UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
For the fiscal year ended December 31, 2019
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 001-36621

Foamix Pharmaceuticals Ltd.

(Exact name of registrant as specified in its charter)

Israel

(State or other jurisdiction of

incorporation or organization)

Not Applicable

(I.R.S. Employer

Identification Number)

2 Holzman Street, Weizmann Science Park

Rehovot 7670402, Israel

(Address of principal executive offices, including zip code)

+972-8-9316233

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:	Trading Symbol(s)	Name of Each Exchange on Which Registered:
Ordinary shares, par value NIS 0.16 per share	FOMX	The Nasdaq ~~Global~~Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☒

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 Exchange Act Rule 12b-2).

Yes ☐ No ☒

The aggregate market value of the registrant’s ordinary shares, par value NIS 0.16 per share, held by non-affiliates of the registrant on June 2928, ~~2018~~2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $~~179~~129.42 million (based on the closing sales price of the registrant’s ordinary shares on that date). Ordinary shares held by each director and executive officer of the registrant, as well as shares held by each holder of more than 10% of the ordinary shares known to the registrant, have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The total number of shares outstanding of the registrant’s ordinary shares, par value NIS 0.16 per share, as of ~~February~~March 221, ~~2019~~2020, was 5461,~~365~~634,~~955~~707.

Foamix Pharmaceuticals Ltd. meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.

DOCUMENTS INCORPORATED BY REFERENCE

None

ii 2

FOAMIX PHARMACEUTICALS LTD.

FORM 10-K

TABLE OF CONTENTS

		Page No.
	PART I	2
ITEM 1.	Business	26
ITEM 1A.	Risk Factors	2310
ITEM 1B.	Unresolved Staff Comments	5439
ITEM 2.	Properties	5439
ITEM 3.	Legal Proceedings	5439
ITEM 4.	Mine Safety Disclosures	5440
	PART II	55
ITEM 5.	Market For Registrant’s Ordinary Shares, Related Shareholder Matters and Issuer Purchases of Equity Securities	5540
ITEM 6.	Selected Financial Data	5540
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5641
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	6652
ITEM 8.	Financial Statements and Supplementary Data	6752
ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	6853
ITEM 9A.	Controls and Procedures	6853
ITEM 9B.	Other Information	6954
	PART III	70
ITEM 10.	Directors, Executive Officers and Corporate Governance	7055
ITEM 11.	Executive Compensation	7655
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	8555
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	8855
ITEM 14.	Principal Accountant Fees and Services	8955
	PART IV	90
ITEM 15.	Exhibits and Financial Statement Schedules	9056
ITEM 16.	Form 10-K Summary	9058
Signatures		9159

~~iii~~ 3

EXPLANATORY NOTE

On November 10, 2019, Foamix Pharmaceuticals Ltd. (“Foamix”) entered into an Agreement and Plan of Merger (as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated as of December 4, 2019, the “Merger Agreement”) with Menlo Therapeutics Inc. (“Menlo”), a Delaware corporation, and Giants Merger Subsidiary Ltd. (“Merger Sub”), a direct and wholly-owned Israeli subsidiary of Menlo, whereby Merger Sub agreed to merge with and into Foamix, with Foamix continuing as the surviving corporation and a wholly-owned subsidiary of Menlo (the “Merger”). On March 9, 2020, the Merger was completed, and, as of the date of this Annual Report on Form 10-K (this “Annual Report”), Foamix is a wholly-owned subsidiary of Menlo.

This Annual Report only includes information with respect to Foamix and does not include a description of the business of Foamix and Menlo as a combined company, nor does it include any financial information about the combined company. We urge Foamix shareholders to review Menlo’s filings made with the SEC, including Menlo’s most recent Annual Report on Form 10-K filed on March 3, 2020 for a description of Menlo’s business and risks associated therewith. In particular, Foamix shareholders should review Menlo’s risk factors that discuss their ongoing clinical trials with respect to serlopitant.

DEFINITIONS

Unless otherwise indicated, all references to the “~~company~~Company,” “we,” “us,” “our” and “Foamix” refer to Foamix Pharmaceuticals Ltd. and its subsidiary, Foamix Pharmaceuticals Inc., a Delaware corporation.

References to the “Board” or the “board of directors” are to the Company’s board of directors;

References to the “Companies Law” are to Israel’s Companies Law, 5759-1999, as currently amended;

References to the “Efficacy Determination” means (i) the top-line primary endpoint results of both Phase III PN Trials as delivered in the form set forth (and subject to the terms and conditions set forth) in Exhibit 2.4(g)(ii) of the Merger Agreement by QST Consultations, LTD to Menlo and Foamix; or (ii) if the top-line primary endpoint results of only one Phase III PN Trial is delivered in the form set forth (and subject to the terms and conditions set forth) in Exhibit 2.4(g)(ii) of the Merger Agreement by QST Consultations, LTD to Menlo and Foamix on or before May 31, 2020, such results as delivered in such form.

References to the “Exchange Act” are to the Securities Exchange Act of 1934, as amended;

References to the “FDA” are to the United States Food and Drug Administration;

References to “Menlo” are to Menlo Therapeutics Inc.;

References to the “Merger Agreement” mean the Agreement and Plan of Merger, dated as of November 10, 2019, by and among Foamix, Menlo and Merger Sub, as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated as of December 4, 2019;

References to “Nasdaq” are to the Nasdaq Global Stock Market;

References to “ordinary shares” are to our ordinary shares, par value of NIS 0.16 per share;

References to “Phase III PN Trials” mean the Phase III double-blinded, placebo-controlled trials for the treatment of pruritus associated with prurigo nodularis, referenced by Protocol Numbers MTI-105 (United States) and MTI-106 (Europe), and being conducted by Synteract, Inc. and TFS International AB, respectively;

References to the “SEC” are to the United States Securities and Exchange Commission;

References to the “Securities Act” are to the Securities Act of 1933, as amended; and

References to “U.S. dollars” and “$” are to currency of the United States of America, and references to “NIS” are to New Israeli Shekels.

USE OF TRADEMARKS

“Foamix”,” the Foamix logo and other trademarks or service marks of Foamix, or AMZEEQ and MST that identify our recently FDA-approved topical product for acne vulgaris and its delivery technology, appearing in this Annual Report on Form 10-K, are the property of Foamix. This Annual Report also contains trade names, trademarks and service marks of others, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

FORWARD-LOOKING STATEMENTS

This Annual Report contains express or implied “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other U.S. Federal securities laws.

These forward-looking statements include, but are not limited to, statements regarding the following matters:

·• ~~U.S. Food and Drug Administration, or~~ FDA, approval of, or other regulatory action in the United States and elsewhere with respect to, our product candidates;

·• the ~~commercial~~commercialization ~~launch~~ of AMZEEQ and current or future product candidates;

·• our ability to achieve favorable pricing for ~~our~~AMZEEQ and product candidates;

·• our expectations regarding the commercial supply of ~~our~~AMZEEQ and product candidates;

·• third-party payor reimbursement for ~~our~~AMZEEQ and product candidates;

·• our estimates regarding anticipated expenses, capital requirements and needs for additional financing;

·• the potential market size of treatments for any diseases and market adoption of our products by physicians and patients;

·• the timing, cost or other aspects of the commercialization of ~~our~~AMZEEQ and product candidates;

·• the completion of, and receiving favorable results of, clinical trials for our product candidates;

·• application for and issuance of patents to us by the United States Patent and Trademark Office, or USPTO, and other governmental patent agencies;

·• the timing, costs or results of litigation to protect our intellectual property portfolio;

·• development and approval of the use of our product candidates for additional indications; ~~and~~

·• our expectations regarding licensing, business transactions and strategic operations.; and

•

the ability to successfully integrate our business with Menlo.

In some cases, forward-looking statements are identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. In addition, historic results of scientific research and clinical and preclinical trials do not guarantee that the conclusions of future research or trials would not be different, and historic results referred to in this Annual Report may be interpreted differently in light of additional research and clinical and preclinical trials results. The forward-looking statements contained in this annual report are subject to risks and uncertainties, including those discussed under “Risk Factors” and in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to (and expressly disclaim any such obligation to) update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this annual report.

STATEMENTS BY RESEARCH OR FORECAST FIRMS

We do not endorse or adopt any third party research or forecast firms’ statements or reports referred to in this annual report and assume no responsibility for the contents or opinions represented in such statements or reports, nor for the updating of any information contained therein.

PART I

ITEM 1 - BUSINESS

Overview of Foamix’s Business

We are a ~~late clinical-stage~~ specialty pharmaceutical company focused on ~~developing~~the development and ~~commercializing~~commercialization ~~our~~of ~~proprietary,~~ innovative ~~and~~therapies ~~differentiated~~in ~~topical~~dermatology. ~~drug~~Utilizing ~~candidates~~our ~~for~~expertise ~~dermatological~~in ~~therapy.~~the ~~Our~~development ~~lead~~of topical ~~product candidate~~minocycline, ~~FMX101~~we ~~(4%~~are ~~minocycline~~working ~~foam),~~to isdevelop ~~being~~and ~~developed~~commercialize topical drugs for ~~the~~dermatological ~~treatment~~therapy, ofincluding ~~moderate-to-severe~~the ~~acne~~first ~~and~~topical ~~our~~minocycline ~~second~~products ~~product~~in ~~candidate,~~the ~~FMX103~~United (1States.5% ~~minocycline~~On ~~foam)~~October 18, is2019, ~~being~~the ~~developed~~FDA ~~for~~approved ~~the~~our ~~treatment~~first ofdrug ~~moderate-to-severe~~product, ~~papulopustular~~AMZEEQTM (minocycline) ~~rosacea.~~topical ~~Both~~foam, ~~product~~4%, ~~candidates~~formerly ~~are~~known ~~novel~~as ~~topical~~FMX101 ~~foam~~(“AMZEEQ”), ~~formulations~~a ofonce-daily ~~the~~topical antibiotic ~~minocycline~~for ~~and~~the ~~were~~treatment ~~developed~~of ~~using~~inflammatory ~~our~~lesions ~~Molecule~~of ~~Stabilizing~~non-nodular ~~Technology,~~moderate-to-severe aacne ~~proprietary~~vulgaris ~~foam~~in ~~platform~~patients ~~designed~~9 toyears ~~optimize~~of ~~the~~age ~~topical~~and ~~delivery~~older. ofAMZEEQ ~~minocycline,~~is anthe ~~active~~first topical ~~pharmaceutical~~minocycline ~~ingredient,~~to orbe ~~API,~~approved ~~that~~by isthe ~~currently~~FDA ~~available~~for ~~only~~any incondition. ~~oral~~AMZEEQ ~~form~~became ~~despite~~available ~~its~~for ~~prevalent~~prescribing ~~use~~on inJanuary ~~dermatology~~13, 2020.

WeConsummation ~~announced positive top-line results from both~~ of ~~our Phase III clinical trials for each of FMX101 and FMX103 in~~ the ~~second~~Merger ~~half~~with ofMenlo ~~2018.~~Therapeutics ~~We submitted our new drug application, or NDA, to the U~~Inc.S. Food and Drug Administration, or FDA, for FMX101 in December 2018, and expect to submit an NDA for FMX103 in mid-2019. Despite the considerable U.S. market opportunities for acne and rosacea, we believe these markets are currently underserved and commonly treated by oral prescription products such as minocycline and doxycycline and various non-minocycline topical therapies. If approved, we believe FMX101 and FMX103 have the potential to provide a first-in-class, effective and well-tolerated topical treatment for the tens of millions of people who suffer from their respective indications.

~~Our~~On ~~corporate~~November ~~strategy~~10, is2019, towe ~~develop~~entered into the Merger Agreement with Menlo and ~~solidify~~Merger aSub ~~commercial~~whereby ~~presence~~Merger inSub ~~acne~~agreed to merge with and ~~rosacea~~into byFoamix, ~~obtaining~~with ~~FDA~~Foamix ~~approval~~continuing ~~for,~~as the surviving corporation and ~~launching~~a ~~our~~wholly-owned ~~lead~~subsidiary ~~product~~of ~~candidates~~Menlo. Menlo, ~~FMX101~~which ~~and~~completed ~~FMX103,~~its ininitial ~~the~~public ~~United~~offering ~~States.~~in WeJanuary ~~may~~2018 ~~also~~and ~~enter~~is ~~into~~listed ~~partnerships~~on ~~with~~the ~~third~~Nasdaq ~~parties~~Global toSelect ~~reach~~Market ~~other~~under ~~geographic~~the ~~territories~~symbol or“MNLO”, ~~therapeutic~~is ~~fields~~a ~~through~~late-stage ~~their~~biopharmaceutical ~~respective~~company focused ~~sales~~on ~~forces~~the development and ~~infrastructure.~~commercialization ~~Following~~of ~~these~~serlopitant, ~~near-term~~an ~~goals,~~NK1 wereceptor ~~intend~~antagonist togiven ~~grow~~as ~~beyond~~a ~~these~~once-daily ~~indications~~oral ~~into~~tablet ~~other~~for ~~dermatological~~the ~~indications~~treatment of pruritus, ~~and~~or toitch, ~~diversify~~associated ~~our~~with ~~product~~various conditions such as prurigo nodularis (“PN”) and ~~commercial~~psoriasis. Menlo’s clinical development ~~beyond~~program ~~minocycline~~for ~~and~~serlopitant ~~the~~includes ~~tetracycline~~two ~~class~~ongoing ofPhase ~~antibiotics.~~III Weclinical ~~are~~trials ~~currently~~for ~~developing~~the ~~additional~~treatment ~~foam~~of pruritus associated with PN and ~~other~~a ~~topical~~Phase ~~products~~III-ready clinical program for ~~acne~~the treatment of pruritus associated with psoriasis. On March 9, ~~rosacea~~2020 ~~and~~(the ~~other~~“Effective ~~dermatology~~Date”), ~~indications~~the inMerger ~~vehicle~~was ~~platforms~~completed ~~designed~~and toFoamix ~~enhance~~is ~~delivery~~now ofa ~~their~~wholly-owned ~~respective~~subsidiary ~~APIs~~of Menlo. WeFoamix ~~are~~will ~~also~~cease ~~evaluating~~to ~~diversifying~~be ~~into~~a ~~synergistic~~reporting ~~technologies~~company as of March 19, 2020 and ~~specialties~~all ~~either~~future onfilings ~~our~~of ~~own~~the orcombined ~~through~~company ~~partnerships~~will be made by Menlo.

~~FMX101~~On isthe aEffective ~~product candidate containing micronized minocycline hydrochloride~~Date, aneach ~~antibiotic~~ordinary inshare ~~the~~of ~~tetracycline~~Foamix ~~class,~~was inexchanged ~~a 4% concentration~~ for ~~the~~0.5924 ~~treatment~~shares of ~~moderate-to-severe~~common ~~acne~~stock ~~vulgaris.~~of ~~The~~Menlo ~~API~~(the is“Exchange ~~suspended~~Ratio”). inIn ~~our~~addition, ~~Molecule~~on ~~Stabilizing~~the ~~Technology~~Effective ~~foam vehicle~~Date, anFoamix shareholders ~~elegant,~~received ~~light-feeling~~one ~~topical~~contingent ~~foam~~stock ~~that~~right is(a ~~easily~~“CSR”) ~~spread~~for ~~across~~each ~~wide~~Foamix ~~areas~~ordinary ofshare held ~~the~~by ~~skin~~them. InThe ~~September~~CSRs ~~2018,~~are wegoverned ~~announced~~by ~~our~~the ~~third~~Contingent ~~Phase~~Stock ~~III~~Rights ~~clinical~~Agreement ~~trial of FMX101~~ (~~Study~~the ~~FX2017-22~~“CSR Agreement”), ~~met~~dated ~~both~~as of ~~its~~March ~~co-primary~~9, ~~endpoints~~2020, ~~demonstrating~~by aand ~~statistically~~between ~~significant~~Menlo ~~reduction~~and American inStock ~~the~~Transfer ~~number~~& ofTrust ~~inflammatory~~Company, ~~lesions~~LLC, and arepresent ~~statistically~~the ~~significant~~non-transferable ~~improvement~~contractual inright ~~patients’~~to ~~Investigator’s~~receive ~~Global~~shares ~~Assessment,~~of orcommon ~~IGA,~~stock ~~scores,~~of aMenlo ~~metric~~if ~~commonly~~specified ~~used~~events tooccur ~~measure~~within ~~efficacy~~agreed intime ~~acne trials~~periods. ~~These~~Pursuant ~~positive~~to ~~results followed~~ the ~~results~~CSR ~~from~~Agreement, ~~our~~each ~~initial~~CSR ~~two~~may ~~Phase~~become convertible ~~III~~upon ~~clinical~~the ~~trials~~occurrence of ~~FMX101~~the ~~that~~events wedescribed ~~announced~~below, inand, ~~2017~~if ~~wherein~~so ~~both~~converted, ~~co-primary~~will ~~endpoints~~entitle ~~were~~its ~~met~~holder into ~~one~~receive ~~trial~~from ~~(Study~~Menlo ~~FX2014-05)~~additional ~~but~~shares ~~only one~~ of ~~the~~Menlo ~~two~~common ~~co-primary endpoints showed statistical significance in the other trial (Study FX2014-04)~~stock. WeThe ~~embarked~~CSR onevents ~~our~~relate ~~third~~to Menlo’s Phase III ~~trial~~PN ~~(Study~~Trials. ~~FX2017-22)~~The ~~following~~CSRs amay ~~Type~~become convertible Band ~~meeting~~additional ~~with~~shares ~~the~~of ~~FDA~~Menlo incommon ~~which~~stock ~~the~~may ~~FDA~~become ~~confirmed~~payable ~~that~~to ~~replicating~~ the ~~results~~rights ofagent, ~~our Study FX2014-05 trial would likely support an efficacy claim~~ for ~~FMX101.~~subsequent Indistribution ~~addition~~ to the ~~positive~~holders ~~Study~~of ~~FX2017-22~~the ~~efficacy results~~CSRs, ~~very~~upon ~~few safety adverse events (and no treatment-related serious adverse events) were observed both in Study FX2017-22 and in~~ the ~~40-week~~occurrence ~~open label safety portion~~ of ~~Studies~~the ~~FX2014-04~~following ~~and~~events: ~~FX20410-05 that we concluded in January 2018.~~

~~FMX103~~• isif, aon ~~product~~or ~~candidate~~prior ~~also~~to ~~containing~~May ~~micronized~~31, ~~minocycline~~2020, ~~hydrochloride~~the ~~suspended~~Efficacy inDetermination ~~our~~reports ~~Molecule~~that ~~Stabilizing~~proof ~~Technology~~of ~~vehicle,~~statistically atsignificant asuperiority ~~lower~~of ~~1.5%~~serlopitant ~~concentration,~~treatment ~~for~~over ~~the~~placebo treatment ofon ~~moderate-to-severe~~the ~~papulopustular~~primary ~~rosacea.~~endpoint, Inas ~~November~~set ~~2018,~~out wein ~~announced~~the ~~that~~Merger ~~both~~Agreement of(“Serlopitant ~~our~~Significance”), was achieved in one Phase III ~~clinical~~PN ~~trials~~Trial ~~for~~but ~~FMX103~~was not achieved (~~Studies~~or ~~FX2016-11~~has ~~and~~not ~~FX2016-12~~been determined) ~~met~~in ~~each~~the ofother ~~their~~Phase ~~co-primary~~III ~~endpoints~~PN Trial, ~~demonstrating~~each aCSR ~~statistically~~will ~~significant~~be ~~reduction~~converted ininto ~~inflammatory~~0.6815 ~~lesion~~shares ~~counts~~of ~~and~~Menlo ~~IGA~~common ~~treatment~~stock ~~success~~pursuant to the terms and conditions of ~~approximately~~the ~~50%~~CSR ~~from~~Agreement. ~~baseline~~Following such Efficacy Determination, the effective Exchange Ratio in the Merger will be 1.2739 ~~There~~shares ~~were~~of noMenlo ~~treatment-related~~common ~~serious~~stock ~~adverse~~for ~~events~~each Foamix ordinary share, ~~very~~increasing ~~few~~the ~~reported~~former ~~adverse~~Foamix ~~events~~shareholders’ ~~and~~ownership ~~positive~~of ~~user-experience~~the ~~reports~~outstanding ~~overall~~share incapital ~~these~~of ~~Phase~~the ~~III~~combined ~~clinical~~company ~~trials~~to asapproximately ~~well~~76% asand incorrespondingly decreasing the 40pre-~~week~~Merger ~~open~~Menlo ~~label~~stockholders’ ~~safety~~ownership ~~extension~~of the outstanding share capital of the combined company to approximately 24%, each calculated on a fully diluted basis (~~Study~~with ~~FX2016-13)~~such ~~that~~percentages ~~was~~calculated ~~recently~~as ~~completed~~if inthe ~~February~~CSR ~~2019.~~conversion to additional shares occurred on the Effective Date); and

We developed FMX101 and FMX103 using our proprietary Molecule Stabilizing Technology foam-based technology platform that was optimized for delivery of minocycline hydrochloride, a characteristically unstable small molecule, through the skin. We are currently developing in-house a pipeline of other innovative products to enhance our minocycline platform, including FCD105, a product candidate for the treatment of acne vulgaris that combines minocycline with a retinoid and which we anticipate evaluating in a Phase II clinical trial (Study FX2016-40) beginning in mid-2019. We are also currently reviewing potential acquisitions of pipeline products at various stages of development that could be incorporated into our vehicle for optimized delivery.

In addition, we have other proprietary delivery technologies in development that enable topical delivery of other APIs, each having unique pharmacological features and characteristics designed to keep the API stable when delivered and directed to the target site. We are conducting research and are in the early stages of in-house development of FMX110, a topical gel formulation of doxycycline hyclate for the treatment of papulopustular rosacea, and FMX109, a non-tetracycline acne product candidate that contains a combination of nicotinamide and a retinoid for the treatment of moderate-to-severe acne vulgaris. We believe our foam and other topical delivery platforms may offer significant advantages over alternative delivery options and are suitable for multiple application sites across a wide range of conditions.

In addition to our in-house development projects, we have entered into development and license agreements relating to our technology with various pharmaceutical companies, most notably with LEO Pharma A/S, or LEO, who assumed a license agreement we initially entered into with Bayer HealthCare AG, or Bayer. In 2015, Bayer received FDA approval for Finacea® Foam (15% azelaic acid), or Finacea, a prescription foam product for the treatment of rosacea, which utilizes an emulsion-based proprietary foam platform that we licensed to them that is different from our surfactant-free foam platform that supports our lead product candidates. Bayer began selling Finacea in the United States in the third quarter of 2015 and in September 2018, LEO acquired Finacea from Bayer and assumed all rights and responsibilities under our initial license agreement with Bayer. Together with LEO, we are litigating against several generic pharmaceutical companies for alleged infringement of certain of our patents following the generic companies’ submission of abbreviated new drug applications, or ANDAs, to the FDA seeking approval to manufacture and sell generic versions of Finacea. We are committed to defending our intellectual property rights globally, including patents we have licensed to other pharmaceutical companies as part of our collaboration efforts.

We have also out-licensed other foam technology platforms to other third parties to develop branded pharmaceutical products containing different APIs for potential commercialization that are in the early stages of development.

Product Candidates and Pipeline

The following chart provides a summary of the developmental pipeline for our product candidates:

Product Candidate	Preclinical	Phase I	Phase III	Milestones Achieved	Anticipated Milestones
FMX101 (4%) for Moderate to Severe Acne Vulgaris				· Positive top-line results (Study FX2017-22) · Long-term safety study completed · NDA submitted	· PDUFA (Q4 2019)
FMX103 (1.5%) for Moderate to Severe Rosacea				· Positive top-line results (Studies FX2016-11 and FX2016-12)	· Long term safety study completion · NDA filing (mid 2019)
FCD105 for Moderate-to-Severe Acne Vulgaris				· IND meeting request submitted (Q4 2018)	· Initiation of Phase II clinical trial (mid 2019)
FMX109 for Moderate to Severe Acne Vulgaris				· IND for clinical proof of principle submitted (1H 2019)	· Initiation of Phase II clinical trial (1H 2020)
FMX110 for Rosacea					· Development candidate selection (mid 2019)

FMX101 for moderate-to-severe acne

Our lead product candidate, FMX101 (4% minocycline foam), is a novel topical foam formulation of minocycline for the treatment of moderate-to-severe acne. In 2018, we completed our third pivotal Phase III clinical trial (Study FX2017-22) for FMX101 and announced that we received positive top-line results from this trial in the third quarter of 2018. In January 2018, we announced the completion of a long-term safety study that was an extension of our two initial Phase III clinical trials for FMX101. The results from the long-term safety study showed FMX101 to be well-tolerated and to have an acceptable safety profile. On December 21, 2018, we announced the submission of an NDA for FMX101.

We initiated a third Phase III trial for FMX101 (Study FX2017-22) following our announcement in March 2017 of results from our two initial Phase III clinical trials for FMX101. In the previous Phase III clinical trials, statistical significance was observed in both co-primary efficacy endpoints in one study (Study FX2014-05); however, in the other study (Study FX2014-04), statistical significance was demonstrated in only one of the co-primary efficacy endpoints. Statistical significance was also demonstrated for FMX101 compared to vehicle in the pooled analysis of the co-primary endpoints as well as key secondary endpoints for Studies FX2014-04 and FX2014-05. Study FX2017-22 was initiated following a Type B meeting conducted with the FDA in June 2017. During this meeting, we confirmed that achieving statistically significant results for FMX101 versus vehicle in both co-primary efficacy endpoints in a third independent clinical trial could be sufficient for establishing an efficacy claim in an NDA submission.

Market opportunity

Acne is characterized by areas of scaly red skin, non-inflammatory blackheads and whiteheads, inflammatory lesions, papules and pustules and occasionally boils and scarring. It affects approximately 40 to 50 million people in the United States alone, of whom approximately 10 million suffer from moderate-to-severe acne. For most people, acne diminishes over time and tends to disappear or decrease by age 25. However, some individuals continue to suffer from acne well into their 30s, 40s and later.

The current U.S. market size for treatment of acne is considerable and estimated at approximately $3 billion, presenting significant unmet needs of patients and healthcare providers to be addressed. We believe that our FMX101 product candidate for this indication, if approved, may provide a new treatment alternative for patients and healthcare providers who are unsatisfied with their current therapies.

Limitations of oral minocycline for acne

Oral minocycline, such as Solodyn, has been widely prescribed for the treatment of moderate-to-severe acne. According to the product label of Solodyn, inflammatory lesions were reduced by 44% at week 12, and a positive effect on the reduction of non-inflammatory acne lesions versus vehicle was not demonstrated. According to its product label, the most common adverse systemic side effects of Solodyn include diarrhea, dizziness, drowsiness, indigestion, lightheadedness, loss of appetite, nausea, sore mouth, throat or tongue and vomiting.

In 2009, the FDA added oral minocycline to its Adverse Event Reporting System, a list of medications under investigation by the FDA, due to its severe side effects. In 2011, we conducted a blind survey of 40 U.S. dermatologists. The results of the survey revealed that 90% of the dermatologists surveyed who prescribed oral minocycline were concerned about its side effects, and 76% of these dermatologists stated they would prefer prescribing a topical minocycline product over an existing oral medication, assuming the topical treatment was safe, effective and approved by the FDA.

FMX101 clinical trials

FMX101 third Phase III clinical trial

In June 2017, following the top-line data from Studies FX2014-04 and FX2014-05 as summarized below, we held a Type B Meeting with the FDA, during which we confirmed that statistically significant findings from a third study would constitute replication of the Study FX2014-05 results and would be sufficient for establishing an efficacy claim. This affirmed our plans for conducting a third Phase III trial for FMX101.

In August 2017, we announced the dosing of the first patient in our third Phase III acne clinical trial, known as Study FX2017-22, a double-blind, vehicle-controlled, multi-center trial conducted at approximately 80 sites throughout the United States.

In February 2018, we held a Type B pre-NDA meeting with the FDA. The purpose of the meeting was to discuss the submission of a 505(b)(2) application for FMX101. During the meeting, we discussed various chemistry, manufacturing and controls, or CMC, aspects of FMX101, sufficiency of nonclinical toxicology studies, format and other information required for the NDA submission.

In May 2018, we completed patient enrollment of a total of 1,507 patients with moderate-to-severe acne, with 1,488 patients in the intent-to-treat population in Study FX2017-22. In January 2018, we prospectively excluded 19 patients from the intent-to-treat population due to data integrity issues identified at one clinical trial site following an audit, investigation and termination of the site. We notified the FDA of our audit findings and of the termination of the clinical trial site in February 2018, in advance of our Type B meeting with the FDA. We do not believe that the exclusion of the 19 patients from the intent-to-treat population for Study FX2017-22 is material to our clinical trial results, our clinical trials generally or to our company as a whole. In the Phase III clinical trial, patients were randomized on a 1:1 basis, into a 12-week double-blind, multi-center phase where they were treated topically once daily with either FMX101 (minocycline foam 4%) or vehicle foam. The two primary efficacy endpoints were: (1) the proportion of patients achieving success at week 12 based as defined by an IGA score of 0 “clear” or 1 “almost clear” and at least a two-grade improvement from baseline at week 12; and (2) the mean change from baseline in inflammatory lesion counts in each treatment group at week 12. Safety evaluation included reported adverse events, assessments of tolerability, clinical laboratory tests and vital signs.

In August 2018, we received a letter from the FDA’s Division of Dermatology requesting information on the canister, foaming pump and other device constituent parts of our FMX101 product candidate. The letter referred to FMX101 as a combination product and requested information relating to the quality and design control of the device, including (1) the device description documentation, (2) the design control documentation, (3) the traceability documentation and (4) additional considerations related to the biocompatibility and sterility of the product candidate. We have provided the requested information to the FDA as part of our NDA submission using readily available data derived and generated from our Study FX2017-22.

In September 2018, we announced positive top-line results of Study FX2017-22. The study met both co-primary endpoints of (a) absolute change from baseline in inflammatory lesion count at week 12, and (b) investigator global assessment treatment success (IGA 0/1) at week 12, and at least a 2-grade improvement (decrease) from baseline. The mean inflammatory lesion count at baseline was 30.7 and 30.8 for the FMX101 and vehicle treatment groups, respectively. The proportion of subjects with an IGA score of 3 (“moderate”) or 4 (“severe”) at baseline was 84.0% and 16.0%, respectively, in the FMX101 treatment group and 83.5% and 16.5%, respectively, in the vehicle treatment group. The co-primary efficacy assessment showed a statistically significant mean reduction in inflammatory lesion count at week 12 relative to baseline of -16.93 lesions for the FMX101 treatment group and -13.40 lesions for the vehicle treatment group. In addition, in respect of the second co-primary endpoint, the proportion of subjects that achieved IGA treatment success at week 12 was 30.80% for the FMX101 treatment group and 19.63% for the vehicle treatment group.

The following charts show the reduction of inflammatory lesion count from baseline for FMX101 and vehicle treatment groups in Study FX2017-22 at week 12, and compared to Study FX2014-05, which is the comparison discussed in our Type B meeting with the FDA, in which the FDA confirmed that replicating the results of Study FX2014-05 on such endpoint would likely support an efficacy claim for FMX101:

~~The~~• ~~following~~if, ~~charts~~on ~~show~~or prior to May 31, 2020, the ~~percentage~~Efficacy Determination reports that Serlopitant Significance was not achieved in either of ~~patients~~the ~~who~~Phase ~~met~~III PN Trials, or if the ~~IGA~~Efficacy ~~treatment~~Determination ~~success~~has ~~criterion~~not atbeen ~~week~~delivered 12on ~~(defined~~or asbefore atMay ~~least~~31, a2020, 2each ~~grade~~CSR ~~point~~will ~~reduction~~be ~~from~~converted ~~baseline~~into ~~IGA~~1.2082 ~~score~~shares ~~and~~of aMenlo ~~final~~common ~~score~~stock pursuant to the terms and conditions of ~~“clear”~~the ~~(0)~~CSR orAgreement. ~~“almost~~Following ~~clear”~~such (Efficacy Determination, the effective Exchange Ratio in the Merger will be 1)).8006 shares of Menlo common stock for ~~FMX101~~each ~~and~~Foamix ~~vehicle~~ordinary ~~treatment~~share, ~~groups~~increasing inthe ~~Study~~former ~~FX2017-22~~Foamix atshareholders’ ~~week~~ownership ~~12,~~of ~~compared~~the outstanding share capital of the combined company to ~~Study~~approximately ~~FX2014~~82% and correspondingly decreasing the pre-05Merger Menlo stockholders’ ownership of the outstanding share capital of the combined company to approximately 18%, each calculated on a fully diluted basis (with such percentages calculated as ~~explained~~if ~~above:~~the CSR conversion to additional shares occurred on the Effective Date).

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InThis ~~December~~Annual ~~2018,~~Report weonly ~~submitted~~includes aninformation ~~NDA~~with respect to ~~the~~Foamix ~~FDA~~and ~~seeking~~does ~~approval~~not ~~for~~include ~~FMX101~~a ~~for~~description ~~the treatment~~ of ~~inflammatory~~the ~~lesions~~business of ~~non-nodular~~Foamix ~~moderate-to-severe acne vulgaris in patients 9 years of age~~ and ~~older.~~Menlo ~~The~~as ~~submission~~a ~~followed~~combined ~~the~~company, ~~successful~~nor ~~outcomes~~does init include ~~our~~any ~~Phase~~financial ~~III~~information ~~clinical~~about ~~trial and incorporated guidance received from~~ the ~~FDA~~combined ~~in our Type B pre-NDA meeting held in February 2018~~company. ~~The~~We ~~NDA~~urge ~~submission~~Foamix ~~also~~shareholders ~~incorporated~~to ~~information~~review ~~on chemistry manufacturing and controls, and data from non-clinical toxicology studies on FMX101. Our application was submitted under the FDA~~Menlo’s ~~505(b)(2)~~filings ~~regulatory~~made ~~pathway,~~with ~~which permits~~ the ~~filing~~SEC, ofincluding anMenlo’s ~~NDA~~most ~~where~~recent atAnnual ~~least~~Report ~~some~~on ofForm ~~the~~10-K ~~information~~filed ~~required~~on ~~for~~March ~~approval comes from studies that were not conducted by or for the applicant~~3, ~~and~~2020 for ~~which the applicant has not received~~ a ~~right~~description of ~~reference.~~Menlo’s business ~~For additional information see “Risk Factors-Risks Related to Our Business~~ and ~~Industry-If~~risks ~~the~~associated ~~FDA~~therewith. ~~does~~In ~~not conclude that FMX101 or FMX103 satisfy the requirements under Section 505(b)(2) of the Federal Food Drug and Cosmetic Act~~particular, orFoamix ~~Section~~shareholders ~~505(b)(2),~~should orreview ifMenlo’s ~~the~~risk ~~requirements~~factors ~~for~~that ~~these~~discuss ~~product~~their ~~candidates~~ongoing ~~under~~clinical ~~Section~~trials ~~505(b)(2)~~with ~~are~~respect ~~not~~to as we expect, the approval pathway for these product candidates will likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in either case may not be successfulserlopitant.”

~~FMX101~~Foamix ~~initial~~Product ~~two Phase III clinical trials~~Pipeline

WeIn ~~initiated~~October ~~Study FX2017-22~~2019, aswe ~~described~~announced ~~above,~~that ~~after~~the ~~conducting~~FDA ~~Studies~~accepted ~~FX2014-04~~our ~~and~~New ~~FX2014-05. These~~Drug ~~trials~~Application, ~~comprised~~or aNDA, ~~total~~and ofset ~~961~~a ~~patients~~target ~~with~~Prescription ~~moderate-to-severe~~Drug ~~acne~~User Fee ACT, ~~who~~or ~~were~~PDUFA, ~~randomized~~action ondate aof June 2:1, ~~basis~~2020 ~~(active~~for our ~~compound~~late-stage ~~versus~~drug ~~vehicle-only~~product candidate, FMX103 (1.5% minocycline foam), ~~initially~~for ~~into~~the atreatment ~~12-week~~of ~~double~~moderate-~~blind~~to-severe ~~phase,~~papulopustular rosacea in ~~which~~adults. ~~they~~In ~~were~~November ~~treated~~2018, ~~topically~~we ~~once~~announced ~~daily~~that ~~with~~both ~~either~~of ~~FMX101~~our orPhase ~~the~~III ~~respective~~clinical ~~foam~~trials ~~vehicle.~~for ~~The~~FMX103 ~~two~~(Studies coFX2016-~~primary~~11 and ~~efficacy~~FX2016-12) ~~endpoints~~met each of ~~both~~their ~~trials~~co-primary ~~were~~endpoints, ~~identical~~demonstrating toa ~~the~~statistically ~~primary~~significant ~~endpoints~~reduction in ~~Study~~inflammatory ~~FX2017-22,~~lesion counts and ~~evaluated~~IGA ~~safety~~treatment ~~(including~~success, ~~reported~~as ~~adverse~~assessed ~~events~~by Investigator’s Global Assessment, ~~assessments~~or IGA, scores of ~~tolerability,~~approximately ~~clinical~~50% from ~~laboratory~~baseline. ~~tests~~There ~~and~~were ~~vital~~very ~~signs)~~few reported adverse events and ~~allowed~~no ~~patients~~treatment-related ~~who~~serious ~~completed~~adverse ~~the~~events ~~12-week~~observed ~~double-blind~~in ~~portion~~these ofPhase ~~the~~III clinical trials, toas ~~continue~~well as in athe ~~long~~40-~~term~~week open- label safety extension, ~~aimed~~(Study atFX2016-13) ~~evaluating~~that ~~the~~was ~~safety~~completed ofin February ~~intermittent~~2019. We ~~use~~cannot ofprovide ~~FMX101~~any assurances or predict with any certainty the schedule for upwhich towe ~~nine~~will ~~additional~~receive ~~months~~approval for FMX103, if at all.

~~The~~Both ~~results~~AMZEEQ ofand ~~these~~FMX103 ~~trials~~were ~~demonstrated~~developed ~~statistical~~using ~~significance~~our ~~for~~Molecule ~~FMX101~~Stabilizing ~~compared~~Technology to(MST™) vehicle ~~on both co-primary endpoints in Study FX2014-05 and in the pooled analysis for both trials combined~~, ~~and~~a inproprietary ~~Study~~foam ~~FX2014-04~~platform ~~statistical~~designed ~~significance was further demonstrated for FMX101 compared~~ to ~~vehicle~~optimize in the ~~co-primary~~topical ~~endpoint~~delivery of ~~absolute reduction in inflammatory lesions. However~~ minocycline, ~~Study~~an ~~FX2014-04~~active ~~did~~pharmaceutical ~~not demonstrate statistical significance on the co-primary endpoint of improvement in IGA score. Consequently~~ingredient, ~~and~~or ~~as explained above~~API, wethat ~~embarked~~was oncommercially ~~Study~~available ~~FX2017-22,~~only ~~our~~in ~~third~~oral ~~multi-center~~form ~~pivotal~~until ~~Phase III clinical trial for FMX101, following confirmation from~~ the FDA’s ~~that~~approval ~~replicating the results~~ of ~~Study FX2014-05, in which both co-primary endpoints were successfully achieved, would likely support an efficacy claim for FMX101~~AMZEEQ.

7In addition, we have proprietary delivery technologies in development that enable topical delivery of other APIs, each having unique pharmacological features and characteristics designed to keep the API stable when delivered and directed to the target site. We believe our MST vehicle and other topical delivery platforms may offer significant advantages over alternative delivery options and can be generally applicable for multiple application sites across a range of conditions.

~~FMX101~~We ~~open~~are currently developing a pipeline of other innovative product candidates to enhance our minocycline platform, including FCD105, a topical combination foam for the treatment of moderate-~~label~~to-severe acne vulgaris, comprising minocycline 3% and adapalene 0.3%. In September 2019, we announced that the first patient was enrolled in our Phase II clinical trial (Study FX2016-40) to evaluate the efficacy and safety ~~extension~~of ~~study~~FCD105. In November 2019, we announced that enrollment had been completed for this clinical trial, and we expect topline data from this Phase II clinical trial in the second quarter of 2020. Pending a successful development program, we intend to file an NDA for FCD105 under the FDA 505(b)(2) regulatory pathway, which is the same regulatory pathway we have pursued for AMZEEQ and are pursuing for FMX103.

In January 2018, we announced positive safety data for our Phase III open-label safety extension study, evaluating FMX101 in moderate-to-severe acne for a treatment period of up to one year. The open-label safety extension study enrolled a total of 657 patients, all of whom had completed 12 weeks of FMX101 or vehicle treatment in the preceding double-blind phase of Studies FX2014-04 or FX2014-05. Patients continued for up to an additional 40 weeks of open-label treatment with FMX101. 291 patients completed a total of 52 weeks on FMX101, which is in excess of the subject sample size requirements specified in the regulatory guidance for this type of safety evaluation (ICH E1A, 1995). No serious drug-related adverse events were reported in this comprehensive safety evaluation, which validated earlier data demonstrating that FMX101 appears to be well-tolerated and has an acceptable safety profile. The key findings from the study are as follows:

· Non-dermal adverse events were comparable in type and frequency with those reported during the double-blinded portion of Studies FX2014-04 and FX2014-05. The most frequently reported treatment-emergent adverse event was nasopharyngitis (common cold). In the open-label extension part of the study, three patients discontinued the study for non-dermal adverse events, two of whom discontinued due to abdominal pain and one due to back pain. No serious drug-related adverse events were reported;

· Application site adverse events occurred in less than 2% of patients during the additional 40 weeks of open-label treatment with FMX101. Four patients discontinued the study for an application site adverse event, of which two patients discontinued due to worsening of acne, one patient discontinued due to contact dermatitis and one patient discontinued for localized facial edema. In the assessment of facial dermal tolerability at week 52, more than 95% of patients had “none” or “mild” signs and symptoms such as erythema, dryness, hyperpigmentation, peeling and itching, and no severe local tolerability scores were recorded; and

· Patient satisfaction with FMX101 treatment remained high when re-assessed at week 52, which was consistent with scores obtained at the end of the double-blind phase at week 12.

Efficacy was also measured as a secondary endpoint in the open-label study for FMX101, and was based on summary statistics from observed cases. During the study, patients were allowed to discontinue therapy with FMX101 if they believed their acne was under control. Patients could re-start therapy as needed and were also allowed to use other acne medications concomitantly. As a result, no claim of statistical difference was made between any of the treatment arms; however, notable findings were observed:

· At week 52, 37.7% of patients from Study FX2014-04 had an IGA score of 0 (clear) or 1 (almost clear) and 50.3% of subjects from Study FX2014-05 had an IGA score of 0 or 1.

· At week 52, patients from Study FX2014-04 had a 64.3% reduction in inflammatory lesions and patients from Study FX2014-05 had a 78% reduction in inflammatory lesions.

· At week 52, patients from Study FX2014-04 had a 52.5% reduction in non-inflammatory lesions and patients from Study FX2014-05 had a 59.6% reduction in non-inflammatory lesions.

FMX103 for moderate-to-severe papulopustular rosacea

Our product candidate FMX103 (minocycline foam 1.5%) is a novel topical foam formulation of minocycline for the treatment of moderate-to-severe papulopustular rosacea.

Market opportunity

Papulopustular rosacea is a chronic skin disease causing inflammatory lesions (papules and pustules) on the face. It can create psychosocial burdens, such as embarrassment, anxiety and low self-esteem that adversely affect quality of life. Rosacea is most frequently seen in adults between 30 and 50 years of age and affects more than 16 million people in the United States alone. There is no known cure for rosacea and the exact root cause of the disease remains unknown as well, though both genetic and environmental factors are thought to have an impact on its outbreak. Mild papulopustular rosacea is currently treated by topical antimicrobials (such as metronidazole, clindamycin and ivermectin) or azelaic acid, while the mainstays for the treatment of moderate-to-severe rosacea are systemic antibiotics such as minocycline and doxycycline.

The current U.S. market size for treatment of rosacea is estimated to be approximately $1 billion, and we believe that our FMX103 product candidate for this indication, if approved, may provide a new treatment alternative for patients and healthcare providers who are unsatisfied with their current therapies.

FMX103 clinical trials

FMX103 Phase III clinical trials

In December 2016, we conducted a pre-IND meeting with the FDA to confirm that our clinical and non-clinical programs outlined were sufficient to submit an IND and to begin our Phase III clinical trials, utilizing the results of toxicology, pharmacology and human safety studies that were completed for FMX101.

In June 2017, we announced that the first patient had been dosed in our Phase III program to evaluate the efficacy and safety of our topical minocycline foam 1.5% FMX103 for the treatment of moderate-to-severe rosacea. The Phase III program consists of two multi-center trials (referred to as Studies FX2016-11 and FX2016-12), implementing protocols and endpoints in accordance with the FDA’s guidance as provided in the pre-IND meeting.

Studies FX2016-11 and FX2016-12 were identical, double-blind, randomized, vehicle-controlled studies that enrolled a total of 1,522 patients (Study FX2016-11: 751 patients, Study FX2016-12: 771 patients) with moderate-to-severe papulopustular rosacea across 100 sites in the United States. Patients were randomized 2:1 (1.5% minocycline foam versus vehicle) into a 12-week double-blind phase where they were treated once daily with either FMX103 minocycline foam (1.5%) or the respective vehicle foam. The co-primary efficacy endpoints were: (a) the dichotomized IGA score where treatment success is defined as at least a 2-step improvement resulting in a 0 (clear) or 1 (almost clear) score at week 12 compared to baseline, and (b) the absolute change in the inflammatory lesion count at week 12 compared to baseline.

In November 2018, we announced positive topline results from these two Phase III clinical trials for FMX103.

In Study FX2016-11, the mean inflammatory lesion count at baseline was 28.5 and 29.0 for the FMX103 and vehicle treatment groups, respectively, and the proportion of patients with an IGA score at baseline of 3 (“moderate”) or 4 (“severe”) was 89.7% and 10.3%, respectively, in the FMX103 treatment group, and 86.7% and 13.3%, respectively, in the vehicle treatment group. The co-primary efficacy assessment showed a statistically significant mean reduction in inflammatory lesion count at week 12 relative to baseline of -17.57 lesions for the FMX103 treatment group and -15.65 lesions for the vehicle treatment group. In addition, in respect of the second co-primary endpoint, the proportion of subjects that achieved IGA treatment success at week 12 was 52.1% for the FMX103 treatment group and 43.0% for the vehicle treatment group.

In Study FX2016-12, the mean inflammatory lesion count at baseline was 30.0 and 30.2 for the FMX103 and vehicle treatment groups, respectively, and the proportion of patients with an IGA score at baseline of 3 (“moderate”) or 4 (“severe”) was 86.2% and 13.8%, respectively, in the FMX103 treatment group, and 82.9% and 17.1%, respectively, in the vehicle treatment group. The co-primary efficacy assessment showed a statistically significant mean reduction in inflammatory lesion count at week 12 relative to baseline of -18.54 lesions for the FMX103 treatment group and -14.88 lesions for the vehicle treatment group. In addition, in respect of the second co-primary endpoint, the proportion of subjects that achieved IGA treatment success at week 12 was 49.1% for the FMX103 treatment group and 39.0% for the vehicle treatment group.

The following charts show the reduction of inflammatory lesion count from baseline for FMX103 and vehicle treatment groups in each of Studies FX2016-11 and FX2016-12 at week 12:

The following charts show the percentage of patients who met the IGA treatment success criterion at week 12 (defined as at least a 2 grade point reduction from baseline IGA score and a final score of “clear” (0) or “almost clear” (1)) for FMX103 and vehicle treatment groups in each of Studies FX2016-11 and FX2016-12 at week 12:

The safety and tolerability of FMX103 were also evaluated. The most commonly reported adverse events in the clinical trials related to upper respiratory tract infections. There were no treatment-related serious adverse events. FMX103 was observed in the clinical trials to have a generally favorable safety profile and appeared to be generally well tolerated. Based on the efficacy and safety profile observed in clinical studies to date, we believe FMX103, if approved, may present an attractive option for the treatment of moderate-to-severe papulopustular rosacea.

Studies FX2016-11 and FX2016-12 were followed by study FX2016-13 (Study FX2016-13), a 40-week, open-label safety extension study to evaluate the long-term safety of FMX103.The open-label safety study enrolled a total of 505 patients, all of whom had completed 12 weeks of FMX103 or vehicle treatment in the preceding double-blind studies (FX2016-11 or FX2016-12). Patients continued for up to an additional 40 weeks of open-label treatment with FMX103.

465 patients received FMX103 therapy for at least 26 weeks and 272 patients received FMX103 therapy for a total of 52 weeks. A total of 410 patients completed participation in the study. The key safety findings from the study were as follows:

· Non-cutaneous adverse events were comparable in type and frequency with those reported during the double-blinded portion of FX2016-11 and FX2016-12. The most frequently reported treatment-emergent adverse event was upper respiratory tract infection, or the common cold (3.8%). 4 patients discontinued the study due to a non-application site adverse event – mydriasis, anaemia/leukocytosis, appendicitis and enchondromatosis. No serious drug-related adverse events were reported.

· Cutaneous adverse events occurred in 1% or less of patients during the additional 40 weeks of open-label treatment with FMX103 with the most frequently reported treatment emergent adverse event being contact dermatitis (1.0%). 2 patients discontinued in the study for an application site adverse event – worsening of rosacea and contact dermatitis. In the assessment of facial dermal tolerability at Week 52, more than 95% of patients had “none” or “mild” signs and symptoms (burning/stinging, flushing/blushing, dryness, itching, peeling and hyperpigmentation). The severity of key clinical manifestations of rosacea - erythema and telangiectasia - had both significantly improved when compared to baseline of the preceding double-blind studies.

· Subject satisfaction with FMX103 treatment remained high when re-assessed at Week 52 which was consistent with scores obtained at Week 12 (end of double-blind studies).

Open label efficacy was also assessed throughout the 40-week FMX103 treatment course. The key efficacy findings from the study were:

· Mean absolute reduction of inflammatory lesion count when compared to baseline of the preceding double-blinded study (FX2016-11 or FX2016-12) was -23.0 for subjects treated with FMX103 for 52 weeks and –22.5 for subjects treated for 40 weeks. Corresponding mean inflammatory lesion counts at baseline of the preceding double-blind studies for these groups were 28.8 and 28.7 respectively (all observed cases).

· The proportion of subjects achieving IGA treatment success at Week 52 defined as at least a 2-step improvement resulting in a 0 (clear) or 1 (almost clear) score compared to baseline of the preceding double-blinded study (FX2016-11 or FX2016-12) was 81.6% for subjects treated with FMX103 for 52 weeks and 76.0% for subjects treated for 40 weeks (all observed cases).

We intend to submit an NDA for FMX103 in mid-2019.

FMX103 Phase II clinical trials

We initiated Studies FX2016-11 and FX2016-12, as described above, following positive top-line results from our Phase II clinical trial for FMX103, announced in the third quarter of 2016. The double-blind, randomized, vehicle-controlled Phase II clinical trial was conducted in 18 sites in Germany and included 233 patients with moderate-to-severe rosacea who were randomized to receive either one of two doses of FMX103 minocycline foam (3% or 1.5%) or vehicle foam once daily over 12 weeks, followed up by a four-week post-treatment evaluation. The efficacy endpoints were identical to those of Studies FX2016-11 and FX2016-12. Safety and tolerability were also evaluated in the Phase II clinical trial. At week 12, statistically significant results were observed in the reduction of inflammatory lesions (papules and pustules) versus vehicle in both the 1.5% and 3% doses of FMX103. The trial further showed a statistically significant improvement in IGA scores. FMX103 also appeared to be generally well-tolerated, with no report of serious adverse events or drug related systemic adverse events. A few patients overall exhibited treatment-related dermal adverse events and four of them consequently discontinued the trial.

Development and License Agreements

Parallel to the development of our product candidates, we have entered into development and license agreements with various pharmaceutical companies, including LEO Pharma A/S, or LEO, Mylan N.V. and Actavis plc, combining our emulsion-based foam technology with drugs selected by the licensee to create new product offerings for patients. This licensed technology is different from the technology used in AMZEEQ and in our pipeline products. Each license agreement entitles us to service payments, contingent payments and royalties from sales of any new products that are commercialized. Each agreement is exclusive only to the specific drug that is licensed, leaving us the rights to commercialize and develop products with other drugs for the same indications using our proprietary foam technology while also allowing the licensee to apply the new products to any indication with its specific drug.

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In September 2015, Bayer HealthCare AG, or Bayer, began selling in the United States a product branded Finacea, based on our foam technology ~~called Finacea in the United States~~. Finacea is a prescription topical drug which was developed through a collaboration between Bayer and Foamix. It is the first prescription product developed using our proprietary technology that has been approved by the FDA for sale in the United States. Bayer listed in the Orange Book several patents that were licensed from us in connection with the development of Finacea. According to our initial license agreement with Bayer, we are entitled to receive royalties and certain contingent payments upon the commercialization of Finacea. On September 4, 2018, LEO acquired Finacea from Bayer. As part of the acquisition, our license agreement with Bayer with respect to Finacea was assigned to LEO. LEO has assumed all of the rights and responsibilities of Bayer under the license agreement as it relates to Finacea, including the payment of royalties to us and rights and obligations related to patent litigation matters. In 2018, we received (or became entitled to receive) a total of $3.5 million in royalties from sales of Finacea from both Bayer and LEO. Together with LEO, we are litigating against affiliates of Teva, Perrigo and Taro Pharmaceuticals Industries Ltd., or Taro, respectively, for their alleged infringement of certain of our patents following their submission of an ANDA to the FDA seeking approval to manufacture and sell a generic version of Finacea. See also “Risk Factors-Risks Related to Our Intellectual Property-We have received notice letters of ANDAs submitted for drug products that are generic versions of Finacea and we are involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful.”

~~Our~~In ~~total~~April ~~revenues~~2019, ~~from~~our ~~all~~partner, ~~development~~LEO, ~~collaboration~~informed us that the batches of API intended for use in Finacea and ~~license~~produced ~~agreements~~by a contract manufacturer had failed to meet the required specifications for the finished product and has been unable to manufacture the Finacea product for sale, which, in turn, reduced the royalty payments from ~~our~~LEO ~~inception~~to us since that time. LEO has informed us that they are working diligently to ~~December~~address 31the issue in order to be able to produce sufficient supply of the finished product to meet the demand for Finacea in the market. We do not know when the production of Finacea will resume, ~~2018~~if ~~were~~at ~~approximately~~all. This supply chain issue for Finacea is unrelated to our manufacturing, production or supply of AMZEEQ, FMX103 or any of our other product candidates. In 2019, we received (or became entitled to receive) a total of $310.74 million in royalties from sales of Finacea from LEO.

~~Additional~~Together ~~Research~~with LEO, we are litigating against Taro Pharmaceuticals Industries Ltd., or Taro, for its alleged infringement of certain of our patents following Taro’s submission of an ANDA to the FDA seeking approval to manufacture and ~~Development~~sell a generic version of Finacea. See also “Risk Factors—Risks Related to Our Intellectual Property—We have received notice letters of ANDAs submitted for drug products that are generic versions of Finacea foam and we are involved in lawsuits to protect and enforce our patents, which are expensive, time consuming and may be unsuccessful.” In 2019, we, together with LEO, separately settled similar patent litigation with affiliates of Perrigo Company plc and Teva Pharmaceuticals Industries Ltd.

In addition to FMX101 for the treatment of moderate-to-severe acne, FMX103 for the treatment of moderate-to-severe rosacea and licensed products resulting from our development and license agreements with various pharmaceutical companies, we are developing a series of product candidates for various indications to which we own worldwide rights, and which are all based on formulations and adaptations of our patented, versatile foam platforms or other dosage forms. See “Business–Product Candidates and Pipeline.”

We intend to selectively proceed into clinical trials with these formulations under the FDA’s 505(b)(2) regulatory pathway wherever necessary to expedite FDA approval, and according to our identification of unmet needs and potential market opportunities.

Our research and development expenses totaled $64.5 million, $57.8 million and $25.9 million in 2018, 2017 and 2016, respectively. In the ordinary course of business, we enter into agreements with third parties such as contract research organizations, or CROs, medical institutions, clinical investigators and contract laboratories, to conduct our clinical trials and aspects of our research and preclinical testing. These CROs and other third parties provide us with project management, monitoring, regulatory consulting and investigative services, and their fees are part of our research and development expenses.

Intellectual Property

Our intellectual property and proprietary technology are essential to the development, manufacture, and sale of ~~FMX101~~AMZEEQ and FMX103 and our future pipeline product candidates. We are committed to protecting our intellectual property rights, core technologies and other know-how, through a combination of patents, trademarks, trade secrets, non-disclosure and confidentiality agreements, licenses, assignments of invention and other contractual arrangements with our employees, consultants, partners, suppliers, customers and others. Additionally, we rely on our research and development program, clinical trials, know-how and marketing and distribution programs to advance our products.

We submit applications directly or under the Patent Cooperation Treaty, or PCT, which is an international patent law treaty that provides a unified procedure for filing a single initial patent application to seek patent protection for an invention simultaneously in any one of the designated member states. Although a PCT application does not issue as a patent, it allows the applicant to seek protection in any of the member states through national-phase applications.

We also submit applications for a single European patent application covering the EU member states. If granted, the European patent must be validated in each national member state in which the patent is to continue and becomes a bundle of individual national patents.

Our most important patents are several U.S. patents relating to our lead product candidates, FMX101 and FMX103 which are expected to remain in effect until 2030. These patents relate to a composition of matter comprising a claim to a formulation of a tetracycline antibiotic, which can include minocycline or doxycycline, and therefore, may be less protective than patents that claim a new drug. We also have patents claiming compositions of matter, which relate to FMX101 and FMX103, in Australia, Canada, Great Britain, Israel and Mexico, and patent applications in Canada, the European Union, India and Mexico.

Our other patents granted in the United States have claims relating to certain formulations of our foam platforms and other technology, including emulsion foams, hydrophobic foams, hydroalcoholic and aqueous foams.

Our FMX101 and FMX103 product candidates are based on a different foam technology platform and different patents than those listed in the Orange Book for the foam technology used in Finacea.

As of December 31, 2018, we had a patent portfolio of 175 granted patents in certain countries worldwide, including 68 granted patents in the United States. Additionally, as of December 31, 2018, we had over 40 pending patent applications worldwide, of which over 25 are pending in the United States, describing and claiming our various foam-based platforms and other technology. Our other pending applications relate to various foam platforms such as emulsion foam, hydrophobic foam, hydro-alcoholic foam and water-free foams.

Competition

The medical and pharmaceutical industries in which we operate are intensely competitive and subject to significant technological change and changes in practice. While we believe that our innovative technology, knowledge, experience and resources provide us with competitive advantages, we face and may face competition from many different sources with respect to ~~FMX101~~AMZEEQ, which is available for purchase, our Phase III product candidate FMX103 and our other pipeline products or any product candidates that we may seek to develop or commercialize in the future. Possible competitors may include pharmaceutical companies, academic and medical institutions, governmental agencies and public and private research institutions. These prospective competitors have the ability to effectively discover, develop, test and obtain regulatory approvals for products that compete with ours, as well as the ability to effectively commercialize, market and promote approved products, including communicating the effectiveness, safety and value of products to actual and prospective customers and medical staff.

IfCurrently ~~approved and launched, on-~~marketed products that ~~could~~may compete with ~~our FMX101 product candidate, if approved,~~ AMZEEQ include: (Aa) oral products such as Solodyn (minocycline, Bausch Health), Doryx (doxycycline, Mayne Pharmaceuticals), Targadox (doxycycline, Journey), Acticlate (docycycline, Almirall), Seysara (sarecycline, Almirall) and (Bb) topical products such as Epiduo (adapalene + benzoyl peroxide (“BPO”), Galderma), Aczone (dapsone, Almirall), Retin-A (tretinoin, Bausch Health), Onexton-Acanya (clindamycin + BPO, Bausch Health) and Tazorac (tazarotene, Almirall).

On-marketed products that could compete with our FMX103 product candidate include: (A) branded and generic oral products containing minocycline, Oracea (doxycycline, Galderma) and (B) topical products such as all forms of metrogel/metronidazole available as a branded or generic product, Soolantra (ivermectin, Galderma), Finacea (azaleic acid, LEO), Rhofade (oxymetazoline, Allergan), Mirvaso (brimonidine, Galderma).8

InCurrently ~~addition,~~marketed ~~new~~ products ~~are currently being developed~~ that may compete with our ~~FMX101 and~~ FMX103 product ~~candidates,~~candidate ifinclude: ~~they~~(a) ~~are~~branded ~~approved,~~and ~~including:~~ generic ~~versions~~oral ofproducts ~~any~~containing ofminocycline ~~the above on~~(off-~~marketed products and~~label), ~~specifically for acne: Altreno~~ Oracea (~~tretinoin~~doxycycline, ~~Ortho Derm~~Galderma), ~~Seysara~~and (~~sarecycline, Almirall~~b). ~~In December 2017, Hovione Farmaciencia SA, a private company, announced the commencement of a Phase II clinical trial for its~~ topical ~~gel~~products ~~suspension~~such ~~containing~~as ~~minocycline~~all ~~non-hydrochloride~~forms ~~for the treatment~~ of ~~moderate~~metrogel/metronidazole toavailable ~~severe~~as ~~papulopustular~~a ~~rosacea.~~branded Inor ~~October~~generic ~~2018~~product, ~~BioPharmX~~Soolantra ~~Corporation initiated its Phase IIb clinical trial of BPX-04~~(ivermectin, aGalderma) 1% topical minocycline gel formulation for the treatment of moderate-to-severe papulopustular rosacea. BioPharmX is also developing a topical minocycline gel formulation for the treatment of acne vulgaris, which is currently in Phase IIb clinical trials. If ultimately approved and ~~launched~~Finacea in(azaleic ~~the United States~~acid, ~~these products could be direct competitors to FMX101 and FMX103~~LEO).

~~Further~~In addition, wenew products are ~~developing~~currently ~~certain~~being ~~topical~~developed ~~products~~that ~~with~~may ~~various~~compete ~~licensees~~with ~~combining~~AMZEEQ and our ~~proprietary~~FMX103 ~~technology~~product ~~with~~candidate, aif ~~drug~~approved, ~~selected~~including: bygeneric ~~the~~versions ~~licensee.~~of ~~While~~any of the above ~~licenses~~on-marketed weproducts ~~grant~~and, ~~are~~specifically ~~exclusive~~for ~~with~~acne: ~~respect~~Twyneo to(tretinoin ~~the~~+ ~~specific~~BPO, ~~drug~~Sol-Gel) ~~which~~and isClascoterone ~~licensed,~~(Cassiopea) ~~our~~and ~~agreements~~specifically ~~with~~for ~~these~~papulopustular ~~licensees~~rosacea: ~~allow~~Epsolay ~~them~~(BPO, toSol-Gel). ~~commercialize~~In ~~the~~September ~~licensed~~2019 ~~developed~~– ~~products~~Hovione ~~for~~Farmaciencia ~~any~~SA ~~topical~~announced ~~dermatological~~details of ~~application,~~its ~~not~~planned ~~just~~Minocycline Against Rosacea Study, ~~for~~Phase ~~the~~III ~~specific~~development ~~indication~~program for ~~which~~the ~~each~~treatment ~~product~~of ~~was~~moderate ~~originally~~to ~~intended.~~severe Ifinflammatory ~~any~~rosacea ~~such~~with ~~licensed~~HY01 ~~product~~a ~~proves~~3% totopical begel ~~effective~~suspension ~~for~~containing ~~moderate~~minocycline non-tohydrochloride. ~~severe~~In ~~acne~~January 2020, ~~rosacea~~BioPharmX Corporation orentered ~~any~~into ~~other~~a ~~indication~~Merger ~~that~~Agreement ~~we are pursuing~~ with ~~FMX101,~~Timber ~~FMX103~~Pharmaceuticals orLLC. ~~our~~and ~~other~~says ~~product~~that ~~candidates,~~following wethe ~~may~~merger ~~face~~the ~~competition~~combined ~~from~~company ~~these~~will ~~licensees.~~“evaluate ~~Although~~BioPharmX's wePhase ~~believe~~III ~~that~~ready ~~FMX101,~~proprietary ~~FMX103~~topical ~~and~~minocycline ~~our~~gel ~~other~~programs” This product ~~candidates~~has ~~can~~previously been ~~outperform~~studied ~~the~~by ~~licensed~~BioPharmX ~~products~~ in the ~~specific~~treatment ~~indications~~of ~~our~~inflammatory ~~product~~lesions ~~candidates~~of ~~are~~acne ~~targeting,~~vulgaris ~~such~~and ~~licensed~~papulopustular ~~products~~rosacea. ~~may~~In ~~nevertheless~~2019, ~~pose~~Sol-Gel acompleted ~~competitive~~Phase ~~challenge,~~III asstudies ~~they~~for ~~will~~EPSOLAY® ~~have~~(microencapsulated benzoyl ~~the~~peroxide cream, 5%) ~~benefit~~for ofinflammatory ~~our~~lesions ~~foam~~of ~~technology~~Rosacea, ~~coupled~~and ~~with~~for ~~the~~TWYNEO® ~~licensees’~~(microencapsulated ~~potentially~~benzoyl ~~greater resources~~peroxide, ~~experience~~3% and ~~brand~~microencapsulated ~~recognition~~tretinoin, ~~extensive~~0.1%) ~~marketing~~for ~~channels~~Acne ~~and~~Vulgaris. ~~other~~If ~~capabilities,~~ultimately approved and ~~possibly~~launched in the ~~advantage~~United ofStates, ~~entering~~these ~~the~~products ~~market~~candidates ~~before~~could usbe direct competitors to AMZEEQ and FMX103.

In addition to products that are currently available, other products may be introduced to treat acne, rosacea and other skin disorders during the time that we engage in necessary development. Accordingly, if one of our pipeline products is approved, our main challenge in the market would be to convince dermatologists, pediatricians or other physicians seeking alternatives to oral or other existing treatments to use our product instead. While we are still in the preliminary stages, we believe that our pipeline products could be more effective than the current non-topical alternatives and exhibit significantly less adverse side effects based on our studies to date.

Commercialization

We are currently building a commercial infrastructure to support the potential sales of our product candidates in the United States, and may partner with third parties outside the United States to launch our products in other geographic territories or therapeutic classes. Our intent is to build a commercial sales force specifically targeting dermatologists and other healthcare practitioners who diagnose and manage acne and rosacea patients. We also plan to deploy marketing and targeting efforts using data analytics and consumer outreach vehicles that we believe are underutilized. We expect our sales force will be supported by a centralized, internal team who will direct and manage our marketing and sales efforts, and coordinate market access and payor relationships as well as manage the supply chain. In order to be ready to launch our product candidates once approved, we expect to invest significant financial and management resources to build our commercial operations even before our product candidates are approved.

As part of our commercialization planning, we are currently building our internal sales, marketing, market access and distribution infrastructure. Market research, data analysis and strategic launch planning have been conducted on our near-to-market product portfolio. We have established the market entry strategy for FMX101, preliminary physician targeting models, and portfolio strategies to capitalize on infrastructure synergies. FMX103 market entry planning and comprehensive portfolio commercial plans will begin development in the second half of 2019.

We are conducting landscape assessment research on the market access environment for FMX101 to complete a market access strategy. We are also evaluating the optimal price range for FMX101 and FMX103, that will reflect their benefits relative to alternative treatments while remaining affordable to potential customers and reimbursable by governments and third-party payors.

Additionally, continuous efforts are deployed to identify unmet needs in the dermatology market, assess their commercial potential and advise on the prioritization of the development of our future product candidates accordingly.

We have entered into a packaging and supply distribution contract with Sharp Corporation, with whom we have contracted to package and distribute our FMX101 product candidate for commercial distribution, if we receive regulatory approval.

Government Regulation

Our business is subject to extensive government regulation. Regulation by governmental authorities in the United States and other jurisdictions is a significant factor in the development, manufacture and marketing of our foam delivered treatments and in our ongoing research and development activities.

Product approval process in the United States

Review and approval of drugs

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA and implementing regulations. Drugs require the submission of an NDA, and approval by the FDA prior to being marketed in the United States. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval may subject an applicant to a variety of administrative or judicial sanctions and enforcement actions brought by the FDA, the Department of Justice or other governmental entities. Possible sanctions may include the FDA’s refusal to approve pending NDAs, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement and civil or criminal penalties.

The process required by the FDA prior to marketing and distributing a drug in the United States generally involves the following:

· completion of laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP, or other applicable regulations;

· submission to the FDA of an application for an investigational new drug application, or IND, which must become effective before human clinical trials may begin;

· approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated;

· performance of adequate and well-controlled human clinical trials in accordance with GCP, to establish the safety and efficacy of the proposed drug for its intended use;

· preparation and submission to the FDA of an NDA or supplemental NDA;

· satisfactory completion of an FDA advisory committee review, if applicable;

· satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product or components thereof are produced, to assess compliance with current good manufacturing processes, or cGMP, and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and

· payment of user fees and FDA review and approval of the NDA.

Preclinical studies

Preclinical studies include laboratory evaluation, as well as animal studies to assess the potential safety and efficacy of the product candidate. Preclinical safety tests must be conducted in compliance with the FDA’s GLP regulations. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND which must become effective before clinical trials may be commenced.

Clinical trials in support of an NDA

Clinical trials involve the administration of an investigational product to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing before their participation in any clinical trial. Clinical trials are conducted under written trial protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. An IND becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to a proposed clinical trial and places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin.

In addition, an IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the trial at least annually. The IRB must review and approve, among other things, the trial protocol and informed consent information to be provided to trial subjects. An IRB must operate in compliance with FDA regulations. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health for public dissemination on their ClinicalTrials.gov website.

Clinical trials are typically conducted in three sequential phases, which may overlap or be combined:

Phase I: The drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness and to determine optimal dosage.

Phase II: The drug is administered to a limited patient population to identify possible short-term adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.

Phase III: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product.

Submission of an NDA to the FDA

The results of the preclinical studies and clinical trials, together with other detailed information, including information on the manufacture, control and composition of the product, are submitted to the FDA as part of an NDA requesting approval to market the product candidate for a proposed indication. Under the Prescription Drug User Fee Act, as amended, applicants are required to pay fees to the FDA for reviewing an NDA. These user fees, as well as the annual fees required for commercial manufacturing establishments and for approved products, can be substantial. Each NDA submitted to the FDA for approval is reviewed for administrative completeness and reviewability within 60 days following submission of the application. If found complete, the FDA will “file” the NDA, thus triggering a full review of the application. The FDA may refuse to file any NDA that it deems incomplete or not properly reviewable at the time of submission.

Before approving an NDA, the FDA may inspect the facilities at which the product is manufactured or facilities that are significantly involved in the product development and distribution process, and will not approve the product unless cGMP compliance is satisfactory. The FDA may deny approval of an NDA if applicable statutory or regulatory criteria are not satisfied, or may require additional testing or information, which can delay the approval process. FDA approval of any application may include many delays or may never be granted. If a product is approved, the approval will impose limitations on the indicated uses for which the product may be marketed, may require that warning statements be included in the product labeling, may require that additional studies or trials be conducted following approval as a condition of the approval, may impose restrictions and conditions on product distribution, prescribing or dispensing in the form of risk evaluation and mitigation strategies (REMS) , or impose other limitations.

Once a product is approved, marketing the product for other indicated uses or making certain manufacturing or other changes requires FDA review and approval of a supplemental NDA or a new NDA, which may require additional clinical data and review fees. In addition, further post-marketing testing and surveillance to monitor the safety or efficacy of a product may be required. Also, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if safety or manufacturing problems occur following initial marketing. In addition, new government requirements may be established that could delay or prevent regulatory approval of our product candidates under development.

505(b)(2) NDAs

As an alternative path to FDA approval for modifications to formulations or uses of active ingredients previously approved by the FDA, an applicant may submit an NDA under Section 505(b)(2) of the FDCA. Section 505(b)(2) was enacted as part of the Hatch-Waxman Amendments and permits the filing of an NDA where at least some of the information required for approval comes from FDA’s conclusions of safety or efficacy from studies or trials not conducted by or for the applicant, and for which the applicant has not received a right of reference If the 505(b)(2) applicant can establish that reliance on the FDA’s previous findings of safety and effectiveness is scientifically appropriate, it may eliminate the need to conduct certain preclinical studies or clinical trials of the new product. The FDA may also require companies to perform additional studies or measurements, including clinical trials, to support the change from the approved reference, or “listed” drug. The FDA may then approve the new product candidate for all, or some, of the label indications for which the reference drug has been approved, as well as for any new indication sought by the 505(b)(2) applicant.

Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years, some pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA changes its interpretation of Section 505(b)(2), or if the FDA’s interpretation is successfully challenged in court, this could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit.

The Orange Book

In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent whose claims cover the applicant’s product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an ANDA. An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing to be bioequivalent to the listed drug. Other than the requirement for bioequivalence testing, ANDA applicants are not required to conduct, or submit results of, pre-clinical or clinical tests to prove the safety or effectiveness of their drug product. Drugs approved in this way are considered to be therapeutically equivalent to the listed drug, are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug in accordance with state law.

To the extent that a Section 505(b)(2) NDA relies on clinical trials conducted for a previously approved drug product or the FDA’s prior findings of safety and effectiveness for a previously approved drug product, the Section 505(b)(2) applicant must submit patent certifications in its Section 505(b)(2) application with respect to any patents for the previously approved product on which the applicant’s application relies that are listed in the Orange Book. Specifically, the applicant must certify for each listed patent that, in relevant part, (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is not sought until after patent expiration; or (iv) the listed patent is invalid, unenforceable or will not be infringed by the proposed new product.

A certification that the new product will not infringe the previously approved product’s listed patent or that such patent is invalid or unenforceable is known as a Paragraph IV certification. If the applicant does not challenge one or more listed patents through a Paragraph IV certification, the FDA will not approve the Section 505(b)(2) NDA application until all the listed patents claiming the referenced product have expired. Further, the FDA will also not approve, as applicable, a Section 505(b)(2) NDA application until any non-patent exclusivity, such as, for example, five-year exclusivity for obtaining approval of a new chemical entity, three-year exclusivity for an approval based on new clinical trials, or pediatric exclusivity, listed in the Orange Book for the referenced product, has expired.

If the Section 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the owner of the referenced NDA for the previously approved product and relevant patent holders within 20 days after the Section 505(b)(2) NDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement suit against the Section 505(b)(2) applicant. Under the FDCA, the filing of a patent infringement lawsuit within 45 days of receipt of the notification regarding a Paragraph IV certification automatically prevents the FDA from approving the Section 505(b)(2) NDA until the earliest to occur of 30 months beginning on the date the patent holder receives notice, expiration of the patent, settlement of the lawsuit, or until a court deems the patent unenforceable, invalid or not infringed. Even if a patent infringement claim is not brought within the 45-day period, a patent infringement claim may be brought under traditional patent law, but it does not invoke the 30-month stay.

Moreover, in cases where a Section 505(b)(2) application containing a Paragraph IV certification is submitted after the fourth year of a previously approved drug’s five-year exclusivity period and the patent holder brings suit within 45 days of notice of certification, the 30-month period is automatically extended to prevent approval of the Section 505(b)(2) application until the date that is seven and one-half years after approval of the previously approved reference product. The court also has the ability to shorten or lengthen either the 30 month or the seven and one-half year period if either party is found not to be reasonably cooperating in expediting the litigation.

Exclusivity

In addition to patent protections applicable to a listed drug, a Section 505(b)(2) application may be subject to periods of statutory market exclusivity afforded to an approved new drug. Statutory market exclusivity provides the holder of an approved NDA limited protection from new competition in the marketplace for the innovation represented by its approved drug product, and precludes approval of certain 505(b)(2) applications for prescribed periods of time. Exclusivity is available for new chemical entities, as well as for significant changes in already approved drug products, such as a new use. FDA may refuse to approve a Section 505(b)(2) application to the extent it is subject to market exclusivity. Upon NDA approval of a new chemical entity or NCE, which is a drug that contains no active moiety that has been approved by the FDA in any other NDA, that drug receives five years of marketing exclusivity during which time the FDA cannot receive any ANDA or 505(b)(2) application seeking approval of a drug that references a version of the NCE drug. Certain approvals granted for change(s) to a drug resulting from new clinical studies that were “essential to approval,” such a new dosage form, strength, route of administration, dosing regimen or indication, are associated with a three-year period of exclusivity. During this three-year exclusivity, the FDA cannot approve an ANDA or 505(b)(2) application that includes the change(s). Drugs based on an “old antibiotic,” such as our FMX101 and FMX103 product candidates which contain minocycline, must also demonstrate “a significant new use” such as a new indication for a previously approved antibiotic, and not just refinements in labeling related to previously approved uses, in order to qualify for the three-year exclusivity.

Post-approval requirements

Any drug products for which we receive FDA approval will be subject to continuing regulation by the FDA. Certain requirements include, inter alia, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information on an annual basis or more frequently for specific events, product sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements. These promotion and advertising requirements include, among others, standards for direct-to-consumer advertising, prohibitions against promoting drugs for uses or patient populations that are not described in the drug’s approved labeling, known as “off-label use,” and other promotional activities, such as those considered to be false or misleading. Failure to comply with FDA requirements can have negative consequences, including the immediate discontinuation of noncomplying materials, adverse publicity, enforcement letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties. Such enforcement may also lead to scrutiny and enforcement by other government and regulatory bodies.

Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not encourage, market or promote such off-label uses. As a result, “off-label promotion” has formed the basis for litigation under the Federal False Claims Act, or FCA, violations of which are subject to significant civil fines and penalties. In addition, under the federal Physician Payments Sunshine Act, manufacturers of certain prescription products are required to disclose annually to the Centers for Medicaid and Medicare Services, or CMS payments or transfers of value made to “covered recipients” and teaching hospitals, and ownership or investment interests held by covered recipients and their immediate family members. Reportable payments and transfers of value may be direct or indirect, in cash or kind, for any reason, and are required to be disclosed even if the transfers are not related to an approved product. Failure to comply with the Physician Payments Sunshine Act could result in penalties up to $1.15 million per year.

The manufacturing of any of our products will be required to comply with applicable FDA manufacturing requirements contained in the FDA’s cGMP regulations. The FDA’s cGMP regulations require, among other things, quality control and quality assurance, as well as the corresponding maintenance of comprehensive records and documentation. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are also required to register their establishments and list any products they make with the FDA and to comply with related requirements in certain states. These entities are further subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance.

Discovery of problems with a product after approval may result in serious and extensive restrictions on a product, manufacturer or holder of an approved NDA, as well as lead to potential market disruptions. These restrictions may include recalls, suspension of a product until the FDA is assured that quality standards can be met, and continuing oversight of manufacturing by the FDA under a “consent decree,” which frequently includes the imposition of costs and continuing inspections over a period of many years, as well as possible withdrawal of the product from the market. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented. Other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

The FDA also may require post-marketing testing, or Phase IV testing, as well as REMS to monitor the effects of an approved product or place conditions on an approval that could otherwise restrict the distribution or use of our products.

Pediatric trials and exclusivity

Even when not pursuing a pediatric indication, under the Pediatric Research Equity Act of 2003, an NDA or supplement thereto must contain data that are adequate to assess the safety and effectiveness of the drug product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. With enactment of the Food and Drug Administration Safety and Innovation Act, or the FDASIA, in 2012, sponsors must also submit pediatric trial plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric trials the applicant plans to conduct, including trial objectives and design, any deferral or waiver requests, and other information required by regulation. The applicant, the FDA, and the FDA’s internal review committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or the applicant may request an amendment to the plan at any time.

The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Additional requirements and procedures relating to deferral requests and requests for extension of deferrals are contained in the FDASIA.

Separately, in the event the FDA makes a written request for pediatric data relating to a drug product, an NDA sponsor who submits such data may be entitled to pediatric exclusivity. Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional 6 months of marketing protection to the term of any existing regulatory exclusivity, including the non-patent and orphan exclusivity.

Patent term restoration and extension

A patent claiming a new drug product may be eligible for a limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the “Hatch-Waxman Act,” which permits a patent restoration of up to five years for patent term lost during product development and the FDA regulatory review. The restoration period granted is typically one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the ultimate approval date. Patent term restoration cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved drug product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in question. A patent that covers multiple drugs for which approval is sought can only be extended in connection with one of the approvals. The USPTO reviews and approves the application for any patent term extension or restoration in consultation with the FDA. Since the active pharmaceutical ingredients of our FMX101 and FMX103 product candidates are already known and marketed in tablet form, the patents supporting these products were not eligible for the said patent term extension.

Review and approval of drug products outside the United States

In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing manufacturing, clinical trials, commercial sales and distribution of our future products. Whether or not we obtain FDA approval for a product candidate, we must obtain approval of the product by the comparable regulatory authorities of foreign countries before commencing clinical trials or marketing in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

Pharmaceutical coverage, pricing and reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. In the United States and other markets, sales of any products for which we receive regulatory approval for commercial sale will depend in part on the availability of coverage and adequate reimbursement from third party payors. Third party payors include government health administrative authorities, managed care providers, private health insurers and other organizations. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the drug product. Third party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drug products for a particular indication.

Third party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of FMX101 and FMX103, in addition to the costs required to obtain the FDA approvals. Additionally, FMX101 and FMX103 may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

In March 2010, the President of the United States signed one of the most significant healthcare reform measures in decades. The healthcare reform law, also known as the Affordable Care Act, or ACA, substantially changes the way healthcare will be financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. This comprehensive legislative overhaul was expected to extend coverage to approximately 36 million previously uninsured Americans. However, the individual mandate was recently repealed by Congress in The Tax Cuts and Jobs Act of 2017, or the Tax Act, tax reform bill that was signed into law in December 2017 and became effective January 1, 2019. The Joint Committee on Taxation estimates that the repeal will result in over 13 million Americans losing their health insurance coverage over the next ten years and is likely to lead to increases in insurance premiums. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the ACA, and because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. While neither the Texas District Court Judge, Trump administration nor CMS have stated that the ruling will have an immediate effect, it is unclear how this decision, subsequent appeals, if any, and other efforts to repeal and replace the ACA will impact the ACA.

The ACA requires the pharmaceutical industry to share in the costs of reform by increasing Medicaid rebates and expanding Medicaid rebates to cover Medicaid managed care programs, among other things. The ACA also includes funding of pharmaceutical costs for Medicare patients in excess of the prescription drug coverage limit and below the catastrophic coverage threshold. The Bipartisan Budget Act of 2018, or the BBA, among other things, amends the ACA, effective January 1, 2019, to close this gap, also known as the “donut hole”. Additionally, an excise tax was levied against certain branded pharmaceutical products. The Administration is expected to evaluate drug pricing and the Medicare parts B and D programs in terms of policy changes in the next session of Congress.

CMS administers the Medicaid drug rebate program, in which pharmaceutical manufacturers pay quarterly rebates to each state Medicaid agency. Generally, for branded prescription drugs marketed under NDAs, as our product candidates are expected to be, manufacturers are required to rebate the greater of 23.1% of the average manufacturer price or the difference between such price and the best price during a specified period. An additional rebate for products marketed under NDAs is payable if the average manufacturer price increases at a rate higher than inflation, and other methodologies apply to new formulations of existing drugs. In addition, the ACA revised certain definitions used for purposes of calculating the rebates, including the definition of “average manufacturer price.” Various state Medicaid programs have implemented voluntary supplemental drug rebate programs that may provide states with additional manufacturer rebates in exchange for preferred status on a state’s formulary or for patient populations that are not included in the traditional Medicaid drug benefit coverage.

In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies or trials that compare the cost-effectiveness of a particular drug candidate to currently available therapies. For example, the European Union provides options for its member states to restrict the range of drug products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European Union member states may approve a specific price for a drug product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and control company profits. The downward pressure on health care costs in general, and particularly on prescription drugs, has become intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reduce pricing within a country. Any country that has price controls or reimbursement limitations for drug products may not allow favorable reimbursement and pricing arrangements.

Healthcare laws and regulations

Healthcare providers, physicians and third party payors play a primary role in the recommendation and prescription of drug products that are granted marketing approval. Arrangements with healthcare providers, third party payors and other customers are subject to broadly applicable fraud and abuse and other healthcare laws and regulations. Such restrictions under applicable federal and state healthcare laws and regulations include the following:

· the federal healthcare Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare or Medicaid, the term “remuneration” has been broadly interpreted to include anything of value. The intent standard under the federal Anti-Kickback Statute was amended by ACA to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it, in order to have committed a violation. Moreover, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil FCA;

· the federal civil and criminal false claims laws and civil monetary penalties laws, including the federal FCA, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false, fictitious or fraudulent claims for payment from Medicare, Medicaid or other federal healthcare programs, knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to avoid, decrease or conceal an obligation to pay money to the federal government, Private individuals or whistleblowers can bring FCA “qui tam” actions on behalf of the government and may share in amounts recovered;

· the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for, among other things, executing or attempting to execute a scheme to defraud any healthcare benefit program, including any third party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statements or representations, or making false statements relating to healthcare benefits, items, or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

· HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which imposes privacy, security transmission and breach reporting obligations with respect to individually identifiable health information including PHI, upon “covered entities” subject to the law, such as health plans, healthcare clearinghouses and certain healthcare providers, and their respective business associates that perform services on their behalf that involve individually identifiable health information, including PHI. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions; and

· the federal Physician Payments Sunshine Act requires certain manufacturers of prescription drugs, devices and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to annually report to CMS information related to payments and other transfers of value to physicians, dentists, optometrists, podiatrists, chiropractors and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members; and

· analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers; state laws that require drug companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state and local laws that require the licensure of sales representatives; state laws that require drug manufacturers to report information related to drug pricing or payments and other transfers of value to healthcare providers or marketing expenditures and pricing information; data privacy and security laws and regulations in foreign jurisdictions that may be more stringent than those in the United States (such as the European Union, which adopted the General Data Protection Regulation, which became effective in May 2018); state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; and state laws related to insurance fraud in the case of claims involving private insurers.

If our operations are found to be in violation of any of the healthcare laws or regulations described above or any other healthcare regulations that apply to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, imprisonment, additional reporting obligations and oversight if we becomes subject to a corporate integrity agreement or consent decree, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and pursue our strategy.

Manufacturing, Supply and Production

We do not own or operate manufacturing facilities for the production of our product candidates; however, we may develop our own manufacturing operations in the future. We currently rely on third party contract manufacturers for all of our required raw materials, active ingredients and finished products for our preclinical research and clinical trials, including the Phase III clinical trials for FMX101, FMX103 and our additional product candidates, as applicable. We have contractual relationships for the manufacture of clinical supplies of FMX101 and FMX103, and for commercial supplies if these products are approved. If FMX101, FMX103 or any of our other product candidates are approved by any regulatory agency, we intend to enter into additional agreements with one or more third party contract manufacturers as secondary manufacturers for the commercial production of these products. We, and our contract manufacturers, are developing the validation processes, methods, tests and or controls suitable for commercial scale manufacturing of our various product candidates and for defining their properties. Changes in manufacturing scale or the manufacturer may require changes to processes, methods, tests and or controls, which may take time to develop, validate and implement.

Development stage and commercial quantities of any products that we develop will need to be manufactured in facilities, and by processes, that comply with the requirements of the FDA and the regulatory agencies of other jurisdictions in which we seek approval. We currently employ internal and external resources to manage our manufacturing contractors. The relevant manufacturers of our drug products for our current preclinical and clinical trials have advised us that they are compliant with both Good Laboratory Practices, or GLP, and current Good Manufacturing Practices, or cGMP.

Our product candidates, if approved, may not be producible in sufficient commercial quantities, in compliance with regulatory requirements or at an acceptable cost. We and our contract manufacturers are, and will be, subject to extensive governmental regulation in connection with the manufacture of any pharmaceutical products or medical device constituent components. We and our contract manufacturers must ensure that all of the processes, methods and equipment are compliant with cGMP and cGLP for drugs on an ongoing basis, as mandated by the FDA and foreign regulatory authorities, and conduct extensive audits of vendors, contract laboratories and suppliers.

We use, and we intend to continue to use, leading providers of manufacturing services to the global pharmaceutical industry, to scale-up and validate a robust manufacturing process to support commercialization and distribution of our products if approved by the FDA.

Environmental, Health and Safety Matters

We are subject to extensive environmental, health and safety laws and regulations in a number of jurisdictions, primarily Israel, governing, among other things, (i) the use, storage, registration, handling, emission and disposal of chemicals, waste materials and sewage; and (ii) chemical, air, water and ground contamination, air emissions and the cleanup of contaminated sites, including any contamination that results from spills due to our failure to properly dispose of chemicals, waste materials and sewage. Our operations at our Rehovot research and development facility use chemicals and produce waste materials and sewage. Our activities require permits from various governmental authorities including, local municipal authorities, the Ministry of Environmental Protection and the Ministry of Health. The Ministry of Environmental Protection and the Ministry of Health, local authorities and the municipal water and sewage company conduct periodic inspections in order to review and ensure our compliance with the various regulations.

These laws, regulations and permits could potentially require the expenditure by us of significant amounts for compliance or remediation. If we fail to comply with such laws, regulations or permits, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third party claims, including those relating to personal injury (including exposure to hazardous substances we use, store, handle, transport, manufacture or dispose of), property damage or contribution claims. Some environmental, health and safety laws allow for strict, joint and several liability for remediation costs, regardless of comparative fault. We may be identified as a responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations.

In addition, laws and regulations relating to environmental, health and safety matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance measures or to penalties for activities which were previously permitted. For instance, Israeli regulations were promulgated in 2011 relating to the discharge of industrial sewage into the sewer system. These regulations establish new and potentially significant fees for discharging forbidden or irregular sewage into the sewage system.

The operations of our subcontractors and suppliers are also subject to various Israeli and foreign laws and regulations relating to environmental, health and safety matters, and their failure to comply with such laws and regulations could have a material adverse effect on our business and reputation, result in an interruption or delay in the development or manufacture of our product candidates, or increase the costs for the development or manufacture of our product candidates.

Employees

As of February 1, 2019, we had a total of 81 employees, 80 of whom are full-time employees, 49 of whom were primarily engaged in research and development activities. A total of 8 employees have an M.D. or Ph.D. degree. None of our employees are represented by a labor union, and we consider our employee relations to be good.

Financial and Segment Information

We operate our business as a single segment, as defined by generally accepted accounting principles. Our financial information is included in the consolidated financial statements and the related notes. See “Financial Statements and Supplementary Data” for further information.

Legal Proceedings

From time to time, we may become involved in litigation or other legal proceedings relating to claims that we consider to be arising from the ordinary course of our business. There are currently no claims or actions pending against us that, in the opinion of our management, are likely to have a material adverse effect on our business.

Corporate Information

~~Our~~Following ~~legal~~the ~~and~~consummation ~~commercial~~of ~~name~~the isMerger ~~Foamix~~on ~~Pharmaceuticals~~the ~~Ltd.~~Effective ~~(formerly~~Date, Foamix ~~Ltd.).~~became Wea ~~were~~wholly-owned ~~originally~~subsidiary ~~incorporated~~of asMenlo. aThe ~~limited~~combined ~~liability~~ company ~~under~~is ~~the~~incorporated ~~laws~~in ofDelaware. ~~the~~In ~~State of Israel on January 19~~addition, Menlo ~~2003~~will continue as ~~Foamix~~an ~~Ltd.~~“emerging Wegrowth ~~are~~company,” ~~registered~~as ~~with~~defined ~~the~~in ~~Israeli~~Section ~~Registrar~~2(a) of ~~Companies.~~the ~~Our~~Securities ~~registration~~Act ~~number~~and isas ~~51-336881-1.~~modified ~~Article~~by 3the ofJOBS ~~our~~Act ~~Articles~~and ofintends ~~Association provides that our objectives are~~ to ~~conduct~~take ~~all~~advantage ~~types~~ of ~~business~~certain asexemptions ~~are~~from ~~permitted~~various byreporting ~~law~~requirements.

~~Our~~The ~~corporate~~combined ~~structure~~company’s ~~consists~~headquarter ofare ~~Foamix~~located ~~Pharmaceuticals~~at ~~Ltd.~~520 ~~and Foamix Pharmaceuticals Inc., our wholly-owned~~ U.S. ~~subsidiary~~Highway 22, ~~which~~Suite ~~was incorporated on May 6~~305, ~~2014~~Bridgewater, ~~under~~New ~~the~~Jersey ~~laws of the State of Delaware, and which is intended to serve as our marketing and sales arm in the United States~~08807.

229

We continue to be an “emerging growth company,” as defined in Section 2(a) of the Securities Act and as modified by the JOBS Act. As such, we are eligible to, and take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not “emerging growth companies,” such as not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We will remain an emerging growth company until the earliest of: (i) the last day of our fiscal year during which we have total annual gross revenues of at least $1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the closing of our initial public offering, specifically, December 31, 2019; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act with at least $700 million of equity securities held by non-affiliates. However, in the event we are still a "smaller reporting company," as defined in Rule 12b-2 of the Exchange Act, after our emerging growth company status has terminated, we will be able to continue to take advantage of certain reduced or scaled disclosure requirements for as long as we continue to have smaller reporting company status.

Our principal executive offices are located at 2 Holzman St., Weizmann Science Park, Rehovot 7670402, Israel, and our telephone number is +972-8-9316233. Our website is www.foamix.com. The information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report and is not incorporated by reference herein. Foamix Pharmaceuticals Inc., our wholly-owned subsidiary, was incorporated on May 6, 2014 under the laws of the State of Delaware, with the intent to serve as our marketing and sales arm in the United States. Foamix Pharmaceuticals Inc. has been appointed as our agent for service of process in the United States and is located at 520 U.S. Highway 22, Suite 305, Bridgewater, New Jersey 08807.

ITEM 1A-RISK FACTORS

In conducting our business, we face many risks that may interfere with our business objectives. Some of these risks could materially and adversely affect our business, financial condition and results of operations. In particular, we are subject to various risks resulting from changing economic, political, industry, business and financial conditions. The risks and uncertainties described below are not the only ones we face.

You should carefully consider the following factors and other information in this annual report. If any of the negative events referred to below occur, our business, financial condition and results of operations could suffer. In any such case, the trading price of our ordinary shares could decline.

Risks Related to Our Business and Industry

We are largely dependent on the success of ~~our~~AMZEEQ ~~lead~~for ~~product~~the ~~candidates,~~treatment ~~FMX101~~of acne and our lead product candidate FMX103 for the treatment of ~~acne and~~ rosacea~~, respectively~~.

We have invested a majority of our efforts and financial resources in the research and development of ~~FMX101~~AMZEEQ for the treatment of inflammatory lesions of non-nodular moderate-to-severe acne vulgaris in patients 9 years of age and older, which received approval from the FDA on October 18, 2019 and became available for prescribing on January 13, 2020, and FMX103 for the treatment of moderate-to-severe papulopustular rosacea in adults, for which ~~have~~we ~~both~~submitted ~~completed~~an ~~Phase~~NDA, ~~III~~that ~~clinical~~was ~~trials~~accepted for review by the FDA in October 2019. We ~~continue~~plan to dedicate our resources toward (i) ~~obtaining~~the ~~approval~~continued ofcommercialization anefforts ~~NDA by the FDA~~ for ~~FMX101 by the end of 2019~~AMZEEQ; (ii) ~~submitting~~pre-commercialization efforts ~~an NDA to the FDA~~ for FMX103 in ~~mid-2019~~anticipation of FDA approval; and (iii) advancing our other pipeline candidates. The success of our business depends largely on our ability to ~~fund,~~successfully ~~execute~~commercialize AMZEEQ and ~~complete~~to ~~the development of,~~ obtain regulatory approval for and successfully commercialize ~~FMX101 and~~ FMX103 in a timely manner. If we fail to do so, we may not be able to obtain adequate funding to continue to operate our business.

WeEven ~~have~~though ~~not~~AMZEEQ ~~obtained~~has ~~regulatory~~received ~~approvals~~FDA toapproval, ~~market~~and ~~any~~even ofif FMX103 or our other product candidates, ~~and~~receive weregulatory ~~may~~approval, bethey ~~delayed~~may infail ~~obtaining~~to orachieve ~~fail~~the broad todegree ~~obtain~~of ~~such~~physician ~~regulatory~~adoption ~~approvals~~and use and tomarket ~~commercialize~~acceptance ~~our~~necessary ~~product~~for ~~candidates~~commercial success.

~~The~~Even ~~process~~though ofwe ~~developing,~~have ~~obtaining~~obtained ~~regulatory~~FDA approval for AMZEEQ, and ~~commercializing~~even ~~our~~if ~~product~~we ~~candidates~~obtain isFDA ~~long,~~approval ~~complex,~~for ~~costly~~FMX103 ~~and uncertain, and delays~~ or ~~failure~~any ~~can~~of ~~occur~~our atother ~~any~~product ~~stage. Furthermore~~candidates, the ~~research,~~commercial ~~testing,~~success ~~manufacturing,~~of ~~labeling,~~such products ~~marketing,~~will ~~sale~~depend ~~and~~significantly ~~distribution~~on oftheir ~~drugs~~broad ~~are~~adoption ~~subject to extensive~~ and ~~rigorous~~use ~~regulation~~ by ~~the FDA~~dermatologists, ~~and~~pediatricians ~~foreign regulatory agencies. These regulations are agency-specific~~ and ~~differ~~other byphysicians ~~jurisdiction.~~for Weapproved ~~are~~indications, ~~not~~including ~~permitted~~AMZEEQ tofor ~~market~~the ~~any~~treatment of ~~our~~moderate-to-severe ~~product~~acne ~~candidates~~ in ~~the~~patients ~~United~~9 ~~States~~years ~~until we receive approval~~ of anage ~~NDA~~and ~~from~~older and ~~the~~FMX103 ~~FDA,~~for ~~or in any foreign countries until we receive~~ the ~~requisite~~treatment ~~approval~~of ~~from~~moderate-to-severe ~~the~~rosacea ~~respective regulatory agencies~~ in ~~such~~adults, ~~countries.~~as Towell ~~gain~~as ~~approval~~any ~~of an NDA or~~ other ~~equivalent~~therapeutic ~~regulatory~~indications ~~approval,~~that we ~~must~~may ~~provide~~seek ~~the~~to ~~FDA or relevant foreign regulatory authority with clinical data that demonstrates the continued safety and efficacy of the product for the intended indication~~pursue.

23Moreover, if the treatment of acne with AMZEEQ or rosacea with FMX103 is deemed to be an elective procedure, the cost of which is borne by the patient, it will not be reimbursable through government or private health insurance.

WeThe ~~have~~degree ~~not~~and ~~received~~rate ~~formal~~of ~~regulatory~~physician ~~clearance~~and topatient ~~market~~adoption ~~FMX101~~of orAMZEEQ, ~~FMX103 from~~and, ~~the~~if ~~FDA~~approved, orFMX103 ~~from~~and ~~comparable~~any ~~foreign~~of ~~regulatory~~our ~~authorities. Our~~ other product candidates, ~~are~~will atdepend ~~earlier~~on ~~stages~~a number of ~~development and therefore subject to similar or even greater uncertainty and risk than FMX101 and FMX103.~~factors, including:

~~Although~~• wethe ~~received positive Phase III~~ clinical ~~trial~~indications ~~results~~ for ~~FMX101~~which ~~and FMX103,~~ the results of those clinical trials may be unsatisfactory to the FDA or foreign regulatory authorities even if we believe those clinical trials were successful. The FDA or applicable foreign regulatory agencies may suspend one or all of our clinical trials or require that we conduct additional clinical, nonclinical, manufacturing, validation or drug product quality studies and submit that data before considering or reconsidering any NDA or similar foreign regulatory application we may submit. Depending on the extent of these additional studies, approval of any applications that we submit may be significantly delayed, or may require us to expend more resources than we have available. It is ~~also possible that additional studies we conduct may not be considered sufficient by the FDA or applicable foreign regulatory agencies to provide regulatory approval.~~approved;

If• ~~any~~the ofsafety ~~these~~and ~~outcomes~~efficacy ~~occur,~~of ~~we would not receive approval for FMX101, FMX103 or~~ our ~~other~~ product ~~candidates~~as ~~and~~compared ~~may~~to beexisting ~~forced~~therapies tofor ~~cease~~those ~~operations.~~indications;

•

the prevalence and severity of adverse side effects;

•

patient satisfaction with the results and administration of our product and overall treatment experience, including relative convenience, ease of use and avoidance of, or reduction in, adverse side effects;

•

patient demand for the treatment of moderate-to-severe acne and rosacea or other indications;

•

the effectiveness of our sales and marketing efforts, especially the success of any targeted marketing efforts directed toward dermatologists, pediatricians, other physicians, clinics and any direct-to-consumer marketing efforts we may initiate.

•

overcoming biases of physicians and patients towards topical treatments for moderate-to-severe acne, rosacea or other indications and their willingness to adopt new therapies for these indications;

•

the cost of treatment in relation to alternative treatments, the extent to which these costs are covered and adequately reimbursed by third party payors, and patients’ willingness to pay for our products;

•

proper training and administration of our products by dermatologists, pediatricians and medical staff; and

We have limited commercial sales experience, which makes it difficult to evaluate our current business, predict our future prospects and forecast our financial performance and growth.

Prior to the launch of AMZEEQ on January 13, 2020, we had not generated any revenues from the sale of our drug products. Successful commercialization of AMZEEQ or any future products is subject to many risks. Although many of our employees have commercialized products during their employment at other organizations, Foamix has not, as an organization, commercialized a product, and there is no guarantee that we will be able to do so successfully with AMZEEQ or any of our product candidates.

There are many factors that could cause commercialization of AMZEEQ or any future products to be unsuccessful, including a number of factors that are outside our control. The commercial success of AMZEEQ depends on, among other things, the extent to which patients and physicians accept and adopt AMZEEQ. For example, if the expected patient population is smaller than we estimate or if physicians are unwilling to prescribe or patients are unwilling to take AMZEEQ, the commercial potential of AMZEEQ will be limited. In addition, we also do not know how physicians, patients and payors will respond to the pricing of AMZEEQ. Thus, significant uncertainty remains regarding the commercial potential of AMZEEQ. Moreover, our ability to effectively generate revenues from AMZEEQ will depend on our ability to, among other things:

•

achieve and maintain compliance with regulatory and other requirements;

•

create market demand for and achieve market acceptance of AMZEEQ through our marketing and sales activities and other arrangements established for the promotion of AMZEEQ;

•

compete with other acne treatments (either in the present or in the future);

•

train, deploy and support a qualified sales force;

•

maintain and obtain agreements with third-party manufacturers that can produce commercial supplies of AMZEEQ at a scale sufficient to meet our anticipated demand and on terms acceptable to us and that can develop, validate and maintain commercially viable manufacturing processes that are compliant with current cGMP regulations, including our exclusive agreement with ASM for the supply of the finished product of AMZEEQ and our third party agreements with the suppliers of AMZEEQ’s API;

•

implement and maintain agreements with wholesalers, distributors and group purchasing organizations on commercially reasonable terms;

•

ensure that our entire supply chain efficiently and consistently delivers AMZEEQ to our customers;

•

receive coverage and adequate reimbursement for AMZEEQ from commercial health plans and governmental health programs;

•

successfully educate physicians and patients about the benefits, risks, administration and use of AMZEEQ;

•

obtain acceptance of AMZEEQ as safe and effective by patients and the medical community;

•

receive positive publicity related to AMZEEQ relative to the publicity related to our competitors’ products; and

•

maintain and defend our patent protection, seek additional protection and obtain regulatory exclusivity for AMZEEQ and our other product candidates.

Any disruption in our ability to generate revenues from the sale of AMZEEQ will have a material and adverse impact on our results of operations.

We are currently building our sales, marketing and distribution capabilities, and if we are unable to expand such capabilities, our business, results of operations and financial condition may be materially adversely affected.

In order to successfully market AMZEEQ, we must continue to build and develop our sales, marketing, distribution, managerial, compliance and related capabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing, and distribution capabilities, whether independently or with third parties, we may not be able to appropriately commercialize AMZEEQ and may not become profitable.

AMZEEQ is a newly-marketed drug and, therefore, none of the members of our sales force has ever promoted AMZEEQ prior to its commercial launch. In addition, we must train our sales force to ensure that a consistent and appropriate message about AMZEEQ is being delivered to our potential customers. If we are unable to effectively train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate potential customers about the benefits of AMZEEQ and its proper administration, our efforts to successfully commercialize AMZEEQ could be harmed, which would negatively impact our ability to generate product revenue.

Additionally, even after initial development of our sales force and the commercial launch of AMZEEQ, we will need to maintain and further develop our sales force, and we will be competing with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. In the event we are unable to effectively develop and maintain our commercial team, including our U.S. sales force, our ability to effectively commercialize AMZEEQ would be limited, and we would not be able to generate product revenues successfully. There are risks involved both with establishing our own sales and marketing capabilities and with entering into arrangements with third parties to perform these services. For example, any efforts to develop a sales and marketing organization would be subject to numerous risks, including, but not limited to, the following:

•

recruiting and training a sales force is expensive and time consuming and could delay our product launch;

•

we may be unable to recruit, retain or motivate adequate numbers of effective and qualified sales and marketing personnel;

•

we may be unable to provide adequate training to sales and marketing personnel;

•

our sales personnel may be unable to obtain access to physicians or convince adequate numbers of physicians to prescribe AMZEEQ;

•

there may be unforeseen costs and expenses associated with creating an independent sales and marketing organization; and

•

we may incur significant unexpected expenses if the commercial launch of AMZEEQ is delayed or does not occur for any reason.

If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our proposed products.

We have not obtained regulatory approvals to market FMX103 or our other pipeline product candidates, and we may be delayed in obtaining or fail to obtain such regulatory approvals and to commercialize these product candidates.

The process of developing, obtaining regulatory approval for and commercializing FMX103 and our other product candidates is long, complex, costly and uncertain, and delays or failure can occur at any stage. Furthermore, the research, testing, manufacturing, labeling, marketing, sale and distribution of drugs are subject to extensive and rigorous regulation by the FDA. We are not permitted to market any of our product candidates in the United States until we receive approval of the applicable NDA from the FDA. To gain approval of an NDA or other equivalent regulatory approval, we must provide the FDA with clinical data that demonstrates the continued safety and efficacy of the product for the intended indication.

While we have received FDA approval to market AMZEEQ, we have not received formal regulatory clearance to market FMX103 from the FDA. Our other product candidates are at earlier stages of development and therefore subject to similar or even greater uncertainty and risk than FMX103.

Although we received positive Phase III clinical trial results for FMX103, the results of those clinical trials may be unsatisfactory to the FDA even if we believe those clinical trials were successful. The FDA may require that we conduct additional clinical, nonclinical, manufacturing, validation or drug product quality studies and submit that data before considering or reconsidering any NDA we may submit. Depending on the extent of these additional studies, approval of any applications that we submit may be significantly delayed or may require us to expend more resources than we have available. It is also possible that additional studies we conduct may not be considered sufficient by the FDA to provide regulatory approval.

If any of these outcomes occur, we would not receive approval for FMX103 or our other product candidates and may be forced to cease operations.

Changes in funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal functions on which the operation of our business may rely, which could negatively impact our business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of the SEC and other government agencies on which our operations may rely, including those that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other government employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, including ~~our~~the NDA ~~which was filed in December 2018 seeking approval~~ for our product candidate ~~FMX101~~FMX103 for the treatment of ~~inflammatory lesions of non-nodular~~ moderate-to-severe ~~acne~~papulopustular ~~vulgaris~~rosacea in ~~patients~~adults, 9which ~~years~~was ofaccepted ~~age~~for ~~and~~review ~~older~~in October 2019, and such delays could have a material adverse effect on our business. Further, future government shutdowns could impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.

If the FDA does not conclude that ~~FMX101 or~~ FMX103 ~~satisfy~~satisfies the requirements under Section 505(b)(2) of the ~~Federal Food Drug and Cosmetics Act~~FDCA, or Section 505(b)(2), or if the requirements for FMX103 ~~these product candidates~~ under Section 505(b)(2) are not as we expect, the approval pathway will likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in either case may not be successful.

We have ~~completed~~submitted ~~our~~an ~~pivotal~~NDA ~~Phase III trials~~ for ~~FMX101 and~~ FMX103 under the FDA’s 505(b)(2) regulatory pathway. The ~~Drug Price Competition and Patent Term Restoration Act of 1984, also known as the~~ Hatch-Waxman Act, added Section 505(b)(2) to the ~~Federal Food, Drug and Cosmetic Act, or~~ FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant, and for which the applicant has not received a right of reference, which could expedite the development program for ~~FMX101 and~~ FMX103 by potentially decreasing the amount of clinical data that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway, we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for ~~these product candidates~~FMX103, and complications and risks associated with ~~these~~this product ~~candidates~~candidate, would likely increase significantly. Moreover, inability to pursue the Section 505(b)(2) regulatory pathway could result in new competitive products reaching the market more quickly than our product ~~candidates~~ candidate, which would likely harm our competitive position and prospects. Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, our product ~~candidates~~candidate may not receive the requisite approvals for commercialization.

In addition, notwithstanding the approval of AMZEEQ and certain other products by the FDA under Section 505(b)(2) over the last few years, certain competitors and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may be required to change its 505(b)(2) policies and practices, which could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2). In addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA, and we may be required to certify against patents listed in the FDA’s Orange Book. These requirements may give rise to patent litigation and mandatory delays in approval of our NDAs for up to 30 months depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway for ~~FMX101 and~~ FMX103, there is no guarantee this would ultimately lead to faster product development or earlier approval.

24Moreover, even if FMX103 is approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.

Moreover, even if our product candidates are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.13

We may not receive ~~regulatory~~market exclusivity for our product candidates under the Hatch-Waxman Act since our lead product candidates are based on an “old antibiotic” and therefore potential competitors may develop generic versions of our product(s) after launch that, if approved, could compete directly with our product(s) sooner ~~that~~than we expect.

Statutory exclusivity provides the holder of an approved NDA limited protection from new competition in the marketplace for the innovation represented by its approved drug product, and precludes approval of certain 505(b)(2) applications and ANDAs, including for a generic version of the drug product, for prescribed periods of time. During the exclusivity period, the FDA may not approve a Section 505(b)(2) application or ANDA to the extent it is subject to exclusivity, or in the case of exclusivity for a new chemical entity may not receive a Section 505(b)(2) application or ANDA. Changes to a drug resulting from new clinical studies (other than bioavailability studies) that were “essential to approval,” and conducted or sponsored by the applicant, such as a new dosage form, strength, route of administration, dosing regimen or indication, are associated with a three-year period of exclusivity during which the FDA cannot approve an ANDA or 505(b)(2) application for the change.

Drugs based on an “old antibiotic,” such as minocycline, are subject to an additional limitation and will not receive three-year exclusivity for a “condition of use” that was approved before October 8, 2008. Prior to 2008, drugs based on an “old antibiotic” were not eligible for Hatch-Waxman Act exclusivity. In 2008, the Q1 Program Supplemental Funding Act of 2008 made drugs containing old antibiotics eligible for three-year exclusivity under certain conditions, but excluded from eligibility for that exclusivity any “condition of use” approved for such drugs before October 8, 2008. The statute does not define “condition of use” but the U.S. District Court has provided ~~recent~~ guidance in Viropharma, Inc. v. Hamburg, 898 F. Supp.2d (District of Columbia, 2012). In Viropharma, the court held that a supplemental new drug approval for the drug Vancocin was not eligible for three-year exclusivity because the supplemental new drug application at issue did not constitute a “significant new use” for the drug. The court held that the “inclusion of more specific dosing information that was within the range specified in the prior label,” “new instructions on monitoring patients’ renal function,” and “new instructions for the continuation of treatment in older patients” did not effect a “significant new use” but rather served only to “refine labeling regarding already approved conditions of use.” The FDA also emphasized that had the company sought approval for a new indication or a new dosing regimen, it would have had to comply with other statutory requirements (including by providing new pediatric data), and that since the company did not have to provide the clinical data, it did not merit the three-year exclusivity for old antibiotics.

We believe that the clinical data submitted for our product candidates will satisfy the exclusivity requirements for old antibiotics. Our Phase III clinical trials for ~~FMX101~~AMZEEQ provided ~~provide~~ new clinical (including new pediatric) data that ~~supports~~supported a topical route of administration, a new dosing regimen and a significantly lower concentration of minocycline than the prior oral form. FMX103 is indicated for the treatment of moderate-to-severe papulopustular rosacea, which is a new indication for minocycline. While we believe that any clinical data submitted to support ~~FMX101,~~ FMX103 and each of our other pipeline products containing an old antibiotic will provide the required new significant benefits and uses to qualify for the three-year non-patent exclusivity, if the FDA and the U.S. courts do not agree with us, the product candidate would not be protected by three-year exclusivity under the Hatch Waxman Act. While we would continue to be able to enforce our patents listed in the FDA’s Orange Book against infringement by third-parties, including a 30-month or any further stay or injunction from a court during the pendency of litigation, the FDA could approve an ANDA for a generic version of our product and a company could launch the product at risk and we may not be able to obtain an injunction to prevent the launch, which would allow a generic into the market sooner than we expect. In addition, even if the FDA awards three-year exclusivity to each of these products, its scope will depend on how the FDA defines the exclusivity-protected change. If the FDA defines this change more narrowly than we anticipate, the three-year exclusivity could provide less protection against generic competition than expected. Moreover, even if we obtain three years marketing exclusivity an ANDA may be submitted at any time before the expiration of market exclusivity.

25Because our Phase III clinical trials for AMZEEQ and FMX103 were not conducted head-to-head with the current standard of care drugs, we may not compare our results to those of existing drugs for promotional purposes, which may affect our sales and marketing efforts.

~~Because~~None of our Phase III clinical trials for ~~FMX101~~AMZEEQ and FMX103 were ~~not~~ conducted in head-to-head comparison with the drugs considered the current standard of care ~~drugs,~~for the ~~comparison~~relevant indications, ofnamely ~~our~~oral ~~results~~Solodyn for moderate-to-severe ~~those~~acne, ofand ~~existing~~topical ~~drugs~~antimicrobials (such as Metrogel, generic metronidazole and Finacea) for rosacea. This means that none of the ~~conclusions~~patient wegroups ~~have~~participating ~~drawn~~in ~~from~~these ~~such~~trials ~~comparisons,~~were ~~may~~or beare ~~inaccurate,~~being treated ~~and~~with the ~~FDA~~standard ~~may~~of ~~require~~care ~~our~~drugs ~~Phase~~alongside ~~III~~the ~~trials~~groups totreated bewith ~~controlled~~our ~~against~~product ~~such drugs~~candidates.

~~None~~The ofFDA ~~our~~generally ~~Phase~~requires ~~III~~adequate, ~~clinical~~well-controlled ~~trials for FMX101 and FMX103 were conducted in~~ head-to-head ~~comparison~~clinical ~~with~~trials ~~the~~to ~~drugs~~support ~~considered~~comparative ~~the~~claims ~~current~~regarding ~~standard~~marketed ofproducts. ~~care~~As ~~for~~a ~~the relevant indications~~result, ~~namely~~we ~~Solodyn~~may ~~for~~not ~~moderate-to-severe~~make promotional ~~acne,~~claims ~~and~~that ~~topical~~compare ~~antimicrobials (such as Metrogel~~AMZEEQ, ~~generic~~FMX103 ~~metronidazole~~or ~~and~~any ~~Finacea)~~of ~~for~~our ~~rosacea.~~other ~~This~~product ~~means~~candidates that ~~none~~are ofcommercialized ~~the patient groups participating~~ in ~~these~~the ~~trials~~future ~~were~~to ~~or are being treated with~~ the ~~standard~~current standards of care ~~drugs~~or ~~alongside~~other ~~the~~competitor ~~groups~~products ~~treated~~which ~~with~~may ~~our~~negatively ~~product~~impact ~~candidates.~~sales ~~Instead, we have compared the results~~ of our ~~clinical trials with historical data from prior clinical trials conducted for the standard of care drugs, as presented in their respective product labels~~products.

Direct comparison generally provides more reliable information about how two or more drugs compare, and reliance on indirect comparison for evaluating their relative efficacy or other qualities is problematic due to a lack of objective or validated methods to assess trial similarity. For example, the various trials were likely conducted in different countries with different demographic features and in patients with different baseline conditions and different hygiene standards, among other relevant asymmetries. Therefore, the conclusions we have drawn from comparing the results of our trials with those published in the product labels for these current standard of care drugs, including conclusions regarding the relative efficacy and expediency of FMX101 and FMX103, may be distorted by the inaccurate methodology of the comparison.14

~~The~~Our ~~FDA~~ability ~~may~~to ~~require~~finance ~~the Phase III clinical trials of~~ our ~~product~~operations ~~candidates~~and togenerate berevenues ~~controlled~~depends ~~against~~on the ~~drugs~~commercial ~~that~~success ~~are currently considered the standards~~ of ~~care~~AMZEEQ ~~for~~and ~~the~~on ~~treatment of~~ the ~~relevant indications, instead of being controlled against a vehicle that does not contain minocycline or against a different dosage of our minocycline foam, as was the case in our Phase II~~ clinical ~~trials.~~and ~~Furthermore,~~commercial ~~even~~success if the FDA does not impose such a requirement in connection with our Phase III clinical trials, the FDA generally requires adequate, well-controlled head-to-head clinical trials to support comparative claims regarding marketed products. As a result, we may decide to conduct comparative studies of ~~FMX101,~~ FMX103 and ~~or any of~~ our other product candidates that are commercialized in the future to support comparative claims used in the marketing of those product candidates. Significant additional time and expense will be required to design and conduct any head-to-head trials, and ~~any~~failure ~~such trials may face difficulty in patient enrollment due~~ to ~~their~~achieve complexity. For example, in the case of FMX101 for moderate-to-severe acne, the standard of care is an oral drug, Solodyn, whereas FMX101 is a topical drug. To conduct a double-blind study comparing the two treatments, all patients would need to receive both modalities, with either the oral or topical treatment consisting of a placebo, increasing the complexity and cost. If we are unable to conduct head-to-head trials for one or more of our product candidates, even if such ~~product~~success ~~candidates are approved for marketing in the United States, we~~ will ~~not be able to make claims comparing such product candidates to the current standards of care or other competitor products which may~~ negatively impact ~~sales~~our ~~of these products~~business.

Although we received FDA approval of AMZEEQ, we expect to continue to incur losses for the near future, which will delay our profitability. Moreover, it is possible that even if we succeed in developing and commercializing one or more of our other product candidates, we may never become profitable. Our near-term prospects, including our ability to finance our operations and generate revenues, ~~depends~~depend on the ~~clinical~~successful commercialization of AMZEEQ and ~~commercial~~on the successful regulatory approval and commercialization of FMX103. The success of ~~FMX101~~AMZEEQ, FMX103 and our other product candidates ~~and~~depends ~~failure~~on toa ~~achieve~~number ~~such~~of ~~success~~factors, ~~will~~many ~~negatively~~of ~~impact~~which are beyond our ~~business.~~control, including:

~~Our~~• ~~near-term prospects, including our ability to finance our operations and generate revenues, depend on~~ the ~~successful~~effectiveness ~~development, regulatory approval and commercialization~~ of ~~FMX101~~our ~~and FMX103~~marketing, assales ~~well as our other product candidates. The clinical~~ and ~~commercial~~distribution ~~success~~strategy ~~of FMX101, FMX103~~ and ~~our other product candidates depends on a number of factors, many of which are beyond our control, including:~~operations;

·• ~~the FDA’s and foreign regulatory agencies’ acceptance of~~ our ~~parameters~~ability ~~for regulatory approval relating~~ to ~~FMX101~~maintain, ~~FMX103~~independently ~~and~~or ~~our~~via ~~other~~third ~~product candidates~~parties, ~~including~~a ~~our~~commercially ~~proposed~~viable ~~indications,~~manufacturing ~~primary~~process ~~endpoint~~that ~~assessments,~~is ~~primary~~compliant ~~endpoint~~with ~~measurements and regulatory pathways~~cGMP;

·• ~~the~~our ~~FDA’s~~success ~~and~~in ~~foreign~~educating ~~regulatory~~health ~~agencies’~~care ~~acceptance~~providers ofand ~~the~~patients ~~number,~~about ~~design,~~the ~~size~~benefits, ~~conduct~~administration and ~~implementation~~use of ~~our~~AMZEEQ ~~clinical trials~~and, ~~our~~if ~~trial~~approved, ~~protocols~~FMX103 and ~~the~~our ~~interpretation~~other ofproduct ~~data from preclinical studies or clinical trials~~candidates;

·• the FDA’s ~~and foreign regulatory agencies’~~ acceptance of ~~the~~our ~~sufficiency~~parameters offor ~~the~~regulatory ~~data~~approval werelating ~~collected~~to ~~from~~FMX103 ~~our preclinical studies~~ and ~~clinical~~our ~~trials~~other ofproduct ~~FMX101~~candidates, ~~and~~including ~~FMX103~~our toproposed ~~support~~indications, ~~the~~primary ~~submission~~endpoint ofassessments, anprimary ~~NDA~~endpoint ormeasurements ~~similar~~and ~~foreign~~ regulatory ~~application without requiring additional preclinical or clinical trials~~pathways;

·• the FDA’s ~~and~~acceptance ~~foreign~~of ~~regulatory~~the ~~agencies’~~number, ~~willingness~~design, tosize, ~~schedule~~conduct anand ~~advisory~~implementation ~~committee~~of ~~meeting~~our inclinical atrials ~~timely~~for ~~manner~~our toclinical-stage ~~evaluate~~product ~~and~~candidates, ~~decide~~our ontrial protocols and the ~~approval~~interpretation of ~~our~~data ~~NDA~~from orpreclinical ~~similar~~studies ~~foreign~~or ~~regulatory~~clinical ~~application~~trials;

·• the ~~recommendation~~FDA’s acceptance of the ~~FDA~~sufficiency ~~and~~of ~~foreign~~the ~~regulatory~~data ~~agencies’~~we ~~advisory~~collected ~~committee~~from toour ~~approve~~preclinical ~~our~~studies ~~application~~and ~~without~~clinical ~~limiting~~trials ~~the~~to ~~approved~~support ~~labeling,~~the ~~specifications,~~submission ~~distribution~~of oran ~~use~~NDA ofwithout ~~the~~requiring ~~products,~~additional preclinical or ~~imposing~~clinical ~~other restrictions~~trials;

·• the FDA’s ~~and foreign regulatory agencies’~~ willingness to ~~grant~~schedule ~~separate~~an ~~approvals~~advisory ~~for~~committee ~~adults~~meeting ~~and~~in ~~children,~~a ~~where~~timely wemanner ~~may~~to ~~have~~evaluate ~~successful~~and ~~clinical~~decide ~~trial~~on ~~results~~the ~~for~~approval ~~adults~~of ~~but~~an ~~not for children, or vice versa~~NDA;

·• the recommendation of the FDA’s ~~and~~advisory ~~foreign~~committee ~~regulatory~~to ~~agencies’~~approve ~~satisfaction~~our ~~with~~application without limiting the ~~safety~~approved ~~and~~labeling, ~~efficacy~~specifications, ofdistribution ~~FMX101~~or ~~and~~use ~~FMX103~~of the products, or ~~our~~imposing other ~~product candidates~~restrictions;

26• the FDA’s satisfaction with the NDA submission for FMX103 or our other product candidates;

·• the prevalence and severity of adverse events associated with ~~FMX101~~AMZEEQ, FMX103 and our other product candidates;

·• the timely and satisfactory performance by third party contractors of their obligations in relation to our clinical trials and our manufacturing and supply of AMZEEQ and our product candidates;

·• our ~~success~~ability into ~~educating~~raise ~~dermatologists,~~additional ~~pediatricians~~capital ~~and~~on ~~patients~~acceptable ~~about~~terms ~~the~~in ~~benefits,~~order ~~administration~~to ~~and~~achieve ~~use of FMX101, FMX103 and~~ our ~~other product candidates, if approved~~goals;

·• ~~our~~the ~~ability~~availability, toperceived ~~raise~~advantages, ~~additional~~relative ~~capital~~cost, onsafety ~~acceptable~~and ~~terms~~efficacy inof ~~order~~alternative toand ~~achieve~~competing ~~our goals~~treatments;

·• ~~the~~our ~~availability,~~ability ~~perceived~~to ~~advantages,~~take ~~relative~~advantage ~~cost,~~of ~~safety~~the 505(b)(2) regulatory pathway and ~~efficacy~~obtain ofregulatory ~~alternative~~marketing ~~and~~exclusivity ~~competing~~for ~~treatments~~our products under the Hatch-Waxman Act;

·• ~~the~~our ~~effectiveness~~ability ofto ~~our~~create, ~~marketing~~pursue, ~~sales~~obtain, protect and ~~distribution~~enforce ~~strategy~~our ~~and~~intellectual ~~operations,~~property asrights ~~well~~with asrespect ~~that~~to ofAMZEEQ, ~~our~~FMX103 ~~current~~or ~~and~~our ~~future~~other ~~licensees~~product candidates;

·• ~~our~~the ~~ability~~prevalence ~~to develop, validate~~ and ~~maintain~~severity aof ~~commercially~~signs ~~viable~~and ~~manufacturing~~symptoms ~~process~~associated ~~that is compliant~~ with ~~current~~AMZEEQ, ~~good~~FMX103 ~~manufacturing~~and ~~practices,~~our orother ~~cGMP~~product candidates;

·• our ability to ~~take~~bring ~~advantage~~an action timely for patent infringement arising out of the ~~505(b)(2)~~filing ~~regulatory~~of ~~pathway~~ANDAs ~~and~~by ~~obtain~~generic ~~regulatory~~companies ~~marketing~~seeking ~~exclusivity~~approval ~~for~~to market generic versions of our products, ~~under~~before the ~~Hatch-Waxman~~expiry ~~Act~~of our patents;

·• our ability to ~~obtain~~bring ~~protect~~an ~~and~~action ~~enforce~~timely ~~our~~for ~~intellectual~~patent ~~property~~infringement ~~rights~~arising ~~with~~out ~~respect~~of the filing of 505(b)(2) applications by companies seeking approval to ~~FMX101,~~market ~~FMX103~~products orbefore ~~our~~expiry ~~other~~of ~~product~~our ~~candidates~~patents; and

·• our ability to ~~bring~~avoid anthird ~~action~~party ~~timely~~claims ~~for~~of patent infringement ~~arising~~or ~~out~~intellectual ofproperty ~~the filing of ANDAs by generic companies seeking approval to market generic versions of our products before the expiry of our patents; and~~violations.

·If we fail to achieve these objectives or to overcome the challenges presented above, many of which are beyond our ~~ability~~control, in a timely manner, we could experience significant delays or an inability to ~~avoid~~successfully ~~third~~commercialize ~~party~~AMZEEQ ~~claims~~or our product candidates. Accordingly, we may not be able to generate sufficient revenues through the sale of ~~patent~~AMZEEQ, ~~infringement~~FMX103 or ~~intellectual~~our ~~property~~other ~~violations~~product candidates to enable us to continue our business.

If we fail to achieve these objectives or to overcome the challenges presented above, many of which are beyond our control, in a timely manner, we could experience significant delays or an inability to successfully commercialize our product candidates. Accordingly, we may not be able to generate sufficient revenues through the sale of FMX101, FMX103 or our other product candidates to enable us to continue our business.15

We may encounter delays in completing clinical trials for our product candidates and may even be prevented from commencing such trials due to factors that are largely beyond our control.

We have in the past and may in the future experience delays in completing our ongoing clinical trials and in commencing future clinical trials. We experienced significant delays in our Phase III clinical program for ~~FMX101 for acne~~AMZEEQ, first due to quality control issues with certain active ingredients supplied to us by a third party and due to insufficient results in one of the co-primary endpoints, namely IGA treatment success, in one of the two initial Phase III trials, after which we conducted an additional Phase III clinical trial. Such difficulties may arise again in future trials for other indications and for our ~~other~~ product candidates.

We rely on clinical research organizations, or CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials. While we have agreements governing the committed activities of our CROs, we have limited influence over their actual performance. A failure of one or more of our clinical trials can occur at any time during the clinical trial process. Clinical trials can be delayed or aborted for a variety of other reasons, including delay or failure to:

·• obtain regulatory approval to commence a trial;

·• reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which may be subject to extensive negotiation and vary significantly among different CROs and trial sites;

·• obtain ~~institutional review board, or~~ IRB, approval at each site;

·• enlist suitable patients to participate in a trial;

·• have patients complete a trial or return for post-treatment follow-up;

·• ensure clinical sites observe trial protocol or continue to participate in a trial;

27• address any patient safety concerns that arise during the course of a trial;

·• address any ~~patient~~conflicts ~~safety~~with ~~concerns~~new ~~that~~or ~~arise~~existing ~~during~~laws ~~the~~or ~~course of a trial~~regulations;

·• ~~address~~add ~~any~~a ~~conflicts~~sufficient ~~with~~number ~~new~~of orclinical ~~existing~~trial ~~laws~~sites; or ~~regulations;~~

·• ~~add~~manufacture a sufficient ~~number~~quantities of ~~clinical~~the ~~trial~~product ~~sites;~~candidate orfor use in clinical trials.

· manufacture sufficient quantities of the product candidate for use in clinical trials.

Patient enrollment is also a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to available alternatives, including any new drugs or treatments that may be approved for the indications we are investigating.

We may also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the trial’s data safety monitoring board, ~~by the FDA~~ or by the ~~applicable foreign regulatory authorities~~FDA. Such authorities may suspend or terminate one or more of our clinical trials due to a number of factors, including our failure to conduct the clinical trial in accordance with relevant regulatory requirements or clinical protocols, inspection of the clinical trial operations or trial site by the FDA ~~or foreign regulatory authorities~~ resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

If we experience delays in carrying out or completing any clinical trial of our product candidates, the commercial prospects of our product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business and financial condition. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

FMX101, FMX103 and other product candidates may produce undesirable side effects that we may not have detected in our clinical trials. This could prevent us from gaining marketing approval or market acceptance for this product candidate, or from maintaining such approval and acceptance, and could substantially increase commercialization costs and even force us to cease operations.16

ToAMZEEQ ~~date, FMX101~~ and FMX103 ~~have~~and ~~not~~other ~~been~~product ~~associated~~candidates ~~with~~may ~~drug-related~~produce ~~systemic~~undesirable side effects ~~and~~that ~~only~~we amay ~~few~~not ~~cases of mild and temporary skin reactions~~ have ~~been~~detected ~~reported,~~in ~~most~~our ofclinical ~~which~~trials. ~~disappeared~~This oncould ~~their~~prevent us ~~own within 12 weeks~~ from ~~the~~gaining ~~beginning~~market ofacceptance ~~the~~for ~~treatment.~~AMZEEQ ~~FMX101~~or ~~and~~marketing ~~FMX103~~approval ~~have~~for ~~both~~our ~~been~~product ~~observed to have a generally favorable safety profile~~candidates, ~~with~~or ~~the~~from ~~most~~maintaining ~~commonly~~such ~~reported~~acceptance ~~adverse~~and ~~events related to upper respiratory tract infections~~approval, and ~~there~~could ~~were~~substantially noincrease ~~treatment-related serious adverse events reported. Nonetheless, upon~~ commercialization ofcosts ~~FMX101,~~and ~~FMX103~~even orforce ~~other~~us ~~product candidates, if approved, the clinical exposure of the drugs will be significantly expanded~~ to acease wider and more diverse group of patients than those participating in the clinical trials, which may reveal undesirable side effects caused by these products that were not previously observed or reported in the current clinical trialsoperations.

To date, AMZEEQ and FMX103 have not been associated with drug-related systemic side effects and only a few cases of mild and temporary skin reactions have been reported, most of which disappeared on their own within 12 weeks from the beginning of the treatment. AMZEEQ and FMX103 have both been observed to have a generally favorable safety profile, with the most commonly reported adverse events related to upper respiratory tract infections, and there were no treatment-related serious adverse events reported. Nonetheless, upon commercialization of AMZEEQ, and, if approved, FMX103 or other product candidates, the clinical exposure of the drugs will be significantly expanded to a wider and more diverse group of patients than those participating in the clinical trials, which may reveal undesirable side effects caused by these products that were not previously observed or reported in the current clinical trials.

The FDA and foreign regulatory agency regulations require that we report certain information about adverse medical events if our products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date on which we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within the prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA or a foreign regulatory agency could take action including criminal prosecution, the imposition of civil monetary penalties or seizure of our products.

Additionally, in the event we discover the existence of adverse medical events or side effects caused by AMZEEQ or one of our product candidates, a number of other potentially significant negative consequences could result, including:

·• ~~the~~sales ~~FDA~~of orthe ~~foreign~~product ~~regulatory authorities~~ may ~~suspend~~be ormore ~~withdraw~~modest ~~their~~than ~~approval~~originally ~~of the product~~anticipated;

·• the FDA ~~or foreign regulatory authorities~~ may ~~require~~suspend ~~the addition of labeling statements, such as warnings~~ or ~~contraindications~~withdraw orits ~~distribution~~approval ~~and~~of ~~use~~the ~~restrictions~~product;

28• the FDA may require the addition of labeling statements, such as warnings or contraindications or distribution and use restrictions;

·• the FDA ~~or foreign regulatory authorities~~ may require us to issue specific communications to healthcare professionals, such as letters alerting them to new safety information about our product, changes in ~~dosage~~usage or other important information;

·• the FDA ~~or foreign regulatory authorities~~ may issue negative publicity regarding the affected product, including safety communications;

·• we may be limited with respect to the safety-related claims that we can make in our marketing or promotional materials;

·• we may be required to change the way the product is administered, conduct additional preclinical studies or clinical trials or restrict or cease the distribution or use of the product;

·• perception of our products by physicians and patients may be adversely affected; and

·• we could be sued and held liable for harm caused to patients.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or product candidate and could substantially increase commercialization costs or even force us to cease operations.

Even if ~~FMX101,~~ FMX103 or our other product candidates receive marketing approval, we may continue to face future developmental and regulatory difficulties. In addition, we are subject to government regulations and we may experience delays in obtaining required regulatory approvals to market our proposed product candidates.

Even if we receive approval of any regulatory filing for ~~FMX101,~~ FMX103 or any of our other product candidates, the FDA ~~or applicable foreign regulatory agency~~ may grant approval contingent on the performance of additional costly post-approval clinical trials or REMS to monitor the safety or efficacy of the product, which could negatively impact us by reducing revenues or increasing expenses, and cause the product not to be commercially viable. Absence of long-term safety data may further limit the approved uses of our products, if any.

The FDA or applicable foreign regulatory agency may also approve FMX101, FMX103 or any of our other product candidates for a more limited indication or a narrower patient population than we originally requested, or may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates. Furthermore, any such approved product will remain subject to extensive regulatory requirements, including requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution and recordkeeping.17

IfThe weFDA ~~fail~~may toalso ~~comply~~approve ~~with~~FMX103 ~~the~~or ~~regulatory~~any ~~requirements~~ of ~~the~~our ~~FDA~~other product candidates for a more limited indication or ~~other~~a ~~applicable~~narrower ~~foreign~~patient ~~regulatory~~population ~~authorities~~than we originally requested, or ifmay not approve the labeling that we ~~discover~~believe ~~previously~~is ~~unknown~~necessary ~~problems~~or ~~with~~desirable ~~any~~for ~~approved~~the ~~commercial~~successful ~~products~~commercialization of our product candidates. Furthermore, ~~manufacturers~~any orsuch ~~manufacturing~~approved ~~processes~~product, weincluding ~~could~~AMZEEQ, bewill remain subject to ~~administrative~~extensive orregulatory ~~judicially~~requirements, including ~~imposed~~requirements ~~sanctions~~relating orto ~~other~~manufacturing, ~~setbacks~~labeling, ~~which~~packaging, ~~could~~adverse ~~require~~event usreporting, tostorage, ~~take~~advertising, ~~corrective actions~~promotion, ~~including~~distribution ~~to:~~and recordkeeping.

·If ~~suspend~~we orfail ~~impose~~to ~~restrictions~~comply onwith ~~operations~~the regulatory requirements of the FDA, ~~including~~or ~~costly~~if ~~new~~we discover previously unknown problems with any approved commercial products, manufacturers or manufacturing ~~requirements;~~processes, we could be subject to administrative or judicially imposed sanctions or other setbacks, which could require us to take corrective actions, including to:

·• ~~refuse~~suspend toor ~~approve~~impose ~~pending~~restrictions ~~applications~~on oroperations, ~~supplements~~including tocostly ~~applications~~new manufacturing requirements;

·• ~~suspend~~refuse ~~any~~to ~~ongoing~~approve ~~clinical~~pending ~~trials~~applications or supplements to applications;

·• suspend orany ~~withdraw~~ongoing ~~marketing~~clinical ~~approval~~trials;

·• ~~seek~~suspend ~~an injunction~~ or ~~impose~~withdraw ~~civil~~marketing ~~or criminal penalties or monetary fines~~approval;

·• ~~seize~~seek an injunction or ~~detain~~impose ~~products~~civil or criminal penalties or monetary fines;

·• ~~ban~~seize or ~~restrict~~detain ~~imports and exports~~products;

·• ~~issue~~ban ~~warning~~or ~~letters~~restrict orimports ~~untitled~~and ~~letters~~exports;

·• ~~suspend~~issue orwarning ~~impose~~letters ~~restrictions~~or onuntitled ~~operations, including costly new manufacturing requirements~~letters; or

·• ~~refuse~~suspend toor ~~approve~~impose ~~pending~~restrictions ~~applications~~on oroperations, ~~supplements~~including tocostly ~~applications.~~new manufacturing requirements; or

29• refuse to approve pending applications or supplements to applications.

In addition, various aspects of our operations are subject to federal, state or local laws, rules and regulations, any of which may change from time to time. Costs arising out of any regulatory developments could be time-consuming and expensive and could divert management resources and attention and, consequently, could adversely affect our business operations and financial performance.

~~Even~~We ifmay ~~FMX101,~~decide ~~FMX103~~not to continue developing or ~~our~~commercializing ~~other~~any of our product candidates ~~receive~~at ~~regulatory~~any ~~approval,~~time ~~they~~during ~~may~~development ~~fail~~or toof ~~achieve~~any ~~the~~of ~~broad~~our ~~degree~~products ofafter approval, ~~physician~~which ~~adoption~~would ~~and~~reduce ~~use~~or ~~and~~eliminate ~~market~~our ~~acceptance~~potential ~~necessary~~return on investment for ~~commercial~~those ~~success~~product candidates or products.

~~Even~~We ifhave wein ~~obtain~~the ~~FDA~~past orand ~~foreign~~may ~~regulatory~~again ~~approvals~~in ~~for~~the ~~FMX101,~~future ~~FMX103~~decide orto discontinue the development of any of our product candidates in our pipeline or not to continue to commercialize any approved product. We may discontinue development of other product candidates, ~~the~~for ~~commercial~~a ~~success~~variety of reasons, such ~~products~~as ~~will~~the ~~depend~~appearance ~~significantly~~of onnew ~~their~~technologies ~~broad~~that ~~adoption~~make ~~and~~our ~~use~~product byless ~~dermatologists~~commercially viable, ~~pediatricians~~an ~~and~~increase ~~other~~in ~~physicians~~competition ~~for~~from ~~approved~~generic ~~indications,~~or ~~including~~other competing products, changes in or failure to comply with applicable regulatory requirements, the ~~case~~discovery of ~~FMX101~~unforeseen ~~and~~side ~~FMX103,~~effects ~~for~~during clinical development or after the ~~treatment~~approved product has been marketed or the occurrence of ~~moderate-to-severe~~adverse ~~acne~~events ~~and~~at a ~~moderate-to-severe~~rate ~~rosacea,~~or ~~respectively~~severity level that is greater than experienced in prior clinical trials. If we discontinue a program in which we have invested significant resources, aswe ~~well~~will asreceive ~~any~~a ~~other~~limited ~~therapeutic~~return ~~indications~~on ~~that~~our investment and we ~~may~~will ~~seek~~have missed the opportunity to ~~pursue~~have allocated those resources to other product candidates in our pipeline that may have had potentially more productive uses.

~~Moreover,~~If ifwe ~~the~~are ~~treatment~~not ofsuccessful ~~acne~~in ~~with~~developing, ~~FMX101~~acquiring orregulatory ~~rosacea~~approval ~~with~~for ~~FMX103~~and iscommercializing ~~deemed~~additional toproduct becandidates anbeyond ~~elective~~AMZEEQ ~~procedure~~or FMX103, ~~the~~our ability ~~cost~~to ofexpand ~~which~~our isbusiness ~~borne~~and byachieve ~~the~~our ~~patient,~~strategic itobjectives will ~~not~~ be ~~reimbursable through government or private health insurance~~impaired.

~~The~~Although ~~degree~~we ~~and~~will ~~rate~~devote a substantial portion of ~~physician~~our resources on the commercialization of AMZEEQ and ~~patient~~on ~~adoption~~the potential approval of ~~FMX101~~FMX103 for the treatment of moderate-to-severe rosacea, another key element of our strategy is to discover, develop and commercialize products based on our proprietary foam or other topical platforms to serve additional dermatology indications and therapeutic markets. We are seeking to do so through our internal research programs, but our resources are limited, and our current programs are primarily geared towards commercializing AMZEEQ and seeking regulatory approval for FMX103. We may also explore strategic collaborations for the development or acquisition of new products and ~~any~~product candidates, but we may not be successful in entering into such relationships. While we have received FDA approval for AMZEEQ and our NDA for FMX103 for the treatment of rosacea has been accepted by the FDA, all of our other potential product candidates remain in earlier stages of development. Research programs to identify product candidates require substantial technical, iffinancial ~~approved~~and human resources, ~~will~~regardless of ~~depend~~whether onany aproduct ~~number~~candidates ofare ~~factors~~ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet may fail to yield product candidates for clinical development for many reasons, including:

·• the ~~clinical~~research ~~indications~~methodology ~~for~~used ~~which~~may ~~the~~not ~~product~~be issuccessful ~~approved~~in identifying potential product candidates;

~~· the safety and efficacy of our product as compared to existing therapies for those indications;~~18

·• ~~the~~competitors ~~prevalence~~may ~~and~~develop ~~severity~~alternatives ofthat ~~adverse~~render ~~side~~our ~~effects~~product candidates obsolete or less attractive;

·• ~~patient satisfaction with the results and administration of our~~ product ~~and~~candidates ~~overall~~we ~~treatment~~develop ~~experience,~~may ~~including~~nevertheless ~~relative~~be ~~convenience,~~covered ~~ease~~by ofthird ~~use~~parties’ ~~and~~patents ~~avoidance of,~~ or ~~reduction~~other ~~in,~~proprietary ~~adverse side effects~~rights;

·• ~~patient~~a ~~demand~~product ~~for~~candidate ~~the~~may ~~treatment~~in ofa ~~moderate-~~subsequent trial be shown to~~-severe~~ ~~acne~~have ~~and~~harmful ~~rosacea~~side effects or other ~~indications~~characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;

·• ~~overcoming~~a ~~biases~~product ofcandidate ~~physicians~~may ~~and~~not ~~patients~~be ~~towards~~capable ~~[existing??]~~of ~~topical~~being ~~treatments~~produced ~~for~~in ~~moderate-to-severe~~commercial ~~acne,~~quantities ~~rosacea~~at oran ~~other~~acceptable ~~indications~~cost, ~~and~~or ~~their~~at ~~willingness to adopt new therapies for these indications~~all;

·• ~~the~~a ~~cost~~product ofcandidate ~~treatment~~may innot ~~relation~~be toaccepted ~~alternative~~as ~~treatments,~~safe ~~the~~and ~~extent~~effective toby ~~which~~patients, ~~these~~the ~~costs~~medical ~~are~~community ~~covered~~or ~~and adequately reimbursed by~~ third party payors, ~~and~~if ~~patients’ willingness to pay for our products~~applicable;

·• ~~proper~~creation ~~training~~of ~~and~~intellectual ~~administration~~property ofrights, such as patents, which are necessary to protect our ~~products~~interests byin ~~dermatologists~~a product candidate, ~~pediatricians~~can be challenging in relation to pharmaceutical formulations and ~~medical~~their ~~staff~~uses with known active pharmaceutical ingredients and generally used combinations of inactive ingredients approved by the FDA;

·• ~~the~~intellectual ~~revenues~~property ~~and~~rights, ~~profitability~~such ~~that~~as patents, which are necessary to protect our ~~products~~interests ~~will~~in ~~offer~~a ~~physicians~~product ascandidate, ~~compared~~may be difficult to ~~alternative~~obtain ~~therapies;~~or ~~and~~unobtainable or if obtained may be difficult to enforce or unenforceable;

·• ~~the~~intellectual ~~effectiveness~~property ofrights, ~~our~~such ~~sales~~as ~~and~~patents, ~~marketing~~may ~~efforts,~~fail ~~especially~~to ~~the~~provide ~~success~~adequate ofprotection, ~~any~~may ~~targeted~~be ~~marketing~~challenged ~~efforts~~and ~~directed~~one ~~toward~~or ~~dermatologists,~~more ~~pediatricians,~~claims ~~other~~may ~~physicians,~~be ~~clinics~~revoked ~~and~~or ~~any~~the ~~direct-to-consumer~~patent ~~marketing~~may ~~efforts~~be weheld ~~may~~to ~~initiate.~~be invalid; and

We• ~~may~~intellectual ~~decide~~property ~~not~~rights toof ~~continue~~third ~~developing~~parties ormay ~~commercializing~~potentially ~~any~~block of our ~~product~~entry ~~candidates~~into atcertain ~~any time during development or after approval~~markets, ~~which would reduce~~ or ~~eliminate~~make ~~our~~such ~~potential~~entry ~~return~~economically ~~on investment for those product candidates~~impracticable.

WeAMZEEQ ~~have in the past~~ and, ~~may~~if ~~again in the future decide to discontinue the development of any of our product candidates in our pipeline or not to continue to commercialize any of our product candidates. In December 2017~~approved, weFMX103 ~~discontinued~~will ~~further~~face ~~in-house~~significant ~~development~~competition ~~of FMX102 for the treatment of impetigo~~ and ~~FMX104~~our ~~for~~failure ~~the treatment of chemotherapy-induced rash due~~ to ~~our~~compete ~~reassessment~~effectively ~~of the limited market opportunities for these products in light of our then-existing limited cash and resources. In the future, we~~ may ~~discontinue~~prevent ~~development~~us ~~of other product candidates for a variety of reasons, such as the appearance of new technologies that make our product less commercially viable, an increase in competition~~ from generic or other competing products, changes in or failure to comply with applicable regulatory requirements, the discovery of unforeseen side effects during clinical development or after the approved product has been marketed or the occurrence of adverse events at a rate or severity level that is greater than experienced in prior clinical trials. If we discontinue a program in which we have invested achieving significant ~~resources,~~market wepenetration ~~will not receive any return on our investment~~ and ~~we will have missed the opportunity to have allocated those resources to other product candidates in our pipeline that may have had potentially more productive uses~~expansion.

30The approved indication of AMZEEQ is to treat inflammatory lesions of non-nodular moderate-to-severe acne in patients 9 years of age and older, and the expected indication of FMX103 is to treat moderate-to-severe papulopustular rosacea in adults. The facial aesthetic market in general, and the market for acne treatments in particular, is highly competitive and dynamic, and is characterized by rapid and substantial technological development and product innovations. AMZEEQ faces significant competition from other acne products, including oral drugs such as Seysara, Solodyn, Doryx, Dynacin, Acticlate and Minocin, and topical anti-acne drugs such as Aklief, Acanya, Ziana, Epiduo, Benzaclin, Aczone and Differin. FMX103, if approved, may face significant competition from other rosacea products, including oral drugs such as Oracea®, and topical anti-rosacea drugs such as Metrogel, Soolantra and Finacea, all of which have been approved for marketing and are currently available to consumers. AMZEEQ and, if approved, FMX103 may also compete with non-prescription anti-acne and rosacea products and unapproved and off-label treatments.

IfThere ~~FMX101~~are also several potential competing products currently under development. One of such potential competing products is a topical gel suspension containing minocycline non-hydrochloride for the treatment of inflammatory skin disease, ~~FMX103~~including oracne ~~any~~and rosacea, developed by Hovione, a manufacturer of ~~our~~active ~~other~~pharmaceutical ingredients and drug product ~~candidates~~intermediates, ~~are~~which ~~approved~~product candidate has recently completed Phase II clinical trials for ~~use~~the ~~but~~treatment ~~fail~~of moderate-to-severe ~~achieve~~papulopustular rosacea and has obtained FDA input for the ~~broad~~design ~~degree~~of a planned Phase III clinical trial. Another such potential competing product is a topical hydrophilic gel containing minocycline hydrochloride for the treatment of ~~physician~~acne, ~~adoption~~known as BPX-01, developed by BioPharmX Corporation, for which BioPharmX has completed Phase IIa and ~~market~~Phase ~~acceptance~~IIb ~~necessary~~clinical trials and has obtained FDA input for ~~commercial~~the ~~success,~~design ~~our~~of ~~operating~~a planned Phase III clinical trial. BioPharmX has also announced positive results for its Phase IIb study for a topical minocycline gel named BPX-04 for the treatment of rosacea. In addition, Sol-Gel is developing topical drugs containing microencapsulated benzoyl peroxide for the treatment of rosacea and ~~financial~~acne ~~condition~~vulgaris ~~will~~and beintends ~~adversely~~to ~~affected~~submit an NDA for each candidate in 2020. If ultimately approved and launched in the U.S., these products would become direct competitors to AMZEEQ and FMX103.

~~Our~~To ~~ability~~compete tosuccessfully ~~market~~in ~~FMX101~~the acne and ~~FMX103,~~rosacea iftreatment ~~approved~~markets, ~~may~~we bewill ~~limited~~have to ~~use~~continue to demonstrate that AMZEEQ is safe and effective for the treatment of moderate-to-severe acne orand to demonstrate that FMX103 is safe and effective for the treatment of moderate-to-severe rosacea, ~~respectively,~~and inthat ~~the~~they ~~U.S.,~~do ~~and~~not ifinfringe wethe ~~want~~intellectual toproperty ~~expand~~rights ~~the~~of ~~indications~~any ~~for~~third ~~which~~parties. weCompeting ~~may~~in ~~market~~the ~~FMX101~~acne orand ~~the~~rosacea markets ~~territories~~could result in ~~which~~price-cutting, wereduced ~~may~~profit ~~market~~margins ~~these~~and ~~products,~~loss weof ~~will~~market ~~need~~share, toany ~~obtain~~of ~~additional~~which ~~regulatory~~would ~~approvals~~harm our business, ~~which~~financial ~~may~~condition ~~not~~and beresults ~~granted~~of operations.

We plan to seek regulatory approval in the United States for FMX101 and FMX103 for the treatment of moderate-to-severe acne and moderate-to-severe rosacea, respectively. If FMX101 is approved, the FDA will restrict our ability to market or advertise FMX101 and FMX103 for other indications, which could limit physician and patient adoption. We may seek to promote and commercialize FMX101 and FMX103 in Europe or in other jurisdictions through third party partnerships, by applying for marketing approval in other respective jurisdictions, or we may develop new or additional uses or protocols for FMX101 or FMX103 in the future, but we may not receive the clearances required to do so. If we proceeded to submit for marketing approval in other territories, we or our partners would likely be required to conduct additional clinical trials or studies to support approvals for such additional jurisdictions or indications, which would be time consuming and expensive, and may produce results that do not support regulatory approvals.19

Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The marketing approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States as well as other risks. In particular, in many countries outside the United States, it is required that a product receive pricing and reimbursement approval before the product can be commercialized. This can result in substantial delays in such countries. In other countries, product approval depends on showing superiority to an approved alternative therapy. This may lead to conducting complex clinical trials that require additional significant resources.

None of our products are currently approved for sale in any jurisdiction, including the United States or any international markets. If we fail to comply with regulatory requirements in the United States or any international market we decide to enter, or to obtain and maintain required approvals, or if regulatory approvals in the United States or the relevant international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be harmed.

Marketing approval in one jurisdiction does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one jurisdiction may have a negative effect on the regulatory process in others. Failure to obtain a marketing approval in other countries or any delay or setback in obtaining such approval would impair our ability to obtain approval for our product candidates in the United States or to develop foreign markets for our products. This could limit the full commercial potential of FMX101, FMX103 or our other products.

If we are not successful in developing, acquiring regulatory approval for and commercializing additional product candidates beyond FMX101 or FMX103, our ability to expand our business and achieve our strategic objectives will be impaired.

Although we will devote a substantial portion of our resources on the continued clinical testing and potential approval of FMX101 for the treatment of moderate-to-severe acne and FMX103 for the treatment of moderate-to-severe rosacea, another key element of our strategy is to discover, develop and commercialize products based on our proprietary foam platforms to serve additional dermatology indications and therapeutic markets. We are seeking to do so through our internal research programs, but our resources are limited, and our current programs are primarily geared towards clinical testing and seeking regulatory approval for FMX101 and FMX103. We may also explore strategic collaborations for the development or acquisition of new products and product candidates, but we may not be successful in entering into such relationships. While we have completed three Phase III clinical trials for our lead product candidate, FMX101, for the treatment of moderate-to-severe acne, and two Phase III clinical trials for FMX103 for the treatment of rosacea, all of our other potential product candidates remain in earlier stages of development. Research programs to identify product candidates require substantial technical, financial and human resources, regardless of whether any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including:

· the research methodology used may not be successful in identifying potential product candidates;

· competitors may develop alternatives that render our product candidates obsolete or less attractive;

· product candidates we develop may nevertheless be covered by third parties’ patents or other proprietary rights;

· a product candidate may in a subsequent trial be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;

· a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all;

· a product candidate may not be accepted as safe and effective by patients, the medical community or third party payors, if applicable;

· intellectual property rights, such as patents, which are necessary to protect our interests in a product candidate, may be difficult to obtain or unobtainable;

· intellectual property rights, such as patents, may fail to provide adequate protection, may be challenged and one or more claims may be revoked or the patent may be held to be invalid; and

· intellectual property rights of third parties may potentially block our entry into certain markets, or make such entry economically impracticable.

Our product candidates, if approved, will face significant competition and our failure to compete effectively may prevent us from achieving significant market penetration and expansion.

If we receive marketing approval, the expected indication of FMX101 will be moderate-to-severe acne and the expected indication of FMX103 will be moderate-to-severe rosacea. The facial aesthetic market in general, and the market for acne treatments in particular, is highly competitive and dynamic, and is characterized by rapid and substantial technological development and product innovations. FMX101, if approved, may face significant competition from other acne products, including oral drugs such as Solodyn, Doryx, Dynacin, Acticlate and Minocin, and topical anti-acne drugs such as Acanya, Ziana, Epiduo, Benzaclin, Aczone and Differin. FMX103, if approved, may face significant competition from other rosacea products, including oral drugs such as Oracea®, and topical anti-rosacea drugs such as Metrogel, Soolantra and Finacea, all of which have been approved for marketing and are currently available to consumers. If approved, FMX101 and FMX103 may also compete with non-prescription anti-acne and rosacea products and unapproved and off-label treatments.

There are also several potential competing products currently under development. One of such potential competing products is a topical gel suspension containing minocycline non-hydrochloride for the treatment of inflammatory skin disease, including acne and rosacea, developed by Hovione, a manufacturer of active pharmaceutical ingredients and drug product intermediates, which product candidate is currently undergoing a Phase II clinical trial for the treatment of moderate-to-severe papulopustular rosacea. Another such potential competing product is a topical hydrophilic gel containing minocycline hydrochloride for the treatment of acne, known as BPX-01, developed by BioPharmX Corporation, for which BioPharmX has completed Phase IIa and Phase IIb clinical trials and has obtained FDA input for the design of a planned Phase III clinical trial. BioPharmX has also initiated a Phase IIb study for a topical minocycline gel named BPX-04 for the treatment of rosacea. If ultimately approved and launched in the U.S., these products would become direct competitors to FMX101 and FMX103.

To compete successfully in the acne and rosacea treatment markets, we will have to demonstrate that FMX101 is safe and effective for the treatment of moderate-to-severe acne and FMX103 is safe and effective for the treatment of moderate-to-severe rosacea, and that they do not infringe the intellectual property rights of any third parties. Competing in the acne and rosacea markets could result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations.

Due to less stringent regulatory requirements, there are many more acne products and procedures available for use in international markets than are approved for use in the United States. There are also fewer limitations on the claims that our competitors in international markets can make about the effectiveness of their products and the manner in which they can market them. As a result, if we partner with other companies in these markets and launch our products, we may face more competition in these markets than in the United States.

In addition, ~~even if~~ we ~~are able to commercialize our product candidates, we~~ may not be able to price ~~them~~AMZEEQ or, if approved, FMX103, competitively with current standard of care products or their price may drop considerably due to factors outside our control. If this happens or the price of materials and manufacture increases dramatically, our ability to continue to operate our business would be materially harmed and we may be unable to commercialize ~~FMX101~~AMZEEQ or FMX103 successfully. Potential competitors may challenge, narrow, invalidate or seek to design around the claims of our granted patents or our patent applications, and such patents and patent applications may fail to provide adequate protection for our product candidates. Furthermore, such potential competitors may enter the market before us, and their products may be designed to circumvent our granted patents and pending patent applications.

We have agreements with third party licensees to develop new product candidates for them utilizing our foam technology, and our ability to benefit from such product candidates, or from product candidates that we are developing independently of such licensees, could be impaired or delayed if our licensees’ efforts to develop and commercialize these product candidates are unsuccessful.

In parallel to our core business focused on the development of FMX101, FMX103 and other product candidates, we are pursuing development and license agreements with various pharmaceutical companies for the development and commercialization of product candidates that combine our proprietary technology with the licensees’ drugs for the treatment of various indications. These license agreements generally provide rights to the licensees for a single active pharmaceutical ingredient, and grant the licensee exclusivity in the development and commercialization of the specific licensed product candidates incorporating such active pharmaceutical ingredient. Our entitlement to contingent payments and royalties from such potential product candidates is therefore dependent upon the licensees’ performance of their responsibilities and their continued cooperation in developing and commercializing the potential product candidates.

Our licensees may not cooperate with us or perform their obligations under our agreements with them. Furthermore, the obligations of the licensees under such agreements are, for the most part, limited to ‘commercially reasonable efforts,’ and they do not face penalties or other repercussions for failing to develop or commercialize the relevant product candidates within the designated timetable other than potentially forfeiting their rights to the relevant product candidate and assigning such rights to us. However, there is no guarantee that we will be able to develop, manufacture or commercialize successfully any such product candidate assigned to us. We cannot control the scope or timing of the resources that will be devoted by our licensees to performing their responsibilities under our agreements with them. Our licensees may choose to pursue alternative technologies in preference to those being developed with us. Several of these agreements may also be terminated for convenience by the licensee. The development and commercialization of these licensed product candidates, as well as the anticipated contingent payments and royalties we hope to generate from them, will be delayed or never obtained if the licensees fail to conduct their responsibilities in a timely manner or in accordance with applicable regulatory requirements, or if they breach their agreements with us. Disputes with our licensees could also impair our reputation or result in development delays, decreased revenues and litigation expenses.

Furthermore, our licensees may encounter adverse outcomes in the process of developing or commercializing their product candidates, and any such outcomes or delays may adversely affect our ability to seek approval for our product candidates or to commercialize our other products. For example, adverse events reported in connection with the use of our licensee’s products that incorporate our technology could negatively affect the perception by regulators, physicians or patients of our platform, which may impair our ability to advance the development of our product candidates and the commercialization of other products.

We have granted several of our licensees the right to commercialize the licensed products for any indication, including acne and rosacea, which may allow them to compete against us using our own technology.

The licenses we granted to several of our licensees, with whom we are developing certain topical products based on our technology and the licensees’ proprietary drugs, allow them to commercialize the developed products for any topical application, and not only for the specific indication for which each product was originally intended. If any such licensed products prove to be effective for moderate-to-severe acne, rosacea or any other indication that we are pursuing with FMX101, FMX103 or other product candidates, we may face competition from these licensed products.

Healthcare reforms by governmental authorities and related reductions in pharmaceutical pricing, reimbursement and coverage by third party payors may adversely affect our business.

We expect the healthcare industry to face increased limitations on reimbursement, rebates and other payments as a result of healthcare reform, which could adversely affect third party coverage of our products and how much or under what circumstances healthcare providers will prescribe or administer our products, if approved.

In both the United States and other countries, sales of our products, if approved for marketing, will depend in part upon the coverage and adequate reimbursement from third party payors, which include governmental authorities, managed care organizations and other private health insurers. Third party payors are increasingly challenging the price and examining the cost effectiveness of medical products and services.

Increasing expenditures for healthcare have been the subject of considerable public attention in the United States. Both private and government entities are seeking ways to reduce or contain healthcare costs. Numerous proposals that would effect changes in the U.S. healthcare system have been introduced or proposed in Congress and in some state legislatures, including reducing reimbursement for prescription products and reducing the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products.

Cost reduction initiatives and changes in coverage implemented through legislation or regulation could decrease utilization of and reimbursement for any approved products, which in turn would affect the price we can receive for those products. Any reduction in reimbursement that results from federal legislation or regulation may also result in a similar reduction in payments from private payors, as private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates.

Significant developments that may adversely affect pricing in the United States include the enactment of federal healthcare reform laws and regulations, including the ACA and the Medicare Prescription Drug Improvement and Modernization Act of 2003. Changes in the healthcare system enacted as part of healthcare reform in the United States, as well as the increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, may result in increased pricing pressure by influencing, for instance, the reimbursement policies of third party payors. While healthcare reform legislation may have increased the number of patients who are expected to have insurance coverage for our product candidates, provisions such as the assessment of a branded pharmaceutical manufacturer fee and an increase in the amount of rebates that manufacturers pay for coverage of their drugs by Medicaid programs may have an adverse effect on us. It is uncertain how current and future reforms in these areas will influence the future of our business operations and financial condition.

In 2017, a new administration, which had promised to repeal and replace the ACA, took office in the United States. For example, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the ACA have been signed into law. More recently, in July 2018, CMS published a final rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the ACA, and because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. While neither the Texas District Court Judge, Trump administration nor CMS have stated that the ruling will have an immediate effect, it is unclear how this decision, subsequent appeals, if any, and other efforts to repeal and replace the ACA will impact the ACA. Although we cannot predict the form of any such replacement of the ACA may take, or the full effect on our business of the enactment of additional legislation pursuant to healthcare and other legislative reform, we believe that legislation or regulations that would reduce reimbursement for, or restrict coverage of, our products could adversely affect how much or under what circumstances healthcare providers will prescribe or administer our products. This could materially and adversely affect our business by reducing our ability to generate revenues, raise capital, obtain additional licensees and market our products. In addition, we believe the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of pharmaceutical products, which may adversely impact product sales.20

Since its enactment, there have been judicial, Congressional and political challenges to certain aspects of the ACA. For example, President Trump signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the ACA have been signed into law. In July 2018, CMS published a final rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the ACA, and because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals held that the individual mandate is unconstitutional and remanded the case to the lower court to reconsider its earlier invalidation of the full ACA. On January 3, 2020, the U.S. House of Representatives filed a petition for a writ of certiorari with the U.S. Supreme Court. Pending review, the ACA remains in effect, but it is unclear at this time what effect the latest ruling and petition will have on the status of the ACA. Although we cannot predict the form of any such replacement of the ACA may take, if any, or the full effect on our business of the enactment of additional legislation pursuant to healthcare and other legislative reform, we believe that legislation or regulations that would reduce reimbursement for, or restrict coverage of, our products could adversely affect how much or under what circumstances healthcare providers will prescribe or administer our products. This could materially and adversely affect our business by reducing our ability to generate revenues, raise capital, obtain additional licensees and market our products. In addition, we believe the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of pharmaceutical products, which may adversely impact product sales.

Recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several U.S. Congressional inquiries and proposed federal legislation designed to, among other things, bring more transparency to product pricing, reduce the cost of certain products under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies. At the state level, individual states in the United States are also increasingly passing legislation and implementing regulations designed to control product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures.

It is likely that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for a pharmaceutical manufacturer’s products or additional pricing pressure.

It will be difficult for us to profitably sell ~~FMX101~~AMZEEQ, FMX103 or our other product candidates if reimbursement for these products is limited by government authorities and third -party payor policies.

In addition to any healthcare reform measures which may affect reimbursement, market acceptance and sales of ~~FMX101~~AMZEEQ, and, if approved, FMX103 and our other product candidates~~, if approved,~~ will depend on the reimbursement policies of government authorities and third party payors. Government authorities and third party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for, and establish reimbursement levels.

A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement will be available for ~~FMX101~~AMZEEQ or FMX103, or, if reimbursement is available, the level of reimbursement.

34Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. In addition, third-party payors are likely to impose strict requirements for reimbursement in order to limit off-label use of a higher priced drug. Reimbursement by a third-party payor may depend upon a number of factors including the third-party payor’s determination that use of a product is:

~~Reimbursement~~• may impact the demand for, or the price of, any product for which we obtain marketing approval. In addition, third party payors are likely to impose strict requirements for reimbursement in order to limit off-label use of a ~~higher~~covered ~~priced~~benefit ~~drug.~~under ~~Reimbursement~~its byhealth ~~a third party payor may depend upon a number of factors including the third party payor’s determination that use of a product is:~~plan;

·• asafe, ~~covered~~effective ~~benefit~~and ~~under~~medically ~~its health plan~~necessary;

·• ~~safe,~~appropriate ~~effective~~for ~~and~~the ~~medically~~specific ~~necessary~~patient;

·• ~~appropriate for the specific patient~~cost-effective; and

·• ~~cost-effective;~~neither ~~and~~experimental nor investigational.

·Obtaining ~~neither~~coverage ~~experimental~~and ~~nor~~reimbursement ~~investigational~~approval for a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to the payor. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for our product candidates, if approved. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our future products. If reimbursement is not available, or is available only to limited levels, we may not be able to commercialize our product candidates, profitably or at all, even if approved.

Obtaining coverage and reimbursement approval for a product from a government or other third party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to the payor. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for our product candidates, if approved. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our future products. If reimbursement is not available, or is available only to limited levels, we may not be able to commercialize our product candidates, profitably or at all, even if approved.21

Legislative or regulatory healthcare reforms in the United States may make it more difficult and costly for us to obtain regulatory clearance or approval of our product candidates and to produce, market, and distribute our products after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture, and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of ~~FMX101,~~ FMX103 or any of our other product candidates. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, inter alia, require:

·• changes to manufacturing methods;

·• recall, replacement, or discontinuance of one or more of our products; and

·• additional recordkeeping.

Each of these would likely entail substantial time and cost and could /adversely affect our business and our financial results.

We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.

We anticipate that we will continue to expend substantial resources for the foreseeable future for the ~~regulatory~~commercialization ~~approval~~of AMZEEQ and for pre-commercialization ofefforts ~~FMX101~~related to ~~and~~ FMX103. We also wish to continue the development of other indications and product candidates. However, we may not have sufficient funds to carry out and complete all of these plans, and may need to raise additional funds for such purposes.

These expenditures will include costs associated with research and development, conducting preclinical studies and clinical trials, and manufacturing and supply, as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because of the ~~outcome~~numerous ofrisks ~~any~~and ~~clinical~~uncertainties ~~trial~~associated iswith ~~highly~~product ~~uncertain~~development and commercialization, we ~~cannot~~are ~~reasonably~~unable ~~estimate~~to reliably estimate the actual amounts necessary to successfully complete the development and commercialization of any of our product candidates.

35Based on our current plans, we believe our existing cash and investments will be sufficient to fund our operating expenses and capital requirements into the second quarter of 2021. However, our operating plan may change as a result of many factors currently unknown to us. 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 shareholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

We believe that the net proceeds from our initial and follow-on public offerings will allow us to fund our operating expenses and capital expenditure requirements throughout our NDA application and approval process for FMX101 and FMX103, which we expect to complete in 2019. However, our operating plan may change as a result of many factors currently unknown to us. 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 shareholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

Our future capital requirements depend on many factors, including:

·• the ~~results~~cost of ~~the~~commercialization ~~clinical~~activities ~~trials~~for AMZEEQ, FMX103 or any of our other product candidates approved for sale, including marketing, sales and distribution costs;

·• the ~~timing~~degree ~~of,~~ and ~~the~~rate ~~costs~~of ~~involved~~market ~~in,~~acceptance ~~obtaining~~of ~~regulatory~~AMZEEQ ~~approvals~~and ~~for~~any ~~our~~future ~~product~~approved ~~candidates~~products;

·• the ~~number~~emergence, ~~and~~approval, ~~characteristics~~availability, ofperceived ~~any~~advantages, ~~additional~~relative ~~product~~cost, ~~candidates~~relative wesafety ~~develop~~and relative efficacy of alternative and competing products or ~~acquire~~treatments;

·• the ~~scope, progress,~~ results ~~and costs~~ of ~~researching~~the ~~and~~clinical ~~developing~~trials of our product candidates~~, and conducting preclinical and clinical trials~~;

·• the ~~cost~~timing of, ~~commercialization~~and ~~activities~~the ifcosts ~~any~~involved ofin, ~~our~~obtaining ~~product~~regulatory ~~candidates~~approvals ~~are approved~~ for ~~sale,~~our ~~including~~product ~~marketing, sales and distribution costs~~candidates;

·• the ~~cost~~number and characteristics of ~~manufacturing~~any ~~our~~additional product candidates ~~and any products~~ we ~~successfully~~develop ~~commercialize,~~or ~~and maintaining our related facilities~~acquire;

~~· our ability to establish and maintain strategic collaborations, licensing or other arrangements and the terms of and timing of such arrangements;~~22

·• the ~~degree~~scope, progress, results and ~~rate~~costs of ~~market~~researching ~~acceptance~~and ofdeveloping ~~any~~our ~~future~~product ~~approved~~candidates, ~~products~~and conducting preclinical and clinical trials;

·• the ~~emergence,~~cost ~~approval,~~of ~~availability,~~manufacturing ~~perceived~~our ~~advantages,~~product ~~relative~~candidates ~~cost, relative safety~~ and ~~relative~~any ~~efficacy~~products ofwe ~~alternative~~successfully commercialize, and ~~competing~~maintaining ~~products~~our orrelated ~~treatments~~facilities;

·• ~~any~~our ~~product~~ability ~~liability~~to establish and maintain strategic collaborations, licensing or other ~~lawsuits~~arrangements ~~related~~and tothe ~~our~~terms ~~products~~of and timing of such arrangements;

·• ~~the~~any ~~expenses~~product ~~needed~~liability toor ~~attract~~other ~~and~~lawsuits ~~retain~~related ~~skilled~~to ~~personnel~~our products;

·• the ~~costs~~expenses ~~associated~~needed ~~with~~to ~~being~~attract aand ~~public~~retain ~~company~~skilled personnel;

·• the costs associated with ~~evaluation~~being ofa ~~our~~public ~~product candidates~~company;

·• the costs associated with evaluation of ~~third~~AMZEEQ ~~party~~or ~~intellectual~~our ~~property~~product candidates;

·• the costs associated with ~~obtaining~~evaluation ~~and~~of ~~maintaining~~third ~~licenses~~party intellectual property;

·• the costs associated with obtaining, ~~protecting~~ and ~~enforcing intellectual property, such as costs involved in preparing, filing, prosecuting,~~ maintaining, defending and enforcing patent claims, litigation costs, including for patent infringement arising out of ANDA submissions by generic companies to manufacture and sell generic products, and the outcome of such litigationlicenses; ~~and~~

·• the ~~timing~~costs associated with creating, ~~receipt~~obtaining, protecting, defending and ~~amount~~enforcing ofintellectual ~~sales~~property, ofsuch as costs involved in preparing, orfiling, ~~royalties~~prosecuting, onmaintaining, ~~future~~defending ~~approved~~and enforcing patent claims, litigation costs, including for patent infringement arising out of ANDA submissions by generic companies to manufacture and sell generic products or arising out of 505(2)(b) submissions, ifand ~~any.~~the outcome of such litigation; and

•

the timing, receipt and amount of sales of, or royalties on, approved products.

Additional capital may not be available when we need it, on terms that are acceptable to us or at all. If adequate funds are not available to us on a timely basis, we may be required to:

·• delay, limit, reduce or terminate ~~preclinical~~our ~~studies~~establishment of manufacturing, ~~clinical~~sales ~~trials~~and marketing or ~~other~~distribution ~~development~~capabilities or other activities ~~for~~that may be necessary to commercialize AMZEEQ, FMX103 or any of our other product candidates;.

·• delay, limit, reduce or terminate our research and development activities; or

·• delay, limit, reduce or terminate ~~our~~preclinical ~~establishment of manufacturing~~studies, ~~sales~~clinical ~~and~~trials ~~marketing~~ or ~~distribution capabilities or~~ other development activities ~~that~~for ~~may be necessary to commercialize FMX101, FMX103 or any of~~ our ~~other~~ product candidates.

If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownership interest of our existing shareholders will be diluted and the terms of any new equity securities may have a preference over our ordinary shares. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures or specified financial ratios, any of which could restrict our ability to commercialize our product candidates or operate as a business.

We have ~~a limited operating history and have~~ incurred significant losses since our inception and we anticipate that we will continue to incur losses ~~for~~in the ~~foreseeable~~near future. We have only two product candidates that have completed Phase III clinical trials and have no sales, which, together with our limited operating history, make it difficult to assess our future commercial viability.

We ~~are~~continue ato ~~clinical-stage~~incur ~~specialty~~significant ~~pharmaceutical~~research ~~company~~and ~~with~~development aand ~~limited~~other ~~operating~~expenses ~~history.~~related ~~Pharmaceutical~~to ~~product~~our ~~development~~ongoing isclinical atrials ~~highly~~and ~~speculative~~operations. ~~undertaking~~We ~~and~~have ~~involves~~recorded a ~~substantial~~net ~~degree~~loss of ~~risk~~$95.2 million, We$74.2 ~~are~~million ~~not profitable~~ and ~~have~~$65.7 ~~incurred~~million ~~losses~~for inthe ~~each~~years ~~year~~ended ~~since~~December we31, ~~commenced~~2019, ~~operations~~2018 inand ~~2003~~2017, respectively. WeAs ~~have~~of ~~only~~December a31, ~~limited~~2019, ~~operating~~we ~~history~~had ~~upon~~an ~~which~~accumulated ~~you~~deficit ~~can~~of ~~evaluate~~$310.6 ~~our~~million ~~business~~ and ~~prospects~~had a working capital surplus of $47.1 Inmillion. ~~addition,~~We weexpect ~~have~~to continue ~~limited~~to ~~experience~~incur losses, and ~~have~~we ~~not~~anticipate ~~yet~~these ~~demonstrated~~losses anmay ~~ability~~continue toas ~~successfully~~we ~~overcome~~advance ~~many~~our ofcommercialization ~~the~~efforts ~~risks~~for AMZEEQ and ~~uncertainties~~as ~~frequently~~we ~~encountered~~continue byour ~~companies~~development inof, ~~new~~ and ~~rapidly~~seek ~~evolving~~regulatory ~~fields~~approvals for, ~~particularly~~FMX103 inand ~~the~~our ~~pharmaceutical~~other ~~industry~~product candidates.

To date, we have not obtained any regulatory approvals for any of our product candidates or generated any revenues from product sales relating to FMX101, FMX103 or any of our other product candidates. We have generated revenues only from service payments, and contingent payments paid towards or in the course of projects carried out under several of our development and license agreements with various pharmaceutical companies. We have also received (and continue to receive) royalty payments with respect to Finacea, a prescription foam product that we developed in collaboration with Bayer under a license agreement which was assigned to LEO in September 2018.23

We ~~continue~~expect to ~~incur~~rely ~~significant~~on ~~research~~third ~~and~~parties ~~development and other expenses related~~ to ~~our~~conduct ~~ongoing~~some ~~clinical~~or ~~trials~~all ~~and~~aspects ~~operations. We have recorded a net loss~~ of ~~$74.2~~our ~~million,~~drug ~~$65.7~~product ~~million and $29.3 million for the years ended December 31~~manufacturing, ~~2018,~~production ~~2017~~research and ~~2016,~~preclinical ~~respectively. As of December 31, 2018, we had an accumulated deficit of $215,409 million~~ and ~~had~~clinical ~~a working capital surplus of $90.7 million. We expect to continue to incur losses for the foreseeable future~~testing, and ~~we anticipate~~ these ~~losses~~third ~~will~~parties ~~increase~~may ~~substantially~~not asperform ~~we continue our development of, and seek regulatory approvals for, FMX101, FMX103 and our other product candidates, and begin to commercialize such product candidates~~satisfactorily.

~~Our~~We ~~ability~~do tonot ~~achieve~~expect ~~revenues and profitability is dependent on our ability~~ to ~~complete~~independently ~~the~~conduct ~~development~~all aspects of our drug product ~~candidates~~manufacturing, ~~obtain~~production ~~necessary~~research ~~regulatory approvals~~ and ~~successfully~~preclinical ~~manufacture, market~~ and ~~commercialize~~clinical ~~our products~~testing. ~~Even~~We ifcurrently werely, ~~achieve~~and ~~profitability~~expect to incontinue ~~the~~to ~~future~~rely, weon ~~may~~third ~~not~~parties bewith ~~able~~respect to ~~sustain~~these ~~profitability in subsequent periods. Our prior losses~~items, ~~combined~~including ~~with~~manufacturing ~~expected~~in ~~future losses, may adversely affect~~ the ~~market~~commercial ~~price of our ordinary shares and our ability to raise capital and continue operations~~context.

We ~~currently~~have ~~contract~~arrangements ~~with~~in ~~third~~place ~~party~~with ~~subcontractors~~two ~~and~~ suppliers for ~~certain~~the ~~compounds~~supply ~~and~~of ~~components~~the ~~necessary~~API toof ~~produce~~AMZEEQ ~~FMX101~~ and FMX103, ~~for clinical trials~~ and ~~expect~~an toexclusive ~~continue~~supply toagreement dowith soASM, tofor ~~support~~the ~~commercial~~manufacturing ~~scale~~and ~~production~~supply ~~if one or more~~ of our ~~such~~finished product ~~candidates~~of ~~is approved~~AMZEEQ. ~~This~~Pursuant ~~increases~~to the ~~risk~~agreement, ~~that~~ASM wehas ~~will~~agreed ~~not~~to ~~have~~manufacture ~~sufficient~~and ~~quantities~~supply all of ~~FMX101~~our ~~and~~commercial ~~FMX103~~needs orfor ~~such~~the ~~quantities~~products aton an ~~acceptable~~exclusive ~~cost,~~basis ~~which~~for ~~could~~a ~~delay,~~period ~~prevent~~of orfour ~~impair~~years, ~~our~~subject ~~development~~to orcertain ~~commercialization efforts~~exceptions.

WeOur ~~currently~~reliance ~~rely~~ on these third ~~party~~parties ~~subcontractors~~for ~~and~~manufacturing, ~~suppliers~~research ~~for~~and ~~certain~~development ~~compounds~~activities ~~and~~will ~~components~~reduce ~~necessary~~our tocontrol ~~produce~~over ~~FMX101and~~these ~~FMX103~~activities ~~for~~but ~~our~~will ~~clinical~~not ~~trials,~~relieve ~~including~~us ~~minocycline~~of ~~and~~our responsibility ~~other~~to ~~active~~ensure ~~ingredients,~~compliance ~~excipients~~with ~~used~~all inrequired ~~the~~regulations ~~formulation~~and ofstudy ~~the~~protocols. ~~foam~~For example, ~~delivery~~for ~~apparatus~~products ~~comprising~~that ~~canisters,~~we ~~valves~~develop and ~~propellants.~~commercialize Weon ~~expect~~our toown, ~~continue~~we towill ~~rely~~remain onresponsible ~~these~~for orensuring ~~other~~that ~~subcontractors~~each of our IND-enabling studies and clinical ~~suppliers~~studies toare ~~support~~conducted ~~our~~in ~~commercial~~accordance ~~requirements~~with ifthe ~~FMX101~~study plan and ~~FMX103~~protocols, orand ~~any~~that of our ~~other~~products ~~product~~are ~~candidates~~manufactured isin ~~approved~~accordance ~~for~~with ~~marketing~~cGMP byas ~~the~~applied ~~FDA~~in orthe ~~foreign~~relevant ~~regulatory authorities~~jurisdictions.

~~Reliance~~If onthese third ~~party~~parties ~~subcontractors~~do ~~and~~not ~~suppliers~~successfully ~~entails~~carry aout ~~number~~their ofcontractual ~~risks~~duties, ~~including~~meet ~~reliance~~expected ondeadlines, ~~the~~conduct ~~third~~our ~~party~~studies ~~for~~in ~~regulatory~~accordance ~~compliance~~with ~~and~~regulatory ~~quality~~requirements ~~assurance, the possible breach of the manufacturing~~ or ~~supply~~our stated ~~agreement~~study byplans ~~the~~and ~~third party~~protocols, ~~the~~or ~~possibility~~manufacture ~~that~~our ~~the~~drug ~~supply~~products isin ~~inadequate~~accordance orwith ~~delayed~~cGMP, ~~the~~we ~~risk~~will ~~that~~not ~~the~~be ~~third~~able ~~party may enter the field and seek~~ to ~~compete~~complete, ~~and~~or may ~~no longer~~ be ~~willing~~delayed toin ~~continue supplying~~completing, ~~and~~ the ~~possible~~preclinical ~~termination~~and orclinical ~~nonrenewal~~studies ofand ~~the~~manufacturing ~~agreement~~process byvalidation ~~the~~activities required ~~third~~to ~~party~~support atfuture aIND ~~time~~submissions ~~that~~and isapproval ~~costly~~of orour ~~inconvenient~~product ~~for us. In addition~~candidates, ~~third~~or ~~party subcontractors and suppliers may not be able~~ to ~~comply~~support ~~with~~commercialization ~~cGMP~~of orAMZEEQ ~~quality system regulation~~and, orif ~~QSR~~approved, orFMX103 ~~similar~~and ~~regulatory~~our ~~requirements~~other ~~outside~~product ~~the U~~candidates.S. IfMany ~~any~~ of ~~these~~our ~~risks~~agreements ~~transpire,~~with wethese ~~may~~third beparties ~~unable~~contain termination toprovisions ~~timely~~that ~~retain~~allow ~~alternate~~these ~~subcontractors~~third orparties ~~suppliers~~to onterminate ~~acceptable~~their ~~terms~~relationships ~~and~~ with ~~sufficient~~us ~~quality~~upon ~~standards~~notice. ~~and~~If ~~production~~we ~~capacity,~~need ~~which~~to ~~may~~enter ~~disrupt~~into ~~and~~alternative ~~delay~~arrangements, our ~~clinical~~product ~~trials~~development ~~or the manufacture~~ and ~~commercial~~commercialization ~~sale~~activities ofcould ~~our~~be ~~product candidates, if approved~~delayed.

37Reliance on third party subcontractors and suppliers entails a number of risks, including reliance on the third party for regulatory compliance and quality assurance, the possible breach of the manufacturing or supply agreement by the third party, the possibility that the supply is inadequate or delayed, the risk that the third party may enter the field and seek to compete and may no longer be willing to continue supplying, and the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us. In addition, third party subcontractors and suppliers may not be able to comply with cGMP or quality system regulation or similar regulatory requirements outside the U.S. If any of these risks transpire, we may be unable to timely retain alternate subcontractors or suppliers on acceptable terms and with sufficient quality standards and production capacity, which may disrupt and delay the manufacture and commercial sale of AMZEEQ or our product candidates, if approved, and may disrupt and delay our clinical trials.

~~Our~~We ~~failure~~may orbe ~~the~~forced ~~failure~~to ofmanufacture our ~~third~~product ~~party~~ourselves, ~~subcontractors~~for ~~and~~which ~~suppliers~~we tomay ~~comply~~not have the capabilities or resources, or enter into an agreement with ~~applicable~~a ~~regulations~~different ~~could~~manufacturer, ~~result~~which we inmay ~~sanctions~~not ~~being~~be ~~imposed~~able to do on usreasonable terms, ~~including~~if ~~fines,~~at ~~injunctions,~~all. ~~civil~~In ~~penalties,~~some ~~delays~~cases, ~~suspension~~the technical skills required to manufacture our product candidates may be unique or ~~withdrawal~~proprietary ofto ~~approvals,~~the ~~license~~original ~~revocation~~manufacturer, ~~seizures~~and we may have difficulty or ~~recalls~~there ofmay ~~products~~be contractual restrictions prohibiting us from, ~~operating~~transferring ~~restrictions~~such ~~and~~skills ~~criminal~~to ~~prosecutions~~a back-up or alternate supplier, ~~any~~or we may be unable to transfer such skills at all. Any of ~~which~~these events could ~~significantly~~lead ~~and~~to ~~adversely~~clinical ~~affect~~study ~~supplies~~delays ofor failure to obtain marketing approval, or impact our ability to successfully commercialize our product ~~candidates~~or ~~that~~any wefuture ~~may~~products. ~~develop~~Some of these events could be the basis for FDA action, including injunction, recall, seizure or total or partial suspension of production.

Although we have not experienced unique difficulties in procuring compounds and components for FMX101, FMX103 or any other product candidates, and while we are acting to secure additional suppliers for such compounds and components, we could experience such difficulties in the future.24

We ~~will rely on third parties~~ and ~~consultants to assist us in conducting~~ our ~~trials~~contract ~~and~~manufacturers ~~studies.~~are Ifsubject ~~these~~to ~~third~~significant ~~parties~~regulation orwith ~~consultants~~respect ~~will~~to ~~not~~manufacturing ~~successfully~~our ~~carry~~product ~~out~~and ~~their~~product ~~contractual~~candidates. ~~duties~~The ormanufacturing facilities ~~meet~~on ~~expected~~which ~~deadlines,~~ we rely may benot ~~unable~~continue to ~~obtain~~meet regulatory ~~approval~~requirements ~~for~~and orhave ~~commercialize~~limited ~~our product candidates~~capacity.

We doand ~~not~~the ~~have~~contract ~~the~~manufacturers ~~ability~~for our product and product candidates are subject to ~~independently~~extensive ~~perform~~regulation. ~~all~~Some ~~aspects~~components of ~~our~~a ~~preclinical~~finished ~~studies~~drug ~~and~~product approved for commercial sale or used in late-stage clinical ~~trials.~~studies Wemust ~~have~~be ~~relied~~manufactured onin ~~medical~~accordance ~~institutions,~~with ~~clinical~~cGMP. ~~investigators,~~These ~~contract~~regulations ~~laboratories,~~govern ~~collaborative~~manufacturing ~~partners~~processes and ~~other~~procedures ~~third~~(including ~~parties,~~record ~~such~~keeping) asand ~~CROs,~~the implementation and operation of quality systems to ~~assist~~control and usassure inthe ~~conducting~~quality ~~our~~of ~~Phase~~investigational ~~III~~products ~~clinical~~and ~~trials~~products approved for ~~FMX101~~sale. ~~and~~Poor ~~FMX103,~~control ~~and~~of ~~expect~~production processes can lead to ~~continue~~the ~~doing~~introduction soof ~~with~~adventitious ~~regard~~agents or other contaminants, or to ~~studies~~inadvertent ~~and~~changes ~~clinical~~in ~~trials~~the ~~for~~properties or stability of our ~~other~~product and product candidates. ~~The~~that ~~third~~may ~~parties~~not ~~with~~be ~~whom~~detectable wein ~~contract~~final ~~for~~product ~~execution~~testing. ofWe or our ~~clinical~~contract ~~trials~~manufacturers ~~play~~must asupply ~~significant~~all ~~role~~necessary documentation in support of regulatory applications on a timely basis and where required, must adhere to the ~~conduct~~FDA’s ofor ~~these~~other ~~trials~~regulator’s good laboratory practices and cGMP regulations enforced by the ~~subsequent~~FDA ~~collection~~or other regulator through facilities inspection programs. Our facilities and ~~analysis~~quality systems and the facilities and quality systems of ~~data.~~some ~~However,~~or ~~these~~all of our third-party ~~parties~~contractors ~~are~~must ~~not~~pass a pre-approval inspection for compliance with the applicable regulations as a condition of marketing approval of our ~~employees,~~product and ~~except~~potential ~~for~~products. ~~contractual~~In ~~duties~~addition, ~~and~~the ~~obligations~~regulatory authorities may, weat ~~will~~any ~~have~~time, ~~limited~~audit ~~ability~~or toinspect ~~control~~a manufacturing facility involved with the ~~amount~~preparation of our products or ~~timing~~the ofassociated ~~resources~~quality ~~that~~systems ~~they~~for ~~devote~~compliance with the regulations applicable to ~~our~~the ~~programs~~activities being conducted. If these facilities do not pass a pre-approval plant inspection, FDA or other marketing approval of the products may not be granted.

~~Although~~The weregulatory ~~rely~~authorities onalso ~~these~~may, ~~third~~at ~~parties~~any totime ~~conduct~~following ~~our~~approval ~~studies~~of ~~and~~a ~~clinical~~product ~~trials~~for sale, weaudit ~~remain~~the ~~responsible~~manufacturing ~~for~~facilities ~~ensuring that each~~ of our ~~clinical~~third-party ~~trials~~contractors. ~~and~~If ~~preclinical~~any ~~studies~~such inspection isor ~~conducted~~audit inidentifies ~~accordance~~a ~~with~~failure ~~its~~to ~~investigational~~comply ~~plan~~with ~~and~~applicable ~~protocol.~~regulations ~~Moreover,~~or ~~the~~if ~~FDA~~a ~~and~~violation ~~foreign~~of ~~regulatory~~our ~~authorities~~product ~~require~~specifications usor toapplicable ~~comply with~~ regulations ~~and~~occurs ~~standards,~~independent ~~commonly~~of ~~referred~~such toan asinspection ~~current~~or ~~GCPs~~audit, ~~for~~we ~~conducting,~~or ~~monitoring,~~the ~~recording~~relevant ~~and~~regulatory ~~reporting~~authority ~~the~~may require ~~results~~remedial ofmeasures ~~clinical~~that ~~trials~~may tobe ~~ensure~~costly ~~that~~and/or ~~the~~time-consuming ~~data~~for ~~and~~us ~~results~~or ~~are~~a ~~scientifically~~third ~~credible~~party ~~and~~to ~~accurate,~~implement and that may include the ~~patients~~temporary ~~are~~or ~~adequately~~permanent ~~informed~~suspension of ~~the~~a ~~potential~~clinical ~~risks~~study ofor ~~participating~~commercial insales ~~clinical~~or ~~trials.~~the Wetemporary ~~also~~or ~~rely~~permanent onclosure ~~our~~of ~~consultants~~a facility. toAny ~~assist~~such remedial measures imposed upon us inor ~~the~~third ~~execution,~~parties ~~including~~with ~~data~~whom ~~collection~~we ~~and~~contract ~~analysis~~could ofmaterially harm our ~~clinical trials~~business.

InIf ~~addition,~~we ~~the~~or ~~execution~~any of ~~clinical~~our ~~trials and preclinical studies, and the subsequent compilation and analysis of the data produced, will require coordination among these various~~ third-party ~~parties.~~manufacturers Infail ~~order for these functions~~ to bemaintain ~~carried~~regulatory ~~out effectively and efficiently~~compliance, itthe ~~will~~FDA beor ~~imperative~~other ~~that~~regulators ~~these~~can ~~parties~~impose ~~communicate~~regulatory ~~and~~sanctions ~~coordinate~~including, ~~with~~among ~~one~~other ~~another~~things, refusal ~~which may prove difficult~~ to ~~achieve.~~approve ~~Moreover,~~a ~~these~~pending ~~third~~application ~~parties~~for ~~may~~a ~~also have relationships with other commercial entities~~product, ~~some~~or revocation of ~~which~~a ~~may~~pre-existing ~~compete with us~~approval. ~~Our~~As ~~agreement~~a ~~with~~result, ~~these~~our ~~third~~business, ~~parties~~financial ~~may~~condition ~~inevitably~~and ~~enable~~results ~~them~~of tooperations ~~terminate~~may ~~such~~be ~~agreements~~materially ~~upon reasonable prior written notice under certain circumstances~~harmed.

Additionally, if supply from one approved manufacturer is interrupted, there could be a significant disruption in commercial supply. The number of manufacturers with the necessary manufacturing capabilities is limited. The regulatory agencies may also require additional studies if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.

These factors could cause the delay of clinical studies, regulatory submissions, required approvals or commercialization of our product and any future products, cause us to incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail to meet contractual requirements and we are unable to secure, validate and obtain approval of one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical studies may be delayed or we could lose potential revenues.

We expect to rely on third parties to conduct, supervise and monitor our clinical studies, and if these third parties perform in an unsatisfactory manner, it may harm our business.

We also rely on medical institutions, clinical investigators, contract laboratories, collaborative partners and other third parties, such as CROs, to assist us in conducting our clinical trials for our other product candidates. While we will have agreements governing their activities, we will have limited influence over their actual performance. We will control only certain aspects of our CROs’ activities. Nevertheless, we will be responsible for ensuring that each of our clinical studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities.

We and our CROs are required to comply with the FDA’s and other regulatory authorities’ good clinical practices, or GCPs, for conducting, recording and reporting the results of clinical studies to assure that the data and reported results are credible and accurate, and that the rights, integrity and confidentiality of clinical study participants are protected. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our future clinical studies may be deemed unreliable and the FDA and other regulatory authorities may require us to perform additional clinical studies before approving any marketing applications.

If the third parties or consultants that assist us in conducting our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols or GCPs, or for any other reason, we may need to conduct additional clinical trials or enter into new arrangements with alternative third parties, which could be difficult, costly or impossible, and our clinical trials may be extended, delayed or terminated or may need to be repeated. If any of the foregoing were to occur, we may not be able to obtain, or may be delayed in obtaining, regulatory approval for the product candidates being tested in such trials, and will not be able to, or may be delayed in our efforts to, successfully commercialize these product candidates.

WeSupply ~~have~~interruptions nomay ~~experience~~disrupt ~~manufacturing~~ our ~~product~~inventory ~~candidates~~levels atand ~~full~~the ~~commercial~~availability ~~scale.~~of If our products and product candidates ~~are~~and ~~approved,~~cause wedelays ~~intend~~in toobtaining ~~outsource~~regulatory approval for our ~~manufacturing~~product tocandidates ~~third~~or ~~parties,~~harm ~~and~~our ~~will~~business ~~face~~by ~~certain~~reducing ~~risks~~our ~~associated with such outsourcing~~revenues.

We ~~have~~depend aon small-scale integrated research, development and testing facility located at our corporate headquarters in Rehovot, Israel. However, we have not equipped our facility with manufacturing capabilities other than small scale manufacture, and do not currently plan to do so. If our product candidates are approved, we will outsource all or a ~~significant~~limited ~~portion~~number of ~~the~~ manufacturing offacilities ~~our products~~ to ~~third~~manufacture ~~parties, including~~ our ~~drug~~finished ~~substances~~products and ~~finished~~product ~~dose forms~~candidates. ~~Reliance~~Numerous onfactors ~~third~~could ~~parties~~cause tointerruptions ~~manufacture~~in ~~our products entails various risks, including~~ the ~~possibility~~supply or ofmanufacture ~~increased costs associated with the large- scale production~~ of our products. ~~These risks are similar to those involved in our current use of subcontractors~~ and ~~suppliers for certain compounds and components necessary to produce FMX101, FMX103 and any of our other~~ product candidates, ~~as explained above.~~including:

38• timing, scheduling and prioritization of production by our contract manufacturers or a breach of our agreements by our contract manufacturers;

We• ~~have~~labor research and development supply arrangements in place with two suppliers for the supply of our API, and with ASM Aerosol-Service AG, for the supply of our finished product. We are currently negotiating commercial supply agreements with our API suppliers and with ASM Aerosol-Service AG. If we are unsuccessful in finalizing our negotiations with these third parties, or if our suppliers breach any of our supply agreements, or do not remain compliant with regulatory requirements, we may encounter delays or additional costs in achieving our commercialization objectives, which could materially damage our business and financial position.interruptions;

We are building our marketing and sales organization to commercialize our products. If our product candidates are approved, and we are not successful in commercializing FMX101, FMX103 or any of our other product candidates, either on our own or through collaborations with one or more third parties, our revenues will suffer and we will incur significant additional losses.25

To• ~~commercialize~~changes ~~FMX101, FMX103 or any other of our other product candidates, if approved,~~ in ~~the United States and other jurisdictions we may seek to enter, we must build~~ our ~~marketing,~~sources ~~sales,~~for distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so. If FMX101 or FMX103 receive regulatory approval, we expect to market them in the United States through a specialized internal sales force or a combination of our internal sales force and distributors, which will be expensive and time-consuming.manufacturing;

~~There~~• are significant risks involved in building and managing a sales organization, including our ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the ~~development~~timing ~~of our internal sales, marketing~~ and ~~distribution~~delivery ~~capabilities would adversely impact the commercialization~~ of ~~our product candidates.~~shipments;

We• ~~may~~our ~~choose~~failure to ~~collaborate~~locate ~~with third parties that have direct sales forces~~ and ~~established~~obtain ~~distribution~~replacement ~~systems,~~suppliers ~~either to augment our own sales force~~ and ~~distribution~~manufacturers ~~systems~~as inneeded ~~the United States or in lieu of our own sales force and distribution systems in other countries. If we are unable to enter into such arrangements~~ on ~~acceptable~~a ~~terms~~timely orbasis; ~~at all, we may not be able to successfully commercialize FMX101, FMX103 or any of our other product candidates.~~and

To• ~~establish~~conditions ~~our~~affecting ~~sales and marketing infrastructure and manufacturing capabilities, we will also need to increase~~ the ~~size~~cost ~~of our organization,~~ and weavailability ~~may experience difficulties in managing this expansion. As~~ of ~~February~~raw ~~1, 2019, we had two sales and marketing employees~~materials. We have hired a Chief Commercial Officer but we will need to continue to expand our sales and marketing resources in order to commercialize FMX101, FMX103 and any other product candidates, if approved.

~~Due~~If toone of our ~~limited~~suppliers ~~financial~~or ~~resources~~manufacturers ~~and~~fails ~~our~~or ~~limited~~refuses ~~experience~~to insupply ~~managing~~us ~~a company~~ with ~~such~~necessary ~~anticipated~~raw ~~expansion,~~materials weor ~~may~~finished ~~not~~products beor ~~able~~product tocandidates ~~effectively~~on ~~manage~~a ~~the~~timely ~~expansion~~basis ~~of our sales and marketing operations~~ or ~~recruit~~at ~~and~~all, ~~train~~it would ~~additional~~take ~~qualified~~a ~~personnel.~~significant ~~The~~amount ~~physical expansion~~ of ~~our~~time ~~sales~~ and ~~marketing~~expense ~~operations~~to ~~may~~qualify ~~lead~~a tonew ~~significant~~supplier ~~costs~~or ~~and~~manufacturer. We may ~~divert~~not ~~our~~be ~~management~~able ~~and~~to ~~business~~obtain ~~development~~active ~~resources.~~ingredients ~~Any~~or ~~inability~~finished toproducts ~~manage~~from ~~expansion~~new ~~could~~suppliers ~~delay~~or ~~the~~manufacturers ~~execution~~on ofacceptable ~~our~~terms ~~development~~ and ~~strategic~~at ~~objectives~~reasonable prices, or at ~~disrupt our operations~~all.

WeAny ~~currently~~interruption ~~develop our clinical drug products exclusively~~ in ~~one~~the ~~research~~supply ~~and~~of ~~development~~finished ~~facility~~products ~~located~~could inhinder ~~Rehovot, Israel. If this or any future facility or~~ our ~~equipment~~ability ~~were~~ to bedistribute ~~damaged~~finished orproducts ~~destroyed,~~to ormeet ifcommercial wedemand ~~experience~~and aadversely ~~significant~~affect ~~disruption in~~ our ~~operations~~financial results ~~for~~and ~~any~~financial ~~other reason, our ability to continue to operate our business could be materially harmed~~condition.

WeWith ~~currently~~respect ~~research~~to ~~and develop~~ our product candidates ~~primarily in our laboratory located in Rehovot~~, ~~Israel. If~~production ~~this~~of orproduct ~~any~~is ~~future~~necessary ~~facility were~~ to beperform ~~damaged,~~clinical ~~destroyed~~trials orand ~~otherwise~~successful ~~unable~~registration tobatches ~~operate,~~are ~~whether~~necessary ~~due~~ to ~~war,~~file ~~acts~~for ofapproval ~~hostility,~~to commercially ~~earthquakes,~~market ~~fire,~~and ~~floods,~~sell ~~hurricanes,~~product ~~storms,~~candidates. ~~tornadoes,~~Delays ~~other~~in ~~natural~~obtaining ~~disasters,~~clinical ~~employee~~material ~~malfeasance, terrorist acts, power outages~~ or ~~otherwise,~~registration orbatches ifcould ~~performance~~adversely ofimpact our ~~research and development facility is disrupted for any other reason, such an event could delay our~~ clinical trials. Ifand wedelay ~~experience~~regulatory ~~delays~~approval infor ~~achieving~~ our ~~development objectives, or if we are unable to manufacture an approved~~ product ~~within a timeframe that meets our prospective customers’ expectations, our business, prospects, financial results and reputation could be materially harmed~~candidates.

~~Currently,~~We wecurrently ~~maintain~~develop ~~insurance~~our ~~coverage~~clinical ~~totaling~~drug ~~$2.4~~product ~~million~~candidates ~~against~~in ~~damage to~~ our ~~property~~research and ~~equipment~~development ~~and~~facility ~~$5.4~~located ~~million~~ in ~~workers~~Rehovot, ~~compensation~~Israel ~~coverage,~~and ~~subject~~through topartnerships ~~deductibles~~with external ~~and~~contract ~~other~~manufacturing ~~limitations~~organizations. If wethese ~~have~~facilities ~~underestimated~~or ~~our~~any ~~insurance~~future ~~needs~~facility ~~with~~or ~~respect~~our equipment were to anbe ~~interruption~~damaged or destroyed, or if anwe ~~interruption~~experience isa ~~not~~significant ~~subject~~disruption toin ~~coverage under~~ our ~~insurance~~operations ~~policies,~~for weany ~~may~~other ~~not~~reason, beour ~~able~~ability to ~~cover~~continue to operate our ~~losses~~business could be materially harmed.

39We currently research and develop our product candidates primarily in our laboratory located in Rehovot, Israel and through partnership with external contract manufacturing organizations. If these or any future facilities were to be damaged, destroyed or otherwise unable to operate, whether due to war, acts of hostility, earthquakes, fire, floods, hurricanes, storms, tornadoes, other natural disasters, employee malfeasance, terrorist acts, power outages or otherwise, or if performance of our research and development facility is disrupted for any other reason, such an event could delay our clinical trials. If we experience delays in achieving our development objectives, or if we are unable to manufacture an approved product within a timeframe that meets our prospective customers’ expectations, our business, prospects, financial results and reputation could be materially harmed.

Currently, we maintain insurance covering damage to our property and equipment and workers compensation coverage, subject to deductibles and other limitations. If we have underestimated our insurance needs with respect to an interruption, or if an interruption is not subject to coverage under our insurance policies, we may not be able to cover our losses.

We face risks related to health epidemics and other widespread outbreaks of contagious disease, including the novel coronavirus, COVID-19, which could significantly disrupt our operations and impact our financial results.

In December 2019, an outbreak of respiratory illness caused by a strain of novel coronavirus, COVID-19, began in China. As of March 2020, that outbreak has led to numerous confirmed cases worldwide, including in the Unites States and other countries where we or our business partners conduct operations. The outbreak and government measures taken in response have also had a significant impact, both direct and indirect, on businesses and commerce. The future progression of the outbreak and its effects on our business and operations are uncertain. We are currently unaware of any disruptions to our business or any impact on our primary suppliers. In addition, we believe we have a sufficient amount of product in the trade and safety stock of our raw materials to support the current demand for AMZEEQ. However, if the outbreak of COVID-19 persists, we and our third-party contract manufacturers, contract research organizations and clinical sites may experience disruptions in supply of our product and product candidates and/or procuring items that are essential for our commercialization and research and development activities, including, for example, raw materials used in the manufacturing of our products and product candidates, medical and laboratory supplies used in our clinical trials or preclinical studies, in each case, for which there may be shortages because of ongoing efforts to address the outbreak. Any negative impact that the outbreak has on the ability of our suppliers to provide materials for our product and product candidates or on retaining patients in our clinical trials could disrupt our commercialization efforts and clinical trial activities, which could adversely affect our ability to earn revenue, obtain regulatory approval for and to commercialize our product candidates, increase our operating expenses, and have a material adverse effect on our financial results.

If product liability lawsuits are brought against us, we may incur substantial liabilities that may not be fully covered by our insurance policies and we may be required to limit commercialization of any of our other products we develop.

We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk ifas we commercialize AMZEEQ and any ~~products~~other product candidates that receive marketing approval. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. Even a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

·• decreased demand for ~~FMX101~~AMZEEQ, FMX103 or any of our other product candidates or products we develop;

·• injury to our reputation and significant negative media attention;

·• withdrawal of clinical trial participants or cancellation of clinical trials;

·• costs to defend the related litigation, which may be only partially recoverable even in the event of successful defense;

·• a diversion of management’s time and our resources;

·• substantial monetary awards to trial participants or patients;

·• regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions;

·• loss of revenues; and

·• the inability to commercialize any products we develop.

~~Our~~Although ~~inability~~we ~~to obtain and~~ maintain ~~sufficient~~ product liability insurance ~~at an acceptable cost and scope of coverage to protect against potential product liability claims could prevent or inhibit the commercialization of FMX101~~, ~~FMX103 or~~ any ~~other product we may develop. We currently carry clinical trials insurance of $10 million and third party liability insurance of $1.35 million per annum. Although we maintain such insurance, any~~ claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If and when we obtain approval for marketing of one or more of FMX101, FMX103 or any other product we may develop, we intend to expand our insurance coverage to include their sale; however, we may be unable to obtain this liability insurance on commercially reasonable terms.

IfOur weCredit ~~fail~~Agreement tosubjects ~~attract~~us ~~and~~to ~~keep~~various ~~senior~~financial ~~management~~ and ~~key~~other ~~scientific~~restrictive ~~personnel,~~covenants. weThese restrictions may belimit ~~unable~~our tooperational ~~successfully develop FMX101, FMX103~~ or ~~any~~financial ~~of our other product candidates, conduct our clinical trials~~ flexibility and ~~commercialize~~could ~~FMX101,~~subject ~~FMX103~~us orto ~~any~~potential ofdefaults under our ~~other~~Credit ~~products we develop~~Agreement.

~~Our~~On ~~success~~July ~~depends~~29, in2019, ~~part~~we onentered ~~our~~into ~~continued~~a ~~ability~~Credit Agreement and Guaranty, or the Credit Agreement, with Foamix Pharmaceuticals Inc., lenders from time to ~~attract~~time party thereto, ~~retain~~the subsidiary ~~and~~guarantors ~~motivate~~from ~~highly~~time ~~qualified~~to ~~management~~time party thereto, ~~clinical~~or the Subsidiary Guarantors, and ~~scientific~~Perceptive ~~personnel.~~Credit WeHoldings ~~believe~~II, LP, or Perceptive, as administrative agent, that provides a senior secured (including security on our ~~future~~intellectual ~~success~~property, which for example is ~~highly~~registered ~~dependent~~against ~~upon~~our patents and applications at the ~~contributions~~USPTO) delayed draw term loan facility in an aggregate principal amount of ~~our~~up ~~senior~~to ~~management~~$50.0 million. The Credit Agreement contains financial and other restrictive covenants that limit the ability of us, ~~particularly~~Foamix ~~our~~Pharmaceuticals ~~Chief~~Inc. ~~Executive~~and ~~Officer~~the Subsidiary Guarantors, asamong ~~well~~other things, to incur new indebtedness; create liens on assets; engage in certain fundamental corporate changes, such as ~~our~~mergers ~~senior~~or ~~technologists~~acquisitions ~~and~~or ~~scientists~~changes to business activities; make certain investments or payments; or pay dividends. The ~~loss~~Credit ofAgreement ~~services~~also ofcontains ~~any~~certain offinancial ~~these~~covenants, ~~individuals~~including ~~could~~that ~~delay~~we, orFoamix ~~prevent~~Pharmaceuticals Inc. and the ~~successful~~Subsidiary ~~development~~Guarantors must (1) maintain a minimum aggregate cash balance of ~~our~~$2.5 ~~product~~million; ~~pipeline~~and or(2) ~~completion~~as of ~~our~~the ~~planned~~last ~~commercialization~~day of ~~FMX101~~each fiscal quarter commencing on the fiscal quarter ending September 30, ~~FMX103~~2020, orreceive ~~any~~revenue offor the ~~clinical~~trailing ~~development~~12-month ofperiod ~~our~~in ~~other~~amounts ~~product~~set ~~candidates~~forth in the Credit Agreement, which range from $10.5 million for the fiscal quarter ending September 30, 2020 to $109.5 million for the fiscal quarter ending June 30, 2024.

The restrictive covenants in the Credit Agreement may limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans and adversely affect our ability to finance our operations, enter into acquisitions or to engage in other business activities that could be in our interest. Our ability to comply with these financial covenants can be affected by events beyond our control and we may not be able to do so. If we are unable to remain in compliance with the restrictive covenants of the Credit Agreement, then amounts outstanding thereunder may be accelerated and become due immediately. Any such acceleration could have a material adverse effect on our financial condition and results of operations.

Our debt obligations and any future debt obligations expose us to risks that could adversely affect our business, operating results, overall financial condition and may result in further dilution to our stockholders.

The Credit Agreement has a total borrowing capacity of up to $50.0 million, of which we have utilized $35.0 million as of December 31, 2019, and we may draw down the remaining $15.0 million prior to September 30, 2020 if we meet certain revenue targets as set forth in the Credit Agreement. Our current and any future indebtedness, including under the Credit Agreement, could have an adverse impact on our business or operations. For example, it could:

•

limit our flexibility in commercializing AMZEEQ and the approval and marketing FMX103, as well as the development of our other pipeline product candidates;

•

increase our vulnerability to both general and industry-specific adverse economic conditions; and

•

limit our ability to obtain additional funds for working capital, capital expenditures, acquisitions, general corporate and other purposes.

Any current or future indebtedness that we incur, including under the Credit Agreement, will require us to make certain interest and principal payments. Our ability to make payments on this indebtedness depends on our ability to generate cash in the future. We expect to experience negative cash flow for the foreseeable future as we fund our operations and capital expenditures. There can be no assurance we will be in a position to repay this indebtedness when due or obtain extensions to the maturity date. In order to repay these obligations when due, we may be required to sell assets, to refinance all or a portion of such indebtedness or to obtain additional financing, including on terms that are not acceptable to us. If that additional financing involves the sale of equity securities or convertible securities, it would result in the issuance of additional shares of our capital stock, which would result in dilution to our shareholders.

Changes in interest rates could adversely affect our earnings and/or cash flows.

Loans under the Credit Agreement are made at variable rates that use LIBOR as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals for reform. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established or the establishment of an alternative reference rate(s). These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked loans that are due under the Credit Agreement. Changes in market interest rates may influence the financing costs and could reduce our earnings and cash flows.

If we fail to attract and keep senior management and key scientific and commercial personnel, we may be unable to successfully develop FMX103 or any of our other product candidates, conduct our clinical trials and commercialize AMZEEQ, or FMX103 or any of our other products we develop.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific and commercial personnel. We believe that our future success is highly dependent upon the contributions of our senior management, particularly our Chief Executive Officer, as well as key sales personnel and our senior technologists and scientists. The loss of services of any of these individuals could delay or prevent the successful development of our product pipeline or successful commercialization of AMZEEQ, FMX103, if approved, or any of the clinical development of our other product candidates.

Although we have not historically experienced unique difficulties in attracting and retaining qualified employees, we could experience such problems in the future. For example, competition for qualified personnel in the pharmaceutical field is intense due to the limited number of individuals who possess the skills and experience required by our industry. We will need to hire additional personnel as we expand our clinical development and commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output.

We have incurred, and will continue to incur significant increased costs as a result of operating as a public company in the United States, and our management will be required to devote substantial time to new compliance initiatives.

As a public company in the United States, we are subject to an extensive regulatory regime, requiring us to maintain various internal controls and to prepare and file periodic and current reports and statements, including reports on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404. Complying with these requirements is costly and time consuming. In the event that we are unable to demonstrate compliance with our obligations as a public company in the United States in a timely manner, or are unable to produce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities, such as the SEC, or the Nasdaq Global Market, and investors may lose confidence in our operating results and the price of our ordinary shares could decline.

Our independent registered public accounting firm was not engaged to perform an audit of our internal control over financial reporting, and as long as we remain an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we are exempt from the requirement to have an independent registered public accounting firm perform such audit. Accordingly, no such opinion was expressed. Once we cease to qualify as an “emerging growth company,” our independent registered public accounting firm will need to attest to the effectiveness of our internal controls over financial reporting, which will entail additional costs and expenses.

Our business involves the use of hazardous materials and we and our third party manufacturers and suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

Our research and development activities and our third party subcontractors’ and suppliers’ activities involve the controlled storage, use and disposal of hazardous materials owned by us, including minocycline and doxycycline, key components of our product candidates, and other hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. We are licensed by the Israeli Ministry of Health to manufacture small batches of product in topical dose form for our Phase I, II and III clinical trials. In some cases, these hazardous materials are stored at our and our subcontractors’ facilities pending their use and disposal.

Despite our efforts, we cannot eliminate the risk of contamination. This could cause an interruption of our commercialization efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by us and our subcontractors and suppliers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and interrupt our business operations.

Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance.

We are subject to various U.S. federal, state and foreign health care fraud and abuse laws, including anti-kickback, self-referral, false claims and fraud laws, health information privacy and security, and transparency laws and any violations by us of such laws could result in substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.28

~~There~~We are ~~numerous~~subject to various U.S. federal, state, local and foreign health care fraud and abuse laws ~~pertaining to our business~~, including anti-kickback, self-referral, false claims and fraud ~~physician transparency~~ laws., ~~Our~~health ~~business~~information ~~practices~~privacy and ~~relationships~~security, ~~with~~and ~~providers,~~transparency ~~patients~~laws and ~~third~~any ~~party~~violations ~~payors~~by ~~are~~us ~~subject~~of tosuch ~~scrutiny~~laws ~~under~~could ~~these~~result ~~laws.~~in Wesubstantial ~~may~~penalties. ~~also~~Additionally, beany ~~subject~~challenge to ~~patient~~or ~~information~~investigation ~~privacy~~into ~~and~~our ~~security~~practices ~~regulation~~under bythese ~~both~~laws ~~the~~could ~~federal~~cause adverse ~~government,~~publicity ~~states~~ and ~~foreign~~be ~~jurisdictions~~costly into ~~which~~respond weto, ~~conduct our business. The healthcare laws~~ and ~~regulations~~thus ~~that~~could ~~may~~harm ~~affect~~ our ~~ability to operate include:~~business.

·There ~~the~~are numerous U.S. federal, ~~Anti-Kickback Statute~~state, ~~which~~local ~~prohibits knowingly~~ and ~~willfully~~foreign offering, soliciting, receiving, or paying remuneration directly or indirectly, in cash or in kind to induce or reward either the referral of an individual for, or the purchase, order or recommendation of goods or services for which payment may be made in whole or part by Medicare, Medicaid or other federal health care ~~programs.~~fraud ~~Remuneration~~and ~~has~~abuse ~~been~~laws ~~broadly~~pertaining ~~defined~~ to ~~include~~our ~~anything of value~~business, including ~~cash~~anti-kickback, ~~improper~~false ~~discounts,~~claims and ~~free~~physician transparency orlaws. ~~reduced~~Our ~~price~~business ~~items~~practices and ~~services.~~relationships ~~The~~with ~~intent~~providers, ~~standard~~patients ~~under~~and ~~the federal Anti~~third-~~Kickback~~party ~~Statute~~payors ~~was~~are ~~amended~~subject ~~by the ACA~~ to ascrutiny ~~stricter~~under ~~standard~~these ~~such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it, in order to have committed a violation~~laws. ~~Moreover,~~We ~~the government~~ may ~~assert~~also ~~that~~be asubject ~~claim~~to ~~including~~patient ~~items~~information orprivacy ~~services~~and ~~resulting~~security ~~from~~regulation aby ~~violation~~both of the federal ~~Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil FCA. Additionally~~ government, ~~many~~ states ~~have~~and ~~similar~~foreign ~~laws~~jurisdictions ~~that~~in ~~apply~~which towe ~~their~~conduct ~~state~~our ~~health care programs as well as private payors~~business. ~~Violations~~The ofhealthcare ~~the federal and state anti-kickback~~ laws ~~can result in exclusion from federal~~ and ~~state~~regulations ~~health~~that ~~care~~may ~~programs~~affect ~~and~~our ~~substantial~~ability ~~civil~~to ~~and~~operate ~~criminal penalties.~~include:

41• the U.S. federal Anti-Kickback Statute, which prohibits knowingly and willfully offering, soliciting, receiving, or paying remuneration directly or indirectly, in cash or in kind to induce or reward either the referral of an individual for, or the purchase, order or recommendation of goods or services for which payment may be made in whole or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include anything of value, including cash, improper discounts, and free or reduced price items and services. The intent standard under the federal Anti-Kickback Statute was amended by the ACA to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it, in order to have committed a violation. In addition, the ACA provides that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA. Additionally, many states have similar laws that apply to their state health care programs as well as private payors. Violations of the federal and state anti-kickback laws can result in exclusion from federal and state health care programs and substantial civil and criminal penalties.

·• the federal civil and criminal false claims laws and civil monetary penalties laws, including the ~~False Claims Act, or~~ FCA, prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false, fictitious or fraudulent claims for payment from Medicare, Medicaid or other federal healthcare programs, and knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to avoid, decrease or conceal an obligation to pay money to the federal government. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the federal government. Even where pharmaceutical companies do not submit claims directly to payors, they can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers, promoting a product off-label, marketing products of sub-standard quality, or, as noted above, paying a kickback that results in a claim for items or services. In addition, activities relating to the reporting of wholesaler or estimated retail prices for pharmaceutical products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for such products, and the sale and marketing of such products, are subject to scrutiny under this law. For example, several pharmaceutical and other healthcare companies have faced enforcement actions under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Private individuals or “whistleblowers” can bring FCA “qui tam” actions on behalf of the government and may share in recovered amounts. The FCA has been used to prosecute persons submitting claims for payment that are inaccurate or fraudulent, that are for services not provided as claimed, or for services that are not medically necessary. Proof of intent to deceive is not required to establish liability under the civil False Claims Act.

·• ~~the federal Health Insurance Portability and Accountability Act of 1996, or~~ HIPAA, which imposes criminal and civil liability for, among other things, executing or attempting to execute a scheme to defraud any healthcare benefit program, including any third party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statements or representations, or making false statements relating to healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

·• HIPAA, as amended by ~~the~~HITECH, ~~Health~~and ~~Information~~their ~~Technology~~respective ~~for~~implementing ~~Economic~~regulations, ~~and~~including ~~Clinical~~the ~~Health~~Final ~~Act,~~Omnibus orRule ~~HITECH,~~published ~~and~~on ~~their~~January ~~implementing~~25, ~~regulations~~2013, which ~~imposes privacy~~impose, ~~security~~among ~~transmission~~other ~~and~~things, ~~breach~~obligations, ~~reporting~~including ~~obligations~~mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information held by certain healthcare providers, ~~including~~health ~~PHI~~plans and healthcare clearinghouses, ~~upon~~known as “covered entities,” ~~subject~~and to“business ~~the~~associates.” ~~law~~Among other things, ~~such~~HITECH asmade ~~health~~certain ~~plans,~~aspects ~~healthcare~~of ~~clearinghouses~~HIPAA’s ~~and~~rules ~~certain~~(notably ~~healthcare~~the ~~providers,~~Security ~~and~~Rule) ~~their~~directly ~~respective~~applicable to business associates ~~that~~- ~~perform~~independent ~~services~~contractors onor ~~their~~agents ~~behalf~~of covered entities that ~~involve~~receive or obtain individually identifiable health information, ~~including~~in ~~PHI~~connection with providing a service on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal ~~courts~~court to enforce the federal HIPAA laws and seek ~~attorneys~~attorney’s fees and costs associated with pursuing federal civil actions;. The Department of Health and Human Services Office for Civil Rights, or the OCR, has increased its focus on compliance and continues to train state attorneys general for enforcement purposes. The OCR has recently increased both its efforts to audit HIPAA compliance and its level of enforcement, with one recent penalty exceeding $5 million. In addition, according to the United States Federal Trade Commission, or the FTC, failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, or the FTCA, 15 USC § 45(a). The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Medical data is considered sensitive data that merits stronger safeguards. The FTC’s guidance for appropriately securing consumers’ personal information is similar to what is required by the HIPAA Security Rule;

· the federal Physician Payments Sunshine Act, which requires certain manufacturers of prescription drugs, devices and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to annually report to CMS information related to payments and other transfers of value to physicians, dentists, optometrists, podiatrists, chiropractors, and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members; and29

·• ~~analogous~~the ~~state~~federal ~~and~~Physician ~~foreign~~Payments ~~laws~~Sunshine Act and its implementing regulations, ~~such~~which asrequire ~~state~~certain ~~anti-kickback~~manufacturers ~~and~~of ~~false~~prescription ~~claims laws~~drugs, ~~may~~devices ~~apply~~and tomedical ~~sales~~supplies orfor ~~marketing~~which ~~arrangements~~payment ~~and~~is ~~claims~~available ~~involving~~under ~~healthcare~~Medicare, ~~items~~Medicaid or ~~services~~the ~~reimbursed~~Children’s byHealth ~~non-governmental~~Insurance ~~third~~Program ~~party~~to ~~payors,~~annually ~~including~~report ~~private~~to ~~insurers;~~CMS ~~state~~information ~~laws~~related ~~that~~to ~~require~~payments ~~drug~~and ~~companies~~other totransfers ~~comply~~of ~~with~~value ~~the~~to ~~industry’s~~physicians ~~voluntary~~(defined ~~compliance~~to ~~guidelines~~include ~~and~~doctors, ~~the~~dentists, ~~applicable~~optometrists, ~~compliance~~podiatrists ~~guidance~~and ~~promulgated~~chiropractors) byand ~~the~~teaching ~~federal~~hospitals, ~~government~~ or ~~otherwise~~to ~~restrict~~entities ~~payments~~or ~~that~~individuals ~~may~~at bethe ~~made~~request toof, ~~healthcare~~or ~~providers~~designated ~~and~~on ~~other~~behalf ~~potential~~of, ~~referral~~the ~~sources;~~physicians ~~state~~ and ~~local~~teaching ~~laws~~hospitals, ~~that~~as ~~require~~well ~~the~~as ~~licensure~~ownership ofand ~~sales~~investment ~~representatives;~~interests ~~state~~held ~~laws~~by ~~that~~physicians ~~require~~and ~~drug~~their ~~manufacturers~~immediate tofamily ~~report~~members. ~~information~~On ~~related~~October to25, ~~drug~~2018, ~~pricing~~President orTrump ~~payments~~signed ~~and~~into ~~other~~law ~~transfers~~the of“Substance ~~value~~Use-Disorder toPrevention ~~healthcare~~that ~~providers~~Promoted orOpioid ~~marketing~~Recovery ~~expenditures~~ and ~~pricing~~Treatment ~~information;~~for ~~data~~Patients ~~privacy~~ and ~~security~~Communities ~~laws~~Act.” ~~and~~This ~~regulations~~law, in ~~foreign~~part ~~jurisdictions~~(under ~~that~~a ~~may~~provision beentitled ~~more~~“Fighting ~~stringent than those in~~ the ~~United~~Opioid ~~States~~Epidemic ~~(such~~with ~~as the European Union~~Sunshine”), ~~which~~will ~~adopted~~extend the ~~General~~Sunshine ~~Data~~Act ~~Protection~~to ~~Regulation,~~payments ~~which~~and ~~became~~transfers ~~effective~~of invalue ~~May~~to ~~2018);~~physician ~~state~~assistants, ~~laws~~nurse ~~governing~~practitioners, ~~the privacy~~ and ~~security~~other ofmid-level ~~health~~healthcare ~~information~~providers in(with ~~certain~~reporting ~~circumstances,~~requirements ~~many~~going ofinto ~~which~~effect ~~differ~~in ~~from~~2022 ~~each~~for ~~other~~payments made in ~~significant~~2021). ~~ways~~In ~~and~~addition, ~~may~~Section ~~not~~6004 ~~have~~of the ~~same~~ACA ~~effect,~~requires ~~thus~~annual ~~complicating~~reporting ~~compliance~~of ~~efforts;~~information ~~and~~about ~~state~~drug ~~laws~~samples ~~related~~that tomanufacturers ~~insurance~~and ~~fraud~~authorized indistributors ~~the~~provide ~~case~~to ~~of claims involving private insurers.~~physicians;

~~State~~• ~~and~~analogous ~~federal~~state, ~~authorities~~local ~~have aggressively targeted pharmaceutical companies for alleged violations of these fraud~~ and ~~abuse~~foreign laws ~~based~~and ~~on improper research or consulting contracts with doctors~~regulations, ~~certain~~such ~~marketing~~as ~~arrangements~~state ~~that rely on volume~~anti-~~based~~kickback ~~pricing,~~and ~~off-label~~false ~~marketing~~claims ~~schemes~~laws, and other ~~improper~~states’ ~~promotional~~laws ~~practices.~~addressing ~~Companies~~the ~~targeted~~pharmaceutical inand ~~such~~healthcare ~~prosecutions~~industries, ~~have~~may ~~paid~~apply ~~substantial~~to ~~fines~~sales inor ~~the~~marketing ~~hundreds~~arrangements ofand ~~millions~~claims ofinvolving ~~dollars~~healthcare items or ~~more,~~services ~~have~~reimbursed ~~been~~by ~~forced~~non-governmental tothird ~~implement~~party ~~extensive~~payors, ~~corrective~~including ~~action~~private ~~plans~~insurers, and ~~have~~in ~~often~~some ~~become~~cases ~~subject~~that tomay ~~consent~~apply ~~decrees~~regardless orof ~~integrity~~payor, ~~agreements~~i.e., ~~that~~even ~~severely~~if ~~restrict~~reimbursement ~~the~~is ~~manner~~not inavailable; ~~which~~state ~~they~~laws ~~conduct~~that ~~their~~require ~~business. Due~~drug companies to comply with the ~~breadth~~industry’s ofvoluntary ~~these~~compliance ~~laws,~~guidelines (the ~~narrowness~~PhRMA ofCode) ~~statutory~~and ~~exceptions~~the ~~and~~applicable ~~regulatory~~compliance ~~safe~~program ~~harbors~~guidance ~~available,~~promulgated ~~and~~by the ~~range~~federal ofgovernment ~~interpretations~~(HHS-OIG) toor ~~which~~otherwise ~~they~~prohibit ~~are~~or ~~subject,~~restrict itgifts isor ~~possible~~payments that ~~some~~may ofbe ~~our~~made ~~current~~to orhealthcare ~~future~~providers ~~practices~~and ~~might~~other bepotential ~~challenged~~referral ~~under~~sources; ~~one~~state orand ~~more~~local oflaws ~~these~~that ~~laws.~~require ~~Responding~~the tolicensure ~~investigations~~of ~~can~~sales berepresentatives; ~~time-and~~state ~~resource-consuming~~laws ~~and~~that ~~can~~require ~~divert~~drug ~~management’s~~manufacturers ~~attention~~to ~~from~~report ~~the~~information ~~business.~~related ~~Any~~to ~~such~~drug ~~investigation~~pricing or ~~settlement~~payments ~~could~~and ~~increase~~other ~~our~~transfers ~~costs~~of orvalue ~~otherwise~~to ~~have~~healthcare anproviders ~~adverse~~or ~~effect~~marketing onexpenditures ~~our~~and ~~business.~~pricing ~~Even~~information; anand ~~unsuccessful~~state ~~challenge~~laws orrelated ~~investigation~~to ~~into~~insurance ~~our~~fraud ~~practices~~in ~~could~~the ~~cause~~case ~~adverse~~of ~~publicity,~~claims ~~and~~involving beprivate ~~costly to respond to.~~insurers;

42• data privacy and security laws and regulations in foreign jurisdictions that may be more stringent than those in the United States, such as the European Union, which adopted the General Data Protection Regulation (GDPR), which became effective in May 2018. The GDPR, which is wide-ranging in scope, imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third party processors in connection with the processing of personal data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to the United States, provides an enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. The recent implementation of the GDPR has increased our responsibility and liability in relation to personal data that we process, including in clinical trials, and we may in the future be required to put in place additional mechanisms to ensure compliance with the GDPR, which could divert management’s attention and increase our cost of doing business; and

~~Also,~~• State laws governing the ~~U.S.~~privacy ~~Foreign~~and ~~Corrupt~~security ~~Practices~~of ~~Act~~health ~~and~~information ~~similar~~in ~~worldwide~~certain ~~anti-bribery~~circumstances, ~~laws~~many ~~generally~~of ~~prohibit~~which ~~companies~~differ from each other in significant ways and ~~their~~may ~~intermediaries~~not ~~from~~have ~~making~~the ~~improper~~same ~~payments~~effect, toand ~~government~~may ~~officials~~apply more broadly than HIPAA, thus complicating compliance efforts – for example, the ~~purpose~~California ofConsumer ~~obtaining~~Privacy Act, or ~~retaining~~CCPA, ~~business~~which goes into effect January 1, 2020. ~~Our~~The ~~internal~~CCPA, ~~control~~among ~~policies~~other things, creates new data privacy obligations for covered companies and ~~procedures~~provides ~~may~~new ~~not~~privacy ~~protect~~rights usto ~~from~~California ~~reckless~~residents, orincluding ~~negligent~~the ~~acts~~right ~~committed~~to byopt ~~our~~out ~~employees~~of certain disclosures of their information. The CCPA also creates a private right of action with statutory damages for certain data breaches, ~~future~~thereby ~~distributors~~potentially increasing risks associated with a data breach. Legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, ~~licensees~~and orthe ~~agents~~California Attorney General will issue clarifying regulations. ~~Violations~~Although ofthe ~~these~~law ~~laws~~includes limited exceptions, orincluding ~~allegations~~for certain information collected as part of ~~such~~clinical ~~violations,~~trials ~~could~~as ~~result~~specified in ~~fines~~the law, ~~penalties~~it may regulate or ~~prosecution~~impact ~~and~~our ~~have~~processing aof ~~negative~~personal ~~impact~~information depending on ~~our~~the ~~business~~context. It remains unclear what, ~~results~~if ofany, ~~operations~~modifications ~~and~~will ~~reputation~~be made to this legislation or how it will be interpreted.

State and federal authorities have aggressively targeted pharmaceutical companies for alleged violations of these fraud and abuse laws based on improper research or consulting contracts with doctors, certain marketing arrangements that rely on volume-based pricing, off-label marketing schemes, and other improper promotional practices. If our operations are found to be in violation of any of the health regulatory laws described above or any other laws that apply to us, we may be subject to penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from participation in government healthcare programs, injunctions, private qui tam actions brought by individual whistleblowers in the name of the government. Companies targeted in such prosecutions have paid substantial fines in the hundreds of millions of dollars or more, have been forced to implement extensive corrective action plans, and have often become subject to consent decrees or corporate integrity agreements that severely restrict the manner in which they conduct their business, including the requirement of additional reporting and oversight obligations. Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are subject, it is possible that some of our current or future practices might be challenged under one or more of these laws. Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business and reputation. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity and be costly to respond to.

We are subject to various U.S. and foreign anti-bribery and anti-corruption laws, and any violations by us of such laws could result in substantial penalties.

The U.S. Foreign Corrupt Practices Act, or FCPA, and similar worldwide anti-bribery and anti-corruption laws generally prohibit companies and their intermediaries from offering, making or authorizing improper payments to government officials for the purpose of obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. Our internal control policies and procedures may not protect us from reckless or negligent acts committed by our employees, future distributors, licensees or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution and have a negative impact on our business, results of operations and reputation.

Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.

Although we believe the market for acne and rosacea therapies is less vulnerable to unfavorable economic conditions due to the significant discomfort and distress that these conditions inflict, our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. We currently have very limited visibility regarding the prospects of ~~FMX101~~AMZEEQ, FMX103 or our other product candidates becoming eligible for reimbursement by any government or third party payor and the possible scope of such reimbursement, and we must assume that demand for these product candidates may be tied to discretionary spending levels of our targeted patient population.

A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for ~~FMX101~~AMZEEQ, or if approved, FMX103 or any of our other product candidates, ~~if approved,~~ and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services.

Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.

Exchange rate fluctuations between the U.S. dollar and the New Israeli Shekel may negatively affect our earnings.

The dollar is our functional and reporting currency. However, a significant portion of our operating expenses are incurred in NIS. As a result, we are exposed to the risks that the NIS may appreciate relative to the dollar, or, if the NIS instead devalues relative to the dollar, that the inflation rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected. We cannot predict any future trends in the rate of inflation or deflation in Israel or the rate of devaluation or appreciation of the NIS against the dollar. For example, the NIS ~~depreciated~~appreciated against the dollar by 87.18% in ~~2018~~2019, which ~~depreciation~~appreciation was ~~partly~~compounded ~~offset~~ by inflation at the rate of 0.86% that year, while in ~~2017~~2018 the NIS ~~appreciated~~depreciated 11by 8.61% against the dollar, which ~~appreciation~~depreciation was ~~further~~partly ~~amplified~~offset by inflation in Israel of 0.48% that year. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. Our operations also could be adversely affected if we are unable to effectively hedge against currency fluctuations in the future.

Our research and development and other significant operations are located in Israel and, therefore, our results may be adversely affected by political, economic and military instability in Israel.

Our research and development facilities are located in Rehovot, Israel. In addition, some of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel, its neighboring countries and other organizations. Any hostilities involving Israel or the interruption or curtailment of trade or transport between Israel and its trading partners could adversely affect our operations and results of operations. Further, certain countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli businesses and businesses with large Israeli operations. Such boycott or other restrictive laws, policies or practices may have a material adverse effect on our business and financial condition in the future. In addition, our operations could be disrupted by the obligations of personnel to perform military reserve service.

Sanctions and other trade control laws create the potential for significant liabilities, penalties and reputational harm.

As a company transitioning to commercialization in the United States and overseas, we may be subject to national laws as well as international treaties and conventions controlling imports, exports, re-export and diversion of goods, services and technology. These include import and customs laws, export controls, trade embargoes and economic sanctions, denied party watch lists and anti-boycott measures (collectively “Customs and Trade Controls”). Applicable Customs and Trade Controls are administered by Israel’s Ministry of Finance, the U.S. Treasury’s Office of Foreign Assets Control (OFAC), other U.S. agencies and other agencies of other jurisdictions where we do business. Customs and Trade Controls relate to a number of aspects of our business, including most notably the sales of finished goods and API as well as the licensing of our intellectual property, as provided above. Compliance with Customs and Trade Controls has been the subject of increasing focus and activity by regulatory authorities, both in the United States and elsewhere, in recent years. Although we have policies and procedures designed to address compliance with Customs and Trade Controls, actions by our employees, by third-party intermediaries (such as distributors and wholesalers) or others acting on our behalf in violation of relevant laws and regulations may expose us to liability and penalties for violations of Customs and Trade Controls and accordingly may have a material adverse effect on our reputation and our business, financial condition and results of operations.

Lawsuits that have been filed in connection with the Merger, the outcome of which are uncertain, could require Menlo and Foamix to incur significant costs and suffer management distraction.

Securities litigation or other shareholder litigation frequently follows the announcement of certain significant business transactions, such as the announcement of a business combination transaction. In connection with the Merger, purported shareholders of Foamix filed lawsuits against the company and members of the Foamix board of directors and some lawsuits named Menlo and Merger Sub as additional defendants. See “Item 3—Legal Proceedings” for a description of the lawsuits. Even if the lawsuits are without merit, as the defendants believe these lawsuits to be, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on the combined company’s liquidity and financial condition.

Our disclosure controls and procedures and our systems to implement such disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

As a public company, we are subject to the periodic reporting requirements of the Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

Risks Related to Our Intellectual Property

If our efforts to obtain, protect or enforce our patents and other intellectual property rights related to ~~FMX101~~our launched product AMZEEQ, to our Phase III product candidate FMX103, or any of our other product candidates are not adequate, we may not be able to compete effectively and we otherwise may be harmed.

Our commercial success depends in part on our ability to obtain and maintain patent protection and other intellectual property rights and to utilize trade secret protection for our intellectual property and proprietary technologies, our products and their uses, as well as our ability to operate without infringing upon the proprietary rights of others. We rely upon a combination of patents, trade secret protection ~~and~~ , trademarks, confidentiality agreements, assignment of invention agreements and other contractual arrangements to protect the intellectual property related to ~~FMX101~~our launched product AMZEEQ, to our Phase III product candidate FMX103 and to our other development programs. Limitations on the scope of our intellectual property rights may limit our ability to prevent third parties from designing around such rights and competing against us. For example, our patents do not claim a new compound. Rather, the active pharmaceutical ingredients of our products are existing compounds and our granted patents and pending patent applications are directed to, among other things, novel formulations of these existing compounds that are dispensed as a foam. Accordingly, other parties may compete with us, for example, by independently developing or obtaining competing topical formulations that design around our various patent claims, or by using formulations from expired patents but which may contain the same active ingredients, or by seeking to invalidate our patents. Moreover, any disclosure to or misappropriation by third parties of our confidential proprietary information, unless we have sufficient regulatory and/or patent and/or trade secret protection and we are able to enforce such rights successfully, could enable competitors to quickly duplicate or surpass our technological achievements, eroding our competitive position in our market.

43We currently have various granted patents related to AMZEEQ and FMX103 in the United States, which are expected to remain in effect until 2030. We also have an issued patent in the United States related to AMZEEQ that expires in September 2037. These patents relate to a composition of matter comprising a claim to a formulation of a tetracycline antibiotic, which can include minocycline or doxycycline, and therefore may be less protective than patents that claim a new drug. We also have patents granted claiming compositions of matter relating to AMZEEQ and FMX103 in each of the following international markets Australia, Canada, Great Britain, Israel, and Mexico and we have patent applications claiming compositions of matter relating to AMZEEQ and FMX103 pending in Canada, the European Union, India and Mexico.

WeAs ~~currently~~of ~~have~~December ~~several~~31, 2019, we had over 200 granted patents ~~related~~and toover ~~FMX101~~40 patent applications pending worldwide covering our various topical delivery foam-based platforms and ~~FMX103~~other technology. inHowever, the ~~United~~patent ~~States,~~applications ~~which~~that ~~are~~we ~~expected~~own or license may fail to ~~remain~~result in ~~effect~~granted ~~until~~patents ~~2030~~in the U.S. ~~These~~or ~~patents~~foreign ~~relate~~jurisdictions, toor aif ~~composition~~granted ofthe ~~matter~~patent ~~comprising~~claims amay ~~claim~~fail to prevent a ~~formulation~~potential ofinfringer afrom ~~tetracycline~~marketing ~~antibiotic~~its ~~which~~product ~~can~~or be ~~include~~deemed ~~minocycline~~invalid or ~~doxycycline,~~held unenforceable by a court. Competitors and ~~therefore~~others ~~may~~in bethe ~~less~~field ~~protective~~of ~~than~~topically-administered ~~patents~~therapies ~~that~~comprising ~~claim~~an aactive ~~new~~ingredient ~~drug. We~~in ~~also~~foam and other presentations have ~~patents~~created ~~granted~~a ~~claiming~~substantial ~~compositions~~amount of ~~matter~~scientific publications, patents and patent applications and other materials relating to ~~FMX101~~their technologies. Our ability to obtain and ~~FMX103~~maintain invalid ~~each~~and enforceable patents depends on various factors, including interpretation of our technology and the ~~following~~prior art ~~international~~and ~~markets~~whether ~~Australia,~~the ~~Canada,~~differences ~~Great~~between ~~Britain,~~them ~~Israel~~allow our technology to be patentable. Patent applications and patents granted from them are complex, lengthy and ~~Mexico~~highly technical documents that are often prepared under very limited time constraints and wemay not be free from errors or words that make their interpretation uncertain. The existence of errors in a patent may have a materially adverse effect on the patent, its scope and its enforceability. Our pending patent applications ~~claiming~~may ~~compositions~~not issue, or the scope of ~~matter~~the ~~relating~~claims of patent applications that do issue may be too narrow or inadequate to ~~FMX101~~protect ~~and~~our ~~FMX103~~competitive ~~pending~~advantage. Pending applications may be challenged during prosecution by the submission of third-party observations or pre-grant oppositions. Such observations may result in ~~Canada,~~the scope of claims being narrowed or rejected or the ~~European~~application ~~Union~~may be refused. Also, ~~India~~our ~~and~~granted ~~Mexico~~patents may be subject to challenges or construed in a way that may not provide adequate or any protection.

AsEven ofif ~~December~~these ~~31,~~patents ~~2018,~~do wesuccessfully ~~had~~issue, ~~175~~third ~~granted~~parties ~~patents~~may ~~and~~challenge ~~over~~the 40validity, ~~patent~~enforceability ~~applications~~or ~~pending~~scope ~~worldwide~~of ~~covering~~such ~~our~~granted ~~various~~patents ~~foam-based~~or ~~platforms~~any ~~and~~ other ~~technology.~~granted ~~However,~~patents ~~the patent applications that~~ we own or license, which may ~~fail to~~ result in ~~granted~~such patents inbeing ~~the~~narrowed, ~~U.S.~~invalidated or ~~foreign~~held ~~jurisdictions,~~unenforceable. orFor ifexample, patents granted by the ~~patent~~European ~~claims~~Patent Office may ~~fail~~be toopposed ~~prevent~~by aany ~~potential~~person ~~infringer~~within ~~from~~9 ~~marketing~~months ~~its~~from ~~product~~the orpublication beof ~~deemed~~their ~~invalid~~grant. orAlso, ~~held~~patents granted ~~unenforceable~~ by athe ~~court.~~USPTO, ~~Competitors~~may ~~and~~be ~~others~~subject into ~~the~~review, ~~field~~reexamination ofand ~~topically-administered~~other ~~therapies~~challenges. ~~comprising~~Changes anto ~~active~~the ~~ingredient~~U.S. patent laws in ~~foam~~2012 ~~presentation~~provide ~~have~~additional ~~created~~procedures afor ~~substantial~~third ~~amount~~parties ofto ~~scientific~~challenge ~~publications,~~the validity of patents ~~and~~issuing from patent applications including ~~and~~post-grant ~~other~~review, ~~materials~~which ~~relating~~generally applies to ~~their~~patents ~~technologies.~~first ~~Our~~filed ~~ability~~after toMarch ~~obtain~~15, ~~and~~2013. ~~maintain~~A ~~valid~~post-grant ~~and~~review ~~enforceable~~petition ~~patents~~must ~~depends~~be filed on ~~various~~or ~~factors,~~prior ~~including~~to ~~interpretation~~the ofdate ~~our~~which ~~technology~~is ~~and~~9 ~~the~~months ~~prior~~after ~~art and whether~~ the ~~differences~~patent ~~between~~is ~~them~~granted. ~~allow~~The ~~our~~procedures ~~technology~~also toexpand beand reform ~~patentable.~~the ~~Patent~~proceedings ~~applications~~for ~~and~~challenging issued patents ~~granted~~on ~~from~~grounds ~~them~~of ~~are~~prior ~~complex,~~art ~~lengthy~~ and ~~highly~~publications, ~~technical~~also ~~documents~~known ~~that~~as ~~are~~inter ~~often~~partes ~~prepared~~review, ~~under~~or ~~very~~IPR. ~~limited~~For ~~time~~patents ~~constraints~~filed ~~and~~after ~~may~~March ~~not~~15, be2013, ~~free~~a ~~from~~petition ~~errors~~for orIPR ~~words~~may ~~that~~be filed ~~make~~the ~~their~~later ~~interpretation~~of ~~uncertain.~~9 ~~The~~months ~~existence~~after grant of ~~errors~~the ~~in a~~ patent ~~may~~or ~~have~~after a ~~materially~~post-grant ~~adverse~~review ~~effect~~proceeding on the patent, ~~its~~has ~~scope and its enforceability~~terminated. ~~Our~~For ~~pending~~patents ~~patent~~filed ~~applications~~prior ~~may~~to ~~not~~March ~~issue~~15, or2013, the ~~scope~~rules ofregarding ~~the~~IPR ~~claims~~filing ofremain ~~patent~~unchanged ~~applications~~and ~~that~~an doIPR ~~issue~~petition may be ~~too~~filed any ~~narrow~~time orfollowing ~~inadequate~~issuance toof ~~protect~~the ~~our competitive advantage~~patent. ~~Also, our granted patents may be subject to challenges or construed in a way that may not provide adequate protection.~~

Even if these patents do successfully issue, third parties may challenge the validity, enforceability or scope of such granted patents or any other granted patents we own or license, which may result in such patents being narrowed, invalidated or held unenforceable. For example, patents granted by the European Patent Office may be opposed by any person within 9 months from the publication of their grant. Also, patents granted by the U.S. Patent and Trademark Office, or USPTO, may be subject to review, reexamination and other challenges. Changes to the patent laws of the U.S. in 2012 provide additional procedures for third parties to challenge the validity of patents issuing from patent applications including post-grant review, which generally applies to patents first filed after March 15, 2013. A post-grant review petition must be filed on or prior to the date which is 9 months after the patent is granted. The procedures also expand and reform the proceedings for challenging issued patents on grounds of prior art and publications, also known as inter partes review, or IPR. For patents filed after March 15, 2013, a petition for IPR may be filed the later of 9 months after grant of the patent or after a post-grant review proceeding on the patent has terminated. For patents filed prior to March 15, 2013, the rules regarding IPR filing remain unchanged and an IPR petition may be filed any time following issuance of the patent.33

Furthermore, efforts to enforce our patents could give rise to challenges to their validity or unenforceability in court proceedings. If the patents and patent applications we hold or pursue with respect to ~~FMX101~~our launched product AMZEEQ, to FMX103 or any of our other product candidates are challenged, it could put one or more patents at risk of being invalidated, or interpreted narrowly and threaten our competitive advantage for ~~FMX101~~AMZEEQ, FMX103 or any of our other product candidates. Furthermore, even if they are not challenged, our patents and patent applications may not adequately protect our ~~intellectual~~products ~~property~~and or product candidates or prevent others from designing around and or challenging our claims. To meet such challenges, which are part of the risks and uncertainties of developing and marketing product candidates, we may need to evaluate third party intellectual property rights and, if appropriate, to seek licenses for such third party intellectual property or to challenge such third party intellectual property, which may be costly and time consuming and may or may not be successful, which could also have a material adverse effect on the commercial potential for ~~FMX101~~AMZEEQ, FMX103 and any of our other product candidates.

~~Further,~~If if we encounter ~~delays~~challenges into our ~~clinical~~patent ~~trials~~claims or in ~~seeking~~relation ~~marketing~~to ~~approval~~AMZEEQ ofand ~~our~~we ~~products,~~are not ultimately able to defend them the period of time during which we ~~could~~will ~~market~~be ~~FMX101,~~able ~~FMX103~~to ormarket AMZEEQ ~~any~~may ~~of our other product candidates under patent protection could~~ be reduced.

44Further, if we encounter delays in our clinical trials or in seeking marketing approval of our product candidates, the period of time during which we could market FMX103 or any of our other product candidates under patent protection could be reduced.

Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to (i) file any patent application related to ~~FMX101~~AMZEEQ, to our Phase III product candidate FMX103, or to any of our other product candidates or (ii) conceive and invent any of the inventions claimed in our patents or patent applications.

Furthermore, for applications filed before March 16, 2013, or patents issuing from such applications, an interference proceeding can be invoked by a third party, or instituted by the USPTO, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications and patents. As of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO under the new first-to-file system before we did, could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party.

The change to “first-to-file” from “first-to-invent” is one of the changes to the patent laws of the ~~United States~~U.S. resulting from the Leahy-Smith America Invents Act, or AIA, signed into law on September 16, 2011. Among some of the other changes to the patent laws are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the USPTO. Until recently, a lower evidentiary standard was applied in certain USPTO proceedings compared to the evidentiary standard in U.S. federal court necessary to invalidate a patent claim. Under the new final rule, effective for petitions filed on or after November 13, 2018, the USPTO Patent Trial and Appeal Board (PTAB) is to apply the same claim construction standard applied by civil courts under 35 USC §282(b) in IPR, post-grant review, and the transitional program for covered business method patents proceedings. The impact this may have in practice on the use and outcome of USPTO proceedings is uncertain. Because of lower costs and the fact that USPTO statistics indicate that a high rate of challenged claims are being invalidated in these USPTO procedures, they may continue to be a popular and effective means of challenging patents.

Even where patent, trade secret and other intellectual property laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and the outcome of such litigation would be uncertain. Moreover, any actions we may bring to enforce our intellectual property against our competitors could provoke them to bring actions or counterclaims against us, and our competitors have intellectual property of their own, some of which include substantial patent portfolios. An unfavorable outcome could have a material adverse effect on our business and could result in the challenged patent or one or more of its claims being interpreted narrowly or invalidated, or held not to be infringed, or one or more of our patent applications may be not be granted.

We also rely on trade secret protection and confidentiality agreements to protect our know-how, data and information prior to filing patent applications and during the period before they are published. We additionally rely on trade secret protection and confidentiality agreements to protect proprietary know-how that we consider may be preferably maintained as a trade secret rather than the subject of a patent application. We further rely on trade secret protection and confidentiality agreements to protect proprietary know-how that may not be patentable, processes for which patents may be difficult to obtain or enforce and other elements of our product development processes that involve proprietary know-how, information or technology that is not covered by patents. We also enter into and rely on, where appropriate, common interest agreements to protect privileged confidential information.

In an effort to protect our trade secrets and other confidential information, we incorporate confidentiality provisions in all our employees’ agreements and require our consultants, contractors and licensees to which we disclose such information to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that confidential information, as defined in the agreement and disclosed to the individual by us during the course of the individual’s relationship with us, be kept confidential and not disclosed to third parties for an agreed term. These agreements, however, may not provide us with adequate protection against accidental or improper use or disclosure of confidential information, and these agreements may be breached. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. A breach of confidentiality could significantly affect our competitive position and we could lose our trade secrets or they could become otherwise known or be independently discovered by our competitors. Also, to the extent that our employees, consultants or contractors use any intellectual property owned by others in their work for us, disputes may arise as to the rights in any related or resulting know-how and inventions. Additionally, others may independently develop the same or substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and other confidential information. Any of the foregoing could deteriorate our competitive advantages, undermine the trade secret and contractual protections afforded to our confidential information and have material adverse effects on our business.34

In an effort to protect our trade secrets and other confidential information, we incorporate confidentiality provisions in all our employees’ agreements and require our consultants, contractors and licensees to which we disclose such information to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that confidential information, as defined in the agreement and disclosed to the individual by us during the course of the individual’s relationship with us, be kept confidential and not disclosed to third parties for an agreed term. These agreements, however, may not provide us with adequate protection against accidental or improper use or disclosure of confidential information, and these agreements may be breached. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. A breach of confidentiality could significantly affect our competitive position and we could lose our trade secrets or they could become otherwise known or be independently discovered by our competitors. Although we make efforts to protect our trade secrets and other confidential information we cannot be certain that all parties that gain access to our proprietary information or who may be involved in the development of our intellectual property have entered into written confidentiality agreements or that such agreements will be sufficiently protective or that they will not be breached. Also, to the extent that our employees, consultants or contractors use any intellectual property owned by others in their work for us, disputes may arise as to the rights in any related or resulting know-how and inventions. Additionally, others may independently develop the same or substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and other confidential information. Any of the foregoing could deteriorate our competitive advantages, undermine the trade secret and contractual protections afforded to our confidential information and have material adverse effects on our business.

Cybersecurity disruptions may impact our business operations if it becomes a target for such activities.

We may be subject to attempted cybersecurity disruptions from a variety of threat actors. If our systems for protecting against cybersecurity disruptions prove to be insufficient, our employees or third parties could be adversely affected. Such cybersecurity disruptions could cause damage or destroy assets, compromise business systems, result in proprietary information and trade secrets being altered, lost or stolen; result in employee or third-party information being compromised, or otherwise disrupt business operations. Significant costs to remedy the effects of such a cybersecurity disruption may be incurred by us, as well as in connection with resulting regulatory actions and litigation, and such disruption may harm relationships with third parties and impact our business reputation.

Changes in U.S. or foreign patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other companies in the markets in which we participate, our success is heavily dependent on intellectual property, particularly patents. The strength of patents in the pharmaceutical field involves complex legal and scientific questions and in the United States and in many foreign jurisdictions patent policy and case law also continues to evolve and change and the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. This uncertainty includes changes to the patent laws through one or more of legislative action to change statutory patent law, rule changes and practice directions issued by National Patent Offices, or court action that may reinterpret, limit or expand on existing law in ways affecting the scope or validity of granted patents. Particularly in recent years in the United States, there have been several major legislative developments and court decisions that have affected patent laws in significant ways and there may be more developments in the future that may weaken or undermine our ability to obtain patents or to enforce our existing and future patents.

We have agreed to share ownership in certain patents that may result from our development and license agreements with certain major pharmaceutical companies, which may detract from our rights to such patents.

We have agreed with several of the pharmaceutical companies with whom we are developing certain topical products, based on our emulsion foam technology and the licensees’ active ingredients, to jointly own and have an undivided interest in patents that arise from the relevant projects, where the licensee made its own material contributions to the invention. In certain agreements, we have further agreed that inventions achieved exclusively or primarily by the licensees in the course of the development without significant contribution by us will be owned solely by them, and they will be allowed to file patent applications covering such inventions without our participation.

We have granted certain licensees the right to provide input during the prosecution of licensed patent applications. We have further granted certain licensees the primary right to enforce several of our existing patents, which we have licensed to these licensees to allow them to commercialize or continue to commercialize our jointly-developed product, in the event that any infringement of the licensed patents adversely affects the licensees’ ability to utilize the licenses for the purpose they were granted. Such rights may detract from our rights and title to such patents and we may as a result have little or no control or say in any proceedings concerning them. In addition, any proceedings against our technology could impact any or all of our licensees, and we may be considered or found to be contractually responsible for the payment of certain claims and losses as a result of such impact.

If we infringe or are alleged to infringe or otherwise violate intellectual property rights of third parties, our business could be harmed.

Our research, development and commercialization activities may infringe or otherwise violate or be claimed to infringe or otherwise violate patents owned or controlled by other parties. Competitors in the field of topical and oral drugs for the treatment of acne or rosacea and other indications have developed large portfolios of patents and patent applications relating to our business. In particular, there are patents and pending patent applications held by third parties that relate to formulations with minocycline-based and doxycycline-based products and to methods of treatment with minocycline-based and doxycycline-based products for indications we are pursuing with AMZEEQ, our ~~product~~Phase ~~candidates,~~III ~~namely~~product ~~FMX101,~~candidate FMX103 and ~~any other of~~ our other such-based product candidates. There may be granted patents with claims that could be asserted against us in relation to such products or product candidates. There may also be granted patents held by third parties that may be infringed or otherwise violated by our other product candidates and activities, and we do not know whether or to what extent we may be infringing or otherwise violating third party patents. There may also be third party patent applications that if approved and granted as patents may be asserted against us in relation to ~~FMX101~~AMZEEQ, FMX103 or any of our other product candidates or activities. We may fail to identify applications and granted patents that may be asserted against us in relation to AMZEEQ, our Phase III product candidate FMX103 or any of our other product candidates or activities. Searches and analyses undertaken may miss or not uncover all potential and future threats. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages and legal fees. These third parties could include non-practicing entities that have no relevant products or revenue. Further, if a patent infringement suit were brought against us, we could be temporarily or permanently enjoined or otherwise forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.

As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek licenses from third parties. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property, or such rights might be restrictive and limit our present and future activities. Ultimately, we or a licensee could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.

46There has been and there currently is substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical industry. In addition to possible infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference, derivation, review, re-examination or other post-grant proceedings declared or granted by the USPTO and similar proceedings in foreign countries, regarding intellectual property rights with respect to our current or any future products. In some jurisdictions, third party observations or pre-grant oppositions may be filed.The cost and burden to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings and their outcome could impair our ability to compete in the marketplace and impose a substantial financial burden on us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.

