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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-28 · 183 added, 215 removed, 87 unchanged (82% of the section changed)

Management’s Discussion and Analysis of the Results of Operations

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

Forward-Looking Statements

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Our consolidated financial statements have been prepared in accordance with U.S.

The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” “may,” “plan,” “seek” or similar language.

All forward-looking statements included in this document are based on information available to us on the date hereof and we assume no obligation to update any such forward-looking statements.

For such forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Our business and financial performance are subject to

substantial risks and uncertainties.

Actual results could differ materially from those projected in the forward-looking statements.

Please see the section titled “Special Cautionary Note Regarding Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K for more information.

In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” herein and in our Annual Report on Form 10-K for the year ended December 31, 2021.

As used below, the words “we,” “us” and “our” may refer to Journey Medical Corporation.

As used below, the words “we,” “us” and “our” refer to Journey Medical Corporation and its consolidated subsidiaries.

We are a commercial-stage pharmaceutical company founded in October 2014 that focuses on the development and commercialization of pharmaceutical products for the treatment of dermatological conditions.

Our current portfolio includes seven branded and three authorized generic prescription drugs for dermatological conditions that are actively marketed in the U.S.

We are managed by experienced life science executives with a track record of creating value for their stakeholders and bringing novel medicines to the market, enabling patients to experience increased quality of life and physicians and other licensed medical professionals to provide better care for their patients.

We aim to acquire rights to future products by licensing or otherwise acquiring an ownership interest in, funding the research and development of, and eventually commercializing, the products through our exclusive field sales organization.

On November 16, 2021, we completed an IPO of our common stock, which resulted in net proceeds of approximately $30.6 million, after deducting underwriting discounts and other offering costs.

Prior to our IPO our operations were primarily financed through a working capital note from Fortress Biotech, Inc.

(“Fortress”), referred to herein as the “Fortress Note,” cash generated by operations and cash raised in our private offering of our 8% Cumulative Convertible Class A Preferred Stock (“Class A Preferred Stock”).

In connection with the closing of our IPO on November 16, 2021, we 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 1,476,044 shares of Journey common stock at our IPO price of $10.00 per share.

We expect our expenses will increase substantially for the foreseeable future as we pursue business development opportunities, commercialize, and market new products and incur additional costs associated with operating as a public company.

To date, our business has not been materially impacted by COVID-19;

however, depending on the extent of the ongoing pandemic, it is possible that our business, financial condition and results of operations could be materially and adversely affected by COVID-19 in the future.

Our cash and cash equivalents balance was $49.1million at December 31, 2021.

Recent Subsequent Highlights (“VYNE Product Acquisition”)

In January 2022, we acquired AMZEEQ (minocycline) topical foam, 4%, and ZILXI (minocycline) topical foam, 1.5%, two FDA-Approved Topical Minocycline Products and Molecule Stabilizing Technology (MST)™ from VYNE Therapeutics, Inc., which expands our product portfolio to seven actively marketed branded dermatology products.

Our current portfolio includes eight branded and three authorized generic prescription drugs for dermatological conditions that are marketed in the U.S.

We are managed by experienced life science executives with a track record of creating value for their stakeholders and bringing novel medicines to the market, enabling patients to experience increased quality of life, and enabling physicians and other licensed medical professionals to provide better care for their patients.

Since inception, we have made significant investments to build out our commercial product portfolios, which we believe, coupled with our experienced dermatology sales leadership team and our recently expanded field sales force, will position our business for growth.

We are a majority-owned subsidiary of Fortress.

2022 Highlights and Events

On December 30, 2022, we filed a shelf registration statement on Form S-3 (File No.

333-269079), which was declared effective by the SEC on January 26, 2023.

This 2022 Shelf covers the offering, issuance and sale by us of up to an aggregate of $150.0 million of our common stock, preferred stock, debt securities, warrants, and units (the “2022 Shelf”).

At December 31, 2022, $150.0 million remains available under the 2022 Shelf.

In connection with the 2022 shelf, we have entered into the Sales Agreement with B.

Riley, relating to shares of our common stock.

In accordance with the terms of the Sales Agreement, we may offer and sell up to 4,900,000 shares of our common stock, par value $0.0001 per share, from time to time through or to B.

Riley acting as our agent or principal.

On March 14, 2022, we dosed the first patient in our Phase 3 clinical trial evaluating DFD-29 (Minocycline Modified Release Capsules 40 mg) for the Treatment of Rosacea.

As of January 10, 2023, we achieved 100% enrollment in the trial, with a top-line data readout expected in the second quarter of 2023.

We plan to submit the NDA for DFD-29 in the second half of 2023 and FDA approval is anticipated in the second half of 2024.

The Phase 2 clinical trials, DFD-29 (40mg) concluded with results indicating improved treatment by the investigational drug when compared to Oraycea® (European equivalent of Oracea®) on both co-primary endpoints.

For the first co-primary endpoint, IGA treatment success, Oraycea only had a 33.33% IGA treatment success rate, while DFD-29 achieved a 66.04% IGA treatment success rate.

For the second co-primary endpoint, the change in total inflammatory lesion count, Oraycea only had a 10.5 reduction in inflammatory lesions, while DFD-29 achieved a 19.2 reduction in inflammatory lesions.

On February 11, 2022, we announced that our exclusive licensing partner in Japan, Maruho Co., Ltd.

(“Maruho”), received marketing and manufacturing approval for Rapifort® Wipes 2.5% (Qbrexza®), for the treatment of primary axillary hyperhidrosis, triggering a net $2.5 million milestone payment to us.

The net payment reflects a milestone payment of $10 million to us from our exclusive licensing partner Maruho, offset by a $7.5 million payment to Dermira, pursuant to the terms of the Asset Purchase Agreement between us and Dermira.

We acquired global rights to Qbrexza from Dermira in 2021.

The period ended December 31, 2022 also reflects total year-to-date royalties of $174,000 from Maruho on sales of Rapifort® Wipes 2.5% in Japan.

On January 12, 2022, we acquired Amzeeq® (minocycline) topical foam, 4%, and Zilxi® (minocycline) topical foam, 1.5%, two FDA-approved topical minocycline products and Molecule Stabilizing Technology (MST)™ from VYNE Therapeutics Inc., which expanded our product portfolio to eight actively marketed branded dermatology products.

These proprietary foam-based products optimize the topical delivery of minocycline, an active pharmaceutical ingredient that was previously available only in oral form.

Approved by FDA nearly 50 years ago, minocycline is a well-established molecule that has been prescribed, in oral formulation, over 30 million times in the past decade.

Approved by the FDA nearly 50 years ago, minocycline is a well-established molecule that has been prescribed, in oral formulation, over 30 million times in the past decade.

Amzeeq (minocycline) topical foam, 4%, is the first and only topical formulation of minocycline to be approved by the FDA for the treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in adults and children 9 years and older.

According to the AAD, acne is the most common skin condition in the United States, affecting up to 50 million Americans annually.

According to the American Academy of Dermatology (“AAD”), acne is the most common skin condition in the United States, affecting up to 50 million Americans annually.

Approved by the FDA in May 2020, Zilxi (minocycline) topical foam, 1.5%, is the first and only topical minocycline treatment for inflammatory lesions due to rosacea in adults.

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Market research shows that over 70% of patients with rosacea are seeking better alternatives to current treatments.

2021 Highlights and Events

● On November 16, 2021, we completed an IPO of our common stock, which resulted in net proceeds of approximately $30.6 million, after deducting underwriting discounts and other offering costs.

● In September 2021, we were the victim of a cybersecurity incident that affected our accounts payable function and led to approximately $9.5 million in wire transfers being misdirected to fraudulent accounts.

The details of the incident and its origin are under investigation with the assistance of third-party cybersecurity experts working at the direction of legal counsel.

The matter was reported to the Federal Bureau of Investigation and does not appear to have compromised any personally identifiable information or protected health information.

Fortress, as our controlling stockholder and supporting partner in our back-office functions, provided us with $9.5 million to ensure our accounts payable operations continued to function smoothly.

The $9.5 million of support was initially in the form of a related party note, which the boards of both companies have agreed and converted into 1,476,044 shares of our common stock upon the consummation of our IPO at the IPO price.

See “ Risk Factors — Risk s Related to our Platform and Data — Our business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our or third parties’ cybersecurity .”

● As of July 18, 2021, we privately offered and issued 750,680 shares of our Class A Preferred Stock at a price of $25.00 per share, for gross proceeds of $19.0 million (the “Class A Preferred Offering”).

In connection with the closing of our IPO on November 16, 2021, we issued 2,231,346 shares of common stock resulting from the conversion of all of the Class A Preferred Stock.

● In June 2021, we entered into an agreement with DRL for the development of DFD-29, a modified release oral minocycline that is being evaluated for the treatment of inflammatory lesions of rosacea.

We and DRL intend to conduct two Phase 3 clinical trials to assess the efficacy, safety and tolerability of DFD-29 as a treatment for rosacea for regulatory approval.

In connection with the DFD-29 Agreement, we agreed to pay DRL additional consideration of $5.0 million in our common stock upon our IPO.

In connection with the closing of our IPO on November 16, 2021, we issued 545,131 unregistered shares of common stock in the Company 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.

● In May 2021, we acquired Qbrexza from Dermira.

● In March 2021, we launched Accutane® (isotretinoin) for the treatment of recalcitrant nodular acne.

● On March 31, 2021, we entered into an agreement with East West Bank (“EWB”) to provide us with a $7.5 million working capital line of credit.

Other Subsequent Highlights

On January 12, 2022, we entered into a third amendment (the “Amendment”) of our loan and security agreement with EWB noted above, which increased the borrowing capacity of our revolving line of credit to $10.0 million, from $7.5 million, and added a term loan not to exceed $20.0 million.

On January 12, 2022, we entered into a third amendment of the loan and security agreement with EWB (the “Amendment”), which increased the borrowing capacity of our revolving line of credit to $10.0 million, $2.9 million of which was outstanding at December 31, 2022, 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, we 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.

In January 2022 and August 2022, the Company borrowed $15.0 million and $5.0 million, respectively, against the term loan.

The term loans bear interest at a floating rate equal to 1.73% above the prime rate and are payable monthly.

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.

We may prepay all or any part of the term loan without penalty or premium, but may not re-borrow any amount, once repaid.

We may elect to prepay all or any part of the term loan without penalty or premium, but we 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 aa audit provisions.

On February 11, 2022, we announced that our exclusive out-licensing partner in Japan, 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 us.

The net payment reflects a milestone payment of $10.0 million to us from our 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 us and Dermira.

In conjunction with the terms list above both trsactions were completed in March of 2021.

We acquired global rights to QBREXZA® from Dermira in 2021.

On March 17, 2022, we dosed the first patient in our Phase 3 clinical trial evaluating DFD-29 (Minocycline Modified Release Capsules 40 mg) for the Treatment of Rosacea.

In addition, the published phase 2 clinical data showed that DFD-29 had approximately double the efficacy compared to Doxycycline capsules 40 mg on reducing total inflammatory lesions and IGA treatment success.

The trial will encompass two multicenter, randomized, double-blind, parallel-group, active and placebo-controlled Phase 3 clinical trials will each enroll up to 320 adult patients with moderate to severe papulopustular rosacea (“PPR”).

One trial is enrolling patients in the United States and the other is enrolling in the United States and Europe.

The studies will be randomized in a 3:3:2 ratio to DFD-29 (Minocycline Hydrochloride Modified Release Capsules, 40 mg), Oracea® (Doxycycline capsules 40 mg) or placebo once daily for 16 weeks.

The primary objective of the studies is to evaluate the safety, efficacy and tolerability of DFD-29 compared to placebo for the treatment of PPR.

The secondary objective is to evaluate the safety, efficacy and tolerability of DFD-29 compared to Oracea® (Doxycycline capsules 40 mg).

Critical Accounting Polices and Uses of Estimates

The Amendment includes customary financial covenants such as collateral ratios and minimum liquidity provisions.

We are in compliance with all applicable financial covenants under the Amendment.

The remaining $7.1 million revolving line of credit is fully available to us without any restrictions, other than certain customary and ordinary closing conditions.

In September 2021, we were the victim of a cybersecurity incident that affected our accounts payable function and led to approximately $9.5 million in wire transfers being misdirected to fraudulent accounts.

The matter was reported to the FBI and remains under their investigation.

The cybersecurity incidenct does not appear to have compromised any personally identifiable information or protected health information.

Fortress, as our controlling stockholder and supporting partner in our back-office functions, provided us with $9.5 million to ensure our accounts payable operations continued to function smoothly.

The $9.5 million of support was in the form of a related party note which the boards of both companies have agreed and converted into 1,476,044 shares of our common stock upon the consummation of our IPO in November 2021 at the IPO price.

The federal government has been able to trace and seize the fraudulently transferred cryptocurrency assets associated with the breach.

The seized cryptocurrency has been transferred into U.S.

government-controlled custodial wallets.

Subsequently, the forfeiture process will be initiated by the U.S.

Attorney’s Office.

The process includes mandatory waiting periods for filing of claims.

Once the cryptocurrency has been converted back into U.S.

dollars, we expect to receive a notification letter to initiate the return of the cash to the Company.

This process could take several months to a year or possibly longer to complete before funds can be returned.

Given the recent market declines, volatility, and liquidity issues with cryptocurrency, there is no certainty as to the amount we will ultimately recover.

See “Risk Factors — Risks Related to our Platform and Data — Our business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our or third parties’ cybersecurity.”

Critical Accounting Policies and Uses of Estimates

Our consolidated financial statements have been prepared in accordance with U.S.

generally accepted accounting principles, or U.S.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods.

The preparation of these consolidated financial statements requires us to make difficult, subjective or complex judgments, often as a result of the need to make estimates and assumptions about the effect of matters that are inherently uncertain in the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods.

Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

While our significant accounting policies are described in the notes to our consolidated financial statements included elsewhere in this Report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

While our significant accounting policies are described in greater detail in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K, we believe that the following accounting policies and estimates are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements in understanding our historical and future performance.

These policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized.

Such variable consideration represents chargebacks, coupons, discounts, other sales allowances, governmenatal rebate programs and sales returns.

Such variable consideration represents chargebacks, coupons, discounts, other sales allowances, governmental rebate programs and sales returns.

These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on gross sales for a reporting period.

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Medicare and Medicaid governmental rebate programs are at risk for material adjustment because of the extensive time delay.

Stock-based Compensation

We utilize stock-based compensation in the form of stock options, restricted stock units, or RSUs, and at times performance-based restricted stock units, or PSU’s.

We expense stock-based compensation to employees, non-employees and Directors over the requisite service period based on the estimated grant-date fair value of the awards and actual forfeitures.

All stock-based compensation costs are recorded as a component of selling, general and administrative expense in the consolidated statements of operations.

Service based stock options and RSU’s

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.

We estimate 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, including 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.

Prior to our IPO, which closed on November 16, 2021, the fair value of our common stock underlying stock options was an input to the Black-Scholes option pricing model.

We 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 our 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 our common stock and the general and industry-specific economic outlook.

RSU’s that are service based are amortized into compensation expense on a straight-line basis over the vesting period, which generally 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 our common stock on the grant date multiplied by the number of shares awarded.

RSU’s that contain performance conditions

We 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 our IPO.

For the years ended December 31, 2021 and 2020, stock-based compensation expense was $2.5 million and $0.2 million, respectively.

As of December 31, 2021, we expect to continue to grant options and other stock-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

Pre-IPO Common Stock Valuations

Prior to our IPO, given the absence of a public trading market of our common stock prior to the IPO, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation , or the Practice Aid, our board of directors exercised reasonable judgment and considered numerous and subjective factors to determine the best estimate of fair value of our common stock prior to the IPO, including, but not limited to:

● relevant precedent transactions involving our capital stock;

● contemporaneous valuations performed by third-party specialists;

● rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock;

● actual operating and financial performance;

● current business conditions and financial projections;

● likelihood of achieving a liquidity event, such as an initial public offering or a sale of our business;

● the lack of marketability of our common stock, and the illiquidity of stock-based awards involving securities in a private company;

● market multiples of comparable publicly-traded companies;

● stage of development;

● industry information such as market size and growth;

and global capital and macroeconomic conditions.

The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date.

In accordance with the Practice Aid, we considered the following methods:

● Option Pricing Method, or OPM.

Under the OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class.

The estimated fair values of the preferred and common stock are inferred by analyzing these options.

This method is appropriate to use when the range of possible future outcomes is so difficult to predict that estimates would be highly speculative, and dissolution or liquidation is not imminent.

● Probability-Weighted Expected Return Method, or PWERM.

The PWERM is a scenario-based analysis that estimates value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class.

For valuations performed beginning in 2021, prior to the initial public offering, in accordance with the Practice Aid, we used a hybrid approach of the OPM and the PWERM methods to determine the estimated fair value of our common stock as a result of the increasing likelihood of the occurrence of certain discrete events, such as a potential initial public offering, improving market conditions and receptivity of the market to initial public offerings.

The enterprise value determined under the OPM and PWERM methods was weighted according to our board of directors’ estimate of the probability of the occurrence of a certain discrete event as of the valuation date.

The resulting equity value for the common stock was then divided by the number of shares of common stock outstanding at the date of the valuation to derive a per share value on a non-marketable basis.

In order to determine the fair value of our common stock on a marketable basis, we then applied a discount for lack of marketability which we derived based on inputs including a company-specific volatility rate, a term equal to the expected time to a future liquidity event and a risk-free rate equal to the yield on treasuries of similar duration.

Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, cash flows, discount rates, market multiples, the selection of comparable companies and the probability of future events.

Changes in any or all of these estimates and assumptions, or the relationships between those assumptions, impact our valuations as of each valuation date and may have a material impact on the valuation of common stock.

The assumptions underlying these valuations represent our management’s best estimate, which involve inherent uncertainties and the application of management judgment.

As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different.

Following the closing of the initial public offering, the fair value of our common stock has been determined based on the quoted market price of our common stock.

As of December 31, 2021, we were 58.39% owned by Fortress Biotech, Inc.

(“Fortress”) and were filing consolidated federal tax return and consolidated or combined state tax returns in multiple jurisdictions with Fortress for tax years prior to 2021.

As we completed our initial public offering on November 12, 2021, we deconsolidated from Fortress consolidated group for federal income tax purpose.

Our financial statements recognize the current and deferred income tax consequences that result from our activities during the current and preceding periods pursuant to the provisions of Accounting Standards Codification Topic 740, Income Taxes (ASC 740), as if we were a separate taxpayer rather than a member of the Fortress consolidated income tax return group.

Fortress has agreed that we do not have to make payments to Fortress for our use of net operation losses (“NOLs”) of Fortress (including other Fortress group members).

Since Fortress does not require us to pay in any form for the utilization of the consolidated group’s NOLs, the tax benefit we realize have been recorded as a capital contribution.

We record 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.

We establish 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 our 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 we will realize the benefits of the net deferred tax assets as of December 31, 2021 and therefore a full valuation allowance on all of our deferred tax assets is required.

We 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, we recognize 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, we do not recognize any portion of the benefit.

As of December 31, 2021, we had no unrecognized tax benefits and do not anticipate any significant change to the unrecognized tax benefit balance.

We 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.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption, if applicable, and our assessment, if any, of their potential impact on our financial condition and results of operations.

Smaller Reporting Company Status

We are a “smaller reporting company,” meaning that the market value of our shares held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year.

See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption, if applicable, and our assessment, if any, of their potential impact on our financial condition and results of operations.

Emerging Growth Company and Smaller Reporting Company Status

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”).

Under the JOBS Act, emerging growth companies can delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years of audited financial statements in our annual reports on Form 10-K, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation and less extensive disclosure about our executive compensation arrangements.

We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

We are also a “smaller reporting company,” meaning that either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) the market value of our shares held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year.

We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than $700 million.

As a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K, have reduced disclosure obligations regarding executive compensation, and smaller reporting companies are permitted to delay adoption of certain recent accounting pronouncements discussed in Note 2 to our consolidated financial statements in this report on Form 10-K.

As a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K, have reduced disclosure obligations regarding executive compensation, and smaller reporting companies are permitted to delay adoption of certain recent accounting pronouncements discussed in Note 2 See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K.

Results of Operations

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The following table summarizes our results of operations for the years ended December 31, 2022 and 2021:

Year Ended December 31,

For the Years Ended December 31,

($ in thousands, except per share data)

Product revenue, net

Other revenue

Total revenue

Operating expenses

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Total operating expenses

(Loss) income from operations

Loss from operations

Other expense

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Interest expense

Foreign exchange transaction losses

Change in fair value of derivative liability

Total other expense

Net (Loss) income before income taxes

Loss before income taxes

Income tax expense

Net (loss) income

The following table reflects our net product revenue by product:

Year Ended December 31,

The following table reflects our revenue by product for the years ended December 31, 2022 and 2021:

For the Years Ended December 31,

($in thousands)

Other branded revenue

Total product revenues, net

Total net product revenues increased $18.6 million, or 42%, to $63.1 million for the year ended December 31, 2021, from $44.5 million for the year ended December 31, 2020.

The increase is primarily due to incremental revenues from our newly launched products, Accutane, launched in the first quarter of 2021, and Qbrexza, launched during the second quarter of 2021.

Offsetting the increase is a decrease in our legacy product, Ximino primarily driven by increased promotional emphasis from our salesforce to Accutane, and increased pressure from generic competition.

Total net product revenue

Other revenue

Total revenue

Total revenues increased $10.5 million, or 17%, to $73.7 million for the year ended December 31, 2022, from $63.1 million for the year ended December 31, 2021.

Total net product revenue increased $7.9 million, or 12%, to $71.0 million for the year ended December 31, 2022, from $63.1 million for the year ended December 31, 2021.

The increase is primarily due to revenue growth from our newly acquired products, Qbrexza and Accutane, acquired and launched in the second quarter of 2021, as well as incremental growth from

Amzeeq and Zilxi (acquired in January 2022).

Qbrexza, Accutane, Amzeeq and Zilxi reflected approximately 77% of our total net product revenues for the year ended December 31, 2022.

Offsetting the increases is a decrease in the net product revenue of Targadox and its authorized generic as a result of continued generic competition.

Additionally, net product revenues of Ximino and Exelderm and their authorized generics were negatively impacted by contract manufacturer product shortages earlier in the year.

These shortages were resolved in the third quarter of 2022 and sales continue to normalize although they are not back to pre-shortage levels.

We expect sales of Ximino and Exelderm to reach pre-shortage levels through 2023.

The above table includes the authorized generic product within the line items for Targadox, Ximino and Exelderm.

Other revenue

The year ended December 31, 2022 includes a net $2.5 million milestone payment from Maruho.

In January 2022, Maruho received manufacturing and marketing approval in Japan for Rapifort® Wipes 2.5%, triggering the net payment.

The net payment reflects a milestone payment of $10.0 million to the Company from Maruho, offset by a $7.5 million payment to Dermira.

The year ended December 31, 2022 also reflects total year-to-date royalties of $174,000 from Maruho on sales of Rapifort® Wipes 2.5% in Japan.

We record gross-to-net sales accruals for chargebacks, distributor service fees, prompt pay discounts, sales returns, coupons, managed care rebates, government rebates, and other allowances customary to the pharmaceutical industry.

Gross-to-net sales accruals and the balance in the related allowance accounts for the years ended December 31, 2022, 2021 and 2020 were as follows:

($’s in thousands)

Balance at December 31, 2019

Balance as of December 31, 2020

Current provision related to sales in the current period

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Reclassifications between liability accounts

Balance at December 31, 2020

Balance as of December 31, 2021

Current provision related to sales in the current period

Checks/credits issued to third parties

Reclassifications between liability accounts

Balance at December 31, 2021

We have established provisions for chargebacks resulting from the launch of our new products noted above.

Included in the reserve for chargebacks and distributor service fees are provisions for prompt pay discounts.

Provisions for sales returns increased by $0.7 million in 2021 compared to 2020 mainly due to incremental provisions resulting from our newly launched products, Accutane, launched in the first quarter of 2021, and Qbrexza, acquired during the second quarter of 2021.

The provision for coupons decreased by $7.8 million in 2021 compared to 2020 mainly due to the timing of payments in 2020.

Managed care and Government rebate provisions increased by $3.4 million for 2021 compared to 2020 due to by higher sales volumes and a greater portion of sales qualifying for managed care rebates.

Balance as of December 31, 2022

The change in our reserve from period-to-period is driven by the decrease in our reserve for coupons.

The provision for coupons was $1.7 million at December 31, 2022 compared to $5.0 million at December 31, 2021.

The change in the coupon reserve is primarily due to a decrease in sales of Minocycline as well as an increase primarily associated with initial program prefunding payments for Amzeeq and Zilxi.

Cost of Goods Sold

Cost of goods sold for increased $17.5 million, to $32.1 million for the year ended December 31, 2021, from $14.6 million for the year ended December 31, 2020.

Cost of goods sold was 50.8% and 32.8% of net product revenues for the years ended December 31, 2021 and 2020, respectively.

The increase primarily reflects the step-up to fair value charge of approximately $6.5 million for the Qbrexza inventory from the asset purchase in the second quarter of 2021 as well as the increase in royalty expense related to Qbrexza.

Cost of goods sold decreased by $1.3 million, or 4%, to $30.8 million for the year ended December 31, 2022, from $32.1 million for the year ended December 31, 2021.

The decrease is primarily due to a $5.9 million decrease in inventory step-up costs.

Approximately $6.5 million of inventory step-up costs were charged against operations through cost of goods sold for the year ended December 31, 2021 as a result of the Qbrexza product acquisition in the second quarter of 2021, compared to $0.6 million of inventory step-up costs for the year ended December 31, 2022, as a result of the Amzeeq and Zilxi product acquisitions in January 2022.

In addition, royalty expenses decreased by $1.7 million, or 12%, mainly due to the decrease in Targadox sales from period-to-period.

The above decreases are offset in part by higher product costs of $1.8 million driven by sales volumes, increased license amortization of $1.8 million and increased Prescription Drug User Fee Act fees of $0.6 million driven by the acquisition of Amzeeq and Zilxi.

The decreases are also offset by increased costs of approximately $2.1 million related to freight, destruction, product validation, stability testing costs, and the establishment of expired product and other inventory reserves for the year ended December 31, 2022.

Research and Development

Research and Deelopment expense increased to $2.7 million for the year ended December 31, 2021, from zero for the year ended December 31, 2020.

The increase is related to clinical trial expenses to develop our DFS-29 product.

We expect these expenses to increase as patients are fully enrolled in the trials.

Research and Development expense increased to $10.9 million for the year ended December 31, 2022 from $2.7 million for the year ended December 31, 2021 due to clinical trial expenses to develop our DFD-29 product, for which our Phase 3 clinical trial is 100% enrolled as of January 10 th , 2023.

We expect these expenses to increase through 2023 as the now fully enrolled two Phase 3 trials are completed and we incur other associated cost of the development program.

Research and Development – licenses acquired

Research and development - licenses acquired expenses are incremental from period-to-period and reflect current year expenses of $13.8 million for in-process R&D as a result of the upfront payment of $10.0 million and a $3.8 million non-cash contingent payment related to the DFD-29 Agreement.

Research and development expenses - licenses acquired decreased $13.8 million, or 100%, from the year ended December 31, 2021.

The year ended December 31, 2021 reflects the acquisition of our development stage asset from DRL, DFD-29, for $10.0 million and the fair value of the contingent payment due DRL of $3.8 million.

We did not have any research and development license acquisition costs for the year ended December 31, 2022.

Selling, General and Administrative Expenses (“SG&A”)

Selling, general and administrative expenses increased $17.7 million to $39.8 million for the year ended December 31, 2021, from $22.1 million for the year ended December 31, 2020.

The increase is primarily attributable to the expansion of our salesforce and marketing expense related to our expanded product portfolio.

In addition, SG&A for the year ended December 31, 2021 includes incremental non-cash stock-based compensation expense of $2.4 million related to the vesting of restricted performance units in connection with the closing of our IPO on November 16, 2021.

Finally, the company expanded its finance and accounting staff in the fourth quarter of 2021.

Along with other supporting services related to being a public company.

Selling, general and administrative expenses increased by $19.6 million, or 49%, to $59.5 million for the year ended December 31, 2022, from $39.8 million for the year ended December 31, 2021.

The increase is primarily attributable to the expansion of our salesforce and marketing expenses related to expanding our product portfolio by four products, additional headcount costs (including non-cash stock compensation expenses), legal expenses associated with patent litigation, and compliance and other professional fees associated with being a public company that we did not incur as a privately held company prior to our IPO in November 2021.

Wire Transfer Fraud Loss

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These costs were attributable to funds erroneously wired to fraudulent accounts as a result of a sophisticated business email compromise fraud scheme.

Interest Expense and Financing Fees

Interest expense and financing fees increased $6.3 million to $7.0 million for the year ended December 31, 2021, from $0.7 million for year ended December 31, 2020.

The increase is primarily attributable to interest, fees and dividends payable related to our liability classified convertible preferred shares and interest expense related to our installment payment licensees.

In addition, we recorded incremental interest expense for our preferred shares and debt fees due to the settlement and conversion to common stock as a result of the closing of our IPO on November 16, 2021.

Please see “ Risk Factors – Our business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our or third parties’ cybersecurity ” for more information.

Interest Expense

Interest expense decreased $5.0 million to $2.0 million for the year ended December 31, 2022, from $7.0 million for the year ended December 31, 2021.

The year ended December 31, 2021 includes dividends and interest on our convertible preferred stock that converted in full, into shares of our common stock upon the closing of our IPO in November 2021.

Interest expense for the year ended December 31, 2022 reflects interest and fees related to our EWB term loan and installment licenses.

Change in Fair Value of Derivative Liabilities

The change in fair value of derivative liabilities reflects the derivative mark-to-market accounting to mark to fair value the contingent payment liability to Dr.

Reddy and liability classified warrants and the placement agent warrants as a result of the settlement and conversion of these warrant liabilities to our common stock.

Reddy, the liability classified warrants and the placement agent warrants issued as partial compensation to the placement agent in our 2021 private financing as a result of the settlement and conversion of these warrant liabilities to our common stock.

In connection with the our IPO we issued 111,567 shares of common stock for settlement of all of the placement agent warrants.

In addition, we issued 545,131 unregistered shares of common stock to Dr.

Reddy in settlement of the contingent payment.

In addition, we issued 545,131 shares of common stock to Dr.

Reddy in a transaction exempt from registration under the Securities Act in settlement of the contingent payment.

We have no derivative liabilities outstanding at December 31, 2022.

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Our effective tax rate for 2022 and 2021 was (0.21%) and (3.86)%, respectively.

The negative effective tax rate of 3.86% for the year ended December 31, 2021 was principally due to our full valuation allowance position.

Our tax rate is affected by recurring items, such as the U.S.

The negative effective tax rate of 0.21% for the year ended December 31, 2022 varies from the statutory rate principally due to our full valuation allowance position.

The increase in the effective tax rate from 2021 to 2022 is primarily due to change in valuation allowance and state taxes.

Our tax rate is affected by valuation allowances, recurring items, such as the U.S.

federal and state statutory tax rates and the relative amounts of income we earn in those jurisdictions.

It is also affected by discrete items that may occur in any given year but are not consistent from year to year.

The effective tax rate for the for year ended December 31, 2021 varied significantly from the effective tax rate from the prior year primarily due to unfavorable permanent book tax differences and our full valuation allowance position.

Liquidity and Capital Resources

At December 31, 2022, we had $32.0 million in cash and cash equivalents as compared to $49.1 million at December 31, 2021.

On November 16, 2021, we completed an IPO of our common stock, which resulted in net proceeds of approximately $30.6 million, after deducting underwriting discounts and other offering costs.

Prior to our IPO, our 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 our private offering of our 8% Cumulative Convertible Class A Preferred Stock (“Class A Preferred Stock”).

In connection with the closing of our IPO on November 16, 2021, we issued 2,231,346 shares of common stock resulting from the conversion of all of the preferred stock.

In addition, the Fortress Note was converted into 1,476,044 shares of Journey common stock at our IPO price of $10.00 per share.

In addition, we have access to a working capital line of credit as discussed below.

For the next twelve months from the issuance of these audited consolidated financial statements, we will be able to fund our operations through a combination of operating activities and the East West Bank Working Line of Credit.

We expect our expenses will increase substantially for the foreseeable future as we pursue business development opportunities, commercialize and market new products and incur additional costs associated with operating as a public company.

On December 30, 2022, we filed a shelf registration statement on Form S-3 (File No.

333-269079), which was declared effective by the SEC on January 23, 2023.

This shelf registration statement covers the offering, issuance and sale by us of up to an aggregate of $150.0 million of our common stock, preferred stock, debt securities, warrants, and units (the “2022 Shelf”).

At December 31, 2022, $150.0 million remains available under the 2022 Shelf.

In connection with the 2022 shelf, we have entered into the Sales Agreement with B.

Riley, relating to shares of our common stock.

In accordance with the terms of the Sales Agreement, we may offer and sell up to 4,900,000 shares of our common stock, par value $0.0001 per share, from time-to-time through B.

Riley acting as our agent or principal.

We are party to a Loan and Security Agreement, dated March 31, 2021, with EWB (as amended, the “EWB Facility”), under which EWB made a $7.5 million line of credit available to us.

On January 12, 2022, we entered into a third amendment of the loan and security agreement with EWB, which increased the borrowing capacity of our revolving line of credit to $10.0 million, of which $2.9 million was outstanding at December 31, 2022, 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.

In January 2022 and August 2022, we borrowed $15.0 million (to facilitate the Vyne Product Acquisition Agreement) and $5.0 million, respectively, against the term loan.

The term loans bear interest at a floating rate equal to 1.73% above the prime rate and are payable monthly.

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.

We may elect to prepay all or any part of the term loan without penalty or premium, but we 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 EWB Facility includes customary financial covenants such as collateral ratios and minimum liquidity provisions.

We are in compliance with all applicable financial covenants under the EWB Facility.

The remaining $7.1 million revolving line of credit is fully available to us without any restrictions, other than certain customary and ordinary closing conditions.

We expect that our expenses will increase substantially for the foreseeable future as we pursue business development opportunities, commercialize and market new products and incur additional costs associated with operating as a public company.

To date, our business has not been materially impacted by COVID-19;

Additionally, the Federal Reserve has raised and is expected to continue to raise the federal funds interest rate throughout 2023 in its effort to take action against domestic inflation.

Because our borrowings under the facility with EWB bear interest at a floating rate, rising interest rates affect the amount of the regular payments we are required to make to EWB.

Accordingly, we may experience materially higher borrowing costs in future fiscal quarters than we historically have to date.

We may require additional financing to pursue both development stage and commercial opportunities.

In addition, we anticipate increased commercialization expenses related to the launch of new products, as well as increased costs related to development and regulatory approval of potential development stage product acquisitions, including DFD-29.

In addition, we anticipate increased commercialization expenses related to the launch of newly acquired products, as well as increased costs related to development and regulatory approval of potential development stage product acquisitions, including DFD-29.

As we continue to expand our product portfolio, we may need to fund possible future operating losses, and, if deemed appropriate, establish or secure through additional third-party manufacturing for our products, and expanded sales and marketing capabilities related to recent product acquisitions.

that our current cash and cash equivalents is sufficient to fund operations for at least the next twelve months.

Our failure to raise capital as and when needed would have a material adverse impact on our financial condition and our ability to pursue our business strategies.

Line of Credit

On March 31, 2021, we entered into a Loan and Security Agreement with East West Bank (“EWB Loan”) for $7.5 million, that was amended to $10.0 million in January 2022 as part of a loan expansion, which also included a $20.0 million term loan totaling $30.0 million in borrowing capacity.

In January 2022, we borrowed $20.0 million against the term loan portion of the amended EWB loan to facilitate the purchase of the VYNE products.

Class A Preferred Stock Offering

As of July 18, 2021, we completed five closings in connection with the Class A Preferred Offering (“Closings”).

As a result of the Closings, we 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, we received $17.0 million of net proceeds.

As noted above, in connection with the closing of our IPO on November 16, 2021, we issued 2,231,346 shares of common stock resulting from the conversion of all of the preferred stock.

Pursuant to its terms the Class A Preferred Stock automatically converted into our common stock at the IPO date at a discount of 15% to the per share qualified stock price.

Dividends on the Class A Preferred Stock of 8% annually are paid on a quarterly basis by Fortress in the form of shares of Fortress’ common stock based upon a 7.5% discount to the average trading price over the 10-day period preceding the dividend payment date.

Furthermore, Fortress is obligated to file one or more registration statements covering the issuance of shares that result from such dividends/exchange.

As consideration for the foregoing issuances by Fortress of its securities, we will issue to Fortress additional shares of our common stock, debt securities, or a combination of the foregoing.

Although our Class A Preferred Stock is in the form of preferred stock, in substance this instrument was accounted for as a liability on our consolidated balance sheet as it converted into a variable number of shares at settlement related to the original amount invested and as such it did not contain a true conversion feature.

For the next twelve months from the issuance of these financial statements, we will be able to fund our operations through a combination of existing cash and cash equivalents generated from operations, and the EWB borrowing facility.

In addition, we may seek to raise capital through additional debt or equity financing, which may include sales of securities under our 2022 Shelf or under a new registration statement.

If such funding is not available or not available on terms acceptable to us, our current plans for expansion of our product portfolio may be scaled back, limited or curtailed.

We regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure.

Cash Flows for the Years Ended December 31, 2022 and 2021

For the Years ended December 31,

($ in thousands)

Net cash (used in) provided by operating activities

($’s in thousands)

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Net change in cash and cash equivalents

Operating Activities

Net cash used in operating activities increased to $2.2 million for the year ended December 31, 2021 from net cash provided by operating activities of $5.1 million for the year ended December 31, 2020.

The decrease is primarily attributable to our net loss of $44.0 million, offset by increases in accounts payable, and expense for development-licenses acquired.

The increases reflect costs related to the continued commercialization and expansion of our product portfolio, including the purchases of licenses and sales and marketing related costs as well as costs associated with being a new public company.

Net cash used in operating activities increased by $11.4 million, to $13.5 million for the year ended December 31, 2022, from $2.2 million for the year ended December 31, 2021.

The increase was driven primarily by vendor, supplier, and other payments in the ordinary course of business, which were generally higher as a result of additional headcount costs, inventory purchases and marketing expenses related to our expanded product portfolio, legal expenses and compliance and other costs associated with being a public company that were not present in the prior year, pre-IPO, offset by accounts receivable cash collections.

Investing Activities

Net cash used in investing activities was $10.0 million and $1.2 million for the years ended December 31, 2021 and 2020, respectively.

The increase is related to the purchase of research and development licenses.

Net cash used in investing activities increased by $10.0 million, to $20.0 million for the year ended December 31, 2022, from $10.0 million for the year ended December 31, 2021.

The increase is primarily due to the $20.0 million in consideration paid for the products acquired in the Vyne Product Acquisition Agreement in January 2022, compared to payments of $10.0 million for the year ended December 31, 2021 for research and development licenses.

Financing Activities

Net cash provided by financing activities was $53.0 million for the year ended December 31, 2021.

Net cash used in financing activities was $0.5 million for the year ended December 31, 2020.

The increase is substantially related to $31.0 million in net proceeds received

from the closing of our IPO and $9.5 million and net proceeds of $17.0 million received from the Fortress Note, and net proceeds from the Class A Preferred Offering, respectively, offset by $5.3 million payment of our license note payable.

Off-Balance Sheet Arrangements

We did not have during the periods presented, nor do we currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Net cash provided by financing activities decreased by $36.6 million, to $16.5 million for the year ended December 31, 2022, from $53.0 million for the year ended December 31, 2021.

The decrease is primarily related to $30.6 million and $17.0 million of net proceeds received from the completion of our IPO in November 2021 and the issuance of our convertible preferred stock, respectively.

In addition, we received proceeds of $9.5 million from the Fortress note for the year ended December 31, 2021.

This is compared to borrowings under the EWB term loan of $20 million and net borrowings under the EWB revolving line of credit of $2.1 million during the year ended December 31, 2022.

Material Cash Requirements

In the normal course of business, we enter into contractual obligations that contain cash requirements of which the most significant to date include the following:

● We are required to make regular payments under the EWB Facility, which was recently amended to increase the borrowing capacity of our revolving line of credit to $10.0 million, $2.9 million of which was outstanding at December 31, 2022, and to add a term loan not to exceed $20.0 million.

Based on the amount currently outstanding under the EWB facility and current interest rates, and assuming we do not make further draws under the EWB Facility, we expect to make the following payments:

Payments by Period

($’s in thousands)

Should we elect to make further borrowings under the EWB facility, we would expect to repay additional amounts each year until maturity.

● Pursuant to the Vyne Product Acquisition Agreement, we agreed to pay to Vyne an additional $5.0 million upon the one-year anniversary of the closing, January 12, 2023, completing our obligation to pay the full purchase price.

Upon the achievement of net sales milestones with respect to the products purchased in the Vyne Product Acquisition, we are also required to pay contingent consideration consisting of a one-time payment, per product, of $10 million, $20 million, $30 million, $40 million and $50 million upon each product reaching annual net sales of $100 million, $200 million, $300 million, $400 million and $500 million, respectively.

Each required payment must only be paid one time following the first achievement of the applicable annual net sales milestone amount.

● Pursuant to the DFD-29 Agreement with DRL, we paid an upfront payment of $10.0 million.

Additional contingent regulatory and commercial milestone payments totaling up to $158.0 million may also be payable.

Royalties ranging from ten percent to twenty percent are payable on net sales of the product.

Additionally, we are required to fund and oversee the Phase 3 clinical trials, which we anticipate will cost approximately $24.0 million, based upon the current development plan and budget.

● We are contractually obligated to make installment milestone payments on our acquired licenses as follows:

Payments by Period

($’s in thousands)

● We are contractually obligated to make sales-based royalty payments to Dermira (for Qbrexza), Sun Pharmaceutical Industries (for Exelderm and Ximino) and PuraCap Caribe (for Targadox).

Due to the contingent nature of these obligations, the amounts of these payments cannot be reasonably predicted.

Quantitative and Qualitative Disclosures About Market Risks

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Item 7. Management’s Discussion and Analysis