DERM US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and 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”). Please see the section titled “Special Cautionary Note Regarding Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K for more information. 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, 2021. As used below, the words “we,” “us” and “our” refer to Journey Medical Corporation and its consolidated subsidiaries.

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 eight branded and three authorized generic prescription drugs for dermatological conditions that are 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 enabling 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 field sales organization. Since inception, we have made significant investments to build out our commercial product portfolios, which we believe, coupled with our experienced dermatology sales leadership team and our recently expanded field sales force, will position our business for growth. We are a majority-owned subsidiary of Fortress.

2022 Highlights and Events

On December 30, 2022, we filed a shelf registration statement on Form S-3 (File No. 333-269079), which was declared effective by the SEC on January 26, 2023. This 2022 Shelf covers the offering, issuance and sale by us of up to an aggregate of $150.0 million of our common stock, preferred stock, debt securities, warrants, and units (the “2022 Shelf”). At December 31, 2022, $150.0 million remains available under the 2022 Shelf. In connection with the 2022 shelf, we have entered into the Sales Agreement with B. Riley, relating to shares of our common stock. In accordance with the terms of the Sales Agreement, we may offer and sell up to 4,900,000 shares of our common stock, par value $0.0001 per share, from time to time through or to B. Riley acting as our agent or principal.

On March 14, 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. As of January 10, 2023, we achieved 100% enrollment in the trial, with a top-line data readout expected in the second quarter of 2023. We plan to submit the NDA for DFD-29 in the second half of 2023 and FDA approval is anticipated in the second half of 2024. The Phase 2 clinical trials, DFD-29 (40mg) concluded with results indicating improved treatment by the investigational drug when compared to Oraycea® (European equivalent of Oracea®) on both co-primary endpoints. For the first co-primary endpoint, IGA treatment success, Oraycea only had a 33.33% IGA treatment success rate, while DFD-29 achieved a 66.04% IGA treatment success rate. For the second co-primary endpoint, the change in total inflammatory lesion count, Oraycea only had a 10.5 reduction in inflammatory lesions, while DFD-29 achieved a 19.2 reduction in inflammatory lesions.

On February 11, 2022, we announced that our exclusive licensing partner in Japan, Maruho Co., Ltd. (“Maruho”), received marketing and manufacturing approval for Rapifort® Wipes 2.5% (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 million to us from our exclusive licensing partner Maruho, offset by a $7.5 million payment to Dermira, pursuant to the terms of the Asset Purchase Agreement between us and Dermira. We acquired global rights to Qbrexza from Dermira in 2021. The period ended December 31, 2022 also reflects total year-to-date royalties of $174,000 from Maruho on sales of Rapifort® Wipes 2.5% in Japan.

On January 12, 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 expanded our product portfolio to eight actively marketed branded dermatology products.

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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 the 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 American Academy of Dermatology (“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.

On January 12, 2022, we entered into a third amendment of the loan and security agreement with EWB (the “Amendment”), which increased the borrowing capacity of our revolving line of credit to $10.0 million, $2.9 million of which was outstanding at December 31, 2022, 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. In January 2022 and August 2022, the Company borrowed $15.0 million and $5.0 million, respectively, against the term loan. The term loans bear interest at a floating rate equal to 1.73% above the prime rate and are payable monthly. 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 elect to prepay all or any part of the term loan without penalty or premium, but we 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. We are in compliance with all applicable financial covenants under the Amendment. The remaining $7.1 million revolving line of credit is fully available to us without any restrictions, other than certain customary and ordinary closing conditions.

In September 2021, we were the victim of a cybersecurity incident that affected our accounts payable function and led to approximately $9.5 million in wire transfers being misdirected to fraudulent accounts. The matter was reported to the FBI and remains under their investigation. The cybersecurity incidenct does not appear to have compromised any personally identifiable information or protected health information. Fortress, as our controlling stockholder and supporting partner in our back-office functions, provided us with $9.5 million to ensure our accounts payable operations continued to function smoothly. The $9.5 million of support was in the form of a related party note which the boards of both companies have agreed and converted into 1,476,044 shares of our common stock upon the consummation of our IPO in November 2021 at the IPO price. The federal government has been able to trace and seize the fraudulently transferred cryptocurrency assets associated with the breach. The seized cryptocurrency has been transferred into U.S. government-controlled custodial wallets. Subsequently, the forfeiture process will be initiated by the U.S. Attorney’s Office. The process includes mandatory waiting periods for filing of claims. Once the cryptocurrency has been converted back into U.S. dollars, we expect to receive a notification letter to initiate the return of the cash to the Company. This process could take several months to a year or possibly longer to complete before funds can be returned. Given the recent market declines, volatility, and liquidity issues with cryptocurrency, there is no certainty as to the amount we will ultimately recover. See “Risk Factors — Risks Related to our Platform and Data — Our business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our or third parties’ cybersecurity.”

Critical Accounting Policies and Uses of Estimates

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make difficult, subjective or complex judgments, often as a result of the need to make estimates and assumptions about the effect of matters that are inherently uncertain in 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.

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While our significant accounting policies are described in greater detail in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K, we believe that the following accounting policies and estimates are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements in understanding our historical and future performance. These policies relate to the more significant areas involving management’s judgments and estimates.

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, governmental 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.

Recent Accounting Pronouncements

See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual 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.

Emerging Growth Company and Smaller Reporting Company Status

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years of audited financial statements in our annual reports on Form 10-K, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

We are also a “smaller reporting company,” meaning that either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) 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 See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K.

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Results of Operations

Comparison of the Years Ended December 31, 2022 and 2021

The following table summarizes our results of operations for the years ended December 31, 2022 and 2021:

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ For the Years Ended December 31, Change

($ in thousands, except per share data) 2022 2021 $ % ​

Revenue: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Operating expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cost of goods sold - product revenue ​ ​ 30,775 ​ ​ 32,084 ​ ​ (1,309) ​ (4) %

Wire transfer fraud loss ​ ​ — ​ ​ 9,540 ​ ​ (9,540) ​ (100) %

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest income ​ ​ (60) ​ ​ (2) ​ ​ (58) ​ 2,900 %

Foreign exchange transaction losses ​ ​ 89 ​ ​ — ​ ​ 89 ​ 100 %

Change in fair value of derivative liability ​ ​ — ​ ​ 447 ​ ​ (447) ​ (100) %

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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Revenues

The following table reflects our revenue by product for the years ended December 31, 2022 and 2021:

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ For the Years Ended December 31, ​ Change

Other branded revenue ​ ​ — ​ ​ 37 ​ ​ (37) ​ (100) %

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Total revenues increased $10.5 million, or 17%, to $73.7 million for the year ended December 31, 2022, from $63.1 million for the year ended December 31, 2021. Total net product revenue increased $7.9 million, or 12%, to $71.0 million for the year ended December 31, 2022, from $63.1 million for the year ended December 31, 2021. The increase is primarily due to revenue growth from our newly acquired products, Qbrexza and Accutane, acquired and launched in the second quarter of 2021, as well as incremental growth from

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Amzeeq and Zilxi (acquired in January 2022). Qbrexza, Accutane, Amzeeq and Zilxi reflected approximately 77% of our total net product revenues for the year ended December 31, 2022. Offsetting the increases is a decrease in the net product revenue of Targadox and its authorized generic as a result of continued generic competition. Additionally, net product revenues of Ximino and Exelderm and their authorized generics were negatively impacted by contract manufacturer product shortages earlier in the year. These shortages were resolved in the third quarter of 2022 and sales continue to normalize although they are not back to pre-shortage levels. We expect sales of Ximino and Exelderm to reach pre-shortage levels through 2023. The above table includes the authorized generic product within the line items for Targadox, Ximino and Exelderm.

Other revenue

The year ended December 31, 2022 includes a net $2.5 million milestone payment from Maruho. In January 2022, Maruho received manufacturing and marketing approval in Japan for Rapifort® Wipes 2.5%, triggering the net payment. The net payment reflects a milestone payment of $10.0 million to the Company from Maruho, offset by a $7.5 million payment to Dermira. The year ended December 31, 2022 also reflects total year-to-date royalties of $174,000 from Maruho on sales of Rapifort® Wipes 2.5% in Japan.

We record gross-to-net sales accruals for chargebacks, distributor service fees, prompt pay discounts, sales returns, coupons, managed care rebates, government rebates, and other allowances customary to the pharmaceutical industry.

Gross-to-net sales accruals and the balance in the related allowance accounts for the years ended December 31, 2022, 2021 and 2020 were as follows:

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Chargebacks ​ Distrubutor ​ Prompt ​ ​ ​ ​ ​ ​ Managed ​ ​ ​ ​ ​ ​

​ ​ and other ​ Service Pay ​ ​ ​ ​ Care ​ Gov’t ​ ​ ​

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The change in our reserve from period-to-period is driven by the decrease in our reserve for coupons. The provision for coupons was $1.7 million at December 31, 2022 compared to $5.0 million at December 31, 2021. The change in the coupon reserve is primarily due to a decrease in sales of Minocycline as well as an increase primarily associated with initial program prefunding payments for Amzeeq and Zilxi.

Cost of Goods Sold

Cost of goods sold decreased by $1.3 million, or 4%, to $30.8 million for the year ended December 31, 2022, from $32.1 million for the year ended December 31, 2021. The decrease is primarily due to a $5.9 million decrease in inventory step-up costs. Approximately $6.5 million of inventory step-up costs were charged against operations through cost of goods sold for the year ended December 31, 2021 as a result of the Qbrexza product acquisition in the second quarter of 2021, compared to $0.6 million of inventory step-up costs for the year ended December 31, 2022, as a result of the Amzeeq and Zilxi product acquisitions in January 2022. In addition, royalty expenses decreased by $1.7 million, or 12%, mainly due to the decrease in Targadox sales from period-to-period. The above decreases are offset in part by higher product costs of $1.8 million driven by sales volumes, increased license amortization of $1.8 million and increased Prescription Drug User Fee Act fees of $0.6 million driven by the acquisition of Amzeeq and Zilxi. The decreases are also offset by increased costs of approximately $2.1 million related to freight, destruction, product validation, stability testing costs, and the establishment of expired product and other inventory reserves for the year ended December 31, 2022.

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Research and Development

Research and Development expense increased to $10.9 million for the year ended December 31, 2022 from $2.7 million for the year ended December 31, 2021 due to clinical trial expenses to develop our DFD-29 product, for which our Phase 3 clinical trial is 100% enrolled as of January 10th, 2023. We expect these expenses to increase through 2023 as the now fully enrolled two Phase 3 trials are completed and we incur other associated cost of the development program.

Research and Development – licenses acquired

Research and development expenses - licenses acquired decreased $13.8 million, or 100%, from the year ended December 31, 2021. The year ended December 31, 2021 reflects the acquisition of our development stage asset from DRL, DFD-29, for $10.0 million and the fair value of the contingent payment due DRL of $3.8 million. We did not have any research and development license acquisition costs for the year ended December 31, 2022.

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

Selling, general and administrative expenses increased by $19.6 million, or 49%, to $59.5 million for the year ended December 31, 2022, from $39.8 million for the year ended December 31, 2021. The increase is primarily attributable to the expansion of our salesforce and marketing expenses related to expanding our product portfolio by four products, additional headcount costs (including non-cash stock compensation expenses), legal expenses associated with patent litigation, and compliance and other professional fees associated with being a public company that we did not incur as a privately held company prior to our IPO in November 2021.

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. Please see “Risk Factors – Our business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our or third parties’ cybersecurity” for more information.

Interest Expense

Interest expense decreased $5.0 million to $2.0 million for the year ended December 31, 2022, from $7.0 million for the year ended December 31, 2021. The year ended December 31, 2021 includes dividends and interest on our convertible preferred stock that converted in full, into shares of our common stock upon the closing of our IPO in November 2021. Interest expense for the year ended December 31, 2022 reflects interest and fees related to our EWB term loan and installment licenses.

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, the liability classified warrants and the placement agent warrants issued as partial compensation to the placement agent in our 2021 private financing 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 shares of common stock to Dr. Reddy in a transaction exempt from registration under the Securities Act in settlement of the contingent payment. We have no derivative liabilities outstanding at December 31, 2022.

Income tax expense

Our effective tax rate for 2022 and 2021 was (0.21%) and (3.86)%, respectively. The negative effective tax rate of 0.21% for the year ended December 31, 2022 varies from the statutory rate principally due to our full valuation allowance position. The increase in the effective tax rate from 2021 to 2022 is primarily due to change in valuation allowance and state taxes. Our tax rate is affected by valuation allowances, 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.

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Liquidity and Capital Resources

At December 31, 2022, we had $32.0 million in cash and cash equivalents as compared to $49.1 million at December 31, 2021.

On December 30, 2022, we filed a shelf registration statement on Form S-3 (File No. 333-269079), which was declared effective by the SEC on January 23, 2023. This shelf registration statement covers the offering, issuance and sale by us of up to an aggregate of $150.0 million of our common stock, preferred stock, debt securities, warrants, and units (the “2022 Shelf”). At December 31, 2022, $150.0 million remains available under the 2022 Shelf. In connection with the 2022 shelf, we have entered into the Sales Agreement with B. Riley, relating to shares of our common stock. In accordance with the terms of the Sales Agreement, we may offer and sell up to 4,900,000 shares of our common stock, par value $0.0001 per share, from time-to-time through B. Riley acting as our agent or principal.

We are party to a Loan and Security Agreement, dated March 31, 2021, with EWB (as amended, the “EWB Facility”), under which EWB made a $7.5 million line of credit available to us. On January 12, 2022, we entered into a third amendment of the loan and security agreement with EWB, which increased the borrowing capacity of our revolving line of credit to $10.0 million, of which $2.9 million was outstanding at December 31, 2022, 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. In January 2022 and August 2022, we borrowed $15.0 million (to facilitate the Vyne Product Acquisition Agreement) and $5.0 million, respectively, against the term loan. The term loans bear interest at a floating rate equal to 1.73% above the prime rate and are payable monthly. 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 elect to prepay all or any part of the term loan without penalty or premium, but we 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 EWB Facility includes customary financial covenants such as collateral ratios and minimum liquidity provisions. We are in compliance with all applicable financial covenants under the EWB Facility. The remaining $7.1 million revolving line of credit is fully available to us without any restrictions, other than certain customary and ordinary closing conditions.

We expect that 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. Additionally, the Federal Reserve has raised and is expected to continue to raise the federal funds interest rate throughout 2023 in its effort to take action against domestic inflation. Because our borrowings under the facility with EWB bear interest at a floating rate, rising interest rates affect the amount of the regular payments we are required to make to EWB. Accordingly, we may experience materially higher borrowing costs in future fiscal quarters than we historically have to date. 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 newly acquired 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.

For the next twelve months from the issuance of these financial statements, we will be able to fund our operations through a combination of existing cash and cash equivalents generated from operations, and the EWB borrowing facility. In addition, we may seek to raise capital through additional debt or equity financing, which may include sales of securities under our 2022 Shelf or under a new registration statement. If such funding is not available or not available on terms acceptable to us, our current plans for expansion of our product portfolio may be scaled back, limited or curtailed. We regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure.

Cash Flows for the Years Ended December 31, 2022 and 2021

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ For the Years ended December 31, ​ Increase

Net cash used in operating activities ​ $ (13,534) ​ $ (2,181) ​ $ 11,353

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Operating Activities

Net cash used in operating activities increased by $11.4 million, to $13.5 million for the year ended December 31, 2022, from $2.2 million for the year ended December 31, 2021. The increase was driven primarily by vendor, supplier, and other payments in the ordinary course of business, which were generally higher as a result of additional headcount costs, inventory purchases and marketing expenses related to our expanded product portfolio, legal expenses and compliance and other costs associated with being a public company that were not present in the prior year, pre-IPO, offset by accounts receivable cash collections.

Investing Activities

Net cash used in investing activities increased by $10.0 million, to $20.0 million for the year ended December 31, 2022, from $10.0 million for the year ended December 31, 2021. The increase is primarily due to the $20.0 million in consideration paid for the products acquired in the Vyne Product Acquisition Agreement in January 2022, compared to payments of $10.0 million for the year ended December 31, 2021 for research and development licenses.

Financing Activities

Net cash provided by financing activities decreased by $36.6 million, to $16.5 million for the year ended December 31, 2022, from $53.0 million for the year ended December 31, 2021. The decrease is primarily related to $30.6 million and $17.0 million of net proceeds received from the completion of our IPO in November 2021 and the issuance of our convertible preferred stock, respectively. In addition, we received proceeds of $9.5 million from the Fortress note for the year ended December 31, 2021. This is compared to borrowings under the EWB term loan of $20 million and net borrowings under the EWB revolving line of credit of $2.1 million during the year ended December 31, 2022.

Material Cash Requirements

In the normal course of business, we enter into contractual obligations that contain cash requirements of which the most significant to date include the following:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Payments by Period

​ ​ ($’s in thousands)

​

Should we elect to make further borrowings under the EWB facility, we would expect to repay additional amounts each year until maturity.

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Payments by Period

​ ​ ($’s in thousands)

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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.

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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.

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

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None.

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Item 9A. Controls and Procedures.

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we were required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as of the end of the period covered by this Annual Report on Form 10-K under the supervision, and with the participation, of our management, including our Chief Executive Officer (who serves as our principal executive officer) and our Interim Chief Financial Officer (who serves as our principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures.

Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K in providing reasonable assurance of achieving the desired control objectives.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on the results of this assessment, management (including our Chief Executive Officer and our Interim Chief Financial Officer) has concluded that, as of December 31, 2022, our internal control over financial reporting was effective.

This Annual Report does not include an attestation report on internal control over financial reporting from our independent registered public accounting firm due to our status as an emerging growth company under the JOBS Act.

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Remediation of previously reported material weakness

As previously disclosed, 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 as of September 30, 2021 due to our internal controls having not been adequately designed to prevent or timely detect unauthorized cash disbursements.

To remediate the material weakness identified, we enhanced and formalized cash disbursement controls to prevent and timely detect unauthorized cash disbursements and significantly enhanced our information technology infrastructure and security measures. As the implementation of the enhanced procedures and controls have functioned effectively for multiple quarters, we concluded that we have remediated the material weakness previously disclosed in 2021.

Changes in Internal Control over Financial Reporting

Other than as discussed above, there have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter ended December 31, 2022 to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

​

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 2023 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 2023 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 2023 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 2023 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 2023 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:

​

Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3

Notes to Consolidated Financial Statements F-7

​

​

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(b) Exhibits.

​

Exhibit Number Description

75

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21.1 ​ List of Subsidiaries of Journey Medical Corporation.*

23.1 ​ Consent of KPMG LLP.*

* Filed herewith.

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

***Furnished herewith.

# 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, 2022 and 2021 F-3

Notes to Consolidated Financial Statements F-7

​

​

F-1

Table of Contents

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, 2022 and 2021, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years then ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years then ended December 31, 2022, 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

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 30, 2023

​

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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 ​ 28,208 ​ 23,112

Prepaid expenses and other current assets ​ 3,309 ​ 2,438

​ ​ ​ ​ ​ ​ ​

Operating lease right-of-use asset, net ​ 189 ​ 89

​ ​ ​ ​ ​ ​ ​

LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​

Current liabilities ​ ​

Due to related party ​ 413 ​ 641

Accrued interest ​ 160 ​ —

Income taxes payable ​ ​ 35 ​ ​ 8

Deferred cash payment (net of discount of $9) ​ ​ 4,991 ​ ​ —

Installment payments – licenses, short-term ​ 2,244 ​ 4,510

Operating lease liability, short-term ​ 83 ​ 98

​ ​ ​ ​ ​ ​ ​

Term loan (net of debt discount of $180) ​ 19,826 ​ —

Installment payments – licenses, long-term ​ 1,412 ​ 3,627

Operating lease liability, long-term ​ 108 ​ —

​ ​ ​ ​ ​ ​ ​

Commitments and contingencies (Note 14) ​ ​

​ ​ ​ ​ ​ ​ ​

Stockholders’ equity ​ ​

Total liabilities and stockholders’ equity ​ $ 105,160 ​ $ 97,284

​

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,

Revenue: ​ ​ ​ ​ ​ ​

Other revenue ​ ​ 2,674 ​ ​ —

​ ​ ​ ​ ​ ​ ​

Operating expenses ​ ​ ​

Cost of goods sold – product revenue ​ 30,775 ​ 32,084

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

Selling, general and administrative ​ 59,468 ​ 39,833

Wire transfer fraud loss ​ — ​ 9,540

​ ​ ​ ​ ​ ​ ​

Other expense (income) ​ ​

Interest income ​ (60) ​ (2)

Foreign exchange transaction losses ​ ​ 89 ​ ​ —

Change in fair value of derivative liability ​ — ​ 447

Total other expense (income) ​ 2,048 ​ 7,479

​ ​ ​ ​ ​ ​ ​

Income tax expense ​ 63 ​ 1,634

​ ​ ​ ​ ​ ​ ​

Net loss per common share: ​ ​ ​ ​ ​ ​

Basic and diluted ​ $ (1.69) ​ $ (4.32)

​ ​ ​ ​ ​ ​ ​

Weighted average number of common shares: ​ ​ ​ ​

​

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

Share-based compensation ​ — ​ ​ — ​ — ​ ​ — ​ ​ 2,466 ​ ​ — ​ ​ 2,466

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

Net loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ (43,994) ​ ​ (43,994)

Share-based compensation ​ — ​ ​ — ​ — ​ ​ — ​ ​ 4,425 ​ ​ — ​ ​ 4,425

Net loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ (29,628) ​ ​ (29,628)

​

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 ​ ​ ​ ​ ​ ​

Bad debt expense ​ 284 ​ 48

Non-cash interest expense ​ 770 ​ 781

Amortization of debt discount ​ 63 ​ 2,572

Accretion of convertible preferred shares ​ — ​ 2,845

Amortization of acquired intangible assets ​ 4,277 ​ 2,474

Amortization of operating lease right-of-use assets ​ 88 ​ 86

Deferred taxes ​ — ​ 1,566

Change in fair value of derivative liability ​ — ​ 447

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

Changes in operating assets and liabilities: ​ ​ ​ ​

Accounts receivable ​ ​ (5,380) ​ ​ 768

Prepaid expenses and other current assets ​ (871) ​ (774)

Related party expenses ​ (228) ​ 1,869

Accrued interest ​ 160 ​ —

Income tax payable ​ 27 ​ (91)

Lease liabilities ​ ​ (95) ​ ​ (84)

Net cash used in operating activities ​ (13,534) ​ (2,181)

​ ​ ​ ​ ​

Cash flows from investing activities ​ ​ ​ ​

Purchase of research and development licenses ​ — ​ (10,000)

Acquired assets ​ ​ (20,000) ​ ​ —

Net cash used in investing activities ​ ​ (20,000) ​ ​ (10,000)

​ ​ ​ ​

Cash flows from financing activities ​ ​ ​ ​

Proceeds from the exercise of stock options ​ 142 ​ 7

Proceeds from Fortress note ​ ​ — ​ ​ 9,540

Payment of license installment note payable ​ (5,000) ​ (5,300)

Proceeds from convertible preferred shares ​ — ​ 18,967

Proceeds from line of credit ​ 5,000 ​ 7,000

Repayment of line of credit ​ ​ (2,864) ​ ​ (6,188)

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

Proceeds from EWB term-loan, net of discount ​ ​ 19,763 ​ ​ —

Net cash provided by financing activities ​ 16,456 ​ 53,016

​ ​ ​ ​ ​ ​ ​

Cash at the beginning of the period ​ 49,081 ​ 8,246

Cash at the end of the period ​ $ 32,003 ​ $ 49,081

​ ​ ​ ​ ​

Supplemental disclosure of cash flow information: ​ ​ ​ ​ ​ ​

Cash paid for interest ​ $ 993 ​ $ —

Cash paid for income taxes ​ $ 168 ​ $ 158

​ ​ ​ ​ ​ ​ ​

Deferred payment for asset acquisition ​ $ 4,740 ​ $ —

ROU assets obtained in exchange for lease liabilities ​ $ 188 ​ $ —

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

​

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”) 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 current product portfolio includes eight branded and three authorized generic prescription drugs for dermatological conditions that are marketed in the U.S. The Company acquires rights to products and product candidates by licensing or otherwise acquiring an ownership interest in, funding the research and development of, and eventually commercializing, the products through its exclusive field sales organization.

At of December 31, 2022 and 2021, the Company is a majority-owned subsidiary of Fortress Biotech, Inc. (“Fortress” or “Parent”).

Liquidity and Capital Resources

At December 31, 2022, the Company had $32.0 million in cash and cash equivalents as compared to $49.1 million at December 31, 2021.

On December 30, 2022, the Company filed a shelf registration statement on Form S-3 (File No. 333-269079), which was declared effective by the Securities and Exchange Commission (“SEC”) on January 26, 2023. This shelf registration statement covers the offering, issuance and sale by the Company of up to an aggregate of $150.0 million of the Company’s common stock, preferred stock, debt securities, warrants, and units (the “2022 Shelf”). At December 31, 2022, $150.0 million remains available under the 2022 Shelf. In connection with the 2022 shelf, the Company has entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“B. Riley”), relating to shares of the Company’s common stock. In accordance with the terms of the Sales Agreement, the Company may offer and sell up to 4,900,000 shares of its common stock, par value $0.0001 per share, from time to time through or to B. Riley acting as the Company’s agent or principal.

On January 12, 2022, the Company entered into a third amendment of the loan and security agreement with EWB (the “Amendment”), which increased the borrowing capacity of the Company’s revolving line of credit to $10.0 million, of which $2.9 million was outstanding at December 31, 2022, 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. In January 2022 and August 2022, the Company borrowed $15.0 million and $5.0 million, respectively, against the term loan. The term loans bear interest at a floating rate equal to 1.73% above the prime rate and are payable monthly. 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. The Company may elect to prepay all or any part of the term loan without penalty or premium, but the Company 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. At December 31, 2022, the Company was in compliance with all applicable financial covenants under the Amendment. The remaining $7.1 million revolving line of credit is fully available to the Company without any restrictions, other than certain customary and ordinary closing conditions.

The Company expects that expenses will increase substantially for the foreseeable future as it pursues business development opportunities, commercializes and markets new products and incurs additional costs associated with operating as a public company. To date, the Company has not been materially impacted by COVID-19; however, depending on the extent of the ongoing pandemic, it is possible that the Company, financial condition and results of operations could be materially and adversely affected by COVID-19 in the future. Additionally, the Federal Reserve has raised and is expected to continue to raise the federal funds interest rate throughout 2023 in its effort to take action against domestic inflation. Because the Company’s borrowings under the facility with EWB bear interest at a floating rate, rising interest rates affect the amount of the regular payments the Company is required to make to EWB. Accordingly, the Company may experience materially higher borrowing costs in future fiscal quarters than it historically has to date. The Company may require additional financing to pursue both development stage and commercial opportunities. In addition, The Company anticipates increased commercialization expenses related to the launch of newly acquired products, as well as increased costs related to development and regulatory approval of potential development stage product acquisitions, including DFD-29. As the Company continues to expand its product portfolio, it may need to fund possible future operating losses, and, if deemed appropriate, establish or secure through

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

additional third-party manufacturing for the Company’s products, and expanded sales and marketing capabilities related to recent product acquisitions.

For the next twelve months from the issuance of these financial statements, the Company will be able to fund our operations through a combination of existing cash and cash equivalents generated from operations, and the EWB borrowing facility. In addition, the Company may seek to raise capital through additional debt or equity financing, which may include sales of securities under the 2022 Shelf or under a new registration statement. If such funding is not available or not available on terms acceptable to the Company, the current plans for expansion of the product portfolio may be scaled back, limited or curtailed. The Company regularly evaluates market conditions, its liquidity profile, and various financing alternatives for opportunities to enhance the Company’s capital structure.

​

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.

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 unaudited interim condensed consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended, the Company 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 coupons, chargebacks, wholesaler fees, prompt-pay discounts, specialty pharmacy discounts, managed care rebates, product returns, government rebates and other allowances customary to the pharmaceutical industry. Significant estimates made by management also include inventory realization, valuation of intangible assets, useful lives of amortizable intangible assets and share-based compensation. 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.

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

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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 17 for significant customers.

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, 2022 and 2021 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

The Company’s accounts receivable consists of amounts due from customers related to product sales and have standard payment terms. For certain customers, the accounts receivable for the customer is net of prompt payment or specialty pharmacy discounts. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company reserves against accounts receivable for estimated losses that may arise from a customer’s inability to pay, and any amounts determined to be uncollectible are written off against the reserve when it is probable that the receivable will not be collected. The Company has historically not experienced significant credit losses. The allowance for doubtful accounts was $0.4 million and $0.1 million at December 31, 2022 and 2021, respectively.

Inventories

Inventories are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company periodically reviews the composition of inventory in order to identify excess, obsolete, slow-moving or otherwise non-saleable items taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand. If non-saleable items are observed and there are no alternate uses for the inventory, the Company records a write-down to net realizable value in the period that the decline in value is first recognized. The Company’s inventory reserves were $0.4 million and zero at December 31, 2022 and 2021, respectively.

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.

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.

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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, payments made to third parties for license and milestone costs related to in-licensed products and technology, and 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 total purchase price for the licenses acquired during the period was reflected as research and development - licenses acquired in the Consolidated Statements of Operations for the year ended December 31, 2022 and 2021.

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.

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.

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.

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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 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 intangible assets with finite useful lives, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable (a “triggering event”). 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. The Company has not recorded any impairment losses on long-lived assets for the years ended December 31, 2022 and 2021.

Share-based Compensation

The Company has a share-based compensation plan in place and records the associated share-based compensation expense over the requisite service period. The share-based compensation plan and related compensation expense are discussed more fully in Note 16 to the Company’s consolidated financial statements.

Compensation expense for service-based stock options is charged against operations on a straight-line basis over the vesting period, which is generally four years. Forfeitures are recorded as they occur. Share-based compensation costs are recorded in both research and development and selling, general and administrative expense in the Company’s consolidated statements of operations. Options granted have a term of 10 years from the grant date.

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, 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 share-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. The following inputs are used in the Black-Scholes calculation.

Expected term—The Company has elected to use the “simplified method” for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years).

Expected volatility— Historical information is the primary basis for the selection of the expected volatility of options granted. However, as the Company has limited trading history for its common shares, the expected volatility was estimated based on the average volatility for comparable guideline publicly traded biotechnology companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

Risk-free interest rate— The risk-free interest rate is selected based upon yields of United States Treasury issues with a term equal to the expected life of the option being valued.

Expected dividend yield—The Company has not issued any dividends in our history and do not expect to issue dividends over the life of the options; therefore, the Company has estimated the dividend yield to be zero.

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.

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.

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 19 below.

Revenue Recognition

The Company records and recognizes revenue in a manner that depicts 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 coupons, chargebacks, wholesaler fees, prompt pay discounts, specialty pharmacy discounts, managed care rebates, product returns, government rebates and other deductions customary to the pharmaceutical industry. Accruals for these provisions are presented in the consolidated financial statements as reductions to gross sales in determining net sales and as a contra asset within 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 estimates and assumptions. The following section briefly describes the nature of the Company’s provisions for variable consideration and how such provisions are estimated:

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. Coupons are processed and redeemed at the time of prescription fulfilment by the pharmacy. The majority of coupon reserve accrual at the end of the period reflects coupons that have been redeemed for which the Company has been billed in addition to an accrual for expected redemptions for product in the distribution channel. The expected accrual reserve requires us to estimate the distribution channel inventory at period end, the expected

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

redemption rates, and the cost per coupon claim that the Company expects to receive. The estimate of product remaining in the distribution channel is comprised of estimated inventory at the wholesaler as well as an estimate of inventory on the shelves at the specialty pharmacies, which the Company estimates based upon historical ordering patterns. 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.

Chargebacks and Government Chargebacks —The Company sells a portion of its products indirectly through wholesaler distributors to contracted indirect customers, qualified government healthcare providers, qualified U.S. Department of Veterans Affairs hospitals, and 340B entities. The Company enters into specific agreements with or provides discounts to these indirect customers and entities to establish pricing for the Company’s products, and in-turn, the indirect customers and entities independently purchase these products. Because the price paid by the indirect customers and/or entities is lower than the price paid by the wholesaler, the Company provides a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and their purchase price. 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.

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

​

Prompt-Pay Discounts –The Company provides for prompt pay discounts if payment is received within contractual payment term days, which generally ranges from 30 to 90 days. These discounts 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.

Specialty Pharmacy Discounts -The Company has in place contractual arrangements with specialty pharmacies and provides for contractually agreed upon discounts. These discounts are recorded at the time of sale based on the customer’s contracted rate and recorded as a reduction of revenue.

Managed Care Rebates — The Company is subject to rebates in connection with its agreements with certain contracted commercial payers. The Company estimates its managed care rebates based on the Company’s estimated payer mix and the applicable contractual rebate rate. The Company’s accrual for managed care rebates is based on an estimate of future claims that the Company expects to receive, which considers an estimate for inventory in the distribution channel. The accrual is recognized at the time of sale, resulting in a reduction of gross product revenue.

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. Products returned for expiration are reimbursed at current wholesale acquisition cost or indirect contract price. The Company estimates the amount of its product sales that may be returned by the Company’s customers and accrues this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company estimates products returns as a percentage of sales to its customers. The rate is estimated by using historical sales information, including its visibility and estimates into the inventory remaining in the distribution channel.

Income Taxes

As of December 31, 2022, the Company was 57.34% owned by Fortress Biotech, Inc. (“Fortress”) and was filing consolidated federal tax returns and consolidated or combined state tax returns in multiple jurisdictions with Fortress for tax years prior to 2021. As the Company completed its initial public offering on November 12, 2021, it deconsolidated from the Fortress consolidated group for federal income tax purpose. The financial statements recognize the current and deferred income tax consequences that result from the activities during the current and preceding periods, as if the Company were a separate taxpayer rather than a member of the Fortress consolidated

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

income tax return group. Fortress has agreed that the Company does not have to make payments to Fortress for the use of net operating losses (“NOLs”) of Fortress (including other Fortress group members). Since Fortress does not require the Company to pay in any form for the utilization of the consolidated group’s NOLs, the tax benefit realized have been 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 it believes it is more likely than not that the deferred tax assets will not be recovered based on an evaluation of objective verifiable evidence. The Company has considered its 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 it will realize the benefits of the net deferred tax assets as of December 31, 2022 and 2021 and therefore a full valuation allowance on all of the deferred tax assets is required.

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. For the years ended December 31, 2022 and 2021, the Company had no unrecognized tax benefits and does not anticipate any significant change to the unrecognized tax benefit balance. The Company classifies 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, 2022 and 2021.

Comprehensive Income

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

Recently Adopted Accounting Pronouncements

There are no recent accounting pronouncements that are expected to have a material impact on the Company’s consolidated financial statements or related disclosures.

NOTE 3. INVENTORY

The Company’s inventory consisted of the following at December 31, 2022 and 2021:

​

​ ​ ​ ​ ​ ​ ​

​ December 31, ​ December 31,

​ ​ ​ ​ ​ ​ ​

Work-in-process ​ 395 ​ —

Inventory reserves ​ ​ (429) ​ ​ —

​

​

NOTE 4. ASSET ACQUISITION

On January 12, 2022, the Company entered into an agreement with Vyne Therapeutics Inc. (“Vyne”) to acquire two United States Food and Drug Administration (“FDA”) approved topical minocycline products, Amzeeq® (minocycline) topical foam, 4%, and Zilxi® (minocycline) topical foam, 1.5%, and a Molecule Stabilizing TechnologyTM proprietary platform from Vyne for an upfront payment of $20.0 million and an additional $5.0 million payment on the one year anniversary of the closing (the “Vyne Product Acquisition Agreement”). This expanded the Company’s product portfolio to eight marketed branded dermatology products. The Company also acquired the associated inventory related to the products.

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Notes to Financial Statements

The Vyne Product Acquisition Agreement also provides for contingent net sales milestone payments, on a product-by-product basis. In the first calendar year in which annual net sales reach each of $100 million, $200 million, $300 million, $400 million and $500 million, the Company is required to make a one-time payment of $10 million, $20 million, $30 million, $40 million and $50 million, respectively, in that year only, per product, totaling up to $450 million. In addition, the Company will pay Vyne 10% of any upfront payment received by the Company from a licensee or sublicensee of the products in any territory outside of the United States, subject to exceptions for certain jurisdictions as detailed in the Vyne Product Acquisition Agreement.

The following table summarizes the aggregate consideration transferred for the assets acquired by the Company in connection with the Vyne Product Acquisition Agreement:

​

​ ​ ​ ​

​ Aggregate

​ ​ Consideration

($’s in thousands) ​ Transferred

Consideration transferred to Vyne at closing ​ $ 20,000

Fair Value of deferred cash payment due January 2023 ​ 4,740

Transaction costs ​ 223

Total consideration transferred at closing ​ $ 24,963

​

The fair value of the deferred cash payment is being accreted to the $5.0 million January 2023 cash payment over a one-year period through interest expense. The deferred cash payment had a carrying value of $5.0 million in the Company’s consolidated balance sheets at December 31, 2022.

The following table summarizes the assets acquired in the Vyne Product Acquisition Agreement:

​

​ ​ ​ ​

​ Assets

($’s in thousands) ​ Recognized

​ ​ ​ ​

Identifiable Intangibles: ​

Amzeeq Intangible ​ 15,162

Zilxi Intangible ​ 3,760

Fair value of net identifiable assets acquired ​ $ 24,963

​

The intangible assets were valued using an income approach, while the inventory was valued using a final sales value less cost to dispose approach.

NOTE 5. INTANGIBLES

The Company executed the Vyne Product Acquisition Agreement on January 12, 2022. The Company recognized intangible assets of $15.2 million for Amzeeq and $3.8 million for Zilxi, the two FDA approved products acquired in the agreement.

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. The Company paid the upfront fee of $12.5 million to Dermira. In addition, the Company is obligated to pay Dermira 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

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JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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. As of December 31, 2022, the Patent Litigation was settled by and between the parties and case subsequently has been dismissed.

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.

The table below provides a summary of the Company’s intangible assets at December 31, 2022 and 2021, respectively:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Estimated ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Useful ​ Gross ​ ​ ​ ​ ​ ​

​ ​ Lives ​ Carrying ​ Accumulated ​ Intangible

($’s in thousands) (Years) Value ​ Amortization Assets, Net

Amortizable intangible assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Ceracade® ​ 3 ​ $ 300 ​ $ (300) ​ $ —

Luxamend® ​ 3 ​ 50 ​ ​ (50) ​ —

Non-amortizable intangible assets: ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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Notes to Financial Statements

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Estimated ​ ​ ​ ​ ​ ​

​ ​ Useful ​ Gross ​ ​ ​ ​ ​ ​

​ ​ Lives ​ Carrying ​ Accumulated ​ Intangible

($’s in thousands) ​ (Years) ​ Value ​ Amortization ​ Assets, Net

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Amortizable intangible assets: ​ ​ ​ ​

Ceracade® ​ 3 ​ $ 300 ​ $ (300) ​ $ —

Luxamend® ​ 3 ​ 50 ​ (50) ​ —

Non-amortizable intangible assets: ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

The table below provides a summary for the year ended December 31, 2022 and 2021, of the Company’s recognized intangible amortization 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

License acquisition adjustment ​ (3)

Amortization expense ​ ​ (2,474)

VYNE License agreement ​ ​ 18,922

Amortization expense ​ ​ (4,277)

​

The Company’s amortization expense for the years ended December 31, 2022 and 2021 was approximately $4.3 million and $2.5 million, respectively. Amortization expense is recorded as a component of cost of goods sold in the Company’s consolidated statements of operations.

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