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Table of Contents

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 March  31, 2022

OR

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 May 9, 2022

Common Stock Class A, $0.0001 par value

6,000,000

Common Stock, $0.0001 par value

11,431,594

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

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3.

Defaults Upon Senior Securities

29

Item 4.

Mine Safety Disclosures

29

Item 5.

Other Information

29

Item 6.

Exhibits

30

 

 

SIGNATURES

31

i

Table of Contents

PART I.      FINANCIAL INFORMATION

Item 1.   Unaudited Condensed Consolidated Financial Statements

JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Balance Sheets

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

    

March 31, 

    

December 31, 

2022

2021

ASSETS

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

 

$

41,331

 

$

49,081

Accounts receivable, net of reserves

 

31,183

 

23,112

Inventory

 

16,137

 

9,862

Prepaid expenses and other current assets

 

1,608

 

2,438

Total current assets

 

90,259

 

84,493

Intangible assets, net

 

30,457

 

12,552

Operating lease right-of-use asset, net

 

67

 

89

Other assets

 

118

 

150

Total assets

$

120,901

$

97,284

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

26,959

$

22,812

Due to related party

 

511

 

641

Accrued expenses

 

25,885

 

22,733

Accrued interest

66

Income taxes payable

 

112

 

8

Line of credit

812

Deferred payment (net of discount of $206)

4,794

Installment payments – licenses, short-term (net of debt discount of $431 and $490 as of March 31, 2022 and December 31, 2021, respectively)

 

2,569

 

4,510

Operating lease liabilities, short-term

 

74

 

98

Total current liabilities

 

60,970

 

51,614

Term loan (net of debt discount of $223)

14,777

Installment payments – licenses, long-term (net of debt discount of $284 and $373 as of March 31, 2022 and December 31, 2021, respectively)

 

3,716

 

3,627

Total liabilities

 

79,463

 

55,241

Commitments and contingencies (Note 15)

 

  

 

  

Stockholders’ equity

 

  

 

  

Common stock, $.0001 par value, 50,000,000 shares authorized, 11,318,344 and 11,316,344 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

 

1

 

1

Common stock - Class A, $.0001 par value, 50,000,000 shares authorized, 6,000,000 shares issued and outstanding as of March 31, 2022 and December 31, 2021

 

1

 

1

Additional paid-in capital

 

81,688

 

80,915

Accumulated deficit

 

(40,252)

 

(38,874)

Total stockholders’ equity

 

41,438

 

42,043

Total liabilities and stockholders’ equity

$

120,901

$

97,284

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

1

Table of Contents

JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Operations

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

    

Three-Month Periods Ended

March 31, 

    

2022

    

2021

Revenue

Product revenue, net

$

20,796

$

10,719

Other revenue

2,500

Total Revenue

23,296

10,719

Operating expenses

 

  

 

  

Cost of goods sold – product revenue

 

8,203

 

3,908

Research and development

 

1,266

 

Selling, general and administrative

 

14,715

 

6,226

Total operating expenses

 

24,184

 

10,134

(Loss) income from operations

 

(888)

 

585

Other expense

 

  

 

  

Interest income

 

(3)

 

Interest expense

389

221

Total other expense

 

386

 

221

Net (loss) income before income taxes

 

(1,274)

 

364

Income tax expense

 

104

 

96

Net (loss) income

$

(1,378)

$

268

Net (loss) income per common share – basic

$

(0.08)

$

0.03

Net (loss) income per common share – diluted

$

(0.08)

$

0.02

Weighted average shares outstanding – basic

 

17,318,344

 

9,158,333

Weighted average shares outstanding – diluted

 

17,318,344

 

10,897,096

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

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JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity

(Dollars in thousands except for share amounts)

Total

    

Common Stock

    

Common Stock A

Additional

(Accumulated

Stockholders’

    

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

 

 

 

773

 

 

773

Issuance of common stock related to equity plan

2,000

Net loss

 

 

 

 

(1,378)

 

(1,378)

Balance as of March 31, 2022

11,318,344

$

1

6,000,000

$

1

$

81,688

$

(40,252)

$

41,438

Total

    

Common Stock

    

Common Stock A

Additional

Retained

Stockholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Earnings

    

Equity

Balance as of December 31, 2020

3,151,333

$

6,000,000

$

1

$

5,171

$

5,120

$

10,292

Share-based compensation

 

 

 

22

 

 

22

Exercise of stock options for cash

10,000

7

7

Contribution of capital – extinguishment of related party payable

 

 

 

178

 

 

178

Net income

 

 

 

 

268

 

268

Balance as of March 31, 2021

3,161,333

$

6,000,000

$

1

$

5,378

$

5,388

$

10,767

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)

    

Three-Month Periods

Ended March 31, 

    

2022

    

2021

Cash flows from operating activities

  

  

Net (loss) income

$

(1,378)

$

268

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Bad debt (recovery) expense

 

(76)

 

70

Non-cash interest expense

 

203

 

221

Amortization of debt discount

 

14

 

Amortization of acquired intangible assets

 

1,017

 

584

Amortization of operating lease right-of-use assets

 

22

 

21

Share-based compensation

 

773

 

22

Deferred taxes provision

 

 

69

Changes in operating assets and liabilities:

 

 

Accounts receivable

(7,995)

390

Inventory

 

(234)

 

(887)

Prepaid expenses and other current assets

 

830

 

472

Other assets

 

32

 

(121)

Accounts payable

 

4,732

 

566

Due to related party

 

(130)

 

70

Accrued expenses

 

2,928

 

(395)

Accrued interest

66

Income tax payable

 

104

 

26

Lease liabilities

(24)

(15)

Net cash provided by operating activities

 

884

 

1,361

 

 

Cash flows from investing activities

 

 

Acquired intangible assets

 

(20,000)

 

Net cash used in investing activities

(20,000)

 

  

 

  

Cash flows from financing activities

 

 

Proceeds from the exercise of options

 

 

7

Payment of license installment note payable

 

(2,000)

 

(1,800)

Proceeds from convertible preferred shares

 

 

12,537

Payment of debt issuance costs associated with convertible preferred shares

 

(214)

 

(1,353)

Proceeds from EWB term-loan, net of discount

14,763

Repayment of line of credit

(812)

Offering costs for the issuance of common stock - initial public offering

 

(371)

 

Net cash provided by financing activities

 

11,366

 

9,391

Net change in cash

 

(7,750)

 

10,752

Cash at the beginning of the period

 

49,081

 

8,246

Cash at the end of the period

$

41,331

$

18,998

 

  

 

  

Supplemental disclosure of cash flow information:

Cash paid for income taxes

$

$

Cash paid for interest

$

95

$

Supplemental disclosure of non-cash financing and investing activities:

Deferred payment for asset acquisition

$

4,794

$

Unpaid debt offering cost

$

$

135

Unpaid initial public offering cost

$

$

362

Extinguishment of related party payable relates to deferred tax assets

$

$

109

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

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

All dollar amounts discussed in these Notes to Unaudited Condensed Consolidated Financial Statements are in thousands of U.S. dollars, except for per share amounts, and unless otherwise indicated.

Liquidity and Capital Resources

At March 31, 2022, the Company had $41.3 million in cash and cash equivalents as compared to $49.1 million at December 31, 2021.

On November 16, 2021, the Company completed an initial public offering (collectively the “Journey IPO” or “IPO”) of its Common Stock, par value $0.0001 (“Common Stock”), which resulted in net proceeds of approximately $30.6 million, after deducting underwriting discounts and other offering costs.

Prior the Company's IPO, the Company's operations were primarily financed through a working capital note from Fortress, referred to herein as the "Fortress Note," cash generated by operations and cash raised in the Company's private offering of 8% Cumulative Convertible Class A Preferred Stock ("Class A Preferred Stock"). In connection with the closing of the Company's IPO on November 16, 2021, the Company issued 2,231,346 shares of Common Stock resulting from the conversion of all of the Class A Preferred Stock. In addition, the Fortress Note was converted into 1,610,467 shares of Journey Common Stock at the Journey IPO price of $10.00 per share.

The Company also has access to a $30.0 million East West Bank (“EWB”) borrowing facility, which includes a $10.0 revolving line of credit (with zero outstanding at March 31, 2022), and a $20.0 million term loan with both maturing on January 12, 2026. In January 2022, the Company borrowed $15.0 million against the term loan. Through June 12, 2023, the Company has the option to borrow an additional $5 million under another term loan facility. For the next twelve months from the issuance of these financial statements, the Company will be able to fund its operations through a combination of existing cash and cash equivalents generated from operations and the EWB borrowing facility.

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

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

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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 product returns, coupons, rebates, chargebacks, discounts, allowances and distribution fees paid to certain wholesalers, inventory realization and useful lives of amortizable intangible assets. 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, 2021. (the “2021 Form 10-K”).

Recently Issued Accounting Pronouncements

During the three-month period ended March 31, 2022, there were no new accounting pronouncements or updates to recently issued accounting pronouncements disclosed in the 2021 Form 10-K that affect the Company’s present or future results of operations, overall financial condition, liquidity or disclosures.

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NOTE 4. INVENTORY

The Company’s inventory consists of the following:

    

March 31, 

    

December 31, 

($’s in thousands)

2022

2021

Raw materials

$

8,357

$

5,572

Work-in-process

 

533

 

Finished goods

 

7,297

 

4,290

Inventory at cost

16,187

Inventory reserves

(50)

Total Inventories

$

16,137

$

9,862

NOTE 5. ASSET ACQUISITION

In January 2022, the Company acquired 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 Therapeutics, Inc. (“VYNE”) for an upfront payment of $20.0 million and an additional $5.0 million payment on the one (1)-year anniversary of the closing (The “VYNE Product Acquisition”). This expands the Company’s product portfolio to nine marketed branded dermatology products. The Company also acquired certain associated inventory.

The VYNE Product Acquisition 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.

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

    

Aggregate

Consideration

($'s in thousands)

    

Transferred

Consideration transferred to VYNE at closing

$

20,000

Fair Value of deferred cash payment due January 2023

 

4,740

Transaction costs

 

223

Total consideration transferred at closing

$

24,963

The fair value of the deferred cash payment is being accreted to the $5.0 million January 2023 cash payment over a one-year period through interest expense.

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The following table summarizes the assets acquired in the VYNE Product Acquisition:

    

 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. INTANGIBLES

The Company's finite-lived intangible assets consist of acquired intangible assets.

The Company acquired AMZEEQ (minocycline) topical foam, 4%, and ZILXI (minocycline) topical foam, 1.5%, two FDA-Approved Topical Minocycline Products and Molecule Stabilizing Technology (MST)(TM) from VYNE, which expands the Company's product portfolio to nine marketed branded dermatology products.

On March 31, 2021, the Company executed an Asset Purchase Agreement (the “Agreement”) with Dermira, Inc., a subsidiary of Eli Lilly and Company (“Dermira”). Pursuant to the terms of the Agreement, the Company acquired the rights to Qbrexza® (glycoprronium), a prescription cloth towelette to treat primary axillary hyperhidrosis in patients nine years of age or older. Upon receipt of clearance under federal antitrust laws, which was received on May 13, 2021, the Company paid the upfront fee of $12.5 million to Dermira. In addition, Dermira is eligible to receive up to $144 million in the aggregate upon the achievement of certain sales milestones. The royalty structure for the Agreement is tiered with royalties for the first two years ranging from approximately 40% to 30%. Thereafter, for a period of eight years, royalties are approximately 12% to 19%. Royalty amounts are subject to 50% diminution in the event of loss of exclusivity due to the introduction of an authorized generic.

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

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

In December 18, 2020, the Company entered an Asset Purchase Agreement with a third party (the "Anti-itch Product Agreement") for a topical product that is indicated to treat scabies and skin itch conditions ("Anti-itch Product"). Pursuant to the terms and conditions of the Anti-itch Product Agreement, the Company agreed to pay $4.0 million, comprised of a $0.2 million upon the execution of the term sheet, payments of $2.8 million in 2021, and a final payment of $1.0 million on January 1, 2022. There are no subsequent milestone payments or royalties beyond the aforementioned payments.

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On July 29, 2020, the Company entered into a license and supply agreement for Accutane® ("Accutane Agreement") with DRL. Pursuant to the Accutane Agreement, the Company agreed to pay $5.0 million, comprised of an upfront payment of $1.0 million paid upon execution, with additional milestone payments totaling $2.0 million. Three additional milestone payments totaling $17.0 million are contingent upon the achievement of certain net sales milestones. Royalties in the low-double digits based on net sales, subject to specified reductions are also due. The term of the Accutane Agreement is ten years and renewable upon mutual agreement. Each party may terminate the Accutane Agreement for material breach by the other party or for certain bankruptcy or insolvency related events. The Company may also terminate upon 180 days written notice to the other party.

The gross carrying amount and accumulated amortization of intangible assets as of March 31, 2022 and December 31, 2021 are summarized as follows:

    

March 31, 2022

Estimated  

Useful 

Gross

Lives

Carrying

Accumulated

Intangble

($'s in thousands)

    

(Years)

    

 Value

    

Amortizaiton

 Assets, Net

Amortizable intangible assets:

  

  

  

  

Ceracade®

3

$

300

$

(300)

$

Luxamend®

 

3

 

50

 

(50)

 

Targadox®

 

3

 

1,250

 

(1,250)

 

Ximino®

 

7

 

7,134

 

(2,718)

 

4,416

Exelderm®

 

3

 

1,600

 

(1,600)

 

Accutane®

 

5

 

4,727

 

(1,024)

 

3,703

Amzeeq®

 

9

 

15,162

 

(422)

 

14,740

Zilxi®

 

9

 

3,760

 

(104)

 

3,656

 

 

33,983

 

(7,468)

26,515

Non-amortizable intangible assets:

 

  

 

  

 

  

 

  

Anti-itch product (1)

 

3

 

3,942

 

 

3,942

Total intangible assets

$

37,925

$

(7,468)

$

30,457

    

December 31, 2021

Estimated

Useful

Gross

 Lives

 Carrying

Accumulated

Intangble

($'s in thousands)

    

 (Years)

    

Value

    

Amortizaiton

    

 Assets, Net

Amortizable intangible assets:

  

  

  

  

Ceracade®

3

$

300

$

(300)

$

Luxamend®

 

3

 

50

 

(50)

 

Targadox®

 

3

 

1,250

 

(1,250)

 

Ximino®

 

7

 

7,134

 

(2,463)

 

4,671

Exelderm®

 

3

 

1,600

 

(1,600)

 

Accutane®

 

5

 

4,727

 

(788)

 

3,939

 

 

15,061

 

(6,451)

8,610

Non-amortizable intangible assets:

 

  

 

  

 

  

 

  

Anti-itch product (1)

 

3

 

3,942

 

 

3,942

Total intangible assets

$

19,003

$

(6,451)

$

12,552

(1)The Company is transferring manufacturing to an existing contract manufacturer and upon validation will launch such product and commence amortizing.

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The Company’s amortization expense for the three-month periods ended March 31, 2022 and 2021 was $1.0 million and $584,000, 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:

    

    

    

Total

($’s in thousands)

    

Ximino®

    

Accutane®

    

Amzeeq®

    

Zilxi®

    

Amortization

Remainder of 2022

$

764

$

710

$

1,263

$

313

$

3,050

December 31, 2023

1,019

945

1,685

418

4,067

December 31, 2024

 

1,019

 

946

1,685

418

 

4,068

December 31, 2025

 

1,019

 

945

1,685

418

 

4,067

December 31, 2026

 

595

 

157

1,685

418

 

2,855

Thereafter

 

 

6,737

1,671

 

8,408

Subtotal

$

4,416

$

3,703

$

14,740

$

3,656

$

26,515

Asset not yet placed in service

 

 

 

3,942

Total

$

4,416

$

3,703

$

14,740

$

3,656

$

30,457

NOTE 7. LICENSES ACQUIRED

On June 29, 2021, the Company entered 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”). Pursuant to the terms and conditions of the DFD-29 Agreement, the Company paid $10.0 million. Additional contingent regulatory and commercial milestone payments totaling up to $163.0 million are also payable. Royalties ranging from approximately ten percent to twenty percent are payable on net sales of the product.

The technology licensed has not reached technological feasibility and has no alternative future use. The licenses purchased by the Company require substantial completion of research and development, and regulatory and marketing approval efforts in order to reach technological feasibility. Accordingly, costs incurred in obtaining the license were charged to research and development expense.

Additionally, the Company is required to fund and oversee the Phase 3 clinical trials approximating $24.0 million, based upon the current development plan and budget. Either party may terminate the DFD-29 Agreement prior to NDA approval in the event of bankruptcy or a material breach that remains uncured beyond the applicable cure period. Additionally, DRL may terminate the DFD-29 Agreement if the Company: i.) ceases development of the DFD-29 product for six consecutive months (except if such cessation is caused by DRL, applicable laws, or action/inaction of any third party beyond the Company's control); ii.) files a patent challenge on any claim for the DFD-29 product patent or DRL background patent; or iii.) fails to initiate development of the DFD-29 product in the European Union ("EU") (such termination solely relates to the rights granted in EU) within 24 months after product regulatory approval or cause first commercial sale in at least one country in the EU within 72 months after product regulatory approval.

In connection with the DFD-29 Agreement, the Company agreed to pay DRL additional consideration of approximately $5 million in cash or shares based on a 15 day volume weighted average price following the IPO date, upon either an IPO of the Company's Common Stock or an acquisition of the Company. The DFD-29 Agreement further specifies that only one payment can be made. As a result of the Company's IPO on November 16, 2021, the Company issued 545,131 unregistered shares of Journey Common Stock to DRL. The restrictions on the unregistered shares of Common Stock are governed by the terms set forth in the DFD-29 Agreement and applicable securities laws.

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-

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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.

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:

    

 March 31, 2022

($'s in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

  

  

  

  

Cash and cash equivalents

$

41,331

$

$

$

41,331

Total

$

41,331

$

$

$

41,331

    

 December 31, 2021

($'s in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

  

  

  

  

Cash and cash equivalents

$

49,081

$

$

$

49,081

Total

$

49,081

$

$

$

49,081

The Company did not carry any level 2 or level 3 assets or liabilities at March 31, 2022, December 31, 2021. No transfers occurred between level 1, level 2, and level 3 instruments for the three-month periods ended March 31, 2022 and 2021.

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 IPO. In addition, the Company reimburses Fortress for various payroll related costs and selling, general and administrative costs. For the three-month periods ended March 31, 2022 and 2021, Fortress employees have provided services to the Company, and the Company recorded related expense of approximately $0.1 million and zero, respectively. At March 31, 2022 and December 31, 2021, the Company’s outstanding balance under the Shared Services Agreement was $0.5 million and $0.6 million, respectively, recorded as accounts payable and accrued expenses - related party on the condensed consolidated balance sheets.

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Fortress Income Tax

At March 31, 2022, 58% of the Company’s outstanding Common Stock was owned by Fortress. Prior to the IPO, 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 19 below for a discussion of income taxes.

NOTE 10. ACCRUED EXPENSES

Accrued expenses consisted of the following:

    

March 31, 

    

December 31, 

($'s in thousands)

2022

2021

Accrued expenses:

 

  

 

  

Accrued compensation

 

$

4,421

 

$

2,702

Research and development

 

160

 

870

Accrued royalties payable

 

3,779

 

3,833

Accrued coupons and rebates

 

11,627

 

10,603

Return reserve

 

3,151

 

3,240

Other

 

2,747

 

1,485

Total accrued expenses

$

25,885

$

22,733

NOTE 11. INSTALLMENT PAYMENTS — LICENSES

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

    

March 31, 2022

    

    

    

($'s in thousands)

    

Ximino (1)

    

Accutane (2)

    

Total

Installment payments - licenses, short-term

$

2,000

$

1,000

$

3,000

Less: imputed interest

 

(379)

 

(52)

 

(431)

Sub-total installment payments - licenses, short-term

1,621

948

2,569

Installment payments - licenses, long-term

3,000

1,000

4,000

Less: imputed interest

(271)

(13)

(284)

Sub-total installment payments - licenses, long-term

2,729

987

3,716

Total installment payments - licenses

$

4,350

$

1,935

$

6,285

    

December 31, 2021

    

    

    

Anti-Itch

    

($'s in thousands)

    

Ximino (1)

    

Accutane (2)

    

Product (3)

    

Total

Installment payments - licenses, short-term

$

2,000

$

2,000

$

1,000

$

5,000

Less: imputed interest

 

(425)

 

(65)

 

-

 

(490)

Sub-total installment payments - licenses, short-term

1,575

1,935

1,000

4,510

Installment payments - licenses, long-term

3,000

1,000

4,000

Less: imputed interest

 

(350)

 

(23)

 

 

(373)

Sub-total installment payments - licenses, long-term

2,650

977

3,627

Total installment payments - licenses

$

4,225

$

2,912

$

1,000

$

8,137

Note 1: Imputed interest rate of 11.96% and maturity date of July 22, 2024.

Note 2: Imputed interest rate of 4.03% and maturity date of July 29, 2023.

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Table of Contents

Note 3: Imputed interest rate of </