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Item 9A. Controls and Procedures

2023-03-31 compared with 2022-03-28 · 501 added, 475 removed, 469 unchanged (68% of the section changed)

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.

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we were required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We have carried out an evaluation as of the end of the period covered by this Annual Report on Form 10-K under the supervision, and with the participation, of our management, including our Chief Executive Officer (who serves as our principal executive officer) and our Interim Chief Financial Officer (who serves as our principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures.

Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K in providing reasonable assurance of achieving the desired control objectives.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).

Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors;

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.

Internal control over financial reporting has inherent limitations.

Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.

Internal control over financial reporting also can be circumvented by collusion or improper management override.

Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.

However, these inherent limitations are known features of the financial reporting process.

Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022.

In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013) .

Based on the results of this assessment, management (including our Chief Executive Officer and our Interim Chief Financial Officer) has concluded that, as of December 31, 2022, our internal control over financial reporting was effective.

This Annual Report does not include an attestation report on internal control over financial reporting from our independent registered public accounting firm due to our status as an emerging growth company under the JOBS Act.

Remediation of previously reported material weakness

As previously disclosed, 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

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.

As a result of the foregoing, we identified a material weakness as of September 30, 2021 due to our internal controls having not been adequately designed to prevent or timely detect unauthorized cash disbursements.

To remediate the material weakness identified, we enhanced and formalized cash disbursement controls to prevent and timely detect unauthorized cash disbursements and significantly enhanced our information technology infrastructure and security measures.

As the implementation of the enhanced procedures and controls have functioned effectively for multiple quarters, we concluded that we have remediated the material weakness previously disclosed in 2021.

Changes in Internal Control over Financial Reporting

Other than as discussed above, there have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter ended December 31, 2022 to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other Information

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The following financial statements are filed as part of this report:

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (KPMG LLP, Short Hills, New Jersey;

Consolidated Balance Sheets as of December 31, 2022 and 2021

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(b) Exhibits.

Third Amended and Restated Certificate of Incorporation of Journey Medical Corporation.

Amended and Restated Bylaws of Journey Medical Corporation.

Third Amended and Restated Certificate of Incorporation of Journey Medical Corporation, filed on March 28, 2022 and incorporated herein by reference.

Amended and Restated Bylaws of Journey Medical Corporation, filed as Exhibit 3.2 to Form 10-K, filed on March 28, 2022 and incorporated herein by reference.

Form of Common Stock Certificate, filed as Exhibit 4.1 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.

Description of Securities of Journey Medical Corporation.

Description of Securities of Journey Medical Corporation, filed as Exhibit 4.2 to Form 10-K, filed on March 28, 2022 and incorporated herein by reference.

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.#

Amendment to Journey Medical Corporation 2015 Stock Plan, filed as Exhibit 10.1 to Form 8-K filed on June 21, 2022 and incorporated herein by reference.#

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.#

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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.

First Amendment to Loan and Security Agreement, entered into by and between Journey Medical Corporation and East West Bank, dated March 31, 2021, filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2022, filed May 10, 2022 and incorporated herein by reference.**

Second Amendment to Loan and Security Agreement, entered into by and between Journey Medical Corporation and East West Bank, dated November 4, 2021, filed as Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2022, filed May 10, 2022 and incorporated herein by reference.**

Third Amendment to Loan and Security Agreement, entered into by and between Journey Medical Corporation and East West Bank, dated January 12, 2022, filed as Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2022, filed May 10, 2022 and incorporated herein by reference.**

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.**

Asset Purchase Agreement between VYNE Therapeutics Inc.

and Journey Medical Corporation, dated as of January 12, 2022, filed as Exhibit 10.1 to Form 8-K filed on January 13, 2022 and incorporated herein by reference.**

License and Supply Agreement for Accutane, entered into by and between Journey Medical Corporation and Dr.

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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.

Shared Services Agreement with Fortress Biotech Inc., dated as of November 12, 2021.

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.

At Market Issuance Sales Agreement, dated as of December 30, 2022, by and between Journey Medical Corporation and B.

Riley Securities, Inc., filed as Exhibit 1.2 to Form S-3, filed on December 30, 2022 and incorporated herein by reference.

List of Subsidiaries of Journey Medical Corporation.*

Power of Attorney (included on signature page).

Consent of KPMG LLP.*

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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** Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K.

*** Furnished herewith.

# Management Compensation Arrangement.

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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.

We have audited the accompanying consolidated balance sheets of Journey Medical Corporation and subsidiary (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years then ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years then ended December 31, 2022, in conformity with U.S.

generally accepted accounting principles.

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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.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

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.

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Operating lease right-of-use asset, net

Deferred tax assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Accounts payable

Accounts payable, related party

Due to related party

Accrued expenses

Accrued expenses, related party

Accrued interest

Income taxes payable

Line of credit

Installment payments – licenses, short-term (net of debt discount of $ 490 and $ 778 as of December 31, 2021 and December 31, 2020, respectively)

Operating lease liabilities, short-term

Deferred cash payment (net of discount of $ 9 )

Installment payments – licenses, short-term

Operating lease liability, short-term

Total current liabilities

Income tax payable

Note payable, related party

Installment payments – licenses, long-term (net of debt discount of $ 373 and $ 863 as of December 31, 2021 and December 31, 2020, respectively)

Operating lease liabilities, long-term

Term loan (net of debt discount of $ 180 )

Installment payments – licenses, long-term

Operating lease liability, long-term

Total liabilities

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Additional paid-in capital

Retained earnings (Accumulated deficit)

Accumulated deficit

Total stockholders’ equity

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Product revenue, net

Other revenue

Total revenue

Operating expenses

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Total operating expenses

(Loss) income from operations

Other expense

Loss from operations

Other expense (income)

Interest income

Interest expense

Foreign exchange transaction losses

Change in fair value of derivative liability

Total other expense

Net (loss) income before income taxes

Total other expense (income)

Loss before income taxes

Income tax expense

Net (loss) income

Net (loss) income per common share – basic

Net (loss) income per common share – diluted

Weighted average shares outstanding – basic

Weighted average shares outstanding – diluted

Net loss per common share:

Basic and diluted

Weighted average number of common shares:

Basic and diluted

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

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Balance as of December 31, 2020

Stock-based compensation

Exercise of stock options for cash

Contribution of capital – extinguishment of related party payable

Balance as of December 31, 2020

Stock-based compensation

Exercise of stock options for cash

Share-based compensation

Exercise of options for cash

Issuance of common stock related to equity plans

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Balance as of December 31, 2021

Share-based compensation

Exercise of stock options for cash

Issuance of common stock for vested restricted stock units

Balance as of December 31, 2022

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

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Cash flows from operating activities

Net (loss) income

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

Depreciation expenses

Bad debt expense

Non-cash interest expense

Accretion of convertible preferred shares

Amortization of debt discount

Amortization of license fee

Accretion of convertible preferred shares

Amortization of acquired intangible assets

Amortization of operating lease right-of-use assets

Stock-based compensation

Deferred taxes provision (benefit)

Share-based compensation

Deferred taxes

Change in fair value of derivative liability

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Accounts payable

Accounts payable, related party

Related party expenses

Accrued expenses

Accrued expenses, related party

Accrued interest

Income tax payable

Lease liabilities

Net cash (used in) provided by operating activities

Net cash used in operating activities

Cash flows from investing activities

Purchase of research and development licenses

Acquired assets

Net cash used in investing activities

Cash flows from financing activities

Proceeds from the exercise of options

Proceeds from the exercise of stock options

Proceeds from Fortress note

Payment of license note payable

Payment of license installment note payable

Proceeds from convertible preferred shares

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Proceeds from issuance of common stock - initial public offering

Proceeds from EWB term-loan, net of discount

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

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Net change in cash

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Supplemental disclosure of cash flow information:

Cash paid for interest

Cash paid for income taxes

Supplemental disclosure of non-cash financing and investing activities:

Deferred payment for asset acquisition

ROU assets obtained in exchange for lease liabilities

Unpaid debt offering cost

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Extinguishment of related party payable relates to deferred tax assets

Unpaid intangible assets

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

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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.

Journey Medical Corporation (collectively “Journey” or 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 current product portfolio includes eight branded and three authorized generic prescription drugs for dermatological conditions that are marketed in the U.S.

The Company acquires rights to products and product candidates by licensing or otherwise acquiring an ownership interest in, funding the research and development of, and eventually commercializing, the products through its exclusive field sales organization.

At of December 31, 2022 and 2021, the Company is a majority-owned subsidiary of Fortress Biotech, Inc.

(“Fortress” or “Parent”).

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

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.

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

333-269079), which was declared effective by the Securities and Exchange Commission (“SEC”) on January 26, 2023.

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

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

In connection with the 2022 shelf, the Company has entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B.

Riley Securities, Inc.

Riley”), relating to shares of the Company’s common stock.

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

Riley acting as the Company’s agent or principal.

On January 12, 2022, the Company entered into a third amendment of the loan and security agreement with EWB (the “Amendment”), which increased the borrowing capacity of the Company’s 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, 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.

The Company may elect to prepay all or any part of the term loan without penalty or premium, but the Company 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.

At December 31, 2022, the Company was in compliance with all applicable financial covenants under the Amendment.

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

The Company expects that expenses will increase substantially for the foreseeable future as it pursues business development opportunities, commercializes and markets new products and incurs additional costs associated with operating as a public company.

To date, the Company has not been materially impacted by COVID-19;

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

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 the Company’s borrowings under the facility with EWB bear interest at a floating rate, rising interest rates affect the amount of the regular payments the Company is required to make to EWB.

Accordingly, the Company may experience materially higher borrowing costs in future fiscal quarters than it historically has to date.

