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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2024

OR

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

For the transition period from _________ to _________

Commission File Number: 001-41063

JOURNEY MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

    

47-1879539

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

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

(Address of principal executive offices and zip code)

(480) 434-6670

(Registrant’s telephone number, including area code)

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

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

DERM

NASDAQ Capital Market

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

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

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

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging growth company

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

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

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

Class of Common Stock

    

Outstanding Shares as of May 14, 2024

Common Stock Class A, $0.0001 par value

6,000,000

Common Stock, $0.0001 par value

14,012,896

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

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

23

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 3.

Defaults Upon Senior Securities

24

Item 4.

Mine Safety Disclosures

24

Item 5.

Other Information

24

Item 6.

Exhibits

25

 

 

SIGNATURES

26

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)

    

March 31,

    

December 31, 

2024

2023

ASSETS

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

 

$

24,057

 

$

27,439

Accounts receivable, net of reserves

 

9,799

 

15,222

Inventory

 

10,580

 

10,206

Prepaid expenses and other current assets

 

2,577

 

3,588

Total current assets

 

47,013

 

56,455

Intangible assets, net

 

19,473

 

20,287

Operating lease right-of-use asset, net

 

79

 

101

Other assets

 

6

 

6

Total assets

$

66,571

$

76,849

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

15,343

$

18,149

Due to related party

 

198

 

195

Accrued expenses

 

20,033

 

20,350

Accrued interest

241

22

Income taxes payable

 

37

 

53

Installment payments – licenses, short-term

 

3,000

 

3,000

Operating lease liability, short-term

 

84

 

99

Total current liabilities

 

38,936

 

41,868

Term loan, long-term, net of debt discount

14,684

14,622

Operating lease liability, long-term

 

 

9

Total liabilities

 

53,620

 

56,499

Commitments and contingencies (Note 13)

 

  

 

  

Stockholders’ equity

 

  

 

  

Common stock, $.0001 par value, 50,000,000 shares authorized, 13,932,310 and 13,323,952 shares issued and outstanding as of March 31, 2024 and December 31, 2023, 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, 2024 and December 31, 2023

 

1

 

1

Additional paid-in capital

 

95,746

 

92,703

Accumulated deficit

 

(82,797)

 

(72,355)

Total stockholders' equity

 

12,951

 

20,350

Total liabilities and stockholders’ equity

$

66,571

$

76,849

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

1

Table of Contents

JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Operations

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

    

Three-Month Periods Ended

March 31, 

    

2024

    

2023

Revenue:

Product revenue, net

$

13,030

$

12,165

Other revenue

48

Total revenue

13,030

12,213

Operating expenses

 

 

Cost of goods sold – product revenue

 

6,816

 

6,449

Research and development

 

7,884

 

2,033

Selling, general and administrative

 

8,420

 

13,292

Total operating expenses

 

23,120

 

21,774

Loss from operations

 

(10,090)

 

(9,561)

Other expense (income)

 

 

Interest income

 

(217)

 

(122)

Interest expense

548

650

Foreign exchange transaction losses

21

47

Total other expense (income)

352

575

Loss before income taxes

 

(10,442)

 

(10,136)

Income tax expense

 

 

Net loss

$

(10,442)

$

(10,136)

Net loss per common share:

Basic and diluted

$

(0.53)

$

(0.57)

Weighted average number of common shares:

 

 

Basic and diluted

 

19,757,449

 

17,807,194

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

2

Table of Contents

JOURNEY MEDICAL CORPORATION

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

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

Three-Month Period Ended March 31, 2024

Total

    

Common Stock

    

Common Stock A

Additional

Accumulated

Shareholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit

    

Equity

Balance as of December 31, 2023

13,323,952

$

1

 

6,000,000

$

1

$

92,703

$

(72,355)

$

20,350

Share-based compensation

 

 

 

 

1,406

 

 

1,406

Exercise of stock options for cash

55,375

 

 

 

68

 

 

68

Issuance of common stock for vested restricted stock units

211,028

 

 

 

 

-

 

 

-

Issuance of common stock under ESPP

52,211

85

85

Issuance of common stock, ATM offering, net of issuance costs of $46

289,744

1,484

1,484

Net loss

-

(10,442)

