VYNE THERAPEUTICS INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the section entitled "Item 1A. Risk Factors".
Company Overview
We are a clinical-stage biopharmaceutical company focused on developing proprietary, innovative and differentiated therapies for the treatment of immuno-inflammatory conditions.
In
Our lead program is VYN201, a locally administered pan-BET inhibitor designed as a "soft" drug to address diseases involving multiple, diverse inflammatory cell signaling pathways while providing low systemic exposure. To date, VYN201 has produced consistent reductions in pro-inflammatory and disease-related biomarkers, improvements in disease severity and a demonstrated local activity through several preclinical models. We believe that these data suggest potential broad utility for VYN201 across multiple routes of administration. InNovember 2022 , we initiated a Phase 1a/b clinical trial evaluating a topical formulation of VYN201 for the treatment of nonsegmental vitiligo. InFebruary 2023 , we announced positive preliminary safety data from the Phase 1a portion of the trial. The first nonsegmental vitiligo patient was dosed in the Phase 1b portion of the trial inJanuary 2023 and we expect topline results from this trial in mid-2023. Our second program is VYN202, a BD2-selective oral small moleculeBET inhibitor. VYN202 is in preclinical development for the treatment of immuno-inflammatory indications, and is being designed to achieve class-leading selectivity (BD2 vs. BD1), maximum potency versus BD2 and optimal oral bioavailability. By maximizing BD2 selectivity, we believe VYN202 has the potential to be a more conveniently-administered non-biologic treatment option for both acute control and chronic management of immuno-inflammatory indications, where the damaging effects of unrestricted inflammatory signaling activity is common. We intend to actively evaluate and enter into strategic partnerships to advance our product candidates through the clinic toward commercialization, and may also partner with leading pharmaceutical companies to advance our molecules in therapeutic areas outside of our core focus in immunology. We believe selectively entering into collaborations has the potential to expand and accelerate the development of our programs and maximize the value of our pipeline.
Known Trends, Events and Uncertainties
Business and Macroeconomic Conditions
The extent of the impact of macroeconomic events and conditions, including inflation, increasing interest rates, adverse developments affecting financial institutions, increasing financial market volatility and uncertainty, the impact of war or military conflict, including the war inUkraine , and public health pandemics on our operational and financial performance will continue to depend on certain developments, including the impact on our financing activities, clinical studies, employee or industry events, and effect on our suppliers and manufacturers, all of which are uncertain and cannot be predicted. Adverse effects of these large macroeconomic conditions have been prevalent in many of the areas where we, our CROs, suppliers or third-party business partners conduct business and as a result, we have experienced disruptions and may continue to experience more pronounced disruptions in our operations. For example, we have experienced delays in enrollment in our clinical trials, and we may continue to experience such delays for a variety of reasons, including COVID-19, labor shortages and supply chain disruptions in distribution of clinical trial materials, study monitoring and data analysis, any of which could materially adversely impact our business, results of operations and overall financial performance in future periods. In addition, financial markets have experienced a period of high volatility due to these macroeconomic factors. The persistence of this volatility may impact our ability to engage in capital market activities and adequately fund our operations. As of the filing date of this Annual Report, the extent to which these macroeconomic events and conditions may impact our financial condition, results of operations or liquidity is uncertain. The effect of these macroeconomic events and conditions may not be fully reflected in our results of operations and overall financial performance until future periods. See Part I, Item 1A "Risk Factors" for further discussion of the possible impact of these macroeconomic conditions on our business. 57
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Collaboration Arrangements
Agreements with Tay Therapeutics
OnApril 30, 2021 , we entered into the Option Agreement with Tay. Pursuant to the Option Agreement, Tay granted us an exclusive option to obtain certain exclusive worldwide rights to research, develop and commercialize products containing Tay'sBET inhibitor compounds for the treatment of any disease, disorder or condition in humans. Pursuant to the Option Agreement, we agreed to use commercially reasonable efforts to stabilize, develop and manufacture a product with a pan-BD BET inhibitor as its active ingredient and Tay agreed to provide a mutually agreed data package for its Oral BETi Compounds. We paid a$1.0 million non-refundable cash payment to Tay upon execution of the Option Agreement, 50% of which was to be used by Tay in the development of the Oral BETi Compounds.
