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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 June 30, 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 August 12, 2024

Common Stock Class A, $0.0001 par value

6,000,000

Common Stock, $0.0001 par value

14,727,237

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

25

Item 4.

Controls and Procedures

25

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3.

Defaults Upon Senior Securities

26

Item 4.

Mine Safety Disclosures

26

Item 5.

Other Information

26

Item 6.

Exhibits

27

 

 

SIGNATURES

28

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)

    

June 30,

    

December 31, 

2024

2023

ASSETS

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

 

$

23,912

 

$

27,439

Accounts receivable, net of reserves

 

10,465

 

15,222

Inventory

 

9,687

 

10,206

Prepaid expenses and other current assets

 

2,406

 

3,588

Total current assets

 

46,470

 

56,455

Intangible assets, net

 

18,658

 

20,287

Operating lease right-of-use asset, net

 

55

 

101

Other assets

 

6

 

6

Total assets

$

65,189

$

76,849

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

14,604

$

18,149

Due to related party

 

260

 

195

Accrued expenses

 

15,972

 

20,350

Accrued interest

251

22

Income taxes payable

 

 

53

Installment payments – licenses, short-term

 

3,000

 

3,000

Operating lease liability, short-term

 

59

 

99

Total current liabilities

 

34,146

 

41,868

Term loan, long-term, net of debt discount

19,748

14,622

Operating lease liability, long-term

 

 

9

Total liabilities

 

53,894

 

56,499

Commitments and contingencies (Note 13)

 

  

 

  

Stockholders’ equity

 

  

 

  

Common stock, $.0001 par value, 50,000,000 shares authorized, 14,018,146 and 13,323,952 shares issued and outstanding as of June 30, 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 June 30, 2024 and December 31, 2023

 

1

 

1

Additional paid-in capital

 

97,451

 

92,703

Accumulated deficit

 

(86,158)

 

(72,355)

Total stockholders' equity

 

11,295

 

20,350

Total liabilities and stockholders’ equity

$

65,189

$

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

    

Six-Month Periods Ended

June 30, 

June 30, 

    

2024

    

2023

    

2024

    

2023

Revenue:

Product revenue, net

$

14,855

$

16,961

$

27,885

$

29,126

Other revenue

211

259

Total revenue

14,855

17,172

27,885

29,385

Operating expenses

 

 

 

 

Cost of goods sold – product revenue

 

6,541

 

7,767

 

13,357

 

14,216

Research and development

 

913

 

1,774

 

8,797

 

3,807

Selling, general and administrative

 

10,328

 

12,141

 

18,748

 

25,433

Loss on impairment of intangible assets

3,143

3,143

Total operating expenses

 

17,782

 

24,825

 

40,902

 

46,599

Loss from operations

 

(2,927)

 

(7,653)

 

(13,017)

 

(17,214)

Other expense (income)

 

 

 

 

Interest income

 

(161)

 

(79)

 

(378)

 

(201)

Interest expense

563

756

1,111

1,406

Foreign exchange transaction losses

32

33

53

80

Total other expense (income)

434

710

786

1,285

Loss before income taxes

 

(3,361)

 

(8,363)

 

(13,803)

 

(18,499)

Income tax expense

 

 

 

 

Net loss

$

(3,361)

$

(8,363)

$

(13,803)

$

(18,499)

Net loss per common share:

Basic and diluted

$

(0.17)

$

(0.46)

$

(0.69)

$

(1.03)

Weighted average number of common shares:

 

 

 

 

Basic and diluted

 

19,993,858

 

18,005,055

 

19,875,653

 

17,906,671

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)

Six-Month Period Ended June 30, 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

 

 

 

3,080

 

 

3,080

Exercise of stock options for cash

70,044

99

99

Issuance of common stock for vested restricted stock units

282,195

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

 

 

 

 

(13,803)

 

(13,803)

Balance as of June 30, 2024

14,018,146

$

1

6,000,000

$

1

$

97,451

$

(86,158)

$

11,295

Three-Month Period Ended June 30, 2024

Total

    

Common Stock

    

Common Stock A

Additional

Accumulated

Shareholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit

    

Equity

Balance as of March 31, 2024

13,932,310

$

1

 

6,000,000

$

1

$

95,746

$

(82,797)

$

12,951

Share-based compensation

 

 

 

 

1,674

 

 

1,674

Exercise of stock options for cash

14,669

 

 

 

31

 

 

31

Issuance of common stock for vested restricted stock units

71,167

 

 

 

 

 

 

Net loss

(3,361)

(3,361)

Balance as of June 30, 2024

14,018,146

$

1

 

6,000,000

$

1

$

97,451

$

(86,158)

$

11,295

Six-Month Period Ended June 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

 

 

 

1,519

 

 

1,519

Exercise of options for cash

5,000

3

3

Issuance of common stock for vested restricted stock units

363,190

Net loss

 

 

 

 

(18,499)

 

(18,499)

Balance as of June 30, 2023

12,133,890

$

1

6,000,000

$

1

$

87,004

$

(87,001)

$

5

Three-Month Period Ended June 30, 2023

Total

    

Common Stock

Common Stock A

Additional

Accumulated

Shareholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit

    

Equity 

Balance as of March 31, 2023

11,834,362

$

1

 

6,000,000

$

1

$

86,128

$

(78,638)

$

7,492

Share-based compensation

 

 

 

 

873

 

 

873

Exercise of options for cash

5,000

3

3

Issuance of common stock for vested restricted stock units

294,528

 

 

 

 

 

Net loss

 

 

 

 

 

(8,363)

 

(8,363)

Balance as of June 30, 2023

12,133,890

$

1

 

6,000,000

$

1

$

87,004

$

(87,001)

$

5

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)

    

Six-Month Periods Ended

June 30, 

    

2024

    

2023

Cash flows from operating activities

  

  

Net loss

$

(13,803)

$

(18,499)

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

 

  

 

  

Bad debt expense

 

152

 

574

Non-cash interest expense

 

 

176

Amortization of debt discount

 

126

 

296

Amortization of acquired intangible assets

 

1,629

 

2,138

Amortization of operating lease right-of-use assets

 

46

 

43

Share-based compensation

 

3,080

 

1,519

Loss on impairment of intangible assets

3,143

Changes in operating assets and liabilities:

 

 

Accounts receivable

4,605

10,897

Inventory

 

519

 

1,993

Prepaid expenses and other current assets

 

1,182

 

1,513

Accounts payable

 

(3,545)

 

(4,797)

Due to related party

 

65

 

190

Accrued expenses

 

(4,378)

 

3,941

Accrued interest

229

(77)

Income tax payable

 

(53)

 

Lease liabilities

(49)

(37)

Net cash (used in) provided by operating activities

 

(10,195)

 

3,013

 

 

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

 

99

 

3

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

 

1,484

 

Issuance of common stock under ESPP

85

Proceeds from term-loan

5,000

Proceeds from line of credit

28,000

Repayments of line of credit

(30,948)

Repayment of EWB term-loan

(10,000)

Payment of issuance costs associated with EWB term-loan modification

(91)

Net cash provided by (used in) financing activities

 

6,668

 

(13,036)

Net change in cash

 

(3,527)

 

(15,023)

Cash at the beginning of the period

 

27,439

 

32,003

Cash at the end of the period

$

23,912

$

16,980

 

  

 

  

Supplemental disclosure of cash flow information:

Cash paid for interest

$

756

$

1,011

Cash paid for income taxes

$

103

$

85

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”) 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 June 30, 2024 and December 31, 2023, the Company was a majority-owned subsidiary of Fortress Biotech, Inc. (“Fortress” or “Parent”).

Liquidity and Capital Resources

At June 30, 2024, the Company had $23.9 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. On June 26, 2024, the Company drew the remaining $5.0 million under the Credit Facility. 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 July 9, 2024, the Company entered into an amendment (the “Amendment”) to the Credit Agreement. The Amendment increased the original principal amount of the Credit Facility from $20.0 million to $25.0 million. The $5.0 million of additional principal added in the Amendment is contractually required to be drawn upon FDA approval of DFD-29, subject to the Company receiving approval on or before June 30, 2025.

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 six months ended June 30, 2024, the Company issued and sold 289,744 shares of common stock under the 2022 Shelf, generating net proceeds of $1.5 million. At June 30, 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, if the conditions for the final drawdown are satisfied. 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

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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 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 statement 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

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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 statement disclosures.

NOTE 4. INVENTORY

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

    

June 30, 

    

December 31, 

($’s in thousands)

2024

2023

Raw materials

$

3,583

$

4,640

Work-in-process

 

296

 

884

Finished goods

 

6,213

 

4,987

Inventory at cost

10,092

10,511

Inventory reserves

(405)

(305)

Total inventories

$

9,687

$

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 June 30, 2024 and December 31, 2023 are summarized as follows:

Estimated

Useful Lives

June 30, 

December 31, 

($’s in thousands)

    

(Years)

    

2024

    

2023

Intangible assets - product licenses

  

3-9

$

37,925

$

37,925

Accumulated amortization

(16,124)

(14,495)

Accumulated impairment loss

 

 

(3,143)

 

(3,143)

Total intangible assets

$

18,658

$

20,287

The Company’s amortization expense for the three-month periods ended June 30, 2024 and 2023 was $0.8 million and $1.1 million, respectively. The Company’s amortization expense for the six-month periods ended June 30, 2024 and 2023 was $1.6 million and $2.1 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

$

1,628

December 31, 2025

3,257

December 31, 2026

 

2,471

December 31, 2027

 

1,775

December 31, 2028

 

1,595

Thereafter

 

3,990

Subtotal

14,716

Asset not yet placed in service

 

3,942

Total

$

18,658

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:

    

 June 30, 2024

($’s in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

  

  

  

  

Cash and cash equivalents

$

23,912

$

$

$

23,912

Total

$

23,912

$

$

$

23,912

    

 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 June 30, 2024 or December 31, 2023. No transfers occurred between level 1, level 2, and level 3 instruments during the six-month periods ended June 30, 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 June 30, 2024 and 2023, the Company recorded related party expenses to Fortress of approximately $8,000 and $21,000, respectively. For the six-month periods ended June 30, 2024 and 2023, the Company recorded related party expenses to Fortress of approximately $18,000 and $36,000, respectively. The due to related party liability at June 30, 2024 and December 31, 2023 was $0.3 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 June 30, 2024, 50.21% 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:

    

June 30, 

    

December 31, 

($’s in thousands)

2024

2023

Accrued expenses:

 

  

 

  

Accrued coupons and rebates

$

6,596

$

9,987

Return reserve

3,214

4,077

Accrued compensation

 

2,039

 

3,374

Accrued royalties payable

1,656

2,015

Accrued legal, accounting and tax

 

448

 

185

Accrued marketing and market access

323

Accrued research and development

 

82

 

20

Accrued inventory

 

375

 

352

Accrued iPledge program

676

174

Other

 

563

 

166

Total accrued expenses

$

15,972

$

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

Six-Month Periods Ended

June 30,

June 30,

($’s in thousands)

2024

    

2023

    

2024

    

2023

Operating lease cost

$

24

$

24

$

48

$

48

Variable lease cost

 

2

1

3

2

Total lease cost

$

26

$

25

$

51

$

50

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

    

Three-Month Periods Ended

Six-Month Periods Ended

June 30,

June 30,

($’s in thousands)

    

2024

    

2023

    

2024

    

2023

Cash paid for amounts included in the measurement of lease liabilities

$

26

$

25

$

51

$

42

Weighted-average remaining lease term - operating leases

 

0.6

 

1.6

 

0.6

 

1.6

Weighted-average discount rate - operating leases

 

6.25

%

 

6.25

%

 

6.25

%

 

6.25

%

As of June 30, 2024, future minimum lease payments under lease agreements associated with the Company’s operations were as follows:

$’s in thousands

    

Remainder of 2024

$

51

2025

 

9

Total lease payments

 

60

Less: present value discount

 

(1)

Total operating lease liabilities

$

59

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NOTE 11. DEBT

The Company’s debt obligations at June 30, 2024 and December 31, 2023 were as follows:

June 30,

December 31,

($’s in thousands)

    

2024

    

2023

Principal balance

$

20,000

$

15,000

Plus: Exit fee

 

1,000

 

750

Less: Debt discount and fees

(1,252)

(1,128)

Net carry amount (Long-term)

$

19,748

$

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. On June 26, 2024, the Company drew the remaining $5.0 million under the Credit Facility. 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 June 30, 2024 was 14.9%. 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 June 30, 2024, the Company was in compliance with the financial covenants under the SWK Credit Facility.

As of June 30, 2024, the contractual maturities of the long-term debt, including the payment of the exit fee, are as follows (dollars in thousands):

Years ending December 31,

    

Term Loan

Remainder of 2024

$

2025

 

2026

 

6,000

2027

 

15,000

Total

 

21,000

Debt discount

 

(1,252)

Total, net

 

19,748

Current portion

 

Term-loan (long-term)

$

19,748

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NOTE 12: INTEREST EXPENSE AND FINANCING FEES

Interest expense and financing fees for the three and six-month periods ended June 30, 2024 and 2023 consisted of the following:

    

Three-Month Periods Ended June 30,

 

Six-Month Periods Ended June 30,

($’s in thousands)

    

2024

    

2023

    

2024

    

2023

Interest payments on term loans and LOC

$

499

$

399

$

985

$

932

Amortization/Accretion

64

272

126

297

Imputed interest on acquired intangible assets

85

177

Total interest expense and financing fees

$

563

$

756

$

1,111

$

1,406

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. At the Company’s 2024 Annual Meeting of Stockholders, held on June 25, 2024, the Company’s stockholders approved, among other matters, an amendment to the Plan to increase the number of shares of Common Stock issuable under the Plan by 3,000,000 to 10,642,857. As of June 30, 2024, 3,145,826 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 a 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 June 30, 2024, 247,789 shares were available for issuance under the 2023 ESPP.

The following table summarizes the components of share-based compensation expense in the consolidated statements of operations for the three and six-month periods ended June 30, 2024 and 2023: