Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this Form 10-K. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. 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 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.
Overview
We are a commercial-stage pharmaceutical company founded in October 2014 that focuses on the development and commercialization of pharmaceutical products for the treatment of dermatological conditions. Our current portfolio includes seven branded and 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 field sales force, will position our business for growth. We are a majority-owned subsidiary of Fortress.
Critical Accounting Policies and Uses of Estimates
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make difficult, subjective or complex judgments, often as a result of the need to make estimates and assumptions about the effect of matters that are inherently uncertain in the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in greater detail in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K, we believe that the following accounting policies and estimates are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements in understanding our historical and future performance. These policies relate to the more significant areas involving management’s judgments and estimates.
Revenue Recognition
Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, coupons, discounts, other sales allowances 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. Historically, adjustments to these estimates to reflect actual results or updated expectations have not been material to our overall business. Coupons, however, can have a significant impact on year-over-year individual product revenue growth trends. If any of our ratios, factors, assessments, experiences, or judgments are not indicative or accurate estimates of our future experience, our results could be materially affected. The potential of our estimates to vary differs by program, product, type of customer and geographic location.
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Recent Accounting Pronouncements
See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption, if applicable, and our assessment, if any, of their potential impact on our financial condition and results of operations.
Emerging Growth Company and Smaller Reporting Company Status
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years of audited financial statements in our annual reports on Form 10-K, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.
We are also a “smaller reporting company,” meaning that either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) the market value of our shares held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than $700 million. As a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K, have reduced disclosure obligations regarding executive compensation, and smaller reporting companies are permitted to delay adoption of certain recent accounting pronouncements discussed in Note 2 See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K.
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Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
The following table summarizes our results of operations for the years ended December 31, 2023 and 2022:
For the Years Ended December 31,
Change
($ in thousands, except per share data)
2023
2022
$
%
Revenue:
Product revenue, net
$
59,662
$
70,995
$
(11,333)
(16)
%
Other revenue
19,519
2,674
16,845
630
%
Total revenue
79,181
73,669
5,512
7
%
Operating expenses
Cost of goods sold - product revenue
26,660
30,775
(4,115)
(13)
%
Research and development
7,541
10,943
(3,402)
(31)
%
Selling, general and administrative
43,910
59,468
(15,558)
(26)
%
Loss on impairment of intangible assets
3,143
—
3,143
100
%
Total operating expenses
81,254
101,186
(19,932)
(20)
%
Loss from operations
(2,073)
(27,517)
25,444
(92)
%
Other expense
Interest income
(322)
(60)
(262)
437
%
Interest expense
1,698
2,019
(321)
(16)
%
Foreign exchange transaction losses
183
89
94
106
%
Total other expense
1,559
2,048
(489)
(24)
%
Loss before income taxes
(3,632)
(29,565)
25,933
(88)
%
Income tax expense
221
63
158
251
%
Net Loss
(3,853)
(29,628)
25,775
(87)
%
Revenues
The following table reflects our revenue by product for the years ended December 31, 2023 and 2022:
For the Years Ended December 31,
Change
($in thousands)
2023
2022
$
%
Qbrexza®
$
25,410
$
26,715
$
(1,305)
(5)
%
Accutane®
20,168
18,373
1,795
10
%
Amzeeq
6,201
7,242
(1,041)
(14)
%
Targadox®
3,204
7,972
(4,768)
(60)
%
Exelderm®
2,395
3,463
(1,068)
(31)
%
Zilxi
1,962
2,273
(311)
(14)
%
Ximino®
287
4,957
(4,670)
(94)
%
Luxamend®
35
—
35
100
%
Total net product revenue
$
59,662
$
70,995
$
(11,333)
(16)
%
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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 $1.8 million from 2022 due to increased unit volume resulting from our focused sales and marketing efforts.
Other revenue
For the Years Ended
December 31,
Change
($in thousands)
2023
2022
$
%
Non-refundable upfront payment from Maruho
$
19,000
$
—
$
19,000
100
%
Net milestone payment from Maruho
—
2,500
(2,500)
(100)
%
Royalties on sales of Rapifort® Wipes 2.5%
519
174
345
198
%
Total other revenue
$
19,519
$
2,674
$
16,845
630
%
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 $2.5 million milestone payment from Maruho. In January 2022, Maruho received manufacturing and marketing approval in Japan for Rapifort Wipes 2.5% (Japanese equivalent to U.S. FDA approved QBREXZA®), for the treatment of primary axillary hyperhidrosis, triggering the one-time net payment. Sales of Rapifort in Japan will no longer be subject to a royalty after October 1, 2023 in accordance with the Second A&R License Agreement.
Gross - to - Net Sales Accruals
We record gross-to-net sales accruals for chargebacks, distributor service fees, prompt pay discounts, sales returns, coupons, managed care rebates, government rebates, and other allowances customary to the pharmaceutical industry.
Gross-to-net sales accruals and the balance in the related allowance accounts for the years ended December 31, 2023, 2022 and 2021 were as follows:
Chargebacks
Distributor
Prompt
Managed
and other
Service
Pay
Care
Gov’t
($’s in thousands)
allowances
Fees
Discounts
Returns
Coupons
Rebates
Rebates
Total
Balance as of December 31, 2021
$
622
$
791
$
197
$
3,240
$
4,992
$
3,492
$
690
$
14,024
Current provision related to sales in the current period
2,663
5,868
1,104
5,387
117,883
22,654
3,651
159,210
Checks/credits issued to third parties
(3,032)
(5,730)
(1,094)
(4,938)
(121,179)
(22,552)
(3,331)
(161,856)
Balance as of December 31, 2022
$
253
$
929
$
207
$
3,689
$
1,696
$
3,594
$
1,010
$
11,378
Current provision related to sales in the current period
1,856
5,439
976
5,483
94,822
22,934
5,191
136,701
Checks/credits issued to third parties
(2,016)
(5,470)
(1,041)
(5,095)
(93,074)
(21,318)
(5,948)
(133,962)
Balance as of December 31, 2023
$
93
$
898
$
142
$
4,077
$
3,444
$
5,210
$
253
$
14,117
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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 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 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 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. 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
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.
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Liquidity and Capital Resources
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. 333 - 269079), which was declared effective by the SEC on January 23, 2023. This shelf registration statement covers the offering, issuance and sale by us of up to an aggregate of $150.0 million of our common stock, preferred stock, debt securities, warrants, and units (the “2022 Shelf”). In connection with the 2022 shelf, we have entered into the Sales Agreement with 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. 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 $27.4 million. Our current assumptions, projected commercial sales of our products, clinical development plans and regulatory submission timelines are uncertain and may not emerge as expected. Additionally, as a result of recurring losses, substantial doubt exists about our ability to continue as a going concern for a period of at least twelve months from the date of issuance of these financial statements.
Cash Flows for the Years Ended December 31, 2023 and 2022
For the Years ended December 31,
Increase
($’s in thousands)
2023
2022
(Decrease)
Net cash provided by (used in) operating activities
$
5,240
$
(13,534)
$
18,774
Net cash used in investing activities
(5,000)
(20,000)
15,000
Net cash provided by (used in) financing activities
(4,804)
16,456
(21,260)
Net change in cash and cash equivalents
(4,564)
(17,078)
(12,514)
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Operating Activities
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 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 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 $5.0 million in payments of the installment notes related to our previously acquired products.
Material Cash Requirements
In the normal course of business, we enter into contractual obligations that contain cash requirements of which the most significant currently include the following:
● We are required to make regular payments under the SWK Credit Facility. Based on the amount currently outstanding under the SWK facility and current interest rates, and assuming we do not make further draws under the SWK facility, we expect to make the following payments:
Payments by Period
Total
2024
2025
2026
2027
($’s in thousands)
Interest
$
6,770
$
1,998
$
1,993
$
1,693
$
1,086
Principal
15,000
—
—
4,500
10,500
Exit fee
750
—
—
—
750
Total
$
22,520
$
1,998
$
1,993
$
6,193
$
12,336
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.
● 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, the Company was required to fund and
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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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is set forth in the financial statements and notes thereto beginning at page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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