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


☐	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

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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

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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: