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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 September 30, 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 November 10, 2022

Common Stock Class A, $0.0001 par value

6,000,000

Common Stock, $0.0001 par value

11,704,325

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

32

 

 

SIGNATURES

33

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)

    

September 30, 

    

December 31, 

2022

2021

ASSETS

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

 

$

34,891

 

$

49,081

Accounts receivable, net of reserves

 

28,533

 

23,112

Inventory

 

15,230

 

9,862

Prepaid expenses and other current assets

 

942

 

2,438

Total current assets

 

79,596

 

84,493

Intangible assets, net

 

28,424

 

12,552

Operating lease right-of-use asset, net

 

22

 

89

Other assets

 

103

 

150

Total assets

$

108,145

$

97,284

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

33,626

$

22,812

Due to related party

 

74

 

641

Accrued expenses

 

17,783

 

22,733

Accrued interest

125

Income taxes payable

 

22

 

8

Line of credit

812

Deferred cash payment (net of discount of $76)

4,924

Installment payments – licenses, short-term

 

4,198

 

4,510

Operating lease liability

 

25

 

98

Total current liabilities

 

60,777

 

51,614

Term loan (net of debt discount of $190)

19,810

Installment payments – licenses, long-term

 

1,374

 

3,627

Total liabilities

 

81,961

 

55,241

Commitments and contingencies (Note 15)

 

  

 

  

Stockholders’ equity

 

  

 

  

Common stock, $.0001 par value, 50,000,000 shares authorized, 11,642,659 and 11,316,344 shares issued and outstanding as of September 30, 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 September 30, 2022 and December 31, 2021

 

1

 

1

Additional paid-in capital

 

84,042

 

80,915

Accumulated deficit

 

(57,860)

 

(38,874)

Total stockholders’ equity

 

26,184

 

42,043

Total liabilities and stockholders’ equity

$

108,145

$

97,284

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, 

    

2022

    

2021

    

2022

    

2021

Revenue:

Product revenue, net

$

16,043

$

19,610

$

55,074

$

45,617

Other revenue

73

2,629

-

Total Revenue

16,116

19,610

57,703

45,617

Operating expenses

 

 

 

 

Cost of goods sold – product revenue

 

7,221

 

11,167

 

23,057

 

22,559

Research and development

 

2,812

 

718

 

6,687

 

747

Research and development - licenses acquired

 

 

76

 

 

13,819

Selling, general and administrative

 

15,575

 

10,755

 

45,481

 

24,776

Wire transfer fraud loss

 

 

9,540

 

 

9,540

Total operating expenses

 

25,608

 

32,256

 

75,225

 

71,441

Loss from operations

 

(9,492)

 

(12,646)

 

(17,522)

 

(25,824)

Other expense

 

 

 

 

Interest income

 

(3)

 

 

(10)

 

-

Interest expense

559

1,373

1,402

2,936

Foreign exchange transaction losses

22

22

Change in fair value of derivative liability

 

 

2

 

 

184

Total other expense

 

578

 

1,375

 

1,414

 

3,120

Loss before income taxes

 

(10,070)

 

(14,021)

 

(18,936)

 

(28,944)

Income tax (benefit) expense

 

10

 

(3,375)

 

50

 

(6,701)

Net Loss

$

(10,080)

$

(10,646)

$

(18,986)

$

(22,243)

Net loss per common share:

Basic and diluted

$

(0.57)

$

(1.16)

$

(1.09)

$

(2.43)

Weighted average number of common shares:

 

 

 

 

Basic and diluted

 

17,618,064

 

9,161,333

 

17,464,561

 

9,160,344

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)

Nine-Month Period Ended September 30, 2022

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

 

 

 

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

Stockholders’

    

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

Nine-Month Period Ended September 30, 2021

Retained

Earnings

Total

    

Common Stock

    

Common Stock A

Additional

(Accumulated

Stockholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit)

    

Equity (Deficit)

Balance as of December 31, 2020

3,151,333

$

6,000,000

$

1

$

5,171

$

5,120

$

10,292

Share-based compensation

 

 

 

41

 

 

41

Exercise of options for cash

10,000

7

7

Contribution of capital – extinguishment of related party payable

 

 

 

194

 

 

194

Net loss

 

 

 

 

(22,243)

 

(22,243)

Balance as of September 30, 2021

3,161,333

$

6,000,000

$

1

$

5,413

$

(17,123)

$

(11,709)

Three-Month Period Ended September 30, 2021

Total

    

Common Stock

Common Stock A

Additional

(Accumulated

Stockholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit)

    

Equity (Deficit)

Balance as of June 30, 2021

3,161,333

$

 

6,000,000

$

1

$

5,684

$

(6,477)

$

(792)

Share-based compensation

 

 

 

 

8

 

 

8

Distribution of capital – extinguishment of related party payable

 

 

 

(279)

 

 

(279)

Net loss

 

 

 

 

 

(10,646)

 

(10,646)

Balance as of September 30, 2021

3,161,333

$

 

6,000,000

$

1

$

5,413

$

(17,123)

$

(11,709)

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)

    

Nine-Month Periods

Ended September 30, 

    

2022

    

2021

Cash flows from operating activities

  

  

Net loss

$

(18,986)

$

(22,243)

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

 

  

 

  

Bad debt expense (recoveries)

 

10

 

(67)

Non-cash interest expense

 

619

 

616

Amortization of debt discount

 

47

 

648

Accretion of convertible preferred shares

 

 

1,034

Amortization of acquired intangible assets

 

3,050

 

1,983

Amortization of operating lease right-of-use assets

 

67

 

64

Share-based compensation

 

2,985

 

41

Deferred tax benefit

(6,701)

Change in fair value of derivative liability

 

 

184

Research and development-licenses acquired, expense

 

 

13,819

Changes in operating assets and liabilities:

 

 

Accounts receivable

(5,431)

(7,743)

Inventory

 

673

 

(10,210)

Prepaid expenses and other current assets

 

1,496

 

174

Other assets

 

47

 

(743)

Accounts payable

 

11,399

 

25,852

Related party expenses

 

(567)

 

1,128

Accrued expenses

 

(5,173)

 

3,350

Accrued interest

125

Income tax payable

 

14

 

(99)

Lease liabilities

(73)

(62)

Net cash (used in) provided by operating activities

 

(9,698)

 

1,025

 

 

Cash flows from investing activities

 

 

Purchase of research and development licenses

(8,800)

Acquired intangible assets

 

(20,000)

 

Net cash used in investing activities

(20,000)

(8,800)

 

 

Cash flows from financing activities

 

 

Proceeds from the exercise of stock options

 

142

 

7

Proceeds from Fortress note

9,540

Payment of license installment note payable

 

(3,000)

 

(5,300)

Proceeds from convertible preferred shares

 

 

18,967

Payment of debt issuance costs associated with convertible preferred shares

 

(214)

 

(1,996)

Proceeds from EWB term-loan, net of discount

19,763

Repayment of line of credit

(812)

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

 

(371)

 

Net cash provided by financing activities

 

15,508

 

21,218

Net change in cash

 

(14,190)

 

13,443

Cash at the beginning of the period

 

49,081

 

8,246

Cash at the end of the period

$

34,891

$

21,689

 

  

 

  

Supplemental disclosure of cash flow information:

Cash paid for interest

$

736

$

Cash paid for income taxes

$

19

$

157

Supplemental disclosure of non-cash financing and investing activities:

Deferred payment for asset acquisition

$

4,740

Unpaid debt offering cost

$

$

214

Unpaid deferred offering cost

$

$

264

Derivative warrant liability associated with convertible preferred shares

$

$

362

Extinguishment of related party payable relates to deferred tax assets

$

$

194

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

As of September 30, 2022 and December 31, 2021, the Company was a 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 September 30, 2022, the Company had $34.9 million in cash and cash equivalents as compared to $38.1 million and $49.1 million at June 30, 2022 and December 31, 2021, respectively.

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 to 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, all amounts outstanding under the Fortress Note were converted into 1,610,467 shares of Journey Common Stock at the IPO price of $10.00 per share.

The Company has access to a $30.0 million East West Bank (“EWB”) borrowing facility, which includes a $10.0 million revolving line of credit, none of which was outstanding at September 30, 2022, and a $20.0 million term loan, both maturing on January 12, 2026. In January 2022 and August 2022, the Company borrowed $15.0 million and $5.0 million, respectively, against the term loan. 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 was in compliance with all applicable financial covenants under the EWB borrowing facility at September 30, 2022. The $10.0 million revolving line of credit is fully available to the Company without any restrictions, other than certain customary and ordinary conditions.

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.

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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 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 September 30, 2022, there were no new accounting pronouncements or updates to recently issued accounting pronouncements disclosed in the 2021 Form 10-K that are expected to materially 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 for the periods ended:

    

September 30, 

    

December 31, 

($’s in thousands)

2022

2021

Raw materials

$

7,124

$

5,572

Work-in-process

 

26

 

Finished goods

 

8,152

 

4,290

Inventory at cost

15,302

9,862

Inventory reserves

(72)

Total Inventories

$

15,230

$

9,862

NOTE 5. ASSET ACQUISITION

On January 12, 2022, the Company entered into an agreement with Vyne Therapeutics Inc. (“Vyne”) to acquire two United States Food and Drug Administration (“FDA”) approved topical minocycline products, Amzeeq® (minocycline) topical foam, 4%, and Zilxi® (minocycline) topical foam, 1.5%, and a Molecule Stabilizing 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 the associated inventory related to the business.

The Vyne Product Acquisition Agreement also provides for contingent net sales milestone payments, on a product-by-product basis. In the first calendar year in which annual net sales reach each of $100 million, $200 million, $300 million, $400 million and $500 million, 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 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 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. INTANGIBLES

The Company’s finite-lived intangible assets consist of acquired intangible assets. The gross carrying amount and accumulated amortization of intangible assets as of September 30, 2022 and December 31, 2021 are summarized as follows:

    

September 30, 2022

Estimated  

Useful 

Gross

Lives

Carrying

Accumulated

Intangible

($'s in thousands)

    

(Years)

    

 Value

    

Amortization

    

 Assets, Net

Amortizable intangible assets:

  

  

  

  

Ceracade®

3

$

300

$

(300)

$

Luxamend®

 

3

 

50

 

(50)

 

Targadox®

 

3

 

1,250

 

(1,250)

 

Ximino®

 

7

 

7,134

 

(3,228)

 

3,906

Exelderm®

 

3

 

1,600

 

(1,600)

 

Accutane®

 

5

 

4,727

 

(1,497)

 

3,230

Amzeeq®

 

9

 

15,162

 

(1,263)

 

13,899

Zilxi®

 

9

 

3,760

 

(313)

 

3,447

 

 

33,983

 

(9,501)

24,482

Non-amortizable intangible assets:

 

 

  

 

  

 

  

Anti-itch product (1)

 

3

 

3,942

 

 

3,942

Total intangible assets

$

37,925

$

(9,501)

$

28,424

    

December 31, 2021

Estimated

Useful

Gross

 Lives

 Carrying

Accumulated

Intangible

($’s in thousands)

    

 (Years)

    

Value

    

Amortization

    

 Assets, Net

Amortizable intangible assets:

  

  

  

  

Ceracade®

3

$

300

$

(300)

$

Luxamend®

 

3

 

50

 

(50)

 

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

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

The Company’s amortization expense for the three-month periods ended September 30, 2022 and 2021 was $1.0 million and $0.7 million, respectively. The Company’s amortization expense for the nine-month periods ended September 30, 2022 and 2021 was $3.1 million and $2.0 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:

    

Total

($’s in thousands)

    

Amortization

Remainder of 2022

$

1,017

December 31, 2023

4,067

December 31, 2024

 

4,068

December 31, 2025

 

4,067

December 31, 2026

 

2,855

Thereafter

 

8,408

Subtotal

$

24,482

Asset not yet placed in service

 

3,942

Total

$

28,424

NOTE 7. LICENSES/PRODUCTS ACQUIRED

DFD-29

On June 29, 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 has retained certain rights to the program in select markets including Brazil, Russia, India and China. Pursuant to the DFD-29 Agreement, the Company paid $10.0 million. Additional contingent regulatory and commercial milestone payments totaling up to $158.0 million may also become payable. The Company is required to pay royalties ranging from approximately ten percent to twenty percent on net sales of the DFD-29 product, subject to certain reductions. In connection with the DFD-29 Agreement, the Company agreed to pay DRL additional consideration of $5.0 million in cash or in our common stock upon the IPO. In connection with the closing of the IPO on November 16, 2021, the Company issued 545,131 unregistered shares of common stock of the Company to DRL in full satisfaction of this obligation. 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

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. The Company’s expenses related to the DFD-29 Phase 3 clinical trials were approximately $2.7 million and $6.5 million for the three and nine-month periods ended September 30, 2022, respectively. Either party may terminate the DFD-29 Agreement prior to approval of a New Drug Application (NDA) 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 the EU) within 24 months after the first product regulatory approval or cause first commercial sale in at least one country in the EU within 72 months after the first product regulatory approval.

The technology licensed has not reached technological feasibility and has no alternative future use. The licenses acquired 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.

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Qbrexza

On March 31, 2021, the Company executed an Asset Purchase Agreement (the “Qbrexza Agreement”) with Dermira, Inc., a subsidiary of Eli Lilly and Company (“Dermira”). 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. Upon receipt of clearance under federal antitrust laws, which was received on May 14, 2021, the Company made an upfront payment of $12.5 million (the “Upfront Payment”) to Dermira. In addition, Dermira is eligible to receive up to $144 million in the aggregate upon the achievement of certain net sales milestones. For the first two years, the Company is required to pay royalties in an amount equal to a percentage of net sales of Qbrexza with such percentage ranging from the mid-twenty to the mid-thirty and, thereafter royalties in an amount equal to a percentage of net sales of Qbrexza with such percentage ranging from the lower teen digits to the upper teen digits on net sales of Qbrexza, subject to certain reductions, for a period of eight years. The Qbrexza Agreement also contains customary representations, warranties, and indemnities.

The Upfront Payment of $12.5 million was allocated to the Qbrexza asset as well as all finished goods and raw material inventory used in the business. The Company is responsible for any product returns made after May 31, 2021 related to sales made by Dermira. The Company allocated the entire Upfront Payment to the inventory since the fair value of the inventory and the additional Qbrexza assets acquired exceeded the Upfront Payment. The future contingent milestone payments, if achieved, will be recorded to intangible asset and amortized over the remaining life of the asset commencing on the closing date.

Accutane

On July 29, 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, of which only $1.0 million remains to be paid. 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 amount equal to a the low-double digit percentage of net sales, subject to certain reductions. 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 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.

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

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