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 Notice 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. 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 seven branded and two 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 field sales force, will position our business for growth. We are a majority-owned subsidiary of Fortress.
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.
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 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.
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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 $700 million. As a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K, have reduced disclosure obligations regarding executive compensation, and smaller reporting companies are permitted to delay adoption of certain recent accounting pronouncements discussed in Note 2 See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K.
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Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
The following table summarizes our results of operations for the years ended December 31, 2023 and 2022:
For the Years Ended December 31, Change
($ in thousands, except per share data) 2023 2022 $ %
Revenue:
Operating expenses
Loss on impairment of intangible assets 3,143 — 3,143 100 %
Other expense
Foreign exchange transaction losses 183 89 94 106 %
Revenues
The following table reflects our revenue by product for the years ended December 31, 2023 and 2022:
For the Years Ended December 31, Change
Luxamend® 35 — 35 100 %
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Total net product revenues decreased $11.3 million, or 16%, to $59.7 million for the year ended December 31, 2023, from $71.0 million for the year ended December 31, 2022. The decrease is primarily due to lower unit volumes from our legacy products, Targadox, Ximino and Exelderm driven specifically by continued generic competition for Targadox and the winding down, and ultimate discontinuation of Ximino, during the third quarter of 2023. Despite unit volume increases from period-to-period for Qbrexza, Amzeeq and Zilxi, net revenues for these products were negatively impacted by higher managed care rebates due to higher managed care program costs. In addition, Qbrexza net revenue was negatively impacted by coupon deductible rate resets in the beginning of 2023, and isolated charges in the first quarter of 2023 for higher-than-anticipated returns from the Dermira product lots purchased in 2021, as well as higher government rebates from increases in certain state rebate programs. As of July 1, 2023, we no longer participate in these programs. Accutane net product revenue increased $1.8 million from 2022 due to increased unit volume resulting from our focused sales and marketing efforts.
Other revenue
For the Years Ended
December 31, Change
Non-refundable upfront payment from Maruho $ 19,000 $ — $ 19,000 100 %
Net milestone payment from Maruho — 2,500 (2,500) (100) %
Other revenues increased approximately $16.8 million, to $19.5 million for the year ended December 31, 2023, from $2.7 million for the year ended December 31, 2022. Other revenue for the year ended December 31, 2023 includes a $19.0 million non-refundable upfront payment from Maruho under the New License Agreement. Royalties on sales of Rapifort Wipes 2.5% in Japan were $0.5 million for the year ended December 31, 2023 as compared to $0.2 million for the year ended December 31, 2022. Other revenue for 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% (Japanese equivalent to U.S. FDA approved QBREXZA®), for the treatment of primary axillary hyperhidrosis, triggering the one-time net payment. Sales of Rapifort in Japan will no longer be subject to a royalty after October 1, 2023 in accordance with the Second A&R License Agreement.
Gross - to - Net Sales Accruals
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, 2023, 2022 and 2021 were as follows:
Chargebacks Distributor Prompt Managed
and other Service Pay Care Gov’t
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The increase in our reserves for gross-to-net sales accruals from period-to-period is driven by increases in our reserves for coupons and managed care rebates of $1.7 million and $1.6 million, respectively. Our provision for coupons was $3.4 million at December 31, 2023 compared to $1.7 million at December 31, 2022. The increase in the coupon reserve is primarily due to an increase in our channel reserve at December 31, 2023 for rebates not credited at the end of the year as a result of the timing of receipt. Our provision for managed care rebates was $5.2 million at December 31, 2023 compared to $3.6 million at December 31, 2022. The increase in the managed care rebate reserve is primarily due to the timing of invoices received.
Cost of Goods Sold
Cost of goods sold decreased by $4.1 million, or 13%, to $26.7 million for the year ended December 31, 2023, from $30.8 million for the year ended December 31, 2022. The decrease is mainly due to lower-than-prior-year product royalties driven by lower sales of products from period-to-period, and a permanent contractual decrease in the Qbrexza royalty percentage from the prior-year period.
Research and Development
Research and development expense decreased by $3.4 million, or 31%, to $7.5 million for the year ended December 31, 2023 from $10.9 million for the year ended December 31, 2022. The decrease is related to lower clinical trial expenses to develop our DFD-29 product as the project winds down and eventually concludes.
Selling, General and Administrative Expenses (“SG&A”)
Selling, general and administrative expenses decreased by $15.6 million, or 26%, to $43.9 million for the year ended December 31, 2023, from $59.5 million for the year ended December 31, 2022. The decrease is mainly due to our expense reduction efforts primarily in sales and marketing and other SG&A areas. During the last quarter of 2022, we began implementing a cost reduction initiative designed to improve operational efficiencies, optimize expenses, and reduce overall costs. The initiative is intended to reduce selling, general, and administrative expenses to better align costs with their revenue-generating capabilities. In connection with the cost reduction initiative, during the last quarter of 2022 and the first two quarters of 2023, we executed a headcount reduction to our sales force and implemented marketing and other cost cuts.
Loss on impairment of intangible assets
We recorded a loss on the impairment of intangible assets of $3.1 million during 2023 related to the impairment of the Ximino intangible asset as a result of lower net product revenues and gross profit levels for the Ximino products. We discontinued selling Ximino on September 29, 2023.
Interest Expense
Interest expense decreased $0.3 million to $1.7 million for the year ended December 31, 2023, from $2.0 million for the year ended December 31, 2022. This decrease was driven in part by the total repayment of our prior credit facility with East West Bank during the third quarter of 2023 and no additional borrowing of funds until entering into the Credit Facility with SWK in December 2023. As we utilize this Credit Facility during 2024 to help us fund our operations, we expect interest expenses may increase year-over-year from the fiscal year ended December 31, 2023.
Income tax expense
Income tax expense increased by $0.2 million during 2023 due to an increase in certain state taxes driven by the Maruho New License Agreement.
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Liquidity and Capital Resources
On December 27, 2023, we entered into the Credit Agreement with SWK. The Credit Agreement provides for a term loan Credit Facility in the original principal amount of up to $20.0 million. On the closing date, we drew $15.0 million. The remaining $5.0 million may be drawn upon our request within 12 months after the closing date. The Term Loans mature on December 27, 2027, and bear interest at a rate per annum equal to the three-month term SOFR (subject to a SOFR floor of 5%) plus 7.75%. The interest rate resets quarterly. Interest payments begin in February 2024 and are paid quarterly. Beginning in February 2026, we are required to repay the outstanding principal of the Term Loans quarterly in an amount equal to 7.5% of the principal amount of funded Term Loans. If our total revenue, measured on a trailing twelve-month basis, is greater than $70.0 million as of December 31, 2025, principal repayment is not required until February 2027, at which point we are required to repay a portion of the outstanding principal of the Term Loans quarterly in an amount equal to 15% of the principal amount of funded Term Loans. The SWK Credit Facility also includes both revenue and liquidity covenants, restrictions as to payment of dividends, and is secured by substantially all assets of the Company. As of December 31, 2023, and as of the date of this Annual Report on Form 10-K, the Company was in compliance with the financial covenants under the SWK Credit Facility
On August 31, 2023, we entered into the New License Agreement with Maruho, whereby we granted an exclusive license to Maruho to develop and commercialize Qbrexza® for the treatment of primary axillary hyperhidrosis in South Korea, Taiwan, Hong Kong, Macau, Thailand, Indonesia, Malaysia, Philippines, Singapore, Vietnam, Brunei, Cambodia, Myanmar and Laos (the “Territory”). Under the terms of the New License Agreement, in exchange for the exclusive rights to Qbrexza® in the Territory, Maruho paid us $19.0 million as a non-refundable upfront payment.
In July 2023, we satisfied all of the outstanding debt obligations we had with East West Bank (“EWB”) by voluntarily repaying the outstanding balance on the term loan under the Loan and Security Agreement, dated March 31, 2021 (as Amended, the “EWB facility”).
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”). In connection with the 2022 shelf, we have entered into the Sales Agreement with B. Riley relating to shares of our common stock in an at-the-market sales program. In accordance with the terms of the Sales Agreement, we may offer and sell up to 4,900,000 shares of our common stock, from time-to-time through B. Riley acting as our agent or principal. During 2023, we issued 748,703 shares of common stock under the 2022 Shelf, generating net proceeds of $4.5 million. At December 31, 2023, 4,151,297 shares remain available for issuance under the 2022 Shelf.
We regularly evaluate market conditions, our liquidity profile, and financing alternatives, including out-licensing arrangements for our products, to enhance our capital structure. We may seek to raise capital through debt or equity financings, to expand our product portfolio, and for other strategic initiatives, which may include sales of securities under either our 2022 Shelf or a new registration statement or drawing on the SWK Credit Facility. We cannot make any assurances that such additional financing will be available to us and, if available, the terms may negatively impact our business and operations. At December 31, 2023, we had cash and cash equivalents of approximately $27.4 million. Our current assumptions, projected commercial sales of our products, clinical development plans and regulatory submission timelines are uncertain and may not emerge as expected. Additionally, as a result of recurring losses, substantial doubt exists about our ability to continue as a going concern for a period of at least twelve months from the date of issuance of these financial statements.
Cash Flows for the Years Ended December 31, 2023 and 2022
For the Years ended December 31, Increase
Net change in cash and cash equivalents (4,564) (17,078) (12,514)
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Operating Activities
Net cash from operating activities changed by $18.8 million from period-to-period, from $13.5 million cash used in operating activities for the year ended December 31, 2022 to $5.2 million net cash provided by operating activities for the year ended December 31, 2023. The change was driven primarily by the lower net loss from period-to-period, driven by our lower expense base and the $19.0 million payment from Maruho. This was offset by vendor payments as we utilized operating cash and the proceeds of the SWK facility to aggressively pay down our current liabilities.
Investing Activities
Net cash used in investing activities decreased by $15.0 million, to $5.0 million for the year ended December 31, 2023, from $20.0 million for the year ended December 31, 2022. The year ended December 31, 2023 reflects the $5.0 million deferred cash payment paid in January 2023 related to the VYNE Product Acquisition. The year ended December 31, 2022 reflects the upfront $20.0 million payment for the VYNE Product Acquisition.
Financing Activities
Net cash used in financing activities increased by $21.3 million, to $4.8 million for the year ended December 31, 2023, from $16.5 million of cash flows provided by financing activities for the year ended December 31, 2022. The increase reflects a cash outflow of $20.0 million for the repayment of principal on the EWB term loan and net cash outflows of $2.9 million from the repayment of the EWB revolving line of credit, offset by net proceeds of $14.6 million from the SWK Term Loan and $4.5 million from the issuance of common stock under the 2022 Shelf. Net cash provided by financing activities for the year ended December 31, 2022 reflects net proceeds of $19.8 million from the EWB term loan and net proceeds of $2.1 million from the EWB revolving line of credit, offset by $5.0 million in payments of the installment notes related to our previously acquired products.
Material Cash Requirements
In the normal course of business, we enter into contractual obligations that contain cash requirements of which the most significant currently include the following:
Payments by Period
($’s in thousands)
Exit fee 750 — — — 750
Should we elect to borrow the remaining $5.0 undrawn balance under the SWB facility, we would expect to repay additional amounts each year until maturity.
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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.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is set forth in the financial statements and notes thereto beginning at page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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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 recognize 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 are 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, 2023. 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, 2023, 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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Changes in Internal Control over Financial Reporting
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, 2023 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 2024 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 2024 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 2024 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 2024 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 2024 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, 2023 and 2022 F-3
Notes to Consolidated Financial Statements F-7
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(b) Exhibits.
Exhibit Number Description
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21.1 List of Subsidiaries of Journey Medical Corporation.*
23.1 Consent of KPMG LLP.*
97.1 Clawback Policy of Journey Medical Corporation*
* 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, 2023 and 2022 F-3
Notes to Consolidated Financial Statements F-7
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Journey Medical Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Journey Medical Corporation and subsidiary (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the years then ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years then ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, and as a result has concluded that this raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 28, 2024
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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 15,222 28,208
Prepaid expenses and other current assets 3,588 3,309
Operating lease right-of-use asset, net 101 189
Other assets 6 95
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Due to related party 195 413
Accrued interest 22 160
Income taxes payable 53 35
Line of credit — 2,948
Deferred cash payment, net of discount — 4,991
Installment payments – licenses, short-term 3,000 2,244
Operating lease liability, short-term 99 83
Installment payments – licenses, long-term — 1,412
Operating lease liability, long-term 9 108
Commitments and contingencies (Note 14)
Stockholders’ equity
Total liabilities and stockholders’ equity $ 76,849 $ 105,160
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:
Operating expenses
Cost of goods sold – product revenue 26,660 30,775
Selling, general and administrative 43,910 59,468
Loss on impairment of intangible assets 3,143 —
Other expense (income)
Interest income (322) (60)
Foreign exchange transaction losses 183 89
Total other expense (income) 1,559 2,048
Income tax expense 221 63
Net loss per common share:
Basic and diluted $ (0.21) $ (1.69)
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 Total
Common Stock Common Stock A Paid-in (Accumulated Shareholders’
Shares Amount Shares Amount Capital Deficit) Equity
Share-based compensation — — — — 4,425 — 4,425
Net loss — — — — — (29,628) (29,628)
Share-based compensation — — — — 2,606 — 2,606
Net loss — — — — — (3,853) (3,853)
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
Non-cash interest expense 353 770
Amortization of debt discount 356 63
Amortization of acquired intangible assets 3,767 4,277
Amortization of operating lease right-of-use assets 88 88
Loss on impairment of intangible assets 3,143 -
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (279) (871)
Other assets — 55
Related party expenses (218) (228)
Income tax payable 18 27
Lease liabilities (83) (95)
Net cash provided by (used in) operating activities 5,240 (13,534)
Cash flows from investing activities
Acquired intangible assets (5,000) (20,000)
Net cash (used in) investing activities (5,000) (20,000)
Cash flows from financing activities
Proceeds from the exercise of stock options 121 142
Payment of license installment note payable (1,000) (5,000)
Repayment of line of credit (30,948) (2,864)
Repayment of EWB term-loan (20,000) —
Payment of issuance costs associated with EWB term-loan modification (91) —
Payment of issuance costs associated with issuance of SWK term-loan (380) —
Net cash (used in) provided by financing activities (4,804) 16,456
Cash at the beginning of the period 32,003 49,081
Cash at the end of the period $ 27,439 $ 32,003
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,127 $ 993
Cash paid for income taxes $ 181 $ 168
Deferred payment for asset acquisition $ — $ 4,740
ROU assets obtained in exchange for lease liabilities $ — $ 188
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 seven branded and two 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.
As of December 31, 2023 and 2022, the Company is a majority-owned subsidiary of Fortress Biotech, Inc. (“Fortress” or “Parent”).
Liquidity and Capital Resources
At December 31, 2023, the Company had $27.4 million in cash and cash equivalents as compared to $32.0 million at December 31, 2022.
On December 27, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) with SWK Funding LLC (“SWK”). The Credit Agreement provides for a term loan facility (the “Credit Facility”) in the original principal amount of up to $20.0 million. On the closing date, the Company drew $15.0 million. The remaining $5.0 million may be drawn upon the Company’s request within 12 months after the closing date. Loans under the Credit Facility (the “Term Loans”) mature on December 27, 2027, and bear interest at a rate per annum equal to the three-month term Secured Overnight Financing Rate (“SOFR”) (subject to a SOFR floor of 5%) plus 7.75%. The interest rate resets quarterly. Interest payments begin in February 2024 and are paid quarterly. Beginning in February 2026, the Company is required to repay a portion of the outstanding principal of the Term Loans quarterly in an amount equal to 7.5% of the principal amount of funded Term Loans.
On August 31, 2023, the Company entered into a license agreement (the “New License Agreement”) with Maruho Co., Ltd., a Japanese company specializing in dermatology (“Maruho”), whereby the Company granted an exclusive license to Maruho to develop and commercialize Qbrexza® for the treatment of primary axillary hyperhidrosis in South Korea, Taiwan, Hong Kong, Macau, Thailand, Indonesia, Malaysia, Philippines, Singapore, Vietnam, Brunei, Cambodia, Myanmar and Laos (the “Territory”). Under the terms of the New License Agreement, in exchange for the exclusive rights to Qbrexza ® in the Territory, Maruho paid $19.0 million to the Company as a non-refundable upfront payment.
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”). In connection with the 2022 Shelf, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) relating to shares of the Company’s common stock. The Company may offer and sell up to 4,900,000 shares of its common stock, from time to time. During 2023, the Company issued 748,703 shares of common stock under the 2022 Shelf, generating net proceeds of $4.5 million. At December 31, 2023, 4,151,297 shares remain available for issuance under the 2022 Shelf.
The Company regularly evaluates market conditions, its liquidity profile, and financing alternatives, including out-licensing arrangements for its products to enhance its capital structure. The Company may seek to raise capital through debt or equity financings to expand its product portfolio and for other strategic initiatives, which may include sales of securities under either the 2022 Shelf or a new registration statement or drawing on the SWK Credit Facility. The Company cannot make any assurances that such additional financing will be available and, if available, the terms may negatively impact the Company’s business and operations. The Company’s current assumptions, projected commercial sales of our products, clinical development plans and regulatory submission timelines are uncertain and may not emerge as expected. Additionally, as a result of recurring losses, substantial doubt exists about the Company’s ability to continue as a going concern for a period of at least twelve months from the date of issuance of these financial statements.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the
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Notes to Financial Statements
recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary if the Company is unable to continue as a going concern.
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 audited 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, specialty pharmacy discounts, managed care rebates, product returns, 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 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.
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Notes to Financial Statements
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, 2023 and 2022 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 are 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 $0.5 million and $0.4 million at December 31, 2023 and 2022, 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 $0.3 million and $0.4 million at December 31, 2023 and 2022, respectively.
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.
Research and Development Costs
Research and development costs are expensed as incurred. 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.
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.
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Notes to Financial Statements
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.
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.
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. During the year ended December 31, 2023, the Company recorded an impairment
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Notes to Financial Statements
loss associated with its intangible asset balance. See Note 5 for further details. The Company did not record any impairment losses on long-lived assets for the year ended December 31, 2022.
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.
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.
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
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Notes to Financial Statements
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, specialty pharmacy discounts, managed care rebates, product returns, 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 series of judgements about future events and uncertainties and can rely 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 the coupon reserve accrual at the end of the period reflects 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 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 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 and qualified government healthcare providers. 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. 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.
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.
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Notes to Financial Statements
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.
Income Taxes
As of December 31, 2023, the Company was 52.01% 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 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, 2023 and 2022 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, 2023 and 2022, 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, 2023 and 2022.
Comprehensive Income
The Company has no components of other comprehensive income, and therefore, comprehensive income equals net income.
Recently Issued Accounting Pronouncements
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires that an entity report segment information in accordance with Topic 280, Segment Reporting. The amendment in the ASU is intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands disclosures in an entity’s income tax rate reconciliation table and disclosures regarding cash taxes paid both in the U.S. and
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Notes to Financial Statements
foreign jurisdictions. The update will be effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and disclosures.
NOTE 3. INVENTORY
The Company’s inventory consisted of the following at December 31, 2023 and 2022:
December 31,
Inventory reserves (305) (429)
NOTE 4. ASSET ACQUISITION
In January 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 APA”). The Company also acquired the associated inventory related to the products.
The Vyne APA 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 and $200 million, the Company is required to make a one-time payment of $10.0 million and $20.0 million, respectively, in that year only, per product. In addition, the Company will pay Vyne 10% of any upfront payment received by the Company from a licensee or sublicensee of the products in any territory outside of the United States, subject to exceptions for certain jurisdictions as detailed in the Vyne APA.
The following table summarizes the aggregate consideration transferred for the assets acquired by the Company in connection with the Vyne APA:
Aggregate
Consideration
($’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 was accreted to the $5.0 million January 2023 cash payment over a one-year period through interest expense. The Company made the $5.0 million deferred cash payment in January 2023.
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Notes to Financial Statements
The following table summarizes the assets acquired in the Vyne APA:
Assets
($’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’s finite-lived intangible assets consist of acquired intangible assets. During the year ended December 31, 2023, the Company experienced lower net product revenues and gross profit levels for its Ximino products. Based on these results, the Company revised the financial outlook and plans for its Ximino products. The Company assessed the revised forecast for Ximino and determined that this constituted a triggering event, and the results of the analysis indicated the carrying amount was not expected to be recovered. The Company recorded an intangible asset impairment charge of $3.1 million during the year ended December 31, 2023. This non-cash charge was recorded to loss on impairment of intangible assets in the consolidated statements of operations.
The table below provides a summary of the Company’s intangible assets at December 31, 2023 and 2022, respectively:
Estimated December 31,
($’s in thousands) Useful Lives (Years) 2023 2022
Intangible assets - product licenses 3-9 $ 37,925 $ 37,925
Accumulated impairment loss (3,143) —
The Company’s amortization expense for the years ended December 31, 2023 and 2022 was approximately $3.8 million and $4.3 million, respectively. Amortization expense is recorded as a component of cost of goods sold in the Company’s consolidated statements of operations.
Future amortization of the Company’s intangible assets is as follows:
Total
For the years ended Amortization
Asset not yet placed in service 3,942
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Notes to Financial Statements
NOTE 6. LICENSES ACQUIRED
DFD-29
In June 2021, the Company entered a license, collaboration, and assignment agreement (the “DFD-29 Agreement”) to obtain global rights for the development and commercialization of a late-stage development modified release oral minocycline for the treatment of rosacea (“DFD-29”) with Dr. Reddy’s Laboratories, Ltd (“DRL”); provided, that DRL retained certain rights to the program in select markets including Brazil, Russia, India and China. Pursuant to the terms and conditions of the DFD-29 Agreement, the Company paid $10.0 million. Based on the development and commercialization of DFD-29, additional contingent regulatory and commercial milestone payments totaling up to $158.0 million may also become payable by the Company. The Company is required to pay royalties ranging from approximately ten percent to fifteen percent on net sales of the DFD-29 product, subject to certain reductions. Additionally, the Company was required to fund and oversee the Phase 3 clinical trials beginning upon the license of DFD-29 in 2021. The Phase 3 clinical trials substantially concluded in July 2023 upon the Company’s receipt of positive topline results from the trials. From inception to date the Company has incurred approximately $23.8 million in costs associated with the development of DFD-29.
Qbrexza
In March 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 Qbrexza APA, the Company acquired the rights to Qbrexza® (glycopyrronium), 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 $144.0 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 certain reductions in the event there is a loss of exclusivity.
Accutane
In July 2020, the Company entered into an exclusive license and supply agreement for Accutane (the “Accutane Agreement”) with DRL. Pursuant to the Accutane Agreement, the Company paid $5.0 million. Three additional milestone payments totaling $17.0 million are contingent upon the achievement of certain net sales milestones. The Company is required to pay royalties in an amount equal to a low-double digit percentage of net sales. The term of the Accutane Agreement is ten years and renewable upon mutual agreement. Each party may terminate the Accutane Agreement for an uncured material breach by the other party or for certain bankruptcy or insolvency related events. The Company may also terminate the Accutane Agreement without cause upon 180 days written notice to DRL.
NOTE 7: FAIR VALUE MEASUREMENTS
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
($’s in thousands) Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents $ 27,439 $ — $ — $ 27,439
($’s in thousands) Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents $ 32,003 $ — $ — $ 32,003
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Notes to Financial Statements
NOTE 8. RELATED PARTY AGREEMENTS
Shared Services Agreement with Fortress
On November 12, 2021, the Company and Fortress entered into an arrangement to share the cost of certain legal, finance, regulatory, and research and development employees (the “Shared Services Agreement”). Fortress’ Executive Chairman and Chief Executive Officer is the Executive Chairman of the Company. Under the terms of the Shared Services Agreement, the Company will reimburse Fortress for the salary and benefit costs associated with these employees based upon actual hours worked on Journey-related projects following the completion of the Company’s initial public offering, which occurred in November 2021. In addition, the Company reimburses Fortress for various payroll-related costs and selling, general and administrative costs incurred by Fortress for the benefit of the Company.
For the year ended December 31, 2023 and 2022, the Company recorded related party expenses to Fortress of approximately $0.1 million and $0.1 million, respectively. The due to related party liability at December 31, 2023 and 2022, were $0.2 million and $0.4 million, respectively, and primarily relate to reimbursable expenses incurred by Fortress on behalf of the Company. The Company would have incurred these costs irrespective of the relationship with Fortress.
NOTE 9. ACCRUED EXPENSES
Accrued expenses for the years ended December 31, 2023 and 2022 consisted of the following:
December 31,
Accrued expenses and other short-term liabilities:
Accrued coupons and rebates $ 9,987 $ 7,604
Accrued royalties payable 2,015 2,627
Accrued research and development 20 1,404
Accrued legal, accounting and tax 185 334
Accrued iPledge program 174 447
NOTE 10. INSTALLMENT PAYMENTS — LICENSES
The following tables show the details of the Company’s installment payments – licenses for the years ended December 31, 2023 and 2022:
($’s in thousands) Short-Term Long-Term Total
Installment payments - licenses $ 3,000 $ — $ 3,000
Less: imputed interest — — —
Sub-total installment payments - licenses $ 3,000 $ — $ 3,000
($’s in thousands) Short-Term Long-Term Total
Installment payments - licenses $ 2,500 $ 1,500 $ 4,000
Less: imputed interest (256) (88) (344)
Sub-total installment payments - licenses $ 2,244 $ 1,412 $ 3,656
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Table of Contents
JOURNEY MEDICAL CORPORATION
Notes to Financial Statements
NOTE 11. OPERATING LEASE OBLIGATIONS
The Company leases 3,681 square feet of office space in Scottsdale, Arizona. The lease was set to expire on December 31, 2022. In September 2022, the Company amended the lease to extend the lease term for an additional 25 months at an annual rate of approximately $0.1 million. The amended lease will expire on January 31, 2025.
The Company recorded rent expense as follows (dollars in thousands):