Locally Administered Pan-BD BET Inhibitor Program (VYN201)
OnAugust 6, 2021 , we exercised our option with respect to the VYN201 program and, onAugust 9, 2021 , the parties entered into the VYN201 License Agreement granting VYNE a worldwide, exclusive license that is sublicensable through multiple tiers to exploit certain of Tay's pan-BD BET inhibitor compounds. We have the sole responsibility for development, regulatory, marketing and commercialization activities to be conducted for the licensed products at our sole cost and discretion. We are required to use commercially reasonable efforts to develop and, if approved, commercialize such products. Pursuant to the VYN201 License Agreement, a joint development committee consisting of one representative from each party reviews the progress of the development plan for the licensed products. Pursuant to the VYN201 License Agreement, we may develop a product that contains or incorporates a specificBET inhibitor, whether alone or in combination with other active ingredients, in any form, formulation, presentation, or dosage, and for any mode of administration. We made a$0.5 million cash payment to Tay in connection with entering into the VYN201 License Agreement. Pursuant to the VYN201 License Agreement, we have 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 inthe United States of up to$15.75 million for all indications. Tay is entitled to additional milestones upon the achievement of regulatory approvals in certain jurisdictions outside theU.S. Tay is entitled to additional milestones upon the achievement of regulatory approvals in certain jurisdictions outside theU.S. In addition, with respect to any products we commercialize under the VYN201 License Agreement, we will pay tiered royalties to Tay on net sales of such licensed products by us, our affiliates, or sublicensees, of 5%, 7.5% and 10% based on tiered annual net sales bands subject to specified reductions. We are obligated to pay royalties until the later of (1) the tenth anniversary of the first commercial sale of the relevant licensed product, (2) the expiration of the last valid claim of the licensed patent rights covering such licensed product in such country and (3) the expiration of regulatory exclusivity for the relevant licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis.
Selective BET Inhibitor Program (VYN202)
Under the Option Agreement, we have an exclusive option (the "Option") to obtain certain exclusive worldwide rights to research, develop and commercialize products containing Tay's Oral BETi Compounds. Under the original terms of the Option Agreement, the Option was to expire upon the earlier of (i) 14 days following the delivery of an agreed data package and selection of a lead candidate by In4Derm and (ii)June 30, 2022 (the "Option Term"). OnJune 15, 2022 , the parties entered into a letter agreement to extend the Option Term toFebruary 28, 2023 . We recently informed Tay that we would like additional time to complete our assessment of the Oral BETi Compounds. In consideration of the significant progress made by the parties and our desire to maintain optionality with respect to our right to exercise the Option for the Oral BETi Compounds, the parties entered into a Letter Agreement onFebruary 27, 2023 (the "Letter Agreement") to extend the Option Term toApril 30, 2023 . Pursuant to the terms of the Letter Agreement, we agreed to pay Tay$250,000 to extend the Option Term. This fee will be deducted from the$4.0 million payable to Tay in the event that we exercise the Option pursuant to the Option Agreement. Upon exercise of the Option, the parties will sign a license agreement (the "Oral License Agreement") and we will pay Tay a$4.0 million cash payment, less the amount paid pursuant to the Letter Agreement. 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 inthe United States for all indications. Tay will be entitled to additional milestones upon the achievement of regulatory approvals in certain jurisdictions outside theU.S. In addition, with respect to any products we commercialize under the Oral License Agreement, we will pay tiered royalties to Tay on net sales of such licensed products by us, our affiliates, or sublicensees, of 5%, 7.5% and 10% based on tiered annual net sales bands subject to specified reductions. 58
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Components of Results of Operations
Revenues
Our revenue reported for the periods presented is comprised of AMZEEQ and ZILXI product sales and royalty revenue.
AMZEEQ and ZILXI were commercially launched in January and October of 2020, respectively. We have not generated revenue from the sales of these products followingJanuary 12, 2022 , the date we sold the MST Franchise to Journey. As a result of the disposition of these assets, product sales have been reclassified to discontinued operations for all periods presented. We will not commercially launch our other product candidates inthe United States or generate any revenues from sales of any of our product candidates unless and until we obtain marketing approval. Historically, we have generated revenues under development and license agreements including royalty payments in relation to Finacea, the prescription foam product that we developed in collaboration with Bayer, which later assigned it toLeo Pharma A/S ("LEO"). In the year endedDecember 31, 2022 and 2021 we received royalties of$0.5 million and$0.9 million , respectively. Our rights to royalty payments from the sale of Finacea were not transferred in the sale of the MST Franchise. Cost of Goods Sold
Cost of goods sold expenses consist 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 has been reclassified to discontinued operations for all periods presented.
Operating Expenses
Research and development expenses
Our research and development expenses have related 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 inJanuary 2022 , our research and development has been focused on our immuno-inflammatory pipeline, including VYN201, VYN202 and FMX114. As a result of the sale of the MST Franchise inJanuary 2022 , research and development expenses related to the MST Franchise have been reclassified to discontinued operations for all periods presented.
Our total research and development expenses for the years ended
Research and development expenses consist primarily of:
•employee-related expenses, including salaries, benefits and related expenses, including share based compensation expenses, for researched and development personnel;
•expenses incurred under agreements with third parties, including subcontractors, suppliers and consultants that conduct regulatory activities, clinical trials and preclinical studies;
•expenses incurred to acquire, develop and manufacture clinical trial materials;
•facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other operating costs;
•costs associated with the creation, development and protection of intellectual property;
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•other costs associated with preclinical and clinical activities and regulatory operations; and
•materials and manufacturing costs related to commercial production prior to FDA approval.
Selling, general and administrative expenses
Our selling, general and administrative expenses for the year ended
Our selling, general and administrative expenses consist principally of:
•employee-related expenses, including salaries, benefits and related expenses, including share-based compensation expenses;
•legal and professional fees for auditors and other consulting expenses; and
•facility, information technology and depreciation expenses.
As a result of the sale of the MST Franchise inJanuary 2022 , selling, general and administrative expenses related to the MST Franchise have been reclassified to discontinued operations for all periods presented.
Interest Expense
During 2021, interest expense primarily consisted of interest expense on our
long-term debt of
Other Income (Expense), net
Other income (expense), net primarily consists of interest earned on our cash and cash equivalents and foreign exchange rate gains and losses.
Income Taxes and Net Operating Loss Carryforwards
We have incurred significant net operating losses ("NOLs") since our inception.
We expect to continue to incur NOLs until such a time when we generate adequate
revenues for us to reach profitability. As of December 31, 2022 , we had federal
and state net operating loss carryforwards of $318.3 million and $90.4 million ,
respectively, of which $44.3 million and $89.0 million of these carryforwards
will begin to expire starting in 2031 through 2040 for federal and state
purposes, respectively. As of December 31, 2022 , we had federal and state
research and development tax credit carryforwards of $6.6 million and $1.2
million , respectively. The federal credits begin to expire in 2031 and the
California research credits have no expiration dates. As of December 31 , 2022,we
had $274.0 million in federal and state NOLs with no limited period of use.
NOLs and tax credit carryforwards are subject to review and possible adjustment
by the Internal Revenue Service and may become subject to an annual limitation
in the event of certain cumulative changes in the ownership interest of
significant stockholders over a three-year period in excess of 50%, as defined
under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended.
This could limit the amount of tax attributes that can be utilized annually to
offset future taxable income or tax liabilities. The amount of the annual
limitation is determined based on the value of our company immediately prior to
the ownership change. Subsequent ownership changes may further affect the
limitation in future years. State NOLs and tax credit carryforwards may be
subject to similar limitations under state laws. We have not determined if we
have experienced Section 382 ownership changes in the past and if a portion of
our net operating loss and tax credit carryforwards are subject to an annual
limitation under Sections 382 or 383. We may have experienced ownership changes
in the past, including in connection to our initial public offering ("IPO"), and
as a result of the Merger and/or subsequent shifts in our stock ownership, some
of which may be outside of our control. As a result, even if we earn net taxable
income, our ability to use the NOL and tax credit carryforwards may be
materially limited, which could harm our future operating results by effectively
increasing our future tax obligations.
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Results of Operations for the Years EndedDecember 31, 2022 andDecember 31, 2021 Summary of Operations Year Ended December 31, Increase/(Decrease) Increase/(Decrease) (in thousands, except %) 2022 2021 $ % Revenues Royalty revenues $ 477$ 931 $ (454) (48.8) % Total revenues 477$ 931 (454) (48.8) % Operating Expenses Research and development 18,385 19,543 (1,158) (5.9) % Selling, general and administrative 16,387 20,299 (3,912) (19.3) % Total operating expenses 34,772 39,842 (5,070) (12.7) % Operating loss (34,295) (38,911) (4,616) (11.9) % Interest expense - (5,610) (5,610) (100.0) % Other income (expense), net 363 (135) 498 368.9 % Loss from continuing operations before income taxes (33,932) (44,656) (10,724) (24.0) % Income tax expense (benefit) 13 (448) (461) (102.9) % Loss from continuing operations (33,945) (44,208) (10,263) (23.2) % Income (loss) from discontinued operations, net of income taxes 10,735 (29,121) 39,856 136.9 % Net loss (23,210) (73,329) (50,119) (68.3) % Revenues
Revenues totaled
We divested our MST Franchise onJanuary 12, 2022 . As a result of the sale, we will not generate revenue from the sales of AMZEEQ or ZILXI following such date. Product revenues have been reclassified to discontinued operations for all periods presented.
Research and development expenses
Our research and development expenses for the year endedDecember 31, 2022 were$18.4 million , representing a decrease of$1.2 million , or 5.9%, compared to$19.5 million for the year endedDecember 31, 2021 . The decrease was primarily due to lower employee-related expenses of$2.1 million , a decrease of$2.4 million in expenses for FMX114 and a decrease of$0.9 million in expenses for other R&D related activities. These decreases described above were partially offset by an increase of$2.8 million in expenses for VYN201 and the option extension fee for the VYN202 program totaling$1.4 million .
Selling, general and administrative expenses
Our selling, general and administrative expenses for the year endedDecember 31, 2022 were$16.4 million , representing a decrease of$3.9 million , or 19.3%, compared to$20.3 million for the year endedDecember 31, 2021 . The decrease was primarily due to lower employee-related expenses of$2.1 million and a decrease of$1.8 million in expenses for consulting and professional fees.
Interest Expense
As a result of the prepayment of our indebtedness outstanding under the Amended and Restated Credit Agreement inAugust 2021 , we did not incur interest expense for the year endedDecember 31, 2022 . During the year endedDecember 31, 2021 , interest expense totaled$5.6 million and primarily consisted of$2.6 million of interest expense associated with our 61
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indebtedness outstanding under the Amended and Restated Credit Agreement and also included prepayment penalties of$1.4 million and write off of deferred financing costs of$1.6 million .
Other Income (Expense), net
Other income for the year ended
Liquidity
Since inception, we have funded operations primarily through private and public placements of our equity, debt and warrants and through fees, cost reimbursements and payments received from our licensees. We commenced generating product revenues related to sales of AMZEEQ and ZILXI inJanuary 2020 andOctober 2020 , respectively. AMZEEQ and ZILXI were sold as part of the sale of the MST Franchise onJanuary 12, 2022 and, as such, we 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 commercialize such products. For the year endedDecember 31, 2022 , we incurred a net loss of$23.2 million and used$29.2 million of cash in operations. The net loss was comprised of$10.7 million of income from discontinued operations and$33.9 million loss from continuing operations. As ofDecember 31, 2022 , we had cash and cash equivalents, and restricted cash of$31.0 million and an accumulated deficit of$662.7 million . We received the$5.0 million deferred payment from Journey onJanuary 12, 2023 , the one-year anniversary of the sale of the MST Franchise. We had no outstanding debt as ofDecember 31, 2022 . In addition, inMarch 2022 , we entered into the Equity Purchase Agreement withLincoln 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 our common stock over the 36-month term of the Equity Purchase Agreement. As ofDecember 31, 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 that 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 consolidated financial statements are issued. The accompanying audited 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 theBET 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 audited 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 Annual Report on Form 10-K, 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-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 62 -------------------------------------------------------------------------------- Table of Contents otherwise modify our business and our research and development activities and other operations. See "Item1A. Risk Factors-Risks Related to our Financial Position and Need for Capital-We will need substantial additional funding to fund our operations, and there is substantial doubt about our ability to continue as a going concern. We could also be forced to delay, reduce or terminate our research and development activities which would have a material adverse effect on our financial condition." The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern.
Capital Resources
Overview
To date, we have financed our operations primarily through private and public placements of our common stock, debt and warrants and through the sale of our products, fees, cost reimbursements and payments received from our licensees. InJanuary 2022 , we sold our MST Franchise, which resulted in an upfront payment of$20.0 million at the close of the sale and deferred payment of$5.0 million inJanuary 2023 . Cash Flows The following table summarizes our statement of cash flows for the years endedDecember 31, 2022 and 2021: Year Ended December 31, 2022 2021 Net cash (used in) / provided by: (in thousands) Operating activities$ (29,200) $ (56,367) Investing activities 15,667 1,027 Financing activities 1,653 39,777
Net cash used in operating activities
During the year endedDecember 31, 2022 , net cash used in operating activities was$29.2 million and primarily reflected our net loss of$23.2 million adjusted for the gain on the sale of the MST Franchise of$12.9 million and non-cash items of$4.7 million related to stock-based compensation expense, depreciation and amortization, and loss from sale and disposal of property and fixed assets. The remainder of the cash used in operations is driven by net change in assets and liabilities. During the year endedDecember 31, 2021 , net cash used in operating activities was$56.4 million and primarily reflected our net loss of$73.3 million , partially offset by non-cash charges and non-cash finance expense of$10.8 million related to stock-based compensation expense, depreciation and amortization and$1.4 million in debt prepayment premium. The remainder of the cash used in operations is driven by net decrease in assets and liabilities.
Net cash provided by investing activities
During the year ended
During the year ended
Net cash provided by financing activities
During the year ended
During the year ended
Cash and Funding Sources
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Our sources of funding in the year endedDecember 31, 2022 totaled$17.3 million and consisted primarily of$15.7 million net proceeds from the sale of the MST Franchise and$1.5 million net proceeds from the issuance of common stock pursuant to our at-the-market offering facility. Our sources of funding in the year endedDecember 31, 2021 totaled$76.0 million and consisted primarily of$29.2 million net proceeds from our at-the-market program and$46.8 million net proceeds from our registered direct public offering completed inJanuary 2021 .
We have no ongoing material financial commitments (such as lines of credit) that may affect our liquidity over the next five years.
Contractual Obligations
Lease Commitments:
InNovember 2022 , we transitioned to a smaller corporate headquarters and signed a Sublease Agreement (the "Sublease") to sublease approximately 5,755 square feet of office space (the "Leased Premises") inBridgewater, New Jersey throughSeptember 30, 2023 . In addition, we signed a Lease Agreement (the "Master Lease") to lease the Leased Premises following the termination of the Sublease throughSeptember 30, 2025 . We expect to incur$0.1 million of rent expense in 2023 relating to the sublease. The future minimum lease payments for the Master Lease total approximately$0.3 million throughSeptember 30, 2025 .
R&D Commitments:
We enter into contracts in the normal course of business with CROs, contract manufacturing organizations and other service providers for clinical trials, preclinical studies and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material. Funding Requirements
Our present and future funding requirements will depend on many factors, including the following:
•costs associated with the research and development of product candidates;
•the time and costs involved in obtaining regulatory approval for our other pipeline product candidates and any delays we may encounter as a result of evolving regulatory requirements or adverse results with respect to any of these product candidates;
•terms and timing of any acquisitions, collaborations or other arrangements;
•the number of potential new products we identify and decide to develop; and
•the costs involved in filing and prosecuting patent applications and obtaining, maintaining and enforcing patents or defending against claims or infringements raised by third parties, and license royalties or other amounts we may be required to pay to obtain rights to third party intellectual property rights. Our operating plan may change as a result of many factors currently unknown to us, and any such change may affect our funding requirements. We may therefore need to seek additional capital sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations or additional license arrangements. Such financings may result in dilution to stockholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business.
For more information as to the risks associated with our future funding needs, see "Item 1A-Risk Factors" included herein.
Off-Balance Sheet Arrangements
As of
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Critical Accounting Policies and Significant Judgments and Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles inthe United States . The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. While our significant accounting policies are more fully described in Note 2, "Significant Accounting Policies," to the consolidated financial statements included in "Financial Statements and Supplementary Data" of this Annual Report, we believe that the following accounting policies are the most critical to assist shareholders and investors reading the consolidated financial statements in fully understanding and evaluating our financial condition and results of operations. These policies relate to significant areas involving management's judgments and estimates and that require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
We record revenue based on a five-step model in accordance with Accounting
Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC
606"). For collaboration agreements under ASC 606we identify the contract, we
identify the performance obligations, determine the transaction price, allocate
the contract transaction price to the performance obligations, and recognize the
revenue when (or as) the performance obligation is satisfied.
Royalty Revenues and Collaboration Agreements
We identify the performance obligations included within the agreement and evaluate which performance obligations are distinct. Upfront payments for licenses are evaluated to determine if the license is capable of being distinct from the obligations to participate on certain development and/or commercialization committees with the collaboration partners and supply manufactured drug product for clinical trials. For performance obligations that are satisfied over time, we utilize the input method and revenue is recognized by consistently applying a method of measuring progress toward complete satisfaction of that performance obligation. We periodically review our estimated periods of performance based on the progress under each arrangement and account for the impact of any changes in estimated periods of performance on a prospective basis. Milestone payments are a form of variable consideration as the payments are contingent upon achievement of a substantive event. Milestone payments are estimated and included in the transaction price when we determine that it is probable that there will not be a significant reversal of cumulative revenue recognized in future periods.
Product sales, Product Sales Provisions and Product Returns
As a result of the disposition of the MST Franchise inJanuary 2022 , we no longer have any revenue generating products. See Note 4, "Discontinued Operations." Our net product revenues were generated through sales of AMZEEQ, which was approved by the FDA inOctober 2019 and was commercially launched inthe United States inJanuary 2020 , and ZILXI, which was approved by the FDA inMay 2020 and was commercially launched inthe United States inOctober 2020 . Our customers were a limited number of national and select regional wholesalers (the "distributors") and certain independent and specialty pharmacies (together, the "customers"). Net product revenue was typically recognized when customers obtained control our products, which occurred at a point in time, typically upon delivery of product to the customers. Product revenue is recorded net of distribution fees, trade discounts, allowances, rebates, copay program coupons, chargebacks, estimated returns and other incentives. These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on gross sales for a reporting 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. Consistent with industry practice, customers are generally allowed to return products within a specified period of time before and after its expiration date. We estimate the amount of product that will be returned and deducts these estimated amounts from its gross revenue at the time the revenue is recognized. The information utilized to estimate the returns provision includes: (i) actual return history (ii) historical return industry information regarding rates for comparable pharmaceutical products and product portfolios, (iii) external data with respect to inventory levels in the wholesale distribution channel, (iv) external data with respect to prescription demand for products and (v) remaining shelf lives of products at the date of sale. 65
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Discontinued Operations
We accounted for the sale of the MST Franchise in accordance with Accounting Standards Codification, ASC, 205 Discontinued Operations and Accounting Standards Update, ASU, No. 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity. We followed the held-for-sale criteria as defined in ASC 360 and ASC 205. ASC 205 requires that a component of an entity that has been disposed of or is classified as held for sale and has operations and cash flows that can be clearly distinguished from the rest of the entity be reported as assets held for sale and discontinued operations. In the period a component of an entity has been disposed of or classified as held for sale, the results of operations for the periods presented are reclassified into separate line items in the consolidated statements of operations. Assets and liabilities are also reclassified into separate line items on the related consolidated balance sheets for the periods presented. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity's operations and financial results be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. Due to the sale of the MST Franchise during the first quarter of 2022, in accordance with ASC 205, Discontinued Operations, we have classified the results of the oncology business as discontinued operations in our consolidated statements of operations and cash flows for all periods presented, see Note 4, Discontinued Operations in the consolidated financial statements. All disposed assets and liabilities associated with our MST Franchise were therefore classified as assets and liabilities of discontinued operations in our consolidated balance sheets for the periods presented. All amounts included in the notes to the consolidated financial statements relate to continuing operations unless otherwise noted.
Recently Issued Accounting Pronouncements
Certain recently issued accounting pronouncements are discussed in Note 2, "Significant Accounting Policies," to the consolidated financial statements included in "Financial Statements and Supplementary Data" of this Annual Report.
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