NOTE 1 - NATURE OF OPERATIONS

Sol-Gel Technologies Ltd. (collectively with its U.S. subsidiary, the Company) is an Israeli Company incorporated in 1997.

The Company is a clinical stage specialty pharmaceutical company focused on developing and commercializing topical dermatological drug products. The Company’s lead product candidates are based upon its proprietary microencapsulation delivery system, consisting of microcapsules made of precipitated silica. The most advanced investigational drugs in the Company's product pipeline are: (i) Twyneo®, which is developed for the treatment of acne vulgaris and (ii) Epsolay®, a potential treatment for subtype II rosacea. The New Drug Application ("NDA") for Twyneo® was accepted by the U.S. Food and Drug Administration (the “FDA”), which assigned a Prescription Drug User Fee Act ("PDUFA") goal date of August 1, 2021. The NDA for Epsolay® was accepted by the FDA, which assigned a PDUFA goal date of April 26, 2021. On such PDUFA goal date, the Company received confirmation from the FDA that action on the NDA could not be taken since a pre-approval inspection of the production site of Epsolay® still needs to be conducted. In June 2021, the Company entered into two exclusive license agreements with a third party for the commercialization of Twyneo® and Epsolay®, in the United States, see note 5. On July 27, 2021, the Company announced that the FDA approved the drug product, Twyneo®, see note 9. In addition to the novel product candidates, the Company’s products include the generic products Acyclovir, Ivermectin and other generic product candidates.

Risk and Uncertainties

Since incorporation through June 30, 2021, the Company has an accumulated deficit of $193,459 and its activities have been funded mainly by its shareholders and collaboration revenues, see also Notes 4 and 5. The Company expects to continue to incur significant research and development and other costs related to its ongoing operations. In June 2021, the Company entered into two exclusive license agreements with a third party for the commercialization of two of the Company's most advanced investigational drug products in the United States including upfront and milestone payments and related royalties, see note 5.

In addition, management is continuing to analyze cash resources and considering raising additional funding from different sources, such as corporate collaborations, public or private equity offerings and/or debt financings, and/or selling shares under the Company's Open Market Sale Agreement with Jefferies LLC. Management expects that the Company's cash and cash equivalents, deposits and marketable securities as of June 30, 2021 will allow the Company to fund its operating plan through at least the next 12 months from the condensed financial statement issuance date.

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic.

The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including revenues from collaboration arrangements, expenses, reserves and allowances, manufacturing, supply, regulatory approvals, clinical trials, commercial launch of branded and generic product candidates, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain and cannot be predicted. The Company continues to monitor and assess new information related to the COVID-19 pandemic, the actions taken to contain or treat COVID-19, as well as the economic impact on various markets.

Furthermore, the estimation process required to prepare the Company’s consolidated financial statements requires assumptions to be made about future events and conditions and the impact of COVID-19 on its financial results, and while management believes such assumptions are reasonable, they are inherently subjective and uncertain. The Company’s actual results could differ materially from those estimates.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:

NOTE 3  - MARKETABLE SECURITIES:

The Company’s debt securities are classified within Level 2 because it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value.

The carrying amount of the cash and cash equivalents, bank deposits, restricted cash, restricted long term deposits, accrued expenses and other liabilities approximates their fair value.

NOTE 4 - COLLABORATION AGREEMENTS:

a. In 2007, the Company granted rights to a third party for use and commercialization of a product for skin protection. Under this agreement, the Company is entitled to royalties during the years 2016 to 2024. Based on current sales, royalties are not material.

b. In 2016 through 2021, the Company entered into several collaboration agreements with two third parties for the development, manufacturing and commercialization of several product candidates. Under the agreements, the third parties are obligated to conduct regulatory, scientific, clinical and technical activities necessary to develop the product and prepare and file ANDA, with the FDA and gain regulatory approval. The Company participates in the development of the product candidates, including participation in joint steering committees and is obligated for sourcing the active pharmaceutical ingredient (API) during the development phase.

Upon FDA approval, the third parties have exclusive rights and are required to use diligent efforts to commercialize these products in territories defined under the agreements, including all required sales, marketing and distributing activities associated with the agreements. The Company is entitled to 50% of the third parties’ gross profits related to the sale of these products, as such term is defined in the agreements.

During the six and three months ended June 30, 2021, respectively, the Company recognized revenues from royalties related to sales of two generic products in the U.S. under these agreements in the amount of $1,582 and $904.

The Agreements are considered to be within the scope of ASC 808, as the parties are active participants and exposed to the risks and rewards of the collaborative activity.

The Company recognizes collaboration revenue when the related sales occur.

NOTE 5 - LICENSE AGREEMENTS:

In June 2021, the Company entered into two exclusive license agreements with a third party for the commercialization of two of the Company most advanced investigational drug products (Twyneo® and Epsolay®) in the United States. The Company is entitled to up to $7.5 million per product in upfront payments and regulatory approval milestone payments assuming 2021 approval of each respective product. The Company is also eligible to receive tiered double-digit royalties ranging from mid-teen to high-teen percentage of net sales as well as up to $9 million in sales milestone payments. According to the agreement, the Company has an option to regain commercialization rights five years following first commercialization. Subsequent to June 30, 2021, the Company received $4 million per product of upfront payments, which are refundable if FDA approval for each respective product is not received by December 31, 2021. As to FDA approval, received subsequent to June 30, 2021, with respect to Twyneo® , see note 9.

NOTE 6 - COMMITMENTS:

In June 2021, the Company entered into a new agreement with a third party for the commercialization of a product candidate. According to the agreement the Company shall receive from the third party an upfront payment of $1,250 and additional milestone payments in the future. In connection with the development of the product candidate, the Company is expected to sign an agreement with another third party. Both third parties are expected to sign a manufacture and supply agreement. In case either the development and/or supply agreements will not be executed during the 3rd quarter of 2021, the Company shall be required to refund the third party with the aforementioned upfront payment. In July 2021, the Company received the upfront payment.

NOTE 7 – SHARE CAPITAL:

Options grants

During the six months ended June 30, 2021, the Company granted 248,600 options to employees and directors:

i.

In January 2021 and March 2021, the Company granted a total of 20,000 options and 3,600 options, respectively, to several employees to purchase ordinary shares at an exercise price of $10.44 and $9.93 per share, respectively. The options vest over a period of 4 years; one quarter of the options vest on the first anniversary of the vesting commencement date (as described in each agreement) and the rest vest quarterly over the following three years. The options expire on the tenth anniversary of their grant date.

ii.

In February 2021, the Company granted a total of 225,000 options to several directors to purchase ordinary shares at an exercise price of $10.02 per share. The options vest over a period of 3 years; one third of the options vest on the first anniversary of the vesting commencement date (as described in each agreement) and the rest vest quarterly over the following two years. The options expire on the tenth anniversary of their grant date.

Ordinary shares

On February 19, 2020, the Company completed an underwritten public offering, in which it issued 2,091,907 ordinary shares and 2,091,907 warrants to purchase up to 1,673,525 ordinary shares, at a public offering price of $11.00 per ordinary shares for total proceeds, net of issuance costs of approximately $21,306. The warrants are exercisable over a six-years period from the date of issuance at a per share exercise price of $14, subject to certain adjustments as defined in the agreement.

In addition and in parallel to the public offering, the Company completed private placement with its controlling shareholder for an additional investment of approximately $5,000 in consideration of 454,628 ordinary shares and 454,628 warrants to purchase up to 363,702 ordinary shares, at the same terms of the underwritten public offering mentioned above.

NOTE 8 - RELATED PARTIES:

a. Related parties include the controlling shareholder and companies under his control, the board of directors and the executive officers of the Company.

b. As to the private placement with the controlling shareholder, see note 7.

NOTE 9 – SUBSEQUENT EVENT:

i. On July 27, 2021, the Company announced that the FDA approved the Company’s first proprietary drug product, Twyneo® . The Company expects to receive a regulatory milestone payment in conjunction with this approval under the exclusive license executed in June 2021 related to the commercialization of Twyneo® and retains the option to regain U.S. commercialization rights five years following first commercialization in the U.S. FDA approval of Twyneo®.

ii. In July 2021, the Company received the upfront payment related to a new agreement with a third party for the commercialization of a product candidate, see Note 6.