What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2024-03-29 compared with 2023-03-31 · 253 added, 318 removed, 652 unchanged (47% of the section changed)

2 unchanged sentences

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.

In designing and evaluating the disclosure controls and procedures, we recognize 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 are 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.

16 unchanged sentences

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 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.

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, 2023 to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other Information

27 unchanged sentences

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.#

Executive Employment Agreement with Ernie De Paolantonio, filed as Exhibit 10.3 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.#

Non-Employee Director Compensation Plan, filed as Exhibit 10.4 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.#

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.**

Journey Medical Corporation 2023 Employee Stock Purchase Plan, filed as Exhibit 10.1 to Form 8-K filed on June 23, 2023 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.**

15 unchanged sentences

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

License Agreement, dated as of August 31, 2023, between Journey Medical Corporation and Maruho Co., Ltd.

filed as Exhibit 10.1 to Form 10 - Q filed on November 13, 2023.**

Second Amended and Restated License Agreement, dated as of August 31, 2023, between Journey Medical Corporation and Maruho Co., Ltd.

filed as Exhibit 10.2 to Form 10 - Q filed on November 13, 2023.**

Credit Agreement, dated as of December 27, 2023, between Journey Medical Corporation with SWK Funding LLC.

List of Subsidiaries of Journey Medical Corporation.*

4 unchanged sentences

Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Clawback Policy of Journey Medical Corporation*

The following financial information from the Company’s Quarterly Report on Form 10-K for the period ended December 31, 2023, formatted in Extensible Business Reporting Language (XBRL):

21 unchanged sentences

generally accepted accounting principles.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, and as a result has concluded that this raises substantial doubt about its ability to continue as a going concern.

Management’s plans in regard to these matters are also described in Note 1.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

33 unchanged sentences

Line of credit

Deferred cash payment (net of discount of $ 9 )

Deferred cash payment, net of discount

Installment payments – licenses, short-term

1 unchanged sentence

Total current liabilities

Term loan (net of debt discount of $ 180 )

Term loan, net of discount

Installment payments – licenses, long-term

20 unchanged sentences

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

4 unchanged sentences

Foreign exchange transaction losses

Change in fair value of derivative liability

Total other expense (income)

11 unchanged sentences

Shareholders’

(Accumulated Deficit)

Balance as of December 31, 2021

Share-based compensation

Exercise of options for cash

Issuance of common stock related to equity plans

Issuance of common shares upon initial public offering, net of issuance costs of $ 1,921 million

Conversion of class A preferred stock settled note to common stock

Conversion of related party payables to common stock

Conversion of placement agent warrants to common stock

Conversion of contingent payment warrants to common stock

Contribution of capital – extinguishment of related party payable

Exercise of stock options for cash

Issuance of common stock for vested restricted stock units

Balance as of December 31, 2022

2 unchanged sentences

Issuance of common stock for vested restricted stock units

Issuance of common stock, ATM offering, net of issuance costs of $ 140

Balance as of December 31, 2023

8 unchanged sentences

Amortization of debt discount

Accretion of convertible preferred shares

Amortization of acquired intangible assets

1 unchanged sentence

Share-based compensation

Deferred taxes

Change in fair value of derivative liability

Research and development-licenses acquired, expense

Loss on impairment of intangible assets

Changes in operating assets and liabilities:

7 unchanged sentences

Lease liabilities

Net cash used in operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities

Purchase of research and development licenses

Acquired assets

Acquired intangible assets

Net cash (used in) investing activities

1 unchanged sentence

Proceeds from the exercise of stock options

Proceeds from Fortress note

Payment of license installment note payable

Proceeds from convertible preferred shares

Payment of debt issuance costs associated with convertible preferred shares

1 unchanged sentence

Repayment of line of credit

Proceeds from issuance of common stock - initial public offering

Proceeds from EWB term-loan, net of discount

Proceeds from term-loan

Repayment of EWB term-loan

Payment of issuance costs associated with EWB term-loan modification

Payment of issuance costs associated with issuance of SWK term-loan

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

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

Net cash provided by financing activities

Net cash (used in) provided by financing activities

Net change in cash

7 unchanged sentences

ROU assets obtained in exchange for lease liabilities

Unpaid debt offering cost

Unpaid initial public offering cost

Derivative warrant liability associated with convertible preferred shares

Conversion of class A preferred stock settled note to common stock

Conversion of related party payables to common stock

Conversion of placement agent warrants to common stock

Conversion of contingent payment warrants to common stock

Extinguishment of related party payable relates to deferred tax assets

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

3 unchanged sentences

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

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

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

As of December 31, 2023 and 2022, the Company is a majority-owned subsidiary of Fortress Biotech, Inc.

(“Fortress” or “Parent”).

1 unchanged sentence

At December 31, 2023, the Company had $ 27.4 million in cash and cash equivalents as compared to $ 32.0 million at December 31, 2022.

On December 27, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) with SWK Funding LLC (“SWK”).

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

On the closing date, the Company drew $ 15.0 million.

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

Loans under the Credit Facility (the “Term Loans”) mature on December 27, 2027, and bear interest at a rate per annum equal to the three-month term Secured Overnight Financing Rate (“SOFR”) (subject to a SOFR floor of 5 %) plus 7.75 %.

The interest rate resets quarterly.

Interest payments begin in February 2024 and are paid quarterly.

Beginning in February 2026, the Company is required to repay a portion of the outstanding principal of the Term Loans quarterly in an amount equal to 7.5 % of the principal amount of funded Term Loans.

On August 31, 2023, the Company entered into a license agreement (the “New License Agreement”) with Maruho Co., Ltd., a Japanese company specializing in dermatology (“Maruho”), whereby the Company 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 $ 19.0 million to the Company as a non-refundable upfront payment.

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

1 unchanged sentence

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

In connection with the 2022 Shelf, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) relating to shares of the Company’s common stock.

The Company may offer and sell up to 4,900,000 shares of its common stock, from time to time.

During 2023, the Company 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.

The Company regularly evaluates market conditions, its liquidity profile, and financing alternatives, including out-licensing arrangements for its products to enhance its capital structure.

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

The Company cannot make any assurances that such additional financing will be available and, if available, the terms may negatively impact the Company’s business and operations.

The Company’s 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 the Company’s ability to continue as a going concern for a period of at least twelve months from the date of issuance of these financial statements.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business.

The financial statements do not include any adjustments relating to the

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.

recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary if the Company is unable to continue as a going concern.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 unchanged sentences

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 unaudited interim condensed consolidated financial statements upon adoption.

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

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

1 unchanged sentence

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.

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

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

7 unchanged sentences

Periodically, the Company may maintain deposits in financial institutions in excess of government insured limits.

Management believes

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.

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.

9 unchanged sentences

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.

For certain customers, the accounts receivable for the customer are 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.

5 unchanged sentences

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

Computer equipment, furniture and fixtures and machinery and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of each asset.

Leasehold improvements are amortized over the shorter of the estimated useful lives or the term of the respective leases.

The Company’s inventory reserves were $ 0.3 million and $ 0.4 million at December 31, 2023 and 2022, respectively.

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.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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.

11 unchanged sentences

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.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

Intangible Assets

12 unchanged sentences

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.

During the year ended December 31, 2023, the Company recorded an impairment

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

loss associated with its intangible asset balance.

See Note 5 for further details.

The Company did not record any impairment losses on long-lived assets for the year ended December 31, 2022.

Share-based Compensation

13 unchanged sentences

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.

3 unchanged sentences

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

5 unchanged sentences

The Company’s revenues primarily result from contracts with customers, which are generally short-term and have a single performance obligation – the delivery of product.

The Company’s performance obligation to deliver products is satisfied at the point in time that the goods are received by the customer, which is when the customer obtains title to and has the risks and rewards of ownership of the products.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer.

1 unchanged sentence

Many of the Company’s products sold are subject to a variety of deductions.

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.

Revenues are recorded net of provisions for variable consideration, including coupons, chargebacks, wholesaler fees, specialty pharmacy discounts, managed care rebates, product returns, 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.

Amounts recorded for revenue deductions can result from a series of judgements about future events and uncertainties and can rely 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:

2 unchanged sentences

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

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 majority of the coupon reserve accrual at the end of the period reflects 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 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 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.

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

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’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.

5 unchanged sentences

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.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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

7 unchanged sentences

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, 2023, the Company was 52.01 % owned by Fortress Biotech, Inc.

1 unchanged sentence

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

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).

11 unchanged sentences

The Company has no components of other comprehensive income, and therefore, comprehensive income equals net income.

Recently Adopted Accounting Pronouncements

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

Recently Issued Accounting Pronouncements

In November 2023, the FASB issued ASU No.

2023-07, Segment Reporting (Topic 280) :

Improvements to Reportable Segment Disclosures , which requires that an entity report segment information in accordance with Topic 280, Segment Reporting.

The amendment in the ASU is intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses.

The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

The Company is currently evaluating the impact of the new standard on its consolidated financial statements.

In December 2023, the FASB issued ASU No.

2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures , which expands disclosures in an entity’s income tax rate reconciliation table and disclosures regarding cash taxes paid both in the U.S.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

foreign jurisdictions.

The update will be effective for annual periods beginning after December 15, 2024.

The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and disclosures.

The Company’s inventory consisted of the following at December 31, 2023 and 2022:

7 unchanged sentences

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.

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

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:

The Vyne APA 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 and $ 200 million, the Company is required to make a one-time payment of $ 10.0 million and $ 20.0 million, respectively, in that year only, per product.

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

Consideration

4 unchanged sentences

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:

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

The Company made the $ 5.0 million deferred cash payment in January 2023.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

The following table summarizes the assets acquired in the Vyne APA:

($’s in thousands)

4 unchanged sentences

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.

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 %.

Thereafter for a period of eight years royalties are approximately 12.0 % to 19.0 %.

Royalty amounts are subject to 50 % diminution in the event of loss of exclusivity due to the introduction of an authorized generic.

Upon closing of the Qbrexza® purchase, the Company became substituted for Dermira as the plaintiff in U.S.

patent litigation commenced by Dermira on October 21, 2020 in the U.S.

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

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”).

The ANDA seeks approval to market a generic version of Qbrexza® prior to the expiration of the Qbrexza® Patents and alleges that the Qbrexza® Patents are invalid.

Perrigo is subject to a 30-month stay preventing it from selling a generic version, but that stay is set to expire on March 9, 2023.

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.

The Company also has the obligation to accept any product returns related to sales made by Dermira.

The Company allocated the upfront payment to inventory since the fair value of the inventory and Qbrexza rights exceeded the purchase price.

The future contingent milestone payments, if achieved, will be recorded to intangible asset and amortized over the seven-year life of the asset commencing on the closing date.

The Company’s finite-lived intangible assets consist of acquired intangible assets.

During the year ended December 31, 2023, the Company experienced lower net product revenues and gross profit levels for its Ximino products.

Based on these results, the Company revised the financial outlook and plans for its Ximino products.

The Company assessed the revised forecast for Ximino and determined that this constituted a triggering event, and the results of the analysis indicated the carrying amount was not expected to be recovered.

The Company recorded an intangible asset impairment charge of $ 3.1 million during the year ended December 31, 2023.

This non-cash charge was recorded to loss on impairment of intangible assets in the consolidated statements of operations.

The table below provides a summary of the Company’s intangible assets at December 31, 2023 and 2022, 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

December 31, 2021

($’s in thousands)

Amortizable intangible assets:

Non-amortizable intangible assets:

Anti-itch product (1)

Useful Lives (Years)

Intangible assets - product licenses

Accumulated amortization

Accumulated impairment loss

Total 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.

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 December 31, 2020

License acquisition adjustment

Amortization expense

Balance at December 31, 2021

VYNE License agreement

Amortization expense

Balance at December 31, 2022

The Company’s amortization expense for the years ended December 31, 2023 and 2022 was approximately $ 3.8 million and $ 4.3 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

Future amortization of the Company’s intangible assets is as follows:

5 unchanged sentences

Asset not yet placed in service

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

LICENSES ACQUIRED

On June 29, 2021, the Company entered a license, collaboration, and assignment agreement (the “DFD-29 Agreement”) to obtain the global rights for the development and commercialization of a late-stage development modified release oral minocycline for the treatment of rosacea (“DFD-29”) with Dr.

In June 2021, the Company entered a license, collaboration, and assignment agreement (the “DFD-29 Agreement”) to obtain global rights for the development and commercialization of a late-stage development modified release oral minocycline for the treatment of rosacea (“DFD-29”) with Dr.

Reddy’s Laboratories, Ltd (“DRL”);

provided, that DRL retained certain rights to the program in select markets including Brazil, Russia, India and China.

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.

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 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 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);

ii.) files a patent challenge on any claim for a product patent or DRL background patent;

or iii.) fails to initiate development of the product in the European Union (“EU”) (such termination solely relates to the rights granted in EU) within 24 months after product regulatory approval or cause first commercial sale in at least one country in the EU within 72 months after product regulatory approval.

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

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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 by the Company.

The Company is required to pay royalties ranging from approximately ten percent to fifteen percent on net sales of the DFD-29 product, subject to certain reductions.

Additionally, the Company was required to fund and oversee the Phase 3 clinical trials beginning upon the license of DFD-29 in 2021.

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

From inception to date the Company has incurred approximately $ 23.8 million in costs associated with the development of DFD-29.

In March 2021, the Company executed an Asset Purchase Agreement (the “Qbrexza APA”) with Dermira, Inc., a subsidiary of Eli Lilly and Company (“Dermira”).

Pursuant to the terms of the Qbrexza APA, the Company acquired the rights to Qbrexza® (glycopyrronium), a prescription cloth towelette to treat primary axillary hyperhidrosis in patients nine years of age or older.

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

In addition, the Company is obligated to pay Dermira up to $ 144.0 million in the aggregate upon the achievement of certain sales milestones.

The royalty structure for the agreement is tiered with royalties for the first two years ranging from approximately 40 % to 30 %.

Thereafter for a period of eight years royalties are approximately 12.0 % to 19.0 %.

Royalty amounts are subject to certain reductions in the event there is a loss of exclusivity.

In July 2020, the Company entered into an exclusive license and supply agreement for Accutane (the “Accutane Agreement”) with DRL.

Pursuant to the Accutane Agreement, the Company paid $ 5.0 million.

Three additional milestone payments totaling $ 17.0 million are contingent upon the achievement of certain net sales milestones.

The Company is required to pay royalties in an amount equal to a low-double digit percentage of net sales.

The term of the Accutane Agreement is ten years and renewable upon mutual agreement.

Each party may terminate the Accutane Agreement for an uncured material breach by the other party or for certain bankruptcy or insolvency related events.

The Company may also terminate the Accutane Agreement without cause upon 180 days written notice to DRL.

FAIR VALUE MEASUREMENTS

6 unchanged sentences

Cash and cash equivalents

Placement Agent Warrants

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.

The Placement Agent Warrants have a term of five years and are exercisable at a 15 % discount to the Qualified Financing price.

The Company valued the Placement Agent Warrants using a Monte Carlo simulation valuation methodology.

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Journey’s warrant liability that are categorized within Level 3 of the fair value hierarchy before the conversion was as follows:

Risk-free interest rate

Expected dividend yield

Expected term in years

Expected volatility

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

In connection with the DFD-29 Agreement, the Company agreed to pay DRL additional consideration upon either an IPO of the Company’s common stock or an acquisition of the Company, the agreement further specifies that only one payment can be made.

The contingent payment associated with an IPO of the Company’s common stock, is deemed to be achieved if upon the completion of an IPO the Company’s market capitalization on a fully diluted basis is $ 150 million or greater at the close of business on the date of such IPO.

The payment due for the achievement of the IPO criteria is a follows:

(a) issue to DRL a number of shares of the Company’s common stock equal to $ 5.0 million as calculated using a fifteen ( 15 ) day volume weighted average price (“VWAP”) of the Company’s closing price, measured fifteen ( 15 ) days following the IPO;

or (b) make a cash payment to DRL equal to $ 5.0 million.

As a result of the 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

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)

Fair value at December 31, 2020

Contingent payment warrant

Placement agent warrant (see note 15)

Change in fair value of warrant liabilities:

Contingent payment warrant

Placement agent warrant

Settlement of warrant liabilities in connection with IPO:

Conversion of contingent payment warrants to common shares

Conversion of placement agent warrants to common shares

Fair value at December 31, 2021

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

Shared Services Agreement with Fortress

On November 12, 2021, the Company and Fortress entered into an arrangement to share the cost of certain legal, finance, regulatory, and research and development employees.

Fortress’s Executive Chairman and Chief Executive Officer is the Executive Chairman of the Company.

Under the terms of the Agreement, the Company will reimburse Fortress for the salary and benefit costs associated with these employees based upon actual hours worked on Journey related projects following the completion of their IPO.

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, 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

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

On November 12, 2021, the Company and Fortress entered into an arrangement to share the cost of certain legal, finance, regulatory, and research and development employees (the “Shared Services Agreement”).

Fortress’ Executive Chairman and Chief Executive Officer is the Executive Chairman of the Company.

Under the terms of the Shared Services Agreement, the Company will reimburse Fortress for the salary and benefit costs associated with these employees based upon actual hours worked on Journey-related projects following the completion of the Company’s initial public offering, which occurred in November 2021.

In addition, the Company reimburses Fortress for various payroll-related costs and selling, general and administrative costs incurred by Fortress for the benefit of the Company.

For the year ended December 31, 2023 and 2022, the Company recorded related party expenses to Fortress of approximately $ 0.1 million and $ 0.1 million, respectively.

The due to related party liability at December 31, 2023 and 2022, were $ 0.2 million and $ 0.4 million, respectively, and primarily relate to reimbursable expenses incurred by Fortress on behalf of the Company.

The Company would have incurred these costs irrespective of the relationship with Fortress.

ACCRUED EXPENSES

10 unchanged sentences

Accrued iPledge program

Accrued marketing and advertising

Total accrued expenses

38 unchanged sentences

The Company’s Debt obligations at December 31, 2023 and 2022 were as follows:

($’s in thousands)

Principal balance

Debt discount and fees

Net carry amount (Long-term)

December 31, 2022

6 unchanged sentences

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.

SWK Long-Term Debt

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

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

On the Closing Date, the Company drew $ 15.0 million.

The remaining $ 5.0 million may be drawn upon request by the Company within 12 months after the Closing Date.

Term Loans under the Credit Facility mature on December 27, 2027.

The Term Loans accrue interest which is payable quarterly in arrears.

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

The interest rate resets quarterly.

If the total revenue of the Company, measured on a trailing twelve-month basis, is greater than $ 70.0 million as of December 31, 2025, the principal repayment start date is extended from February 2026 to February 2027, at which point the Company is required to repay a portion of the outstanding principal of the Term Loans quarterly in an amount equal to 15 % of the principal amount of funded Term Loans, with any remaining principal balance due on the maturity date.

The Company may at any time prepay the outstanding principal balance of the Term Loans in whole or in part.

Prepayment of the Term Loans is subject to payment of a prepayment premium equal to (i) 2 % of the Term Loans prepaid plus the amount of interest that would have been due through the first anniversary of the Closing Date if the Term Loans are prepaid prior to the first anniversary of the Closing Date, (ii) 1 % of the Term Loans prepaid if the Term Loans are prepaid on or after the first anniversary of the Closing Date but prior to the second anniversary of the Closing Date, or (iii) 0 % if prepaid thereafter.

Upon repayment in full of the Term Loans, the Company will pay an exit fee equal to 5 % of the original principal amount of the Term Loans.

Additionally, the Company paid an origination fee of $ 0.2 million on the Closing Date and incurred issuance costs of $ 0.2 million, both of which have been recorded as a debt discount.

The Company is accreting the carrying value of the SWK Term Loan to the original principal balance plus the exit fee over the term of the loan using the effective interest method.

The amortization of the discount is accounted for as interest expense.

The effective interest rate on the SWK Term Loan for the fiscal year ended December 31, 2023 was 15.1 %.

The fair value of the debt approximates its carrying value.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

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, the Company was in compliance with the financial covenants under the SWK Credit Facility.

As of December 31, 2023, the contractual maturities of the long-term debt, including the payment of the exit fee, are as follows (dollars in thousands):

Years ending December 31,

Debt discount

Current portion

Term-loan (long-term)

East West Bank Line of Credit and Long-Term Debt

The Company was previously party to a Loan and Security Agreement, dated March 31, 2021 (as amended, the “EWB Facility”), with East West Bank (“EWB”), under which EWB made a $ 20.0 million term loan and a $ 10.0 million revolving line of credit available to the Company.

During 2023, the Company voluntarily repaid the entire $ 20.0 million outstanding term loan principal balance under the EWB Facility.

The repayment satisfied all of the Company’s outstanding debt obligations under the EWB Facility.

The Company has no further obligations to EWB.

INTEREST EXPENSE AND FINANCING FEES

1 unchanged sentence

Year Ended December 31,

Interest payments on EWB term loan and LOC

Imputed Interest on acquired intangible assets

Interest payments on term loans and LOC

Amortization/accretion

Interest and Fees on convertible preferred shares

Dividends payable on convertible preferred shares

Imputed interest on acquired intangible assets

Total interest expense and financing fees

2 unchanged sentences

The Company has undertaken to make contingent milestone payments to the licensors of its portfolio of drug products and candidates.

In addition, the Company shall pay royalties to such licensors based on a percentage of net sales of each drug candidate following regulatory marketing approval.

In addition, the Company is required to pay royalties to such licensors based on a percentage of net sales of each drug candidate following regulatory marketing approval.

For additional information on future milestone payments and royalties, see Note 4 and Note 6.

STOCKHOLDERS’ EQUITY AND CLASS A PREFERRED STOCK

STOCKHOLDERS’ EQUITY

The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 50,000,000 shares of $ 0.0001 par value Common Stock of which 6,000,000 shares are designated and authorized as Class A Common Stock.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

Voting Rights

4 unchanged sentences

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.

2 unchanged sentences

The rights, preferences and privileges of the holders of Common Stock and Class A Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of the Company’s Preferred Stock that are or may be issued.

On November 16, 2021, the Company completed an IPO of its common stock and issued 3,520,000 shares of its common stock at $ 10.00 per share, which resulted in net proceeds of approximately $ 30.6 million, after deducting underwriting discounts and other offering costs.

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

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”).

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 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.

SHARE-BASED COMPENSATION

10 unchanged sentences

Notes to Financial Statements

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.

In 2023, the Company’s Board of Directors adopted, and stockholders approved, the Journey Medical Corporation 2023 Employee Stock Purchase Plan (the “2023 ESPP”).

The Company initially reserved 300,000 shares of common stock for future issuance under the 2023 ESPP.

As of December 31, 2023, 300,000 shares were available for issuance under the 2023 ESPP.

The following table summarizes the components of share-based compensation expense in the consolidated statements of operations for the years ended December 31, 2023 and 2022:

14 unchanged sentences

The weighted average grant-date fair value of stock options issued during the year ended December 31, 2023 was $ 1.27 per share.

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

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

The following table summarizes the Company’s stock option activity for the year ended December 31, 2023:

3 unchanged sentences

For the years ended December 31, 2023 and 2022, the Company issued 82,300 and 155,649 shares, respectively, of Common Stock upon the exercise of outstanding stock options and received proceeds of $ 120,555 and $ 142,330 , 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.

For the years ended December 31, 2023 and 2022, approximately $ 0.5 million and $ 0.8 million, respectively, of stock option compensation cost was charged against operations.

At December 31, 2023, the Company had unrecognized share-based compensation expense related to all unvested options of $ 0.9 million, which the Company expects to recognize over a weighted-average period of approximately 1.9 years.

7 unchanged sentences

For the years ended December 31, 2023 and 2022, approximately $ 2.0 million and $ 3.6 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, 2023 approximately 1,306,923 of RSU’s remained unvested and there was approximately $ 1.6 million of unrecognized compensation cost related to RSUs, which the Company expects to recognize over a weighted-average period of approximately 1.5 years.

Employee Stock Purchase Plan

The 2023 ESPP provides that eligible employees may contribute up to 10 % of their eligible earnings toward a semi-annual purchase of the Company’s common stock.

The 2023 ESPP is qualified under Section 423 of the Internal Revenue Code.

The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the last date of purchase (or, if not a trading day, on the immediately preceding trading day).

The offering period under the 2023 ESPP has a duration of six months , and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85 % of the lesser of (i) the fair market value of the Company’s common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of the Company’s common stock on the purchase date.

The Company estimates the fair value of the common stock under the 2023 ESPP using a Black-Scholes valuation model.

The fair value was estimated on the date of grant for the offering period beginning August 1, 2023 using the Black-Scholes option valuation model and the straight-line attribution approach with the following assumptions:

risk-free interest rate ( 5.5 %);

expected term ( 0.5 years);

expected volatility ( 129 %);

and an expected dividend yield ( 0 %).

The Company recorded $ 46,700 of stock-based compensation under the 2023 ESPP for the year ended December 31, 2023.

As of December 31, 2023, there was unrecognized stock-based compensation expense of $ 9,524 related to the current ESPP offering period, which ends January 31, 2024.

REVENUES FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Net Revenues

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

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

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

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

Revenues by product are summarized as follows:

1 unchanged sentence

($ in thousands)

Other branded revenue

Total product revenues

2 unchanged sentences

($in thousands)

Other revenue

Non-refundable upfront payment from Maruho

Net milestone payment from Maruho

Royalties on sales of Rapifort® Wipes 2.5 %

Total other revenue

Other revenue reflects royalties on sales of Rapifort® Wipes 2.5 % in Japan, from Maruho, the Company’s exclusive out-licensing partner in Japan.

Other revenue for the year ended December 31, 2023 also reflects a net $ 19.0 million payment from Maruho under the New License Agreement.

Other revenue for the year ended December 31, 2022 also reflects 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 net payment.

Maruho License Agreement

On August 31, 2023, the Company entered into the New License Agreement with Maruho.

Under the terms of the New License Agreement, the Company granted an exclusive license to develop and commercialize Qbrexza for the treatment of primary axillary hyperhidrosis in the Territory.

Prior to the date of the New License Agreement, the Company and Maruho were party to an existing exclusive amended and restated license agreement (the “First A&R License Agreement”), under which Maruho acquired exclusive license rights to Qbrexza in Japan.

In connection with Journey’s entry into the New License Agreement, Journey and Maruho also entered into the Second Amended and Restated Exclusive License Agreement (the “Second A&R License Agreement”), which supersedes the First A&R License Agreement.

The Second A&R License Agreement contains modifications that remove Maruho’s obligation to pay Journey royalties on its net sales of Rapifort (the Japanese equivalent of Qbrexza) in Japan for sales occurring after October 1, 2023 and removes Maruho’s obligation to pay $ 10.0 million to Journey in the event that Maruho achieves net sales of at least ¥ 4 billion (yen) of Rapifort during a single fiscal year.

All other remaining potential milestone payment obligations, which aggregate to $ 45.0 million, remain in full force and effect.

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

Maruho is also obligated to pay royalties to the Company related to sales of the product in the Territory equal to the corresponding rate payable by the Company to Dermira under the asset purchase agreement between Journey and Dermira.

The New License Agreement may be terminated by Maruho in its entirety or on a region-by-region basis for convenience upon 30 days ’ notice to the Company.

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.

The Company does not have any obligation to assist in the regulatory approval efforts of Maruho under the New License Agreement in the Territory.

The arrangement with Maruho provides for the transfer of the following:

(i) an exclusive license of Qbrexza from Journey to Maruho, including all related patents and know-how, and (ii) a non-exclusive license from Journey to Maruho to manufacture or have manufactured drug substance and products outside of the Territory, but exclusively for the sale of products in the Territory.

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, 2023, one of the Company’s customers accounted for more than 10.0% of its total accounts receivable balance at 13.0 %.

As of December 31, 2022, two of the Company’s customers accounted for more than 10.0% of its total accounts receivable balance at 16.7 % and 10.4 %.

7 unchanged sentences

Total income tax expense

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:

23 unchanged sentences

Provision to return

Change in state rate

State tax adjustments

Change in valuation allowance

Share-based compensation

Effective income tax rate

The Company has incurred NOLs in previous years.

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.

As required by ASC 740, the Company has evaluated the evidence bearing upon the realizability of its deferred tax assets.

Based on the weight of available evidence, both positive and negative, the Company has determined that it is more likely than not that it will not realize the benefits of these assets.

Accordingly, the Company recorded a valuation allowance of $ 20.2 million at December 31, 2023.

The valuation allowance increased by $ 0.8 million during the year ended December 31, 2023, primarily as a result of the increase in NOL carryforwards generated in the current period.

As of December 31, 2023, the Company had federal and state NOL carryforwards of approximately $ 15.6 million and $ 22.7 million, respectively.

The Federal NOL carryforwards do not expire, but $ 19.5 million of the state NOL carryforwards expire if not utilized prior to 2042.

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

Utilization of the U.S.

federal and state NOL carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future.

These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax liabilities, respectively.

The Company has performed calculations to support that its NOL carryovers are subject to limitations under section 382 (“382 Limitations”).

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

The Company is subject to U.S.

federal and various state taxes.

federal and state taxes.

As of December 31, 2023, the earliest federal tax year open for the assessment of income taxes under the applicable statutes of limitations is its 2020 tax year.

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

JOURNEY MEDICAL CORPORATION

Notes to Financial Statements

NET (LOSS) INCOME PER COMMON SHARE

4 unchanged sentences

Year ended December 31,

Common stock equivalents:

Basic and diluted

Potentially dilutive securities:

Unvested restricted stock units

Stock options

Total potentially dilutive securities

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, 2023 and 2022, 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, 2023 and 2022.

SUBSEQUENT EVENTS

The Company evaluates events that occur after the period’s end date through the date the financial statements are available to be issued.

Accordingly, management has evaluated subsequent events through the date these financial statements are issued and has determined that no subsequent events require disclosure in these financial statements.

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.

12 unchanged sentences

Rosenwald, M.D.

Executive Chairman

March 28, 2024

Rosenwald, M.D.

/s/ Joseph Benesch

6 unchanged sentences

Neil Herskowitz

/s/ Jeff Paley, M.D.

March 30, 2023

Jeff Paley, M.D.

/s/ Justin Smith

March 28, 2024

/s/ Miranda Toledano

March 30, 2023

Miranda Toledano

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