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Item 7. Management’s Discussion and Analysis

2024-03-29 compared with 2023-03-31 · 95 added, 169 removed, 101 unchanged (72% of the section changed)

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The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).

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

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

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

In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” herein.

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

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

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

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

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

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

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

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

We are a majority-owned subsidiary of Fortress.

2022 Highlights and Events

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

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

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

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

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

Riley, relating to shares of our common stock.

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

Riley acting as our agent or principal.

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

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

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

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

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

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

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

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

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

We acquired global rights to Qbrexza from Dermira in 2021.

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

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

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

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

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

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

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

Rosacea is a common skin disease that affects 16 million Americans, according to AAD.

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

On January 12, 2022, we entered into a third amendment of the loan and security agreement with EWB (the “Amendment”), which increased the borrowing capacity of our revolving line of credit to $10.0 million, $2.9 million of which was outstanding at December 31, 2022, and added a term loan not to exceed $20.0 million.

Both the revolving line of credit and the term loan mature on January 12, 2026.

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

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

The term loans contain an interest-only payment period through January 12, 2024, with an extension through July 12, 2024 if certain covenants are met, after which the outstanding balance of each term loan is payable in equal monthly installments of principal, plus all accrued interest, through the term loan maturity date.

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

Any outstanding borrowing against the revolving line of credit bears interest at a floating rate equal to 0.70% above the prime rate.

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

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

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

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

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

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

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

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

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

The seized cryptocurrency has been transferred into U.S.

government-controlled custodial wallets.

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

Attorney’s Office.

The process includes mandatory waiting periods for filing of claims.

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

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

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

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

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

Critical Accounting Policies and Uses of Estimates

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

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

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

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

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The potential of our estimates to vary differs by program, product, type of customer and geographic location.

In addition, estimates associated with U.S.

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

Recent Accounting Pronouncements

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Research and development

Research and development - licenses acquired

Selling, general and administrative

Wire transfer fraud loss

Loss on impairment of intangible assets

Total operating expenses

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Foreign exchange transaction losses

Change in fair value of derivative liability

Total other expense

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($in thousands)

Other branded revenue

Total net product revenue

Other revenue

Total revenue

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

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

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

Amzeeq and Zilxi (acquired in January 2022).

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

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

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

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

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

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

Total net product revenues decreased $11.3 million, or 16%, to $59.7 million for the year ended December 31, 2023, from $71.0 million for the year ended December 31, 2022.

The decrease is primarily due to lower unit volumes from our legacy products, Targadox, Ximino and Exelderm driven specifically by continued generic competition for Targadox and the winding down, and ultimate discontinuation of Ximino, during the third quarter of 2023.

Despite unit volume increases from period-to-period for Qbrexza, Amzeeq and Zilxi, net revenues for these products were negatively impacted by higher managed care rebates due to higher managed care program costs.

In addition, Qbrexza net revenue was negatively impacted by coupon deductible rate resets in the beginning of 2023, and isolated charges in the first quarter of 2023 for higher-than-anticipated returns from the Dermira product lots purchased in 2021, as well as higher government rebates from increases in certain state rebate programs.

As of July 1, 2023, we no longer participate in these programs.

Accutane net product revenue increased $1.8 million from 2022 due to increased unit volume resulting from our focused sales and marketing efforts.

Other revenue

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

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

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

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

For the Years Ended

($in thousands)

Non-refundable upfront payment from Maruho

Net milestone payment from Maruho

Royalties on sales of Rapifort® Wipes 2.5%

Total other revenue

Other revenues increased approximately $16.8 million, to $19.5 million for the year ended December 31, 2023, from $2.7 million for the year ended December 31, 2022.

Other revenue for the year ended December 31, 2023 includes a $19.0 million non-refundable upfront payment from Maruho under the New License Agreement.

Royalties on sales of Rapifort Wipes 2.5% in Japan were $0.5 million for the year ended December 31, 2023 as compared to $0.2 million for the year ended December 31, 2022.

Other revenue for the year ended December 31, 2022 includes a net $2.5 million milestone payment from Maruho.

In January 2022, Maruho received manufacturing and marketing approval in Japan for Rapifort Wipes 2.5% (Japanese equivalent to U.S.

FDA approved QBREXZA®), for the treatment of primary axillary hyperhidrosis, triggering the one-time net payment.

Sales of Rapifort in Japan will no longer be subject to a royalty after October 1, 2023 in accordance with the Second A&R License Agreement.

Gross - to - Net Sales Accruals

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

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Checks/credits issued to third parties

Reclassifications between liability accounts

Balance as of December 31, 2022

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Balance as of December 31, 2023

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

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

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

The increase in our reserves for gross-to-net sales accruals from period-to-period is driven by increases in our reserves for coupons and managed care rebates of $1.7 million and $1.6 million, respectively.

Our provision for coupons was $3.4 million at December 31, 2023 compared to $1.7 million at December 31, 2022.

The increase in the coupon reserve is primarily due to an increase in our channel reserve at December 31, 2023 for rebates not credited at the end of the year as a result of the timing of receipt.

Our provision for managed care rebates was $5.2 million at December 31, 2023 compared to $3.6 million at December 31, 2022.

The increase in the managed care rebate reserve is primarily due to the timing of invoices received.

Cost of Goods Sold

Cost of goods sold decreased by $4.1 million, or 13%, to $26.7 million for the year ended December 31, 2023, from $30.8 million for the year ended December 31, 2022.

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

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

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

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

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

The decrease is mainly due to lower-than-prior-year product royalties driven by lower sales of products from period-to-period, and a permanent contractual decrease in the Qbrexza royalty percentage from the prior-year period.

Research and Development

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

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

Research and Development – licenses acquired

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

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

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

Research and development expense decreased by $3.4 million, or 31%, to $7.5 million for the year ended December 31, 2023 from $10.9 million for the year ended December 31, 2022.

The decrease is related to lower clinical trial expenses to develop our DFD-29 product as the project winds down and eventually concludes.

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

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

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

Wire Transfer Fraud Loss

In September 2021, wire fraud-related costs totaled approximately $9.5 million.

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

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

Selling, general and administrative expenses decreased by $15.6 million, or 26%, to $43.9 million for the year ended December 31, 2023, from $59.5 million for the year ended December 31, 2022.

The decrease is mainly due to our expense reduction efforts primarily in sales and marketing and other SG&A areas.

During the last quarter of 2022, we began implementing a cost reduction initiative designed to improve operational efficiencies, optimize expenses, and reduce overall costs.

The initiative is intended to reduce selling, general, and administrative expenses to better align costs with their revenue-generating capabilities.

In connection with the cost reduction initiative, during the last quarter of 2022 and the first two quarters of 2023, we executed a headcount reduction to our sales force and implemented marketing and other cost cuts.

Loss on impairment of intangible assets

We recorded a loss on the impairment of intangible assets of $3.1 million during 2023 related to the impairment of the Ximino intangible asset as a result of lower net product revenues and gross profit levels for the Ximino products.

We discontinued selling Ximino on September 29, 2023.

Interest Expense

Interest expense decreased $0.3 million to $1.7 million for the year ended December 31, 2023, from $2.0 million for the year ended December 31, 2022.

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

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

Change in Fair Value of Derivative Liabilities

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

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

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

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

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

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

This decrease was driven in part by the total repayment of our prior credit facility with East West Bank during the third quarter of 2023 and no additional borrowing of funds until entering into the Credit Facility with SWK in December 2023.

As we utilize this Credit Facility during 2024 to help us fund our operations, we expect interest expenses may increase year-over-year from the fiscal year ended December 31, 2023.

Income tax expense

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

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

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

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

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

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

Income tax expense increased by $0.2 million during 2023 due to an increase in certain state taxes driven by the Maruho New License Agreement.

Liquidity and Capital Resources

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

On December 27, 2023, we entered into the Credit Agreement with SWK.

The Credit Agreement provides for a term loan Credit Facility in the original principal amount of up to $20.0 million.

On the closing date, we drew $15.0 million.

The remaining $5.0 million may be drawn upon our request within 12 months after the closing date.

The Term Loans mature on December 27, 2027, and bear interest at a rate per annum equal to the three-month term SOFR (subject to a SOFR floor of 5%) plus 7.75%.

The interest rate resets quarterly.

Interest payments begin in February 2024 and are paid quarterly.

Beginning in February 2026, we are required to repay the outstanding principal of the Term Loans quarterly in an amount equal to 7.5% of the principal amount of funded Term Loans.

If our total revenue, measured on a trailing twelve-month basis, is greater than $70.0 million as of December 31, 2025, principal repayment is not required until February 2027, at which point we are required to repay a portion of the outstanding principal of the Term Loans quarterly in an amount equal to 15% of the principal amount of funded Term Loans.

The SWK Credit Facility also includes both revenue and liquidity covenants, restrictions as to payment of dividends, and is secured by substantially all assets of the Company.

As of December 31, 2023, and as of the date of this Annual Report on Form 10-K, the Company was in compliance with the financial covenants under the SWK Credit Facility

On August 31, 2023, we entered into the New License Agreement with Maruho, whereby we granted an exclusive license to Maruho to develop and commercialize Qbrexza® for the treatment of primary axillary hyperhidrosis in South Korea, Taiwan, Hong Kong, Macau, Thailand, Indonesia, Malaysia, Philippines, Singapore, Vietnam, Brunei, Cambodia, Myanmar and Laos (the “Territory”).

Under the terms of the New License Agreement, in exchange for the exclusive rights to Qbrexza® in the Territory, Maruho paid us $19.0 million as a non-refundable upfront payment.

In July 2023, we satisfied all of the outstanding debt obligations we had with East West Bank (“EWB”) by voluntarily repaying the outstanding balance on the term loan under the Loan and Security Agreement, dated March 31, 2021 (as Amended, the “EWB facility”).

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

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

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

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

Riley, relating to shares of our common stock.

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

Riley relating to shares of our common stock in an at-the-market sales program.

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

Riley acting as our agent or principal.

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

On January 12, 2022, we entered into a third amendment of the loan and security agreement with EWB, which increased the borrowing capacity of our revolving line of credit to $10.0 million, of which $2.9 million was outstanding at December 31, 2022, and added a term loan not to exceed $20.0 million.

Both the revolving line of credit and the term loan mature on January 12, 2026.

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

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

The term loans contain an interest-only payment period through January 12, 2024, with an extension through July 12, 2024, if certain covenants are met, after which the outstanding balance of each term loan is payable in equal monthly installments of principal, plus all accrued interest, through the term loan maturity date.

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

Any outstanding borrowing against the revolving line of credit bears interest at a floating rate equal to 0.70% above the prime rate.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

During 2023, we issued 748,703 shares of common stock under the 2022 Shelf, generating net proceeds of $4.5 million.

At December 31, 2023, 4,151,297 shares remain available for issuance under the 2022 Shelf.

We regularly evaluate market conditions, our liquidity profile, and financing alternatives, including out-licensing arrangements for our products, to enhance our capital structure.

We may seek to raise capital through debt or equity financings, to expand our product portfolio, and for other strategic initiatives, which may include sales of securities under either our 2022 Shelf or a new registration statement or drawing on the SWK Credit Facility.

We cannot make any assurances that such additional financing will be available to us and, if available, the terms may negatively impact our business and operations.

At December 31, 2023, we had cash and cash equivalents of approximately $27.4 million.

Our current assumptions, projected commercial sales of our products, clinical development plans and regulatory submission timelines are uncertain and may not emerge as expected.

Additionally, as a result of recurring losses, substantial doubt exists about our ability to continue as a going concern for a period of at least twelve months from the date of issuance of these financial statements.

Cash Flows for the Years Ended December 31, 2023 and 2022

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($’s in thousands)

Net cash used in operating activities

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net cash provided by (used in) financing activities

Net change in cash and cash equivalents

Operating Activities

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

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

Net cash from operating activities changed by $18.8 million from period-to-period, from $13.5 million cash used in operating activities for the year ended December 31, 2022 to $5.2 million net cash provided by operating activities for the year ended December 31, 2023.

The change was driven primarily by the lower net loss from period-to-period, driven by our lower expense base and the $19.0 million payment from Maruho.

This was offset by vendor payments as we utilized operating cash and the proceeds of the SWK facility to aggressively pay down our current liabilities.

Investing Activities

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

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

Net cash used in investing activities decreased by $15.0 million, to $5.0 million for the year ended December 31, 2023, from $20.0 million for the year ended December 31, 2022.

The year ended December 31, 2023 reflects the $5.0 million deferred cash payment paid in January 2023 related to the VYNE Product Acquisition.

The year ended December 31, 2022 reflects the upfront $20.0 million payment for the VYNE Product Acquisition.

Financing Activities

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

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

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

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

Net cash used in financing activities increased by $21.3 million, to $4.8 million for the year ended December 31, 2023, from $16.5 million of cash flows provided by financing activities for the year ended December 31, 2022.

The increase reflects a cash outflow of $20.0 million for the repayment of principal on the EWB term loan and net cash outflows of $2.9 million from the repayment of the EWB revolving line of credit, offset by net proceeds of $14.6 million from the SWK Term Loan and $4.5 million from the issuance of common stock under the 2022 Shelf.

Net cash provided by financing activities for the year ended December 31, 2022 reflects net proceeds of $19.8 million from the EWB term loan and net proceeds of $2.1 million from the EWB revolving line of credit, offset by $5.0 million in payments of the installment notes related to our previously acquired products.

Material Cash Requirements

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

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

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

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

● We are required to make regular payments under the SWK Credit Facility.

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

Payments by Period

($’s in thousands)

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

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

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

Should we elect to borrow the remaining $5.0 undrawn balance under the SWB facility, we would expect to repay additional amounts each year until maturity.

● Pursuant to the Vyne Product Acquisition Agreement, upon the achievement of net sales milestones with respect to the products purchased in the Vyne Product Acquisition, we are also required to pay contingent consideration consisting of a one-time payment, per product, of $10.0 million and $20.0 million upon each product reaching annual net sales of $100 million and $200 million, respectively.

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

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

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

● On June 29, 2021, we entered into the DFD-29 Agreement to obtain the global rights for the development and commercialization of DFD-29 with DRL.

Based on the development and commercialization of DFD-29, additional contingent regulatory and commercial milestone payments totaling up to $158.0 million may also become payable.

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

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

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

Payments by Period

($’s in thousands)

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

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

Additionally, the Company was required to fund and

oversee the Phase 3 clinical trials beginning upon the license of DFD-29 in 2021.

The two Phase 3 clinical trials substantially concluded in July 2023 upon the receipt of positive topline results from the trials.

In January 2024, the Company paid a $4.0 million filing fee to the FDA upon filing of an NDA for DFD-29.

The Company is obligated to make a $3.0 million milestone payment to DRL in April 2024 based on the FDA’s acceptance of the NDA filed in January 2024.

● We are contractually obligated to make installment milestone payments of $3.0 million on Ximino, all of which is classified as current as it is due within a year of December 31, 2023.

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

Due to the contingent nature of these obligations, the amounts of these payments cannot be reasonably predicted as of the date of this Annual Report on Form 10-K.

Quantitative and Qualitative Disclosures About Market Risks

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What changed 10-K

Item 7. Management’s Discussion and Analysis