Journey Medical Corp 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Changes in and Management’s Report on Internal Control over Financial Reporting. This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. Further, for as long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirement. In September 2021, an employee email account was compromised by a third-party impersonator and payments intended for a vendor, approximating $9.5 million, were fraudulently re-directed into an individual bank account controlled by this third-party impersonator. The impersonator had taken a number of steps to deceive our employees and reduce the likelihood of detection. As a result of the foregoing, we identified a material weakness due to our internal controls having not been adequately designed to prevent or timely detect unauthorized cash disbursements. In light of the above incident, our management took immediate action to remediate the material weakness, including enhancing and formalizing cash disbursement controls to prevent and timely detect unauthorized cash disbursements and significantly enhancing our 77 Table of Contents information technology infrastructure and security measures. However, given the identification of the material weakness during September 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were not effective at the reasonable assurance level. As of the date of this filing we believe this material weakness has been remediated. Limitations on the Effectiveness of Controls. Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. ​ Item 9B. Other Information None. ​ Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. ​ None. ​ 78 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders. ​ Item 11. Executive Compensation The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders. ​ Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ​ The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders. ​ Item 13. Certain Relationships and Related Transactions, and Director Independence . The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders. ​ Item 14. Principal Accounting Fees and Services ​ The information required by this Item is incorporated by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders. ​ ​ 79 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) Financial Statements. The following financial statements are filed as part of this report: ​ Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2021 and 2020 F-3 Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 F-4 Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2021 and 2020 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 F-6 Notes to Consolidated Financial Statements F-7 ​ ​ 80 Table of Contents (b) Exhibits. ​ Exhibit Number Description 3.1 ​ Third Amended and Restated Certificate of Incorporation of Journey Medical Corporation. * 3.2 ​ Amended and Restated Bylaws of Journey Medical Corporation. * 4.1 ​ Form of Common Stock Certificate, filed as Exhibit 4.1 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. 4.2 ​ Description of Securities of Journey Medical Corporation. * 10.1 ​ Journey Medical Corporation 2015 Stock Plan, filed as Exhibit 10.1 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. 10.2 ​ Executive Employment Agreement with Claude Maraoui, dated September 22, 2014, filed as Exhibit 10.2 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. 10.3 ​ Executive Employment Agreement with Ernie De Paolantonio, filed as Exhibit 10.3 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. 10.4 ​ Non-Employee Director Compensation Plan, filed as Exhibit 10.2 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. 10.5 ​ Loan and Security Agreement, entered into by and between Journey Medical Corporation and East West Bank, dated March 31, 2021, filed as Exhibit 10.5 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. 10.6 ​ Asset Purchase Agreement for Qbrexza, entered into by and between Journey Medical Corporation and Dermira, Inc., a subsidiary of Eli Lilly and Company, dated as of March 31, 2021, filed as Exhibit 10.6 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. ** 10.7 ​ License and Supply Agreement for Accutane, entered into by and between Journey Medical Corporation and Dr. Reddy’s Laboratories Ltd., dated as of July 29, 2020, filed as Exhibit 10.7 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. ** 10.8 ​ License and Supply Agreement for Targadox, entered into by and between Journey Medical Corporation and Blu Caribe Inc., dated as of March 10, 2015, filed as Exhibit 10.8 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. ** 10.9 ​ First Amendment to the License and Supply Agreement for Targadox, entered into by and between Journey Medical Corporation and Blu Caribe Inc., dated as of August 26, 2015, filed as Exhibit 10.9 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. ** 10.10 ​ Asset Purchase Agreement for Exelderm, entered into by and between Journey Medical Corporation and Sun Pharmaceutical Industries, Inc., dated as of August 31, 2018, filed as Exhibit 10.10 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. ** 10.11 ​ Amendment 1 to the Asset Purchase Agreement for Exelderm, entered into by and between Journey Medical Corporation and Sun Pharmaceutical Industries, Inc., dated as of September 5, 2018, filed as Exhibit 10.11 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. ** 10.12 ​ Asset Purchase Agreement for Ximino, entered into by and between Journey Medical Corporation and Sun Pharmaceutical Industries, Inc., dated as of July 22, 2019, filed as Exhibit 10.12 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. ** 10.13 ​ Asset Purchase Agreement for the Anti-itch Product, entered into by and between Journey Medical Corporation and Sun Pharmaceutical Industries, Inc., dated as of December 18, 2020, filed as Exhibit 10.13 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. ** 10.14 ​ License, Collaboration, and Assignment Agreement for DFD-29, entered into by and between Journey Medical Corporation and Dr. Reddy’s Laboratories Ltd., dated as of June 29, 2021, filed as Exhibit 10.14 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. ** 10.15 ​ Asset Purchase Agreement between Journey Medical Corporation and VYNE Therapeutics Inc., dated as of January 12, 2022, filed as Exhibit 10.1 to the Form 8-K filed on January 13, 2022 and incorporated herein by reference. ** 10.16 ​ Shared Services Agreement with Fortress Biotech Inc., dated as of November 12, 2021. * 10.17 ​ Fortress Promissory Note, dated as of June 6, 2015, filed as Exhibit 10.16 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. 21.1 ​ List of Subsidiaries of Journey Medical Corporation. * 24.1 ​ Power of Attorney (included on signature page). * 31.1 ​ Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 81 Table of Contents 31.2 ​ Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 32.1 ​ Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * 32.2 ​ Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * 101 ​ The following financial information from the Company’s Quarterly Report on Form 10-K for the period ended December 31, 2021, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements. 104 ​ Cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL. * Filed herewith. ** Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. # Management Compensation Arrangement. ​ ​ Item 16. Form 10-K Summary ​ The Company has elected not to provide summary information. ​ ​ ​ 82 Table of Contents INDEX TO FINANCIAL STATEMENTS ​ Report of Independent Registered Public Accounting Firm ( KPMG LLP , Short Hills, New Jersey ; PCAOB# 185 ) F-2 Consolidated Balance Sheets as of December 31, 2021 and 2020 F-3 Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 F-4 Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2021 and 2020 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 F-6 Notes to Consolidated Financial Statements F-7 ​ ​ F-1 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Journey Medical Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Journey Medical Corporation and subsidiary (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2021. Short Hills, New Jersey March 28, 2022 ​ F-2 Table of Contents JOURNEY MEDICAL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ 2021 2020 ASSETS ​ ​ Current assets ​ ​ Cash and cash equivalents $ 49,081 $ 8,246 Accounts receivable, net of reserves ​ 23,112 ​ 23,928 Inventory ​ 9,862 ​ 1,404 Prepaid expenses and other current assets ​ 2,438 ​ 1,664 Total current assets ​ 84,493 ​ 35,242 ​ ​ ​ ​ ​ ​ ​ Intangible assets, net ​ 12,552 ​ 15,029 Operating lease right-of-use asset, net ​ 89 ​ 175 Deferred tax assets ​ — ​ 1,454 Other assets ​ 150 ​ 6 Total assets ​ $ 97,284 ​ $ 51,906 ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​ Current liabilities ​ ​ Accounts payable ​ $ 22,812 ​ $ 1,839 Accounts payable, related party ​ 589 ​ 117 Accrued expenses ​ 22,733 ​ 21,498 Accrued expenses, related party ​ 52 ​ — Line of credit ​ ​ 812 ​ ​ — Installment payments – licenses, short-term (net of debt discount of $ 490 and $ 778 as of December 31, 2021 and December 31, 2020, respectively) ​ 4,510 ​ 4,522 Operating lease liabilities, short-term ​ 98 ​ 85 Total current liabilities ​ 51,606 ​ 28,061 ​ ​ ​ ​ ​ ​ ​ Income tax payable ​ 8 ​ 99 Note payable, related party ​ — ​ 5,220 Installment payments – licenses, long-term (net of debt discount of $ 373 and $ 863 as of December 31, 2021 and December 31, 2020, respectively) ​ 3,627 ​ 8,137 Operating lease liabilities, long-term ​ — ​ 97 Total liabilities ​ 55,241 ​ 41,614 Commitments and contingencies (Note 13) ​ ​ Stockholders’ equity ​ ​ Common stock, $ .0001 par value, 50,000,000 shares authorized, 11,316,344 and 3,151,333 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively ​ 1 ​ — Common stock - Class A, $ .0001 par value, 50,000,000 shares authorized, 6,000,000 shares issued and outstanding as of December 31, 2021 and December 31, 2020 ​ 1 ​ 1 Additional paid-in capital ​ 80,915 ​ 5,171 Retained earnings (Accumulated deficit) ​ ( 38,874 ) ​ 5,120 Total stockholders’ equity ​ 42,043 ​ 10,292 Total liabilities and stockholders’ equity ​ $ 97,284 ​ $ 51,906 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ F-3 Table of Contents JOURNEY MEDICAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ 2021 2020 Product revenue, net ​ $ 63,134 ​ $ 44,531 ​ ​ ​ ​ ​ ​ ​ Operating expenses ​ ​ ​ Cost of goods sold – product revenue ​ 32,084 ​ 14,594 Research and development ​ 2,739 ​ — Research and development - licenses acquired ​ 13,819 ​ — Selling, general and administrative ​ 39,833 ​ 22,086 Wire transfer fraud loss ​ 9,540 ​ — Total operating expenses ​ 98,015 ​ 36,680 (Loss) income from operations ​ ( 34,881 ) ​ 7,851 ​ ​ ​ ​ ​ ​ ​ Other expense ​ ​ Interest income ​ ( 2 ) ​ — Interest expense ​ ​ 7,034 ​ ​ 698 Change in fair value of derivative liability ​ 447 ​ — Total other expense ​ 7,479 ​ 698 Net (loss) income before income taxes ​ ( 42,360 ) ​ 7,153 ​ ​ ​ ​ ​ ​ ​ Income tax expense ​ 1,634 ​ 1,870 Net (loss) income ​ $ ( 43,994 ) ​ $ 5,283 ​ ​ ​ ​ ​ ​ ​ Net (loss) income per common share – basic ​ $ ( 4.32 ) ​ $ 0.58 Net (loss) income per common share – diluted ​ $ ( 4.32 ) ​ $ 0.49 ​ ​ ​ ​ ​ ​ ​ Weighted average shares outstanding – basic ​ 10,189,844 ​ 9,135,985 Weighted average shares outstanding – diluted ​ 10,189,844 ​ 10,836,122 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ F-4 Table of Contents JOURNEY MEDICAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Retained ​ Total ​ Common Stock Common Stock A ​ Paid-in ​ Earnings ​ Shareholders' ​ Shares Amount Shares Amount Capital (Accumulated Deficit) Equity Balance as of December 31, 2019 ​ 3,133,333 ​ $ — ​ 6,000,000 ​ $ 1 ​ $ 2,914 ​ $ ( 163 ) ​ $ 2,752 Stock-based compensation ​ — ​ — ​ — ​ — ​ 153 ​ — ​ 153 Exercise of stock options for cash ​ 18,000 ​ — ​ — ​ — ​ 13 ​ — ​ 13 Contribution of capital – extinguishment of related party payable ​ — ​ — ​ — ​ — ​ 2,091 ​ — ​ 2,091 Net income ​ — ​ — ​ — ​ — ​ — ​ 5,283 ​ 5,283 Balance as of December 31, 2020 ​ 3,151,333 ​ $ — ​ 6,000,000 ​ $ 1 ​ $ 5,171 ​ $ 5,120 ​ $ 10,292 Stock-based compensation ​ — ​ ​ — ​ — ​ ​ — ​ ​ 2,466 ​ ​ — ​ ​ 2,466 Exercise of stock options for cash ​ 10,000 ​ ​ — ​ — ​ ​ — ​ ​ 7 ​ ​ — ​ ​ 7 Issuance of common stock related to equity plans ​ 136,500 ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Issuance of common shares upon initial public offering, net of issuance costs of $ 1,921 million ​ 3,520,000 ​ ​ 1 ​ — ​ ​ — ​ ​ 30,614 ​ ​ — ​ ​ 30,615 Conversion of class A preferred stock settled note to common stock ​ 2,231,346 ​ ​ — ​ — ​ ​ — ​ ​ 21,812 ​ ​ — ​ ​ 21,812 Conversion of related party payables to common stock ​ 1,610,467 ​ ​ — ​ — ​ ​ — ​ ​ 16,105 ​ ​ — ​ ​ 16,105 Conversion of placement agent warrants to common stock ​ 111,567 ​ ​ — ​ — ​ ​ — ​ ​ 948 ​ ​ — ​ ​ 948 Conversion of contingent payment warrants to common stock ​ 545,131 ​ ​ — ​ — ​ ​ — ​ ​ 3,680 ​ ​ — ​ ​ 3,680 Contribution of capital – extinguishment of related party payable ​ — ​ ​ — ​ — ​ ​ — ​ ​ 112 ​ ​ — ​ ​ 112 Net loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 43,994 ) ​ ​ ( 43,994 ) Balance as of December 31, 2021 ​ 11,316,344 ​ $ 1 ​ 6,000,000 ​ $ 1 ​ $ 80,915 ​ $ ( 38,874 ) ​ $ 42,043 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ F-5 Table of Contents JOURNEY MEDICAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2021 2020 Cash flows from operating activities ​ ​ ​ ​ ​ ​ Net (loss) income ​ $ ( 43,994 ) ​ $ 5,283 Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ ​ ​ Depreciation expenses ​ — ​ 5 Bad debt expense ​ 48 ​ 49 Non-cash interest expense ​ 781 ​ 698 Accretion of convertible preferred shares ​ 2,845 ​ — Amortization of debt discount ​ 2,572 ​ — Amortization of license fee ​ 2,474 ​ 1,420 Amortization of operating lease right-of-use assets ​ 86 ​ 91 Stock-based compensation ​ 2,466 ​ 153 Deferred taxes provision (benefit) ​ 1,566 ​ ( 335 ) Change in fair value of derivative liability ​ 447 ​ — Research and development-licenses acquired, expense ​ 13,819 ​ — Changes in operating assets and liabilities: ​ ​ ​ ​ Accounts receivable ​ ​ 768 ​ ​ ( 5,022 ) Inventory ​ ( 8,458 ) ​ ( 547 ) Prepaid expenses and other current assets ​ ( 774 ) ​ ( 1,009 ) Other assets ​ ( 144 ) ​ — Accounts payable ​ 20,388 ​ ( 204 ) Accounts payable, related party ​ 1,325 ​ 52 Accrued expenses ​ 1,235 ​ 2,390 Accrued expenses, related party ​ 544 ​ — Income tax payable ​ ( 91 ) ​ 2,191 Lease liabilities ​ ​ ( 84 ) ​ ​ ( 83 ) Net cash (used in) provided by operating activities ​ ( 2,181 ) ​ 5,132 ​ ​ ​ ​ ​ Cash flows from investing activities ​ ​ ​ ​ Purchase of research and development licenses ​ ( 10,000 ) ​ ( 1,200 ) Net cash used in investing activities ​ ​ ( 10,000 ) ​ ​ ( 1,200 ) ​ ​ ​ ​ Cash flows from financing activities ​ ​ ​ ​ Proceeds from the exercise of options ​ 7 ​ 13 Proceeds from Fortress Note ​ ​ 9,540 ​ ​ — Payment of license note payable ​ ( 5,300 ) ​ ( 500 ) Proceeds from convertible preferred shares ​ 18,967 ​ — Payment of debt issuance costs associated with convertible preferred shares ​ ( 1,996 ) ​ — Proceeds from line of credit ​ 7,000 ​ — Repayment of line of credit ​ ​ ( 6,188 ) ​ ​ — Proceeds from issuance of common stock - initial public offering ​ 32,536 ​ — Offering costs for the issuance of common stock - initial public offering ​ ( 1,550 ) ​ — Net cash provided by (used in) financing activities ​ 53,016 ​ ( 487 ) ​ ​ ​ ​ ​ ​ ​ Net change in cash ​ 40,835 ​ 3,445 Cash at the beginning of the period ​ 8,246 ​ 4,801 Cash at the end of the period ​ $ 49,081 ​ $ 8,246 ​ ​ ​ ​ ​ Supplemental disclosure of cash flow information: ​ ​ ​ ​ ​ ​ Cash paid for income taxes ​ $ 158 ​ $ 110 ​ ​ ​ ​ ​ ​ ​ Supplemental disclosure of non-cash financing and investing activities: ​ ​ ​ ​ ​ ​ Unpaid debt offering cost ​ $ 214 ​ $ — Unpaid initial public offering cost ​ $ 371 ​ $ — Derivative warrant liability associated with convertible preferred shares ​ $ 362 ​ $ — Conversion of class A preferred stock settled note to common stock ​ $ 21,812 ​ $ — Conversion of related party payables to common stock ​ $ 16,105 ​ $ — Conversion of placement agent warrants to common stock ​ $ 948 ​ $ — Conversion of contingent payment warrants to common stock ​ $ 3,680 ​ $ — Extinguishment of related party payable relates to deferred tax assets ​ $ 43 ​ $ 2,091 Unpaid intangible assets ​ $ — ​ $ 7,872 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ ​ ​ F-6 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements ​ NOTE 1. ORGANIZATION AND PLAN OF BUSINESS OPERATIONS Journey Medical Corporation (collectively “Journey” or the “Company”) was formed on July 18, 2014. The Company is a commercial-stage pharmaceutical company that focuses on the development and commercialization of pharmaceutical products for the treatment of dermatological conditions. The Company’s product portfolio at December31, 2021 includes five branded and three authorized generic prescription drugs for dermatological conditions that are marketed in the U.S. The Company acquires rights to future products by licensing or otherwise acquiring an ownership interest in, funding the research and development of, and eventually commercializing, the products through their exclusive field sales organization. As of December 31, 2021 and 2020, the Company is a majority-owned subsidiary of Fortress Biotech, Inc. (“Fortress” or “Parent”). Liquidity and Capital Resources At December 31, 2021, the Company had $ 49.1 million in cash and cash equivalents as compared to $ 8.2 million at December 31, 2020. On November 16, 2021, the Company completed an initial public offering (collectively the “Journey IPO” or “IPO”) of its common stock, which resulted in net proceeds of approximately $ 30.6 million, after deducting underwriting discounts and other offering costs. Prior the Company’s IPO, the Company’s operations were primarily financed through a working capital note from Fortress, referred to herein as the “Fortress Note,” cash generated by operations and cash raised in the Company’s private offering of 8 % Cumulative Convertible Class A Preferred Stock (“Class A Preferred Stock”). In connection with the closing of the Company’s IPO on November 16, 2021, the Company issued 2,231,346 shares of common stock resulting from the conversion of all of the Class A Preferred Stock. In addition, the Fortress Note was converted into 1,610,467 shares of Journey common stock at the Journey IPO price of $ 10.00 per share. The Company also has access to a borrowing facility, which includes a working capital line of credit and a term loan. For the next twelve months from the issuance of these audited consolidated financial statements, the Company will be able to fund its operations through a combination of operating activities and the East West Bank borrowing facility. In January 2022 the Company borrowed $ 15 million against the term loan to facilitate the VYNE asset purchase. See Note 18, Subsequent Events, for further details. The Company regularly evaluates market conditions, its liquidity profile, and various financing alternatives for opportunities to enhance its capital structure. The Company may seek to raise capital through debt or equity financings to expand its product portfolio. If such funding is not available or not available on terms acceptable to the Company, the Company’s current plans for expansion of its product portfolio will be curtailed. In addition to the foregoing, the Company experienced minimal impact on revenue levels and its liquidity due to the worldwide spread of COVID-19. ​ NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. F-7 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements 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 consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended, the Company upon completion of its public offering 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 product returns, coupons, rebates, chargebacks, discounts, allowances and distribution fees paid to certain wholesalers, inventory realization, useful lives of amortizable intangible assets, fair value of stock options and warrants, stock-based compensation, accrued expenses, provisions for income taxes and contingencies. 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. Cash and Cash Equivalents The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at December 31, 2021 and 2020 consisted entirely of cash and cash equivalents in institutions within the United States. Balances at certain institutions have exceeded Federal Deposit Insurance Corporation insured limits. Accounts Receivable, Net Accounts receivable consists of amounts due to the Company for product sales Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due and the customer’s current ability to pay its obligation to the Company. The Company writes off accounts receivable when they become uncollectible. The allowance for doubtful accounts was $ 0.1 million at both December 31, 2021 and 2020. Inventories Inventories comprise raw materials and finished goods, which are valued at the lower of cost and net realizable value, on a first-in, first-out basis. The Company evaluates the carrying value of inventories on a regular basis, taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand. The acquired Qbrexza finished goods inventory initially incuded a fair value step-up of $ 6.5 million, which was fully expensed within cost of sales for the year ended December 31, 2021, as the inventory was sold to customers. F-8 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements Property and Equipment Computer equipment, furniture and fixtures and machinery and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of the estimated useful lives or the term of the respective leases. Intangible Assets Intangible assets are reported at cost, less accumulated amortization and impairments. Intangible assets with finite lives are amortized over their estimated useful lives, which represents the estimated life of the product. Amortization is calculated primarily using the straight-line method. During the ordinary course of business, the Company has entered into certain licenses and asset purchase agreements. Potential milestone payments for achieving sales targets or regulatory development milestones are recorded when it is probable of achievement. Upon a milestone payment being achieved, the milestone payment will be capitalized and amortized over the remaining useful life for approved products and expensed for milestones prior to FDA approval. Royalty payments are recorded as cost of goods sold as sales are recognized. Impairment of Long-Lived Assets The Company reviews long-lived assets, including property and equipment, for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the long-lived asset in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. As of December 31, 2021 and 2020, there were no indicators of impairment. Leases Arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. Variable lease expenses are recorded when incurred. In calculating the right-of-use asset and lease liability, the Company elects to combine lease and non-lease components. Fair Value Measurement The Company follows accounting guidance on fair value measurements for financial assets and liabilities measured at fair value on a recurring basis. Under the accounting guidance, 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. F-9 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements 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, as well as instruments for which the determination of fair value requires significant judgment or estimation. 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. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. 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. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash. Periodically, the Company may maintain deposits in financial institutions in excess of government insured limits. Management believes that the Company is not exposed to significant credit risk as the Company’s deposits are held at financial institutions that management believes to be of high credit quality. The Company has not experienced any losses on these deposits. The Company’s accounts receivable primarily represent amounts due from drug wholesalers and specialty pharmacies in the United States. The Company performs periodic credit evaluations of customers and does not require collateral. An allowance for doubtful accounts is maintained for potential credit losses based on the aging of accounts receivable, historical bad debts experience, and the customer’s current ability to pay its obligations to the Company. Accounts receivables balances are written off against the allowance when it is probable that the receivable will not be collected. See Note 15 for significant customers. Revenue Recognition The Company records revenue in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company’s revenues primarily result from contracts with customers, which are generally short-term and have a single performance obligation – the delivery of product. The Company’s performance obligation to deliver products is satisfied at the point in time that the goods are received by the customer, which is when the customer obtains title to and has the risks and rewards of ownership of the products. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Many of the Company’s products sold are subject to a variety of deductions. Revenues are recorded net of provisions for variable consideration, including chargebacks, coupons, discounts, other sales allowances, governmental rebate programs, price adjustments and returns. Accruals for these provisions are presented in the consolidated financial statements as reductions in determining net sales and as a contra asset in accounts receivable, net (if settled via credit) and other current liabilities (if paid in cash). Amounts recorded for revenue deductions can result from a complex series of judgements about future events and uncertainties and can rely heavily on F-10 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements estimates and assumptions. The following section briefly describes the nature of the Company’s provisions for variable consideration and how such provisions are estimated. Gross-to-Net Sales Accruals — The Company records gross-to-net sales accruals for government rebates, chargebacks, wholesaler distributor service fees, other rebates and administrative fees, sales returns and allowances and sales discounts. Discounts and Other Sales Allowances — The Company provides prompt pay discounts and allowances to its wholesale customers. The Company provides for prompt pay discounts if payment is received within the payment term days which generally range from 30 to 98 days . These discounts and allowances are recorded at the time of sale based on the customer’s contracted rate and recorded as a reduction of revenue and a reduction to accounts receivables. Wholesaler fees — The Company pays administrative and other fees to certain wholesale customers consistent with pharmaceutical industry practices for sales order management, data, and distribution services. The Company records a provision for these fees based on contracted rates. Assumptions used to establish the provision include level of wholesaler inventories, contract sales volumes and average contract pricing. The Company regularly reviews the information related to these estimates and adjust the provision accordingly. Product Returns — Consistent with industry practice, the Company offers customers a right to return any unused product. The customer’s right of return commences six months prior to product expiration date and ends one year after product expiration date. The Company estimates the amount of its product sales that may be returned by its customers and accrues this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return reserves using available industry data and its own sales information, including its visibility and estimates into the inventory remaining in the distribution channel. The Company bases its product returns allowance on estimated on-hand inventories in the sales channels, measured end-customer demand, actual returns history and other factors, such as the trend experience for lots where product is still being returned, as applicable. If the historical data the Company uses to calculate these estimates does not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. Under this methodology, the Company tracks actual returns by individual production lots. Returns on closed lots, that is, lots no longer eligible for return credits, are analyzed to determine historical returns experience. Returns on open lots, that is, lots still eligible for return credits, are monitored and compared with historical return trend rates. Any changes from the historical trend rates are considered in determining the current sales return allowance. Government Chargebacks — Chargebacks for fees and discounts to indirect qualified government healthcare providers represent the estimated obligations resulting from contractual commitments to sell products to qualified U.S. Department of Veterans Affairs hospitals and 340B entities at prices lower than the list prices charged to customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the statutory selling price to the qualified government entity. These allowances are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivables, net. The chargeback amount from the Company’s direct customer is generally determined at the time of their resale to the qualified government healthcare provider by customers, and the Company generally issues credits for such amounts within a few weeks of its direct customers’ resale to the qualified government healthcare provider, and the Company generally issues credits for such amounts within a few weeks of its direct customer’s notification to the Company of the resale. The allowance for chargebacks is based on expected sell-through levels by the Company’s direct customers to indirect customers, as well as estimated wholesaler inventory levels. Government Rebates — Government rebate accruals are based on estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. U.S. Medicaid rebate accruals are generally based on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. These accruals are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue. For Medicaid programs, the Company estimates the portion F-11 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements of sales attributed to Medicaid patients and record a liability for the rebates to be paid to the respective state Medicaid programs. The Company’s liability for these rebates consists of invoices received for: i) claims from prior quarters that have not been paid or for which an invoice has not yet been received ii) estimates of claims for the current quarter and iii) estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period. Wholesaler Chargeback Accruals — The Company sells a portion of its products indirectly through wholesaler distributors to contracted customers commonly referred to as “indirect customers.” The Company enters into specific agreements with these indirect customers to establish pricing for its products, and in-turn, the indirect customers independently select a wholesaler from which to purchase the products. Because the price paid by the indirect customers is lower than the price paid by the wholesaler (wholesale acquisition cost, or “WAC”), the Company provides a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and WAC. The Company’s provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels as well as historical chargeback rates. The Company continually monitors its reserve for chargebacks and adjusts the reserve accordingly when expected chargebacks differ from actual experience. Coupons — The Company offers coupons on products for qualified commercially-insured parties with prescription drug co-payments. Such product sales flow through both traditional wholesaler and specialty pharmacy channels. Approximately 85 % of the Company’s product revenues are sold through the specialty pharmacy channel, which has a shorter cycle from the Company’s sales date to the fulfilment of the prescription by the specialty pharmacy customer, resulting in less inventory in this channel. Coupons are processed and redeemed at the time of prescription fulfilment by the pharmacy, and the Company is charged for the coupons redeemed monthly. The majority of coupon liability at the end of the period represents coupons that have been redeemed and for which the Company has been billed, and an accrual for expected redemptions for product in the distribution channel. This element of the liability requires the Company to estimate the distribution channel inventory at period end, the expected redemption rates, and the cost per coupon claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. The estimate of product remaining in the distribution channel is comprised of actual inventory at the wholesaler as well as an estimate of inventory at the specialty pharmacies, which the Company estimates based upon historical ordering patterns, which consist of reordering approximately every two weeks. The estimated redemption rate is based on historical redemptions as a percentage of units sold. The cost per coupon is based on the coupon rate. Managed Care Rebates — The Company offers managed care rebates to certain providers. The Company calculates rebate payment amounts due under this program based on actual qualifying products and applies a contractual discount rate. The accrual is based on an estimate of claims that the Company expects to receive and inventory in the distribution channel. The accrual is recognized at the time of sale, resulting in a reduction of product revenue. Research and Development Costs Research and development costs are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Upfront and milestone payments due to third parties that perform research and development services on the Company’s behalf will be expensed as services are rendered or when the milestone is achieved. Research and development costs primarily consist of personnel related expenses and, payments made to third parties for license and milestone costs related to in-licensed products and technology, payments made to third party contract research organizations. In accordance with Accounting Standards Codification (“ASC”) 730-10-25-1, Research and Development , costs incurred in obtaining technology licenses are charged to research and development expense if the technology licensed has not reached commercial feasibility and has no alternative future use. Such licenses purchased by the Company require substantial completion of research and development, regulatory and marketing approval efforts in order to reach commercial feasibility and have no alternative future use. Accordingly, the F-12 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements total purchase price for the licenses acquired during the period was reflected as research and development - licenses acquired on the Consolidated Statements of Operations for the years ended December 31, 2021. Stock-based Compensation The Company has a stock-based compensation plan in place and records the associated stock-based compensation expense over the requisite service period. The stock-based compensation plan and related compensation expense are discussed more fully in Note 14 to the Company’s consolidated financial statements. Compensation expense for service-based stock options is charged against operations on a straight-line basis between the grant date for the option and the vesting period, which is generally four years. The Company estimates the fair value of all service-based stock option awards as of the grant date by applying the Black-Scholes option pricing valuation model. The application of this valuation model involves assumptions that are highly subjective, judgmental, and sensitive in the determination of compensation cost. Compensation cost is adjusted for actual forfeitures. Options granted have a term of 10 years from the grant date. Restricted stock units (“RSU’s”) that are service based are recorded as deferred compensation and amortized into compensation expense on a straight-line basis over the vesting period, which ranges from three to four years in duration. Compensation cost for service based RSU’s is based on the grant date fair value of the award, which is the closing market price of the Company’s common stock on the grant date multiplied by the number of shares awarded. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, which requires the use of a number of assumptions, including the fair value of the common stock, expected volatility, risk-free interest rate, expected dividends and the expected term of the option. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Forfeitures are recorded as they occur. All stock-based compensation costs are recorded in selling, general and administrative (“SG&A”) expense in the Company’s consolidated statements of operations. Prior to the Company’s IPO, which closed on November 16, 2021, the fair value of the Company’s common stock underlying stock options was an input to the Black-Scholes option pricing model. The Company engaged an independent third-party valuation firm to provide an estimate of the fair value of its common stock annually, utilizing input from management. The fair value of the Company’s common stock was determined considering a number of objective and subjective factors, including valuations of guideline public companies, transactions of guideline public companies, discounts for lack of control transactions, lack of liquidity of the Company’s common stock and the general and industry-specific economic outlook. Contingencies The Company records accruals for contingencies and legal proceedings expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated. If a loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Income Taxes As of December 31, 2021, after the IPO the Company was 58.39 % owned by Fortress Biotech, Inc. (“Fortress”) and prior to the IPO was filing consolidated federal tax return and consolidated or combined state tax returns in multiple jurisdictions with Fortress. As the Company completed its initial public offering on November 12, 2021, the Company deconsolidated from Fortress consolidated group for federal income tax purpose. The Company’s financial statements recognize the current and deferred income tax consequences that result from the Company’s activities during the current and preceding periods pursuant to the provisions of Accounting Standards Codification Topic 740, Income Taxes (ASC 740), as if the Company were a separate taxpayer rather than a member of the Fortress F-13 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements consolidated income tax return group. Fortress has agreed that JMC does not have to make payments to Fortress for JMC’s use of net operation losses (“NOLs”) of Fortress (including other Fortress group members) accordingly, for any NOLs, the tax benefit the Company realized was recorded as a capital contribution. 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 cumulative tax and book income/loss incurred since inception, and the other positive and negative evidence, and has concluded that it is not more likely than not that the Company will realize the benefits of the net deferred tax assets as of December 31, 2021 and therefore a full valuation allowance on all of its deferred tax assets is required. The Company did not record any valuation allowance as of December 31, 2020. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50 % likely of being realized. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit. As of December 31, 2021, the Company had no unrecognized tax benefits and does not anticipate any significant change to the unrecognized tax benefit balance. The Company would classify interest and penalties related to uncertain tax positions as income tax expense, if applicable. There was no interest expense or penalties related to unrecognized tax benefits recorded through December 31, 2021. Net Loss (Income) Per Share Basic net (loss) income per share of common stock is calculated by dividing net (loss) income by the weighted-average number of shares of common stock outstanding during the reporting period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the reporting period after giving effect to dilutive potential common shares for stock options and restricted stock units, determined using the treasury stock method. See Note 17 below. Comprehensive Income The Company has no components of other comprehensive income, and therefore, comprehensive income equals net income. Recently Adopted Accounting Pronouncements In December 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. On January 1, 2021, the Company’s adoption of this guidance did not have a material impact on its financial statements. Recently Issued Accounting Pronouncements In August 2020, the FASB issued ASU 2020-06 “ Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its financial statements. F-14 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements ​ NOTE 3. INVENTORY The Company’s inventory consists of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ($in thousands) 2021 2020 ​ ​ ​ ​ ​ ​ ​ Raw materials ​ $ 5,572 ​ $ — Work-in-process ​ — ​ — Finished goods ​ 4,290 ​ 1,404 Total inventories ​ $ 9,862 ​ $ 1,404 ​ The acquired Qbrexza inventory includes a fair value step-up of $ 6.5 million, which was fully expensed within cost of sales during the year ended December 31, 2021, as the inventory was sold to customers. For additional information on the Company’s asset acquisition of Qbrexza, please refer to Note 4. ​ NOTE 4. INTANGIBLES On March 31, 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 agreement, the Company acquired the rights to Qbrexza® (glycoprronium), a prescription cloth towelette to treat primary axillary hyperhidrosis in patients nine years of age or older. Upon HSR acceptance, which was received on May 13, 2021, the Company paid the upfront fee of $ 12.5 million to Dermira. In addition, Dermira is eligible to receive up to $ 144 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 for a period of eight years royalties are approximately 12.0 % to 19.0 %. Royalty amounts are subject to 50 % diminution in the event of loss of exclusivity due to the introduction of an authorized generic. Upon closing of the Qbrexza® purchase, the Company became substituted for Dermira as the plaintiff in U.S. patent litigation commenced by Dermira on October 21, 2020 in the U.S. District Court of Delaware (the “Patent Litigation”) against Perrigo Pharma International DAC (“Perrigo”) alleging infringement of certain patents covering Qbrexza® (the “Qbrexza® Patents”), which are included among the proprietary rights to Qbrexza®. The Patent Litigation was initiated following the submission by Perrigo, in accordance with the procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”), of an Abbreviated New Drug Application (“ANDA”). The ANDA seeks approval to market a generic version of Qbrexza® prior to the expiration of the Qbrexza® Patents and alleges that the Qbrexza® Patents are invalid. Perrigo is subject to a 30-month stay preventing it from selling a generic version, but that stay is set to expire on March 9, 2023. Trial in the Patent Litigation is scheduled for September 19, 2022. The Company cannot make any predictions about the final outcome of this matter or the timing thereof. The purchase price of $ 12.5 million included the asset, Qbrexza, as well as finished goods and raw material inventory. The Company also has the obligation to accept any product returns related to sales made by Dermira. The Company allocated the upfront payment to inventory since the fair value of the inventory and Qbrexza rights exceeded the purchase price. The future contingent milestone payments, if achieved, will be recorded to intangible asset and amortized over the seven-year life of the asset commencing on the closing date. In December 18, 2020, the Company entered an Asset Purchase Agreement with a third party (the “Anti-itch Product Agreement”) for a topical product that is indicated to treat scabies and skin itch conditions (“Anti-itch Product”). Pursuant to the terms and conditions of the Anti-itch Product Agreement, the Company agreed to pay $ 4.0 million, comprised of a non-refundable deposit of $ 0.2 million upon the execution of the term sheet, a cash upfront payment of $ 1.8 million on January 1, 2021 and additional future payments of $ 0.5 million on April 1, 2021, $ 0.5 million on July 1, 2021, and $ 1.0 million on January 1, 2022. There are no subsequent milestone payments or royalties beyond the aforementioned payments. Commercial launch of this product is expected in the first half of 2022. F-15 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements On July 29, 2020, the Company entered into a license and supply agreement for Accutane® (“Accutane Agreement”) with DRL. Pursuant to the Accutane Agreement, the Company agreed to pay $ 5.0 million, comprised of an upfront payment of $ 1.0 million paid upon execution, with additional milestone payments totaling $ 4.0 million. Three additional milestone payments totaling $ 17.0 million are contingent upon the achievement of certain net sales milestones. Royalties in the low-double digits based on net sales, subject to specified reductions are also due. The term of the agreement is ten years and renewable upon mutual agreement. The Company is required to pay royalties during the term of the agreement. The agreement contains customary representations, warranties, and indemnities. Each party may also terminate the agreement for material breach by the other party or for certain bankruptcy or insolvency related events and the Company may terminate for upon 180 days written notice to the other party. The table below provides a summary of the Company’s intangible assets at December 31, 2021 and 2020, respectively: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Estimated Useful December 31, ​ December 31, ($in thousands) Lives (Years) 2021 2020 Ceracade® ​ 3 ​ $ 300 ​ $ 300 Luxamend® ​ 3 ​ 50 ​ 50 Targadox® ​ 3 ​ 1,250 ​ 1,250 Ximino® ​ 7 ​ 7,134 ​ 7,134 Exelderm® ​ 3 ​ 1,600 ​ 1,600 Accutane ​ 5 ​ 4,727 ​ 4,727 Anti-itch product (1) ​ 3 ​ 3,942 ​ 3,945 Total intangible assets ​ ​ ​ 19,003 ​ 19,006 Accumulated amortization ​ ​ ​ ( 6,451 ) ​ ( 3,977 ) Net intangible assets ​ ​ ​ $ 12,552 ​ $ 15,029 (1) As of December 31, 2021, this asset has not yet been placed in service, therefore no amortization expense was recognized on this asset for the year ended December 31, 2021. Commercial launch of this product is expected in the first half of 2022. The Company’s amortization expense for the year ended December 31, 2021 and 2020 was approximately $ 2.5 million and $ 1.4 million, respectively. Amortization expense is recorded as a component of cost of goods sold in the Company’s consolidated statements of operations. The table below provides a summary for the year ended December 31, 2021 and 2020, of the Company’s recognized expense related to its product licenses, which was recorded in costs of goods sold on the consolidated statement of operations: ​ ​ ​ ​ ​ ​ Intangible ($’s in thousands) Assets, Net Balance at January 1, 2020 ​ $ 7,377 Isotretinion agreement (1) ​ 4,727 Anti-itch product license acquisition (2) ​ 3,945 Exelderm milestone ​ ​ 400 Amortization expense ​ ​ ( 1,420 ) Balance at December 31, 2020 ​ $ 15,029 Anti-itch product license acquisition adjustment ​ ​ ( 3 ) Amortization expense ​ ​ ( 2,474 ) Unvested balance at December 31, 2021 ​ $ 12,552 (1) Includes an upfront payment of $ 1.0 million and one milestone payment of $ 0.5 million in 2020 as well as four payments totaling $ 3.5 million due at various points between 2021 through 2023. Such payments were discounted by $ 0.3 million due to the long-term nature of such payments. As of December 31, 2020, this asset has not yet been placed in service, therefore no amortization F-16 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements expense was recognized on this asset for the year ended December 31, 2020. The Company placed the assets in service in the first quarter of 2021. (2) Includes an upfront payment of $ 0.2 million, three payments totaling $ 2.8 million due in 2021 and $ 1.0 million due in 2022. Such payments were discounted by $ 0.1 million due to the long-term nature of such payments. As of December 31,2021 and 2020, this asset has not yet been placed in service, therefore no amortization expense was recognized on this asset for the year ended December 31, 2021 and 2020 respectively. Future amortization of the Company’s intangible assets is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ($’s in thousands) Ximino® Accutane® Amortization December 31, 2022 ​ $ 1,019 ​ $ 946 ​ $ 1,965 December 31, 2023 ​ 1,019 ​ 945 ​ 1,964 December 31, 2024 ​ 1,019 ​ 946 ​ 1,965 December 31, 2025 ​ 1,019 ​ 945 ​ 1,964 Thereafter ​ 595 ​ 157 ​ 752 Subtotal ​ $ 4,671 ​ $ 3,939 ​ $ 8,610 Asset not yet placed in service ​ — ​ — ​ 3,942 Total ​ $ 4,671 ​ $ 3,939 ​ $ 12,552 ​ ​ NOTE 5. LICENSES ACQUIRED On June 29, 2021, the Company entered a license, collaboration, and assignment agreement (the “DFD-29 Agreement”) to obtain the 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”). Pursuant to the terms and conditions of the DFD-29 Agreement, the Company agreed to pay $ 10.0 million, of which $ 2.0 million (the “First Installment”) was paid upon execution and $ 8.0 million (the “Second Installment”) is payable 90 days following June 29, 2021. Additional contingent regulatory and commercial milestone payments totaling up to $ 163.0 million are also payable. Royalties ranging from approximately 10 % to approximately 15 % are payable on net sales of the DFD-29 product. In accordance with ASC 730-10-25-1, Research and Development , costs incurred in obtaining technology licenses are charged to research and development expense if the technology licensed has not reached technological feasibility and has no alternative future use. The licenses purchased by the Company require substantial completion of research and development, and regulatory and marketing approval efforts in order to reach technological feasibility. As such, the $ 10.0 million for the year ended December 31, 2021 for the purchase price of licenses acquired were classified as research and development-licenses acquired in the consolidated statement of operations. Additionally, the Company is required to fund and oversee the Phase 3 clinical trials approximating $ 24.0 million, based upon the current development plan and budget. Either party may terminate the agreement prior to NDA approval in the event of bankruptcy or a material breach that remains uncured beyond the applicable cure period. Additionally, DRL may terminate the agreement if Company: i.) ceases development of the product for 6 consecutive months (except if such cessation is caused by DRL, applicable laws, or action/inaction of any third party beyond Company's control); ii.) files a patent challenge on any claim for a product patent or DRL background patent; or iii.) fails to initiate development of the product in the European Union (“EU”) (such termination solely relates to the rights granted in EU) within 24 months after product regulatory approval or cause first commercial sale in at least one country in the EU within 72 months after product regulatory approval. In connection with the closing of the Company’s IPO on November 16, 2021, the Company issued 545,131 unregistered shares of Journey Medical Inc. common stock to DRL calculated using a 15-day volume weighted average price (“VWAP”) of $ 9.1721 per share. The restrictions on the unregistered shares of common stock are governed by the terms set forth in the DFD-29 Agreement and applicable securities laws. See “Contingent Payment Derivative” in Note 6 for further details. F-17 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements ​ NOTE 6: FAIR VALUE MEASUREMENTS Placement Agent Warrants Pursuant to the terms of the Company’s Class A Preferred Stock offering (see Note 14), the Company will issue upon a Qualified Financing (an external financing of $ 25.0 million or greater) to the placement agent (“the Placement Agent Warrants”) to purchase 5 % of the shares of common stock into which the Class A Preferred Stock converts. This condition was met by the Company’s IPO. The Placement Agent Warrants have a term of five years and are exercisable at a 15 % discount to the Qualified Financing price. The Company valued the Placement Agent Warrants using a Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Journey’s warrant liability that are categorized within Level 3 of the fair value hierarchy before the conversion was as follows: ​ ​ ​ ​ ​ Risk-free interest rate 0.98 % Expected dividend yield — ​ Expected term in years 1.0 ​ Expected volatility 50 % ​ In connection with the Company’s IPO, the Company issued 111,567 shares of common stock in related to the conversion of all of the placement agent warrants. ​ Contingent Payment Derivative In connection with the DFD-29 Agreement, the Company agreed to pay DRL additional consideration upon either an IPO of the Company’s common stock or an acquisition of the Company, the agreement further specifies that only one payment can be made. The contingent payment associated with an IPO of the Company’s common stock, is deemed to be achieved if upon the completion of an IPO the Company’s market capitalization on a fully diluted basis is $ 150 million or greater at the close of business on the date of such IPO. The payment due for the achievement of the IPO criteria is a follows: (a) issue to DRL a number of shares of the Company’s common stock equal to $ 5.0 million as calculated using a fifteen ( 15 ) day volume weighted average price (“VWAP”) of the Company’s closing price, measured fifteen ( 15 ) days following the IPO; or (b) make a cash payment to DRL equal to $ 5.0 million. As a result of the Company’s IPO on November 16, 2021, calculated using a 15-day VWAP of $ 9.1721 per share, the Company issued 545,131 unregistered shares of Journey common stock to DRL. The restrictions on the unregistered shares of common stock are governed by the terms set forth in the DFD-29 Agreement and applicable securities laws. The Company valued the contingent payment discussed above utilizing a Probability Weighted Expected Return Method (PWERM) model using a discount rate of 30 % and expected term of 3 – 5 months. ​ Financial assets and liabilities measured at fair value on a recurring basis are summarized below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ($in thousands) Level 1 Level 2 Level 3 Total Assets: ​ ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 49,081 ​ $ — ​ $ — ​ $ 49,081 Total ​ $ 49,081 ​ $ — ​ $ — ​ $ 49,081 ​ F-18 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2020 ($in thousands) Level 1 Level 2 Level 3 Total Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 8,246 ​ $ — ​ $ — ​ $ 8,246 Total ​ $ 8,246 ​ $ — ​ $ — ​ $ 8,246 ​ The table below provides a roll-forward of the changes in fair value of Level 3 financial instruments as of December 31, 2021: ​ ​ ​ ​ ​ ​ Warrant ($in thousands) liabilities Fair value at December 31, 2020 ​ $ — Additions: ​ Contingent payment warrant ​ 3,819 Placement agent warrant ​ 362 Change in fair value of warrant liabilities: ​ ​ ​ Contingent payment warrant ​ ​ ( 139 ) Placement agent warrant ​ ​ 586 Settlement of warrant liabilities in connection with IPO: ​ ​ Conversion of contingent payment warrants to common shares ​ ​ ( 3,680 ) Conversion of placement agent warrants to common shares ​ ​ ( 948 ) Fair value at December 31, 2021 ​ $ — ​ During the year ended December 31, 2021 , no transfers occurred between Level 1, Level 2, and Level 3 instruments. ​ NOTE 7. RELATED PARTY AGREEMENTS Shared Services Agreement with Fortress On November 12, 2021, the Company and Fortress entered into an arrangement to share the cost of certain legal, finance, regulatory, and research and development employees. Fortress’s Executive Chairman and Chief Executive Officer is the Executive Chairman of the Company. Under the terms of the 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 their IPO. To date, Fortress employees have provided services to the Company totaling approximately $ 0.5 million. Upon completion of the Company’s IPO, the amount converted into 52,438 shares of Journey common stock at the IPO price of $ 10.00 per share. In the normal course of business, the Company reimburses Fortress for various payroll related costs and selling, general and administrative costs. As of December 31, 2021 and 2020, the Company had a balance of approximately $ 0.6 million and $ 0.1 million, respectively, recorded as accounts payable and accrued expenses – related party on the consolidated balance sheets. Fortress Note Since the Company’s inception in October 2014, Fortress has funded the Company’s operations through the Fortress Note. The Fortress Note matures on or before December 31, 2024. At December 31, 2021 and 2020, the Company’s outstanding balance under the Fortress Note was zero and $ 5.2 million, respectively. The Fortress Note is recorded on the consolidated balance sheets as Note payable, related party and is an interest-free note. On September 30, 2021, Fortress increased the Journey promissory note by $ 9.5 million in response to a cyber incident that occurred at Journey and resulted in $ 9.5 million of fraudulent payments. The $ 9.5 million contribution was approved by the boards of directors of both the Fortress and Journey and will ensure that Journey’s accounts payable function will continue to operate smoothly. This F-19 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements contribution, along with $ 5.2 million already outstanding under the Fortress Note converted into 1,476,044 shares of the Company’s common stock upon the closing of the Company’s IPO at the IPO price of $ 10.00 per share. Fortress Income Tax As of December 31, 2021, after the IPO the Company is 58.39 % owned by Fortress prior to the IPO and has been filing consolidated federal tax returns and consolidated or combined state tax returns in multiple jurisdictions with Fortress. In connection with the filing of the consolidated tax return, the Company’s tax liabilities for the year ended December 31, 2020 of $ 1.9 million was satisfied utilizing NOLs generated by Fortress. Extinguishment of these liabilities to Fortress was recorded as a contribution of capital. Additionally, see Note 16 below for a discussion of income taxes. ​ NOTE 8. ACCRUED EXPENSES Accrued expenses consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ($'s in thousands) 2021 2020 Accrued expenses: ​ ​ Accrued emplyee compensation $ 2,702 $ 2,041 Research and development - license fees ​ 870 ​ — Accrued royalties payable ​ 3,833 ​ 2,682 Accured coupons and rebates ​ 10,603 ​ 12,869 Return reserve ​ 3,240 ​ 2,580 Other ​ 1,485 ​ 1,326 Total accrued expenses ​ $ 22,733 ​ $ 21,498 ​ ​ F-20 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements NOTE 9. INSTALLMENT PAYMENTS — LICENSES The following tables show the details of the Company’s installment payments – licenses for the periods presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ​ ​ ​ ​ ​ Anti-Itch ​ ​ ($in thousands) Ximino 1 Accutane 2 Product 3 Total Installment payments - licenses, short-term ​ $ 2,000 ​ $ 2,000 ​ $ 1,000 ​ $ 5,000 Less: imputed interest ​ ( 425 ) ​ ( 65 ) ​ — ​ ( 490 ) Sub-total installment payments - licenses, short-term ​ $ 1,575 ​ $ 1,935 ​ $ 1,000 ​ $ 4,510 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Installment payments - licenses, long-term ​ $ 3,000 ​ $ 1,000 ​ $ — ​ $ 4,000 Less: imputed interest ​ ​ ( 350 ) ​ ​ ( 23 ) ​ ​ — ​ ​ ( 373 ) Sub-total installment payments - licenses, long-term ​ $ 2,650 ​ $ 977 ​ $ — ​ $ 3,627 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total installment payments - licenses ​ $ 4,225 ​ $ 2,912 ​ $ 1,000 ​ $ 8,137 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2020 ​ ​ ​ ​ ​ Anti-Itch ​ ​ ($in thousands) ​ Ximino 1 ​ Accutane 2 ​ Product 3 ​ Total Installment payments - licenses, short-term ​ $ 2,000 ​ $ 500 ​ $ 2,800 ​ $ 5,300 Less: imputed interest ​ ( 602 ) ​ ( 122 ) ​ ( 54 ) ​ ( 778 ) Sub-total installment payments - licenses, short-term ​ $ 1,398 ​ $ 378 ​ $ 2,746 ​ $ 4,522 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Installment payments - licenses, long-term ​ $ 5,000 ​ $ 3,000 ​ $ 1,000 ​ $ 9,000 Less: imputed interest ​ ( 775 ) ​ ( 88 ) ​ — ​ ( 863 ) Sub-total installment payments - licenses, long-term ​ $ 4,225 ​ $ 2,912 ​ $ 1,000 ​ $ 8,137 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total installment payments - licenses ​ $ 5,623 ​ $ 3,290 ​ $ 3,746 ​ $ 12,659 Note 1: Imputed interest rate of 11.96 % and maturity date of July 22, 2024. Note 2: Imputed interest rate of 4.03 % and maturity date of July 29, 2023. Note 3: Imputed interest rate of 4.25 % and maturity date of January 1, 2022. ​ NOTE 10. OPERATING LEASE OBLIGATIONS The Company leases 3,681 square feet of office space in Scottsdale, Arizona. In August 2020, the Company amended its office lease and extended the lease term for an additional 25 months at an annual rate of approximately $ 0.1 million. The term of the amended lease commenced on December 1, 2020 and will expire on December 31, 2022. The Company recorded rent expense as follows (dollars in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31, ​ 2021 ​ 2020 Operating lease cost ​ $ 89 ​ $ 94 Variable lease cost ​ ​ 4 ​ ​ 6 Total lease cost ​ $ 93 ​ $ 100 ​ F-21 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements The following table summarizes quantitative information about the Company’s operating leases (dollars in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31, ​ 2021 2020 Operating cash flows from operating leases ​ $ 91 ​ $ 86 ​ Right-of-use assets exchanged for new operating lease liabilities ​ ​ — ​ ​ 182 ​ Weighted-average remaining lease term – operating leases ​ 1.0 ​ 1.5 ​ Weighted-average discount rate – operating leases ​ 4.0 % 5.0 % ​ As of December 31, 2021, future minimum lease payments under lease agreements associated with the Company’s operations were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Future Lease ($in thousands) Liability Year Ended December 31, 2022 ​ $ 100 Total ​ 100 Less: present value discount ​ ( 2 ) Operating lease liabilities ​ $ 98 ​ ​ NOTE 11. LINE OF CREDIT East West Bank Working Capital Line of Credit On March 31, 2021, the Company entered into an agreement with East West Bank (“the EWB Agreement”) in which EWB agreed to provide a $ 7.5 million working capital line of credit. The line of credit is secured by the Company’s receivables and cash. Interest on the line is the greater of 4.25 % or the prime rate plus 1 %. The agreement matures in 36 months . The outstanding balance of the working capital line of credit was $ 812,000 at December 31, 2021. The EWB agreement was amended in January of 2022. See Note 18, Subsequent Events, for more detailed information on the amendment. ​ NOTE 12. INTEREST EXPENSE AND FINANCING FEES Interest expense and financing fees for the periods consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2021 ​ 2020 ($in thousands) Interest Fees 1 Total Interest Fees 1 Total Convertible preferred shares ​ $ 2,845 ​ $ 2,572 ​ $ 5,417 ​ $ — ​ $ — ​ $ — Dividend payable ​ 820 ​ — ​ 820 ​ — ​ — ​ — Installment payments - licenses 2 ​ 724 ​ — ​ 724 ​ 696 ​ — ​ 696 Anti-itch product installment payments ​ 57 ​ ​ — ​ 57 ​ 2 ​ — ​ 2 LOC fees ​ ​ 16 ​ ​ ​ ​ ​ 16 ​ ​ — ​ ​ — ​ ​ — Total Interest Expense and Financing Fee ​ $ 4,462 ​ $ 2,572 ​ $ 7,034 ​ $ 698 ​ $ — ​ $ 698 Note 1: Amortization of fees in connection with debt raises. Note 2: Imputed interest expense related to Ximino, Accutane and anti-itch cream acquisitions. The conversion premium relates to the 15 % discount at which the Class A Preferred Stock converts, see Note 14. In accordance with the measurement and recognition guidance of ASC 835-30 Imputation of Interest, the Company will accrete the convertible preferred share settled notes to the estimated settlement amount of $ 14.8 million. ​ F-22 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements 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 shall 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 4. ​ NOTE 14. STOCKHOLDERS’ EQUITY AND CLASS A PREFERRED STOCK Common Stock The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 50,000,000 shares of $ 0.0001 par value Common Stock of which 6,000,000 shares are designated and authorized as Class A Common Stock. Voting Rights Each holder of Common Stock is entitled to one vote per share of Common Stock held on all matters submitted to a vote of the stockholders, including the election of directors. The Company’s Certificate of Incorporation and bylaws do not provide for cumulative voting rights. Each holder of Class A Common Stock is entitled to a number of votes that is equal to 1.1 times a fraction, the numerator of which is the sum of the shares of outstanding Common Stock, including the Class A Common Stock and the denominator of which is the number of outstanding shares of Class A Common Stock. Thus, the Class A Common Stock will at all times constitute a voting majority. Dividends The holders of the Company’s outstanding shares of Common Stock and Class A Common Stock are entitled to receive dividends, if any, as may be declared from time to time by the Company’s Board of Directors out of legally available funds. Liquidation In the event of the Company’s liquidation, dissolution or winding up, holders of Common Stock and Class A Common Stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of the Company’s debts and other liabilities, subject to the satisfaction of any liquidation preference granted to the holders of any outstanding shares of Preferred Stock. Rights and Preference Holders of the Company’s Common Stock and Class A Common Stock have no preemptive, conversion or subscription rights, and there is no redemption or sinking fund provisions applicable to either the Common Stock or the Class A Common Stock. The rights, preferences and privileges of the holders of Common Stock and Class A Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of the Company’s Preferred Stock that are or may be issued. On November 16, 2021, the Company completed an IPO of its common stock and issued 3,520,000 shares of its common stock at $ 10.00 per share, which resulted in net proceeds of approximately $ 30.6 million, after deducting underwriting discounts and other offering costs. In addition, as a result of the IPO, the Company issued shares of its Common stock based on the following: F-23 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements 8 % Cumulative Convertible Class A Preferred Offering In March 2021, the Company commenced an offering of 8 % Cumulative Convertible Class A Preferred Stock (“Class A Preferred Offering”) in an aggregate minimum amount of $ 12.5 million and an aggregate maximum amount of $ 30.0 million. The Class A Preferred Offering terminated on July 18, 2021. The Class A Preferred Stock automatically converts into the Company’s Common Stock upon a sale of the Company or a financing in an amount of at least $ 25.0 million within a year of the closing date of the Class A Preferred Offering (extendable by another six months at the Company’s option) at a discount of 15 % to the per share qualified stock price. In the event that neither a sale of the Company nor a $ 25.0 million financing is completed, the Class A Preferred Stock will be exchanged for shares of Fortress common stock, at a 7.5 % discount to the average Fortress common stock trading price over the 10-day period preceding such exchange. The Company has completed five closings in connection with the Class A Preferred Offering (“Closings”). As a result of the Closings, the Company issued an aggregate of 758,680 Class A Preferred shares at a price of $ 25.00 per share, for gross proceeds of $ 19.0 million. Following the payment of placement agent fees of $ 1.9 million, and other expenses of $ 0.1 million, the Company received $ 17.0 million of net proceeds. In connection with the Company’s IPO, the company issued 2,231,346 shares of common stock resulting from the conversion of all of the Class A Preferred Stock. Stock Based Compensation In 2015, the Company’s Board of Directors adopted, and stockholders approved, the Journey Medical 2015 Stock Plan (the “Plan”) originally authorizing the Company to grant up to 3,000,000 shares of common stock, with subsequent authorizations totaling 1,642,857 , to eligible employees, directors, and consultants in the form of restricted stock, stock options and other types of grants. The amount, terms, and exercisability provisions of grants are determined by the Board of Directors. As of December 31, 2021, 1,020,661 shares were available for issuance under the Plan. Total compensation cost that has been charged against operations related to the above plan was $ 2.5 million, and $ 0.2 million for the years ended December 31, 2021 and 2020, respectively. The Company’s stock compensation expense is recorded as a component of SG&A in the Company’s consolidated statements of operations. Stock Options The Company 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 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 between the grant date for the option and each vesting date. The Company estimates the fair value of stock options on the grant date by applying the Black-Scholes option pricing valuation model. The application of this valuation model involves assumptions that are highly subjective, judgmental, and sensitive in the determination of compensation cost. Prior to the Company’s IPO, which closed on November 16, 2021, the fair value of the Company’s common stock underlying stock options was an input to the Black-Scholes option pricing model. The fair value of the Company’s common stock was determined considering a number of objective and subjective factors, including valuations of guideline public companies, transactions of guideline public companies, discounts for lack of control transactions, lack of liquidity of the Company’s common stock and the general and industry-specific economic outlook. Historical information is the primary basis for the selection of the expected volatility of options granted. However, due to the Company’s limited time as a public filer, the Company’s volititily prior to the Company’s IPO, was derived from guidline public companies. The risk-free interest rate is selected based upon yields of United States Treasury issues with a term equal to the expected life of the option being valued. The expected term of options granted is based on the Simplified Method under SAB 107 and the expected term for non-employees is the remaining contractual life. F-24 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements The weighted-average key assumptions used in determining the fair value of options granted for the years ended December 31, 2021 and 2020, are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ Weighted ​ ​ Weighted weighted average ​ ​ Number ​ average ​ average ​ remaining ​ ​ of ​ exercise ​ intrinsic ​ contractual ​ Shares price value life (years) Outstanding options at December 31, 2019 ​ 2,294,000 ​ $ 0.79 ​ $ 5,916,970 ​ 6.73 Exercised ​ ( 18,000 ) ​ ​ 0.69 ​ ​ 29,428 ​ — Forfeited ​ ( 134,000 ) ​ ​ 0.72 ​ ​ 325,539 ​ — Outstanding options at December 31, 2020 2,142,000 ​ $ 0.80 ​ $ 7,934,320 5.72 Exercised ( 10,000 ) ​ 0.68 ​ — — Forfeited ( 27,666 ) ​ 1.37 ​ — — Outstanding options at December 31, 2021 2,104,334 ​ $ 0.79 ​ $ 9,661,393 4.68 Options vested and exercisable at December 31, 2021 1,990,916 ​ $ 0.76 ​ $ 9,207,917 4.53 ​ For the years ended December 31, 2021 and 2020, the Company issued 10,000 shares and 18,000 shares, respectively, of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of $ 7,000 and $ 13,000 , respectively. For the years ended December 31, 2021 and 2020, approximately $ 51,000 and $ 153,000 , respectively, of stock option compensation cost has been charged against operations. As of December 31, 2021, there was $ 23,000 of unrecognized compensation cost related to unamortized stock option compensation, which is expected to be recognized over a remaining weighted-average period of approximately 0.9 years. The aggregate intrinsic value in the previous table reflects the total pretax 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 December 31, 2021. 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 Company grants RSU’s to its employees and Directors. Restricted stock and RSU’s are charged against income on a straight-line basis over the vesting period, which ranges from one to four years in duration. Compensation cost for restricted stock and RSU’s is based on the award’s grant date fair value, which is the closing market price of the Company’s common stock on the grant date, multiplied by the number of shares awarded. The Company’s non-vested RSU’s, at December 31, 2021 and 2020, and changes during the year ended December 31, 2021, are presented below: ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ average ​ ​ Number of ​ exercise ​ units price Unvested balance at December 31, 2019 — ​ $ — Granted 845,524 ​ 3.37 Forfeited ( 30,000 ) ​ ​ 3.37 Unvested balance at December 31, 2020 ​ 815,524 ​ $ 3.37 Granted ​ 143,006 ​ ​ 7.13 Vested ​ ( 136,500 ) ​ ​ 3.37 Forfeited ​ ( 107,000 ) ​ ​ 3.37 Unvested balance at December 31, 2021 ​ 715,030 ​ $ 4.12 ​ As of December 31, 2021, the Company had unrecognized stock-based compensation expense related to all unvested restricted stock unit of $ 1.0 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.8 years. F-25 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements ​ RSU’s that contain performance conditions The Company recorded approximately $ 2.4 million of stock-based compensation expense in the fourth quarter of 2021, associated with performance-based RSU’s granted to key employees that fully vested upon the closing of the Company’s IPO. ​ NOTE 15. REVENUES FROM CONTRACTS AND SIGNIFICANT CUSTOMERS Disaggregation of Net Revenues The Company has the following actively marketed products, Qbrexza®, Accutane®, Targadox®, Ximino®, Exelderm®, and Luxamend®. All of the Company’s product revenues are recorded in the U.S. ​ Revenues by product are summarized as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ($’s in thousands) 2021 2020 Targadox® ​ $ 22,378 ​ $ 30,708 Ximino® ​ 8,247 ​ 9,518 Exelderm® ​ 5,363 ​ 4,453 Accutane® ​ 10,053 ​ — Qbrexza® ​ 17,056 ​ — Other branded revenue ​ 37 ​ ( 148 ) Total product revenue, net ​ $ 63,134 ​ $ 44,531 ​ Significant Customers As of December 31, 2021, two of the Company’s customers accounted for more than 10% of its total accounts receivable balance at 16.3 % and 12.9 %. As of December 31, 2020, one of the Company’s customers accounted for 12 % of its total accounts receivable balance. ​ For the year ended December 31, 2021 and 2020, none of the Company’s customers accounted for more than 10% of its total gross product revenue. ​ F-26 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements NOTE 16. INCOME TAXES The components of the income tax provision are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Years Ended December 31, ($’s in thousands) 2021 2020 Current: ​ ​ ​ ​ Federal ​ $ — ​ $ 1,669 State ​ 67 ​ 536 Total current ​ 67 ​ 2,205 ​ ​ ​ ​ ​ ​ ​ Deferred: ​ ​ Federal ​ ( 7,829 ) ​ ( 234 ) State ​ ( 1,474 ) ​ ( 101 ) Total deferred ​ ( 9,303 ) ​ ( 335 ) Valuation allowance ​ ​ 10,870 ​ ​ — Total income tax expense ​ $ 1,634 ​ $ 1,870 ​ Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards. The significant components of the Company’s deferred tax assets consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ($’s in thousands) 2021 2020 Deferred tax assets: ​ ​ ​ ​ Net operating loss carryforwards ​ $ 3,113 ​ $ 5 Amortization of license fees ​ 4,760 ​ 1,086 Stock compensation ​ 667 ​ 113 Lease liability ​ 25 ​ 48 Reserve on sales return, discount and bad debt ​ 3,573 ​ 765 Accruals and reserves ​ 505 ​ 248 Tax credits ​ 193 ​ — Business interest expense deduction limit ​ 41 ​ — State taxes ​ 12 ​ — Total deferred tax assets ​ 12,889 ​ 2,265 Less: valuation allowance ​ ​ ( 10,870 ) ​ ​ — Deferred tax assets, net ​ $ 2,019 ​ $ 2,265 ​ ​ ​ ​ ​ ​ ​ Deferred tax liability: ​ ​ ​ ​ ​ ​ Section 481(a) adjustment on reserve on sales return, discount and bad debt ​ ​ ( 1,996 ) ​ ​ ( 765 ) Right-of-use asset ​ ​ ( 23 ) ​ ​ ( 46 ) Deferred tax assets, net ​ $ — ​ $ 1,454 ​ F-27 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements A reconciliation of the statutory tax rates and the effective tax rates is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Years Ended December 31, ​ 2021 2020 Percentage of pre-tax income: ​ ​ ​ U.S. federal statutory income tax rate 21 % 21 % State taxes, net of federal benefit 4 % 6 % Non-deductible items ( 5 ) % 0 % Provision to return 0 % 0 % Change in state rate 0 % ( 1 ) % Change in valuation allowance ​ ( 26 ) % 0 % Other 2 % 0 % Effective income tax rate ( 4 ) % 26 % ​ The Company has incurred NOLs in previous years. As of December 31, 2021, the Company had remaining federal NOLs of approximately $ 13.8 million and had remaining state NOLs of approximately $ 4.3 million, which will begin to expire in 2034. The Company also had federal research and development credit carryforward of $ 193 thousand as of December 31, 2021, which will begin to expire in 2040 if unused. The utilization of the Company’s NOLs and tax credits may be subject to annual Internal Revenue Code Section 382 limitations (382 Limitations). The Company is subject to U.S. federal and various state taxes. As of December 31, 2021, the earliest federal tax year open for the assessment of income taxes under the applicable statutes of limitations is its 2018 tax year. The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state. ​ NOTE 17. NET (LOSS) INCOME PER COMMON SHARE The Company accounts for and discloses net (loss) income per share using the treasury stock method. Net (loss) income per common share, or basic (loss) income per share, is computed by dividing net (loss) income by the weighted-average number of common shares outstanding. Net (loss) income per common share assuming dilutions, or diluted (loss) income per share, is computed by reflecting the potential dilution from the exercise of “in-the-money” stock options, and non-vested restricted stock units. The Company’s common stock equivalents, including unvested restricted stock and options have been excluded from the computation of diluted loss per share for the year ended December 31, 2021, as the effect of including such securities would be anti-dilutive. Therefore, the weighted average common stock outstanding used to calculate both basic and diluted income loss per share is the same for the year ended December 31, 2021. The following is a reconciliation of the numerator and denominator of the diluted net income per share computations for the year ended December 31, 2020 (in thousands except for share and per share amounts): ​ ​ ​ ​ ​ ​ For the Year Ended ​ ​ December 31, ​ ​ 2020 Net income ​ $ 5,283 ​ ​ ​ ​ Weighted average shares outstanding - basic ​ 9,135,985 Stock options ​ 1,700,137 Weighted average shares outstanding - diluted ​ 10,836,122 ​ ​ ​ ​ Per share data: ​ Basic ​ $ 0.58 Diluted ​ $ 0.49 ​ ​ F-28 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements ​ NOTE 18. SUBSEQUENT EVENTS VYNE Therapeutics Product Acquisition (“VYNE Product Acquisition”) On January 13, 2022 the Company entered into a definitive agreement with VYNE Therapeutics, Inc. (“VYNE”) to acquire its Molecule Stabilizing Technology (“MST”)™ franchise for an upfront payment of $ 20.0 million and an additional $ 5.0 million on the one (1)-year anniversary of the closing. The agreement also provides for contingent net sales milestone payments. The Company acquired AMZEEQ (minocycline) topical foam, 4%, and ZILXI (minocycline) topical foam, 1.5%, two FDA-Approved Topical Minocycline Products and Molecule Stabilizing Technology (MST)™. Amendment to the East West Bank Working Capital Line of Credit On January 12, 2022, the Company entered into a third amendment (the “Amendment”) of its loan and security agreement with East West Bank, which increased the borrowing capacity of the Company’s revolving line of credit to $ 10.0 million, from $ 7.5 million, and added a term loan not to exceed $ 20.0 million. Both the revolving line of credit and the term loan mature on January 12, 2026. The term loan includes two tranches, the first of which is a$ 15.0 million term loan and the second of which is a $ 5.0 million term loan. On January 12, 2022, the Company borrowed $ 15.0 million against the first tranche of the term loan to facilitate the VYNE Product Acquisition. The term loan bears interest on its outstanding daily balance at a floating rate equal to 1.73 % above the prime rate and is payable monthly, on the first calendar day each month. The term loans contain an interest only payment period through January 12, 2024, with an extension through July 12, 2024 if certain covenants are met, after which the outstanding balance of each term loan is payable in equal monthly installments of principal, plus all accrued interest, through the term loan maturity date. The Company may prepay all or any part of the term loan without penalty or premium, but may not re-borrow any amount, once repaid. Any outstanding borrowing against the revolving line of credit bears interest at a floating rate equal to 0.70 % above the prime rate. The Amendment includes customary financial covenants such as collateral ratios and minimum liquidity provisions as well as audit provisions. Maruho Milestone Payment On February 11, 2022 the Company announced that its exclusive out-licensing partner in Japan p, received manufacturing and marketing approval in Japan for Rapifort® Wipes 2.5% (Japanese equivalent to U.S. FDA approved QBREXZA®) for the treatment of primary axillary hyperhidrosis, triggering a net $ 2.5 million milestone payment to the Company. The net payment reflects a milestone payment of $ 10 million to the Company from the Company’s exclusive licensing partner in Japan, Maruho Co., Ltd. (“Maruho”), offset by a $ 7.5 million payment to Dermira, Inc., pursuant to the terms of the Asset Purchase Agreement between the Company and Dermira Inc. In conjunction with the terms of the licensing agreement with Maruho, the milestone payment was paid to Maruho within 30 days of the approval. The Company acquired global rights to QBREXZA® from Dermira Inc. in 2021. ​ ​ F-29 Table of Contents SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ​ Journey Medical Corporation By: /s/ Claude Maraoui Name: Claude Maraoui Title: President, Chief Executive Officer, and Director March 28, 2022 ​ POWER OF ATTORNEY ​ We, the undersigned directors and/or executive officers of Journey Medical Corporation, hereby severally constitute and appoint Claude Maraoui, acting singly, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her in any and all capacities, to sign this report and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary or appropriate to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby approving, ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. ​ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. ​ Signature Title Date /s/ Claude Maraoui President, Chief Executive Officer and Director March 28, 2022 Claude Maraoui (Principal Executive Officer) ​ ​ ​ /s/ Lindsay A. Rosenwald, M.D. ​ ​ ​ ​ Lindsay A. Rosenwald, M.D. ​ Executive Chairman ​ March 28, 2022 ​ ​ ​ ​ ​ /s/ Ernie De Paolantonio Chief Financial Officer March 28, 2022 Ernie De Paolantonio (Principal Financial Officer) /s/ Neil Herskowitz Director March 28, 2022 Neil Herskowitz /s/ Jeff Paley, M.D. Director March 28, 2022 Jeff Paley, M.D. /s/ Justin Smith Director March 28, 2022 Justin Smith /s/ Miranda Toledano Director March 28, 2022 Miranda Toledano ​ ​ ​ ​ ​ ​ ​ 83