Item 7. Management’s Discussion and Analysis of the Results of Operations

Forward-Looking Statements

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this Form 10-K. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” “may,” “plan,” “seek” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof and we assume no obligation to update any such forward-looking statements. For such forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Our business and financial performance are subject to

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substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” herein and in our Annual Report on Form 10-K for the year ended December 31, 2020. As used below, the words “we,” “us” and “our” may refer to Journey Medical Corporation.

Overview

We are a commercial-stage pharmaceutical company founded in October 2014 that focuses on the development and commercialization of pharmaceutical products for the treatment of dermatological conditions. Our current portfolio includes seven branded and three authorized generic prescription drugs for dermatological conditions that are actively marketed in the U.S. We are managed by experienced life science executives with a track record of creating value for their stakeholders and bringing novel medicines to the market, enabling patients to experience increased quality of life and physicians and other licensed medical professionals to provide better care for their patients. We aim to acquire rights to future products by licensing or otherwise acquiring an ownership interest in, funding the research and development of, and eventually commercializing, the products through our exclusive field sales organization.

On November 16, 2021, we completed an IPO of our common stock, which resulted in net proceeds of approximately $30.6 million, after deducting underwriting discounts and other offering costs.

Prior to our IPO our operations were primarily financed through a working capital note from Fortress Biotech, Inc. (“Fortress”), referred to herein as the “Fortress Note,” cash generated by operations and cash raised in our private offering of our 8% Cumulative Convertible Class A Preferred Stock (“Class A Preferred Stock”). In connection with the closing of our IPO on November 16, 2021, we issued 2,231,346 shares of common stock resulting from the conversion of all of the Class A Preferred Stock. In addition, the Fortress Note was converted into 1,476,044 shares of Journey common stock at our IPO price of $10.00 per share.

We expect our expenses will increase substantially for the foreseeable future as we pursue business development opportunities, commercialize, and market new products and incur additional costs associated with operating as a public company. To date, our business has not been materially impacted by COVID-19; however, depending on the extent of the ongoing pandemic, it is possible that our business, financial condition and results of operations could be materially and adversely affected by COVID-19 in the future.

Our cash and cash equivalents balance was $49.1million at December 31, 2021.

Recent Subsequent Highlights (“VYNE Product Acquisition”)

In January 2022, we acquired AMZEEQ (minocycline) topical foam, 4%, and ZILXI (minocycline) topical foam, 1.5%, two FDA-Approved Topical Minocycline Products and Molecule Stabilizing Technology (MST)TM from VYNE Therapeutics, Inc., which expands our product portfolio to seven actively marketed branded dermatology products.

These proprietary foam-based products optimize the topical delivery of minocycline, an active pharmaceutical ingredient that was previously available only in oral form. Approved by FDA nearly 50 years ago, minocycline is a well-established molecule that has been prescribed, in oral formulation, over 30 million times in the past decade.

AMZEEQ (minocycline) topical foam, 4%, is the first and only topical formulation of minocycline to be approved by the FDA for the treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in adults and children 9 years and older. According to the AAD, acne is the most common skin condition in the United States, affecting up to 50 million Americans annually.

Approved by the FDA in May 2020, ZILXI (minocycline) topical foam, 1.5%, is the first and only topical minocycline treatment for inflammatory lesions due to rosacea in adults. Rosacea is a common skin disease that affects 16 million Americans, according to AAD. Market research shows that over 70% of patients with rosacea are seeking better alternatives to current treatments.

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2021 Highlights and Events

● In May 2021, we acquired Qbrexza from Dermira.

Other Subsequent Highlights

On January 12, 2022, we entered into a third amendment (the “Amendment”) of our loan and security agreement with EWB noted above, which increased the borrowing capacity of our revolving line of credit to $10.0 million, from $7.5 million, and added a term loan not to exceed $20.0 million. Both the revolving line of credit and the term loan mature on January 12, 2026. The term loan includes two tranches, the first of which is a $15.0 million term loan and the second of which is a $5.0 million term loan. On January 12, 2022, we borrowed $15.0 million against the first tranche of the term loan to facilitate the VYNE Product Acquisition. The term loan bears interest on its outstanding daily balance at a floating rate equal to 1.73% above the prime rate and is payable monthly, on the first calendar day each month. The term loans contain an interest only payment period through January 12, 2024, with an extension through July 12, 2024 if certain covenants are met, after which the outstanding balance of each term loan is payable in equal monthly installments of principal, plus all accrued interest, through the term loan maturity date. We may prepay all or any part of the term loan without penalty or premium, but may not re-borrow any amount, once repaid. Any outstanding borrowing against the revolving line of credit bears interest at a floating rate equal to 0.70% above the prime rate. The Amendment includes customary financial covenants such as collateral ratios and minimum liquidity provisions as well aa audit provisions.

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On February 11, 2022, we announced that our exclusive out-licensing partner in Japan, received manufacturing and marketing approval in Japan for Rapifort® Wipes 2.5% (Japanese equivalent to U.S. FDA approved QBREXZA®) for the treatment of primary axillary hyperhidrosis, triggering a net $2.5 million milestone payment to us. The net payment reflects a milestone payment of $10.0 million to us from our exclusive licensing partner in Japan, Maruho Co., Ltd. (“Maruho”), offset by a $7.5 million payment to Dermira, Inc., pursuant to the terms of the Asset Purchase Agreement between us and Dermira. In conjunction with the terms list above both trsactions were completed in March of 2021. We acquired global rights to QBREXZA® from Dermira in 2021.

On March 17, 2022, we dosed the first patient in our Phase 3 clinical trial evaluating DFD-29 (Minocycline Modified Release Capsules 40 mg) for the Treatment of Rosacea. In addition, the published phase 2 clinical data showed that DFD-29 had approximately double the efficacy compared to Doxycycline capsules 40 mg on reducing total inflammatory lesions and IGA treatment success. The trial will encompass two multicenter, randomized, double-blind, parallel-group, active and placebo-controlled Phase 3 clinical trials will each enroll up to 320 adult patients with moderate to severe papulopustular rosacea (“PPR”). One trial is enrolling patients in the United States and the other is enrolling in the United States and Europe. The studies will be randomized in a 3:3:2 ratio to DFD-29 (Minocycline Hydrochloride Modified Release Capsules, 40 mg), Oracea® (Doxycycline capsules 40 mg) or placebo once daily for 16 weeks. The primary objective of the studies is to evaluate the safety, efficacy and tolerability of DFD-29 compared to placebo for the treatment of PPR. The secondary objective is to evaluate the safety, efficacy and tolerability of DFD-29 compared to Oracea® (Doxycycline capsules 40 mg).

Critical Accounting Polices and Uses of Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

While our significant accounting policies are described in the notes to our consolidated financial statements included elsewhere in this Report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

Revenue Recognition

Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, coupons, discounts, other sales allowances, governmenatal rebate programs and sales returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on gross sales for a reporting period. Historically, adjustments to these estimates to reflect actual results or updated expectations have not been material to our overall business. Coupons , however, can have a significant impact on year-over-year individual product revenue growth trends. If any of our ratios, factors, assessments, experiences, or judgments are not indicative or accurate estimates of our future experience, our results could be materially affected. The potential of our estimates to vary differs by program, product, type of customer and geographic location. In addition, estimates associated with U.S. Medicare and Medicaid governmental rebate programs are at risk for material adjustment because of the extensive time delay.

Stock-based Compensation

We utilize stock-based compensation in the form of stock options, restricted stock units, or RSUs, and at times performance-based restricted stock units, or PSU’s. We expense stock-based compensation to employees, non-employees and Directors over the requisite service period based on the estimated grant-date fair value of the awards and actual forfeitures. All stock-based compensation costs are recorded as a component of selling, general and administrative expense in the consolidated statements of operations.

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Service based stock options and RSU’s

Compensation expense for service-based stock options is charged against operations on a straight-line basis between the grant date for the option and the vesting period, which is generally four years. We estimate the fair value of all service-based stock option awards as of the grant date by applying the Black-Scholes option pricing valuation model. The application of this valuation model involves assumptions that are highly subjective, judgmental, and sensitive in the determination of compensation cost, including expected volatility, risk-free interest rate, expected dividends and the expected term of the option. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

Prior to our IPO, which closed on November 16, 2021, the fair value of our common stock underlying stock options was an input to the Black-Scholes option pricing model. We engaged an independent third-party valuation firm to provide an estimate of the fair value of its common stock annually, utilizing input from management. The fair value of our common stock was determined considering a number of objective and subjective factors, including valuations of guideline public companies, transactions of guideline public companies, discounts for lack of control transactions, lack of liquidity of our common stock and the general and industry-specific economic outlook.

RSU’s that are service based are amortized into compensation expense on a straight-line basis over the vesting period, which generally ranges from three to four years in duration. Compensation cost for service based RSU’s is based on the grant date fair value of the award, which is the closing market price of our common stock on the grant date multiplied by the number of shares awarded.

RSU’s that contain performance conditions

We recorded approximately $2.4 million of stock-based compensation expense in the fourth quarter of 2021, associated with performance-based RSU’s granted to key employees that fully vested upon the closing of our IPO.

For the years ended December 31, 2021 and 2020, stock-based compensation expense was $2.5 million and $0.2 million, respectively. As of December 31, 2021, we expect to continue to grant options and other stock-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

Pre-IPO Common Stock Valuations

Prior to our IPO, given the absence of a public trading market of our common stock prior to the IPO, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation, or the Practice Aid, our board of directors exercised reasonable judgment and considered numerous and subjective factors to determine the best estimate of fair value of our common stock prior to the IPO, including, but not limited to:

● relevant precedent transactions involving our capital stock;

● contemporaneous valuations performed by third-party specialists;

● actual operating and financial performance;

● current business conditions and financial projections;

● market multiples of comparable publicly-traded companies;

● stage of development;

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● industry information such as market size and growth; and

● U.S. and global capital and macroeconomic conditions.

The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, we considered the following methods:

For valuations performed beginning in 2021, prior to the initial public offering, in accordance with the Practice Aid, we used a hybrid approach of the OPM and the PWERM methods to determine the estimated fair value of our common stock as a result of the increasing likelihood of the occurrence of certain discrete events, such as a potential initial public offering, improving market conditions and receptivity of the market to initial public offerings. The enterprise value determined under the OPM and PWERM methods was weighted according to our board of directors’ estimate of the probability of the occurrence of a certain discrete event as of the valuation date. The resulting equity value for the common stock was then divided by the number of shares of common stock outstanding at the date of the valuation to derive a per share value on a non-marketable basis. In order to determine the fair value of our common stock on a marketable basis, we then applied a discount for lack of marketability which we derived based on inputs including a company-specific volatility rate, a term equal to the expected time to a future liquidity event and a risk-free rate equal to the yield on treasuries of similar duration.

Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, cash flows, discount rates, market multiples, the selection of comparable companies and the probability of future events. Changes in any or all of these estimates and assumptions, or the relationships between those assumptions, impact our valuations as of each valuation date and may have a material impact on the valuation of common stock. The assumptions underlying these valuations represent our management’s best estimate, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different.

Following the closing of the initial public offering, the fair value of our common stock has been determined based on the quoted market price of our common stock.

Income Taxes

As of December 31, 2021, we were 58.39% owned by Fortress Biotech, Inc. (“Fortress”) and were filing consolidated federal tax return and consolidated or combined state tax returns in multiple jurisdictions with Fortress for tax years prior to 2021. As we completed our initial public offering on November 12, 2021, we deconsolidated from Fortress consolidated group for federal income tax purpose. Our financial statements recognize the current and deferred income tax consequences that result from our activities during the current and preceding periods pursuant to the provisions of Accounting Standards Codification Topic 740, Income Taxes (ASC 740), as if we were a separate taxpayer rather than a member of the Fortress consolidated income tax return group. Fortress has agreed that we do not have to make payments to Fortress for our use of net operation losses (“NOLs”) of Fortress (including other Fortress group members). Since Fortress does not require us to pay in any form for the utilization of the consolidated group’s NOLs, the tax benefit we realize have been recorded as a capital contribution.

We record income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. We establish a valuation allowance if management believes it is more likely than not that the deferred tax assets will not be recovered based on an evaluation of objective verifiable evidence. Management has considered our history of cumulative tax and book income/loss incurred since inception, and the other positive and

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negative evidence, and has concluded that it is not more likely than not that we will realize the benefits of the net deferred tax assets as of December 31, 2021 and therefore a full valuation allowance on all of our deferred tax assets is required. We did not record any valuation allowance as of December 31, 2020.

For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is greater than 50% likely of being realized. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit. As of December 31, 2021, we had no unrecognized tax benefits and do not anticipate any significant change to the unrecognized tax benefit balance. We classify interest and penalties related to uncertain tax positions as income tax expense, if applicable. There was no interest expense or penalties related to unrecognized tax benefits recorded through December 31, 2021.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption, if applicable, and our assessment, if any, of their potential impact on our financial condition and results of operations.

Smaller Reporting Company Status

We are a “smaller reporting company,” meaning that the market value of our shares held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than $700 million. As a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K, have reduced disclosure obligations regarding executive compensation, and smaller reporting companies are permitted to delay adoption of certain recent accounting pronouncements discussed in Note 2 to our consolidated financial statements in this report on Form 10-K.

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Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

The following table summarizes our results of operations for the years ended December 31, 2021 and 2020:

Year Ended December 31, Change

($ in thousands, except per share data) 2021 2020 $ %

Operating expenses

Research and development - licenses acquired 13,819 — 13,819 100 %

Other expense

Interest income (2) — (2) 100 %

Change in fair value of derivative liability 447 — 447 100 %

Revenues

The following table reflects our net product revenue by product:

Year Ended December 31, Change

Total net product revenues increased $18.6 million, or 42%, to $63.1 million for the year ended December 31, 2021, from $44.5 million for the year ended December 31, 2020. The increase is primarily due to incremental revenues from our newly launched products, Accutane, launched in the first quarter of 2021, and Qbrexza, launched during the second quarter of 2021. Offsetting the increase is a decrease in our legacy product, Ximino primarily driven by increased promotional emphasis from our salesforce to Accutane, and increased pressure from generic competition.

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Gross-to-net sales accruals and the balance in the related allowance accounts for the years ended December 31, 2021, 2020 and 2019 were as follows:

Chargebacks

and Managed

Distributor Care Gov’t

($’s in thousands) Service Fees Returns Coupons Rebates Rebates Total

Reclassifications between liability accounts — (1,100) 1,100 — — —

Reclassifications between liability accounts — (315) 315 — — —

We have established provisions for chargebacks resulting from the launch of our new products noted above. Included in the reserve for chargebacks and distributor service fees are provisions for prompt pay discounts.

Provisions for sales returns increased by $0.7 million in 2021 compared to 2020 mainly due to incremental provisions resulting from our newly launched products, Accutane, launched in the first quarter of 2021, and Qbrexza, acquired during the second quarter of 2021.

The provision for coupons decreased by $7.8 million in 2021 compared to 2020 mainly due to the timing of payments in 2020.

Managed care and Government rebate provisions increased by $3.4 million for 2021 compared to 2020 due to by higher sales volumes and a greater portion of sales qualifying for managed care rebates.

Cost of Goods Sold

Cost of goods sold for increased $17.5 million, to $32.1 million for the year ended December 31, 2021, from $14.6 million for the year ended December 31, 2020. Cost of goods sold was 50.8% and 32.8% of net product revenues for the years ended December 31, 2021 and 2020, respectively. The increase primarily reflects the step-up to fair value charge of approximately $6.5 million for the Qbrexza inventory from the asset purchase in the second quarter of 2021 as well as the increase in royalty expense related to Qbrexza.

Research and Development

Research and Deelopment expense increased to $2.7 million for the year ended December 31, 2021, from zero for the year ended December 31, 2020. The increase is related to clinical trial expenses to develop our DFS-29 product. We expect these expenses to increase as patients are fully enrolled in the trials.

Research and Development – Licenses Acquired

Research and development - licenses acquired expenses are incremental from period-to-period and reflect current year expenses of $13.8 million for in-process R&D as a result of the upfront payment of $10.0 million and a $3.8 million non-cash contingent payment related to the DFD-29 Agreement.

Selling, General and Administrative Expenses (“SG&A”)

Selling, general and administrative expenses increased $17.7 million to $39.8 million for the year ended December 31, 2021, from $22.1 million for the year ended December 31, 2020. The increase is primarily attributable to the expansion of our salesforce and marketing expense related to our expanded product portfolio. In addition, SG&A for the year ended December 31, 2021 includes incremental non-cash stock-based compensation expense of $2.4 million related to the vesting of restricted performance units in connection with the closing of our IPO on November 16, 2021. Finally, the company expanded its finance and accounting staff in the fourth quarter of 2021. Along with other supporting services related to being a public company.

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Wire Transfer Fraud Loss

In September 2021, wire fraud related costs totaled approximately $9.5 million. These costs were attributable to funds erroneously wired to fraudulent accounts as a result of a sophisticated business email compromise fraud scheme.

Interest Expense and Financing Fees

Interest expense and financing fees increased $6.3 million to $7.0 million for the year ended December 31, 2021, from $0.7 million for year ended December 31, 2020. The increase is primarily attributable to interest, fees and dividends payable related to our liability classified convertible preferred shares and interest expense related to our installment payment licensees. In addition, we recorded incremental interest expense for our preferred shares and debt fees due to the settlement and conversion to common stock as a result of the closing of our IPO on November 16, 2021.

Change in Fair Value of Derivative Liabilities

The change in fair value of derivative liabilities reflects the derivative mark-to-market accounting to mark to fair value the contingent payment liability to Dr. Reddy and liability classified warrants and the placement agent warrants as a result of the settlement and conversion of these warrant liabilities to our common stock. In connection with the our IPO we issued 111,567 shares of common stock for settlement of all of the placement agent warrants. In addition, we issued 545,131 unregistered shares of common stock to Dr. Reddy in settlement of the contingent payment. We have no derivative liabilities outstanding at December 31, 2021.

Income tax expense

Our effective tax rate for 2021 and 2020 was (3.86)% and 26.18%, respectively. The negative effective tax rate of 3.86% for the year ended December 31, 2021 was principally due to our full valuation allowance position. Our tax rate is affected by recurring items, such as the U.S. federal and state statutory tax rates and the relative amounts of income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. The effective tax rate for the for year ended December 31, 2021 varied significantly from the effective tax rate from the prior year primarily due to unfavorable permanent book tax differences and our full valuation allowance position.

Liquidity and Capital Resources

At December 31, 2021, we had $49.1 million in cash and cash equivalents as compared to $8.2 million at December 31, 2020.

On November 16, 2021, we completed an IPO of our common stock, which resulted in net proceeds of approximately $30.6 million, after deducting underwriting discounts and other offering costs.

Prior to our IPO, our operations were primarily financed through a working capital note from Fortress, referred to herein as the “Fortress Note,” cash generated by operations and cash raised in our private offering of our 8% Cumulative Convertible Class A Preferred Stock (“Class A Preferred Stock”). In connection with the closing of our IPO on November 16, 2021, we issued 2,231,346 shares of common stock resulting from the conversion of all of the preferred stock. In addition, the Fortress Note was converted into 1,476,044 shares of Journey common stock at our IPO price of $10.00 per share. In addition, we have access to a working capital line of credit as discussed below. For the next twelve months from the issuance of these audited consolidated financial statements, we will be able to fund our operations through a combination of operating activities and the East West Bank Working Line of Credit.

We expect our expenses will increase substantially for the foreseeable future as we pursue business development opportunities, commercialize and market new products and incur additional costs associated with operating as a public company. To date, our business has not been materially impacted by COVID-19; however, depending on the extent of the ongoing pandemic, it is possible that our business, financial condition and results of operations could be materially and adversely affected by COVID-19 in the future.

We may require additional financing to pursue both development stage and commercial opportunities. In addition, we anticipate increased commercialization expenses related to the launch of new products, as well as increased costs related to development and regulatory approval of potential development stage product acquisitions, including DFD-29. As we continue to expand our product portfolio, we may need to fund possible future operating losses, and, if deemed appropriate, establish or secure through additional third-party manufacturing for our products, and expanded sales and marketing capabilities related to recent product acquisitions. We believe

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that our current cash and cash equivalents is sufficient to fund operations for at least the next twelve months. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition and our ability to pursue our business strategies.

Line of Credit

On March 31, 2021, we entered into a Loan and Security Agreement with East West Bank (“EWB Loan”) for $7.5 million, that was amended to $10.0 million in January 2022 as part of a loan expansion, which also included a $20.0 million term loan totaling $30.0 million in borrowing capacity. In January 2022, we borrowed $20.0 million against the term loan portion of the amended EWB loan to facilitate the purchase of the VYNE products.

Class A Preferred Stock Offering

As of July 18, 2021, we completed five closings in connection with the Class A Preferred Offering (“Closings”). As a result of the Closings, we issued an aggregate of 758,680 Class A Preferred shares at a price of $25.00 per share, for gross proceeds of $19.0 million. Following the payment of placement agent fees of $1.9 million, and other expenses of $0.1 million, we received $17.0 million of net proceeds. As noted above, in connection with the closing of our IPO on November 16, 2021, we issued 2,231,346 shares of common stock resulting from the conversion of all of the preferred stock. Pursuant to its terms the Class A Preferred Stock automatically converted into our common stock at the IPO date at a discount of 15% to the per share qualified stock price.

Dividends on the Class A Preferred Stock of 8% annually are paid on a quarterly basis by Fortress in the form of shares of Fortress’ common stock based upon a 7.5% discount to the average trading price over the 10-day period preceding the dividend payment date. Furthermore, Fortress is obligated to file one or more registration statements covering the issuance of shares that result from such dividends/exchange. As consideration for the foregoing issuances by Fortress of its securities, we will issue to Fortress additional shares of our common stock, debt securities, or a combination of the foregoing.

Although our Class A Preferred Stock is in the form of preferred stock, in substance this instrument was accounted for as a liability on our consolidated balance sheet as it converted into a variable number of shares at settlement related to the original amount invested and as such it did not contain a true conversion feature.

Cash Flows for the Years Ended December 31, 2021 and 2020

For the Years Ended December 31,

Net cash used in investing activities (10,000) (1,200) (8,800)

Net cash provided by (used in) financing activities 53,016 (487) 53,503

Net change in cash and cash equivalents $ 40,835 $ 3,445 $ 37,390

Operating Activities

Net cash used in operating activities increased to $2.2 million for the year ended December 31, 2021 from net cash provided by operating activities of $5.1 million for the year ended December 31, 2020. The decrease is primarily attributable to our net loss of $44.0 million, offset by increases in accounts payable, and expense for development-licenses acquired. The increases reflect costs related to the continued commercialization and expansion of our product portfolio, including the purchases of licenses and sales and marketing related costs as well as costs associated with being a new public company.

Investing Activities

Net cash used in investing activities was $10.0 million and $1.2 million for the years ended December 31, 2021 and 2020, respectively. The increase is related to the purchase of research and development licenses.

Financing Activities

Net cash provided by financing activities was $53.0 million for the year ended December 31, 2021. Net cash used in financing activities was $0.5 million for the year ended December 31, 2020. The increase is substantially related to $31.0 million in net proceeds received

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from the closing of our IPO and $9.5 million and net proceeds of $17.0 million received from the Fortress Note, and net proceeds from the Class A Preferred Offering, respectively, offset by $5.3 million payment of our license note payable.

Off-Balance Sheet Arrangements

We did not have during the periods presented, nor do we currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Item 7A. Quantitative and Qualitative Disclosures About Market Risks

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.

Item 8. Financial Statements and Supplementary Data.

The information required by this Item is set forth in the financial statements and notes thereto beginning at page F-1 of this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in and Management’s Report on Internal Control over Financial Reporting.

This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. Further, for as long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirement.

In September 2021, an employee email account was compromised by a third-party impersonator and payments intended for a vendor, approximating $9.5 million, were fraudulently re-directed into an individual bank account controlled by this third-party impersonator. The impersonator had taken a number of steps to deceive our employees and reduce the likelihood of detection. As a result of the foregoing, we identified a material weakness due to our internal controls having not been adequately designed to prevent or timely detect unauthorized cash disbursements.

In light of the above incident, our management took immediate action to remediate the material weakness, including enhancing and formalizing cash disbursement controls to prevent and timely detect unauthorized cash disbursements and significantly enhancing our

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information technology infrastructure and security measures. However, given the identification of the material weakness during September 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were not effective at the reasonable assurance level. As of the date of this filing we believe this material weakness has been remediated.

Limitations on the Effectiveness of Controls.

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

Item 9B. Other Information

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders.

Item 11. Executive Compensation

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders.

Item 14. Principal Accounting Fees and Services

The information required by this Item is incorporated by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Financial Statements.

The following financial statements are filed as part of this report:

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets as of December 31, 2021 and 2020 F-3

Notes to Consolidated Financial Statements F-7

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(b) Exhibits.

Exhibit Number Description

3.2 Amended and Restated Bylaws of Journey Medical Corporation. *

4.2 Description of Securities of Journey Medical Corporation. *

21.1 List of Subsidiaries of Journey Medical Corporation. *

24.1 Power of Attorney (included on signature page). *

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* Filed herewith.

**Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K.

# Management Compensation Arrangement.

Item 16. Form 10-K Summary

The Company has elected not to provide summary information.

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INDEX TO FINANCIAL STATEMENTS

Consolidated Balance Sheets as of December 31, 2021 and 2020 F-3

Notes to Consolidated Financial Statements F-7

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Journey Medical Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Journey Medical Corporation and subsidiary (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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.

We conducted our audits in accordance with 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 due to error or fraud. Our 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.

/s/ KPMG LLP

We have served as the Company’s auditor since 2021.

Short Hills, New Jersey

March 28, 2022

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JOURNEY MEDICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

December 31,

ASSETS

Current assets

Accounts receivable, net of reserves 23,112 23,928

Prepaid expenses and other current assets 2,438 1,664

Operating lease right-of-use asset, net 89 175

Deferred tax assets — 1,454

Other assets 150 6

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable, related party 589 117

Accrued expenses, related party 52 —

Line of credit 812 —

Operating lease liabilities, short-term 98 85

Income tax payable 8 99

Note payable, related party — 5,220

Operating lease liabilities, long-term — 97

Commitments and contingencies (Note 13)

Stockholders’ equity

Retained earnings (Accumulated deficit) (38,874) 5,120

Total liabilities and stockholders’ equity $ 97,284 $ 51,906

The accompanying notes are an integral part of these consolidated financial statements.

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JOURNEY MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

Year Ended December 31,

Operating expenses

Cost of goods sold – product revenue 32,084 14,594

Research and development 2,739 —

Research and development - licenses acquired 13,819 —

Selling, general and administrative 39,833 22,086

Wire transfer fraud loss 9,540 —

(Loss) income from operations (34,881) 7,851

Other expense

Interest income (2) —

Change in fair value of derivative liability 447 —

Net (loss) income before income taxes (42,360) 7,153

Net (loss) income per common share – basic $ (4.32) $ 0.58

Net (loss) income per common share – diluted $ (4.32) $ 0.49

The accompanying notes are an integral part of these consolidated financial statements.

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JOURNEY MEDICAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

Additional Retained Total

Common Stock Common Stock A Paid-in Earnings Shareholders'

Shares Amount Shares Amount Capital (Accumulated Deficit) Equity

Stock-based compensation — — — — 153 — 153

Exercise of stock options for cash 18,000 — — — 13 — 13

Net income — — — — — 5,283 5,283

Stock-based compensation — — — — 2,466 — 2,466

Exercise of stock options for cash 10,000 — — — 7 — 7

Net loss — — — — — (43,994) (43,994)

The accompanying notes are an integral part of these consolidated financial statements.

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JOURNEY MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended

December 31,

Cash flows from operating activities

Depreciation expenses — 5

Bad debt expense 48 49

Non-cash interest expense 781 698

Accretion of convertible preferred shares 2,845 —

Amortization of debt discount 2,572 —

Amortization of license fee 2,474 1,420

Amortization of operating lease right-of-use assets 86 91

Stock-based compensation 2,466 153

Deferred taxes provision (benefit) 1,566 (335)

Change in fair value of derivative liability 447 —

Research and development-licenses acquired, expense 13,819 —

Changes in operating assets and liabilities:

Accounts receivable 768 (5,022)

Prepaid expenses and other current assets (774) (1,009)

Other assets (144) —

Accounts payable, related party 1,325 52

Accrued expenses, related party 544 —

Income tax payable (91) 2,191

Lease liabilities (84) (83)

Net cash (used in) provided by operating activities (2,181) 5,132

Cash flows from investing activities

Purchase of research and development licenses (10,000) (1,200)

Net cash used in investing activities (10,000) (1,200)

Cash flows from financing activities

Proceeds from the exercise of options 7 13

Proceeds from Fortress Note 9,540 —

Payment of license note payable (5,300) (500)

Proceeds from convertible preferred shares 18,967 —

Proceeds from line of credit 7,000 —

Repayment of line of credit (6,188) —

Proceeds from issuance of common stock - initial public offering 32,536 —

Net cash provided by (used in) financing activities 53,016 (487)

Cash at the beginning of the period 8,246 4,801

Cash at the end of the period $ 49,081 $ 8,246

Supplemental disclosure of cash flow information:

Cash paid for income taxes $ 158 $ 110

Unpaid debt offering cost $ 214 $ —

Unpaid initial public offering cost $ 371 $ —

Conversion of related party payables to common stock $ 16,105 $ —

Conversion of placement agent warrants to common stock $ 948 $ —

Conversion of contingent payment warrants to common stock $ 3,680 $ —

Unpaid intangible assets $ — $ 7,872

The accompanying notes are an integral part of these consolidated financial statements.

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

NOTE 1. ORGANIZATION AND PLAN OF BUSINESS OPERATIONS

Journey Medical Corporation (collectively “Journey” or the “Company”) was formed on July 18, 2014. The Company is a commercial-stage pharmaceutical company that focuses on the development and commercialization of pharmaceutical products for the treatment of dermatological conditions. The Company’s product portfolio at December31, 2021 includes five branded and three authorized generic prescription drugs for dermatological conditions that are marketed in the U.S. The Company acquires rights to future products by licensing or otherwise acquiring an ownership interest in, funding the research and development of, and eventually commercializing, the products through their exclusive field sales organization.

As of December 31, 2021 and 2020, the Company is a majority-owned subsidiary of Fortress Biotech, Inc. (“Fortress” or “Parent”).

Liquidity and Capital Resources

At December 31, 2021, the Company had $49.1 million in cash and cash equivalents as compared to $8.2 million at December 31, 2020.

On November 16, 2021, the Company completed an initial public offering (collectively the “Journey IPO” or “IPO”) of its common stock, which resulted in net proceeds of approximately $30.6 million, after deducting underwriting discounts and other offering costs.

Prior the Company’s IPO, the Company’s operations were primarily financed through a working capital note from Fortress, referred to herein as the “Fortress Note,” cash generated by operations and cash raised in the Company’s private offering of 8% Cumulative Convertible Class A Preferred Stock (“Class A Preferred Stock”). In connection with the closing of the Company’s IPO on November 16, 2021, the Company issued 2,231,346 shares of common stock resulting from the conversion of all of the Class A Preferred Stock. In addition, the Fortress Note was converted into 1,610,467 shares of Journey common stock at the Journey IPO price of $10.00 per share. The Company also has access to a borrowing facility, which includes a working capital line of credit and a term loan. For the next twelve months from the issuance of these audited consolidated financial statements, the Company will be able to fund its operations through a combination of operating activities and the East West Bank borrowing facility. In January 2022 the Company borrowed $15 million against the term loan to facilitate the VYNE asset purchase. See Note 18, Subsequent Events, for further details.

The Company regularly evaluates market conditions, its liquidity profile, and various financing alternatives for opportunities to enhance its capital structure. The Company may seek to raise capital through debt or equity financings to expand its product portfolio. If such funding is not available or not available on terms acceptable to the Company, the Company’s current plans for expansion of its product portfolio will be curtailed.

In addition to the foregoing, the Company experienced minimal impact on revenue levels and its liquidity due to the worldwide spread of COVID-19.

NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s consolidated financial statements include the accounts of the Company and the accounts of the Company’s wholly-owned subsidiary, JG Pharma, Inc. (“JG” or “JG Pharma”). All intercompany balances and transactions have been eliminated.

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

Emerging Growth Company

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended, the Company upon completion of its public offering meets the definition of an emerging growth company and elected the extended transition period for complying with new or revised accounting standards, which delays the adoption of these accounting standards until they would apply to private companies.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates made by management include provisions for product returns, coupons, rebates, chargebacks, discounts, allowances and distribution fees paid to certain wholesalers, inventory realization, useful lives of amortizable intangible assets, fair value of stock options and warrants, stock-based compensation, accrued expenses, provisions for income taxes and contingencies. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one segment, which reflects products for the treatment of dermatological conditions.

Cash and Cash Equivalents

The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at December 31, 2021 and 2020 consisted entirely of cash and cash equivalents in institutions within the United States. Balances at certain institutions have exceeded Federal Deposit Insurance Corporation insured limits.

Accounts Receivable, Net

Accounts receivable consists of amounts due to the Company for product sales Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due and the customer’s current ability to pay its obligation to the Company. The Company writes off accounts receivable when they become uncollectible. The allowance for doubtful accounts was $0.1 million at both December 31, 2021 and 2020.

Inventories

Inventories comprise raw materials and finished goods, which are valued at the lower of cost and net realizable value, on a first-in, first-out basis. The Company evaluates the carrying value of inventories on a regular basis, taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand. The acquired Qbrexza finished goods inventory initially incuded a fair value step-up of $6.5 million, which was fully expensed within cost of sales for the year ended December 31, 2021, as the inventory was sold to customers.

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

Property and Equipment

Computer equipment, furniture and fixtures and machinery and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of the estimated useful lives or the term of the respective leases.

Intangible Assets

Intangible assets are reported at cost, less accumulated amortization and impairments. Intangible assets with finite lives are amortized over their estimated useful lives, which represents the estimated life of the product. Amortization is calculated primarily using the straight-line method.

During the ordinary course of business, the Company has entered into certain licenses and asset purchase agreements. Potential milestone payments for achieving sales targets or regulatory development milestones are recorded when it is probable of achievement. Upon a milestone payment being achieved, the milestone payment will be capitalized and amortized over the remaining useful life for approved products and expensed for milestones prior to FDA approval. Royalty payments are recorded as cost of goods sold as sales are recognized.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the long-lived asset in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. As of December 31, 2021 and 2020, there were no indicators of impairment.

Leases

Arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. Variable lease expenses are recorded when incurred.

In calculating the right-of-use asset and lease liability, the Company elects to combine lease and non-lease components.

Fair Value Measurement

The Company follows accounting guidance on fair value measurements for financial assets and liabilities measured at fair value on a recurring basis. Under the accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

The accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.

Level 3: Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

Certain of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as accounts payable, accrued expenses and other current liabilities.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash. Periodically, the Company may maintain deposits in financial institutions in excess of government insured limits. Management believes that the Company is not exposed to significant credit risk as the Company’s deposits are held at financial institutions that management believes to be of high credit quality. The Company has not experienced any losses on these deposits.

The Company’s accounts receivable primarily represent amounts due from drug wholesalers and specialty pharmacies in the United States. The Company performs periodic credit evaluations of customers and does not require collateral. An allowance for doubtful accounts is maintained for potential credit losses based on the aging of accounts receivable, historical bad debts experience, and the customer’s current ability to pay its obligations to the Company. Accounts receivables balances are written off against the allowance when it is probable that the receivable will not be collected. See Note 15 for significant customers.

Revenue Recognition

The Company records revenue in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this revenue standard is that a company should recognize revenue to depict the transfer of 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. The Company’s revenues primarily result from contracts with customers, which are generally short-term and have a single performance obligation – the delivery of product. The Company’s performance obligation to deliver products is satisfied at the point in time that the goods are received by the customer, which is when the customer obtains title to and has the risks and rewards of ownership of the products. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.

Many of the Company’s products sold are subject to a variety of deductions. Revenues are recorded net of provisions for variable consideration, including chargebacks, coupons, discounts, other sales allowances, governmental rebate programs, price adjustments and returns. Accruals for these provisions are presented in the consolidated financial statements as reductions in determining net sales and as a contra asset in accounts receivable, net (if settled via credit) and other current liabilities (if paid in cash). Amounts recorded for revenue deductions can result from a complex series of judgements about future events and uncertainties and can rely heavily on

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

estimates and assumptions. The following section briefly describes the nature of the Company’s provisions for variable consideration and how such provisions are estimated.

Gross-to-Net Sales Accruals — The Company records gross-to-net sales accruals for government rebates, chargebacks, wholesaler distributor service fees, other rebates and administrative fees, sales returns and allowances and sales discounts.

Discounts and Other Sales Allowances — The Company provides prompt pay discounts and allowances to its wholesale customers. The Company provides for prompt pay discounts if payment is received within the payment term days which generally range from 30 to 98 days. These discounts and allowances are recorded at the time of sale based on the customer’s contracted rate and recorded as a reduction of revenue and a reduction to accounts receivables.

Wholesaler fees — The Company pays administrative and other fees to certain wholesale customers consistent with pharmaceutical industry practices for sales order management, data, and distribution services. The Company records a provision for these fees based on contracted rates. Assumptions used to establish the provision include level of wholesaler inventories, contract sales volumes and average contract pricing. The Company regularly reviews the information related to these estimates and adjust the provision accordingly.

Product Returns — Consistent with industry practice, the Company offers customers a right to return any unused product. The customer’s right of return commences six months prior to product expiration date and ends one year after product expiration date. The Company estimates the amount of its product sales that may be returned by its customers and accrues this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return reserves using available industry data and its own sales information, including its visibility and estimates into the inventory remaining in the distribution channel.

The Company bases its product returns allowance on estimated on-hand inventories in the sales channels, measured end-customer demand, actual returns history and other factors, such as the trend experience for lots where product is still being returned, as applicable. If the historical data the Company uses to calculate these estimates does not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. Under this methodology, the Company tracks actual returns by individual production lots. Returns on closed lots, that is, lots no longer eligible for return credits, are analyzed to determine historical returns experience. Returns on open lots, that is, lots still eligible for return credits, are monitored and compared with historical return trend rates. Any changes from the historical trend rates are considered in determining the current sales return allowance.

Government Chargebacks — Chargebacks for fees and discounts to indirect qualified government healthcare providers represent the estimated obligations resulting from contractual commitments to sell products to qualified U.S. Department of Veterans Affairs hospitals and 340B entities at prices lower than the list prices charged to customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the statutory selling price to the qualified government entity. These allowances are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivables, net. The chargeback amount from the Company’s direct customer is generally determined at the time of their resale to the qualified government healthcare provider by customers, and the Company generally issues credits for such amounts within a few weeks of its direct customers’ resale to the qualified government healthcare provider, and the Company generally issues credits for such amounts within a few weeks of its direct customer’s notification to the Company of the resale. The allowance for chargebacks is based on expected sell-through levels by the Company’s direct customers to indirect customers, as well as estimated wholesaler inventory levels.

Government Rebates — Government rebate accruals are based on estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. U.S. Medicaid rebate accruals are generally based on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. These accruals are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue. For Medicaid programs, the Company estimates the portion

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

of sales attributed to Medicaid patients and record a liability for the rebates to be paid to the respective state Medicaid programs. The Company’s liability for these rebates consists of invoices received for: i) claims from prior quarters that have not been paid or for which an invoice has not yet been received ii) estimates of claims for the current quarter and iii) estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.

Wholesaler Chargeback Accruals — The Company sells a portion of its products indirectly through wholesaler distributors to contracted customers commonly referred to as “indirect customers.” The Company enters into specific agreements with these indirect customers to establish pricing for its products, and in-turn, the indirect customers independently select a wholesaler from which to purchase the products. Because the price paid by the indirect customers is lower than the price paid by the wholesaler (wholesale acquisition cost, or “WAC”), the Company provides a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and WAC. The Company’s provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels as well as historical chargeback rates. The Company continually monitors its reserve for chargebacks and adjusts the reserve accordingly when expected chargebacks differ from actual experience.

Coupons — The Company offers coupons on products for qualified commercially-insured parties with prescription drug co-payments. Such product sales flow through both traditional wholesaler and specialty pharmacy channels. Approximately 85% of the Company’s product revenues are sold through the specialty pharmacy channel, which has a shorter cycle from the Company’s sales date to the fulfilment of the prescription by the specialty pharmacy customer, resulting in less inventory in this channel. Coupons are processed and redeemed at the time of prescription fulfilment by the pharmacy, and the Company is charged for the coupons redeemed monthly. The majority of coupon liability at the end of the period represents coupons that have been redeemed and for which the Company has been billed, and an accrual for expected redemptions for product in the distribution channel. This element of the liability requires the Company to estimate the distribution channel inventory at period end, the expected redemption rates, and the cost per coupon claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. The estimate of product remaining in the distribution channel is comprised of actual inventory at the wholesaler as well as an estimate of inventory at the specialty pharmacies, which the Company estimates based upon historical ordering patterns, which consist of reordering approximately every two weeks. The estimated redemption rate is based on historical redemptions as a percentage of units sold. The cost per coupon is based on the coupon rate.

Managed Care Rebates — The Company offers managed care rebates to certain providers. The Company calculates rebate payment amounts due under this program based on actual qualifying products and applies a contractual discount rate. The accrual is based on an estimate of claims that the Company expects to receive and inventory in the distribution channel. The accrual is recognized at the time of sale, resulting in a reduction of product revenue.

Research and Development Costs

Research and development costs are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Upfront and milestone payments due to third parties that perform research and development services on the Company’s behalf will be expensed as services are rendered or when the milestone is achieved.

Research and development costs primarily consist of personnel related expenses and, payments made to third parties for license and milestone costs related to in-licensed products and technology, payments made to third party contract research organizations.

In accordance with Accounting Standards Codification (“ASC”) 730-10-25-1, Research and Development, costs incurred in obtaining technology licenses are charged to research and development expense if the technology licensed has not reached commercial feasibility and has no alternative future use. Such licenses purchased by the Company require substantial completion of research and development, regulatory and marketing approval efforts in order to reach commercial feasibility and have no alternative future use. Accordingly, the

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

total purchase price for the licenses acquired during the period was reflected as research and development - licenses acquired on the Consolidated Statements of Operations for the years ended December 31, 2021.

Stock-based Compensation

The Company has a stock-based compensation plan in place and records the associated stock-based compensation expense over the requisite service period. The stock-based compensation plan and related compensation expense are discussed more fully in Note 14 to the Company’s consolidated financial statements.

Compensation expense for service-based stock options is charged against operations on a straight-line basis between the grant date for the option and the vesting period, which is generally four years. The Company estimates the fair value of all service-based stock option awards as of the grant date by applying the Black-Scholes option pricing valuation model. The application of this valuation model involves assumptions that are highly subjective, judgmental, and sensitive in the determination of compensation cost. Compensation cost is adjusted for actual forfeitures. Options granted have a term of 10 years from the grant date.

Restricted stock units (“RSU’s”) that are service based are recorded as deferred compensation and amortized into compensation expense on a straight-line basis over the vesting period, which ranges from three to four years in duration. Compensation cost for service based RSU’s is based on the grant date fair value of the award, which is the closing market price of the Company’s common stock on the grant date multiplied by the number of shares awarded.

The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, which requires the use of a number of assumptions, including the fair value of the common stock, expected volatility, risk-free interest rate, expected dividends and the expected term of the option. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Forfeitures are recorded as they occur. All stock-based compensation costs are recorded in selling, general and administrative (“SG&A”) expense in the Company’s consolidated statements of operations.

Prior to the Company’s IPO, which closed on November 16, 2021, the fair value of the Company’s common stock underlying stock options was an input to the Black-Scholes option pricing model. The Company engaged an independent third-party valuation firm to provide an estimate of the fair value of its common stock annually, utilizing input from management. The fair value of the Company’s common stock was determined considering a number of objective and subjective factors, including valuations of guideline public companies, transactions of guideline public companies, discounts for lack of control transactions, lack of liquidity of the Company’s common stock and the general and industry-specific economic outlook.

Contingencies

The Company records accruals for contingencies and legal proceedings expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated.

If a loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

Income Taxes

As of December 31, 2021, after the IPO the Company was 58.39% owned by Fortress Biotech, Inc. (“Fortress”) and prior to the IPO was filing consolidated federal tax return and consolidated or combined state tax returns in multiple jurisdictions with Fortress. As the Company completed its initial public offering on November 12, 2021, the Company deconsolidated from Fortress consolidated group for federal income tax purpose. The Company’s financial statements recognize the current and deferred income tax consequences that result from the Company’s activities during the current and preceding periods pursuant to the provisions of Accounting Standards Codification Topic 740, Income Taxes (ASC 740), as if the Company were a separate taxpayer rather than a member of the Fortress

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

consolidated income tax return group. Fortress has agreed that JMC does not have to make payments to Fortress for JMC’s use of net operation losses (“NOLs”) of Fortress (including other Fortress group members) accordingly, for any NOLs, the tax benefit the Company realized was recorded as a capital contribution.

The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company establishes a valuation allowance if management believes it is more likely than not that the deferred tax assets will not be recovered based on an evaluation of objective verifiable evidence. Management has considered the Company’s history of cumulative tax and book income/loss incurred since inception, and the other positive and negative evidence, and has concluded that it is not more likely than not that the Company will realize the benefits of the net deferred tax assets as of December 31, 2021 and therefore a full valuation allowance on all of its deferred tax assets is required. The Company did not record any valuation allowance as of December 31, 2020.

For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit. As of December 31, 2021, the Company had no unrecognized tax benefits and does not anticipate any significant change to the unrecognized tax benefit balance. The Company would classify interest and penalties related to uncertain tax positions as income tax expense, if applicable. There was no interest expense or penalties related to unrecognized tax benefits recorded through December 31, 2021.

Net Loss (Income) Per Share

Basic net (loss) income per share of common stock is calculated by dividing net (loss) income by the weighted-average number of shares of common stock outstanding during the reporting period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the reporting period after giving effect to dilutive potential common shares for stock options and restricted stock units, determined using the treasury stock method. See Note 17 below.

Comprehensive Income

The Company has no components of other comprehensive income, and therefore, comprehensive income equals net income.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. On January 1, 2021, the Company’s adoption of this guidance did not have a material impact on its financial statements.

Recently Issued Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its financial statements.

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

NOTE 3. INVENTORY

The Company’s inventory consists of the following:

December 31, December 31,

Raw materials $ 5,572 $ —

Work-in-process — —

The acquired Qbrexza inventory includes a fair value step-up of $6.5 million, which was fully expensed within cost of sales during the year ended December 31, 2021, as the inventory was sold to customers. For additional information on the Company’s asset acquisition of Qbrexza, please refer to Note 4.

NOTE 4. INTANGIBLES

On March 31, 2021, the Company executed an Asset Purchase Agreement (the “Qbrexza APA”) with Dermira, Inc., a subsidiary of Eli Lilly and Company (“Dermira”). Pursuant to the terms of the agreement, the Company acquired the rights to Qbrexza® (glycoprronium), a prescription cloth towelette to treat primary axillary hyperhidrosis in patients nine years of age or older. Upon HSR acceptance, which was received on May 13, 2021, the Company paid the upfront fee of $12.5 million to Dermira. In addition, Dermira is eligible to receive up to $144 million in the aggregate upon the achievement of certain sales milestones. The royalty structure for the agreement is tiered with royalties for the first two years ranging from approximately 40% to 30%. Thereafter for a period of eight years royalties are approximately 12.0% to 19.0%. Royalty amounts are subject to 50% diminution in the event of loss of exclusivity due to the introduction of an authorized generic.

Upon closing of the Qbrexza® purchase, the Company became substituted for Dermira as the plaintiff in U.S. patent litigation commenced by Dermira on October 21, 2020 in the U.S. District Court of Delaware (the “Patent Litigation”) against Perrigo Pharma International DAC (“Perrigo”) alleging infringement of certain patents covering Qbrexza® (the “Qbrexza® Patents”), which are included among the proprietary rights to Qbrexza®. The Patent Litigation was initiated following the submission by Perrigo, in accordance with the procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”), of an Abbreviated New Drug Application (“ANDA”). The ANDA seeks approval to market a generic version of Qbrexza® prior to the expiration of the Qbrexza® Patents and alleges that the Qbrexza® Patents are invalid. Perrigo is subject to a 30-month stay preventing it from selling a generic version, but that stay is set to expire on March 9, 2023. Trial in the Patent Litigation is scheduled for September 19, 2022. The Company cannot make any predictions about the final outcome of this matter or the timing thereof.

The purchase price of $12.5 million included the asset, Qbrexza, as well as finished goods and raw material inventory. The Company also has the obligation to accept any product returns related to sales made by Dermira. The Company allocated the upfront payment to inventory since the fair value of the inventory and Qbrexza rights exceeded the purchase price. The future contingent milestone payments, if achieved, will be recorded to intangible asset and amortized over the seven-year life of the asset commencing on the closing date.

In December 18, 2020, the Company entered an Asset Purchase Agreement with a third party (the “Anti-itch Product Agreement”) for a topical product that is indicated to treat scabies and skin itch conditions (“Anti-itch Product”). Pursuant to the terms and conditions of the Anti-itch Product Agreement, the Company agreed to pay $4.0 million, comprised of a non-refundable deposit of $0.2 million upon the execution of the term sheet, a cash upfront payment of $1.8 million on January 1, 2021 and additional future payments of $0.5 million on April 1, 2021, $0.5 million on July 1, 2021, and $1.0 million on January 1, 2022. There are no subsequent milestone payments or royalties beyond the aforementioned payments. Commercial launch of this product is expected in the first half of 2022.

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

On July 29, 2020, the Company entered into a license and supply agreement for Accutane® (“Accutane Agreement”) with DRL. Pursuant to the Accutane Agreement, the Company agreed to pay $5.0 million, comprised of an upfront payment of $1.0 million paid upon execution, with additional milestone payments totaling $4.0 million. Three additional milestone payments totaling $17.0 million are contingent upon the achievement of certain net sales milestones. Royalties in the low-double digits based on net sales, subject to specified reductions are also due.

The term of the agreement is ten years and renewable upon mutual agreement. The Company is required to pay royalties during the term of the agreement. The agreement contains customary representations, warranties, and indemnities. Each party may also terminate the agreement for material breach by the other party or for certain bankruptcy or insolvency related events and the Company may terminate for upon 180 days written notice to the other party.

The table below provides a summary of the Company’s intangible assets at December 31, 2021 and 2020, respectively:

Estimated Useful December 31, December 31,

Accumulated amortization (6,451) (3,977)

The Company’s amortization expense for the year ended December 31, 2021 and 2020 was approximately $2.5 million and $1.4 million, respectively. Amortization expense is recorded as a component of cost of goods sold in the Company’s consolidated statements of operations.

The table below provides a summary for the year ended December 31, 2021 and 2020, of the Company’s recognized expense related to its product licenses, which was recorded in costs of goods sold on the consolidated statement of operations:

Intangible

($’s in thousands) Assets, Net

Isotretinion agreement (1) 4,727

Anti-itch product license acquisition (2) 3,945

Exelderm milestone 400

Amortization expense (1,420)

Anti-itch product license acquisition adjustment (3)

Amortization expense (2,474)

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

expense was recognized on this asset for the year ended December 31, 2020. The Company placed the assets in service in the first quarter of 2021.

Future amortization of the Company’s intangible assets is as follows:

Total

($’s in thousands) Ximino® Accutane® Amortization

Asset not yet placed in service — — 3,942

NOTE 5. LICENSES ACQUIRED

DERM US Equity

DERM · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of the Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risks

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Item 9B. Other Information

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accounting Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Item 16. Form 10-K Summary

DERM US Equity☆

DERM · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of the Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risks

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Item 9B. Other Information

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accounting Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Item 16. Form 10-K Summary

DERM US Equity