(10,442)

Balance as of March 31, 2024

13,932,310

$

1

 

6,000,000

$

1

$

95,746

$

(82,797)

$

12,951

Three-Month Period Ended March 31, 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

 

 

 

 

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

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

3

Table of Contents

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, 

    

2024

    

2023

Cash flows from operating activities

  

  

Net loss

$

(10,442)

$

(10,136)

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

 

  

 

  

Bad debt expense

 

6

 

126

Non-cash interest expense

 

 

98

Amortization of debt discount

 

62

 

17

Amortization of acquired intangible assets

 

814

 

1,069

Amortization of operating lease right-of-use assets

 

22

 

22

Share-based compensation

 

1,406

 

646

Changes in operating assets and liabilities:

 

 

Accounts receivable

5,417

466

Inventory

 

(374)

 

881

Prepaid expenses and other current assets

 

1,011

 

832

Accounts payable

 

(2,806)

 

7,088

Due to related party

 

3

 

(43)

Accrued expenses

 

(317)

 

(2,013)

Accrued interest

219

5

Income tax payable

 

(16)

 

Lease liabilities

(24)

(14)

Net cash used in operating activities

 

(5,019)

 

(956)

 

 

Cash flows from investing activities

 

 

Acquired intangible assets

 

 

(5,000)

Net cash provided by (used in) investing activities

(5,000)

 

 

Cash flows from financing activities

 

 

Proceeds from exercise of stock options

 

68

 

Proceeds from issuance of common stock, ATM offering, net of issuance costs

 

1,484

 

Issuance of common stock under ESPP

85

Proceeds from line of credit

28,000

Repayments of line of credit

(27,948)

Net cash provided by financing activities

 

1,637

 

52

Net change in cash

 

(3,382)

 

(5,904)

Cash at the beginning of the period

 

27,439

 

32,003

Cash at the end of the period

$

24,057

$

26,099

 

  

 

  

Supplemental disclosure of cash flow information:

Cash paid for interest

$

267

$

535

Cash paid for income taxes

$

$

7

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

4

Table of Contents

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”) is a commercial-stage pharmaceutical company that primarily focuses on the selling and marketing of U.S. Food and Drug Administration (“FDA”)-approved prescription pharmaceutical products for the treatment of dermatological conditions. The Company’s current product portfolio includes seven branded and two 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 field sales organization.

As of March 31, 2024 and December 31, 2023, the Company was a majority-owned subsidiary of Fortress Biotech, Inc. (“Fortress” or “Parent”).

Liquidity and Capital Resources

At March 31, 2024, the Company had $24.1 million in cash and cash equivalents as compared to $27.4 million of cash and cash equivalents at December 31, 2023.

On December 27, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) with SWK Funding LLC (“SWK”). The Credit Agreement provides for a term loan facility (the “Credit Facility”) in the original principal amount of up to $20.0 million. On the closing date, the Company drew $15.0 million. The remaining $5.0 million may be drawn upon the Company’s request within 12 months after the closing date. Loans under the Credit Facility (the “Term Loans”) mature on December 27, 2027, and bear interest at a rate per annum equal to the three-month term Secured Overnight Financing Rate (“SOFR”) (subject to a SOFR floor of 5%) plus 7.75%. The interest rate resets quarterly. Interest payments began in February 2024 and are paid quarterly. Beginning in February 2026, the Company is required to repay a portion of the outstanding principal of the Term Loans quarterly in an amount equal to 7.5% of the principal amount of funded Term Loans.

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”). In connection with the 2022 Shelf, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) relating to shares of the Company’s common stock. The Company may offer and sell up to 4,900,000 shares of its common stock, from time to time, under the Sales Agreement. During the three months ended March 31, 2024, the Company issued and sold 289,744 shares of common stock under the 2022 Shelf, generating net proceeds of $1.5 million. At March 31, 2024, 3,861,553 shares remain available for issuance under the 2022 Shelf.

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 either the 2022 Shelf or a new registration statement or drawing on the SWK Credit Facility. 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. The Company’s expectations are based on current assumptions, projected commercial sales of products, clinical development plans and regulatory submission timelines, which may be uncertain and may not emerge as expected. Additionally, as a result of recurring losses, 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.

5

Table of Contents

NOTE 2. BASIS OF PRESENTATION

Basis of Presentation and Principles of Consolidation

The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s consolidated financial statements include the accounts of the Company and the accounts of the Company’s wholly-owned subsidiary, JG Pharma, Inc. (“JG” or “JG Pharma”). 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 audited 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 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, specialty pharmacy discounts, managed care rebates, product returns, 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, 2023 (the “2023 Form 10-K”).

Accounting Standards Note Yet Adopted

In November 2023, the FASB issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires that an entity report segment information in accordance with Topic 280, Segment Reporting. The amendment in the ASU is intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of the new standard on its financial statements and disclosures.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands disclosures in an entity’s income tax rate reconciliation table and disclosures regarding cash taxes paid both in the U.S. and foreign jurisdictions. The update will be effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact that this guidance will have on its financial statements and disclosures.

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NOTE 4. INVENTORY

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

    

March 31, 

    

December 31, 

($’s in thousands)

2024

2023

Raw materials

$

4,180

$

4,640

Work-in-process

 

805

 

884

Finished goods

 

5,865

 

4,987

Inventory at cost

10,850

10,511

Inventory reserves

(270)

(305)

Total inventories

$

10,580

$

10,206

NOTE 5. INTANGIBLE ASSETS

The Company’s finite-lived intangible assets consist of acquired intangible assets. The Company’s intangible assets as of March 31, 2024 and December 31, 2023 are summarized as follows:

Estimated

Useful Lives

March 31, 

December 31, 

($’s in thousands)

    

(Years)

    

2024

    

2023

Intangible assets - product licenses

  

3-9

$

37,925

$

37,925

Accumulated amortization

(15,309)

(14,495)

Accumulated impairment loss

 

 

(3,143)

 

(3,143)

Total intangible assets

$

19,473

$

20,287

The Company’s amortization expense for the three-month periods ended March 31, 2024 and 2023 was $0.8 million and $1.1 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:

For the years ended

    

Total Amortization

Remainder of 2024

$

2,443

December 31, 2025

3,257

December 31, 2026

 

2,471

December 31, 2027

 

1,775

December 31, 2028

 

1,595

Thereafter

 

3,990

Subtotal

15,531

Asset not yet placed in service

 

3,942

Total

$

19,473

NOTE 6. 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

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markets including Brazil, Russia, India and China. Pursuant to the terms and conditions of the DFD-29 Agreement, the Company paid $10.0 million. Based on the development and commercialization of DFD-29, additional contingent regulatory and commercial milestone payments totaling up to $155.0 million may also become payable by the Company. 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. Additionally, the Company was required to fund and oversee the Phase 3 clinical trials beginning after the execution of the DFD-29 Agreement in 2021. The Phase 3 clinical trials substantially concluded in July 2023 upon the Company’s receipt of positive Phase 3 clinical trial results.

Qbrexza

In March 2021, the Company executed an Asset Purchase Agreement (the “Qbrexza APA”) with Dermira, Inc., a subsidiary of Eli Lilly and Company (“Dermira”). Pursuant to the terms of the Qbrexza APA, the Company acquired the rights to Qbrexza® (glycopyrronium), a prescription cloth towelette to treat primary axillary hyperhidrosis in patients nine years of age or older. The Company paid the upfront fee of $12.5 million to Dermira. In addition, the Company is obligated to pay Dermira up to $144.0 million in the aggregate upon the achievement of certain sales milestones. The royalty structure for the agreement is tiered with royalties for the first two years ranging from approximately 40% to 30%. Thereafter, royalties are approximately 12.0% to 19.0%. Royalty amounts are subject to certain reductions in the event there is a loss of exclusivity.

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 paid $5.0 million. 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 7. 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:

    

 March 31, 2024

($’s in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

  

  

  

  

Cash and cash equivalents

$

24,057

$

$

$

24,057

Total

$

24,057

$

$

$

24,057

    

 December 31, 2023

($’s in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

  

  

  

  

Cash and cash equivalents

$

27,439

$

$

$

27,439

Total

$

27,439

$

$

$

27,439

The Company did not carry any level 2 or level 3 assets or liabilities at March 31, 2024 or December 31, 2023. No transfers occurred between level 1, level 2, and level 3 instruments during the three-month periods ended March 31, 2024 and 2023.

NOTE 8. 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 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, 2024 and 2023, the Company recorded related party expenses to Fortress of approximately $9,361 and $15,000, respectively. The due to related party liability at March 31, 2024 and December 31, 2023 was $0.2 million and $0.2 million, respectively, and primarily relate 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 March 31, 2024, 50.43% of all classes of the Company’s outstanding common stock was owned by Fortress. Prior to the Company’s 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 16 below for a discussion of income taxes.

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NOTE 9. ACCRUED EXPENSES

Accrued expenses consisted of the following:

    

March 31, 

    

December 31, 

($’s in thousands)

2024

2023

Accrued expenses:

 

  

 

  

Accrued coupons and rebates

$

7,169

$

9,987

Return reserve

2,806

4,077

Accrued compensation

 

3,599

 

3,374

Accrued royalties payable

1,382

2,015

Accrued legal, accounting and tax

 

335

 

185

Accrued research and development

 

3,034

 

20

Accrued inventory

 

581

 

352

Accrued iPledge program

587

174

Other

 

540

 

166

Total accrued expenses

$

20,033

$

20,350

NOTE 10. 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

March 31,

($’s in thousands)

2024

    

2023

Operating lease cost

$

24

$

24

Variable lease cost

 

1

1

Total lease cost

$

25

$

25

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

    

Three-Month Periods Ended

March 31,

($’s in thousands)

    

2024

2023

Cash paid for amounts included in the measurement of lease liabilities

$

25

$

17

Weighted-average remaining lease term - operating leases

 

0.8

 

1.8

Weighted-average discount rate - operating leases

 

6.25

%

 

6.25

%

As of March 31, 2024, future minimum lease payments under lease agreements associated with the Company’s operations were as follows:

$’s in thousands

    

    

Remainder of 2024

$

77

2025

 

9

Total lease payments

 

86

Less: present value discount

 

(2)

Total operating lease liabilities

$

84

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NOTE 11. DEBT

The Company’s debt obligations at March 31, 2024 and December 31, 2023 were as follows:

March 31,

December 31,

($’s in thousands)

    

2024

    

2023

Principal balance

$

15,000

$

15,000

Plus: Exit fee

 

750

 

750

Less: Debt discount and fees

$

(1,066)

$

(1,128)

Net carry amount (Long-term)

$

14,684

$

14,622

SWK Long-Term Debt

On December 27, 2023 (the “Closing Date”), the Company entered into a Credit Agreement with SWK. The Credit Agreement provides for a term loan Credit Facility in the original principal amount of up to $20.0 million. On the Closing Date, the Company drew $15.0 million. The remaining $5.0 million may be drawn upon request by the Company within 12 months after the Closing Date. Term Loans under the Credit Facility mature on December 27, 2027. The Term Loans accrue interest which is payable quarterly in arrears. The Term Loans bear interest at a rate per annum equal to the three-month term SOFR (subject to a SOFR floor of 5%) plus 7.75%. The interest rate resets quarterly.

Beginning in February 2026, the Company is required to repay a portion of the outstanding principal of the Term Loans quarterly in an amount equal to 7.5% of the principal amount of funded Term Loans, with any remaining principal balance due on the maturity date. If the total revenue of the Company, measured on a trailing twelve-month basis, is greater than $70.0 million as of December 31, 2025, the principal repayment start date is extended from February 2026 to February 2027, at which point the Company is required to repay a portion of the outstanding principal of the Term Loans quarterly in an amount equal to 15% of the principal amount of funded Term Loans, with any remaining principal balance due on the maturity date.

The Company may at any time prepay the outstanding principal balance of the Term Loans in whole or in part. Prepayment of the Term Loans is subject to payment of a prepayment premium equal to (i) 2% of the Term Loans prepaid plus the amount of interest that would have been due through the first anniversary of the Closing Date if the Term Loans are prepaid prior to the first anniversary of the Closing Date, (ii) 1% of the Term Loans prepaid if the Term Loans are prepaid on or after the first anniversary of the Closing Date but prior to the second anniversary of the Closing Date, or (iii) 0% if prepaid thereafter.

Upon repayment in full of the Term Loans, the Company will pay an exit fee equal to 5% of the original principal amount of the Term Loans. Additionally, the Company paid an origination fee of $0.2 million on the Closing Date and incurred issuance costs of $0.2 million, both of which have been recorded as a debt discount. The Company is accreting the carrying value of the SWK Term Loan to the original principal balance plus the exit fee over the term of the loan using the effective interest method. The amortization of the discount is accounted for as interest expense. The effective interest rate on the SWK Term Loan as of March 31, 2024 was 15.1%. The fair value of the debt approximates its carrying value.

The SWK Credit Facility also includes both revenue and liquidity covenants, restrictions as to payment of dividends, and is secured by substantially all assets of the Company. As of March 31, 2024, the Company was in compliance with the financial covenants under the SWK Credit Facility.

As of March 31, 2024, the contractual maturities of the long-term debt, including the payment of the exit fee, are as follows (dollars in thousands):

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Years ending December 31,

    

Term Loan

Remainder of 2024

$

2025

 

2026

 

4,500

2027

 

11,250

Total

 

15,750

Debt discount

 

(1,066)

Total, net

 

14,684

Current portion

 

Term-loan (long-term)

$

14,684

NOTE 12: INTEREST EXPENSE AND FINANCING FEES

Interest expense and financing fees for the three months ended March 31, 2024 consisted of the following:

    

Three-Month Periods Ended March 31,

($’s in thousands)

    

2024

    

2023

Interest payments on term loans and LOC

$

486

$

535

Amortization/Accretion

62

33

Imputed interest on acquired intangible assets

82

Total Interest expense and financing fees

$

548

$

650

NOTE 13. COMMITMENTS AND CONTINGENCIES

License Agreements

The Company has undertaken to make contingent milestone payments to the licensors of its portfolio of drug products and candidates. In addition, the Company is required to pay royalties to such licensors based on a percentage of net sales of each drug candidate following regulatory marketing approval. For additional information on future milestone payments and royalties, see Note 6.

NOTE 14. SHARE-BASED COMPENSATION

In 2015, the Company’s Board of Directors adopted, and stockholders approved, the Journey Medical 2015 Stock Plan (the “Plan”) authorizing the Company to grant shares of common stock to eligible employees, directors, and consultants in the form of restricted stock, restricted stock units (“RSUs”), stock options and other types of grants. The amount, terms, and exercisability provisions of grants are determined by the Board of Directors. The number of shares issuable under the Plan is 7,642,857. As of March 31, 2024, 863,295 shares were available for issuance under the Plan.

The Company, from time to time, grants stock options to employees, non-employees and directors with exercise prices equal to the closing price of the underlying shares of the Company’s common stock on the Nasdaq Capital Market on the date that the options are granted. Options granted have a term of ten years from the grant date. Options granted generally vest over four-year period. Compensation cost for stock options is charged against operations on a straight-line basis over the vesting period. The Company estimates the fair value of stock options on the grant date by applying the Black-Scholes option pricing valuation model.

In 2023, the Company’s Board of Directors adopted, and stockholders approved, the Journey Medical Corporation 2023 Employee Stock Purchase Plan (the “2023 ESPP”). The Company initially reserved 300,000 shares of common stock for future issuance under the 2023 ESPP. As of March 31, 2024, 247,789 shares were available for issuance under the 2023 ESPP.

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The following table summarizes the components of share-based compensation expense in the consolidated statements of operations for the three-month period ended March 31, 2024 and 2023:

    

Three-Month Periods Ended March 31,

($’s in thousands)

    

2024

    

2023

Research and development

$

145

$

33

Selling, general and administrative

 

1,261

 

613

Total non-cash compensation expense related to share-based compensation included in operating expense

$

1,406

$

646

Stock Options

The following table summarizes the Company’s stock option activities:

Weighted

    

    

Weighted

    

    

average

Number

average

Aggregate

remaining

of

exercise

intrinsic

contractual 

    

Shares

    

price

    

value

    

life (years)

Outstanding options at December 31, 2023

2,769,869

$

1.49

$

6,053,833

4.53

Granted

25,000

4.57

Exercised

(55,375)

1.22

Forfeited

(65,523)

2.91

Expired

(1,250)

2.62

Outstanding options at March 31, 2024

 

2,672,721

$

1.49

$

5,866,003

 

4.23

Options vested and exercisable at March 31, 2024

 

1,991,507

$

0.97

$

5,393,973

 

2.73

For the three-month periods ended March 31, 2024 and 2023, approximately $73,000 and $0.2 million, respectively, of stock option compensation expense was charged against operations. For the three-month period ended March 31, 2024, the Company issued 55,375 shares of common stock upon the exercise of outstanding stock options and received proceeds $67,514. The Company did not issue any shares of common stock upon the exercise of stock options for the three-month period ended March 31, 2023. At March 31, 2024, the Company had unrecognized stock-based compensation expense related to all unvested options of $0.8 million, which the Company expects to recognize over a weighted-average period of approximately 1.8 years.

The aggregate intrinsic value in the previous table reflects the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all option holders exercised their options on March 31, 2024. The intrinsic value of the Company’s stock options changes based on the closing price of the Company’s common stock.

Restricted Stock Units

The following table summarizes the activity related to the Company’s RSUs for the three-month period ended March 31, 2024:

    

Weighted

Number of

average grant

    

units

    

date Fair value

Unvested balance at December 31, 2023

 

1,306,923

$

3.88

Granted

 

887,500

 

4.97

Vested

(211,028)

3.58

Forfeited

(10,000)

5.02

Unvested balance at March 31, 2024

1,973,395

$

4.40

For the three-month periods ended March 31, 2024 and 2023, approximately $1.3 million and $0.5 million, respectively, of stock compensation expense related to RSUs was charged against operations. For the three-month periods ended March 31, 2024 and 2023

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the Company issued 211,028 and 68,662 shares of common stock, respectively, upon vesting of RSU’s amounting to $0.8 million and $0.2 million, respectively, in total aggregate fair market value. At March 31, 2024, 1,973,395 RSUs remained unvested and there was approximately $4.6 million of unrecognized compensation cost related to restricted stock which the Company expects to recognize over a weighted-average period of approximately 1.6 years.

Employee Stock Purchase Plan

The 2023 ESPP provides that eligible employees may contribute up to 10% of their eligible earnings toward a semi-annual purchase of the Company’s common stock. The 2023 ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the last date of purchase (or, if not a trading day, on the immediately preceding trading day). The offering period under the 2023 ESPP has a duration of six months, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85% of the lesser of (i) the fair market value of the Company’s common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of the Company’s common stock on the purchase date. The Company estimates the fair value of the common stock under the 2023 ESPP using a Black-Scholes valuation model. The fair value was estimated on the date of grant for the offering period beginning February 1, 2024 using the Black-Scholes option valuation model and the straight-line attribution approach with the following assumptions: risk-free interest rate (5.2%); expected term (0.5 years); expected volatility (98%); and an expected dividend yield (0%). The Company recorded $59,240 of stock-based compensation under the 2023 ESPP for the three-month periods ended March 31, 2024. As of March 31, 2024, there was unrecognized stock-based compensation expense of $106,110 related to the current ESPP offering period, which ends July 31, 2024.

NOTE 15. REVENUES FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Net Revenues

The Company has the following actively marketed products, Qbrexza®, Amzeeq®, Zilxi®, Accutane®, Exelderm®, Targadox®, and Luxamend®. All of the Company’s product revenues are recorded in the U.S.

Revenues by product are summarized as follows:

Three-Month Periods Ended March 31, 

($ in thousands)

    

2024

    

2023

Qbrexza®

$

5,017

$

4,094

Accutane®

 

5,819

 

4,648

Amzeeq®

755

1,193

Zilxi®

273

314

Other / legacy

1,166

1,916

Total product revenues

$

13,030

$

12,165

The Company recognized other revenue as follows:

    

Three-Month Periods Ended March 31,

($in thousands)

2024

2023

Other revenue

 

 

48

Total other revenue

$

$

48

Significant Customers

For the three-month periods ended March 31, 2024 and 2023 there were no customers that accounted for more than 10% of the Company’s total gross product revenue.

At March 31, 2024, one of the Company’s customers accounted for more than 10% of its total accounts receivable balance at 14.0%. At December 31, 2023, one of the Company’s customers accounted for more than 10% of its total accounts receivable balance at 13.0%.

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NOTE 16. INCOME TAXES

Three-Month Periods Ended

March 31, 

($ in thousands)

    

2024

2023

Net Income (loss) before income taxes

$

(10,442)

$

(10,136)

Provision (benefit) for Income

 

 

Effective tax rate

 

0.0

%

 

0.0

%

The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company establishes a valuation allowance if management believes it is more likely than not that the deferred tax assets will not be recovered based on an evaluation of objective verifiable evidence. Management has considered the Company’s history of book and tax income and losses incurred since inception, and the other positive and negative evidence, and has concluded that it is more likely than not that the Company will not realize the benefits of the net deferred tax assets as of March 31, 2024.

As of March 31, 2024, the Company had no unrecognized tax benefits and does not anticipate any significant change to the unrecognized tax benefit balance.

NOTE 17. NET LOSS PER COMMON SHARE

The Company accounts for and discloses net earnings (loss) per share using the treasury stock method. Net earnings (loss) per share, or basic earnings (loss) per share, is computed by dividing net earnings (loss) by the weighted-average number of shares of common stock outstanding. Net earnings (loss) per share assuming dilutions, or diluted earnings (loss) per share, is computed by reflecting the potential dilution from the exercise of in-the-money stock options and the issuance of non-vested restricted stock units.

The Company’s basic and diluted weighted-average number of common shares outstanding for the three-month periods ended March 31, 2024 and 2023 were as follows:

Three-Month Periods Ended March 31,

    

2024

    

2023

Basic and diluted

19,757,449

17,807,194

Potentially dilutive securities:

Unvested restricted stock units

 

1,973,395

1,931,969

Stock options

 

1,624,382

1,130,557

Total potentially dilutive securities

3,597,777

3,062,526

The Company’s potentially dilutive securities, including unvested restricted stock and options have been excluded from the computation of diluted loss per share for the three-month periods ended March 31, 2024, and 2023, as the effect would be to reduce the loss per share. Therefore, the weighted average common stock outstanding used to calculate both basic and diluted income loss per share is the same for the three-month periods ended March 31, 2024 and 2023.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements

Certain matters discussed in this report may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. The words “anticipate,” “believe,” “estimate,” “may,” “expect,” “will,” “could,” “project,” “should,” “intend” and similar expressions are generally intended to identify forward-looking statements. Our actual results may differ materially from the results anticipated in or implied by these forward-looking statements due to a variety of factors, including, without limitation:

the fact that our products and product candidates are subject to time and cost intensive regulation and clinical testing and as a result, may never be successfully developed or commercialized;
a substantial portion of our sales derive from products that are without patent protection and/or are or may become subject to third-party generic competition, the introduction of new competitor products, or an increase in market share of existing competitor products, any of which could have a significant adverse impact on our operating income;
we operate in a heavily regulated industry, and we cannot predict the impact that any future legislation or administrative or executive action may have on our operations;
our revenue is dependent mainly upon sales of our dermatology products and any setback relating to the sale of such products could impair our operating results;
competition could limit our products’ commercial opportunity and profitability, including competition from manufacturers of generic versions of our products;
the risk that our products do not achieve broad market acceptance, including by government and third-party payors;
our reliance third parties for several aspects of our operations;
our dependence on our ability to identify, develop, and acquire or in-license products and integrate them into our operations, at which we may be unsuccessful;
the dependence of the success of our business, including our ability to finance our company and generate additional revenue, on the successful development and regulatory approval of the DFD-29 product candidate and any future product candidates that we may develop, in-license or acquire;
clinical drug development is very expensive, time consuming, and uncertain and our clinical trials may fail to adequately demonstrate the safety and efficacy of our current or any future product candidates;
our competitors could develop and commercialize products similar or identical to ours;
risks related to the protection of our intellectual property and our potential inability to maintain sufficient patent protection for our technology and products;
our business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our or our third parties’ cybersecurity;
the effects of major public health issues, epidemics or pandemics on our product revenues and any future clinical trials;
our potential need to raise additional capital;

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the substantial doubt expressed about our ability to continue as a going concern;
Fortress controls a voting majority of our common stock, which could be detrimental to our other shareholders;
and the risks described in under the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

The forward-looking statements contained in this report reflect our views and assumptions as of the effective date of this report. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. Except as required by law, we assume no responsibility for updating any forward-looking statements.

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Overview

We are a commercial-stage pharmaceutical company founded in October 2014 that primarily focuses on the selling and marketing of FDA-approved prescription pharmaceutical products for the treatment of dermatological conditions. Our current portfolio includes seven branded and two authorized generic prescription drugs for dermatological conditions that are actively marketed in the U.S. We are managed by experienced life science executives with a track record of creating value for their stakeholders and bringing novel medicines to the market, enabling patients to experience increased quality of life and physicians and other licensed medical professionals to provide better care for their patients. We aim to acquire 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 our field sales force.

Recent Corporate Highlights

In July 2023, we announced positive topline data from our two DFD-29 Phase 3 clinical trials for the treatment of papulopustular rosacea. The Phase 3 clinical trials achieved the co-primary and all secondary endpoints, the subjects completed the 16-week treatment and the drug was well-tolerated. DFD-29 demonstrated statistical superiority over both the standard of care, Oracea® capsules, and placebo for Investigator’s Global Assessment treatment success and the reduction in the total inflammatory lesion count in both studies. We summitted a New Drug Application (“NDA”) under Section 505(b)(2) of the United States Federal Food, Drug and Cosmetic Act (“FDCA”) with the U.S. Food and Drug Administration (the “FDA”) for DFD-29 on January 4, 2024, paying a $4.0 million filing fee, and expect potential approval from the FDA in the second half of 2024. On March 18, 2024, we announced the FDA accepted the Company’s NDA with a Prescription Drug User Fee Act goal date of November 4, 2024.

Critical Accounting Polices and Uses of Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. Applying these principles requires our judgment in determining the appropriateness of acceptable accounting principles and methods of application in diverse and complex economic activities. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of revenues, expenses, assets and liabilities, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

For a discussion of our critical accounting estimates, see the section of the 2023 Form 10-K titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Use of Estimates.” There were no material changes in our critical accounting estimates or accounting policies from December 31, 2023.

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Accounting Pronouncements

During the three-month period ended March 31, 2024, there were no new accounting pronouncements or updates to recently issued accounting pronouncements disclosed in the 2023 Form 10-K that are expected to materially affect the Company’s present or future financial statements.

Emerging Growth Company and Smaller Reporting Company Status

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years of audited financial statements in our annual reports on Form 10-K, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

We are also a “smaller reporting company,” meaning that either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) the market value of our shares held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than $700 million. As a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K, we have reduced disclosure obligations regarding executive compensation, and smaller reporting companies are permitted to delay adoption of certain recent accounting pronouncements discussed in Note 2 to our consolidated financial statements in this report on Form 10-Q.

Results of Operations

The following table summarizes our results of operations for the three-month periods ended March 31, 2024 and 2023:

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Comparison of the Three-Month Periods Ended March 31, 2024 and 2023

Three-Month Periods Ended March 31, 

Change

($ in thousands, except per share data)

    

2024

    

2023

    

$

    

%

Revenue:

Product revenue, net

 

$

13,030

 

$

12,165

$

865

7

%

Other revenue

48

(48)

-100

%

Total revenue

13,030

12,213

817

7

%

Operating expenses

 

  

 

  

  

  

Cost of goods sold – product revenue

 

6,816

 

6,449

367

6

%

Research and development

 

7,884

 

2,033

5,851

288

%

Selling, general and administrative

 

8,420

 

13,292

(4,872)

-37

%

Total operating expenses

 

23,120

 

21,774

1,346

6

%

Loss from operations

 

(10,090)

 

(9,561)

(529)

6

%

Other expense (income)

 

 

  

  

  

Interest income