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, 2023


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

For the transition period from _________ to _________

Commission File Number: 001-41063

JOURNEY MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices and zip code)

(480) 434-6670

(Registrant’s telephone number, including area code)

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


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

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

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

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

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

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

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

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


Class of Common Stock		Outstanding Shares as of May 19, 2023
Common Stock Class A, $0.0001 par value		6,000,000
Common Stock, $0.0001 par value		12,126,390

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Balance Sheets

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


	March 31,		December 31,
	2023		2022
ASSETS
Current assets
Cash and cash equivalents	$	17,349	$	32,003
Accounts receivable, net of reserves		27,616		28,208
Inventory		13,278		14,159
Prepaid expenses and other current assets		2,477		3,309
Total current assets		60,720		77,679

Intangible assets, net		26,128		27,197
Operating lease right-of-use asset, net		167		189
Restricted cash		8,750		—
Other assets		88		95
Total assets	$	95,853	$	105,160

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	43,658	$	36,570
Due to related party		370		413
Accrued expenses		17,375		19,388
Accrued interest		165		160
Income taxes payable		35		35
Line of credit		3,000		2,948
Term loan, short-term (net of discount of $86)		9,914		—
Deferred cash payment (net of discount of $9)		—		4,991
Installment payments – licenses, short-term		2,288		2,244
Operating lease liability, short-term		93		83
Total current liabilities		76,898		66,832

Term loan, long-term (net of debt discount of $71 and $174)		9,929		19,826
Installment payments – licenses, long-term		1,450		1,412
Operating lease liability, long-term		84		108
Total liabilities		88,361		88,178

Commitments and contingencies (Note 14)

Stockholders’ equity
Common stock, $.0001 par value, 50,000,000 shares authorized, 11,834,362 and 11,765,700 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively		1		1
Common stock - Class A, $.0001 par value, 50,000,000 shares authorized, 6,000,000 shares issued and outstanding as of March 31, 2023 and December 31, 2022		1		1
Additional paid-in capital		86,128		85,482
Accumulated deficit		(78,638)		(68,502)
Total stockholders’ equity		7,492		16,982
Total liabilities and stockholders’ equity	$	95,853	$	105,160

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

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JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Operations

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


	Three-Month Periods Ended
	March 31,
	2023		2022
Revenue:
Product revenue, net	$	12,165	$	20,796
Other revenue		48		2,500
Total revenue		12,213		23,296

Operating expenses
Cost of goods sold – product revenue		6,449		8,203
Research and development		2,033		1,266
Selling, general and administrative		13,292		14,715
Total operating expenses		21,774		24,184
Loss from operations		(9,561)		(888)

Other expense (income)
Interest income		(122)		(3)
Interest expense		650		389
Foreign exchange transaction losses		47		—
Total other expense (income)		575		386
Loss before income taxes		(10,136)		(1,274)

Income tax expense		—		104
Net Loss	$	(10,136)	$	(1,378)

Net loss per common share:
Basic and diluted	$	(0.57)	$	(0.08)
Weighted average number of common shares:
Basic and diluted		17,807,194		17,318,344

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

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JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands except for share and per 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, 2022	11,765,700	$	1	6,000,000	$	1	$	85,482	$	(68,502)	$	16,982
Share-based compensation	—		—	—		—		646		—		646
Issuance of common stock for vested restricted stock units	68,662		—	—		—		—		—		—
Net loss	—		—	—		—		—		(10,136)		(10,136)
Balance as of March 31, 2023	11,834,362	$	1	6,000,000	$	1	$	86,128	$	(78,638)	$	7,492


											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 for vested restricted stock units	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

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

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JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Cash Flows

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


	Three-Month Periods Ended
	March 31,
	2023		2022
Cash flows from operating activities
Net loss	$	(10,136)	$	(1,378)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense (recovery)		126		(76)
Non-cash interest expense		98		203
Amortization of debt discount		17		14
Amortization of acquired intangible assets		1,069		1,017
Amortization of operating lease right-of-use assets		22		22
Share-based compensation		646		773
Changes in operating assets and liabilities:
Accounts receivable		466		(7,995)
Inventory		881		(234)
Prepaid expenses and other current assets		832		830
Other assets		—		32
Accounts payable		7,088		4,732
Due to related party		(43)		(130)
Accrued expenses		(2,013)		2,928
Accrued interest		5		66
Income tax payable		—		104
Lease liabilities		(14)		(24)
Net cash (used in) provided by operating activities		(956)		884

Cash flows from investing activities
Acquired intangible assets		(5,000)		(20,000)
Net cash used in investing activities		(5,000)		(20,000)

Cash flows from financing activities
Payment of license installment note payable		—		(2,000)
Payment of debt issuance costs associated with convertible preferred shares		—		(214)
Proceeds from line of credit		28,000		—
Repayments of line of credit		(27,948)		(812)
Proceeds from EWB term-loan, net of discount		—		14,763
Offering costs for the issuance of common stock - initial public offering		—		(371)
Net cash provided by financing activities		52		11,366

Net change in cash and restricted cash		(5,904)		(7,750)
Cash and restricted cash at the beginning of the period		32,003		49,081
Cash and restricted cash at the end of the period	$	26,099	$	41,331

Supplemental disclosure of cash flow information:
Cash paid for interest	$	535	$	95
Cash paid for income taxes	$	7	$	—

Supplemental disclosure of non-cash financing and investing activities:
Deferred payment for asset acquisition	$	—	$	4,794

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 primarily focuses on the selling and marketing of FDA-approved prescription pharmaceutical products for the treatment of dermatological conditions. The Company’s current product portfolio includes eight branded and 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 its field sales force.

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

Liquidity and Capital Resources

At March 31, 2023, the Company had $26.1 million in cash and cash equivalents and restricted cash as compared to $32.0 million of cash and cash equivalents at December 31, 2022. At March 31, 2023, the Company reclassified $8.8 million of cash from cash and cash equivalents to restricted cash on the Company’s condensed consolidated balances to reflect the minimum cash requirement pursuant to an amendment to the Company’s Loan and Security Agreement with East West Bank.

On December 30, 2022, the Company filed a shelf registration statement on Form S-3 (File No. 333-269079), which was declared effective by the Securities and Exchange Commission (“SEC”) on January 26, 2023. This shelf registration statement covers the offering, issuance, and sale by the Company of up to an aggregate of $150.0 million of the Company’s common stock, preferred stock, debt securities, warrants, and units (the “2022 Shelf”). At March 31, 2023, $150.0 million remains available under the 2022 Shelf. In connection with the 2022 shelf, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“B. Riley”), relating to shares of the Company’s common stock. In accordance with the terms of the Sales Agreement, the Company may offer and sell up to 4,900,000 shares of its common stock, par value $0.0001 per share, from time to time through or to B. Riley acting as the Company’s agent or principal.

The Company is party to a Loan and Security Agreement, dated March 31, 2021 (as amended, the “EWB Facility”), with East West Bank (“EWB”), under which EWB originally made a $7.5 million revolving line of credit available to the Company. On January 12, 2022, the Company entered into an amendment of the loan and security agreement with EWB that increased the borrowing capacity of the Company’s revolving line of credit up to $10.0 million, of which $3.0 million was outstanding at March 31, 2023, and added a term loan not to exceed $20.0 million. Both the revolving line of credit and the term loan were to mature 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. On May 16, 2023, the Company entered into an amendment to the EWB Facility (the “2023 Amendment) that effected several changes to the EWB facility. Under the 2023 Amendment, the Company paid down $10.0 million of the term loan upon the closing of the 2023 Amendment. The term loan previously contained an interest-only payment period through January 12, 2024, after which the outstanding balance of the term loan was to have been payable in equal monthly installments of principal, plus all accrued interest, through the term loan maturity date. The 2023 Amendment revised the maturity date of the term loan from January 12, 2026 to July 1, 2024 and provides that the Company is no longer required to make monthly installments of principal of the term loan, and instead, is required to make interest-only payments until the maturity date, at which time all principal and all accrued but unpaid interest will be due. The Company may prepay all or any part of the term loan without penalty or premium, but may not re-borrow any amount once repaid. The 2023 Amendment removed the revolving line of credit from the EWB Facility effective as of the date of the 2023 Amendment. There were no amounts outstanding under the revolving line of credit as of the date of the 2023 Amendment. Under the 2023 Amendment, the $10.0 million remaining term loan balance is due on the new maturity date of July 1, 2024 and the Company will maintain a minimum required cash balance of $8.75 million in deposit accounts with EWB which increases to $10.0 million on August 31, 2023. The minimum required cash balance is included as a separate line item, “restricted cash,” in the Company’s condensed consolidated balance sheet at March 31, 2023.

As a result of increased losses in the later part of 2022, during the last quarter of 2022, the Company implemented a cost reduction initiative designed to improve operational efficiencies, optimize expenses and reduce overall costs. The initiative is intended to reduce

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selling, general, and administrative expenses to better align costs with their revenue-generating capabilities. In connection with the cost reduction initiative, the Company executed a headcount reduction to its salesforce and implemented marketing cost cuts in the first quarter of 2023 and in April 2023. The impact of the cost reduction initiatives is expected to result in a reduction of greater than $12.0 million of annual selling, general, and administrative costs.

In May 2023, the Company paid the remaining balance on its revolving line of credit of $3.0 million and, as noted above, in connection with the 2023 Amendment, prepaid $10.0 million of its term loan. After the term loan is paid in full, the Company’s assets are expected to be unencumbered and therefore available to support a new borrowing relationship, which the Company plans to pursue along with the Company’s costs reduction initiatives in 2023, to provide additional working capital. In addition to reductions in sales force and marketing expenses, the Company may seek to raise capital through additional debt or equity financing, which may include sales of securities under its 2022 Shelf or under a new registration statement.

The Company cannot make any assurances that additional financing will be available to it and, if available, the terms may negatively impact the Company’s business and operations. As such, the Company has concluded that substantial doubt exists about the Company’s ability to continue as a going concern for a period of at least twelve months from the date of issuance of these financial statements.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary if the Company is unable to continue as a going concern.

NOTE 2. BASIS OF PRESENTATION

Basis of Presentation and Principles of Consolidation

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

Emerging Growth Company

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies, and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s unaudited interim condensed consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended, the Company meets the definition of an emerging growth company and elected the extended transition period for complying with new or revised accounting standards, which delays the adoption of these accounting standards until they would apply to private companies.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates made by management include provisions for coupons, chargebacks, wholesaler fees, prompt-pay discounts, specialty pharmacy discounts, managed care rebates, product returns, government rebates and other allowances customary to the pharmaceutical industry. Significant estimates made by management also include inventory realization, valuation of intangible assets, useful lives of amortizable intangible

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assets and share-based compensation. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one segment, which reflects products for the treatment of dermatological conditions.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Recently Issued Accounting Pronouncements

During the three-month period ended March 31, 2023, there were no new accounting pronouncements or updates to recently issued accounting pronouncements disclosed in the 2022 Form 10-K that affect the Company’s present or future results of operations, overall financial condition, liquidity, or disclosures.

NOTE 4. INVENTORY

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


	March 31,		December 31,
($’s in thousands)	2023		2022
Raw materials	$	5,829	$	6,454
Work-in-process		635		395
Finished goods		7,256		7,739
Inventory at cost		13,720		14,588
Inventory reserves		(442)		(429)
Total Inventories	$	13,278	$	14,159

NOTE 5. ASSET ACQUISITION

In January 2022, the Company entered into an agreement with VYNE Therapeutics, Inc. (“VYNE”) to acquire two United States Food and Drug Administration (“FDA”) Approved Topical Minocycline Products, Amzeeq^® (minocycline) topical foam, 4%, and Zilxi® (minocycline) topical foam, 1.5%, and a Molecule Stabilizing Technology™ proprietary platform from VYNE for an upfront payment of $20.0 million and an additional $5.0 million payment on the one (1)-year anniversary of the closing (the “VYNE Product Acquisition Agreement”). This expanded the Company’s product portfolio to eight marketed branded dermatology products. The Company also acquired certain associated inventory.

The VYNE Product Acquisition Agreement also provides for contingent net sales milestone payments. In the first calendar year in which annual sales reach each of $100 million, $200 million, $300 million, $400 million and $500 million, a one-time payment of $10 million, $20 million, $30 million, $40 million and $50 million, respectively, will be paid in that year only, per product, totaling up to $450 million. In addition, the Company will pay VYNE 10% of any upfront payment received by the Company from a licensee or sublicensee of the products in any territory outside of the United States, subject to exceptions for certain jurisdictions as detailed in the VYNE Product Acquisition Agreement.

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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 was accreted to the $5.0 million January 2023 cash payment over a one-year period through interest expense. The Company made the $5 million deferred cash payment in January 2023.

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 gross carrying amount and accumulated amortization of intangible assets as of March 31, 2023 and December 31, 2022 are summarized as follows:

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	March 31, 2023
	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		(3,737)		3,397
Exelderm®		3		1,600		(1,600)		—
Accutane®		5		4,727		(1,970)		2,757
Amzeeq®		9		15,162		(1,995)		13,167
Zilxi®		6		3,760		(895)		2,865
				33,983		(11,797)		22,186
Non-amortizable intangible assets:
Anti-itch product (1)		3		3,942		—		3,942

Total intangible assets			$	37,925	$	(11,797)	$	26,128


	December 31, 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		(3,482)		3,652
Exelderm®		3		1,600		(1,600)		—
Accutane®		5		4,727		(1,733)		2,994
Amzeeq®		9		15,162		(1,597)		13,565
Zilxi®		6		3,760		(716)		3,044
				33,983		(10,728)		23,255
Non-amortizable intangible assets:
Anti-itch product (1)		3		3,942		—		3,942

Total intangible assets			$	37,925	$	(10,728)	$	27,197

(1)

As of March 31, 2023, this asset has not yet been placed in service, therefore no amortization expense was recognized on this asset for the period ended March 31, 2023.

The Company’s amortization expense for the three-month periods ended March 31, 2023 and 2022 was $1.1 million and $1.0 million, respectively. Amortization expense is recorded as a component of cost of goods sold in the Company’s unaudited condensed consolidated statements of operations.

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


$’s in thousands	Total Amortization
Remainder of 2023	$	3,207
December 31, 2024		4,277
December 31, 2025		4,277
December 31, 2026		3,064
December 31, 2027		1,775
Thereafter		5,586
Subtotal		22,186
Asset not yet placed in service		3,942
Total	$	26,128

NOTE 7. LICENSES ACQUIRED

DFD-29

In June 2021, the Company entered a license, collaboration, and assignment agreement (the “DFD-29 Agreement”) to obtain global rights for the development and commercialization of a late-stage development modified release oral minocycline for the treatment of rosacea (“DFD-29”) with Dr. Reddy’s Laboratories, Ltd (“DRL”); provided, that DRL retained certain rights to the program in select markets including Brazil, Russia, India and China. Based on the development and commercialization of DFD-29, additional contingent regulatory and commercial milestone payments totaling up to $158.0 million may also become payable. The Company is required to pay royalties ranging from approximately ten percent to fifteen percent on net sales of the DFD-29 product, subject to certain reductions. Additionally, the Company is required to fund and oversee the Phase 3 clinical trials.

Qbrexza

In March 2021, the Company acquired global rights to Qbrexza (glycoprronium), a prescription cloth towelette to treat primary axillary hyperhidrosis in patients nine years of age or older. The Company paid an upfront fee of $12.5 million to Dermira, Inc., a subsidiary of Eli Lilly and Company (“Dermira”). In addition, the Company is obligated to pay Dermira up to $144 million in the aggregate upon the achievement of certain net sales milestones. The royalty structure for the agreement is tiered with royalties for the first two years ranging from approximately 40% to 30%. Thereafter for a period of eight years, royalties are approximately 12.0% to 19.0%. Royalty amounts are subject to a 50% diminution in the event of loss of exclusivity due to the introduction of an authorized generic.

Accutane

In July 2020, the Company entered into an exclusive license and supply agreement for Accutane (the “Accutane Agreement”) with DRL. Pursuant to the Accutane Agreement, the Company agreed to pay $5.0 million, comprised of an upfront payment of $1.0 million paid upon execution, with additional milestone payments totaling $4.0 million. To date, we have paid $3.0 million of the additional milestone payments. Three additional milestone payments totaling $17.0 million are contingent upon the achievement of certain net sales milestones. The Company is required to pay royalties in an amount equal to a 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 without cause upon 180 days written notice to DRL.

NOTE 8. FAIR VALUE MEASUREMENTS

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

The accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories:

Level 1: Quoted prices in active markets for identical assets or liabilities.

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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, 2023
($’s in thousands)	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents	$	17,349	$	—	$	—	$	17,349
Restricted cash		8,750						8,750
Total	$	26,099	$	—	$	—	$	26,099


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

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

NOTE 9. RELATED PARTY AGREEMENTS

Shared Services Agreement with Fortress

On November 12, 2021, the Company and Fortress entered into an arrangement to share the cost of certain legal, finance, regulatory, and research and development employees (the “Shared Services Agreement”). Fortress’ Executive Chairman and Chief Executive Officer is the Executive Chairman of the Company. Under the terms of the Shared Services Agreement, the Company will reimburse Fortress for the salary and benefit costs associated with these employees based upon actual hours worked on Journey-related projects following the completion of the Company’s initial public offering, which occurred in November 2021. In addition, the Company reimburses Fortress for various payroll-related costs and selling, general and administrative costs incurred by Fortress for the benefit of the Company. For the three-month periods ended March 31, 2023 and 2022, Fortress employees have provided services to the Company, and the Company recorded related expenses of approximately $15,000 and $0.1 million, respectively. At March 31, 2023 and December 31, 2022, the Company’s outstanding balance under the Shared Services Agreement was $0.4 million and $0.4 million, respectively, recorded as due to related party on the condensed consolidated balance sheets.

Fortress Income Tax

At March 31, 2023, 57.12% of all classes of the Company’s outstanding Common Stock was owned by Fortress. Prior to our initial public offering of securities in 2021, the Company had been filing consolidated federal tax returns and consolidated or combined state tax returns in multiple jurisdictions with Fortress. The Company may still be required to file combined tax returns in certain “combined filing states”. These jurisdictions generally require corporations engaged in unitary business and meet the capital stock requirement of fifty percent to file a combined state tax return.

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

NOTE 10. ACCRUED EXPENSES

Accrued expenses consisted of the following:


	March 31,		December 31,
($’s in thousands)	2023		2022
Accrued expenses:
Accrued coupons and rebates	$	8,160	$	7,604
Return reserve		3,371		3,689
Accrued compensation		2,598		2,586
Accrued royalties payable		1,607		2,627
Accrued severance		266		—
Accrued legal, accounting and tax		249		334
Accrued research and development		177		1,404
Accrued Inventory		112		112
Accrued iPledge program		157		447
Other		678		585
Total accrued expenses	$	17,375	$	19,388

NOTE 11. INSTALLMENT PAYMENTS — LICENSES

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


	March 31, 2023
($’s in thousands)	Short-Term		Long-Term		Total
Installment payments - licenses	$	2,500	$	1,500	$	4,000
Less: imputed interest		(212)		(50)		(262)
Sub-total installment payments - licenses	$	2,288	$	1,450	$	3,738


	December 31, 2022
($’s in thousands)	Short-Term		Long-Term		Total
Installment payments - licenses	$	2,500	$	1,500	$	4,000
Less: imputed interest		(256)		(88)		(344)
Sub-total installment payments - licenses	$	2,244	$	1,412	$	3,656

NOTE 12. OPERATING LEASE OBLIGATIONS

The Company leases 3,681 square feet of office space in Scottsdale, Arizona. In September 2022, the Company amended the lease to extend the lease term for an additional 25 months at an annual rate of approximately $0.1 million. The amended lease will expire on January 31, 2025.

The Company recorded rent expense as follows:

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



	Three-Month Period Ended March 31,
($’s in thousands)	2023			2022
Cash paid for amounts included in the measurement of lease liabilities	$	17		$	25
Weighted-average remaining lease term - operating leases		1.8			0.8
Weighted-average discount rate - operating leases		6.25	%		4.0	%

As of March 31, 2023, future minimum lease payments under lease agreements associated with the Company’s operations were as follows:


$’s in thousands
Remainder of 2023	$	76
2024		102
2025		9
Total lease payments		187
Less: present value discount		(10)
Total operating lease liabilities	$	177

NOTE 13. DEBT AND INTEREST EXPENSE

The Company’s debt obligations at March 31, 2023 and December 31, 2022 were as follows:


March 31, 2023
					Net
	Principal		Unamortized		Carry
($’s in thousands)	Balance		Discount & Fees		Amount
EWB Revolving LOC	$	3,000	$	—	$	3,000
EWB Term Loan (Short-term)		10,000		86		9,914
Total Short-Term Debt	$	13,000	$	86	$	12,914
EWB Term Loan (Long-term)	$	10,000	$	71	$	9,929
Total Debt & Obligations	$	23,000	$	157	$	22,843


December 31, 2022
			Net
	Principal	Unamortized	Carry

PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	28

SIGNATURES		29

Three Month Period Ended March 31,

($’s in thousands)

Operating lease cost

Variable lease cost

Total lease cost