NOTE 9 - SHARE CAPITAL

Common stock

As of March 31, 2020, the Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 300,000,000 shares of $0.0001 par value common stock.

Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when and if declared by the board of directors, subject to the prior rights of holders of all classes of preferred stock outstanding. The Company has never declared any dividends on common stock.

Issuance of stock

On July 29, 2019, pursuant to the Credit Agreement and Securities Purchase Agreement, Foamix issued and sold, in a registered offering, an aggregate of 6,542,057 ordinary shares at a purchase price of $2.14 per share, later exchanged to 3,875,514 Menlo common stock at the closing of the Merger. The aggregate gross proceeds of approximately $14 million, before deducting issuance costs allocated as described in Note 8-Long Term Debt, in the amount of $286.

Pursuant to the completion of the merger, on March 9, 2020, the Company issued 36,550,335 shares to Foamix shareholders (See also "Note 12 - Subsequent Events" for more information relating to subsequent issuance of shares to Foamix shareholders).

Warrants

In addition to the Credit Agreement signed on July 29, 2019, on the Closing Date, Foamix issued to the lender Warrants to purchase up to an aggregate of 1,100,000 of its ordinary shares, later exchanged to 651,640 of Menlo’s common stock. Upon the closing of the Merger, each Warrant received one CSR as described in Note 3- Business Combinations (See also “Note 12 – Subsequent Events” for more information relating to subsequent issuance of shares to Foamix shareholders). The warrants were exercisable immediately following the closing of the Credit Agreement and are due to expire on July 29, 2026. Any Warrants left outstanding will be cashless exercised on the Warrants’ expiration date, if in the money.

The exchange of Warrants from Foamix warrants to Menlo warrants and the additional CSR, was accounted for as a modification, by analogy, from the modification’s guidance under ASC 260-10-S99-2. The Company assessed the significance of the modification of the Warrants by comparing the fair value of the Warrants immediately before and after the amendments. In its assessment, it also considered additional qualitative factors. The Company concluded that the change of terms was not significant. Therefore, the incremental fair value, in the amount of $41, of the modified Warrants over the original ones (as of modification date) was recognized in retained earnings as deemed dividend to the Warrants holders.

Share-based compensation

Equity incentive plan:

Upon closing of the Merger, the company adopted Foamix’s equity incentive plan (the “Plan”). As of March 31, 2020, 1,286,346 shares remain issuable under the Plan. (See also “Note 12 – Subsequent Events” for more information relating to subsequent issuance of equity awards)

Employee Share Purchase Plan:

Upon closing of the Merger, the company adopted Foamix’s ESPP pursuant to which qualified employees (as defined in the ESPP) may elect to purchase designated shares of the Company’s common stock at a price equal to 85% of the lesser of the fair market value of the common stock at the beginning or end of each semi-annual share purchase period (“Purchase Period”). Employees are permitted to purchase the number of shares purchasable with up to 15% of the earnings paid (as such term is defined in the ESPP) to each of the participating employees during the Purchase Period, subject to certain limitations under Section 423 of the U.S. Internal Revenue Code.

As of March 31, 2020, 3,083,157 shares remain available for grant under the ESPP.

During the three months ended March 31, 2020, 61,031 Foamix ordinary shares, later exchanged to 36,155 Menlo common stock, were issued to the employees.

Options and RSUs granted to employees and directors:

In the three months ended March 31, 2020 and 2019, the Company granted options and RSU as follows:


	Three months ended March 31, 2020
	Award amount*	Exercise price range*		Vesting period	Expiration
Employees and Directors:
Options	1,465,190		$2.67-$6.80	1 year - 4 years	10 years
RSUs	435,559		—	1 year - 4 years	—


	Three month ended March 31, 2019
	Award amount*	Exercise price range*		Vesting period	Expiration
Employees:
Options	531,818		$6.01-$6.43	4 years	10 years
RSUs	162,689		—	4 years	—

* All amounts and exercise prices for pre-Merge grants are presented following the exchange to Menlo options and RSUs at the Exchange Ratio described in Note 3-Business Combination.

The fair value of options and RSUs granted to employees and directors during the three months ended March 31, 2020, and the three months ended March 31, 2019 was $4,268 and $2,736 , respectively.

The fair value of RSUs granted is based on the share price on grant date.

The fair value of options granted was computed using the Black-Scholes model. The underlying data used for computing the fair value of the options are as follows:


	Three months ended March 31
	2020	2019
Dividend yield	0%	0%
Expected volatility	60.44%-69.83%	61.2%-61.4%
Risk-free interest rate	1.17%-1.26%	2.55%-2.62%
Expected term	6 years	6 years

Pursuant to the Merger, all outstanding options and RSUs granted by Foamix were exchanged to stock options and RSUs of Menlo's common stock according to the Exchange Ratio. In addition, for each option and RSU the holder received a CSR as described in Note 3- Business Combination. This transaction was considered by the company to be a modification under ASC 718. The modification did not affect the remaining requisite service period. As a result of the modification, for outstanding options and RSUs granted to Foamix employees and consultants, the Company recorded incremental compensation expense of $60 related to the modification in the consolidated statement of operations.

Awards granted to options and RSU holders who are no longer employed or providing services to the Company are accounted for in accordance with ASC 815-40. Under this guidance, the awards are classified as a derivative liability because the award no longer exchanges a fixed amount of cash for a fixed number of shares. Accordingly, the Company reclassified $1.6 million from additional paid-in capital to derivative liability on the unaudited condensed consolidated balance sheet. Prior to the reclassification of these awards as a liability instrument, the Company recorded an incremental compensation expense of $587 due to the above mentioned modification in accordance with ASC 718.

Prior to the Merger, Menlo recognized all expenses relating to awards outstanding as of the Effective Date. These awards were subject to acceleration upon the change of control per the previous Menlo stock option plan.

The following table illustrates the effect of share-based compensation on the statements of operations:


	Three months ended
	March 31
	2020		2019
Research and development expenses	$	516	$	354
Selling, general and administrative		1,243		596
Total	$	1,759	$	950