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

In addition, The Company anticipates 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 the Company continues to expand its product portfolio, it may need to fund possible future operating losses, and, if deemed appropriate, establish or secure through

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

additional third-party manufacturing for the Company’s products, and expanded sales and marketing capabilities related to recent product acquisitions.

For the next twelve months from the issuance of these financial statements, the Company 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, the Company may seek to raise capital through additional debt or equity financing, which may include sales of securities under the 2022 Shelf or under a new registration statement.

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

The Company regularly evaluates market conditions, its liquidity profile, and various financing alternatives for opportunities to enhance the Company’s capital structure.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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All intercompany balances and transactions have been eliminated.

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.

Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s unaudited interim condensed consolidated financial statements upon adoption.

Under the Jumpstart Our Business Startups Act of 2012, as amended, the Company meets the definition of an emerging growth company and elected the extended transition period for complying with new or revised accounting standards, which delays the adoption of these accounting standards until they would apply to private companies.

Use of Estimates

The preparation of 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.

Significant estimates made by management include provisions for coupons, chargebacks, wholesaler fees, prompt-pay discounts, specialty pharmacy discounts, managed care rebates, product returns, government rebates and other allowances customary to the pharmaceutical industry.

Significant estimates made by management also include inventory realization, valuation of intangible assets, useful lives of amortizable intangible assets and share-based compensation.

Actual results may differ materially and adversely from these estimates.

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The Company views its operations and manages its business in one segment, which reflects products for the treatment of dermatological conditions.

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

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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 17 for significant customers.

Cash and Cash Equivalents

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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 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.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

The Company’s accounts receivable consists of amounts due from customers related to product sales and have standard payment terms.

For certain customers, the accounts receivable for the customer is net of prompt payment or specialty pharmacy discounts.

The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile.

The Company reserves against accounts receivable for estimated losses that may arise from a customer’s inability to pay, and any amounts determined to be uncollectible are written off against the reserve when it is probable that the receivable will not be collected.

The Company has historically not experienced significant credit losses.

The allowance for doubtful accounts was $ 0.4 million and $ 0.1 million at December 31, 2022 and 2021, respectively.

Inventories are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis.

The Company periodically reviews the composition of inventory in order to identify excess, obsolete, slow-moving or otherwise non-saleable items taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand.

If non-saleable items are observed and there are no alternate uses for the inventory, the Company records a write-down to net realizable value in the period that the decline in value is first recognized.

The Company’s inventory reserves were $ 0.4 million and zero at December 31, 2022 and 2021, respectively.

Property and Equipment

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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.

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.

3 unchanged sentences

In calculating the right-of-use asset and lease liability, the Company elects to combine lease and non-lease components.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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, payments made to third parties for license and milestone costs related to in-licensed products and technology, and 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 total purchase price for the licenses acquired during the period was reflected as research and development - licenses acquired in the Consolidated Statements of Operations for the year ended December 31, 2022 and 2021.

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.

Fair Value Measurement

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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.

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:

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

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.

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.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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 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.

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 intangible assets with finite useful lives, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable (a “triggering event”).

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.

The Company has not recorded any impairment losses on long-lived assets for the years ended December 31, 2022 and 2021.

Share-based Compensation

The Company has a share-based compensation plan in place and records the associated share-based compensation expense over the requisite service period.

The share-based compensation plan and related compensation expense are discussed more fully in Note 16 to the Company’s consolidated financial statements.

Compensation expense for service-based stock options is charged against operations on a straight-line basis over the vesting period, which is generally four years.

Forfeitures are recorded as they occur.

Share-based compensation costs are recorded in both research and development and selling, general and administrative expense in the Company’s consolidated statements of operations.

Options granted have a term of 10 years from the grant date.

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, 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 share-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

The following inputs are used in the Black-Scholes calculation.

Expected term—The Company has elected to use the “simplified method” for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years).

Expected volatility— Historical information is the primary basis for the selection of the expected volatility of options granted.

However, as the Company has limited trading history for its common shares, the expected volatility was estimated based on the average volatility for comparable guideline publicly traded biotechnology companies over a period equal to the expected term of the stock option grants.

The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

Risk-free interest rate— 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.

Expected dividend yield—The Company has not issued any dividends in our history and do not expect to issue dividends over the life of the options;

therefore, the Company has estimated the dividend yield to be zero.

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.

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.

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 19 below.

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 records and recognizes revenue in a manner that depicts 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.

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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

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

estimates and assumptions.

Revenues are recorded net of provisions for variable consideration, including coupons, chargebacks, wholesaler fees, prompt pay discounts, specialty pharmacy discounts, managed care rebates, product returns, government rebates and other deductions customary to the pharmaceutical industry.

Accruals for these provisions are presented in the consolidated financial statements as reductions to gross sales in determining net sales and as a contra asset within 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 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.

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

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.

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.

Accordingly, the

Coupons are processed and redeemed at the time of prescription fulfilment by the pharmacy.

The majority of coupon reserve accrual at the end of the period reflects coupons that have been redeemed for which the Company has been billed in addition to an accrual for expected redemptions for product in the distribution channel.

The expected accrual reserve requires us to estimate the distribution channel inventory at period end, the expected

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.

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

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

redemption rates, and the cost per coupon claim that the Company expects to receive.

The estimate of product remaining in the distribution channel is comprised of estimated inventory at the wholesaler as well as an estimate of inventory on the shelves at the specialty pharmacies, which the Company estimates based upon historical ordering patterns.

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.

Chargebacks and Government Chargebacks — The Company sells a portion of its products indirectly through wholesaler distributors to contracted indirect customers, qualified government healthcare providers, qualified U.S.

Department of Veterans Affairs hospitals, and 340B entities.

The Company enters into specific agreements with or provides discounts to these indirect customers and entities to establish pricing for the Company’s products, and in-turn, the indirect customers and entities independently purchase these products.

Because the price paid by the indirect customers and/or entities is lower than the price paid by the wholesaler, the Company provides a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and their purchase price.

The Company continually monitors its reserve for chargebacks and adjusts the reserve accordingly when expected chargebacks differ from actual experience.

Wholesaler fees – The Company provides allowances to its wholesale customers for sales order management, data, and distribution services.

The Company also pays administrative and other fees to certain wholesale customers consistent with pharmaceutical industry practices.

The Company records a provision for these fees based on contracted rates.

Assumptions used to establish the provision include contract sales volumes and average contract pricing.

The Company regularly reviews the information related to these estimates and adjusts the provision accordingly.

Prompt-Pay Discounts – The Company provides for prompt pay discounts if payment is received within contractual payment term days, which generally ranges from 30 to 90 days.

These discounts 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.

Specialty Pharmacy Discounts - The Company has in place contractual arrangements with specialty pharmacies and provides for contractually agreed upon discounts.

These discounts are recorded at the time of sale based on the customer’s contracted rate and recorded as a reduction of revenue.

Managed Care Rebates — The Company is subject to rebates in connection with its agreements with certain contracted commercial payers.

The Company estimates its managed care rebates based on the Company’s estimated payer mix and the applicable contractual rebate rate.

The Company’s accrual for managed care rebates is based on an estimate of future claims that the Company expects to receive, which considers an estimate for inventory in the distribution channel.

The accrual is recognized at the time of sale, resulting in a reduction of gross product revenue.

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.

Products returned for expiration are reimbursed at current wholesale acquisition cost or indirect contract price.

The Company estimates the amount of its product sales that may be returned by the Company’s customers and accrues this estimate as a reduction of revenue in the period the related product revenue is recognized.

The Company estimates products returns as a percentage of sales to its customers.

The rate is estimated by using historical sales information, including its visibility and estimates into the inventory remaining in the distribution channel.

As of December 31, 2022, the Company was 57.34 % owned by Fortress Biotech, Inc.

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

As the Company completed its initial public offering on November 12, 2021, it deconsolidated from the Fortress consolidated group for federal income tax purpose.

The financial statements recognize the current and deferred income tax consequences that result from the activities during the current and preceding periods, as if the Company were a separate taxpayer rather than a member of the Fortress consolidated

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.

income tax return group.

Fortress has agreed that the Company does not have to make payments to Fortress for the use of net operating losses (“NOLs”) of Fortress (including other Fortress group members).

Since Fortress does not require the Company to pay in any form for the utilization of the consolidated group’s NOLs, the tax benefit realized have been 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.

The Company establishes a valuation allowance if it believes it is more likely than not that the deferred tax assets will not be recovered based on an evaluation of objective verifiable evidence.

The Company has considered its 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 it will realize the benefits of the net deferred tax assets as of December 31, 2022 and 2021 and therefore a full valuation allowance on all of the deferred tax assets is required.

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.

See Note 17 below.

For the years ended December 31, 2022 and 2021, the Company had no unrecognized tax benefits and does not anticipate any significant change to the unrecognized tax benefit balance.

The Company classifies 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, 2022 and 2021.

Comprehensive Income

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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.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

The Company’s inventory consists of the following:

($in thousands)

There are no recent accounting pronouncements that are expected to have a material impact on the Company’s consolidated financial statements or related disclosures.

The Company’s inventory consisted of the following at December 31, 2022 and 2021:

($’s in thousands)

Raw materials

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Finished goods

Inventory at cost

Inventory reserves

Total Inventories

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.

ASSET ACQUISITION

On January 12, 2022, the Company entered into an agreement with Vyne Therapeutics Inc.

(“Vyne”) to acquire two United States Food and Drug Administration (“FDA”) approved topical minocycline products, Amzeeq® (minocycline) topical foam, 4 %, and Zilxi® (minocycline) topical foam, 1.5 %, and a Molecule Stabilizing Technology™ proprietary platform from Vyne for an upfront payment of $ 20.0 million and an additional $ 5.0 million payment on the one year anniversary of the closing (the “Vyne Product Acquisition Agreement”).

This expanded the Company’s product portfolio to eight marketed branded dermatology products.

The Company also acquired the associated inventory related to the products.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

The Vyne Product Acquisition Agreement also provides for contingent net sales milestone payments, on a product-by-product basis.

In the first calendar year in which annual net sales reach each of $ 100 million, $ 200 million, $ 300 million, $ 400 million and $ 500 million, the Company is required to make a one-time payment of $ 10 million, $ 20 million, $ 30 million, $ 40 million and $ 50 million, respectively, in that year only, per product, totaling up to $ 450 million.

In addition, the Company will pay Vyne 10 % of any upfront payment received by the Company from a licensee or sublicensee of the products in any territory outside of the United States, subject to exceptions for certain jurisdictions as detailed in the Vyne Product Acquisition Agreement.

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

Consideration

($’s in thousands)

Consideration transferred to Vyne at closing

Fair Value of deferred cash payment due January 2023

Transaction costs

Total consideration transferred at closing

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

The deferred cash payment had a carrying value of $ 5.0 million in the Company’s consolidated balance sheets at December 31, 2022.

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

($’s in thousands)

Identifiable Intangibles:

Amzeeq Intangible

Zilxi Intangible

Fair value of net identifiable assets acquired

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

The Company executed the Vyne Product Acquisition Agreement on January 12, 2022.

The Company recognized intangible assets of $ 15.2 million for Amzeeq and $ 3.8 million for Zilxi, the two FDA approved products acquired in the agreement.

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 Company paid the upfront fee of $ 12.5 million to Dermira.

In addition, the Company is obligated to pay Dermira 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 %.

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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®.

District Court of Delaware (the “Patent Litigation”) against Perrigo Pharma

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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”).

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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.

As of December 31, 2022, the Patent Litigation was settled by and between the parties and case subsequently has been dismissed.

The purchase price of $ 12.5 million included the asset, Qbrexza, as well as finished goods and raw material inventory.

2 unchanged sentences

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.

The table below provides a summary of the Company’s intangible assets at December 31, 2022 and 2021, respectively:

December 31, 2022

($’s in thousands)

Amortizable intangible assets:

Non-amortizable intangible assets:

Anti-itch product (1)

Total intangible assets

(1) As of December 31, 2022, this asset has not yet been placed in service, therefore no amortization expense was recognized on this asset for the year ended December 31, 2022.

Commercial launch of this product is expected in 2023.

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

($in thousands)

Lives (Years)

December 31, 2021

($’s in thousands)

Amortizable intangible assets:

Non-amortizable intangible assets:

Anti-itch product (1)

Total intangible assets

Accumulated amortization

Net intangible assets

(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:

The commercial launch of this product is expected in 2023.

The table below provides a summary for the year ended December 31, 2022 and 2021, of the Company’s recognized intangible amortization expense related to its product licenses, which was recorded in costs of goods sold on the consolidated statement of operations:

($’s in thousands)

Balance at January 1, 2020

Isotretinion agreement (1)

Anti-itch product license acquisition (2)

Exelderm milestone

Balance at December 31, 2020

License acquisition adjustment

Amortization expense

Balance at December 31, 2021

Anti-itch product license acquisition adjustment

VYNE License agreement

Amortization expense

Unvested balance at December 31, 2021

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

Balance at December 31, 2022

The Company’s amortization expense for the years ended December 31, 2022 and 2021 was approximately $ 4.3 million and $ 2.5 million, respectively.

Amortization expense is recorded as a component of cost of goods sold in the Company’s consolidated statements of operations.

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.

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:

($’s in thousands)

For the years ended

December 31, 2023

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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.

Pursuant to the terms and conditions of the DFD-29 Agreement, the Company paid $ 10.0 million.

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

The product candidates acquired 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.

Additionally, the DFD-29 Agreement contained contingent consideration payable by the Company upon either an IPO of the Company’s common stock or an acquisition of the Company.

The Company recognized $ 3.8 million of expense classified as research and development-licenses acquired upon execution of the DFD-29 Agreement associated with the contingent consideration.

In connection with the closing of the Company’s IPO on November 16, 2021, the Company issued 545,131 shares of its common stock to DRL in a transaction exempt from registration under the Securities Act calculated using a 15-day volume weighted average price (“VWAP”) of $ 9.1721 per share in full settlement of the contingent payment 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.

See “Contingent Payment Derivative” in Note 7 for further details.

The Company is required to fund and oversee the Phase 3 clinical trials.

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:

Additionally, DRL may terminate the agreement if the 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);

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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.

From inception to date the Company has incurred approximately $ 13.0 million associated with the development of DFD-29.

JOURNEY MEDICAL CORPORATION

1 unchanged sentence

FAIR VALUE MEASUREMENTS

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

December 31, 2022

($’s in thousands)

Cash and cash equivalents

December 31, 2021

($’s in thousands)

Cash and cash equivalents

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.

Pursuant to the terms of the Company’s Class A Preferred Stock offering (see Note 15), the Company was required to issue upon a Qualified Financing (an external financing of $ 25.0 million or greater) warrants 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.

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Expected volatility

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.

In connection with the Company’s IPO, the Company issued 111,567 shares of common stock related to the conversion of all of the Placement Agent Warrants.

Contingent Payment Derivative

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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)

Cash and cash equivalents

As a result of the IPO on November 16, 2021, calculated using a 15-day VWAP of $ 9.1721 per share, the Company issued 545,131 shares of Journey common stock to DRL in a transaction exempt from registration under the Securities Act.

The restrictions on the shares of common stock issued in such transaction are governed by the terms set forth in the DFD-29 Agreement and applicable securities laws.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

December 31, 2020

($in thousands)

Cash and cash equivalents

The table below provides a roll-forward of the changes in fair value of Level 3 financial instruments as of December 31, 2021:

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.

The table below provides a roll-forward of the changes in fair value of Level 3 financial instruments as of December 31, 2022 and 2021:

($in thousands)

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Contingent payment warrant

Placement agent warrant

Placement agent warrant (see note 15)

Change in fair value of warrant liabilities:

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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.

Fair value at December 31, 2022

During the years ended December 31, 2022 and 2021 , no transfers occurred between Level 1, Level 2, and Level 3 instruments.

RELATED PARTY AGREEMENTS

3 unchanged sentences

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.

For the years ended December 31, 2022 and 2021, the Company incurred expenses to Fortress employees totaling $ 0.1 million and $ 0.6 million, respectively.

Upon completion of the Company’s IPO, the Company’s outstanding balance owed to Fortress of $ 0.5 million 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.

As of December 31, 2022 and 2021, the Company had a balance of approximately $ 0.4 million and $ 0.6 million, respectively, recorded as due to 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.

From the Company’s inception in October 2014 until the IPO, Fortress funded the Company’s operations through the Fortress Note for a total of $ 5.2 million.

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 being made by the Company.

In lieu of repayment a $ 9.5 million contribution was approved by the boards of directors of both the Fortress and Journey and was made with the purpose of ensuring that Journey’s accounts payable function would continue to operate smoothly.

This contribution, along with $ 5.2 million already outstanding under the Fortress Note, was 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 in full settlement of the amounts owed to Fortress.

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.

ACCRUED EXPENSES

Accrued expenses consisted of the following:

Accrued expenses for the years ended December 31, 2022 and 2021 consisted of the following:

($’s in thousands)

Accrued expenses:

Accrued emplyee compensation

Research and development - license fees

Accrued expenses and other short-term liabilities:

Accrued coupons and rebates

Accrued compensation

Accrued royalties payable

Accured coupons and rebates

Return reserve

Accrued Inventory

Accrued research and development

Accrued legal, accounting and tax

Accrued iPledge program

Accrued marketing and advertising

Total accrued expenses

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

INSTALLMENT PAYMENTS — LICENSES

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

The following tables show the details of the Company’s installment payments – licenses for the years ended December 31, 2022 and 2021:

December 31, 2022

($in thousands)

Installment payments - licenses, short-term

imputed interest

Sub-total installment payments - licenses, short-term

Installment payments - licenses, long-term

($’s in thousands)

Installment payments - licenses

imputed interest

Sub-total installment payments - licenses, long-term

Total installment payments - licenses

Sub-total installment payments - licenses

December 31, 2021

($in thousands)

Installment payments - licenses, short-term

imputed interest

Sub-total installment payments - licenses, short-term

Installment payments - licenses, long-term

($’s in thousands)

Installment payments - licenses

imputed interest

Sub-total installment payments - licenses, long-term

Total installment payments - licenses

Imputed interest rate of 11.96 % and maturity date of July 22, 2024.

Imputed interest rate of 4.03 % and maturity date of July 29, 2023.

Imputed interest rate of 4.25 % and maturity date of January 1, 2022.

Sub-total installment payments - licenses

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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 lease was set to expire on December 31, 2022.

In September 2022, the Company amended the lease to extend the lease term for an additional 25 months at an annual rate of approximately $ 0.1 million.

The amended lease will expire on January 31, 2025.

The Company recorded rent expense as follows (dollars in thousands):

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Total lease cost

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,

Operating cash flows from operating leases

Cash paid for amounts included in the measurement of lease liabilities

Right-of-use assets exchanged for new operating lease liabilities

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Weighted-average discount rate - operating leases

As of December 31, 2021, future minimum lease payments under lease agreements associated with the Company’s operations were as follows:

($in thousands)

Year Ended December 31, 2022

As of December 31, 2022, future payments of operating lease liabilities are as follows:

For the year ended December 31,

($’s in thousands)

Total lease payments

present value discount

Operating lease liabilities

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.

INTEREST EXPENSE AND FINANCING FEES

Interest expense and financing fees for the periods consisted of the following:

Year Ended December 31,

($in thousands)

Convertible preferred shares

Dividend payable

Installment payments - licenses 2

Anti-itch product installment payments

Total Interest Expense and Financing Fee

Amortization of fees in connection with debt raises.

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.

Total operating lease liabilities

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

The Company’s Debt obligations at December 31, 2022 and 2021 were as follows:

December 31, 2022

($’s in thousands)

Discount & Fees

Deferred cash payment

EWB Revolving LOC

Total Short-Term Debt

EWB Term Loan (Long-term)

Total Debt & Obligations

December 31, 2021

EWB Revolving LOC (Short-term)

East West Bank Line of Credit and Long-Term Debt

On January 12, 2022, the Company entered into a third amendment of the loan and security agreement with EWB (the “Amendment”), which increased the borrowing capacity of the Company’s 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.

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

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

The term loan effective interest rate at December 31, 2022 is 9.64 %.

The term loan contains 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.

The Company was in compliance with all applicable financial covenants under the Amendment as of December 31, 2022.

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

The Company accounted for the Amendment as a debt modification.

The remaining unamortized debt issuance costs related to the original revolving facility together with any lender fees and direct third-party costs incurred in connection with the entry into the Amendment are considered associated with the new arrangement.

The fees allocated to the revolving line are amortized over the new four-year term of the amended revolving facility.

The fees allocated to the term loan are recorded as a debt discount and amortized to interest expense over the four-year term of the term loan under the effective interest method.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

INTEREST EXPENSE AND FINANCING FEES

Interest expense and financing fees for the years ended December 31, 2022 and 2021 consisted of the following:

Year Ended December 31,

Interest payments on EWB term loan and LOC

Imputed Interest on acquired intangible assets

Amortization/Accretion

Interest and Fees on convertible preferred shares

Dividends payable on convertible preferred shares

Total Interest Expense and Financing Fees

COMMITMENTS AND CONTINGENCIES

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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.

For additional information on future milestone payments and royalties, see Note 4 and Note 5.

STOCKHOLDERS’ EQUITY AND CLASS A PREFERRED STOCK

4 unchanged sentences

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.

Thus, the holders of the Class A Common Stock will at all times constitute a voting majority.

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.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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.

4 unchanged sentences

In addition, as a result of the IPO, the Company issued shares of its Common stock based on the following.

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.

In March 2021, the Company commenced an offering of 8 % Cumulative Convertible Class A Preferred Stock (“Class A Preferred Offering”).

The Class A Preferred Offering terminated on July 18, 2021 and raised gross proceeds of $ 19 million.

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.

In the event that neither a sale of the Company nor a $ 25.0 million financing was completed, the Class A Preferred Stock was to 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 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.

SHARE-BASED COMPENSATION

In 2015, the Company’s Board of Directors adopted, and stockholders approved, the Journey Medical Corporation 2015 Stock Plan (the “Plan”) authorizing the Company to grant up to 4,642,857 shares of Common Stock to eligible employees, directors, and consultants in the form of restricted stock, restricted stock units (“RSUs”), stock options and other types of grants.

The amount, terms, and exercisability provisions of grants are determined by the Board of Directors.

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.

At the Company’s 2022 Annual Meeting, held on June 21, 2022, the Company’s stockholders approved, among other matters, an amendment to the Plan to increase the number of shares of Common Stock issuable under the Plan by 3,000,000 to 7,642,857 .

At December 31, 2022 there were 1,146,620 shares available for issuance under the Plan.

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.

Compensation cost for stock options is charged against operations on a straight-line basis over the vesting period.

The Company estimates the fair value of stock options on the grant date by applying the Black-Scholes option pricing valuation model.

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.

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:

Outstanding options at December 31, 2019

Total compensation cost charged against operations related to the above plan for the years ended December 31, 2022 and 2021 was $ 4.4 million and $ 2.5 million, respectively.

The following table summarizes the components of share-based compensation expense in the consolidated statements of operations for the years ended December 31, 2022 and 2021:

Year Ended December 31,

($’s in thousands)

Research and development

Selling, general and administrative

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

Stock Options

The weighted-average key assumptions used in determining the fair value of options granted for the year ended December 31, 2022 are as follows:

Risk-free interest rate

2.89 % - 4.20 %

Expected volatility

80.25 % - 86.18 %

Weighted average expected volatility

Expected term (years)

Expected dividend yield

The weighted average grant-date fair value of stock options issued during the year ended December 31, 2022 was $ 2.67 per share.

The Company did not grant any stock options during the year ended December 31, 2021.

The following table summarizes the Company’s stock option activity for the year ended December 31, 2022:

Outstanding options at December 31, 2021

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Options vested and exercisable at December 31, 2022

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.

For the years ended December 31, 2022 and 2021, the Company issued 155,649 and 10,000 shares, respectively, of Common Stock upon the exercise of outstanding stock options and received proceeds of $ 142,330 and $ 6,800 , respectively.

For the years ended December 31, 2022 and 2021, approximately $ 0.8 million and $ 51,669 , respectively, of stock option compensation cost was charged against operations.

At December 31, 2022, the Company had unrecognized share-based compensation expense related to all unvested options of $ 2.0 million, which the Company expects to recognize over a weighted-average period of approximately 2.4 years.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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:

Unvested balance at December 31, 2019

The following table summarizes the Company’s RSU activity for the year ended December 31, 2022:

Unvested balance at December 31, 2021

Unvested balance at December 31, 2022

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.

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.

REVENUES FROM CONTRACTS AND SIGNIFICANT CUSTOMERS

For the years ended December 31, 2022 and 2021 the Company issued 293,707 and 136,500 shares of Common Stock, respectively, upon the vesting of RSU’s amounting to $ 0.9 million and $ 1.4 million, respectively, in total aggregate fair market value.

For the years ended December 31, 2022 and 2021, approximately $ 3.6 million and $ 2.5 million, respectively, of RSU compensation cost was charged against operations.

The $ 2.5 million of RSU compensation cost that was charged against operations for the year ended December 31, 2021 includes $ 2.4 million of RSU compensation cost related to RSU’s that fully vested upon the Company’s IPO on November 12, 2021.

At December 31, 2022 approximately 2,261,048 of RSU’s remained unvested and there was approximately $ 4.8 million of unrecognized compensation cost related to RSUs, which the Company expects to recognize over a weighted-average period of approximately 1.9 years.

REVENUES FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Net Revenues

The Company has the following actively marketed products, Qbrexza®, Accutane®, Targadox®, Ximino®, Exelderm®, and Luxamend®.

The Company has the following actively marketed products, Qbrexza®, Amzeeq®, Zilxi®, Accutane®, Ximino®, Exelderm®, and Targadox®.

All of the Company’s product revenues are recorded in the U.S.

Revenues by product are summarized as follows:

($’s in thousands)

Year Ended December 31,

($ in thousands)

Other branded revenue

Total product revenue, net

Total product revenues

The Company recognized other revenue as follows:

Year Ended December 31,

($in thousands)

Other revenue

Total other revenue

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

Other revenue for the year ended December 31, 2022 included a net $ 2.5 million milestone payment from Maruho Co., Ltd, upon receipt of marketing and manufacturing approval for Rapifort® Wipes 2.5 % (Qbrexza®), as well as $ 0.2 million in royalties from Maruho on sales of Rapifort® Wipes 2.5 % in Japan.

Significant Customers

As of December 31, 2022, two of the Company’s customers accounted for more than 10% of its total accounts receivable balance at 16.7 % and 10.4 %.

As of December 31, 2020, one of the Company’s customers accounted for 12 % of its total accounts receivable balance.

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 %.

For the year ended December 31, 2022 and 2021, none of the Company’s customers accounted for more than 10% of its total gross product revenue.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

The components of the income tax provision are as follows:

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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.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

The significant components of the Company’s deferred tax assets consisted of the following:

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Amortization of license fees

R&D capitalization

Stock compensation

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Deferred tax assets, net

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

A reconciliation of the statutory tax rates and the effective tax rates is as follows:

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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).

As of December 31, 2022, the Company had total federal NOLs of approximately $ 27.0 million, of which $ 7.6 million is subject to expiration and will begin to expire in the year 2033, total state NOLs of $ 17 million, of which $ 4.7 million is subject to expiration and will begin to expire in the year 2026, and federal income tax credits of $ 1.2 million, which will begin to expire in 2031.

Approximately $ 19.4 million of the federal NOLs and $ 12.3 million of the state NOLs can be carried forward indefinitely.

The utilization of the Company’s NOLs are subject to annual Internal Revenue Code Section 382 limitations (382 Limitations).

Based on the analysis of the NOLs carryovers subject to the 382 Limitations, the Company has concluded that the 382 Limitations would not prevent the Company from utilizing all of its NOLs carryovers before expiration.

The Company is subject to U.S.

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The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state.

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

Weighted average shares outstanding - basic

Stock options

Weighted average shares outstanding - diluted

Per share data:

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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.

NET (LOSS) INCOME PER COMMON SHARE

The Company accounts for and discloses net earnings (loss) per share using the treasury stock method.

Net earnings (loss) per common share, or basic earnings (loss) per share, is computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding.

Net earnings (loss) per common share assuming dilutions, or diluted earnings (loss) per share, is computed by reflecting the potential dilution from the exercise of in-the-money stock options, and non-vested restricted stock units.

The Company’s basic and diluted weighted-average number of common shares outstanding for years ended December 31, 2022 and 2021 were as follows:

Year ended December 31,

Common stock equivalents:

Unvested restricted stock units

Stock Options

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 years ended December 31, 2022 and 2021, as the effect would be to reduce the loss per share.

Therefore, the weighted average Common Stock outstanding used to calculate both basic and diluted income loss per share is the same for the years ended December 31, 2022 and 2021.

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.

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March 30, 2023

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.

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March 30, 2023

/s/ Ernie De Paolantonio

Chief Financial Officer

/s/ Joseph Benesch

Interim Chief Financial Officer

March 30, 2023

Ernie De Paolantonio

Joseph Benesch

(Principal Financial Officer)

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures