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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, 2023

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 9, 2023

Common Stock Class A, $0.0001 par value

6,000,000

Common Stock, $0.0001 par value

12,508,449

Table of Contents

JOURNEY MEDICAL CORPORATION

Quarterly Report on Form 10-Q

TABLE OF CONTENTS

PART I.

FINANCIAL INFORMATION

    

Item 1.

Condensed Consolidated Financial Statements (unaudited)

1

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

 

 

SIGNATURES

32

i

Table of Contents

PART I.      FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements (unaudited)

JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Balance Sheets

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

    

September 30, 

    

December 31, 

2023

2022

ASSETS

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

 

$

24,749

 

$

32,003

Accounts receivable, net of reserves

 

7,989

 

28,208

Inventory

 

11,024

 

14,159

Prepaid expenses and other current assets

 

924

 

3,309

Total current assets

 

44,686

 

77,679

Intangible assets, net

 

21,102

 

27,197

Operating lease right-of-use asset, net

 

124

 

189

Other assets

 

6

 

95

Total assets

$

65,918

$

105,160

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

28,164

$

36,570

Due to related party

 

1,093

 

413

Accrued expenses

 

16,026

 

19,388

Accrued interest

160

Income taxes payable

 

130

 

35

Line of credit

2,948

Deferred cash payment (net of discount of $9)

4,991

Installment payments – licenses, short-term

 

3,000

 

2,244

Operating lease liability, short-term

 

97

 

83

Total current liabilities

 

48,510

 

66,832

Term loan, long-term (net of debt discount of $174)

19,826

Installment payments – licenses, long-term

 

 

1,412

Operating lease liability, long-term

 

34

 

108

Total liabilities

 

48,544

 

88,178

Commitments and contingencies (Note 14)

 

  

 

  

Stockholders’ equity

 

  

 

  

Common stock, $.0001 par value, 50,000,000 shares authorized, 12,496,782 and 11,765,700 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively

 

1

 

1

Common stock - Class A, $.0001 par value, 50,000,000 shares authorized, 6,000,000 shares issued and outstanding as of September 30, 2023 and December 31, 2022

 

1

 

1

Additional paid-in capital

 

87,584

 

85,482

Accumulated deficit

 

(70,212)

 

(68,502)

Total stockholders' equity

 

17,374

 

16,982

Total liabilities and stockholders’ equity

$

65,918

$

105,160

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

1

Table of Contents

JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Operations

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

    

Three-Month Periods Ended

    

Nine-Month Periods Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Revenue:

Product revenue, net

$

15,279

$

16,043

$

44,405

$

55,074

Other revenue

19,260

73

19,519

2,629

Total revenue

34,539

16,116

63,924

57,703

Operating expenses

 

 

 

 

Cost of goods sold – product revenue

 

6,429

 

7,221

 

20,645

 

23,057

Research and development

 

2,229

 

2,812

 

6,036

 

6,687

Selling, general and administrative

 

8,636

 

15,575

 

34,069

 

45,481

Loss on impairment of intangible assets

3,143

Total operating expenses

 

17,294

 

25,608

 

63,893

 

75,225

Income (loss) from operations

 

17,245

 

(9,492)

 

31

 

(17,522)

Other expense (income)

 

 

 

 

Interest income

 

(8)

 

(3)

 

(209)

 

(10)

Interest expense

268

559

1,674

1,402

Foreign exchange transaction losses

101

22

181

22

Total other expense (income)

361

578

1,646

1,414

Income (loss) before income taxes

 

16,884

 

(10,070)

 

(1,615)

 

(18,936)

Income tax expense

 

95

 

10

 

95

 

50

Net income (loss)

$

16,789

$

(10,080)

$

(1,710)

$

(18,986)

Net income (loss) per common share:

Basic

$

0.91

$

(0.57)

$

(0.09)

$

(1.09)

Diluted

$

0.80

$

(0.57)

$

(0.09)

$

(1.09)

Weighted average number of common shares:

 

 

 

 

Basic

 

18,416,368

 

17,618,064

 

18,078,437

 

17,464,561

Diluted

21,034,758

17,618,064

18,078,437

17,464,561

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

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JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

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

Nine-Month Period Ended September 30, 2023

Total

    

Common Stock

    

Common Stock A

Additional

Accumulated

Shareholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit

    

Equity

Balance as of December 31, 2022

11,765,700

$

1

6,000,000

$

1

$

85,482

$

(68,502)

$

16,982

Share-based compensation

 

 

 

2,077

 

 

2,077

Exercise of options for cash

23,000

25

25

Issuance of common stock for vested restricted stock units

708,082

Net loss

 

 

 

 

(1,710)

 

(1,710)

Balance as of September 30, 2023

12,496,782

$

1

6,000,000

$

1

$

87,584

$

(70,212)

$

17,374

Three-Month Period Ended September 30, 2023

Total

    

Common Stock

    

Common Stock A

Additional

Accumulated

Shareholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit

    

Equity

Balance as of June 30, 2023

12,133,890

$

1

 

6,000,000

$

1

$

87,004

$

(87,001)

$

5

Share-based compensation

 

 

 

 

558

 

 

558

Exercise of options for cash

18,000

 

 

 

22

 

 

22

Issuance of common stock for vested restricted stock units

344,892

 

 

 

 

 

 

Net income

16,789

16,789

Balance as of September 30, 2023

12,496,782

$

1

 

6,000,000

$

1

$

87,584

$

(70,212)

$

17,374

Nine-Month Period Ended September 30, 2022

Total

    

Common Stock

    

Common Stock A

Additional

Accumulated

Shareholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit

    

Equity

Balance as of December 31, 2021

11,316,344

$

1

6,000,000

$

1

$

80,915

$

(38,874)

$

42,043

Share-based compensation

 

 

 

2,985

 

 

2,985

Exercise of stock options for cash

155,649

142

142

Issuance of common stock for vested restricted stock units

170,666

Net loss

 

 

 

 

(18,986)

 

(18,986)

Balance as of September 30, 2022

11,642,659

$

1

6,000,000

$

1

$

84,042

$

(57,860)

$

26,184

Three-Month Period Ended September 30, 2022

Total

    

Common Stock

Common Stock A

Additional

Accumulated

Shareholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit

    

Equity 

Balance as of June 30, 2022

11,556,493

$

1

 

6,000,000

$

1

$

82,573

$

(47,780)

$

34,795

Share-based compensation

 

 

 

 

1,438

 

 

1,438

Exercise of stock options for cash

22,500

31

31

Issuance of common stock for vested restricted stock units

63,666

 

 

 

 

 

Net loss

 

 

 

 

 

(10,080)

 

(10,080)

Balance as of September 30, 2022

11,642,659

$

1

 

6,000,000

$

1

$

84,042

$

(57,860)

$

26,184

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

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JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Cash Flows

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

    

Nine-Month Periods Ended

September 30, 

    

2023

    

2022

Cash flows from operating activities

  

  

Net loss

$

(1,710)

$

(18,986)

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

 

  

 

  

Bad debt expense

 

492

 

10

Non-cash interest expense

 

353

 

619

Amortization of debt discount

 

354

 

47

Amortization of acquired intangible assets

 

2,952

 

3,050

Amortization of operating lease right-of-use assets

 

65

 

67

Share-based compensation

 

2,077

 

2,985

Loss on impairment of intangible assets

3,143

Changes in operating assets and liabilities:

 

 

Accounts receivable

19,727

(5,431)

Inventory

 

3,135

 

673

Prepaid expenses and other current assets

 

2,385

 

1,496

Other assets

 

-

 

47

Accounts payable

 

(8,406)

 

11,399

Due to related party

 

680

 

(567)

Accrued expenses

 

(3,362)

 

(5,173)

Accrued interest

(160)

125

Income tax payable

 

95

 

14

Lease liabilities

(60)

(73)

Net cash provided by (used in) operating activities

 

21,760

 

(9,698)

 

 

Cash flows from investing activities

 

 

Acquired intangible assets

 

(5,000)

 

(20,000)

Net cash used in investing activities

(5,000)

(20,000)

 

 

Cash flows from financing activities

 

 

Proceeds from exercise of stock options

 

25

 

142

Payment of license installment note payable

 

(1,000)

 

(3,000)

Payment of debt issuance costs associated with convertible preferred shares

 

 

(214)

Proceeds from line of credit

28,000

Repayments of line of credit

(30,948)

(812)

Proceeds from EWB term-loan, net of discount

19,763

Repayment of EWB term-loan

(20,000)

Payment of issuance costs associated with EWB term-loan modification

(91)

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

 

 

(371)

Net cash (used in) provided by financing activities

 

(24,014)

 

15,508

Net change in cash

 

(7,254)

 

(14,190)

Cash at the beginning of the period

 

32,003

 

49,081

Cash at the end of the period

$

24,749

$

34,891

 

  

 

  

Supplemental disclosure of cash flow information:

Cash paid for interest

$

1,127

$

736

Cash paid for income taxes

$

85

$

19

Supplemental disclosure of non-cash financing and investing activities:

Deferred payment for asset acquisition

$

$

4,740

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

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JOURNEY MEDICAL CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1. ORGANIZATION AND PLAN OF BUSINESS OPERATIONS

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

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

Liquidity and Capital Resources

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

On August 31, 2023, the Company entered into a license agreement (the “New License Agreement”) with Maruho Co., Ltd., a Japanese company specializing in dermatology (“Maruho”), whereby the Company granted an exclusive license to Maruho to develop and commercialize Qbrexza® for the treatment of primary axillary hyperhidrosis in South Korea, Taiwan, Hong Kong, Macau, Thailand, Indonesia, Malaysia, Philippines, Singapore, Vietnam, Brunei, Cambodia, Myanmar and Laos (the “Territory”). Under the terms of the New License Agreement, in exchange for the exclusive rights to Qbrexza® in the Territory, Maruho paid $19.0 million to the Company as a non-refundable upfront payment.

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

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

As a result of increased losses in the latter part of 2022, during the last quarter of 2022, the Company implemented a cost reduction initiative designed to improve operational efficiencies, optimize expenses and reduce overall costs. The initiative is intended to reduce selling, general, and administrative expenses to better align costs with revenues being generated. In connection with the cost reduction initiative, during the nine-month period ended September 30, 2023, the Company executed a headcount reduction to its salesforce and implemented marketing and other cost cuts. As a result of the headcount reduction, the Company recorded a severance obligation of approximately $0.7 million, of which $0.1 million remains to be paid at September 30, 2023.

The Company regularly evaluates market conditions, its liquidity profile, and financing alternatives, including out-licensing arrangements for its products to enhance its capital structure. The Company may seek to raise capital through debt or equity financings to expand its product portfolio and for other strategic initiatives, which may include sales of securities under its 2022 Shelf or under a new registration statement. The Company cannot make any assurances that such additional financing will be available and, if available, the terms may negatively impact the Company’s business and operations. As such, substantial doubt exists about the Company’s ability to continue as a going concern for a period of at least twelve months from the date of issuance of these financial statements.

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

NOTE 2. BASIS OF PRESENTATION

Basis of Presentation and Principles of Consolidation

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

Emerging Growth Company

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

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates made by management include provisions for coupons, chargebacks, wholesaler fees, prompt-pay discounts, specialty pharmacy discounts, managed care rebates, product returns, government rebates and other allowances customary to the pharmaceutical industry. Significant estimates made by management also include inventory realization, valuation of intangible assets, useful lives of amortizable intangible assets and share-based compensation. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Segment Information

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

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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Recently Issued Accounting Pronouncements

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

NOTE 4. INVENTORY

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

    

September 30, 

    

December 31, 

($’s in thousands)

2023

2022

Raw materials

$

4,664

$

6,454

Work-in-process

 

458

 

395

Finished goods

 

6,683

 

7,739

Inventory at cost

11,805

14,588

Inventory reserves

(781)

(429)

Total inventories

$

11,024

$

14,159

NOTE 5. ASSET ACQUISITION

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

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

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

    

Aggregate

Consideration

($’s in thousands)

    

Transferred

Consideration transferred to VYNE at closing

$

20,000

Fair value of deferred cash payment due January 2023

 

4,740

Transaction costs

 

223

Total consideration transferred at closing

$

24,963

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

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

    

Assets

($’s in thousands)

Recognized

Inventory

6,041

Identifiable intangibles:

 

  

Amzeeq intangible

 

15,162

Zilxi intangible

 

3,760

Fair value of net identifiable assets acquired

$

24,963

The intangible assets were valued using an income approach, while the inventory was valued using a final sales value less cost to dispose approach.

NOTE 6. INTANGIBLE ASSETS

The Company’s finite-lived intangible assets consist of acquired intangible assets. During the nine months ended September 30, 2023, the Company experienced lower net product revenues and gross profit levels for its Ximino products. Based on these results, the Company revised the financial outlook and plans for its Ximino products. The Company assessed the revised forecast for Ximino and determined that this constituted a triggering event, and the results of the analysis indicated the carrying amount was not expected to be recovered. The Company recorded an intangible asset impairment charge of $3.1 million during the nine months ended September 30, 2023. This non-cash charge was recorded to loss on impairment of intangible assets on the unaudited condensed consolidated statements of operations.

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

Estimated

Useful Lives

September 30, 

December 31, 

($’s in thousands)

    

(Years)

    

2023

    

2022

Intangible assets - product licenses

  

3-9

$

37,925

$

37,925

Accumulated amortization

(13,680)

(10,728)

Accumulated impairment loss

 

 

(3,143)

 

Total intangible assets

$

21,102

$

27,197

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

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

$’s in thousands

    

Total Amortization

Remainder of 2023

$

813

December 31, 2024

3,258

December 31, 2025

 

3,258

December 31, 2026

 

2,470

December 31, 2027

 

1,775

Thereafter

 

5,586

Subtotal

17,160

Asset not yet placed in service

 

3,942

Total

$

21,102

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NOTE 7. LICENSES ACQUIRED

DFD-29

In June 2021, the Company entered a license, collaboration, and assignment agreement (the “DFD-29 Agreement”) to obtain global rights for the development and commercialization of a late-stage development modified release oral minocycline for the treatment of rosacea (“DFD-29”) with Dr. Reddy’s Laboratories, Ltd (“DRL”); provided, that DRL retained certain rights to the program in select markets including Brazil, Russia, India and China. Based on the development and commercialization of DFD-29, additional contingent regulatory and commercial milestone payments totaling up to $158.0 million may also become payable by the Company. The Company is required to pay royalties ranging from approximately ten percent to fifteen percent on net sales of the DFD-29 product, subject to certain reductions. Additionally, the Company was required to fund and oversee the Phase 3 clinical trials beginning upon the license of DFD-29 in 2021. The Phase 3 clinical trials substantially concluded in July 2023 upon the Company’s receipt of positive topline results from the trials.

Qbrexza

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

Accutane

In July 2020, the Company entered into an exclusive license and supply agreement for Accutane (the “Accutane Agreement”) with DRL. Pursuant to the Accutane Agreement, the Company agreed to pay $5.0 million, comprised of an upfront payment of $1.0 million paid upon execution, with additional milestone payments totaling $4.0 million. To date, the Company has paid all milestone payments. Three additional milestone payments totaling $17.0 million are contingent upon the achievement of certain net sales milestones. The Company is required to pay royalties in an amount equal to a low-double digit percentage of net sales. The term of the Accutane Agreement is ten years and renewable upon mutual agreement. Each party may terminate the Accutane Agreement for an uncured material breach by the other party or for certain bankruptcy or insolvency related events. The Company may also terminate the Accutane Agreement without cause upon 180 days written notice to DRL.

NOTE 8. FAIR VALUE MEASUREMENTS

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

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

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

Level 2: Observable inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.

Level 3: Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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

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

    

 September 30, 2023

($’s in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

  

  

  

  

Cash and cash equivalents

$

24,749

$

$

$

24,749

Total

$

24,749

$

$

$

24,749

    

 December 31, 2022

($’s in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

  

  

  

  

Cash and cash equivalents

$

32,003

$

$

$

32,003

Total

$

32,003

$

$

$

32,003

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

NOTE 9. RELATED PARTY AGREEMENTS

Shared Services Agreement with Fortress

On November 12, 2021, the Company and Fortress entered into an arrangement to share the cost of certain legal, finance, regulatory, and research and development employees (the “Shared Services Agreement”). Fortress’ Executive Chairman and Chief Executive Officer is the Executive Chairman of the Company. Under the terms of the Shared Services Agreement, the Company will reimburse Fortress for the salary and benefit costs associated with these employees based upon actual hours worked on Journey-related projects following the completion of the Company’s initial public offering, which occurred in November 2021. In addition, the Company reimburses Fortress for various payroll-related costs and selling, general and administrative costs incurred by Fortress for the benefit of the Company.

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

Fortress Income Tax

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

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

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NOTE 10. ACCRUED EXPENSES

Accrued expenses consisted of the following:

    

September 30, 

    

December 31, 

($’s in thousands)

2023

2022

Accrued expenses:

 

  

 

  

Accrued coupons and rebates

$

6,099

$

7,604

Return reserve

4,523

3,689

Accrued compensation

 

2,392

 

2,586

Accrued royalties payable

1,794

2,627

Accrued legal, accounting and tax

 

217

 

334

Accrued research and development

 

117

 

1,404

Accrued inventory

 

112

 

112

Accrued iPledge program

136

447

Other

 

636

 

585

Total accrued expenses

$

16,026

$

19,388

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

NOTE 11. INSTALLMENT PAYMENTS — LICENSES

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

    

September 30, 2023

($’s in thousands)

    

Short-Term

    

Long-Term

    

Total

Installment payments - licenses

$

3,000

$

$

3,000

Less: imputed interest

 

 

 

Sub-total installment payments - licenses

$

3,000

$

$

3,000

    

December 31, 2022

($’s in thousands)

    

Short-Term

    

Long-Term

    

Total

Installment payments - licenses

$

2,500

$

1,500

$

4,000

Less: imputed interest

 

(256)

 

(88)

 

(344)

Sub-total installment payments - licenses

$

2,244

$

1,412

$

3,656

NOTE 12. OPERATING LEASE OBLIGATIONS

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

The Company recorded lease expense as follows:

    

Three-Month Periods Ended

Nine-Month Periods Ended

September 30,

September 30,

($’s in thousands)

2023

    

2022

    

2023

    

2022

Operating lease cost

$

24

$

27

$

72

$

76

Variable lease cost

 

1

1

3

3

Total lease cost

$

25

$

28

$

75

$

79

11

Table of Contents

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