Journey Medical Corp - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number: 001-41063

JOURNEY MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		47-1879539
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9237 E Via de Ventura Blvd., Suite 105, Scottsdale, AZ 85258

(Address of principal executive offices and zip code)

(480) 434-6670

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	DERM	NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-accelerated Filer	☒	Smaller Reporting Company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Class of Common Stock		Outstanding Shares as of November 9, 2023
Common Stock Class A, $0.0001 par value		6,000,000
Common Stock, $0.0001 par value		12,508,449

Table of Contents

JOURNEY MEDICAL CORPORATION

Quarterly Report on Form 10-Q

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	31

SIGNATURES		32

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Balance Sheets

(Dollars in thousands except for share and per share amounts)


	September 30,		December 31,
	2023		2022
ASSETS
Current assets
Cash and cash equivalents	$	24,749	$	32,003
Accounts receivable, net of reserves		7,989		28,208
Inventory		11,024		14,159
Prepaid expenses and other current assets		924		3,309
Total current assets		44,686		77,679

Intangible assets, net		21,102		27,197
Operating lease right-of-use asset, net		124		189
Other assets		6		95
Total assets	$	65,918	$	105,160

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	28,164	$	36,570
Due to related party		1,093		413
Accrued expenses		16,026		19,388
Accrued interest		—		160
Income taxes payable		130		35
Line of credit		—		2,948
Deferred cash payment (net of discount of $9)		—		4,991
Installment payments – licenses, short-term		3,000		2,244
Operating lease liability, short-term		97		83
Total current liabilities		48,510		66,832

Term loan, long-term (net of debt discount of $174)		—		19,826
Installment payments – licenses, long-term		—		1,412
Operating lease liability, long-term		34		108
Total liabilities		48,544		88,178

Commitments and contingencies (Note 14)

Stockholders’ equity
Common stock, $.0001 par value, 50,000,000 shares authorized, 12,496,782 and 11,765,700 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		1		1
Common stock - Class A, $.0001 par value, 50,000,000 shares authorized, 6,000,000 shares issued and outstanding as of September 30, 2023 and December 31, 2022		1		1
Additional paid-in capital		87,584		85,482
Accumulated deficit		(70,212)		(68,502)
Total stockholders' equity		17,374		16,982
Total liabilities and stockholders’ equity	$	65,918	$	105,160

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

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JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Operations

(Dollars in thousands except for share and per share amounts)


	Three-Month Periods Ended				Nine-Month Periods Ended
	September 30,				September 30,
	2023		2022		2023		2022
Revenue:
Product revenue, net	$	15,279	$	16,043	$	44,405	$	55,074
Other revenue		19,260		73		19,519		2,629
Total revenue		34,539		16,116		63,924		57,703

Operating expenses
Cost of goods sold – product revenue		6,429		7,221		20,645		23,057
Research and development		2,229		2,812		6,036		6,687
Selling, general and administrative		8,636		15,575		34,069		45,481
Loss on impairment of intangible assets		—		—		3,143		—
Total operating expenses		17,294		25,608		63,893		75,225
Income (loss) from operations		17,245		(9,492)		31		(17,522)

Other expense (income)
Interest income		(8)		(3)		(209)		(10)
Interest expense		268		559		1,674		1,402
Foreign exchange transaction losses		101		22		181		22
Total other expense (income)		361		578		1,646		1,414
Income (loss) before income taxes		16,884		(10,070)		(1,615)		(18,936)

Income tax expense		95		10		95		50
Net income (loss)	$	16,789	$	(10,080)	$	(1,710)	$	(18,986)

Net income (loss) per common share:
Basic	$	0.91	$	(0.57)	$	(0.09)	$	(1.09)
Diluted	$	0.80	$	(0.57)	$	(0.09)	$	(1.09)
Weighted average number of common shares:
Basic		18,416,368		17,618,064		18,078,437		17,464,561
Diluted		21,034,758		17,618,064		18,078,437		17,464,561

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

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JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands except for share and per share amounts)

Nine-Month Period Ended September 30, 2023


											Total
	Common Stock			Common Stock A			Additional		Accumulated		Shareholders’
	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Equity
Balance as of December 31, 2022	11,765,700	$	1	6,000,000	$	1	$	85,482	$	(68,502)	$	16,982
Share-based compensation	—		—	—		—		2,077		—		2,077
Exercise of options for cash	23,000		—	—		—		25		—		25
Issuance of common stock for vested restricted stock units	708,082		—	—		—		—		—		—
Net loss	—		—	—		—		—		(1,710)		(1,710)
Balance as of September 30, 2023	12,496,782	$	1	6,000,000	$	1	$	87,584	$	(70,212)	$	17,374

Three-Month Period Ended September 30, 2023


											Total
	Common Stock			Common Stock A			Additional		Accumulated		Shareholders’
	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Equity
Balance as of June 30, 2023	12,133,890	$	1	6,000,000	$	1	$	87,004	$	(87,001)	$	5
Share-based compensation	—		—	—		—		558		—		558
Exercise of options for cash	18,000		—	—		—		22		—		22
Issuance of common stock for vested restricted stock units	344,892		—	—		—		—		—		—
Net income	—		—	—		—		—		16,789		16,789
Balance as of September 30, 2023	12,496,782	$	1	6,000,000	$	1	$	87,584	$	(70,212)	$	17,374

Nine-Month Period Ended September 30, 2022


											Total
	Common Stock			Common Stock A			Additional		Accumulated		Shareholders’
	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Equity
Balance as of December 31, 2021	11,316,344	$	1	6,000,000	$	1	$	80,915	$	(38,874)	$	42,043
Share-based compensation	—		—	—		—		2,985		—		2,985
Exercise of stock options for cash	155,649		—	—		—		142		—		142
Issuance of common stock for vested restricted stock units	170,666		—	—		—		—		—		—
Net loss	—		—	—		—		—		(18,986)		(18,986)
Balance as of September 30, 2022	11,642,659	$	1	6,000,000	$	1	$	84,042	$	(57,860)	$	26,184

Three-Month Period Ended September 30, 2022


											Total
	Common Stock			Common Stock A			Additional		Accumulated		Shareholders’
	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Equity
Balance as of June 30, 2022	11,556,493	$	1	6,000,000	$	1	$	82,573	$	(47,780)	$	34,795
Share-based compensation	—		—	—		—		1,438		—		1,438
Exercise of stock options for cash	22,500		—	—		—		31		—		31
Issuance of common stock for vested restricted stock units	63,666		—	—		—		—		—		—
Net loss	—		—	—		—		—		(10,080)		(10,080)
Balance as of September 30, 2022	11,642,659	$	1	6,000,000	$	1	$	84,042	$	(57,860)	$	26,184

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

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JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollars in thousands except for share and per share amounts)


	Nine-Month Periods Ended
	September 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(1,710)	$	(18,986)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense		492		10
Non-cash interest expense		353		619
Amortization of debt discount		354		47
Amortization of acquired intangible assets		2,952		3,050
Amortization of operating lease right-of-use assets		65		67
Share-based compensation		2,077		2,985
Loss on impairment of intangible assets		3,143		—
Changes in operating assets and liabilities:
Accounts receivable		19,727		(5,431)
Inventory		3,135		673
Prepaid expenses and other current assets		2,385		1,496
Other assets		-		47
Accounts payable		(8,406)		11,399
Due to related party		680		(567)
Accrued expenses		(3,362)		(5,173)
Accrued interest		(160)		125
Income tax payable		95		14
Lease liabilities		(60)		(73)
Net cash provided by (used in) operating activities		21,760		(9,698)

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 exercise of stock options		25		142
Payment of license installment note payable		(1,000)		(3,000)
Payment of debt issuance costs associated with convertible preferred shares		—		(214)
Proceeds from line of credit		28,000		—
Repayments of line of credit		(30,948)		(812)
Proceeds from EWB term-loan, net of discount		—		19,763
Repayment of EWB term-loan		(20,000)		—
Payment of issuance costs associated with EWB term-loan modification		(91)		—
Offering costs for the issuance of common stock - initial public offering		—		(371)
Net cash (used in) provided by financing activities		(24,014)		15,508

Net change in cash		(7,254)		(14,190)
Cash at the beginning of the period		32,003		49,081
Cash at the end of the period	$	24,749	$	34,891

Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,127	$	736
Cash paid for income taxes	$	85	$	19

Supplemental disclosure of non-cash financing and investing activities:
Deferred payment for asset acquisition	$	—	$	4,740

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

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JOURNEY MEDICAL CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1. ORGANIZATION AND PLAN OF BUSINESS OPERATIONS

Journey Medical Corporation (“Journey” or the “Company”) was formed on July 18, 2014. The Company is a commercial-stage pharmaceutical company that primarily focuses on the selling and marketing of FDA-approved prescription pharmaceutical products for the treatment of dermatological conditions. The Company’s current product portfolio includes eight branded and two authorized generic prescription drugs for dermatological conditions that are marketed in the U.S. The Company acquires rights to future products by licensing or otherwise acquiring an ownership interest in, funding the research and development of, and eventually commercializing, the products through its field sales force.

As of September 30, 2023 and December 31, 2022, the Company was a majority-owned subsidiary of Fortress Biotech, Inc. (“Fortress” or “Parent”).

Liquidity and Capital Resources

At September 30, 2023, the Company had $24.7 million in cash and cash equivalents as compared to $32.0 million of cash and cash equivalents at December 31, 2022.

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.

In July 2023, the Company satisfied all of the outstanding debt obligations under the Loan and Security Agreement, dated March 31, 2021 (as amended, the “EWB Facility”) by voluntarily repaying the entire $10.0 million outstanding term loan under the EWB facility.

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 September 30, 2023, $150.0 million remains available under the 2022 Shelf. In connection with the 2022 shelf, the Company 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.

As a result of increased losses in the latter part of 2022, during the last quarter of 2022, the Company implemented 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 revenues being generated. In connection with the cost reduction initiative, during the nine-month period ended September 30, 2023, the Company executed a headcount reduction to its salesforce and implemented marketing and other cost cuts. As a result of the headcount reduction, the Company recorded a severance obligation of approximately $0.7 million, of which $0.1 million remains to be paid at September 30, 2023.

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 its 2022 Shelf or under a new registration statement. 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. As such, 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.

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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 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

Basis of Presentation and Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the balances and results for the periods presented. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited interim condensed consolidated financial statement results are not necessarily indicative of results to be expected for the full fiscal year or any future period. The Company’s unaudited interim condensed consolidated financial statements include the accounts of the Company and the accounts of the Company’s wholly-owned subsidiary, JG Pharma, Inc. 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 unaudited condensed 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.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

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Recently Issued Accounting Pronouncements

During the nine-month period ended September 30, 2023, there were no new accounting pronouncements or updates to recently issued accounting pronouncements disclosed in the 2022 Form 10-K that affect the Company’s present or future results of operations, overall financial condition, liquidity, or disclosures.

NOTE 4. INVENTORY

The Company’s inventory consists of the following for the periods ended:


	September 30,		December 31,
($’s in thousands)	2023		2022
Raw materials	$	4,664	$	6,454
Work-in-process		458		395
Finished goods		6,683		7,739
Inventory at cost		11,805		14,588
Inventory reserves		(781)		(429)
Total inventories	$	11,024	$	14,159

NOTE 5. 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 Technology™ 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 certain associated inventory.

The VYNE Product Acquisition Agreement also provides for contingent net sales milestone payments. In the first calendar year in which annual sales reach each of $100 million, $200 million, $300 million, $400 million and $500 million, a one-time payment of $10 million, $20 million, $30 million, $40 million and $50 million, respectively, will be paid 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 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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The following table summarizes the assets acquired in the VYNE Product Acquisition Agreement:


	Assets
($’s in thousands)	Recognized

Inventory		6,041
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 6. INTANGIBLE ASSETS

The Company’s finite-lived intangible assets consist of acquired intangible assets. During the nine months ended September 30, 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 nine months ended September 30, 2023. This non-cash charge was recorded to loss on impairment of intangible assets on the unaudited condensed consolidated statements of operations.

The Company’s intangible assets as of September 30, 2023 and December 31, 2022 are summarized as follows:


	Estimated
	Useful Lives		September 30,		December 31,
($’s in thousands)	(Years)		2023		2022
Intangible assets - product licenses		3-9	$	37,925	$	37,925
Accumulated amortization				(13,680)		(10,728)
Accumulated impairment loss				(3,143)		—
Total intangible assets			$	21,102	$	27,197

The Company’s amortization expense for the three-month periods ended September 30, 2023 and 2022 was $0.8 million and $1.0 million, respectively. The Company’s amortization expense for the nine-month periods ended September 30, 2023 and 2022 was $3.0 million and $3.1 million, respectively. Amortization expense is recorded as a component of cost of goods sold in the Company’s unaudited condensed consolidated statements of operations.

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


$’s in thousands	Total Amortization
Remainder of 2023	$	813
December 31, 2024		3,258
December 31, 2025		3,258
December 31, 2026		2,470
December 31, 2027		1,775
Thereafter		5,586
Subtotal		17,160
Asset not yet placed in service		3,942
Total	$	21,102

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NOTE 7. 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. 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.

Qbrexza

In March 2021, the Company acquired global rights to Qbrexza (glycoprronium), a prescription cloth towelette to treat primary axillary hyperhidrosis in patients nine years of age or older. The Company paid an upfront fee of $12.5 million to Dermira, Inc., a subsidiary of Eli Lilly and Company (“Dermira”). In addition, the Company is obligated to pay Dermira up to $144 million in the aggregate upon the achievement of certain net 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 a 50% diminution in the event of loss of exclusivity due to the introduction of an authorized generic.

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 agreed to pay $5.0 million, comprised of an upfront payment of $1.0 million paid upon execution, with additional milestone payments totaling $4.0 million. To date, the Company has paid all milestone payments. 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 8. FAIR VALUE MEASUREMENTS

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.

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.

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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.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:


	September 30, 2023
($’s in thousands)	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents	$	24,749	$	—	$	—	$	24,749
Total	$	24,749	$	—	$	—	$	24,749


	December 31, 2022
($’s in thousands)	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents	$	32,003	$	—	$	—	$	32,003
Total	$	32,003	$	—	$	—	$	32,003

The Company did not carry any level 2 or level 3 assets or liabilities at September 30, 2023 or December 31, 2022. No transfers occurred between level 1, level 2, and level 3 instruments during the nine-month periods ended September 30, 2023 and 2022.

NOTE 9. 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 three-month periods ended September 30, 2023 and 2022, the Company recorded related party expenses to Fortress of approximately $11,239 and $7,798, respectively. The due to related party liability at September 30, 2023 and December 31, 2022, was $1.1 million and $0.4 million, respectively, and primarily relates to reimbursable expenses incurred by Fortress on behalf of the Company. The Company would have incurred these costs irrespective of the relationship with Fortress.

Fortress Income Tax

At September 30, 2023, 54.34% of all classes of the Company’s outstanding Common Stock was owned by Fortress. Prior to our initial public offering of securities in 2021, the Company had been filing consolidated federal tax returns and consolidated or combined state tax returns in multiple jurisdictions with Fortress. The Company may still be required to file combined tax returns in certain “combined filing states.” These jurisdictions generally require corporations engaged in unitary business and meet the capital stock requirement of fifty percent to file a combined state tax return.

Additionally, see Note 17 below for a discussion of income taxes.

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NOTE 10. ACCRUED EXPENSES

Accrued expenses consisted of the following:


	September 30,		December 31,
($’s in thousands)	2023		2022
Accrued expenses:
Accrued coupons and rebates	$	6,099	$	7,604
Return reserve		4,523		3,689
Accrued compensation		2,392		2,586
Accrued royalties payable		1,794		2,627
Accrued legal, accounting and tax		217		334
Accrued research and development		117		1,404
Accrued inventory		112		112
Accrued iPledge program		136		447
Other		636		585
Total accrued expenses	$	16,026	$	19,388

During the nine-month period ended September 30, 2023, the Company executed a headcount reduction to its salesforce and implemented marketing and other cost cuts. As a result of the headcount reduction, the Company recorded a severance obligation of approximately $0.7 million, of which $0.1 million remains to be paid at September 30, 2023. The accrued severance obligation is included within accrued compensation in the above table.

NOTE 11. INSTALLMENT PAYMENTS — LICENSES

The following tables show the details of the Company’s installment payments – licenses for the periods presented:


	September 30, 2023
($’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


	December 31, 2022
($’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

NOTE 12. OPERATING LEASE OBLIGATIONS

The Company leases 3,681 square feet of office space in Scottsdale, Arizona. 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 lease expense as follows:


	Three-Month Periods Ended					Nine-Month Periods Ended
	September 30,				September 30,
($’s in thousands)	2023		2022		2023		2022
Operating lease cost	$	24	$	27	$	72	$	76
Variable lease cost		1		1		3		3
Total lease cost	$	25	$	28	$	75	$	79

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The following table summarizes quantitative information about the Company’s operating leases:


	Three-Month Periods Ended						Nine-Month Periods Ended
	September 30,						September 30,
($’s in thousands)	2023			2022			2023			2022
Cash paid for amounts included in the measurement of lease liabilities	$	25		$	25		$	67		$	79
Weighted-average remaining lease term - operating leases		1.4			0.3			1.4			0.3
Weighted-average discount rate - operating leases		6.25	%		4.0	%		6.25	%		4.0	%

As of September 30, 2023, future minimum lease payments under lease agreements associated with the Company’s operations were as follows:


$’s in thousands
Remainder of 2023	$	33
2024		102
2025		9
Total lease payments		144
Less: present value discount		(13)
Total operating lease liabilities	$	131

NOTE 13. DEBT AND INTEREST EXPENSE

The Company has no debt obligations outstanding as of September 30, 2023. The Company’s debt obligations at December 31, 2022 were as follows:


December 31, 2022
					Net
	Principal		Unamortized		Carry
($’s in thousands)	Balance		Discount & Fees		Amount
Deferred cash payment	$	5,000	$	9	$	4,991
EWB Revolving LOC		2,948		—		2,948
Total Short-Term Debt	$	7,948	$	9	$	7,939
EWB Term Loan (Long-term)	$	20,000	$	174	$	19,826
Total Debt & Obligations	$	27,948	$	183	$	27,765

East West Bank Line of Credit and Long-Term Debt

In July 2023, the Company voluntarily repaid the entire $10.0 million outstanding term loan principal balance under the EWB Facility. The repayment satisfied all of the Company’s outstanding debt obligations under the EWB Facility. The Company has no further obligations to EWB.

Interest expense and financing fees

Interest expense consisted of the following:


	Three-Month Periods Ended September 30,				Nine-Month Periods Ended September 30,
($’s in thousands)	2023		2022		2023		2022
Interest payments on EWB term loan and LOC	$	34	$	333	$	967	$	710
Amortization/Accretion		58		90		354		257
Imputed interest on acquired intangible assets		176		136		353		435
Total Interest Expense and Financing Fees	$	268	$	559	$	1,674	$	1,402

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NOTE 14. COMMITMENTS AND CONTINGENCIES

License Agreements

The Company has undertaken to make contingent milestone payments to the licensors of its portfolio of drug products and candidates. In addition, the Company is required to pay royalties to such licensors based on a percentage of net sales of each drug candidate following regulatory marketing approval. For additional information on future milestone payments and royalties, see Note 7.

NOTE 15. SHARE-BASED COMPENSATION

In 2015, the Company’s Board of Directors adopted, and stockholders approved, the Journey Medical 2015 Stock Plan (the “Plan”) authorizing the Company to grant up to 4,642,857 shares of Common Stock to eligible employees, directors, and consultants in the form of restricted stock, restricted stock units (“RSUs”), stock options and other types of grants. The amount, terms, and exercisability provisions of grants are determined by the Board of Directors. At the Company’s 2022 Annual Meeting of Stockholders, held on June 21, 2022, the Company’s stockholders approved, among other matters, an amendment to the Plan to increase the number of shares of Common Stock issuable under the Plan by 3,000,000 to 7,642,857. As of September 30, 2023, 1,374,373 shares were available for issuance under the Plan.

In 2023, the Company’s Board of Directors adopted, and stockholders approved, the Journey Medical Corporation 2023 Employee Stock Purchase Plan (the "2023 ESPP"). The Company initially reserved 300,000 shares of common stock for future issuance under the 2023 ESPP. As of September 30, 2023, 300,000 shares were available for issuance under the 2023 ESPP.

The following table summarizes the components of share-based compensation expense in the consolidated statements of operations:


	Three-Month Periods Ended September 30,				Nine-Month Periods Ended September 30,
($’s in thousands)	2023		2022		2023		2022
Research and development	$	23	$	34	$	87	$	34
Selling, general and administrative		535		1,404		1,990		2,951
Total non-cash compensation expense related to share-based compensation included in operating expense	$	558	$	1,438	$	2,077	$	2,985

Stock Options

The following table summarizes the Company’s stock option activities:


						Weighted
		Weighted				average
	Number	average		Aggregate		remaining
	of	exercise		intrinsic		contractual
	Shares	price		value		life (years)
Outstanding options at December 31, 2022	2,960,000	$	1.76	$	2,217,815	5.65
Granted	430,756		1.64		—
Exercised	(23,000)		1.08		—	—
Forfeited	(445,838)		3.08		—	—
Expired	(23,850)		3.55		—	—
Outstanding options at September 30, 2023	2,898,068	$	1.53	$	4,107,260	4.84
Options vested and exercisable at September 30, 2023	2,051,950	$	0.99	$	3,743,200	3.09

For the three-month periods ended September 30, 2023 and 2022, approximately $80,000 and $0.4 million, respectively, of stock option compensation expense was charged against operations. For the nine-month periods ended September 30, 2023 and 2022, approximately $0.4 million and $0.4 million, respectively, of stock option compensation expense was charged against operations. For the three-month periods ended September 30, 2023 and 2022, the Company issued 18,000 shares and 22,500 shares, respectively, of common stock upon the exercise of outstanding stock options and received proceeds $21,345 and $31,275, respectively. At September 30, 2023, the Company

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had unrecognized stock-based compensation expense related to all unvested options of $1.1 million, which the Company expects to recognize over a weighted-average period of approximately 2.0 years.

The aggregate intrinsic value in the previous table reflects the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all option holders exercised their options on September 30, 2023. The intrinsic value of the Company’s stock options changes based on the closing price of the Company’s Common Stock.

Restricted Stock Units

The following table summarizes the activity related to the Company's RSUs for the nine-month period ended September 30, 2023:


		Weighted
		average
	Number of	grant date
	units	Fair value
Unvested balance at December 31, 2022	2,261,048	$	4.05
Granted	119,888		1.82
Vested	(708,082)		3.94
Forfeited	(307,042)		4.27
Unvested balance at September 30, 2023	1,365,812	$	3.87

For the three-month periods ended September 30, 2023 and 2022, approximately $0.5 million and $1.1 million, respectively, of stock compensation expense related to RSUs was charged against operations. For the nine-month periods ended September 30, 2023 and 2022, approximately $1.6 million and $2.6 million, respectively, of stock compensation expense related to RSUs was charged against operations. For the three-month periods ended September 30, 2023 and 2022 the Company issued 344,892 and 63,666 shares of common stock, respectively, upon vesting of RSU’s amounting to $1.3 million and $0.2 million, respectively, in total aggregate fair market value. For the nine-month periods ended September 30, 2023 and 2022, the Company issued 708,082 and 170,666 shares upon vesting of RSU’s amounting to $2.8 million and $0.6 million, respectively, in total aggregate fair market value. At September 30, 2023, 1,365,812 RSUs remained unvested and there was approximately $2.1 million of unrecognized compensation cost related to restricted stock which the Company expects to recognize over a weighted-average period of approximately 1.6 years.

Employee Stock Purchase Plan

The 2023 ESPP provides that eligible employees may contribute up to 10% of their eligible earnings toward a semi-annual purchase of the Company’s common stock. The 2023 ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the last date of purchase (or, if not a trading day, on the immediately preceding trading day). The offering period under the 2023 ESPP has a duration of six months, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85% of the lesser of (i) the fair market value of the Company’s common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of the Company’s common stock on the purchase date. The Company estimates the fair value of the common stock under the 2023 ESPP using a Black-Scholes valuation model. The fair value was estimated on the date of grant for the offering period beginning August 1, 2023 using the Black-Scholes option valuation model and the straight-line attribution approach with the following assumptions: risk-free interest rate (5.5%); expected term (0.5 years); expected volatility (129%); and an expected dividend yield (0%). The Company recorded $17,273 of stock-based compensation under the 2023 ESPP for the three and nine-month periods ended September 30, 2023. As of September 30, 2023, there was unrecognized stock-based compensation expense of $35,409 related to the current ESPP offering period, which ends January 31, 2024.

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NOTE 16. REVENUES FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Net Revenues

The Company’s net product revenues are summarized as follows:


	Three-Month Periods Ended September 30,				Nine-Month Periods Ended September 30,
($ in thousands)	2023		2022		2023		2022
Qbrexza®	$	5,865	$	6,265	$	18,038	$	19,752
Accutane®		4,882		4,121		15,109		14,228
Amzeeq®		2,336		1,161		4,904		5,892
Zilxi®		681		554		1,567		1,851
Targadox®		929		1,168		2,386		6,558
Exelderm®		764		1,001		1,813		3,018
Ximino®		(199)		1,773		567		3,775
Luxamend®		21		—		21		—
Total product revenues	$	15,279	$	16,043	$	44,405	$	55,074

The above table includes the authorized generic product within the line items for Targadox®, Ximino® and Exelderm®.

Significant Customers

For the three-month periods ended September 30, 2023 and 2022 and for the nine-month periods ended September 30, 2023 and 2022, there were no customers that accounted for more than 10% of the Company’s total gross product revenue.

At September 30, 2023, two of the Company’s customers accounted for more than 10% of its total accounts receivable balance at 25% and 15%. At December 31, 2022, two of the Company’s customers accounted for more than 10% of its total accounts receivable balance at 16.7% and 10.4%.

Other Revenue


	Three-Month Periods Ended September 30,				Nine-Month Periods Ended September 30,
($ in thousands)	2023		2022		2023		2022
Non-refundable upfront payment from Maruho	$	19,000	$	—	$	19,000	$	—
Net milestone payment from Maruho		—		—		—		2,500
Royalties on sales of Rapifort® Wipes 2.5%		260		73		519		129
Total other revenue	$	19,260	$	73	$	19,519	$	2,629

Other revenue reflects royalties on sales of Rapifort® Wipes 2.5% in Japan, from Maruho, the Company’s exclusive out-licensing partner in Japan. Other revenue for the nine-month period ended September 30, 2023 also reflects a net $19.0 million payment from Maruho under the New License Agreement. Other revenue for the nine-month period ended September 30, 2022 also reflects 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 net payment.

Maruho License Agreement

On August 31, 2023, the Company entered into the New License Agreement with Maruho. Under the terms of the New License Agreement, the Company granted an exclusive license to develop and commercialize Qbrexza® for the treatment of primary axillary hyperhidrosis in the Territory. Prior to the date of the New License Agreement, the Company and Maruho were party to an existing exclusive amended and restated license agreement (the “First A&R License Agreement”), under which Maruho acquired exclusive license rights to Qbrexza® in Japan.

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In connection with Journey’s entry into the New License Agreement, Journey and Maruho also entered into the Second Amended and Restated Exclusive License Agreement (the “Second A&R License Agreement”), which supersedes the First A&R License Agreement. The Second A&R License Agreement contains modifications that remove Maruho’s obligation to pay Journey royalties on its net sales of Rapifort® (the Japanese equivalent of Qbrexza®) in Japan for sales occurring after October 1, 2023 and removes Maruho’s obligation to pay $10 million to Journey in the event that Maruho achieves net sales of at least ¥4 billion (yen) of Rapifort® during a single fiscal year. All other remaining potential milestone payment obligations, which aggregate to $45 million, remain in full force and effect.

Under the terms of the New License Agreement, in exchange for the exclusive rights to Qbrexza® in the Territory, Maruho paid the Company a $19.0 million non-refundable upfront payment. Maruho is also obligated to pay royalties to the Company related to sales of the product in the Territory equal to the corresponding rate payable by the Company to Dermira under the asset purchase agreement between Journey and Dermira.

The New License Agreement may be terminated by Maruho in its entirety or on a region-by-region basis for convenience upon 30 days’ notice to the Company.

The Company does not have any obligation to assist in the regulatory approval efforts of Maruho under the New License Agreement in the Territory. The arrangement with Maruho provides for the transfer of the following: (i) an exclusive license of Qbrexza® from Journey to Maruho, including all related patents and know-how, and (ii) a non-exclusive license from Journey to Maruho to manufacture or have manufactured drug substance and products outside of the Territory, but exclusively for the sale of products in the Territory

The transaction closed in the third quarter of 2023 and the Company recognized $19.0 million as Other revenue in the unaudited condensed consolidated statements of operations.

NOTE 17. INCOME TAXES


	Three-Month Periods Ended						Nine-Month Periods Ended
	September 30,						September 30,
($ in thousands)	2023			2022			2023			2022
Net Income (loss) before income taxes	$	16,884		$	(10,070)		$	(1,615)		$	(18,936)
Provision (benefit) for Income		95			10			95			50
Effective tax rate		0.6	%		-0.1	%		-5.9	%		-0.3	%

The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company establishes a valuation allowance if management believes it is more likely than not that the deferred tax assets will not be recovered based on an evaluation of objective verifiable evidence. Management has considered the Company’s history of book and tax income and losses incurred since inception, and the other positive and negative evidence, and has concluded that it is more likely than not that the Company will not realize the benefits of the net deferred tax assets as of September 30, 2023.

As of September 30, 2023, the Company had no unrecognized tax benefits and does not anticipate any significant change to the unrecognized tax benefit balance.

NOTE 18. NET EARNINGS (LOSS) PER COMMON SHARE

The Company accounts for and discloses net earnings (loss) per share using the treasury stock method. Net earnings (loss) per share, or basic earnings (loss) per share, is computed by dividing net earnings (loss) by the weighted-average number of shares of common stock

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outstanding. Net earnings (loss) per share assuming dilutions, or diluted earnings (loss) per share, is computed by reflecting the potential dilution from the exercise of in-the-money stock options and the issuance of non-vested restricted stock units.

Diluted net income (loss) per share was calculated as follows:


	Three-Month Periods Ended September 30,				Nine-Month Periods Ended September 30,
	2023		2022		2023		2022
Diluted earnings per share
Numerator:
Net income (loss) - basic and diluted	$	16,789	$	(10,080)	$	(1,710)	$	(18,986)

Denominator
Weighted-average shares outstanding - basic		18,416,368		17,618,064		18,078,437		17,464,561

Dilutive impact from:
Stock options		1,252,578		—		—		—
Restricted stock units		1,365,812		—		—		—
Weighted-average shares outstanding – diluted		21,034,758		17,618,064		18,078,437		17,464,561

Net income (loss) per share – basic	$	0.91	$	(0.57)	$	(0.09)	$	(1.09)
Net income (loss) per share - diluted	$	0.80	$	(0.57)	$	(0.09)	$	(1.09)

Potentially dilutive securities excluded from the calculation of net income (loss) per share
Unvested restricted stock units		—		2,401,589		1,365,812		2,401,589
Stock options		976,949		1,509,484		1,144,412		1,643,454
Total potentially dilutive securities		976,949		3,911,073		2,510,224		4,045,043

The Company’s potentially dilutive securities, including unvested restricted stock and options have been excluded from the computation of diluted loss per share for the nine-month period ended September 30, 2023 and for the three and nine-month periods ended September 30, 2022, as the effect would be to reduce the loss per share. Therefore, the weighted average Common Stock outstanding used to calculate both basic and diluted income loss per share is the same for the nine-month period ended September 30, 2023, and for the three and nine-month periods ended September 30, 2022.

NOTE 19. SUBSEQUENT EVENT

The Company evaluates events that occur after the period’s end date through the date the financial statements are available to be issued. Accordingly, management has evaluated subsequent events through the date these financial statements are issued and has determined that no subsequent events require disclosure in these financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements

Certain matters discussed in this report may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. The words “anticipate,” “believe,” “estimate,” “may,” “expect,” “will,” “could,” “project,” “should,” “intend” and similar expressions are generally intended to identify forward-looking statements. Our actual results may differ materially from the results anticipated in or implied by these forward-looking statements due to a variety of factors, including, without limitation:

●

the fact that our products and product candidates are subject to time and cost intensive regulation and clinical testing and as a result, may never be successfully developed or commercialized;

●

a substantial portion of our sales derive from products that may become subject to third-party generic competition, the introduction of new competitor products, or an increase in market share of existing competitor products, any of which could have a significant adverse impact on our operating income;

●

we operate in a heavily regulated industry, and we cannot predict the impact that any future legislation or administrative or executive action may have on our operations;

●

our revenue is dependent mainly upon sales of our dermatology products and any setback relating to the sale of such products could impair our operating results;

●

competition could limit our products’ commercial opportunity and profitability, including competition from manufacturers of generic versions of our products;

●

the risk that our products do not achieve broad market acceptance, including by government and third-party payors;

●

our reliance third parties for several aspects of our operations;

●

our dependence on our ability to identify, develop, and acquire or in-license products and integrate them into our operations, at which we may be unsuccessful;

●

the dependence of the success of our business, including our ability to finance our company and generate additional revenue, on the successful development and regulatory approval of the DFD-29 product candidate and any future product candidates that we may develop, in-license or acquire;

●

clinical drug development is very expensive, time consuming, and uncertain and our clinical trials may fail to adequately demonstrate the safety and efficacy of our current or any future product candidates;

●

our competitors could develop and commercialize products similar or identical to ours;

●

risks related to the protection of our intellectual property and our potential inability to maintain sufficient patent protection for our technology and products;

●

our business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our or our third parties’ cybersecurity;

●

the substantial doubt expressed about our ability to continue as a going concern;

●

the effects of major public health issues, epidemics or pandemics on our product revenues and any future clinical trials;

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●

our potential need to raise additional capital;

●

Fortress controls a voting majority of our common stock, which could be detrimental to our other shareholders;

●

and the risks described in under the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

The forward-looking statements contained in this report reflect our views and assumptions as of the effective date of this report. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. Except as required by law, we assume no responsibility for updating any forward-looking statements.

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Overview

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

Recent Corporate Highlights

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 the Territory. Under the terms of the New License Agreement, Maruho paid $19.0 million as a non-refundable upfront payment. Maruho is also obligated to make royalty payments to us related to sales of the product in the Territory equal to the corresponding rate payable by us to Dermira under the asset purchase agreement between us and Dermira.

In July 2023, we paid off the entire $10.0 million outstanding balance on the EWB term loan. We have no further obligations to EWB or outstanding bank debt.

In July 2023, we announced positive topline data from our two DFD-29 Phase 3 clinical trials for the treatment of papulopustular rosacea. The Phase 3 clinical trials achieved the co-primary and all secondary endpoints and subjects completed the 16-week treatment with no significant safety issues. DFD-29 demonstrated statistical superiority over both the standard of care, Oracea® capsules, and placebo for Investigator’s Global Assessment treatment success and the reduction in the total inflammatory lesion count in both studies. We plan to file an NDA to the U.S. Food and Drug Administration for DFD-29 around the end of 2023 and expect potential approval from the FDA in the second half of 2024.

Critical Accounting Polices and Uses of Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. Applying these principles requires our judgment in determining the appropriateness of acceptable accounting principles and methods of application in diverse and complex economic activities. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of revenues, expenses, assets and liabilities, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

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For a discussion of our critical accounting estimates, see the section of the 2022 Form 10-K titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Use of Estimates.” There were no material changes in our critical accounting estimates or accounting policies from December 31, 2022.

Accounting Pronouncements

During the nine-month period ended September 30, 2023, there were no new accounting pronouncements or updates to recently issued accounting pronouncements disclosed in the 2022 Form 10-K that are expected to materially affect the Company’s present or future financial statements.

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 to our consolidated financial statements in this report on Form 10-Q.

Results of Operations

The following table summarizes our results of operations for the three-month periods ended September 30, 2023 and 2022:

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Comparison of the Three-Month Periods Ended September 30, 2023 and 2022


	Three-Month Periods Ended September 30,				Change
($ in thousands, except per share data)	2023		2022		$		%
Revenue:
Product revenue, net	$	15,279	$	16,043	$	(764)	-5	%
Other revenue		19,260		73		19,187	26284	%
Total revenue		34,539		16,116		18,423	114	%

Operating expenses
Cost of goods sold – product revenue		6,429		7,221		(792)	-11	%
Research and development		2,229		2,812		(583)	-21	%
Selling, general and administrative		8,636		15,575		(6,939)	-45	%
Total operating expenses		17,294		25,608		(8,314)	-32	%
Income (loss) from operations		17,245		(9,492)		26,737	-282	%

Other expense (income)
Interest income		(8)		(3)		(5)	167	%
Interest expense		268		559		(291)	-52	%
Foreign exchange transaction losses		101		22		79	359	%
Total other expense (income)		361		578		(217)	-38	%
Income (loss) before income taxes		16,884		(10,070)		26,954	-268	%

Income tax expense		95		10		85	850	%
Net income (loss)	$	16,789	$	(10,080)		26,869	-267	%

Revenues

The following table reflects our net product revenue for the three-month periods ended September 30, 2023 and 2022:


	Three-Month Periods Ended
	September 30,				Change
($ in thousands)	2023		2022		$		%
Qbrexza®	$	5,865	$	6,265	$	(400)	-6	%
Accutane®		4,882		4,121		761	18	%
Amzeeq®		2,336		1,161		1,175	101	%
Zilxi®		681		554		127	23	%
Targadox®		929		1,168		(239)	-20	%
Exelderm®		764		1,001		(237)	-24	%
Ximino®		(199)		1,773		(1,972)	-111	%
Luxamend®		21		—		21	100	%
Total net product revenue	$	15,279	$	16,043	$	(764)	-5	%

Total net product revenues decreased by $0.8 million, or 5.0%, to $15.3 million for the three-month period ended September 30, 2023, from $16.0 million for the three-month period ended September 30, 2022. The decrease is primarily due to lower net revenue from Ximino resulting from lower unit volumes due to the winding down of the product during the third quarter, along with higher coupon redemption volumes. We discontinued selling Ximino on September 29, 2023. The decrease was partially offset by an increase in net product revenues from Accutane, Amzeeq and Zilxi due to our continued sales and marketing emphasis on these products as well as optimization of our coupon processing access program for our specialty pharmaceutical customers. Qbrexza unit volumes slightly decreased from period-to-period resulting in a $0.4 million decrease in net sales. Our four core products, Qbrexza, Accutane, Amzeeq and Zilxi, all acquired and launched since 2022, represent approximately 90%, or $13.8 million, of our total net product revenue for the three-month period ended September 30, 2023.

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Other revenue


	Three-Month Periods Ended September 30,				Change
($ in thousands)	2023		2022		$		%
Non-refundable upfront payment from Maruho	$	19,000	$	—	$	19,000	100	%
Royalties on sales of Rapifort® Wipes 2.5%		260		73		187	256	%
Total other revenue	$	19,260	$	73	$	19,187	26284	%

Other revenues increased approximately $19.2 million, to $19.3 million for the three-month period ended September 30, 2023, from $73,000 for the three-month period ended September 30, 2022. Other revenue in the current period includes a $19.0 million non-refundable upfront payment from Maruho under the New License Agreement. In addition, royalties on sales of Rapifort® Wipes 2.5%. in Japan were $260,000 for the three-month period ended September 30, 2023 as compared to $73,000 for the three-month period ended September 30, 2022. 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 three-month periods ended September 30, 2023 and 2022, were as follows:


	Chargebacks										Managed
	and other		Distributor		Prompt Pay						Care		Gov’t
($’s in thousands)	allowances		Service Fees		Discounts		Returns		Coupons		Rebates		Rebates		Total
Balance as of June 30, 2023	$	265	$	879	$	192	$	4,545	$	4,092	$	3,732	$	3,417	$	17,122
Current provision related to sales in the current period		230		1,283		215		497		20,604		5,478		519		28,826
Checks/credits issued to third parties		(403)		(1,348)		(261)		(519)		(22,926)		(6,266)		(3,560)		(35,283)
Balance as of September 30, 2023	$	92	$	814	$	146	$	4,523	$	1,770	$	2,944	$	376	$	10,665


	Chargebacks										Managed
	and other		Distributor		Prompt Pay						Care		Gov’t
($’s in thousands)	allowances		Service Fees		Discounts		Returns		Coupons		Rebates		Rebates		Total
Balance as of June 30, 2022	$	273	$	933	$	194	$	2,727	$	2,499	$	3,191	$	1,218	$	11,035
Current provision related to sales in the current period		829		1,515		290		1,706		25,801		6,897		639		37,677
Checks/credits issued to third parties		(814)		(1,522)		(280)		(1,471)		(26,348)		(6,339)		(928)		(37,702)
Balance as of September 30, 2022	$	288	$	926	$	204	$	2,962	$	1,952	$	3,749	$	929	$	11,010

Gross-to-net sales accruals were $10.7 million at September 30, 2023, compared to $17.1 million at June 30, 2023, a decrease of $6.4 million. The decrease is primarily due to the termination of our Medicaid National Drug Rebate and Pharmaceutical Pricing Agreements in the third quarter. In addition, our reserve for coupons decreased as a result of our efforts to reduce overall coupon expense and make improvements to our programs, including increasing patient out-of-pocket costs for certain products and changing our overall mix of coupon related business to reduce the volume of higher dollar claims. Additionally, our managed care reserve decreased due to lower unit volumes and product mix of claims.

Cost of Goods Sold

Cost of goods sold decreased by $0.8 million, or 11%, to $6.4 million for the three-month period ended September 30, 2023, from $7.2 million for the three-month period ended September 30, 2022. The decrease is primarily due to the contractual decrease in our Qbrexza royalty from period to period, accounting for $0.6 million of the decrease, as well as lower sales of this product during the period.

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Research and Development

Research and Development expense decreased by $0.6 million, or 21%, to $2.2 million for the three-month period ended September 30, 2023, from $2.8 million for the three-month period ended September 30, 2022. The decrease is related to lower clinical trial expenses to develop our DFD-29 product as the project winds down.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses decreased by $6.9 million, or 45%, to $8.6 million for the three-month period ended September 30, 2023, from $15.6 million for the three-month period ended September 30, 2022. The decrease is mainly due to our expense reduction efforts primarily in sales and marketing and other SG&A areas, including a headcount reduction to our salesforce, designed to improve operational efficiencies, optimize expenses and reduce overall costs.

Interest Expense

Interest expense decreased by $0.3 million to $0.3 million for the three-month period ended September 30, 2023, from $0.6 million for the three-month period ended September 30, 2022. The decrease is primarily attributable to the repayment of the EWB Facility term loan in July 2023, which ended our obligation to pay interest on any borrowed money.

Comparison of the Nine-Month Periods Ended September 30, 2023 and 2022


	Nine-Month Periods Ended September 30,				Change
($in thousands, except per share data)	2023		2022		$		%
Revenue:
Product revenue, net	$	44,405	$	55,074	$	(10,669)	-19	%
Other revenue		19,519		2,629		16,890	642	%
Total revenue		63,924		57,703		6,221	11	%

Operating expenses
Cost of goods sold – product revenue		20,645		23,057		(2,412)	-10	%
Research and development		6,036		6,687		(651)	-10	%
Selling, general and administrative		34,069		45,481		(11,412)	-25	%
Loss on impairment of intangible assets		3,143		—		3,143	100	%
Total operating expenses		63,893		75,225		(11,332)	-15	%
Income (loss) from operations		31		(17,522)		17,553	-100	%

Other expense (income)
Interest income		(209)		(10)		(199)	1990	%
Interest expense		1,674		1,402		272	19	%
Foreign exchange transaction losses		181		22		159	723	%
Total other expense (income)		1,646		1,414		232	16	%
Loss before income taxes		(1,615)		(18,936)		17,321	-91	%

Income tax expense		95		50		45	90	%
Net loss	$	(1,710)	$	(18,986)		17,276	-91	%

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Revenues

The following table reflects our net product revenue for the nine-month periods ended September 30, 2023 and 2022:


	Nine-Month Periods Ended
	September 30,				Change
($in thousands)	2023		2022		$		%
Qbrexza®	$	18,038	$	19,752	$	(1,714)	-9	%
Accutane®		15,109		14,228		881	6	%
Amzeeq®		4,904		5,892		(988)	-17	%
Zilxi®		1,567		1,851		(284)	-15	%
Targadox®		2,386		6,558		(4,172)	-64	%
Exelderm®		1,813		3,018		(1,205)	-40	%
Ximino®		567		3,775		(3,208)	-85	%
Luxamend®		21		—		21	100	%
Total net product revenue	$	44,405	$	55,074	$	(10,669)	-19	%

Total net product revenues decreased by $10.7 million, or 19.0%, to $44.4 million for the nine-month period ended September 30, 2023, from $55.1 million for the nine-month period ended September 30, 2022. The decrease is primarily due to lower unit volumes from our legacy products, Targadox, Ximino and Exelderm, substantially driven by continued generic competition for Targadox. In addition, during the third quarter of 2023, we wound down and discontinued selling Ximino on September 29, 2023. The nine-month period ended September 30, 2023 was also negatively impacted by higher gross-to-net allowances, that occurred in the first quarter, for coupon rebates as a result of higher deductible rate resets, higher managed care rebates due to higher managed care program costs, higher-than-anticipated returns from the Dermira product lots purchased in 2021, and higher government rebates from increases in state rebate programs impacting the net revenues of our four core growth products, Qbrexza, Accutane, Amzeeq and Zilxi.

Other revenue


	Nine-Month Periods Ended September 30,				Change
($in thousands)	2023		2022		$		%
Non-refundable upfront payment from Maruho	$	19,000	$	—	$	19,000	100	%
Net milestone payment from Maruho		—		2,500		(2,500)	-100	%
Royalties on sales of Rapifort® Wipes 2.5%		519		129		390	302	%
Total other revenue	$	19,519	$	2,629	$	16,890	642	%

Other revenues increased approximately $16.9 million, to $19.5 million for the nine-month period ended September 30, 2023, from $2.6 million for the nine-month period ended September 30, 2022. Other revenue for the nine-month period ended September 30, 2023 includes a $19.0 million non-refundable upfront payment from Maruho under the New License Agreement. In addition, royalties on sales of Rapifort® Wipes 2.5%. in Japan were $0.5 million for the nine-month period ended September 30, 2023 as compared to $0.1 million for the three month period ended September 30, 2022. Other revenue for the nine-month period ended September 30, 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

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Gross-to-net sales accruals and the balance in the related allowance accounts for the nine-month period ended September 30, 2023 and 2022, were as follows:


	Chargebacks
	and		Distributor		Prompt						Managed
	other		Service		Pay						Care		Gov't
($'s in thousands)	allowances		Fees		Discounts		Returns		Coupons		Rebates		Rebates		Total
Balance as of December 31, 2022	$	253	$	929	$	207	$	3,689	$	1,696	$	3,594	$	1,010	$	11,378
Current provision related to sales in the current period		1,601		4,181		763		4,670		74,298		16,892		4,860		107,265
Checks/credits issued to third parties		(1,762)		(4,296)		(824)		(3,836)		(80,391)		(17,542)		(5,494)		(114,145)
Reclass coupon vendor deposit to accounts payable		—		—		—		—		6,167		—		—		6,167
Balance as of September 30, 2023	$	92	$	814	$	146	$	4,523	$	1,770	$	2,944	$	376	$	10,665


	Chargebacks
	and		Distributor		Prompt						Managed
	other		Service		Pay						Care		Gov't
($'s in thousands)	allowances		Fees		Discounts		Returns		Coupons		Rebates		Rebates		Total
Balance as of December 31, 2021	$	622	$	791	$	197	$	3,240	$	4,992	$	3,492	$	690	$	14,024
Current provision related to sales in the current period		1,941		4,367		816		3,996		92,330		17,131		2,395		122,976
Checks/credits issued to third parties		(2,275)		(4,232)		(809)		(4,274)		(95,370)		(16,874)		(2,156)		(125,990)
Balance as of September 30, 2022	$	288	$	926	$	204	$	2,962	$	1,952	$	3,749	$	929	$	11,010

Gross-to-net sales accruals were $10.7 million at September 30, 2023, compared to $11.4 million at December 31, 2022, a decrease of $0.7 million. The decrease is primarily due to the decrease in gross sales for the nine-month period ended September 30, 2023. In addition, we terminated our Medicaid National Drug Rebate and Pharmaceutical Pricing Agreements in the third quarter. The decrease is partially offset by an increase in the provision for returns for Qbrexza for actual returns experience that occurred in the first quarter.

Cost of Goods Sold

Cost of goods sold decreased by $2.4 million, or 10%, to $20.6 million for the nine-month period ended September 30, 2023, from $23.1 million for the nine-month period ended September 30, 2022. The decrease is mainly due to lower than-prior-year product royalties driven by lower sales, including a contractual decrease in the Qbrexza royalty percentage from the prior year period.

Research and Development

Research and development expense decreased by $0.7 million, or 10%, to $6.0 million for the nine-month period ended September 30, 2023, from $6.7 million for the nine-month period ended September 30, 2022. The decrease is related to lower clinical trial expenses to develop our DFD-29 product as the project winds down.

Selling, General and Administrative

SG&A expenses decreased by $11.4 million, or 25%, to $34.1 million for the nine-month period ended September 30, 2023, from $45.5 million for the nine-month period ended September 30, 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 implemented 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 salesforce and implemented marketing and other cost cuts.

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Loss on impairment of intangible assets

We recorded a loss on the impairment of intangible assets of $3.1 million in the second quarter of 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 increased by $0.3 million to $1.7 million for the nine-month period ended September 30, 2023, from $1.4 million for the nine-month period ended September 30, 2022.

Liquidity and Capital Resources

At September 30, 2023, we had $24.7 million in cash and cash equivalents as compared to $32.0 million of cash and cash equivalents at December 31, 2022.

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. 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 us as a non-refundable upfront payment.

In July 2023, we satisfied all of our outstanding debt obligations to East West Bank by voluntarily repaying the entire $10.0 million outstanding term loan under 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 Securities and Exchange Commission (“SEC”) on January 26, 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 September 30, 2023, $150.0 million remains available under the 2022 Shelf. In connection with the 2022 shelf, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“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.

As a result of increased losses in the latter part of 2022, during the last quarter of 2022, we implemented 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 revenues being generated. In connection with the cost reduction initiative, during the nine-month period ended September 30, 2023, we executed a headcount reduction to our salesforce and implemented marketing and other cost cuts. As a result of the headcount reduction, the Company recorded a severance obligation of approximately $0.7 million, of which $0.1 million remains to be paid at September 30, 2023.

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 our 2022 Shelf or under a new registration statement. 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. As such, 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 the financial statements included in this Quarterly Report on Form 10-Q.

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Cash Flows for the Nine-Month Periods Ended September 30, 2023 and 2022


	Nine-Month Periods Ended September 30,				Increase
($’s in thousands)	2023		2022		(Decrease)
Net cash provided by (used in) operating activities	$	21,760	$	(9,698)	$	31,458
Net cash used in investing activities		(5,000)		(20,000)		15,000
Net cash provided by (used in) financing activities		(24,014)		15,508		(39,522)
Net change in cash and cash equivalents		(7,254)		(14,190)		6,936

Operating Activities

Net cash flows provided by operating activities for the nine-month period ended September 30, 2023 increased by $31.5 million to $21.8 million from net cash flows used by operating activities of $9.7 million for the nine-month period ended September 30, 2022. The increase was driven primarily by the Company’s cost reduction efforts as well as the cash payment of $19.0 million received under the New License Agreement with Maruho. This was also driven by vendor, supplier, and other payments in the ordinary course of business, which were generally lower as a result of our expense optimization efforts and accounts receivable collections.

Investing Activities

Net cash used in investing activities decreased by $15.0 million from period to period. The nine-month period ended September 30, 2023 reflects the $5.0 million deferred cash payment paid in January 2023 related to the VYNE Product Acquisition. The nine-month period ended September 30, 2022 reflects the upfront $20.0 million payment for the VYNE Product Acquisition.

Financing Activities

Net cash flows used in financing activities for nine-month period ended September 30, 2023 increased by $39.5 million to $24.0 million from $15.5 million of cash flows provided by financing activities for the nine-month period ended September 30, 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. Net cash provided by financing activities for the nine-month period ended September 30, 2022 reflects net proceeds of $19.8 million from the EWB term loan offset by $3.0 million in payments of the installment notes related to our previously acquired products and $0.8 million for repayment our EWB revolving line of credit.

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:

●

Pursuant to our January 2022 agreement with VYNE Therapeutics, Inc. under which we acquired Amzeeq® and Zilxi® (the “VYNE Product Acquisition Agreement”), upon the achievement of net sales milestone payments with respect to the products purchased in the VYNE Product Acquisition Agreement, we are also required to pay contingent consideration consisting of a one-time payment, per product, of $10 million, $20 million, $30 million, $40 million and $50 million upon each product reaching annual sales of $100 million, $200 million, $300 million, $400 million and $500 million, respectively. Each required payment must only be paid one time following the first achievement of the applicable annual sales milestone amount.

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●

On June 29, 2021, we entered into a license, collaboration, and assignment agreement (the “DFD-29 Agreement”) to obtain the 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”). 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. Royalties ranging from ten percent to twenty percent are payable on net sales of the product. Additionally, the Company was required to fund and oversee the Phase 3 clinical trials beginning upon the license of DFD-29 in 2021. The two Phase 3 clinical trials substantially concluded in July 2023 upon the receipt of positive topline results from the trials. The Company expects to pay an approximately $4.0 million filing fee to the FDA upon filing of an Investigational New Drug Application (“NDA”) for DFD-29 around year end 2023. The Company also has an additional contingent milestone payment to DRL upon acceptance of the NDA, the timing of which is uncertain.

●

We are contractually obligated to make installment milestone payments of $3.0 million on Ximino, all of which is classified as current as is it due within a year of the September 30, 2023.

●

We are contractually obligated to make sales-based royalty payments to Dermira (for Qbrexza), Sun Pharmaceutical Industries (for Exelderm and Ximino) and PuraCap Caribe (for Targadox). Due to the contingent nature of these obligations, the amounts of these payments cannot be reasonably predicted.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of September 30, 2023, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports 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 principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in internal control over financial reporting occurred during the most recent quarter with respect to our operations; which materially affected, or is reasonable likely to materially affect, our internal controls over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings.

To our knowledge, there are no legal proceedings pending against us, other than routine actions, administrative proceedings, and other actions not deemed material, that are expected to have a material adverse effect on our financial condition, results of operations, or cash flows. In the ordinary course of business, however, the Company may be subject to both insured and uninsured litigation. Suits and claims may be brought against the Company by customers, suppliers, partners and/or third parties (including tort claims for personal injury arising from clinical trials of the Company’s product candidates and property damage) alleging deficiencies in performance, breach of contract, etc., and seeking resulting alleged damages.

Item 1A. Risk Factors.

We have disclosed below, as well as under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”), supplemented by the disclosure below, a number of risks which may materially affect our business, financial condition or results of operations. You should carefully consider these Risk Factors and other information set forth elsewhere in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us may also materially adversely affect our business, financial condition and/or results of operations.

There is substantial doubt regarding our ability to continue as a going concern. We may need to raise additional funding (which may not be available on acceptable terms to the Company, or at all) and/or to delay, limit or terminate certain of our product development and commercialization efforts or other operations.

Based on our current business plan and the current amount of cash and cash equivalents available to us, we have concluded that there is substantial doubt regarding our ability to continue as a going concern for a period of at least 12 months from the date of the issuance of the financial statements included in our Quarterly Report on Form 10-Q for the period ended September 30, 2023. In July 2023, we repaid our previously outstanding term loan in full, and therefore our assets are now unencumbered and available to support a new borrowing relationship to provide additional working capital, which we plan to pursue along with our costs reduction initiatives in 2023. In addition to reductions in sales force and marketing expenses, we may also seek to raise capital through additional debt or equity financing, which may include sales of securities under our existing shelf registration statement on Form S-3, including under the Sales Agreement with B. Riley, or under a new registration statement.

Our efforts to raise additional funding may divert our management from its day-to-day activities, which may adversely affect our ability to develop and commercialize our products. In addition, we cannot guarantee that financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline. The sale of additional equity or convertible securities would dilute all of our stockholders. Potential indebtedness, if incurred, would result in increased fixed payment obligations, and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We may be required to relinquish rights to some of our technologies or products or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.

If funding for our operations is not available or not available on terms acceptable to us, our strategic plans may be limited. In addition, in order to address our current funding constraints, we may be required to further revise our business plan and strategy, which may result in us (i) significantly curtailing, delaying or discontinuing our DFD-29 research or development programs or the commercialization of any other products, (ii) selling certain of our assets and/or (iii) being unable to expand our operations or otherwise capitalize on our business opportunities. Such measures may become necessary whether or not we are able to raise additional capital. As a result, our business, financial condition, and results of operations could be materially affected.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the period covered by this report, we have not sold any equity securities in transactions that were not registered under the Securities Act, and we nor our affiliates have purchased any equity securities issued by us.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits

Exhibit No.		Description
3.1		Third Amended and Restated Certificate of Incorporation of Journey Medical Corporation, filed as Exhibit 3.1 to Form 10-K, filed on March 28, 2022 and incorporated herein by reference.
3.2		Amended and Restated Bylaws of Journey Medical Corporation, filed as Exhibit 3.2 to Form 10-K, filed on March 28, 2022 and incorporated herein by reference.
4.1		Form of Common Stock Certificate, filed as Exhibit 4.1 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.
4.2		Description of Securities of Journey Medical Corporation, filed as Exhibit 4.2 to Form 10-K, filed on March 28, 2022 and incorporated herein by reference.
10.1		License Agreement, dated as of August 31, 2023, between Journey Medical Corporation and Maruho Co., Ltd.**+
10.2		Second Amended and Restated License Agreement, dated as of August 31, 2023, between Journey Medical Corporation and Maruho Co., Ltd.**+
31.1		Certification of Chief Executive Officer of Journey Medical Corporation pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 2023.**
31.2		Certification of Principal Financial Officer of Journey Medical Corporation pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 2023.**
32.1		Certification of Chief Executive Officer of Journey Medical Corporation pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 9, 2023.***
32.2		Certification of Principal Financial Officer of Journey Medical Corporation pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 9, 2023.***
101		The following financial information from the Company’s quarterly report on Form 10-Q for the period ended September 30, 2023, formatted in Inline Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statement of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements (filed herewith).**
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).**

** Filed herewith.

*** Furnished herewith.

+ Certain confidential portions of this exhibit were omitted (indicated by “[***]”) pursuant to Item 601(b)(10)(iv) of Regulation S-K because the information is both not material and the type of information that the Company treats as private or confidential.

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SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Journey Medical Corporation
	(Registrant)

Date: November 9, 2023	By:	/s/ Claude Maraoui
	Claude Maraoui
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: November 9, 2023	By:	/s/ Joseph Benesch
	Joseph Benesch
	Interim Chief Financial Officer
	(Principal Financial Officer)