The company prepaid its entire outstanding debt of $35.0 million, including a premium, totaling approximately $36.5 million, resulting in the termination of the credit agreement - On August 11, 2021, the company prepaid its entire outstanding indebtedness of $35.0 million, plus a $1.4 million prepayment premium and accrued interest, totaling approximately $36.5 million252 - The prepayment resulted in the termination of the Amended and Restated Credit Agreement and all associated security interests252 Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including corporate governance documents and certifications - The exhibit index includes corporate documents (Amended and Restated Certificate of Incorporation, Bylaws), officer certifications (CEO, CFO), and XBRL instance and taxonomy documents254 SIGNATURES The report was signed by the President and CEO, and the Chief Financial Officer and Treasurer on August 12, 2021 - The report was signed on August 12, 2021, by David Domzalski (President and CEO) and Tyler Zeronda (Chief Financial Officer and Treasurer)260