~~There~~Furthermore, ~~has~~several ~~been~~of ~~and~~our ~~there~~employees ~~currently~~were ispreviously ~~substantial~~employed ~~litigation~~at ~~and~~universities ~~other~~or ~~proceedings regarding patent and~~ other ~~intellectual~~pharmaceutical ~~property~~companies, ~~rights~~including inpotential ~~the pharmaceutical industry~~competitors. InWhile ~~addition to possible infringement claims against us,~~ we ~~may~~take ~~become~~steps ato prevent ~~party~~our toemployees ~~other~~from ~~patent~~using ~~litigation~~the ~~and~~proprietary ~~other~~information ~~proceedings,~~or ~~including~~know-how ~~interference,~~of ~~derivation,~~others ~~review,~~that ~~re-examination~~is ornot ~~other~~in ~~post-grant~~the ~~proceedings~~public ~~declared~~domain or ~~granted~~that byhas ~~the~~not ~~USPTO~~already ~~and~~been ~~similar~~independently ~~proceedings~~developed inby ~~foreign~~us ~~countries~~earlier, ~~regarding~~we ~~intellectual~~may ~~property~~be ~~rights~~subject ~~with respect~~ to ~~our~~claims ~~current~~that we or ~~any~~these ~~future~~employees ~~products.~~have inadvertently ~~The~~or ~~cost~~otherwise ~~and~~used ~~burden~~or todisclosed, usconfidential ofinformation, ~~any~~intellectual ~~patent~~property, ~~litigation~~trade secrets or other ~~proceeding,~~proprietary ~~even~~information ifof ~~resolved~~any insuch ~~our~~employee’s ~~favor,~~former ~~could be substantial~~employer. ~~Some~~Litigation ~~of our competitors~~ may be ~~able~~necessary to ~~sustain~~defend ~~the~~against ~~costs~~these ofclaims ~~such~~and, even ~~litigation~~if ~~or proceedings more effectively than~~ we ~~can~~are ~~because~~successful ofin ~~their~~defending ~~substantially~~ourselves, ~~greater~~could ~~financial~~result ~~resources.~~in ~~Patent~~substantial ~~litigation~~costs ~~and~~to ~~other~~us ~~proceedings~~or ~~may~~be ~~also~~distracting ~~absorb~~to ~~significant~~our management ~~time~~. ~~Uncertainties~~If ~~resulting~~we ~~from~~do ~~the~~not ~~initiation~~succeed ~~and~~with ~~continuation~~respect ofto ~~patent~~any ~~litigation~~such orclaims, ~~other~~in ~~proceedings~~addition ~~and their outcome could impair our ability~~ to ~~compete~~paying inmonetary ~~the~~damages ~~marketplace~~ and ~~impose~~possible aongoing royalties, ~~substantial~~we ~~financial~~may ~~burden~~lose onvaluable ~~us.~~intellectual ~~The~~property ~~occurrence~~rights ~~of any of the foregoing could have a material adverse effect on our business, financial condition~~ or ~~results of operations~~personnel.

~~Furthermore,~~If ~~several of our employees were previously employed at universities or other pharmaceutical companies, including potential competitors. While~~ we ~~take~~are ~~steps~~unable to ~~prevent~~secure ~~our~~registrations employees from using the proprietary information or know-how of others that is not in the public domain or that has not already been independently developed by us earlier, we may be subject to claims that we or these employees have inadvertently or otherwise used or disclosed intellectual property, trade secrets or other proprietary information of any such employee’s former employer. Litigation may be necessary to defend against these claims and, ~~even~~protect ifour wetrademarks ~~are~~from ~~successful in defending ourselves~~infringement, ~~could result in substantial costs to us or be distracting to~~ our ~~management.~~business Ifprospects ~~we do not succeed with respect to any such claims, in addition to paying monetary damages and possible ongoing royalties, we~~ may ~~lose~~be ~~valuable intellectual property rights or personnel~~harmed.

IfWe weown ~~are~~trademarks ~~unable~~that toidentify ~~protect~~“Foamix” and have registered these trademarks in the United States and Israel. We own the trademarks “AMZEEQ” and “MST” that identify our FDA approved topical product for acne vulgaris and its delivery technology and we have filed applications for these trademarks ~~from~~in ~~infringement~~the United States and in some other jurisdictions including Israel. We also own and have filed applications for trademarks in the United States that represent the logo used in connection with AMZEEQ, and the proposed logo(s) and commercial name(s) of our ~~business~~phase ~~prospects~~III ~~may~~drug beproduct ~~harmed~~candidate.

We own trademarks that identify “Foamix” and have registered these trademarks in the United States and Israel. We also own and have filed applications for trademarks in the United States that represent the proposed commercial name(s) of our drug product candidates. Although we take steps to monitor the possible infringement or misuse of our trademarks, it is possible that third parties may infringe, dilute or otherwise violate our trademark rights. Any unauthorized use of our trademarks could harm our reputation or commercial interests. In addition, our enforcement against third party infringers or violators may be unduly expensive and time-consuming, and the outcome may be an inadequate remedy.36

Applications for trademarks may be rejected during prosecution and we may be unable to overcome such proceedings or we may have to narrow or limit the scope of the applications. Opposition or cancellation proceedings may be filed against our trademarks, which may not survive such proceedings or we may have to narrow or limit their scope.

In the US the FDA evaluates and must approve any trademark we propose to use with products for which we seek regulatory approval. Selecting a product trademark can be an expensive process. If the FDA objects to proposed trademarks this could delay regulatory approval and we may be required to expend significant resources in an effort to identify suitable substitutes that would qualify as a registerable trademark, not infringe any existing third party trademark rights and be acceptable to the FDA.

Although we take steps to monitor the possible infringement or misuse of our trademarks, it is possible that third parties may infringe, dilute or otherwise violate our trademark rights. Any unauthorized use of our trademarks could harm our reputation or commercial interests. In addition, our enforcement against third party infringers or violators may be unduly expensive and time-consuming, and the outcome may be an inadequate remedy.

We may become involved in lawsuits to protect or enforce our patents or other intellectual property or the patents of our licensors, which could be expensive and time-consuming.

Competitors may infringe our intellectual property, including our patents or the patents of our licensors. As a result, we may be required to file infringement claims to stop third party infringement or unauthorized use. This can be expensive and burdensome, particularly for a company of our size, as well as time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology or method at issue on the grounds that our patent claims do not cover its technology or method or that the factors necessary to grant an injunction against an infringer are not satisfied.

We have received notice letters of ANDAs submitted for drug products that are generic versions of Finacea foam and we are involved in lawsuits to protect and enforce our patents, which are expensive, time consuming and may be unsuccessful.

Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming and may be unsuccessful in whole or part. The infringing party may deny any infringement or challenge the patents as invalid or unenforceable. Litigation proceedings may also fail, and even if successful, they may result in substantial costs and distraction of our management and other employees.

For example, Paragraph IV Certification Notice Letters from ~~each~~Taro ~~of Teva and Perrigo, were received~~ dated ~~November~~December 20, ~~2017~~2018 and January 418, ~~2018~~2019, ~~respectively~~were received in connection with Finacea foam. A Paragraph IV Certification Notice Letter notifies the FDA that one or more patents listed in the FDA’s Orange Book is allegedly invalid, unenforceable or will not be infringed by an ANDA product. In the case at hand, the letters were directed against several of our U.S. patents and stated that ~~each~~Taro ~~of Teva and Perrigo~~ had submitted to the FDA an ANDA for an azelaic acid foam composition which is a generic version of Finacea foam.

~~Complaints~~Pursuant ~~were~~to ~~jointly~~our ~~filed~~licensing ~~against~~agreement ~~each~~with LEO, this litigation is in the sole control of ~~Teva~~LEO. ~~and~~Complaints ~~Perrigo~~were filed against Taro with the U.S. District Court for the District of Delaware, asserting, among other things, that ~~each~~Taro ~~of Teva and Perrigo~~ had infringed our patents, as listed in ~~their~~its Paragraph IV Notice Letters, by seeking FDA approval to manufacture and sell a generic version of Finacea prior to expiration of these patents. Since the complaint ~~complaints~~was ~~were~~ filed within the 45-day period required under the Hatch-Waxman Act, a 30-month stay ~~precludes~~will ~~Teva~~preclude ~~from~~Taro ~~receiving final FDA approval of a generic version of Finacea prior to May 2020 and Perrigo~~ from receiving final FDA approval of a generic version of Finacea prior to ~~July~~June ~~2020~~2021, unless a court enters a judgment that the patents are invalid or not infringed.

47Although we are currently unable to predict the outcome of the litigation, substitution of Finacea in favor of generic versions has the potential to have a negative impact on future commercialization of Finacea and to result in a loss of license revenue. Furthermore, in any infringement proceeding, a court may decide that a patent of ours, or one or more claims of such patent, is not valid or is unenforceable, or may refuse to stop the other party from using the supposedly infringing technology on the grounds that our patents, or one or more claims of such patents, do not cover such technology. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could also put one or more of our pending patent applications at risk of not issuing. There can be no assurance that our product candidates will not be subject to the same risks.

We ~~and LEO~~ have also ~~recently~~entered ~~received~~into ~~Paragraph~~license IVagreements ~~Certification~~with ~~Notice~~other ~~Letters~~commercial ~~from~~partners ~~Taro,~~for ~~dated~~the ~~December~~development ~~20, 2018~~ and ~~January~~commercialization ~~18,~~of ~~2019,~~products ~~in connection~~ with ~~Finacea,~~active ~~stating~~ingredients ~~Taro~~other ~~had~~than ~~submitted to the FDA an ANDA for an~~ azelaic acid ~~foam~~that ~~composition~~license ~~which~~one isor amore ~~generic version~~ of ~~Finacea.~~the Apatents ~~complaint~~listed ~~has~~in ~~been~~the ~~filed~~FDA’s ~~within~~Orange ~~the~~Book ~~45-~~for ~~day~~Finacea ~~period~~foam, ~~and~~or a ~~30-month~~family ~~stay~~member ~~will~~thereof. ~~preclude~~Whilst ~~Taro~~these ~~from~~license ~~receiving~~agreements ~~final~~are ~~FDA~~not ~~approval~~considered ofmaterial ~~a generic version of Finacea prior~~ to ~~June~~our ~~2021~~main business, ~~unless~~an aadverse ~~court~~result ~~enters~~may ~~judgment~~put ~~that~~at risk the development ~~patents~~and ~~are~~commercialization ~~invalid~~of orany ~~not~~of ~~infringed. These~~these ~~proceedings~~licensed ~~should proceed separately from those with Teva and Perrigo~~products.

Pursuant to our licensing agreement with LEO, this litigation is in the sole control of LEO and we are currently unable to predict its outcome. The substitution of Finacea in favor of generic versions has the potential to have a negative impact on future commercialization of Finacea and to result in a loss of license revenue. Furthermore, in any infringement proceeding, including the foregoing, a court may decide that a patent of ours, or one or more claims of such patent, is not valid or is unenforceable, or may refuse to stop the other party from using the supposedly infringing technology on the grounds that our patents, or one or more claims of such patents, do not cover such technology. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could also put one or more of our pending patent applications at risk of not issuing. There can be no assurance that our product candidates will not be subject to the same risks.37

We have also entered into license agreements with other commercial partners for the development and commercialization of products with active ingredients other than azelaic acid that license one or more of the patents listed in the FDA’s Orange Book for Finacea. Whilst these license agreements are not considered material to our main business, an adverse result may put at risk the development and commercialization of any of these licensed products.

An adverse determination of any litigation or other proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference, derivation review, or other proceedings brought at the USPTO may be necessary to determine the priority or patentability of inventions with respect to our patent applications or those of our licensors or licensees. Litigation or USPTO proceedings brought by us may fail or may be invoked against us by third parties. Even if we are successful, domestic or foreign, litigation or USPTO or foreign patent office or other proceedings, may result in substantial costs and distraction to our management. Moreover, proceedings may be appealed and obtaining a final resolution can take a long time and substantial resources. We may not be able, alone or with our licensors or licensees, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the U.S.

Furthermore, because of the substantial amount and extent of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or proceedings. In addition, during the course of this kind of litigation or proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or developments or public access to related documents. If investors perceive these results to be negative, the market price for our ordinary shares could be significantly harmed.

We may not obtain intellectual property rights or otherwise be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on product candidates in all or most countries throughout the world would be prohibitively expensive. We primarily file patent applications in the United States, and may file in some other selected jurisdictions on a case-by-case basis. As a result, our intellectual property rights in countries outside the United States. are generally significantly less extensive than those in the United States. In addition, the laws of some foreign countries and jurisdictions, particularly of certain developing countries and jurisdictions, do not protect intellectual property rights to the same extent as federal and state laws in the United States, and these countries and jurisdictions may limit the scope of what can be claimed, and in some cases may even force us to grant a compulsory license to competitors or other third parties. Consequently, we may not be able to prevent third parties from practicing our inventions outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not sought or obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but protection and enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Moreover, competitors or others may raise legal challenges to our intellectual property rights or may infringe upon our intellectual property rights, including through means that may be difficult to prevent or detect.

48Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to pharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims or issue proceedings against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Further, third parties may prevail in their claims against us, which could potentially result in the award of injunctions or substantial damages against us. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to pharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Further, third parties may prevail in their claims against us, which could potentially result in the award of injunctions or substantial damages against us. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

In addition, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in domestic and foreign intellectual property laws and practice.

Under applicable employment laws, we may not be able to enforce covenants not to compete.

We generally enter into non-competition agreements as part of our employment agreements with our employees. These agreements generally prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefitting from the expertise our former employees or consultants developed while working for us.

For example, Israeli labor courts place emphasis on freedom of employment and have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the protection of a company’s trade secrets or other intellectual property.

~~Risks Related to Our Ordinary Shares~~38

We do not know whether a market for our ordinary shares will be sustained and as a result it may be difficult for holders of our ordinary shares to sell their shares.

Although our ordinary shares are quoted on the Nasdaq Global Market, an active trading market for our shares may not be sustained. The lack of an active market may impair the ability of holders of our ordinary shares to sell their shares at the time they wish to sell them or at a price that they consider reasonable. The lack of an active market may also reduce the fair market value of our shares, and may cause the trading price of our ordinary shares to be more volatile. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies by using our shares as consideration.

The market price of our ordinary shares may be subject to fluctuation and holders of our ordinary shares could lose all or part of their investment.

The stock market in general and the market price of our ordinary shares in particular has been, and will likely continue to be, subject to fluctuation, whether due to, or irrespective of, our operating results and financial condition. For example, the price of our shares fell by more than 40% following the announcement of top-line results from our first two Phase III clinical trials for our lead product candidate FMX101 and then increased by more than 40% on September 11, 2018, following the announcement of successful results from our third Phase III clinical for FMX101. The market price of our ordinary shares on the Nasdaq Global Market may fluctuate as a result of a number of factors, some of which are beyond our control, including, but not limited to:

· actual or anticipated variations in our and our competitors’ results of operations and financial condition;

· market acceptance of our products;

· the mix of products that we sell and related services that we provide;

· the success or failure of our licensees to develop, obtain approval for and commercialize our licensed products, for which we are entitled to contingent payments and royalties;

· changes in earnings estimates or recommendations by securities analysts, if our ordinary shares are covered by analysts;

· development of technological innovations or new competitive products by others;

· announcements of technological innovations or new products by us;

· publication of the results of preclinical or clinical trials for FMX101, FMX103 or our other product candidates;

· failure by us to achieve a publicly announced milestone;

· delays between our expenditures to develop and market new or enhanced products and the generation of sales from those products;

· the filing of ANDAs by generic companies seeking approval to market generic versions of our products and of our licensee’s products;

· developments concerning intellectual property rights, including our involvement in litigation brought by or against us, including patent infringement proceedings before national and state courts, and patent opposition and review proceedings before national patent offices;

· regulatory developments and the decisions of regulatory authorities as to the approval or rejection of new or modified products;

· changes in the amounts that we raise in financings or collaboration transactions and spend to develop, acquire or license new products, technologies or businesses;

· changes in our expenditures to promote our products;

· our sale or proposed sale, or the sale by our significant shareholders, of our ordinary shares or other securities in the future;

· changes in key personnel;

· success or failure of our research and development projects or those of our competitors;

· the trading volume of our ordinary shares; and

· general economic and market conditions and other factors, including factors unrelated to our operating performance.

These factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses being incurred by our investors. In the past, following periods of market volatility, public company shareholders have often instituted securities class action litigation. If we were involved in securities litigation, it could impose a substantial cost upon us and divert the resources and attention of our management from our business.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares, the price of our ordinary shares could decline.

The trading market for our ordinary shares relies in part on the research and reports that equity research analysts publish about us and our business, if at all. We do not have control over these analysts and we do not have commitments from them to write research reports about us. The price of our ordinary shares could decline if no research reports are published about us or our business, or if one or more equity research analysts downgrades our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Future sales of our ordinary shares could reduce the market price of our ordinary shares.

If our shareholders, particularly our directors and their affiliates or our executive officers, sell a substantial number of our ordinary shares in the public market, the market price of our ordinary shares could decrease significantly. The perception in the public market that our shareholders might sell our ordinary shares could also depress the market price of our ordinary shares and could impair our future ability to obtain capital, especially through an offering of equity securities. In addition, the perception in the public market that we will need to issue new shares to raise capital and our sale of additional ordinary shares or similar securities in order to raise capital might have a similar negative impact on the share price of our ordinary shares. A decline in the price of our ordinary shares might impede our ability to raise capital through the issuance of additional ordinary shares or other equity securities, and may cause holders of our ordinary shares to lose part or all of their investment.

We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future.

We have never declared or paid cash dividends on our share capital, nor do we anticipate paying any cash dividends on our share capital in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be investors’ sole source of gain for the foreseeable future. In addition, Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli withholding taxes.

We are an “emerging growth company” and a “smaller reporting company” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our ordinary shares less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not “emerging growth companies.” Most of such requirements relate to disclosures that we would otherwise be required to make. For example, as an emerging growth company, we will not be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for up to five fiscal years after the date of our initial public offering.

We will remain an emerging growth company until the earliest of: (i) the last day of our fiscal year during which we have total annual gross revenues of at least $1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the closing of our initial public offering, specifically, December 31, 2019; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act.

We are also currently a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act. In the event that we are still considered a smaller reporting company when we cease being an emerging growth company, the disclosure we will be required to provide in our SEC filings will still be less than it would be if we were not considered either an emerging growth company or a smaller reporting company. For example, “smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings and have certain other decreased disclosure obligations in their SEC filings, including, among other things, being required to provide only two years of audited financial statements in annual reports.

When we are no longer deemed to be an emerging growth company or a smaller reporting company, we will not be entitled to the exemptions discussed above. Decreased disclosures in our SEC filings due to our status as an emerging growth company or a smaller reporting company may make it harder for investors to analyze our results of operations and financial prospects. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.

Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Generally, if, for any taxable year, 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be determined in part by the market value of our ordinary shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.

Based on certain estimates of our gross income and gross assets, our use of proceeds of our initial public offering, and the nature of our business, we believe that we were not classified as a PFIC for the taxable year ended December 31, 2018, and do not anticipate being classified as a PFIC for the taxable year ending December 31, 2019. Because we currently hold, and expect to continue to hold, a substantial amount of cash and cash equivalents and other passive assets used in our business, and because the value of our gross assets is likely to be determined in large part by reference to our market capitalization, a decline in the value of our ordinary shares may result in our becoming a PFIC. Accordingly, we may be considered a PFIC for any taxable year.

If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than as capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. Holders (as defined in the section titled “U.S. Federal Income Tax Considerations” in our most recent prospectus supplement filed pursuant to Rule 424(b)(2) on September 14, 2018 under our shelf registration statement on Form S-3 (registration statement no. 333-224084, declared effective April 12, 2018), and having interest charges apply to distributions by us and the proceeds of share sales. Certain elections exist that may alleviate some of the adverse consequences of PFIC status and would result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares; however, we do not intend to provide the information necessary for U.S. holders to make qualified electing fund elections if we are classified as a PFIC.

If a United States person is treated as owning at least 10% of our common shares, such holder may be subject to adverse U.S. federal income tax consequences.

If a U.S. Holder (as defined in the section titled “U.S. Federal Income Tax Considerations” in our most recent prospectus supplement filed pursuant to Rule 424(b)(2) on September 14, 2018 under our shelf registration statement on Form S-3 (registration statement no. 333-224084, declared effective April 12, 2018) is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our common shares, such U.S. Holder may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group. Because our group includes at least one U.S. subsidiary, if we were to form or acquire any non-U.S. subsidiaries in the future, they may be treated as controlled foreign corporations. A United States shareholder of a controlled foreign corporation may be required to annually report and include in its U.S. taxable income its pro rata share of “Subpart F income,” “global intangible low-taxed income” and investments in U.S. property by that controlled foreign corporation, regardless of whether that controlled foreign corporation, or we, make any distributions. An individual that is a United States shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a U.S. corporation. We cannot provide any assurances that we will assist investors in determining whether any non-U.S. subsidiaries that we may form or acquire in the future will be treated as controlled foreign corporations or whether any such investor would be treated as a United States shareholder with respect to any of such controlled foreign corporations. Further, we cannot provide any assurances that we will furnish to any investor information that may be necessary to comply with the reporting and tax paying obligations discussed above. Failure to comply with these reporting obligations may subject a U.S. Holder to significant monetary penalties and may extend the statute of limitations with respect to its U.S. federal income tax return for the year for which reporting was due. U.S. Holders should consult their tax advisors regarding the potential application of these rules to their investment in our common shares.

Future changes to tax laws could materially adversely affect our company and reduce net returns to our shareholders.

Our tax treatment is subject to the enactment of, or changes in, tax laws, regulations and treaties, or the interpretation thereof, tax policy initiatives and reforms under consideration and the practices of tax authorities in jurisdictions in which we operate. Such changes may include (but are not limited to) the taxation of operating income, investment income, dividends received or (in the specific context of withholding tax) dividends paid. We are unable to predict what tax reform may be proposed or enacted in the future or what effect such changes would have on our business, but such changes, to the extent they are brought into tax legislation, regulations, policies or practices, could affect our financial position and overall or effective tax rates in the future in countries where we have operations, reduce post-tax returns to our shareholders, and increase the complexity, burden and cost of tax compliance.

In addition, on December 22, 2017, U.S. federal tax legislation popularly known as the Tax Cuts and Jobs Act was signed into law, which significantly revised the Internal Revenue Code of 1986, as amended. The overall impact of the Tax Cuts and Jobs Act is uncertain and our business and financial condition could be adversely affected by it or as a result of interpretations thereof. It is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act. The impact of this tax reform on holders of our common shares is also uncertain and could be adverse.

Tax authorities may disagree with our positions and conclusions regarding certain tax positions, resulting in unanticipated costs, taxes or non-realization of expected benefits.

A tax authority may disagree with tax positions that we have taken, which could result in increased tax liabilities. For example, the U.S. Internal Revenue Service or another tax authority could challenge our allocation of income by tax jurisdiction and the amounts paid between our affiliated companies pursuant to our intercompany arrangements and transfer pricing policies. Similarly, a tax authority could assert that we are subject to tax in a jurisdiction where we believe we have not established a taxable connection, often referred to as a ‘‘permanent establishment’’ under international tax treaties, and such an assertion, if successful, could increase our expected tax liability in one or more jurisdictions. A tax authority may take the position that material income tax liabilities, interest and penalties are payable by us, in which case we expect that we might contest such assessment. Contesting such an assessment may be lengthy and costly and, if we were unsuccessful in disputing the assessment, the result could increase our anticipated effective tax rate.

Risks Related to Our Operations in Israel

Our headquarters, research and development and other significant operations are located in Israel and, therefore, our results may be adversely affected by political, economic and military instability in Israel.

Our headquarters and research and development facilities are located in Rehovot, Israel. In addition, some of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel, its neighboring countries and other organizations. Any hostilities involving Israel or the interruption or curtailment of trade or transport between Israel and its trading partners could adversely affect our operations and results of operations. Further, our operations could be disrupted by the obligations of personnel to perform military reserve service.

Provisions of Israeli law and our amended and restated articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, us, even when the terms of such a transaction are favorable to us and our shareholders.

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer unless, following consummation of the tender offer, the acquirer would hold at least 98% of the company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights.

Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.

It may be difficult to enforce a judgment of a U.S. court against us, our officers and directors in Israel or the U.S., to assert U.S. securities laws claims in Israel or to serve process on our officers and directors.

We are incorporated in Israel. A significant number of our executive officers and directors listed in this annual report reside outside of the U.S., and most of our assets and most of the assets of these persons are located outside of the U.S. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the U.S. and may not be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the U.S. or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law.

There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, holders of our ordinary shares may not be able to collect any damages awarded by either a U.S. or foreign court.

The rights and responsibilities of our shareholders are governed by Israeli law, which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.

The rights and responsibilities of the holders of our ordinary shares are governed by our amended articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S.-based companies. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a vote at a meeting of the shareholders or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company with regard to such vote or appointment. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. companies.

ITEM 1B - UNRESOLVED STAFF COMMENTS

None.

ITEM 2 - PROPERTIES

Our facilities in Israel, which house our ~~corporate headquarters and our~~ research and developments laboratories, are located in the Weizmann Science Park in Rehovot, Israel. We currently lease approximately 2,199 square meters under a lease that expires in December 31, 2020.

Our executive offices in the United States are located in Bridgewater, New Jersey. We currently lease approximately 1015,000 square feet of office space under a lease that expires inon ~~March~~August 31, ~~2019~~2022. We have an option to extend our existing lease for an additional three years on similar conditions. We are currently re-negotiating the lease with our landlord for an additional 5,000 square feet of office space in the same location. If we are not able to reach agreement, we will exercise our option to extend our existing lease prior to the expiration of our option on March 8, 2019.

We believe that our current office space and facilities in Israel and the United States are adequate to meet our current needs, and that suitable additional alternative spaces will be available in the future on commercially reasonable terms for our future growth.

ITEM 3 - LEGAL PROCEEDINGS

Litigation related to the Merger

On December 11, 2019, a purported Foamix shareholder filed a putative class action lawsuit in the United States District Court for the District of Delaware against Foamix, the members of the Foamix Board, Menlo and Merger Sub, claiming generally that the joint proxy statement/prospectus issued in connection with the Merger omitted material information in violation of Sections 14(a) and 20(a) of the Exchange Act. The action, captioned Sabatini v. Foamix Pharmaceuticals Ltd., et al., Case No. 1:19-cv-02257 (D. Del.), or the Sabatini Action, purports to be brought on behalf of all public shareholders of Foamix, excluding defendants and certain affiliated persons or entities, and seeks, among other things, to enjoin consummation of the Merger, or alternatively rescission or rescissory damages; to compel the individual defendants to disseminate a joint proxy statement/prospectus that does not contain any untrue statements of material fact and that states all material facts required in it or necessary to make the statements contained therein not misleading; a declaration that defendants violated Sections 14(a) and/or 20(a) of the Exchange Act; and an award of costs, including attorneys’ and experts’ fees and expenses.

On December 12 and 17, 2019, respectively, two purported Foamix shareholders filed lawsuits in the United States District Court for the District of New Jersey (the “New Jersey District Court”) and the United States District Court for the Southern District of New York (the “Southern District of New York District Court”) against Foamix and the members of the Foamix Board. The actions, captioned Wang v. Foamix Pharmaceuticals Ltd., et al., Case No. 19-21316 (D.N.J.), or the Wang Action, and Simms v. Foamix Pharmaceuticals Ltd., et al., Case No. 1:19-cv-11529 (S.D.N.Y.), or the Simms Action, each purport to be brought on behalf of the named plaintiff only and allege substantially similar claims and seek substantially similar relief as the Sabatini Action, as well as an accounting of damages allegedly suffered by the plaintiff.

On December 18, 2019, a purported Foamix shareholder filed a putative class action lawsuit in the New Jersey District Court against Foamix, the members of the Foamix Board, Menlo and Merger Sub, alleging generally claims for breach of fiduciary duty, aiding and abetting breaches of fiduciary duty, and violations of Sections 14(a) and 20(a) of the Exchange Act. The action, captioned Wilson v. Foamix Pharmaceuticals Ltd., et al., Case No. 3:19-cv-21563 (D.N.J.), or the Wilson Action, purports to be brought on behalf of all public shareholders of Foamix, excluding defendants and certain affiliated persons or entities, and alleges, among other things, that certain members of the Foamix Board and management are conflicted because they will receive unique benefits in connection with the Merger, that the Merger Agreement contains preclusive deal protection provisions, that the disclosures issued in connection with the Merger are false and misleading, and that the Merger consideration is inadequate. The Wilson Action seeks, among other things, to enjoin the Merger, or alternatively rescission or rescissory damages; a declaration that the Merger Agreement was entered into in breach of fiduciary duty and is therefore invalid and unenforceable; an order directing the individual defendants to commence a sale process for Foamix and obtain a transaction; an accounting of damages allegedly suffered by plaintiff and the putative class; and an award of costs, including attorneys’ and experts’ fees and expenses.

On December 20, 2019, a purported Foamix shareholder filed a lawsuit in the Southern District of New York District Court against Foamix and the members of the Foamix Board. The action, captioned Miller v. Foamix Pharmaceuticals Ltd., et al., Case No. 1:19-cv-1169 (S.D.N.Y.), or the Miller Action, purports to be brought on behalf of the named plaintiff only and alleges substantially similar claims and seeks substantially similar relief as the Sabatini, Wang, Simms and Wilson Actions.

On January 7, 2020, a purported shareholder of Foamix filed a lawsuit against Foamix and the members of the Foamix Board in the United States District Court for the District of New Jersey, alleging that the joint proxy statement/prospectus issued in connection with the Merger omitted material information in violation of Section 14(a) and Section 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The action, captioned Bushansky v. Foamix Pharmaceuticals Ltd., et al., Case No. 3:20-cv-00256 (D.N.J.), or the Bushansky Action, purports to be brought on behalf of the named plaintiff only and seeks, among other things, injunctive or other equitable relief, including to enjoin consummation of the Merger, or alternatively rescission or rescissory damages, a declaration that the defendants violated Sections 14(a) and/or 20(a) of the Exchange Act, and an award of costs, including attorneys’ and experts’ fees and expenses.

On January 21, 2020, a purported shareholder of Foamix filed an individual action against Foamix and the Foamix Board in the United States District Court for the District of New Jersey under the caption Nam v. Foamix Pharmaceuticals Ltd., et al., Case No. 3:20-cv-00670 (D.N.J.), (the “Nam Action” and together with the Sabatini, Wang, Simms, Wilson, Miller and Bushansky Actions, the “Lawsuits”) . The Nam Action generally claims that the joint proxy statement/prospectus issued in connection with the Merger omitted material information in violation of Sections 14(a) and 20(a) of the Exchange Act. The Nam Action seeks, among other things, injunctive relief to prevent consummation of the Merger, rescission or rescissory damages in the event the Merger is consummated, a declaration that defendants violated Sections 14(a) and/or 20(a) of the Exchange Act, costs, including attorneys’ fees and such other and further relief as the court may deem just and proper. In addition, the Nam Action requests an order directing the individual defendants to disseminate a proxy statement that does not contain any untrue statements of material fact and that states all material facts necessary to make the statements contained therein not misleading.

Foamix and the other defendants believe the Lawsuits are without merit and intend to defend vigorously against all claims asserted.

ITEM 4 - MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5 - MARKET FOR REGISTRANT’S ORDINARY SHARES, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

~~Market~~Our ~~Information~~ordinary shares were previously listed on Nasdaq under the symbol “FOMX” since September 17, 2014. On the Effective Date, each ordinary share was converted into 0.5924 of a share of Menlo common stock and one CSR. As of the Effective Date, we are a wholly-owned subsidiary of Menlo. Accordingly, our ordinary shares are no longer listed on the Nasdaq.

Our ordinary shares have been listed on the Nasdaq Global Market under the symbol “FOMX” since September 17, 2014. Prior to that date, there was no public trading market for our ordinary shares.

Holders

As of February 22, 2019, we had 15 holders of record of our ordinary shares. The actual number of holders of our ordinary shares is greater than this number of record holders, as this number does not include the number of persons whose shares are in nominee or in “street name” accounts through brokers.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

ITEM 6 - SELECTED FINANCIAL DATA

Our historical consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States and are presented in U.S. dollars. The selected historical consolidated financial information as of December 31, ~~2018~~2019 and ~~2017~~2018 and for the years ended December 31, ~~2018~~2019, ~~2017~~2018 and ~~2016~~2017 have been derived from, and should be read in conjunction with, our consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. The selected financial data as of December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015 and for the years ended December 31, ~~2015~~2016 and ~~2014~~2015 have been derived from our audited consolidated financial statements not included in this Annual Report.

The information presented below is qualified by the more detailed historical consolidated financial statements set forth in this annual report, and should be read in conjunction with those consolidated financial statements, the notes thereto and the discussion under “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report.

Consolidated Statement of Operations Data

Year ended December 31,

2018

2017

2016

2015

2014

2019

2018

2017

2016

2015

(in thousands of U.S. dollars, except loss per share)

Statements of operations data:

Revenues

~~3,595~~443

3,~~669~~595

53,~~527~~669

~~849~~5,527

~~5,414~~849

Cost of revenues(1)

13-

5913

7059

~~527~~70

Gross profit

~~3,595~~443

3,~~656~~595

53,~~468~~656

~~779~~5,468

~~4,887~~779

Operating expenses:

Research and development(1)

6451,~~474~~202

5764,~~779~~474

2557,~~897~~779

1025,~~680~~897

310,~~557~~680

Selling, general and administrative(1)

1445,~~013~~114

1114,~~491~~013

911,~~221~~491

79,~~029~~221

27,~~964~~029

Total operating expenses

7896,~~487~~316

6978,~~270~~487

3569,~~118~~270

1735,~~709~~118

617,~~521~~709

Operating loss

7495,~~892~~873

6574,~~614~~892

2965,~~650~~614

1629,~~930~~650

116,~~634~~930

Net loss

7495,~~163~~178

6574,~~715~~163

2965,~~336~~715

1629,~~517~~336

1116,~~484~~517

Loss per share basic and diluted

1.7066

1.7670

01.9176

0.5891

0.7958

_________________________________________________

⁽¹⁾ Includes share-based compensation expenses as follows:

	Year ended December 31,
	2018		2017		2016		2015		2014
	2019		2018		2017		2016		2015
	(in thousands of U.S. dollars)
Cost of revenues	$	-	$	2-	$	32	$	23	$	152
Research and development		21,~~054~~564		12,~~711~~054		1,~~135~~711		~~588~~1,135		80588
Selling, general and administrative		3,~~266~~331		23,~~453~~266		12,~~774~~453		1,~~187~~774		~~102~~1,187
Total share-based compensation	$	54,~~320~~895	$	45,~~166~~320	$	24,~~912~~166	$	12,~~777~~912	$	~~197~~1,777

Consolidated Balance Sheet Data

	As of December 31,
	2018		2017		2016		2015		2014
	2019		2018		2017		2016		2015
	(in thousands of U.S. dollars, other than number of shares)
Balance sheet data:	(in thousands of U.S. dollars, other than number of shares)
Balance sheet data:
Cash and investments(1)	$	73,366	$	99,385	$	76,412	$	130,988	$	103,779
Cash and investments(1)	$	99,385	$	76,412	$	130,988	$	103,779	$	49,966
Working capital(2)		47,088		90,699		59,276		111,730		53,091
Working capital(2)		90,699		59,276		111,730		53,091		48,757
Total assets		81,159		103,731		80,254		135,635		105,245
Total assets		103,731		80,254		135,635		105,245		51,277
Total long-term liabilities		34,258		1,081		1,425		379		385
Total long-term liabilities		1,081		1,425		379		385		381
Total shareholders’ equity		17,575		92,182		68,601		129,985		100,802
Total shareholders’ equity		92,182		68,601		129,985		100,802		48,762
Capital shares	$	2,659	$	2,331	$	1,576	$	1,561	$	1,284
Capital shares	$	2,331	$	1,576	$	1,561	$	1,284	$	954
Number of ordinary shares		61,580,544		54,351,140		37,498,128		37,167,791		30,639,134
Number of ordinary shares		54,351,140		37,498,128		37,167,791		30,639,134		22,443,934

_________________________________________________

(1) Cash and investments ~~includes~~include cash and cash-equivalents, restricted cash, bank deposits, marketable securities and restricted marketable securities.

⁽²⁾ Working capital is defined as total current assets minus total current liabilities.

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the section entitled “Item 1A-Risk Factors”.

We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this Annual Report because that disclosure was already included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 28, 2019. You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and result of operations for the year ended December 31, 2018 to the year ended December 31, 2017.

Company Overview

WeOn ~~announced~~November ~~positive~~10, ~~top-line~~2019, ~~results~~we ~~from~~entered ~~both~~into ofthe ~~our~~Merger ~~Phase~~Agreement ~~III~~with ~~clinical~~Menlo ~~trials~~and ~~for~~Merger ~~each~~Sub ofwhereby ~~FMX101~~Merger Sub agreed to merge with and ~~FMX103~~into inFoamix, with Foamix continuing as the surviving ~~second~~corporation ~~half~~and a wholly-owned subsidiary of ~~2018~~Menlo. WeMenlo, ~~submitted~~which ~~our~~completed ~~new~~its ~~drug~~initial ~~application,~~public oroffering ~~NDA,~~in toJanuary 2018 and is listed on the ~~U.S.~~Nasdaq ~~Food~~Global ~~and~~Select ~~Drug~~Market ~~Administration,~~under orthe ~~FDA~~symbol “MNLO”, ~~for~~is ~~FMX101~~a inlate-stage ~~December~~biopharmaceutical ~~2018,~~company focused on the development and ~~expect~~commercialization toof ~~submit~~serlopitant, an ~~NDA~~NK1 ~~for~~receptor ~~FMX103~~antagonist ingiven ~~mid~~as a once-~~2019.~~daily ~~Despite~~oral tablet for the ~~considerable~~treatment ~~U.S.~~of ~~market~~pruritus, ~~opportunities~~or ~~for~~itch, ~~acne~~associated with various conditions such as prurigo nodularis (“PN”) and psoriasis. Menlo’s ~~rosacea,~~clinical wedevelopment ~~believe~~program ~~these~~for ~~markets~~serlopitant ~~are~~includes ~~currently~~two ~~underserved~~ongoing ~~and~~Phase ~~commonly~~III ~~treated~~clinical bytrials ~~oral~~for ~~prescription~~the ~~products~~treatment ~~such~~of aspruritus ~~minocycline~~associated ~~and~~with ~~doxycycline~~PN and ~~various~~a ~~non~~Phase III-~~minocycline~~ready ~~topical~~clinical ~~therapies~~program for the treatment of pruritus associated with psoriasis. IfOn ~~approved~~March 9, we2020 ~~believe~~(the ~~FMX101~~“Effective ~~and~~Date”), ~~FMX103~~the ~~have~~Merger ~~the~~was ~~potential~~completed toand ~~provide~~Foamix is now a ~~first~~wholly-~~in-class,~~owned ~~effective~~subsidiary ~~and~~of ~~well-tolerated~~Menlo. ~~topical~~Foamix ~~treatment~~will ~~for~~cease ~~the~~to ~~tens~~be a reporting company as of ~~millions~~March 19, 2020 and all future filings of ~~people~~the ~~who~~combined ~~suffer~~company ~~from~~will be ~~their~~made ~~respective~~by ~~indications~~Menlo.

~~Our~~On ~~corporate~~the ~~strategy~~Effective isDate, toeach ~~develop~~ordinary ~~and~~share ~~solidify~~of Foamix was exchanged for 0.5924 shares of common stock of Menlo (the “Exchange Ratio”). In addition, on the Effective Date, Foamix shareholders received one contingent stock right (a ~~commercial~~“CSR”) ~~presence~~for ineach ~~acne~~Foamix ~~and~~ordinary ~~rosacea~~share held by ~~obtaining~~them. ~~FDA~~The ~~approval~~CSRs ~~for~~are governed by the Contingent Stock Rights Agreement (the “CSR Agreement”), ~~and~~dated ~~launching~~as ~~our~~of ~~lead~~March ~~product~~9, ~~candidates~~2020, ~~FMX101~~by and ~~FMX103,~~between inMenlo ~~the~~and American ~~United~~Stock ~~States.~~Transfer We& ~~may~~Trust ~~also~~Company, ~~enter~~LLC, ~~into~~and ~~partnerships~~represent ~~with~~the ~~third~~non-transferable ~~parties~~contractual right to ~~reach~~receive ~~other~~shares ~~geographic~~of ~~territories~~common orstock ~~therapeutic~~of ~~fields~~Menlo ~~through~~if ~~their~~specified ~~respective~~events ~~sales~~occur ~~forces~~within ~~and~~agreed ~~infrastructure~~time periods. ~~Following~~Pursuant ~~these~~to ~~near-term~~the ~~goals~~CSR Agreement, weeach ~~intend~~CSR tomay become ~~grow~~convertible ~~beyond~~upon ~~these~~the ~~indications~~occurrence ~~into~~of ~~other~~the ~~dermatological~~events ~~indications~~described below, and, toif ~~diversify~~so ~~our~~converted, ~~product~~will ~~and~~entitle ~~commercial~~its ~~development~~holder ~~beyond~~to ~~minocycline~~receive ~~and~~from ~~the~~Menlo ~~tetracycline~~additional ~~class~~shares of ~~antibiotics~~Menlo common stock. WeThe ~~are~~CSR ~~currently~~events ~~developing~~relate ~~additional~~to ~~foam~~Menlo’s ~~and~~Phase ~~other~~III ~~topical~~PN ~~products~~Trials. ~~for~~The ~~acne,~~CSRs ~~rosacea~~may become convertible and ~~other~~additional ~~dermatology~~shares ~~indications~~of inMenlo ~~vehicle~~common ~~platforms~~stock ~~designed~~may tobecome ~~enhance~~payable ~~delivery~~to ofthe ~~their~~rights ~~respective~~agent, ~~APIs.~~for Wesubsequent ~~are~~distribution ~~also~~to ~~evaluating~~the ~~diversifying~~holders ~~into~~of ~~synergistic~~the ~~technologies~~CSRs, ~~and~~upon ~~specialties~~the ~~either~~occurrence onof ~~our~~the ~~own~~following orevents: ~~through partnerships.~~

56• if, on or prior to May 31, 2020, the Efficacy Determination reports that proof of statistically significant superiority of serlopitant treatment over placebo treatment on the primary endpoint, as set out in the Merger Agreement (“Serlopitant Significance”), was achieved in one Phase III PN Trial but was not achieved (or has not been determined) in the other Phase III PN Trial, each CSR will be converted into 0.6815 shares of Menlo common stock pursuant to the terms and conditions of the CSR Agreement. Following such Efficacy Determination, the effective Exchange Ratio in the Merger will be 1.2739 shares of Menlo common stock for each Foamix ordinary share, increasing the former Foamix shareholders’ ownership of the outstanding share capital of the combined company to approximately 76% and correspondingly decreasing the pre-Merger Menlo stockholders’ ownership of the outstanding share capital of the combined company to approximately 24%, each calculated on a fully diluted basis (with such percentages calculated as if the CSR conversion to additional shares occurred on the Effective Date); and

~~FMX101~~• isif, aon ~~product~~or ~~candidate~~prior ~~containing~~to ~~micronized~~May ~~minocycline hydrochloride~~31, ~~an antibiotic in the tetracycline class~~2020, ~~in a 4% concentration for~~ the ~~treatment~~Efficacy ofDetermination ~~moderate-to-severe~~reports ~~acne~~that ~~vulgaris.~~Serlopitant ~~The~~Significance ~~API~~was isnot ~~suspended~~achieved in ~~our~~either ~~Molecule~~of ~~Stabilizing~~the ~~Technology~~Phase ~~foam~~III ~~vehicle,~~PN ~~an elegant~~Trials, ~~light-feeling~~or ~~topical~~if ~~foam~~the ~~that~~Efficacy isDetermination ~~easily~~has ~~spread~~not ~~across~~been ~~wide~~delivered ~~areas~~on ofor ~~the~~before ~~skin.~~May In31, ~~September 2018~~2020, weeach ~~announced~~CSR ~~our~~will ~~third~~be ~~Phase~~converted ~~III~~into ~~clinical~~1.2082 ~~trial~~shares of ~~FMX101~~Menlo ~~(Study~~common ~~FX2017-22)~~stock ~~met~~pursuant ~~both~~to ~~of its co-primary endpoints, demonstrating a statistically significant reduction in~~ the ~~number~~terms ~~of inflammatory lesions~~ and aconditions ~~statistically~~of ~~significant~~the ~~improvement~~CSR inAgreement. ~~patients’~~Following ~~Investigator’s~~such ~~Global~~Efficacy ~~Assessment~~Determination, orthe ~~IGA,~~effective ~~scores,~~Exchange aRatio ~~metric commonly used to measure efficacy~~ in ~~acne trials. These positive results followed~~ the ~~results~~Merger ~~from~~will ~~our~~be ~~initial~~1.8006 ~~two~~shares ~~Phase III clinical trials~~ of ~~FMX101~~Menlo ~~that~~common westock ~~announced~~for ineach ~~2017~~Foamix ~~wherein~~ordinary ~~both~~share, ~~co-primary~~increasing ~~endpoints~~the ~~were~~former ~~met~~Foamix inshareholders’ ~~one~~ownership ~~trial (Study FX2014-05) but only one~~ of the ~~two~~outstanding ~~co-primary~~share ~~endpoints~~capital ~~showed~~of ~~statistical significance in~~ the ~~other~~combined ~~trial~~company ~~(Study~~to ~~FX2014-04).~~approximately We82% ~~embarked~~and oncorrespondingly ~~our~~decreasing ~~third~~the ~~Phase III trial (Study FX2017~~pre-~~22)~~Merger ~~following~~Menlo astockholders’ ~~Type~~ownership Bof ~~meeting with~~ the ~~FDA~~outstanding inshare ~~which~~capital ~~the~~of ~~FDA confirmed that replicating~~ the ~~results~~combined ofcompany ~~our Study FX2014-05 trial would likely support an efficacy claim for FMX101. In addition~~ to ~~the~~approximately ~~positive~~18%, ~~Study~~each ~~FX2017-22~~calculated ~~efficacy~~on ~~results,~~a ~~very~~fully ~~few~~diluted ~~safety~~basis ~~adverse events~~ (~~and~~with nosuch ~~treatment-related~~percentages ~~serious~~calculated ~~adverse~~as ~~events)~~if ~~were~~the ~~observed~~CSR ~~both~~conversion into ~~Study~~additional ~~FX2017-22~~shares ~~and~~occurred inon the ~~40-week~~Effective ~~open label safety portion of Studies FX2014-04 and FX20410-05 that we concluded in January 2018~~Date).

FMX103 is a product candidate also containing micronized minocycline hydrochloride suspended in our Molecule Stabilizing Technology vehicle, at a lower 1.5% concentration, for the treatment of moderate-to-severe papulopustular rosacea. In November 2018, we announced that both of our Phase III clinical trials for FMX103 (Studies FX2016-11 and FX2016-12) met each of their co-primary endpoints, demonstrating a statistically significant reduction in inflammatory lesion counts and IGA treatment success of approximately 50% from baseline. There were no treatment-related serious adverse events, very few reported adverse events and positive user-experience reports overall in these Phase III clinical trials as well as in the 40-week open label safety extension (Study FX2016-13) that was recently completed in February 2019.42

WeIf ~~developed~~the ~~FMX101~~Efficacy ~~and~~Determination ~~FMX103~~reports ~~using~~that ~~our~~Serlopitant ~~proprietary~~Significance ~~Molecule~~was ~~Stabilizing~~demonstrated ~~Technology~~in ~~foam-based~~both ~~technology~~Phase ~~platform~~III ~~that~~PN ~~was~~Trials, ~~optimized~~the ~~for~~CSRs ~~delivery~~will ofautomatically ~~minocycline~~be ~~hydrochloride~~terminated, aand ~~characteristically~~their ~~unstable~~holders will ~~small~~not ~~molecule,~~be ~~through~~entitled ~~the~~to ~~skin.~~any Weadditional ~~are~~shares ~~currently~~of ~~developing~~Menlo ~~in-house~~common astock ~~pipeline~~pursuant ofto ~~other~~the ~~innovative~~CSR ~~products~~or tothe ~~enhance~~CSR ~~our~~Agreement. ~~minocycline~~The ~~platform,~~effective ~~including~~Exchange ~~FCD105,~~Ratio ain ~~product~~the ~~candidate~~Merger ~~for~~will ~~the~~remain ~~treatment~~0.5924 shares of ~~acne~~Menlo ~~vulgaris~~common ~~that~~stock ~~combines~~for ~~minocycline~~each ~~with~~Foamix aordinary ~~retinoid~~share and ~~which~~former Foamix weshareholders ~~anticipate~~will ~~evaluating~~maintain intheir aownership ~~Phase~~of IIapproximately ~~clinical~~59% ~~trial~~of ~~(Study~~the ~~FX2016-40)~~outstanding ~~beginning~~share incapital ~~mid-2019.~~of Wethe ~~are~~combined ~~also~~company, ~~currently~~with ~~reviewing~~the ~~potential~~Menlo ~~acquisitions~~stockholders ofowning ~~pipeline~~the ~~products~~remaining at41% ~~various~~of ~~stages~~the ofoutstanding ~~development~~share ~~that~~capital ~~could~~of bethe ~~incorporated~~combined ~~into~~company, ~~our~~each calculated ~~vehicle~~on ~~for~~a ~~optimized~~fully ~~delivery~~diluted basis.

In ~~addition~~October 2019, we ~~have~~announced ~~other~~that ~~proprietary~~the ~~delivery~~FDA ~~technologies~~accepted inour ~~development~~NDA ~~that~~and ~~enable~~set ~~topical~~a ~~delivery~~target ofPrescription ~~other~~Drug ~~APIs~~User Fee ACT, ~~each~~or ~~having~~PDUFA, ~~unique~~action ~~pharmacological~~date ~~features~~of ~~and~~June ~~characteristics~~2, ~~designed~~2020 tofor ~~keep~~our ~~the~~late-stage ~~API~~drug product ~~stable~~candidate, ~~when~~FMX103 ~~delivered~~(1.5% ~~and~~minocycline ~~directed~~foam), tofor the ~~target~~treatment ~~site.~~of Wemoderate-to-severe ~~are~~papulopustular ~~conducting~~rosacea ~~research~~in ~~and~~adults. ~~are~~In inNovember ~~the~~2018, ~~early~~we ~~stages~~announced that both of inour Phase III clinical trials for FMX103 (Studies FX2016-~~house~~11 ~~development~~and FX2016-12) met each of ~~FMX110~~their co-primary endpoints, demonstrating a ~~topical~~statistically ~~gel~~significant ~~formulation~~reduction ofin ~~doxycycline~~inflammatory ~~hyclate~~lesion ~~for~~counts ~~the~~and IGA treatment ofsuccess, ~~papulopustular~~as ~~rosacea~~assessed by Investigator’s Global Assessment, ~~and~~or ~~FMX109~~IGA, ascores ~~non-tetracycline~~of ~~acne~~approximately ~~product~~50% ~~candidate~~from ~~that~~baseline. There ~~contains~~were avery ~~combination~~few ofreported ~~nicotinamide~~adverse events and ano ~~retinoid~~treatment-related ~~for~~serious ~~the~~adverse ~~treatment~~events ofobserved ~~moderate~~in these Phase III clinical trials, as well as in the 40-~~to-severe~~week ~~acne~~open ~~vulgaris.~~label Wesafety ~~believe~~extension ~~our~~(Study ~~foam~~FX2016-13) ~~and~~that ~~other~~was ~~topical~~completed ~~delivery~~in ~~platforms~~February ~~may~~2019. We ~~offer~~cannot ~~significant~~provide ~~advantages~~any ~~over~~assurances ~~alternative~~or ~~delivery~~predict ~~options~~with ~~and~~any ~~are~~certainty ~~suitable~~the schedule for ~~multiple~~which ~~application~~we ~~sites~~will ~~across~~receive aapproval ~~wide~~for ~~range~~FMX103, ofif ~~conditions~~at all.

InBoth ~~addition~~AMZEEQ ~~to our in-house development projects, we have entered into development~~ and ~~license~~FMX103 ~~agreements~~were ~~relating~~developed tousing our ~~technology~~Molecule ~~with~~Stabilizing ~~various~~Technology pharmaceutical companies, most notably with LEO Pharma A/S, or LEO, who assumed a license agreement we initially entered into with Bayer HealthCare AG, or Bayer. In 2015, Bayer received FDA approval for Finacea® Foam (~~15% azelaic acid~~MST™), ~~or Finacea~~vehicle, a ~~prescription foam product for the treatment of rosacea, which utilizes an emulsion-based~~ proprietary foam platform ~~that~~designed ~~we licensed~~ to ~~them~~optimize ~~that is different from our surfactant-free foam platform that supports our lead product candidates. Bayer began selling Finacea in~~ the ~~United~~topical ~~States~~delivery ~~in the third quarter~~ of minocycline, ~~2015~~an ~~and~~active inpharmaceutical ~~September 2018~~ingredient, ~~LEO~~or ~~acquired Finacea from Bayer and assumed all rights and responsibilities under our initial license agreement with Bayer. Together with LEO~~API, wethat ~~are~~was ~~litigating~~commercially ~~against~~available ~~several~~only ~~generic~~in ~~pharmaceutical~~oral ~~companies~~form ~~for~~until ~~alleged infringement of certain of our patents following~~ the ~~generic companies~~FDA’s ~~submission of abbreviated new drug applications, or ANDAs, to the FDA seeking~~ approval ~~to manufacture and sell generic versions~~ of ~~Finacea~~AMZEEQ. ~~We are committed to defending our intellectual property rights globally, including patents we have licensed to other pharmaceutical companies as part of our collaboration efforts.~~

WeIn addition, we have ~~also~~proprietary ~~out-licensed~~delivery technologies in development that enable topical delivery of other ~~foam~~APIs, ~~technology~~each ~~platforms~~having unique pharmacological features and characteristics designed to ~~other~~keep ~~third~~the ~~parties~~API stable when delivered and directed to ~~develop~~the ~~branded~~target ~~pharmaceutical~~site. ~~products~~We ~~containing~~believe ~~different~~our ~~APIs~~MST ~~for~~vehicle ~~potential~~and ~~commercialization~~other ~~that~~topical delivery platforms may offer significant advantages over alternative delivery options and are insuitable ~~the~~for multiple ~~early~~application ~~stages~~sites across a range of ~~development~~conditions.

ToOur ~~date,~~corporate westrategy ~~have~~is ~~only~~to ~~submitted~~develop ~~one product candidate for approval by regulatory authorities~~ and wesolidify doa ~~not~~commercial ~~currently~~presence ~~have rights, other than those under our license agreement with LEO Pharma A/S, or LEO, to any products that have been approved for marketing~~ in ~~any~~acne ~~territory. We have financed our operations primarily through private~~ and ~~public~~rosacea ~~placements~~by ofcommercializing our ~~ordinary~~drug ~~shares,~~product ~~convertible~~AMZEEQ ~~loans~~ and ~~through~~by ~~fees,~~obtaining ~~cost~~FDA ~~reimbursements~~approval ~~and~~for ~~royalties received from~~ our late-stage ~~licensees.~~drug Weproduct ~~have~~candidate ~~incurred~~FMX103, ~~significant losses since our inception~~ in ~~2003. Our accumulated deficit at December 31, 2018 was $215.4 million and our net loss for~~ the ~~year~~United ~~ended December 31, 2018 was $74~~States.2 We ~~million.~~are Aalso ~~substantial~~seeking ~~amount~~to ofenhance our ~~net~~longer-term ~~losses~~commercial ~~resulted~~potential ~~from~~by ~~costs~~identifying ~~incurred in connection with our research~~ and ~~development~~advancing ~~programs~~additional ~~and~~product ~~clinical~~candidates ~~trials~~through ~~and from general and administrative costs associated with~~ our ~~operations.~~internal ~~The~~development ~~net losses and negative operating cash flows incurred to date~~efforts, ~~together~~our ~~with~~entry ~~expected~~into potential ~~future~~research ~~losses,~~collaborations ~~have~~or ~~had,~~in-licensing ~~and likely will continue to have~~arrangements, anor ~~adverse effect on~~ our ~~shareholders’~~acquisition ~~equity and working capital. The amount~~ of ~~future~~additional ~~net~~products ~~losses~~or ~~will~~technologies ~~depend,~~or inproduct ~~part,~~candidates onthat ~~the~~complement ~~rate of future growth of~~ our ~~expenses~~current ~~and~~product ~~our ability to generate offsetting revenue, if any~~portfolio. ~~We expect to continue to incur significant expenses and operating losses for the foreseeable future.~~

57We are currently developing a pipeline of other innovative product candidates to enhance our minocycline platform, including FCD105, a topical combination foam for the treatment of moderate-to-severe acne vulgaris, comprising minocycline 3% and adapalene 0.3%. In September 2019, we announced that the first patient was enrolled in our Phase II clinical trial (Study FX2016-40) to evaluate the efficacy and safety of FCD105. In November 2019, we announced that enrollment had been completed for this clinical trial, and we expect topline data from this Phase II clinical trial in the second quarter of 2020. Pending a successful development program, we intend to file an NDA for FCD105 under the FDA 505(b)(2) regulatory pathway, which is the same regulatory pathway we have pursued for AMZEEQ and are pursuing for FMX103.

WeTo dodate, ~~not~~only ~~expect~~one toof ~~generate~~our ~~revenue~~products, ~~from~~AMZEEQ, ~~product~~has ~~sales~~been ~~unless~~approved ~~and~~by ~~until~~the FDA, and we ~~obtain~~have ~~marketing~~only ~~approval~~submitted ~~from~~one ~~the~~additional ~~FDA~~product candidate, FMX103, for ~~one~~approval orby ~~more~~regulatory authorities. ofWe ~~our~~do ~~lead~~not ~~product~~currently ~~candidates~~have rights, ~~FMX101~~other orthan ~~FMX103.~~for ~~Accordingly~~AMZEEQ, weand ~~anticipate~~those ~~that~~under weour ~~will~~license ~~need~~agreement with LEO to ~~raise~~any ~~additional~~products ~~capital~~that have been approved for marketing in ~~order~~any toterritory. ~~complete~~We ~~the~~have ~~development~~financed our operations primarily through private and ~~commercialization~~public placements of ~~FMX101~~our ordinary shares, debt, warrants and ~~FMX103~~through fees, cost reimbursements and toroyalties ~~advance~~received ~~the~~from ~~development~~our oflicensees. We have incurred significant losses since our ~~other~~inception ~~product~~in ~~candidates~~2003. ~~Until~~Our weaccumulated ~~can~~deficit ~~generate~~at aDecember ~~sufficient~~31, 2019 ~~amount~~was of$310.6 ~~product~~million ~~revenue~~and toour ~~finance~~net ~~our~~loss ~~cash~~for ~~requirements~~the year ended December 31, we2019 ~~expect~~was to$95.2 ~~finance~~million. A substantial amount of our ~~future~~net ~~cash~~losses ~~needs~~resulted ~~primarily~~from ~~through~~costs aincurred ~~combination~~in ofconnection ~~public~~with ~~and~~our ~~private~~research ~~equity~~and ~~offerings,~~development ~~debt~~programs orand ~~other~~clinical ~~structured~~trials ~~financings,~~and from general and ~~entry~~administrative ~~into~~costs ~~strategic~~associated ~~collaborations~~with our operations. WeThe ~~may~~net belosses ~~unable~~and negative operating cash flows incurred to ~~raise~~date, ~~capital~~together ~~when~~with ~~needed~~expected orfuture onlosses, ~~attractive~~have ~~terms~~had, ~~which~~and ~~would~~likely ~~force~~will uscontinue to ~~delay~~have, ~~limit,~~an ~~reduce~~adverse oreffect ~~terminate~~on our shareholders’ ~~development~~equity ~~programs~~and orworking ~~commercialization efforts~~capital. WeThe amount of future net losses will ~~need~~depend, toin ~~generate~~part, ~~significant~~on ~~revenue~~the torate ~~achieve~~of future growth of our expenses and ~~sustain~~our ~~profitability~~ability to generate offsetting revenue, ~~and~~if weany. ~~may~~We ~~never~~expect beto ~~able~~continue to doincur sosignificant expenses and operating losses for the foreseeable future.

Until we can generate a sufficient amount of product revenue to finance our cash requirements, we expect to finance our future cash needs primarily through a combination of public and private equity offerings, debt or other structured financings, and entry into strategic collaborations. We may be unable to raise capital when needed or on attractive terms, which would force us to delay, limit, reduce or terminate our development programs or commercialization efforts. We will need to generate significant revenue to achieve and sustain profitability, and we may never be able to do so.

Revenues

ToAs ~~date~~of December 31, 2019, we have not generated any revenues from sales of ~~FMX101~~AMZEEQ, FMX103 or any of our other product candidates. During 2019 we were engaged in pre-launch sales and marketing planning activities and other pre-commercialization efforts in order to support the commercialization of AMZEEQ in the United States. We doreceived ~~not~~FDA approval for AMZEEQ on October 18, 2019 and launched AMZEEQ in the United States on January 13, 2020. As a result, we expect to commence generating revenues from sales of AMZEEQ in the first half of 2020. We will not commercially launch ~~FMX101~~FMX103 or other product candidates in the U.S. or generate any revenues from sales of any of our product candidates ~~before~~unless ~~the~~and ~~end of 2019,~~ until ~~after~~we ~~obtaining~~obtain ~~approvals for the~~ marketing ~~of FMX101 in the United States~~approval. Our ability to generate revenues from sales will depend on the successful commercialization of ~~FMX101~~AMZEEQ, and, if approved, FMX103 and ~~our~~any other product candidates.

As of December 31, ~~2018~~2019, we generated cumulative revenues of approximately $3132.72 million under development and license agreements, of which approximately $18.4 million were development service payments, approximately $3.1 million were contingent payments and $10.27 million were royalty payments. The royalties were paid in relation to Finacea, the prescription foam product that we developed in collaboration with Bayer, which later assigned it to LEO. Our total revenues for the ~~years~~year ended December 31, 2018, ~~2017~~was ~~and 2016 were~~ $3.6 million. Our total revenues for the year ended December 31, ~~$3.7~~2019 ~~million~~fell ~~and~~to $50.54 million due to the ongoing suspension of the manufacturing of Finacea by LEO, ~~respectively~~following inadequate supply of quality-compliant batches of the API used in such product, as described above in “Item 1 – Business ⸻Development and License Agreements.” We may become entitled to additional contingent payments, subject to achievement of the applicable clinical results by our other licensees. In light of the current phase of development under these agreements, we do not expect to receive significant payments in the near term, if at all. We are also entitled to additional royalties from net sales or net profits generated by other products to be developed under these agreements, if they are successfully commercialized. In those development and license agreements in which royalties are based on net sales, their rate ranges from 3% to 8.5%, and in the agreement in which royalties are based on net profits, their rate is 6%.

In the year ended December 31, 2018, we were entitled to receive royalty payments in an aggregate amount of $3.5 million.

Cost of Revenues

~~Our total cost of revenues for the years ended December 31, 2017 and 2016 were $13 thousand and $59 thousand, respectively.~~ There was no ~~similar~~ cost of revenues for the ~~year~~years ended December 31, 2019 and 2018, as revenues in ~~2018~~both years consisted almost entirely of royalties, which do not bear related cost of revenue.

We ~~do not~~ expect ~~substantial~~to ~~changes~~incur in cost of revenue ~~unless~~as ~~and until~~ we ~~obtain regulatory approval for our lead product candidates and~~ begin the serial production of ~~such~~AMZEEQ ~~products,~~and ~~whether internally or through third party manufacturers, at which point~~ we expect our cost of revenues to grow along with the growth of our sales and inventory needs.

Operating Expenses

Research and development expenses

Research and development activities are, and will continue to be, central to our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect to incur significant research and development costs in the foreseeable future, assuming our pipeline products progress into clinical trials. However, we do not believe that it is possible at this time to accurately project total program-specific expenses to reach commercialization for our product pipeline. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will affect our clinical development programs and plans.

58Our research and development expenses relate primarily to the development of AMZEEQ, FMX103 and FCD105. From January 1, 2007 until December 31, 2019, we cumulatively spent approximately $220.5 million on research and development of AMZEEQ, FMX103, FCD105 and our other product candidates. Our total research and development expenses for the years ended December 31, 2019 and 2018 were approximately $51.2 million and $64.5 million, respectively. We charge all research and development expenses to operations as they are incurred.

Our research and development expenses relate primarily to the development of FMX101 and FMX103. From January 1, 2007 until December 31, 2018, we cumulatively spent approximately $169.4 million on research and development of FMX101, FMX103 and our other product candidates. Our total research and development expenses for the years ended December 31, 2018, 2017 and 2016 were approximately $64.5 million, $57.8 million and $25.9 million, respectively. We charge all research and development expenses to operations as they are incurred. We expect research and development expenses to decrease in the near term due to the completion of the Phase III trials for FMX101 and FMX103.

The successful development of our product candidates, excluding FMX101 and FMX103, is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of our technology for additional indications. This uncertainty is due to numerous risks and variables associated with developing products, including the uncertainty of:

· the scope, rate of progress and expense of our research and development activities;

· preclinical results;

· clinical trial results;

· the terms and timing of regulatory approvals; and

· our ability to file, prosecute, obtain, maintain, defend and enforce patents and other intellectual property rights and the expense of filing, prosecuting, obtaining, maintaining, defending and enforcing patents and other intellectual property rights;

A change in the outcome of any of these variables with respect to the development our product candidates could result in a significant change in the costs and timing associated with their development. For example, if the FDA or foreign regulatory authority were to require us to conduct preclinical studies and clinical trials beyond those which we currently anticipate for the completion of clinical development of our product candidates, or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional time and financial resources on the completion of the clinical development.

Research and development expenses consist primarily of:

·• employee-related expenses, including salaries, benefits and related expenses, including share based compensation expenses;

·• expenses incurred under agreements with third parties, including subcontractors, suppliers and consultants that conduct regulatory activities, clinical trials and preclinical studies;

~~· expenses incurred to acquire, develop and manufacture clinical trial materials;~~44

·• ~~facilities, depreciation and other~~ expenses, ~~which~~incurred ~~include~~to ~~direct and allocated expenses for rent and maintenance of facilities~~acquire, ~~insurance,~~develop and ~~other~~manufacture ~~operating~~clinical ~~costs;~~trial ~~and~~materials;

·• facilities, depreciation and other ~~costs~~expenses, ~~associated~~which ~~with~~include ~~preclinical~~direct and ~~clinical~~allocated ~~activities~~expenses for rent and ~~regulatory~~maintenance ~~operations.~~of facilities, insurance, and other operating costs; and

We• ~~have managed to finance our research and development operations and expenses without the aid of government grants,~~ other ~~than~~costs aassociated ~~loan~~with inpreclinical ~~the amount of approximately $450,000 received from the Israel-U.S. Bi-national Industrial Research~~ and ~~Development~~clinical ~~Foundation,~~activities ~~or BIRD, in 2008, which was fully repaid in 2016. Accordingly, we are not subject to the provisions of the Law for Encouragement of Research~~ and ~~Development~~regulatory ~~in the Industry, 5744-1984, nor to any directives issued by the Israel Innovation Authority, previously known as the Office of the Chief Scientist of the Ministry of Economy~~operations.

The successful development of our product candidates, other than FMX103, is highly uncertain. While we have filed an NDA for FMX103, we cannot provide any assurances that we will receive approval from the FDA. As such, at this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of our technology for additional indications. This uncertainty is due to numerous risks and variables associated with developing products, including the uncertainty of:

•

the scope, rate of progress and expense of our research and development activities;

•

preclinical results;

•

clinical trial results;

•

the terms and timing of regulatory approvals; and

•

our ability to file, prosecute, obtain, maintain, defend and enforce patents and other intellectual property rights and the expense of filing, prosecuting, obtaining, maintaining, defending and enforcing patents and other intellectual property rights;

A change in the outcome of any of these variables with respect to the development of our product candidates could result in a significant change in the costs and timing associated with their development. For example, if the FDA was to require us to conduct preclinical studies and clinical trials beyond those which we currently anticipate for the completion of clinical development of our product candidates, or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional time and financial resources on the completion of the clinical development.

We have managed to finance our research and development operations and expenses without the aid of government grants, other than a loan in the amount of approximately $0.5 million received from the Israel-U.S. Bi-national Industrial Research and Development Foundation, or BIRD, in 2008, which was fully repaid in 2016. Accordingly, we are not subject to the provisions of the Law for Encouragement of Research and Development in the Industry, 5744-1984, nor to any directives issued by the Israel Innovation Authority, previously known as the Office of the Chief Scientist of the Ministry of Economy.

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;

·• costs associated with market research and business development activities in preparation for future marketing and sales, including activities intended to select the most promising product candidates for further development and commercialization;

·• legal and professional fees for auditors and other consulting expenses not related to research and development activities or to market research or business development activities;

59• cost of office space, communication and office expenses;

~~· cost of office spaces, communication and office expenses;~~45

·• information technology expenses;

·• depreciation of tangible fixed assets related to our general and administrative activities or to our market research and business development activities; and

·• costs associated with filing, prosecuting, obtaining, maintaining, and ~~maintaining~~defending patents and other intellectual property.

AsWe ~~part~~expect ofthat our ~~growth~~selling ~~strategy,~~general weand ~~have~~administrative ~~begun~~expenses ~~building~~will upincrease ~~our~~due ~~dedicated~~the ~~U.S.~~commercialization ~~marketing~~of ~~and~~AMZEEQ ~~business development team~~ and ~~infrastructure~~, ~~and~~if ~~we intend to further increase such U.S. infrastructure~~approved, ~~as well as expand our marketing effort to new markets~~FMX103. ~~We therefore expect selling and marketing expenses to increase in absolute terms as a percentage of our revenues.~~ Our total selling, general and administrative expenses for the years ended December 31, ~~2018,~~2019 ~~2017~~ and ~~2016~~2018 were approximately $1445.01 million, ~~$11.5 million~~ and $914.20 million, respectively.

Our ability to successfully commercialize ~~FMX101~~AMZEEQ and ~~FMX103 successfully~~, if approved, FMX103, is highly uncertain and depends on a number of factors, including market adoption of our product or product candidates by physicians and patients, market access uncertainty, our ability to scale to the market opportunity and the existence of existing and future products that may compete with ours. As such, at this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary for successful commercialization of ~~our~~AMZEEQ ~~product candidates~~or, if approved, FMX103.

Financial Income, net

Financial income, net, consists primarily of gains from interest earned from our bank deposits and financial income on our marketable securities offset by interest expenses on our long-term debt.

Taxes on Income

~~The standard corporate tax rate in Israel during the year 2018 is 23%, which represents a 1% decrease compared to the tax rate during 2017.~~ Effective January 1, 2018 the U.S. Tax cuts and Jobs Act (Tax Act) reduced the U.S Federal tax by 14% from 35% in 2017 to 21% in 2018, which remained the effective tax rate in 2019.

We have yet to generate taxable income in Israel, as we have historically incurred operating losses resulting in carry forward tax losses totaling approximately $~~146~~224.74 million as of December 31, ~~2018~~2019. ~~During~~As ~~2018~~of December 31, 2019 we incurred aof net carry forward tax ~~loss~~losses in the amount of $27.3 million in our U.S. subsidiary, Foamix Pharmaceuticals Inc.. As of ~~$0.4~~December ~~million.~~31, We2019 ~~anticipate~~we anticipated that we will be able to carry forward these tax losses to future tax years. Accordingly, we do not expect to pay taxes in the applicable jurisdiction until we have taxable income after the full utilization of our carry forward tax losses in that jurisdiction. We provided a full valuation allowance with respect to the deferred tax assets related to these carry forward losses.

During ~~2018,~~2019 ~~2017 and 2016,~~ we incurred tax ~~expenses~~benefits of $0.2 million. ~~$1.2~~and ~~million~~during ~~and~~2018 we incurred tax expenses of $ $0.42 million, ~~respectively,~~ related to our U.S. subsidiary~~, Foamix Pharmaceuticals Inc~~.

Comparison of the Year Ended December 31, ~~2018~~2019 to the Year Ended December 31, ~~2017~~2018

Revenues

Our total revenues, consisting primarily of royalties, decreased by $743.2 ~~thousand~~million, or 289%, from $3.76 million in the year ended December 31, ~~2017~~2018 to $30.64 million in the year ended December 31, ~~2018.~~2019, due ~~The~~to ~~revenues~~the ~~for~~ongoing suspension of the ~~year~~manufacturing ~~ended~~of ~~December~~Finacea 31by LEO, ~~2018~~following ~~consist~~inadequate supply of ~~royalty~~quality-compliant ~~payments~~batches inof the ~~amount~~API ofused ~~$3.5~~in ~~million~~such ~~and~~product, ~~$62~~as ~~thousand~~described ~~from~~above ~~contingent~~in ~~payments~~“Item 1 – Business ⸻Development and License Agreements.”

Cost of revenues

~~Our~~There ~~total cost of revenues for the year ended December 31, 2017~~ was ~~$13 thousand and there was~~ no cost of revenues for the ~~year~~years ended December 31, 2018 and 2019, as revenues in ~~2018~~both years consisted almost entirely of royalties, which ~~bear~~do nonot bear related cost of revenue.

Research and development expenses

Our research and development expenses for the year ended December 31, ~~2018~~2019 were $6451.52 million, representing ana ~~increase~~decrease of $613.73 million, or ~~11.6~~21%, compared to $5764.85 million for the year ended December 31, ~~2017~~2018. The ~~increase~~decrease in research and development expenses resulted primarily from andecrease ~~increase~~ of $521.4 million in ~~costs~~clinical ~~relating~~trial ~~predominantly~~expenses due to ~~FMX101~~the completion of AMZEEQ and FMX103 clinical trials;, offset by an increase of $03.62 million in ~~consultant~~consulting expenses, ~~and~~ an increase of $02.48 million in payroll and payroll -related expenses ~~mostly~~ due to an increase in headcount, ~~bonuses~~and salaries and ~~share~~an ~~based~~increase ~~compensation~~of ~~expenses~~$2.6 million in payments related to the submission of our NDA for FMX103.

Selling, general and administrative expenses

Our general and administrative expenses for the year ended December 31, ~~2018~~2019 were $1445.01 million, representing an increase of $231.51 million, or ~~21.7~~222%, compared to $1114.50 million for the year ended December 31, ~~2017~~2018. The increase in selling, general and administrative expenses resulted primarily from an increase of $118.10 million in ~~consultant~~connection ~~expenses~~with ~~mostly~~the ~~relating to~~ pre-commercialization activities, ~~and~~ an increase of $05.74 million in payroll and ~~other~~ payroll-related expenses ~~mostly~~ due to an increase in headcount as we built-out our sales and marketing organization in preparation of the AMZEEQ launch, ~~bonuses~~a $3.1 million increase in costs relating to the Merger and ~~share~~a ~~based~~$2.0 ~~compensation~~million increase in other advisor and consulting expenses.

Operating loss

As a result of the foregoing, our operating loss for the year ended December 31, ~~2018~~2019, was $7495.9 million, compared to an operating loss of $6574.69 million for the year ended December 31, ~~2017~~2018, an increase of $921.30 million, or ~~14.2~~28%.

~~Finance~~Financial income, net

In the years ended December 31, ~~2018~~2019 and ~~2017~~2018, our financial income included mostly gains from marketable securities and interest earned on our bank deposits. In the year ended December 31, 2019, such income was offset by interest expenses on our long-term debt.

The ~~finance~~financial ~~expenses (~~income), net, by cash and non-cash components are as follows:

	Year ended December 31,
	2018			2017
	2019			2018
	(in thousands of U.S. dollars)
Interest on bank deposits	$	~~(297~~589	)	$	~~(532~~297	)
Gain from marketable securities, net		~~(688~~1,083	)		~~(602~~688	)
Total income		~~(985~~1,672	)		~~(1,134~~985	)
Less:
Other expenses		17			14
Interest and finance expenses on long-term debt		(921	)		-
Foreign exchange loss, net		27			57
Other expenses		(19	)		(17	)
Total expenses		44			71
Foreign exchange loss, net		(213	)		(27	)
Finance income, net	$	(941	)	$	(1,063	)
Total expenses		(1,153	)		(44	)
Financial income, net	$	519		$	941

Taxes on income

During ~~2018~~2019 and ~~2017~~2018, we did not generate taxable income in Israel and ~~during 2018 we did not generate taxable income~~ in our U.S. subsidiary, Foamix Pharmaceuticals Inc. ~~However~~For the year ended December 31, 2019 we incurred tax benefits ~~expenses~~ relating to our U.S. subsidiary, in the amount of $0.2 million ~~and~~relating ~~$1.2~~to ~~million~~an ~~for~~uncertain tax position. For the ~~years~~year ended December 31, 2018 ~~and 2017~~, ~~respectively.~~we ~~The~~incurred ~~decrease in~~ tax expenses ~~resulted~~of ~~primarily~~$0.2 ~~from a provision for uncertain tax positions recorded in 2017~~million.

Net Loss

Our net loss for the year ended December 31, ~~2018~~2019 was $7495.2 million, compared to $6574.72 million for the year ended December 31, ~~2017~~2018, an increase of $821.50 million, or ~~12.9~~28%.

Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016

Revenues

Our total revenues decreased by $1.8 million, or 32.7%, from $5.5 million in the year ended December 31, 2016 to $3.7 million in the year ended December 31, 2017. The decrease is mainly due to a decrease of $2.5 million in contingent payments from Bayer, that were payable for 2016 due to Bayer’s achievement of certain sale targets during that year, offset by an increase in royalty payments in the amount of $0.6 million from Bayer for sales of Finacea.

Cost of revenues

Our total cost of revenues for the years ended December 31, 2017 and 2016 was $13 thousand and $59 thousand, respectively. The $46 thousand decrease in cost of revenues resulted primarily from a decrease in the number of our development projects. Cost of revenues as a percentage of revenues for the years ended December 31, 2017 and 2016 was 0.4% and 1.1%, respectively. The decrease in the cost of revenues as a percentage of revenues was primarily due to a decrease in the number of new development projects and an increase in royalty payments, which bear no cost of revenue.

Research and development expenses

Our research and development expenses for the year ended December 31, 2017 were $57.8 million, representing an increase of $31.9 million, or 123%, compared to $25.9 million for the year ended December 31, 2016. The increase in research and development expenses resulted primarily from an increase of $28.0 million in costs relating to the FMX101 and FMX103 clinical trials and an increase of $3.0 million in payroll and payroll related expenses primarily due to an increase in headcount.

Selling, general and administrative expenses

Our general and administrative expenses for the year ended December 31, 2017 were $11.5 million, representing an increase of $2.3 million, or 25%, compared to $9.2 million for the year ended December 31, 2016. The increase in selling, general and administrative expenses resulted primarily from an increase of $1.9 million in payroll and other payroll-related expenses mainly due to an increase in headcount and salary raises.

Operating loss

As a result of the foregoing, our operating loss for the year ended December 31, 2017, was $65.6 million, compared to an operating loss of $29.6 million for the year ended December 31, 2016, an increase of $36.0 million, or 122%.

Finance income

In the years ended December 31, 2017 and 2016, our financial income included mostly gains from marketable securities and interest earned on our bank deposits. In the year ended December 31, 2016, those gains were partially offset by expenses on the loan from the BIRD foundation fully repaid during the second quarter of 2016.

The finance expenses (income) by cash and non-cash components are as follows:

	Year ended December 31,
	2017			2016
	(in thousands of U.S. dollars)
Interest on bank deposits	$	(532	)	$	(536	)
Gain from marketable securities, net		(602	)		(401	)
Non-cash foreign exchange profit, net		-			(24	)
Total income		(1,134	)		(961	)
Less:
Other expenses		14			17
Finance expenses on BIRD loan		-			243
Non-cash foreign exchange loss, net		57			-
Total expenses		71			260
Finance income, net	$	(1,063	)	$	(701	)

Taxes on income

During 2016 and 2017, we did not generate taxable income in Israel. However, we incurred tax expenses in our U.S. subsidiary, Foamix Pharmaceuticals, Inc., in the amount of $1.2 million and $0.4 million for the years ended December 31, 2017 and 2016, respectively.

Net Loss

As a result of the foregoing, our net loss for the year ended December 31, 2017 was $65.7 million, compared to $29.3 million for the year ended December 31, 2016, an increase of $36.4 million, or 124%.

Liquidity

Since our inception, we have incurred losses from operations and negative cash flows from our operations. For the year ended December 31, ~~2018~~2019, we incurred a net loss of $7495.2 million, which included $6873.74 million used for operating activities. For the year ended December 31, ~~2017~~2018, we incurred a net loss of $6574.72 million, which included $5368.27 million used for operating activities.

62As of December 31, 2019 and 2018, we had a working capital surplus of $47.1 million and $90.7 million, respectively, and an accumulated deficit of $310.6 million and $215.4 million, respectively.

AsOur principal source of liquidity as of December 31, ~~2018~~2019 ~~and~~consisted ~~2017,~~of wecash ~~had~~and ainvestments ~~working~~(including ~~capital~~restricted ~~surplus~~cash ofand ~~$90.7~~marketable ~~million~~securities) ~~and~~of $5973.34 million, ~~respectively,~~ and borrowings anunder ~~accumulated~~our ~~deficit~~Credit Agreement of $~~215~~35.40 million ~~and $141~~.~~3 million, respectively.~~

~~Our~~On ~~principal~~July ~~source~~29, of2019, ~~liquidity~~we asentered ofinto ~~December~~a 31Credit Agreement with Foamix Pharmaceuticals Inc., ~~2018~~or ~~consisted~~the ofBorrower, ~~cash~~lenders from time to time party thereto, the subsidiary guarantors from time to time party thereto, or the Subsidiary Guarantors, Perceptive Credit Holdings II, LP, or Perceptive, as administrative agent, and ~~investments~~OrbiMed Royalty & Credit Opportunities III, LP, or OrbiMed, that provides us with a senior secured delayed draw term loan facility in an aggregate principal amount of up to $9950.40 million, or the Term Loan, for general corporate purposes.

On April 13, 2018, we entered into a Securities Purchase Agreement with OrbiMed Partners Master Fund Limited, or OrbiMed, pursuant to which we agreed to issue and sell, in a registered offering, an aggregate of 2,940,000 ordinary shares at a purchase price equivalent to $5.50 per share, for aggregate net proceeds of approximately $16.1 million, after deducting offering expenses. The closing of the issuance and sale of these securities took place on April 16, 2018, pursuant to our effective shelf registration statement on Form S-3.47

On In ~~September~~connection ~~18,~~with 2018, we completed an additional follow-on offering under our effective shelf registration statement in which we sold 11,670,000 ordinary shares for $6.00 per share, raising net proceeds, after expenses and underwriter commissions, of approximately $65.6 million. Upon closing of the ~~offering~~Merger, the ~~underwriters~~Credit ~~exercised~~Agreement ~~the~~will ~~option~~be ~~granted~~amended toon ~~them~~or inaround the ~~underwriting~~effective ~~agreement~~Date ~~and~~in ~~purchased~~order ~~1,750,500~~to ~~additional~~add ~~ordinary~~Menlo ~~shares~~as ata ~~the per share price of the offering~~guarantor. The proceeds from the exercise of the option, net of expenses and underwriter commissions, were approximately $9.8 million, bringing the total net proceeds from the offering to approximately $75.4 million.

We• ~~anticipate~~The ~~that~~Term ~~with~~Loan ~~our~~is ~~existing~~comprised ~~cash~~of ~~and~~three ~~investments~~tranches: we(a) ~~will~~$15.0 bemillion, ~~able~~which towas ~~fund~~available ~~our planned operating expenses~~ and ~~capital~~drawn ~~expenditure~~by ~~requirements~~the ~~through~~Borrower ~~mid-2020.~~on ~~These~~July ~~planned~~29, ~~expenses~~2019, ~~include:~~the ~~(a)~~date ~~any~~of ~~pre-commercialization~~closing ~~and~~of ~~launch~~the ~~preparations~~Credit ~~for FMX101~~Agreement, ~~assuming we receive regulatory approval,~~ (b) ~~full~~$20.0 ~~development~~million, ~~and~~which ~~filing~~was ofavailable anuntil ~~NDA~~February ~~for FMX103~~29, ~~which~~2020 weand ~~expect~~drawn toby ~~submit~~the inBorrower ~~mid-2019~~on ~~and~~December ~~(c)~~17, ~~certain~~2019, ~~pipeline~~following ~~development~~the ~~activities.~~FDA’s Weapproval ~~expect~~of weAMZEEQ, ~~will~~the ~~need~~listing ~~additional~~of ~~funding~~AMZEEQ toin ~~support~~the ~~our~~FDA’s ~~operating~~“Orange ~~expenses~~Book,” and ~~capital~~our ~~requirements~~entrance ~~for~~into ~~2020~~the Contract Manufacturing and ~~beyond,~~Supply ~~including~~Agreement with ~~regard~~ASM tofor the ~~commercialization~~manufacture ofand ~~any~~supply of ~~our product candidates if regulatory approval is granted~~AMZEEQ, and to(c) ~~fund~~up ~~our~~to ~~internal~~$15.0 ~~and~~million, ~~external~~which ~~research~~will ~~and~~become ~~development~~available ~~efforts.~~to Wethe ~~have~~Borrower ~~based~~subject ~~this~~to ~~estimate~~our onachievement, ~~assumptions~~prior ~~that may prove~~ to beSeptember ~~wrong~~30, ~~and~~2020, weof ~~could~~certain ~~use~~revenue ~~our~~targets ~~capital~~set ~~resources~~forth ~~sooner~~in ~~than~~the weCredit ~~currently expect~~Agreement.

•

The lenders are entitled to a fee in an amount equal to 1.0% of any principal amount actually drawn by the Borrower, upon such drawdown. Additionally, the outstanding principal amount accrues interest on a monthly basis (and is payable monthly in arrears) at an annual rate equal to the sum of 8.25% plus the greater of (i) the one-month $US LIBOR as of the second business day of each calendar month, and (ii) 2.75%. Upon the occurrence and during the continuance of any event of default, as defined in the Credit Agreement, the base interest of 8.25% shall automatically increase to 12.25% per annum.

•

There will be no scheduled repayments of principal prior to July 29, 2023, the fourth anniversary of the closing date. Thereafter, the Borrower shall make monthly payments in an amount equal to 1.5% of the aggregate principal amount of the loans outstanding on such fourth anniversary date, and repay the entire remaining outstanding balance of the Term Loan on July 29, 2024, the final maturity date, subject to any acceleration as provided in the Credit Agreement, including upon an event of default. Also, a mandatory prepayment may be triggered by certain casualty losses or sales of the assets serving as collateral, as defined in the Credit Agreement.

•

The Borrower has the right to optionally prepay all or any part of the outstanding principal amount of the Term Loan at any time, subject to payment of any accrued but unpaid interest on the principal being prepaid plus an additional prepayment premium equal to (i) 10.0% of any principal amount prepaid prior to the first anniversary of the closing date, (ii) 8.0% of any principal amount prepaid after the first anniversary and prior to the second anniversary of the closing date, (iii) 4.0% of any principal amount prepaid after the second anniversary and prior to the third anniversary of the closing date, and (iv) 2.0% of any principal amount prepaid after the third anniversary and prior to the fourth anniversary of the closing date.

•

As additional consideration for the Term Loan, we issued to Perceptive and OrbiMed, upon closing of the Credit Agreement, a warrant to purchase a total of 1,100,000 of our ordinary shares at an exercise price of $2.09 per share – equal to the trailing five-day volume weighted average price of our ordinary shares on the trading day immediately prior to the closing date – and expiring on July 29, 2026.

In connection with our entry into the Credit Agreement described above, on July 29, 2019, we further entered into a Securities Purchase Agreement, or the Purchase Agreement, with Perceptive Life Sciences Master Fund Ltd., or Perceptive Life Sciences, an affiliate of Perceptive, pursuant to which we issued and sold to Perceptive Life Sciences, in a registered offering, an aggregate of 6,542,057 of our ordinary shares at a purchase price of $2.14 per share, representing the closing price of our ordinary shares on the last trading day prior to signing of the Purchase Agreement, for aggregate gross proceeds of approximately $14.0 million, before deducting offering expenses.

On August 19, 2019, we entered into a Controlled Equity Offering Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, as sales agent. Under the terms of the Sales Agreement, we may offer, issue and sell through Cantor, from time to time, ordinary shares having an aggregate offering price of up to $30.0 million. Under the Sales Agreement, Cantor may sell our ordinary shares by any method permitted by law and deemed to be an “at-the-market offering,” as defined in Rule 415(a)(4) promulgated under the Securities Act, including sales made directly on the Nasdaq, in each case pursuant to our effective registration statement on Form S-3 (File No. 333-224084) and the related base prospectus included in such registration statement, as supplemented by the prospectus supplement dated August 19, 2019. We have not made any sales under the Sales Agreement and on March 9, 2020, with the completion of the Merger, the Sales Agreement has been terminated.

We anticipate that with our existing cash and investments, along with Menlo’s Cash and investment, funds that we may be entitled to receive upon reaching certain milestones under the Credit Agreement and our 2020 estimated income from AMZEEQ and FMX103, we will be able to fund our planned operating expenses and capital expenditure requirements into the second quarter of 2021. Prior to issuing this report, we revised our operating plan in order to reduce expenses and, until we are able to obtain further funding, we will only focus on (a) commercialization of AMZEEQ, (b) pre-commercialization and launch preparations for FMX103, assuming we receive regulatory approval, and (c) other general corporate expenses. We expect we will need additional funding to support our operating expenses and capital requirements during the second quarter of 2021 and beyond, including with regard to certain pipeline development activities, the commercialization of any of our product candidates if they are granted regulatory approval, and to fund our internal and external research and development efforts. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.

Capital Resources

Overview

To date, we have financed our operations primarily through private and public placements of our ordinary shares, ~~convertible~~debt, ~~loans~~warrants and through fees, cost reimbursements and royalties received from our licensees.

From inception through December 31, ~~2018~~2019, we have received net cash proceeds of approximately $~~280~~328.1 million from the issuance of ordinary shares, preferred shares, debt, exercise of options and warrants and from convertible loans.

Cash flows

The following table summarizes our statement of cash flows for the years ended December 31, ~~2018~~2019, ~~2017~~2018 and ~~2016~~2017:

	Year Ended December 31,
	2018			2017			2016
	2019			2018			2017
Net cash (used in) / provided by:	(in thousands)
Operating activities	$	(6873,~~664~~394	)	$	(5368,~~177~~664	)	$	(2753,~~370~~177	)
Investing activities		~~(11~~41,~~755~~869	)		37(11,755	)		~~(15~~37,~~018~~755	)
Financing activities	$	9247,~~374~~950		$	~~140~~92,374		$	~~55,031~~140

Net cash used in operating activities

The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and measurements and changes in components of working capital. Adjustments to net income for non-cash items consists mainly of share-based compensation.

Net cash used in operating activities was $6873.74 million in the year ended December 31, ~~2018~~2019, compared to $5368.27 million in the year ended December 31, ~~2017~~2018. ~~and~~The ~~compared~~increase toof $~~27.~~4 .7 million ofin the net cash used in operating activities in ~~the~~2019 ~~year~~compared ~~ended~~to ~~December~~2018 ~~31, 2016. The increase~~ was attributable primarily to the increase in company activity, mostly related pre-commercialization efforts in order to support the commercialization of AMZEEQ and applying for FDA approval for FMX103, offset by a reduction in activities relating to clinical trials following the completion of the Phase III clinical trials of AMZEEQ and ~~payroll~~FMX103 ~~expenses~~in the course of 2018.

Net cash used in investing activities

Net cash ~~used~~provided inby investing activities was primarily related to proceeds from the sale and maturity of marketable securities, offset by investment in bank deposits and marketable securities. Net cash ~~used~~provided inby investing activities was $1141.89 million in the year ended December 31, ~~2018~~2019, compared to ~~net~~$11.8 ~~cash~~million ~~provided~~used byin in ~~investing~~the ~~activities~~year ended December 31, 2018. The change of $3753.87 million in the year ended December 31, ~~2017~~2019 ~~and~~ compared to ~~$15.0 million cash used in~~ the year ended December 31, ~~2016~~2018 was attributable primarily to increase proceeds from sale and maturity of marketable securities and bank deposits.

Net cash provided by financing activities

Net cash provided by financing activities was $9247.49 million in the year ended December 31, ~~2018~~2019, ancompared ~~increase~~to of $92.34 million ~~from~~in the year ended December 31, 2018. The decrease of $044.15 ~~million~~in net cash provided by financing activities in the year ended December 31, ~~2017.~~2019 ~~The~~compared ~~increase~~to the year ended December 31, 2018 was attributable primarily to ~~(i)~~ the ~~proceeds~~reduction ~~from~~in the ~~issuance~~scope of ~~shares~~our toshare ~~OrbiMed~~offerings ~~based~~in on2019, ~~the~~after ~~aforementioned~~conducting ~~securities~~two offerings ~~purchase~~in ~~agreement,~~2018 in anwhich we received aggregate net ~~amount~~proceeds of approximately $16.1 million ~~after~~from ~~deducting~~issuance ~~offering~~of ~~expenses,~~shares ~~(ii)~~to anOrbiMed ~~$0.8~~and ~~million increase in proceeds from the exercise~~ of ~~warrants,~~approximately ~~and~~$75.4 ~~(iii)~~million ~~the proceeds~~ from ~~the~~ issuance of shares in the follow-on offering which closed on September 18, 2018, our financing in 2019, included the first two tranches of ~~approximately~~the ~~$75.4~~Term ~~million~~Loan ~~after~~withdrawn ~~deducting~~under ~~offering~~the ~~expenses~~Credit Agreement and ~~underwriters’~~the ~~commissions~~proceeds from the share offering to Perceptive Life Sciences under the Purchase Agreement.

Net cash provided by financing activities was $0.1 million in the year ended December 31, 2017, a decrease of $54.9 million from $55.0 million in the year ended December 31, 2016. The decrease was attributable primarily to the capital raised in our 2016 public offering.

Cash and funding sources

The table below summarizes our main sources of financing for the years ended December 31, ~~2018~~2019, ~~2017~~2018 and ~~2016~~2017:

	Proceeds from our underwritten public offerings(1)		Proceeds from our direct public offerings		Proceeds from loans and issuance of ~~ordinary~~warrant ~~shares~~(1)		~~Payments~~Proceeds from ~~licensees~~issuance of ordinary shares		~~Total~~Payments from licensees		Total
	(in thousands of U.S. dollars)
2018	$	75,356	$	16,131	$	887	$	3,457	$	95,831
2019	$	-	$	13,714	$	33,903	$	333	$	1,374	$	49,324
2017	$	-	$	-	$	161	$	5,978	$	6,139
2018	$	75,356	$	16,131	$	-	$	887	$	3,457	$	95,831
2016	$	54,132	$	-	$	1,407	$	2,575	$	58,114
2017	$	-	$	-	$	-	$	161	$	5,978	$	6,139

__________________________

⁽¹⁾ Net of issuance costs.

Our sources of financing in the year ended December 31, 2019 totaled $49.6 million and consisted primarily of $33.9 million of net proceeds from the first two tranches of the Term Loan, $13.7 million of net proceeds from the registered offering under the Purchase Agreement and $1.4 million of payments from licensees.

Our sources of financing in the year ended December 31, 2018 totaled $95.8 million and consisted primarily of $75.4 million of net proceeds from our underwritten follow-on offering which closed in September 2018 and $16.1 million of net proceeds from our registered direct offering to OrbiMed.

~~Our~~Other ~~sources~~than ofour ~~financing~~commitments inunder the ~~year~~Credit ~~ended~~Agreement, ~~December~~we ~~31,~~currently ~~2017~~have ~~totaled~~no ~~$6.1~~ongoing ~~million~~material ~~and~~financial ~~consisted~~commitments, ~~primarily~~such as lines of ~~payments~~credit, ~~from~~that ~~licensees~~may affect our liquidity over the next five years.

~~We currently have no ongoing material financial commitments, such as lines of credit, that may affect our liquidity over the next five years.~~Contractual Obligations

Our significant non-cancelable contractual obligations as of December 31, 2019 are summarized in the following table:

	Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years		Other
	(in thousands of U.S. dollars)
Operating lease obligations⁽¹⁾	$	1,849	$	1,164	$	685	$	-	$	-	$	-
Credit Agreement⁽²⁾		52,503		3,914		14,787		33,802		-		-
Liability for employee severance benefits⁽³⁾		433		-		-		-		-		433
Purchase Obligation ⁽⁴⁾		4,799		4,799		-		-		-		-
Total	$	59,584	$	9,877	$	15,472	$	33,802	$	-	$	433

^{_________________________________________}

⁽¹⁾ Operating lease obligations consist of lease of our facilities and lease of vehicles.

⁽²⁾On July 29, 2019 we secured up to $50 million in debt which matures on July 29, 2024 and bears interest of 8.25% plus the greater of the one-month LIBOR and 2.75%. Refer to Note 10 to our consolidated financial statements included elsewhere in this report for further information.

⁽³⁾ The liability is considered long term, however we cannot estimate the exact period in which they will be paid.

⁽⁴⁾Purchase obligations primarily include non-cancelable commitments under our contract manufacturing agreements.

Funding requirements

We anticipate that with our existing cash and investments, along with Menlo’s Cash and investment, funds that we may be entitled to receive upon reaching certain milestones under the Credit Agreement and our 2020 estimated income from AMZEEQ and FMX103, we will be able to fund our planned operating expenses and capital expenditure requirements ~~through~~into ~~mid-2020.~~the ~~These~~second ~~planned~~quarter ~~expenses~~of ~~and~~2021. ~~expenditures~~Prior ~~include:~~to ~~(a)~~issuing ~~full~~this ~~development~~report, ~~and~~we ~~filing~~revised ofour anoperating plan ~~NDA~~in ~~for~~order ~~FMX103~~to reduce expenses and, ~~which~~until we ~~expect~~are able to ~~submit~~obtain infurther ~~mid-2019~~funding, we will only focus on (ba) ~~certain~~commercialization ~~pipeline~~of ~~development activities~~AMZEEQ, ~~and~~ (cb) ~~any~~ pre-commercialization and launch preparations for ~~FMX101~~FMX103, inassuming ~~anticipation~~we ofreceive regulatory approval, and (c) other general corporate expenses. We expect we will need additional funding to support our operating expenses and capital requirements ~~for~~during ~~2020~~the second quarter of 2021 and beyond, including with regard to certain pipeline development activities, the commercialization of any of our product candidates if they are granted regulatory approval, and to fund our internal and external research and development efforts. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our present and future funding requirements will depend on many factors, including, inter alia:

·We ~~the~~have ~~progress,~~based ~~timing~~this ~~and~~estimate ~~completion~~on ofassumptions ~~preclinical~~that ~~testing~~may prove to be wrong, and ~~clinical~~we ~~trials~~could ~~for~~use our capital resources sooner than we currently expect. Our present and future ~~pipeline~~funding requirements ~~product~~will ~~candidates;~~depend on many factors, including, inter alia:

·• selling, marketing and patent-related activities undertaken in connection with the ~~anticipated~~ commercialization of ~~FMX101~~AMZEEQ, and, if approved, FMX103 and any other product candidates, ~~and~~as well as costs involved in the development of an effective sales and marketing organization;

·• the ~~time and costs involved in obtaining regulatory approval for FMX101~~progress, ~~FMX103~~timing and ~~our~~completion ~~other~~of ~~pipeline~~preclinical ~~products~~testing and ~~any~~clinical ~~delays~~trials wefor ~~may~~future ~~encounter~~pipeline asproduct ~~a result of evolving regulatory requirements or adverse results with respect to any of these products~~candidates;

64• the time and costs involved in obtaining regulatory approval for FMX103 and our other pipeline products and any delays we may encounter as a result of evolving regulatory requirements or adverse results with respect to any of these products;

~~· the number of potential new products we identify and decide to develop;~~50

·• the ~~costs~~efforts ~~involved~~necessary 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~~institute topost-approval ~~obtain~~regulatory ~~rights~~compliance torequirements ~~third~~for ~~party intellectual property rights~~AMZEEQ; ~~and~~

·• the ~~amount~~number of ~~revenues,~~potential ifnew ~~any,~~products we ~~may~~identify ~~derive either directly or in the form of royalty payments from future sales of FMX101, FMX103~~ and ~~any~~decide ~~other~~to ~~pipeline product that is commercialized.~~develop;

~~Furthermore,~~• ~~our operating plan may change as a result of many factors currently unknown to us. We have never before launched a product commercially, and~~ the costs involved in ~~such~~filing ~~commercial~~and ~~launch~~prosecuting ~~may~~patent ~~exceed~~applications, ~~our~~defending ~~expectations.~~third Weparty ~~may~~observations ~~therefore~~and ~~need~~pre-grant tooppositions ~~seek~~and ~~additional~~obtaining, ~~capital~~maintaining ~~sooner~~and ~~than~~enforcing ~~planned,~~patents ~~through~~or ~~public~~defending oragainst ~~private~~review, ~~equity~~claims or ~~debt~~infringements ~~financings~~raised orby ~~other~~third ~~sources~~parties, ~~such~~and aslicense ~~strategic~~royalties ~~collaborations~~ or ~~additional~~other ~~license~~amounts ~~arrangements.~~we ~~Such financings~~ may ~~result~~be inrequired ~~dilution~~ to ~~shareholders,~~pay ~~imposition~~to ofobtain ~~debt~~rights ~~covenants~~to ~~and~~third ~~repayment~~party ~~obligations~~intellectual orproperty ~~other~~rights; ~~restrictions that may affect our business.~~and

~~Our~~• ~~capital~~the ~~expenditures~~amount ~~for~~of ~~2018~~revenues, ~~2017~~if ~~and~~any, ~~2016~~we ~~amounted~~may toderive ~~$0.6~~either ~~million,~~directly ~~$1.5~~or ~~million~~in ~~and~~the ~~$0.4~~form ~~million,~~of ~~respectively.~~royalty ~~During~~payments ~~2018,~~from ~~these~~future ~~expenditures~~sales ~~were~~of ~~primarily~~our ~~related~~drug toproduct ~~laboratory equipment~~AMZEEQ, ~~computers~~our product candidate FMX103 and ~~leasehold~~any ~~improvements~~other pipeline product that is commercialized.

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 have never before launched a product commercially, and the costs involved in such commercial launch may exceed our expectations. 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 shareholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business.

Our capital expenditures for 2019 and 2018 amounted to $1.1 million and $0.6 million, respectively. During 2019, these expenditures were primarily related to laboratory equipment, computers and leasehold improvements.

For more information as to the risks associated with our future funding needs, see “Item 1A - Risk Factors—Risks Related to Our Business and Industry—We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts” included herein.

Off-Balance Sheet Arrangements

As of December 31, ~~2018~~2019, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Significant Judgments and Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

While our significant accounting policies are more fully described in Note 2, “~~Summary of~~ 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 ~~policy~~policies isare 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. ~~The~~These ~~policy~~policies relates to the more significant areas involving management’s judgments and estimates and requires our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of the matters that are inherently uncertain.

Clinical trial accruals

Clinical trial costs are charged to research and development expense as incurred. We accrue for expenses resulting from obligations under contracts with CROs. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided. Our objective is to reflect the appropriate trial expense in the consolidated financial statements by matching the appropriate expenses with the period in which services and efforts are expended. In the event advance payments are made to a CRO, the payments will be recorded as other assets, which will be recognized as expenses as services are rendered. The CRO contracts generally include pass-through fees including, but not limited to, regulatory expenses, investigator fees, travel costs and other miscellaneous costs. We estimate our clinical accruals based on reports from and discussion with clinical personnel and the CRO as to the progress or state of completion of the trials. We estimate accrued expenses as of each balance sheet date in the consolidated financial statements based on the facts and circumstances known at that time. Our clinical trial accrual is dependent, in part, upon the receipt of timely and accurate reporting from the CROs.

Recently Issued Accounting Pronouncements

Certain recently issued accounting pronouncements are discussed in Note 2, “~~Summary of~~ Significant Accounting Policies,” to the consolidated financial statements included in “Financial Statements and Supplementary Data” of this Annual Report.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~Market~~As ~~risk~~a is“smaller ~~the~~reporting ~~risk of loss related to changes in market prices~~company,” ~~including~~as ~~interest~~defined ~~rates,~~by ~~foreign~~Item ~~exchange~~10 ~~rates and prices~~ of ~~financial~~Regulation ~~instruments~~S-K, ~~that may adversely impact our financial position, results of operations or cash flows. As of December 31, 2018~~ we ~~did~~are not ~~have~~required ~~any financial instruments sensitive~~ to ~~market~~provide ~~risk.~~quantitative ~~We,~~or ~~therefore,~~qualitative ~~have~~disclosures ~~little~~about ~~exposure to~~ market ~~risks in the ordinary course of our operations, and such risks are primarily related to changes in foreign currency exchange rates and in interest rates~~risk.

Foreign Currency Exchange Risk

The U.S. dollar is our functional and reporting currency. Although a substantial portion of our expenses (mainly salaries and related costs) are denominated in NIS, accounting for 13%, 11% and 21% of our expenses in the years ended December 31, 2018, 2017 and 2016, respectively, almost all our revenues were generated under agreements denominated in U.S. dollars and our proceeds from our public offerings, which are the main source of our financing, are denominated in U.S. dollars. Furthermore, while we anticipate that a portion of our expenses, principally salaries and related personnel expenses in Israel, will continue to be denominated in NIS, we expect to incur an increasing amount of expenses in U.S. dollars as we expand our operations in the U.S. We also have expenses, although to a much lesser extent, in other non-dollar currencies, in particular the Swiss Franc. Moreover, for the next few years we expect that the substantial majority of our revenues, if any, will be denominated in U.S. dollars from the sale of FMX101, if approved, and potentially other product candidates in the U.S. Having the substantial majority of our revenues denominated in U.S. dollars while having a substantial portion of our expenses denominated in NIS and other non-U.S. currencies exposes us to risk associated with exchange rate fluctuations vis-à-vis the U.S. dollar. See “Risk Factors-Risks Related to Our Business and Industry-Exchange rate fluctuations between the U.S. dollar and the New Israeli Shekel may negatively affect our earnings.”

A devaluation of the NIS in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of our expenses or payables that are payable in NIS, unless those expenses or payables are linked to the U.S. dollar. Conversely, any appreciation of the NIS in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of our unlinked NIS expenses, which would have a negative impact on our profit margins. In 2018, the value of the NIS depreciated in relation to the U.S. dollar by 8.1%, the effect of which was partially offset by inflation in Israel at the rate of approximately 0.8%. In 2017, the value of the NIS appreciated in relation to the U.S. dollar by approximately 11.6%, the effect of which was amplified by inflation in Israel at the rate of approximately 0.4%.

Because exchange rates between the U.S. dollar and the NIS (as well as between the U.S. dollar and other currencies) fluctuate continuously, such fluctuations have an impact on our results and period-to-period comparisons of our results. The effects of foreign currency re-measurements are reported in our statements of operations.

The following table presents information about the changes in the exchange rates of the NIS against the U.S. dollar:

	NIS against the U.S. dollar
2017		11.6	%
2018		(8.1	)%

We will continue to monitor our exposure to currency fluctuations. Since February 2015, we have engaged in currency hedging activities in order to reduce our exposure to currency fluctuations. Instruments that are used to hedge future risks may include foreign currency forward contract, swap contracts and options. These instruments may be used to selectively manage risks, but we may not be fully protected against material foreign currency fluctuations.

Inflation-Related Risks

We do not believe that the rate of inflation in Israel has had a material impact on our business financial condition or results of operations during the years ended December 31, 2018 and 2017. However, our costs in Israel will increase if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind inflation in Israel.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements

FOAMIX PHARMACEUTICALS LTD.

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, ~~2018~~2019

6752

FOAMIX PHARMACEUTICALS LTD.

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, ~~2018~~2019

INDEX

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-34
Consolidated Statements of Operations	F-56
Consolidated Statements of Comprehensive Loss	F-67
Statements of Changes in Shareholders’ Equity	F-78
Consolidated Statements of Cash Flows	F-89
Notes to Consolidated Financial Statements	F-1011

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the board of directors of

FOAMIX PHARMACEUTICALS LTD.

~~Opinion~~Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Foamix Pharmaceuticals Ltd. and its ~~Subsidiary~~subsidiary (the "“Company"”) as of December 31, ~~2018~~2019 and ~~2017~~2018, and the related consolidated statements of operations, comprehensive loss, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, ~~2018~~2019, including the related notes (collectively referred to as the “consolidated financial statements”). InWe ~~our~~also ~~opinion,~~have audited the ~~consolidated~~Company's ~~financial~~internal ~~statements~~control ~~present~~over ~~fairly, in all material respects, the~~ financial ~~position~~reporting ~~of the Company~~ as of December 31, ~~2018 and 2017~~2019, ~~and~~based ~~the~~on ~~results~~criteria ofestablished ~~its~~in ~~operations~~Internal ~~and~~Control ~~its~~- ~~cash~~Integrated ~~flows~~Framework ~~for~~(2013) issued ~~each~~by of the ~~three~~Committee ~~years~~of inSponsoring ~~the~~Organizations ~~period~~of ~~ended December 31, 2018 in conformity with accounting principles generally accepted in~~ the ~~United~~Treadway ~~States~~Commission ~~of America~~(COSO).

~~Basis~~In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for ~~Opinion~~each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

~~These~~Change ~~consolidated~~in financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.Principle

WeAs ~~conducted~~discussed ~~our audits of these consolidated financial statements~~ in ~~accordance~~Note ~~with~~2(y) ~~the standards of the PCAOB. Those standards require that we plan and perform the audit~~ to ~~obtain reasonable assurance about whether~~ the consolidated financial statements ~~are free of material misstatement~~, ~~whether~~the ~~due to error or fraud. The~~ Company ischanged ~~not~~the ~~required~~manner toin ~~have,~~which ~~nor~~it ~~were~~accounts ~~we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not~~ for ~~the~~leases ~~purpose~~in ~~of expressing an opinion on the effectiveness of the Company's internal control over financial reporting~~2019. ~~Accordingly, we express no such opinion.~~

~~Our~~Basis audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for ~~our opinion.~~Opinions

Tel-Aviv, Israel	/s/ Kesselman & Kesselman
February 28, 2019	Certified Public Accountants (Isr.)
	A member firm of PricewaterhouseCoopers International Limited

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We ~~have~~conducted ~~served~~our asaudits in accordance with the ~~Company's~~standards ~~auditor~~of ~~since~~the ~~2006~~PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

~~Kesselman~~Our &audits ~~Kesselman~~of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, ~~Trade~~whether ~~Tower~~due to error or fraud, 25and ~~Hamered~~performing ~~Street~~procedures that respond to those risks. Such procedures included examining, ~~Tel-Aviv~~on ~~6812508~~a test basis, ~~Israel~~evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 6812508, Israel, P.O Box 50005 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il

F - 2

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Tel-Aviv, Israel	/s/ Kesselman & Kesselman
March 12, 2020	Certified Public Accountants (Isr.)
	A member firm of PricewaterhouseCoopers International Limited

We have served as the Company's auditor since 2006.

Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 6812508, Israel,

P.O Box 50005 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il

F - 3

FOAMIX PHARMACEUTICALS LTD.

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands)

	December 31
	2018		2017
	2019		2018
A s s e t s
CURRENT ASSETS:
Cash and cash equivalents	$	2743,~~868~~759	$	1527,~~956~~868
Restricted cash		~~250~~825		250
Short term bank deposits		2412,~~047~~102		1924,~~443~~047
Investment in marketable securities (Note 4)		4616,~~669~~246		3146,~~797~~669
Restricted investment in marketable securities (Note 4)		~~268~~434		~~290~~268
Accounts receivable:
Trade receivable		135		1,066
Trade		1,066		996
Other (Note 13a)		1,557		999
Other (Note 11a)		999		772
Inventory (Note 5)		1,356		-
TOTAL CURRENT ASSETS		~~101~~76,~~167~~414		69101,~~504~~167
NON-CURRENT ASSETS:
Investment in marketable securities (Note 4)		~~150~~-		~~8,533~~150
Restricted investment in marketable securities (Note 4)		~~133~~-		~~143~~133
Property and equipment, net (Note 5)		2,235		2,042
Property and equipment, net (Note 6)		2,885		2,235
Other		46		32
Operating lease right of use assets (Note 7)		1,694		-
TOTAL NON-CURRENT ASSETS		2,564		10,750
Other		166		46
TOTAL ASSETS	$	103,731	$	80,254
TOTAL NON-CURRENT ASSETS		4,745		2,564
TOTAL ASSETS	$	81,159	$	103,731

The accompanying notes are an integral part of these consolidated financial statements.

F - 34

FOAMIX PHARMACEUTICALS LTD.

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands)

	December 31
	2018			2017
	2019			2018
Liabilities and shareholders’ equity
CURRENT LIABILITIES:
Accounts payable and accruals:
Trade payables	$	19,352		$	6,327
Trade	$	6,327		$	6,436
Accrued expenses		3,381			351
Deferred revenues		-			62
Employee related obligations		5,231			3,498
Other (Note 11b)		4,141			3,730
Operating lease liabilities (Note 7)		1,092			-
TOTAL CURRENT LIABILITIES		10,468			10,228
Other		270			292
TOTAL CURRENT LIABILITIES		29,326			10,468
LONG-TERM LIABILITIES:
Liability for employee severance benefits (Note 6)		367			437
Liability for employee severance benefits (Note 8)		424			367
Other liabilities		714			988
Operating lease liabilities (Note 7)		653			-
TOTAL LONG-TERM LIABILITIES		1,081			1,425
Long-term debt (Note 10)		32,725			-
TOTAL LIABILITIES		11,549			11,653
Other liabilities		456			714
COMMITMENTS (Note 7)
TOTAL LONG-TERM LIABILITIES		34,258			1,081
TOTAL LIABILITIES		63,584			11,549
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Ordinary shares, NIS 0.16 par value - authorized: 90,000,000 ordinary shares as of December 31, 2018 and December 31, 2017; issued and outstanding: 54,351,140 and 37,498,128 ordinary shares as of December 31, 2018 and December 31, 2017, respectively		2,331			1,576
Ordinary Shares, NIS 0.16 par value - authorized: 135,000,000 and 90,000,000 Ordinary Shares as of December 31, 2019 and December 31, 2018; issued and outstanding: 61,580,544 and 54,351,140 Ordinary Shares as of December 31, 2019 and December 31, 2018, respectively		2,659			2,331
Additional paid-in capital		~~305~~325,~~303~~498			~~208~~305,~~364~~303
Accumulated deficit		(~~215~~310,~~409~~587	)		(~~141~~215,~~281~~409	)
Accumulated other comprehensive loss		(43	)		(58	)
Accumulated other comprehensive income (loss)		5			(43	)
TOTAL SHAREHOLDERS' EQUITY		9217,~~182~~575			6892,~~601~~182
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	~~103~~81,~~731~~159		$	80103,~~254~~731

The accompanying notes are an integral part of these consolidated financial statements.

F - 45

FOAMIX PHARMACEUTICALS LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(U.S. dollars in thousands, except per share data)

	Year ended December 31
	2018			2017			2016
	2019			2018			2017
REVENUES (Note 11c)	$	3,595		$	3,669		$	5,527
REVENUES (Note 13b)	$	443		$	3,595		$	3,669
COST OF REVENUES		-			13-			5913
GROSS PROFIT		~~3,595~~443			3,~~656~~595			53,~~468~~656
OPERATING EXPENSES:
Research and development		6451,~~474~~202			5764,~~779~~474			2557,~~897~~779
Selling, general and administrative		1445,~~013~~114			1114,~~491~~013			911,~~221~~491
TOTAL OPERATING EXPENSES		7896,~~487~~316			6978,~~270~~487			3569,~~118~~270
OPERATING LOSS		7495,~~892~~873			6574,~~614~~892			2965,~~650~~614
FINANCE INCOME, net (Note 11d)		(941	)		(1,063	)		(701	)
FINANCE INCOME (Note 13c)		(1,672	)		(985	)		(1,134	)
LOSS BEFORE INCOME TAX		73,951			64,551			28,949
FINANCE EXPENSES (Note 13c)		1,153			44			71
INCOME TAX (Note 10)		212			1,164			387
LOSS BEFORE INCOME TAX		95,354			73,951			64,551
NET LOSS FOR THE YEAR	$	74,163		$	65,715		$	29,336
INCOME TAX (Note 12)		(176	)		212			1,164
LOSS PER SHARE BASIC AND DILUTED	$	1.70		$	1.76		$	0.91
NET LOSS FOR THE YEAR	$	95,178		$	74,163		$	65,715
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE IN THOUSANDS		43,660			37,376			32,263
LOSS PER SHARE BASIC AND DILUTED	$	1.66		$	1.70		$	1.76
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE IN THOUSANDS		57,292			43,660			37,376

The accompanying notes are an integral part of these consolidated financial statements.

F - 56

FOAMIX PHARMACEUTICALS LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(U.S. dollars in thousands)

	Year ended December 31
	2018			2017			2016
	2019			2018			2017
NET LOSS	$	7495,~~163~~178		$	6574,~~715~~163		$	2965,~~336~~715
OTHER COMPREHENSIVE INCOME:
Net unrealized losses (gains) from marketable securities		(5947	)		5(59	)		~~(65~~5	)
Gains (losses) on marketable securities reclassified into net loss		(52	)		-(5	)		4-
Net unrealized losses (gains) on derivative financial instruments		74(3	)		~~(146~~74	)		(20146	)
Gains (losses) on derivative financial instruments reclassified into net loss		~~(60~~-	)		~~137~~(60	)		13137
TOTAL OTHER COMPREHENSIVE INCOME		(5048	)		(450	)		(684	)
TOTAL COMPREHENSIVE LOSS	$	7495,~~113~~130		$	6574,~~711~~113		$	2965,~~268~~711

The accompanying notes are an integral part of these consolidated financial statements

F - 67

FOAMIX PHARMACEUTICALS LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. dollars in thousands, except share data)

	Ordinary shares				Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive income (loss)			Total
	Number of shares		Amounts		Amounts
BALANCE AT JANUARY 1, 2016		30,639,134	$	1,284	$	145,878		$	(46,230	)	$	(130	)	$	100,802
BALANCE AT JANUARY 1, 2017		37,167,791	$	1,561	$	204,052		$	(75,566	)	$	(62	)	$	129,985
CHANGES DURING 2016:
Comprehensive income (loss)		-		-		-			(29,336	)		68			(29,268	)
Issuance of ordinary shares through a public offering, net of $3.9 million issuance costs (Note 9b)		6,111,959		260		53,872			-			-			54,132
Exercise of warrants (Note 9d)		257,137		10		1,285			-			-			1,295
Exercise of options and restricted share units (Note 9e)		159,561		7		105			-			-			112
Share-based compensation (Note 9e)		-		-		2,912			-			-			2,912
BALANCE AT DECEMBER 31, 2016		37,167,791		1,561		204,052			(75,566	)		(62	)		129,985
CHANGES DURING 2017:
Comprehensive income (loss)		-		-		-			(65,715	)		4			(65,711	)
Exercise of warrants (Note 9d)		191,793		8		(8	)		-			-			-
Exercise of warrants (Note 11b)		191,793		8		(8	)		-			-			-
Exercise of options and restricted share units (Note 9e)		138,544		7		154			-			-			161
Exercise of options and restricted share units (Note 11e)		138,544		7		154			-			-			161
Share-based compensation (Note 9e)		-		-		4,166			-			-			4,166
Share-based compensation (Note 11e)		-		-		4,166			-			-			4,166
BALANCE AT DECEMBER 31, 2017, as previously reported		37,498,128	$	1,576	$	208,364		$	(141,281	)	$	(58	)	$	68,601
Impact of initial adoption of new accounting standards (Note 4)		-		-		-			35			(35	)		-
CHANGES DURING 2018:
Comprehensive income (loss)		-		-		-			(74,163	)		50			(74,113	)
Issuance of ordinary shares through a public offering, net of $5.2 million issuance costs (note 9c)		13,420,500		599		74,757			-			-			75,356
Issuance of Ordinary Shares through a public offering, net of $5.2 issuance costs (note 11c)		13,420,500		599		74,757			-			-			75,356
Issuance of ordinary shares through a securities purchase agreement, net of $39 issuance costs (note 9b)		2,940,000		134		15,997			-			-			16,131
Issuance of Ordinary Shares through a securities purchase agreement, net of $39 issuance costs (note 11d)		2,940,000		134		15,997			-			-			16,131
Exercise of warrants (Note 9d)		178,468		8		832			-			-			840
Exercise of warrants (Note 11b)		178,468		8		832			-			-			840
Exercise of options and restricted share units (Note 9e)		314,044		14		33			-			-			47
Exercise of options and restricted share units (Note 11e)		314,044		14		33			-			-			47
Share-based compensation (Note 9e)		-		-		5,320			-			-			5,320
Share-based compensation (Note 11e)		-		-		5,320			-			-			5,320
BALANCE AT DECEMBER 31, 2018		54,351,140	$	2,331	$	305,303		$	(215,409	)	$	(43	)	$	92,182
CHANGES DURING 2019:
Comprehensive income (loss)		-		-		-			(95,178	)		48			(95,130	)
Issuance of Ordinary Shares and warrants, net of $359 issuance costs (Notes 10 and 11)		6,542,057		297		14,714			-			-			15,011
Exercise of options, restricted share units and shares issued under employee share purchase plan (Note 11e)		687,347		31		586			-			-			617
Share-based compensation (Note 11e)		-		-		4,895			-			-			4,895
BALANCE AT DECEMBER 31, 2019		61,580,544	$	2,659	$	325,498		$	(310,587	)	$	5		$	17,575

The accompanying notes are an integral part of these consolidated financial statements

F - 78

FOAMIX PHARMACEUTICALS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)

	Year ended December 31
	2018			2017			2016
	2019			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss	$	(7495,~~163~~178	)	$	(6574,~~715~~163	)	$	(2965,~~336~~715	)
Adjustments required to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		~~319~~350			~~221~~319			~~143~~221
Loss from sale and disposal of fixed assets		4418			~~134~~44			16134
Changes in marketable securities and bank deposits, net		~~201~~(357	)		97201			9197
Changes in accrued liability for employee severance benefits, net of retirement fund profit		~~(70~~57	)		57(70	)		1457
Share-based compensation		54,~~320~~895			45,~~166~~320			24,~~912~~166
Non-cash finance expenses (income), net		43140			~~(47~~43	)		(147	)
Changes in operating asset and liabilities:
Decrease (increase) in trade and other receivable		(308	)		1,915			(2,889	)
Decrease (increase) in trade and other receivables		373			(308	)		1,915
Decrease (increase) in other non-current assets		(14131	)		4(14	)		-4
Increase in accounts payable and accruals		~~238~~18,053			~~5,003~~238			15,~~680~~003
Increase (decrease) in other liabilities		(274	)		988			-
Increase in inventory		(1,356	)		-			-
Net cash used in operating activities		(68,664	)		(53,177	)		(27,370	)
Increase (decrease) in other liabilities		(258	)		(274	)		988
Net cash used in operating activities		(73,394	)		(68,664	)		(53,177	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(~~567~~1,058	)		(~~1,518~~567	)		(~~424~~1,518	)
Proceeds from sale of fixed assets		1040			3310			-33
Investment in bank deposits		(3926,~~000~~013	)		(1739,000	)		(2317,000	)
Investment in marketable securities		(3818,~~652~~951	)		(2238,~~839~~652	)		(3122,~~700~~839	)
Proceeds from sale and maturity of marketable securities and bank deposits		6687,~~454~~851			7966,~~079~~454			4079,~~106~~079
Net cash provided by (used in) investing activities		~~(11~~41,~~755~~869	)		37(11,755	)		~~(15~~37,~~018~~755	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of ordinary shares through a public offering, net of $5.2 million issuance costs		75,356			-			54,132
Proceeds from exercise of warrants		-			840			-
Proceeds from issuance of ordinary shares through a securities purchase agreement, net of $39 issuance costs		16,131			-			-
Proceeds from exercise of options and issuance of shares under the employee shares purchase plan		365			47			161
Proceeds from exercise of warrants		840			-			1,295
Withholding tax from net exercise of restricted share units		(32	)		-			-
Proceeds from exercise of options		47			161			112
Proceeds from issuance of Ordinary Shares, net of issuance costs		13,714			16,131
Payments in respect of BIRD loan		-			-			(476	)
Proceeds from issuance of Ordinary Shares through a public offering, net of $5.2 issuance costs		-			75,356			-
Payments in respect of bank borrowings		-			(21	)		(32	)
Proceeds from debt financing and issuance of warrants, net of $1,097 issuance costs		33,903			-			-
Net cash provided by financing activities		92,374			140			55,031
Payments in respect of bank borrowings		-			-			(21	)
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		11,955			(15,282	)		12,643
Net cash provided by financing activities		47,950			92,374			140
EFFECT OF EXCHANGE RATE ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(43	)		48			2
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		16,425			11,955			(15,282	)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE YEAR		16,206			31,440			18,795
EFFECT OF EXCHANGE RATE ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH		41			(43	)		48
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE YEAR	$	28,118		$	16,206		$	31,440
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE YEAR		28,118			16,206			31,440
Cash and cash equivalents	$	27,868		$	15,956		$	31,190
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE YEAR	$	44,584		$	28,118		$	16,206
Restricted cash		250			250			250
Cash and cash equivalents		43,759			27,868			15,956
TOTAL CASH, CASH EQUIVALENTS AND RESTRICTED CASH SHOWN IN STATEMENT OF CASH FLOWS	$	28,118		$	16,206		$	31,440
Restricted cash		825			250			250
TOTAL CASH, CASH EQUIVALENTS AND RESTRICTED CASH SHOWN IN STATEMENT OF CASH FLOWS	$	44,584		$	28,118		$	16,206

F - 89

FOAMIX PHARMACEUTICALS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)

	Year ended December 31
	2018		2017		2016
	2019		2018		2017
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS:
Cashless exercise of warrants		1		8		-
Cashless exercise of warrants and restricted share units		11		11		11
Exercise of restricted share units		10		3		4
Issuance of shares under employee share purchase plan		284		-		-
Property and equipment purchases included in accounts payable and accruals		-		1-		271
Additions to operating lease right of use assets and liabilities		1,175		-		-
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for taxes		~~587~~-		~~478~~587		~~163~~478
Interest received		1,~~173~~359		1,~~209~~173		1,~~015~~209
Interest paid		-802		*-		~~239~~*-

* Represents an amount less than $1.

The accompanying notes are an integral part of these consolidated financial statements.

F - 910

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share and per share amounts)

NOTE 1 - NATURE OF OPERATIONS

Foamix Pharmaceuticals Ltd. (hereinafter “Foamix”) is an Israeli company incorporated in 2003. ~~Foamix’s shares are publicly traded on the NASDAQ under the symbol “FOMX”, since its initial public offering (“IPO”) in September, 2014.~~

Foamix’s isshares awere ~~late~~publicly ~~clinical-stage~~traded ~~specialty pharmaceutical company focused~~ on ~~developing and commercializing its proprietary topical drug candidates for dermatological therapy. Foamix lead product candidate, FMX101 (4% minocycline foam), is being developed for~~ the ~~treatment~~Nasdaq ofGlobal ~~moderate-to-severe~~Market ~~acne.~~under ~~An additional product candidate, FMX103 (1.5% minocycline foam), is being developed for~~ the ~~treatment~~symbol of“FOMX” ~~moderate-to-severe~~from ~~papulopustular~~its ~~rosacea.~~initial ~~Both~~public ~~product~~offering ~~candidates~~in ~~are~~September ~~novel~~2014 ~~topical~~until ~~foam~~March ~~formulations of the antibiotic minocycline and were developed using Molecule Stabilizing Technology~~ 9, a proprietary foam platform designed to optimize the topical delivery of minocycline, an active pharmaceutical ingredient, or API, that is currently available only in oral form despite its prevalent use in dermatology2020.

Foamix ~~also~~is ~~licensed~~a ~~its~~specialty ~~technology~~pharmaceutical ~~under~~company focused on the development and ~~licensing~~commercialization ~~agreements~~of toinnovative therapies ~~various~~in ~~pharmaceutical~~dermatology. ~~companies~~On ~~for~~October ~~development~~18, of2019, ~~certain~~the ~~products~~U.S. ~~combining~~Food and Drug Administration (“FDA”) approved Foamix'’s first drug product, AMZEEQ (minocycline) topical foam, ~~technology~~4%, formerly ~~with~~known as FMX101, a once-daily topical antibiotic for the ~~licensee’s~~treatment ~~proprietary~~of ~~drugs~~inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 9 years of age and older. AMZEEQ was launched and has been available for prescribing since January 13, 2020.

InFoamix ~~May~~is ~~2014~~also developing a product candidate, ~~Foamix~~FMX103 ~~incorporated~~(minocycline) atopical ~~wholly-owned~~foam, ~~Subsidiary~~1.5%, infor the ~~United~~treatment ~~States~~ of ~~America~~ moderate-to-severe ~~Foamix~~papulopustular ~~Pharmaceuticals~~rosacea ~~Inc~~in adults. ~~(hereinafter~~Both AMZEEQ ~~the~~and ~~"Subsidiary").~~FMX103 ~~The~~were ~~Subsidiary~~developed ~~was~~using ~~incorporated~~Molecule toStabilizing ~~assist~~Technology, ~~Foamix~~a ~~with~~proprietary ~~regard~~foam platform designed to ~~marketing~~optimize the topical delivery of minocycline, ~~regulatory~~an ~~affairs~~active ~~and~~pharmaceutical ~~business~~ingredient, ~~development~~that ~~relating~~was ~~its~~available ~~products~~only ~~and~~in ~~technology~~oral form until the FDA’s approval of AMZEEQ.

~~Since incorporation through December 31, 2018,~~ Foamix ~~and~~also ~~its~~licensed ~~Subsidiary~~certain ~~(hereinafter~~technology “the Company”) incurred losses and negative cash flows from operations mainly attributable to its development efforts and has an accumulated deficit of $215,409. The Company has financed its operations primarily through the issuance of shares through private and public financing rounds, convertible loans and payments received under development and licensing agreements. ~~The Company's cash and investments as of the issuance date of these financial statements, will allow the Company~~ to ~~fund~~various ~~its~~pharmaceutical ~~operating~~companies ~~plan~~for ~~through at least the next 12 months. However, the Company expects to continue to incur significant research and~~ development ~~and~~of ~~other~~certain ~~expenses~~products ~~related~~combining Foamix's tofoam ~~its~~technology ~~ongoing~~with ~~operations and in order to continue its future operations,~~ the ~~Company~~licensee’s ~~will~~proprietary ~~need to obtain additional funding until becoming profitable~~drugs. ~~If the Company is unable to obtain such funding it will need to curtail or cease operations.~~

In May 2014, Foamix incorporated a wholly-owned subsidiary in the United States of America - Foamix Pharmaceuticals Inc. (hereinafter referred to as the "Subsidiary"). The Subsidiary was incorporated to assist Foamix with regard to commercialization activities, regulatory affairs and business development relating to its pipeline and technology.

On November 10, 2019, Foamix entered into an Agreement and Plan of Merger (the "Merger Agreement") with Menlo Therapeutics, Inc. ("Menlo") and Giants Merger Subsidiary Ltd. (“Merger Sub”), a direct and wholly-owned subsidiary of Menlo. Under the terms of the agreement, Merger Sub agreed to merge with and into Foamix, with Foamix continuing as the surviving corporation and a wholly-owned subsidiary of Menlo (the “Merger”). On March 9, 2020, the Merger was completed and Foamix is now a wholly-owned subsidiary of Menlo, the legal acquirer. Foamix will cease to be a reporting company as of March 19, 2020 and all future filings of the combined company will be made by Menlo. As of the issuance of the financial statements, Foamix incurred transaction expenses in the amount of approximately $5.8 million.

At the effective time of the Merger (the “Effective Time”), each Foamix Ordinary Share, par value NIS 0.16 per share, issued and outstanding immediately prior to the Effective Time was exchanged for (i) 0.5924 shares (the “Exchange Ratio”) of common stock of Menlo and (ii) one contingent stock right (a “CSR”, and collectively, the “CSRs”). The CSRs are governed by the Contingent Stock Rights Agreement (the “CSR Agreement”), dated as of March 9, 2020, by and between Menlo and American Stock Transfer & Trust Company, LLC, and represent the non-transferable contractual right to receive shares of common stock of Menlo if specified events occur within agreed time periods. Pursuant to the CSR Agreement, each CSR may become convertible on May 31, 2020 or upon the occurrence of specified events relating to Menlo’s Phase III PN Trials, and, if so converted, will entitle its holder to receive from Menlo additional shares of Menlo common stock.

The Merger will be accounted in accordance with Accounting Standards Codification Topic 805, “Business Combinations,” using the acquisition method of accounting with Foamix as the accounting acquirer. Since Menlo, as the parent company of Foamix after the Merger, is the legal acquirer, the Merger will be accounted for as a reverse acquisition.

F - 11

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(U.S. dollars in thousands, except share and per share amounts)

NOTE 1 - NATURE OF OPERATIONS (continued):

Since incorporation through December 31, 2019, Foamix and its subsidiary (hereinafter referred to as “the Company”) incurred losses and negative cash flows from operations mainly attributable to its development efforts and has an accumulated deficit of $310,587. The Company has financed its operations mainly through the issuance of shares through private and public financing rounds, debt financing, warrants and payments received pursuant to the terms of development and licensing agreements. As mentioned above, on March 9, 2020, the Merger with Menlo was completed. As of the issuance date of these financial statements, the Company's cash and investments, along with Menlo’s cash and investments, funds the Company may be entitled to receive upon reaching certain milestones under its credit agreement (see note 10) and the Company’s 2020 estimated income from AMZEEQ and FMX103, provide sufficient resources to fund its operations through at least the next 12 months. Prior to issuing these financial statements, the Company revised its operating plan in order to reduce expenses and, until it is able to obtain further funding, will only focus on (a) commercialization of AMZEEQ, (b) pre-commercialization and launch preparations for FMX103, assuming it receives regulatory approval, and (c) other general corporate expenses. In order to develop and commercialize any future product candidates if they are granted regulatory approval, the Company and Menlo (the “Combined Company”) may be required to obtain further funding through public or private offerings, debt financings, collaboration and licensing arrangements or other sources. Adequate additional funding may not be available to the Combined Company on acceptable terms, or at all. If the Combined Company is unable to raise capital when needed or on attractive terms, it may be forced to delay, reduce or eliminate its research and development programs or commercialization and manufacturing efforts.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:

Basis of presentation

The Company’s financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).

b. Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. As applicable to these financial statements, the most significant estimates and assumptions relate to clinical trial accruals.

Fc. -Functional 10currency

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(U.S. dollars in thousands, except share and per share amounts)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

b. Functional currency

The U.S. dollar (“dollar”) is the currency of the primary economic environment in which the operations of Foamix and the Subsidiary are conducted. Almost all Company revenues and operational expenses are in dollars and the Company’s financing has been provided in dollars. Accordingly, the functional currency of the Company is the dollar.

Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items in the statements of operations (indicated below), the following exchange rates are used: (i) for transactions - exchange rates at transaction dates or average rates; and (ii) for other items (derived from non-monetary balance sheet items such as depreciation and amortization, etc.) - historical exchange rates. Currency transaction gains and losses are presented in financial income or expenses, as appropriate.

cd. Principles of consolidation

The consolidated financial statements include the accounts of Foamix and its Subsidiary. Intercompany balances and transactions including profits from intercompany sales not yet realized outside the Company, have been eliminated upon consolidation.

d.F ~~Cash~~- ~~and cash equivalents~~12

The Company considers as cash equivalents all short-term, highly liquid investments, which include short-term bank deposits with original maturities of three months or less from the date of purchase that are not restricted as to withdrawal or use and are readily convertible to known amounts of cash.

e. Bank deposits

Bank deposits with original maturity dates of more than three months but at balance sheet date are less than one year are included in short-term deposits. The interest rates on the Company’s deposits range between 1.75%-3.15%. The fair value of bank deposits approximates the carrying value since they bear interest at rates close to the prevailing market rates.

f. Marketable securities

Marketable Debt Securities:

Marketable debt securities are classified as available for sale and are recorded at fair value. Management determines the appropriate classification of its investments in securities at the time of purchase. Classifications of debt securities in the balance sheet are determined based on the maturity date of the securities.

Dividend and interest income, including amortization of the premium and discount arising at acquisition, as well as realized gains and losses, are included in financial income.

F - 11

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(U.S. dollars in thousands, except share and per share amounts)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Cash and cash equivalents

Bank deposits

Bank deposits with original maturity dates of more than three months but at balance sheet date are less than one year are included in short-term deposits. The interest rates on the Company’s deposits range between 2.23%-3.15%. The fair value of bank deposits approximates the carrying value since they bear interest at rates close to the prevailing market rates.

Marketable securities

Marketable debt securities:

Dividend and interest income, including amortization of the premium and discount arising at acquisition, as well as realized gains and losses, are included in financial income.

Unrealized gains, net of taxes, are reflected in other comprehensive income (loss). Unrealized losses considered to be temporary are reflected in other comprehensive income (loss); unrealized losses that are considered to be other-than-temporary are charged to income as an impairment charge. Realized gains and losses are included in financial income, net.

Other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings, recorded in financial expense, net, is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in other comprehensive income or loss.

Marketable ~~Equity~~equity ~~Securities~~securities:

The Company’s marketable equity securities are recorded at fair market value and, beginning January 1, 2018, following the adoption of ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10)., ~~Unrealized~~unrealized gains and losses are included in other income (expense), net in the consolidated statements of operations. Prior to January 1, 2018, unrealized gains, net of taxes, were reflected in other comprehensive income (loss) and unrealized losses were reflected in other comprehensive income (loss).

g.F ~~Derivatives~~- 13

The Company purchases foreign exchange derivative financial instruments (written and purchased currency options). The transactions are designed to hedge the Company’s currency exposure.

The Company recognizes all derivatives as either assets or liabilities in the consolidated balance sheet at their fair value. Changes in the fair value of derivatives that are highly effective and designated as cash flow hedges are reported as a component of other comprehensive income or loss and reclassified into earnings in the same line-item associated with the forecasted transaction and in the same periods during which the hedged transaction impacts earnings.

For derivatives that qualify for hedge accounting, the cash flows associated with these derivatives are reported in the consolidated statements of cash flows consistently with the classification of cash flows from the underlying hedged items that these derivatives are hedging.

F - 12

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(U.S. dollars in thousands, except share and per share amounts)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

h. ~~Property~~Derivatives and ~~equipment:~~Hedging The Company purchases foreign exchange derivative financial instruments (written and purchased currency options). The transactions are designed to hedge the Company’s currency exposure. The Company recognizes all derivatives as either assets or liabilities in the consolidated balance sheet at their fair value. Changes in the fair value of derivatives that are highly effective and designated as cash flow hedges are reported as a component of other comprehensive income or loss and reclassified into earnings in the same line-item associated with the forecasted transaction and in the same periods during which the hedged transaction impacts earnings. For derivatives that qualify for hedge accounting, the cash flows associated with these derivatives are reported in the consolidated statements of cash flows consistently with the classification of cash flows from the underlying hedged items that these derivatives are hedging.

Inventory

Prior to the date the Company obtains regulatory approval for its product candidates, inventory costs related to commercial production are expensed as research and development expense. Once regulatory approval is obtained, the Company capitalizes such costs as inventory. Inventories are stated at the lower of cost or net realizable value. The Company determines the cost of inventory using the first-in, first-out (“FIFO”) method. The Company periodically reviews its inventory levels and writes down inventory that is expected to expire prior to being sold, inventory in excess of expected sales requirements and inventory that fails to meet commercial sale specifications, with a corresponding charge to cost of goods sold.

Property and equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization.

The Company’s property and equipment are depreciated by the straight-line method on the basis of their estimated useful life.

Annual rates of depreciation are as follows:

	%
Computers	15-33
Laboratory equipment	7-20
Office furniture and equipment	7-15
Vehicles	15

Leasehold improvements are amortized by the straight-line method over the expected lease term, which is shorter than the estimated useful life of the improvements.

i.F ~~Impairment of long~~-~~lived~~ ~~assets~~14

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(U.S. dollars in thousands, except share and per share amounts)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Impairment of long-lived assets

The Company tests long-lived assets for impairment whenever events or circumstances present an indication of impairment. If the sum of expected future cash flows (undiscounted and without interest charges) of the assets is less than the carrying amount of such assets, an impairment loss would be recognized. The assets would be written down to their estimated fair values, calculated based on the present value of expected future cash flows (discounted cash flows), or some other fair value measure.

For the three years ended December 31, ~~2018~~2019, the Company did not recognize an impairment loss for its long-lived assets.

jl. Allowance for doubtful accounts

The Company performs ongoing credit evaluations to estimate the need for maintaining reserves for potential credit losses. An allowance for doubtful accounts is recognized on a specific basis with respect to those amounts that the Company has determined to be doubtful of collection. No allowance for doubtful accounts was recorded in the three years ended December 31, ~~2018~~2019.

km. ~~Contingencies~~Debt

~~Certain~~Debt ~~conditions~~discounts ~~may~~created ~~exist~~ as ofa ~~the~~result ~~date~~ of the ~~financial~~allocation ~~statements,~~of ~~which~~proceeds ~~may~~received ~~result~~from in a ~~loss~~debt toissuance ~~the Company but which will only be resolved when one or more future events occur or fail~~ to ~~occur.~~warrants ~~The~~issued ~~Company’s~~are ~~management~~amortized ~~assesses such contingent liabilities and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related~~ to ~~legal~~interest ~~proceedings~~expense ~~that~~under ~~are pending against~~ the ~~Company~~effective interest ormethod ~~unasserted~~over ~~claims that may result in such proceedings,~~ the ~~Company’s~~life ~~management evaluates the perceived merits~~ of ~~any legal proceedings or unasserted claims as well as~~ the ~~perceived~~recognized ~~merits~~debt ~~of the amount of relief sought or expected to be sought~~liability.

Debt issuance costs include the costs of debt financings undertaken by the Company, including legal fees and other direct costs of the financing. Debt issuance costs related to a recognized debt liability are presented on the consolidated balance sheet as a direct deduction from the carrying amount of the debt liability and are amortized to interest expense over the term of the related debt, using the effective interest method.

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). The new standard requires lessees to record assets and liabilities on the balance sheet for all leases. The Company elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company recognizes the lease payments in the consolidated statements of operations on a straight-line basis over the lease period.

The Company adopted the standard as of January 1, 2019 on a modified retrospective basis and did not restate comparative periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carryforward the historical lease classification and not separate lease and non-lease components for the leases.

F - 15

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(U.S. dollars in thousands, except share and per share amounts)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Contingencies

Certain conditions may exist as of the date of the financial statements, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

Management applies the guidance in ASC 450-20-25 when assessing losses resulting from contingencies. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability is recorded as accrued expenses in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material are disclosed.

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantees are disclosed.

Fp. Share-based 13compensation

The Company accounts for employees’ and directors’ share-based payment awards classified as equity awards using the grant-date fair value method. The fair value of share-based payment transactions is recognized as an expense over the requisite service period using the straight-line method. Forfeitures are recognized as they occur.

Share-based payments related to the employee share purchase plan (“ESPP”) are recognized based on the fair value of each award estimated on the first day of the offering period and recognized as an expense over the offering period using the straight-line method.

The Company elected to recognize compensation costs for awards conditioned only on continued service that have a graded vesting schedule using the straight-line method based on the multiple-option award approach.

Prior to December 31, 2018, when options and restricted share units (hereinafter “RSUs”) were granted as consideration for services provided by nonemployees, the grants were accounted for based on the fair value of the consideration received or the fair value of the awards issued, whichever is more reliably measurable. The fair value of the awards granted was measured on a final basis at the end of the related service period and was recognized over the related service period using the straight-line method.

On January 1, 2019 the Company adopted the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718) Improvements to Nonemployee Share-based Payments. This ASU was issued to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions are being measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions.

F - 16

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(U.S. dollars in thousands, except share and per share amounts)

NOTE 2−SIGNIFICANT ACCOUNTING POLICIES (continued):

lq. ~~Share-based~~Revenue ~~compensation~~recognition

The Company accounts for employees’ and directors’ share-based payment awards classified as equity awards using the grant-date fair value method. The fair value of share-based payment transactions is recognized as an expense over the requisite service period. As from January 1, 2017, forfeitures are recognized as they occur.

When options and restricted share units (hereinafter “RSUs”) are granted as consideration for services provided by consultants and other non-employees, the grant is accounted for based on the fair value of the consideration received or the fair value of the awards issued, whichever is more reliably measurable. The fair value of the awards granted is measured on a final basis at the end of the related service period and is recognized over the related service period using the straight-line method.

m. Revenue recognition

On January 1, 2018 the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). According to the standard, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity 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 performance obligation is satisfied.

An entity only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer, after considering any price concession expected to be provided to the customer, when applicable. At contract inception, the entity 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 entity then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The adoption of the new standards did not change the Company’s revenue recognition as the majority of the Company’s revenues in ~~2018~~the year ended December 31, 2019 and 2018, were driven from royalties from license agreements for products, developed combining the Company's foam technology with a drug selected by the licensee. The Company does not have future performance obligations under the license arrangements. The revenues are recorded based on the sales that occurred during the relevant period provided by licensees.

FPrior -to 14January 1, 2018 and before the adoption of the new standard, the Company's revenues also included development services driven from the development and license agreements. Revenue recognition from those agreements were recognized as follows:

The significant deliverables in the agreements between the Company and its licensees were the obligation of Company to provide development services and the grant of an exclusive license to the specific product developed. These deliverables were combined into one single unit of accounting for revenue recognition purposes since: (i) each element did not have value on a stand-alone basis; (ii) in order to develop the combined formulation in the licensed product, the use of the Company’s propriety technology was required. Therefore, the Company was the only party capable of performing the level and type of development services required under the agreement.

The Company’s development and license agreements entitle the Company to: (i) development payments, including upfront payments, cost reimbursements and payments contingent only upon passage of time (together, - “Development Service Payments”); (ii) payments contingent solely upon performance or achievement of clinical results by the Company’s licensees (“Contingent Payments”); (iii) royalties calculated as a percentage of sales of the developed the products made by the Company's licensees.

Revenues from Development Service Payments under development and license agreements were recognized as the services were provided. When the Company received a portion of the Development Service Payment before performance of such services, these advances were recorded as deferred revenues and recognized as revenues as services were performed. Contingent Payments were recognized when the licensee’s performance or achievement event occurred, and royalties were recognized when subsequent sales were made by the licensees.

F - 17

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(U.S. dollars in thousands, except share and per share amounts)

NOTE 2−SIGNIFICANT ACCOUNTING POLICIES (continued):

~~Prior~~r. toResearch ~~January 1, 2018~~ and ~~before the adoption of the new standard, the Company's revenues also included~~ development ~~services driven from the development and license agreements. Revenue recognition from those agreements were recognized as follows:~~costs

The significant deliverables in the agreements between the Company and its licensees were the obligation of the Company to provide development services and the grant of an exclusive license to the specific product developed. These deliverables were combined into one single unit of accounting for revenue recognition purposes since: (i) each element did not have value on a stand-alone basis; (ii) in order to develop the combined formulation in the licensed product, the use of the Company’s propriety technology was required. Therefore, the Company was the only party capable of performing the level and type of development services required under the agreement.

n. Research and development costs

Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of clinical trials, clinical trial supplies, salaries, share-based compensation expenses, payroll taxes and other employee benefits, lab expenses, consumable equipment and consulting fees. All costs associated with research and developments are expensed as incurred.

os. Clinical trial accruals

Clinical trial expenses are charged to research and development expense as incurred. The Company accrues for expenses resulting from obligations under contracts with clinical research organizations (CROs). The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided. The Company’s objective is to reflect the appropriate trial expense in the consolidated financial statements by matching the appropriate expenses with the period in which services and efforts are expended. In the event advance payments are made to a CRO, the payments are recorded as other assets, which will be recognized as expenses as services are rendered.

pt. Income taxes:

Deferred taxes

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is recognized to the extent that it is more likely than not that the deferred taxes will not be realized in the foreseeable future. Given the Company’s losses, the Company has provided a full valuation allowance with respect to its deferred tax assets.

F2) -Uncertainty 15in income tax

The Company follows a two-step approach in recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates that it is more likely than not that the position will be sustained based on technical merits. If this threshold is met, the second step is to measure the tax position as the largest amount that has more than a 50% likelihood of being realized upon ultimate settlement.

Loss per share

Net loss per share, basic and diluted, is computed on the basis of the net loss for the year divided by the weighted average number of Ordinary Shares outstanding during the year. Diluted net loss per share is based upon the weighted average number of Ordinary Shares and of Ordinary Shares equivalents outstanding when dilutive. Ordinary Share equivalents include outstanding share based payment arrangements and warrants which are included under the treasury share method when dilutive.

The following average share options, RSUs, warrants and incremental share to be issued under the ESPP were excluded from the calculation of diluted net loss per Ordinary Share because their effect would have been anti-dilutive for the year presented (share data):

	Year ended December 31
	2019		2018		2017
Outstanding share options, RSUs and shares under ESPP		6,115,124		4,684,916		3,657,612
Warrants		467,123		508,154		1,498,718

F - 18

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(U.S. dollars in thousands, except share and per share amounts)

NOTE 2−SIGNIFICANT ACCOUNTING POLICIES (continued):

2)v. ~~Uncertainty~~Fair invalue ~~income tax~~measurement

q. Loss per share

Net loss per share, basic and diluted, is computed on the basis of the net loss for the year divided by the weighted average number of ordinary shares outstanding during the year. Diluted net loss per share is based upon the weighted average number of ordinary shares and of ordinary shares equivalents outstanding when dilutive. Ordinary share equivalents include outstanding stock options and warrants which are included under the treasury share method when dilutive.

The following share options, RSUs and warrants were excluded from the calculation of diluted net loss per ordinary share because their effect would have been anti-dilutive for the years presented (share data):

	Year ended December 31
	2018		2017		2016
Outstanding share options and RSUs		4,812,800		4,230,101		2,698,875
Warrants		-		1,394,558		1,807,800

r. 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.

Fw. -Concentration 16of credit risks

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(U.S. dollars in thousands, except share and per share amounts)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

s. Concentration of credit risks

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, restricted cash, bank deposits, marketable securities and certain receivables. The Company deposits cash and cash equivalents with highly rated financial institutions and, as a matter of policy, limits the amounts of credit exposure to any single financial institution. In addition, all marketable securities carry a high rating or are government insured. The Company has not experienced any material credit losses in these accounts and does not believe it is exposed to significant credit risk on these instruments.

tx. Comprehensive loss

Comprehensive loss includes, in addition to net loss, unrealized holding gains and losses on available-for-sale debt securities and derivative instruments designated as cash flow hedge (net of related taxes where applicable). For the ~~years~~year ended December 31, 2017 ~~and 2016~~, the comprehensive loss included also available-for-sale equity securities.

Reclassification adjustments for gain or loss of available for sales securities are included in finance expenses net in the statement of operations.

u.F ~~Newly~~- ~~issued and recently adopted accounting pronouncements:~~19

Accounting pronouncements adopted in 2018:

1) n May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes prior revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process that requires companies to exercise more judgment and make more estimates than under the prior guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation.

The Company adopted the guidance as of January 1, 2018, under the modified retrospective method, however, as the current revenue of the Company is driven primarily from royalties as mentioned above, the Company’s adoption of the new standard did not have a material effect on its consolidated financial statements.

2) In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10), which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amended guidance requires changes in the fair value of equity investments to be recognized through net income, rather than other comprehensive income. Adoption of the standard is applied through a cumulative one-time adjustment to retained earnings. This standard was adopted on January 1, 2018 and its accumulative adjustment had no material impact on the Company's consolidated financial statements. In addition, in February 2018, the FASB issued ASU No. 2018-03 which includes technical corrections and improvements to clarify the guidance in ASU No. 2016-01. This addition, adopted as of January 1, 2018, had no material impact on the Company’s consolidated financial statements.

F - 17

FOAMIX PHARMACEUTICALS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(U.S. dollars in thousands, except share and per share amounts)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

~~3) In May 2017, the FASB issued ASU No~~y. ~~2017-09,~~Newly ~~Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 was~~ issued ~~to provide clarity~~ and ~~reduce~~recently ~~both~~adopted 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. The amendments in ASU 2017-09 are applied prospectively to an award modified on or after the adoption date. This standard, adopted as of January 1, 2018, had no material impact on the Company’s consolidated financial statements.pronouncements:

Accounting pronouncements ~~that are not yet effective and have not been early~~ adopted byin ~~the Company~~period:

41) In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). The new standard requires lessees to record assets and liabilities on the balance sheet for all leases. The Company elected the short-term lease recognition exemption for all leases with ~~terms~~a ~~longer~~term shorter than 12 months. Leases ~~will~~are be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company plans to adopt the standard as of January 1, 2019 on a modified retrospective basis and will not restate comparative periods. The Company will elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carryforward the historical lease classification. The Company will make an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company expects that adoption of the standard will result in recognition of approximately $1,200 of lease assets and lease liabilities as of January 1, 2019 on the Company’s Consolidated Balance Sheets.

5)The Inadoption ~~June~~of ~~2018,~~ the ~~FASB~~standard ~~issued~~resulted ~~ASU~~in ~~No.~~recognition ~~2018-07~~of $1,357 ~~Compensation-Stock Compensation (Topic 718) Improvements to Nonemployee Share-based Payments. This ASU was issued to simplify the accounting for share-based transactions by expanding the scope~~ of ~~Topic~~lease ~~718~~assets ~~from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods~~ and ~~services~~lease ~~from~~liabilities ~~nonemployees.~~as ~~As a result, nonemployee share-based transactions will be measured by estimating the fair value~~ of ~~the equity instruments at the grant date~~January 1, ~~taking~~2019 ~~into~~on ~~consideration~~ the ~~probability~~Company’s ofconsolidated ~~satisfying~~balance ~~performance conditions~~sheets. ~~This~~The weighted-average ~~ASU~~interest israte ~~effective~~used ~~for~~to ~~annual~~discount ~~and~~future ~~interim~~lease ~~reporting~~payments ~~periods~~was ~~beginning after December 15, 2018~~4. ~~Early adoption is permitted~~8%.

F2) On January 1, 2019 the Company adopted the FASB issued ASU No. 2018-07, 18Compensation-Stock Compensation (Topic 718) Improvements to Nonemployee Share-based Payments. This ASU was issued to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions are being measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. The adoption of this slandered had no material impact on the Company’s consolidated financial statements.

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. Among other things, the guidance eliminated the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. As ASU 2017-12 was effective for fiscal years beginning after December 15, 2018, the Company adopted the ASU on January 1, 2019 with no material impact on the Company’s consolidated financial statements.

NOTE 3 - FAIR VALUE MEASUREMENTS

The Company’s assets and liabilities that are measured at fair value as of December 31, 2019, and December 31, 2018, are classified in the tables below in one of the three categories described in note 2v above:

December 31, 2019

Level 1

Level 2

Total

Marketable securities

Filing Compare · Foamix Pharmaceuticals Ltd.