Journey Medical Corp 10-K

Item 9A. Controls and Procedures. Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, we 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. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K in providing reasonable assurance of achieving the desired control objectives. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements. Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013) . Based on the results of this assessment, management (including our Chief Executive Officer and our Interim Chief Financial Officer) has concluded that, as of December 31, 2023, our internal control over financial reporting was effective. This Annual Report does not include an attestation report on internal control over financial reporting from our independent registered public accounting firm due to our status as an emerging growth company under the JOBS Act. 72 Table of Contents Changes in 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. ​ Item 9B. Other Information N o n e . ​ Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. ​ None. ​ 73 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders. ​ Item 11. Executive Compensation The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders. ​ Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ​ The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders. ​ Item 13. Certain Relationships and Related Transactions, and Director Independence . The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders. ​ Item 14. Principal Accounting Fees and Services ​ The information required by this Item is incorporated by reference from our Proxy Statement for our 2024 Annual Meeting of Stockholders. ​ ​ 74 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) Financial Statements. The following financial statements are filed as part of this report: ​ Report of Independent Registered Public Accounting Firm (KPMG LLP, Short Hills, New Jersey; PCAOB# 185) F-2 Consolidated Balance Sheets as of December 31, 2023 and 2022 F-3 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 F-4 Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2023 and 2022 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 F-6 Notes to Consolidated Financial Statements F-7 ​ ​ 75 Table of Contents (b) Exhibits. ​ Exhibit Number Description 3.1 ​ Third Amended and Restated Certificate of Incorporation of Journey Medical Corporation, filed on March 28, 2022 and incorporated herein by reference. 3.2 ​ Amended and Restated Bylaws of Journey Medical Corporation, filed as Exhibit 3.2 to Form 10-K, filed on March 28, 2022 and incorporated herein by reference. 4.1 ​ Form of Common Stock Certificate, filed as Exhibit 4.1 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. 4.2 ​ Description of Securities of Journey Medical Corporation, filed as Exhibit 4.2 to Form 10-K, filed on March 28, 2022 and incorporated herein by reference. 10.1 ​ Journey Medical Corporation 2015 Stock Plan, filed as Exhibit 10.1 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.# 10.2 ​ Amendment to Journey Medical Corporation 2015 Stock Plan, filed as Exhibit 10.1 to Form 8-K filed on June 21, 2022 and incorporated herein by reference.# 10.3 ​ 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.# 10.4 ​ Non-Employee Director Compensation Plan, filed as Exhibit 10.4 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.# 10.5 ​ 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.# 10.6 ​ 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.** 10.7 ​ Asset Purchase Agreement between VYNE Therapeutics Inc. and Journey Medical Corporation, dated as of January 12, 2022, filed as Exhibit 10.1 to Form 8-K filed on January 13, 2022 and incorporated herein by reference.** 10.8 ​ License and Supply Agreement for Accutane, entered into by and between Journey Medical Corporation and Dr. Reddy’s Laboratories Ltd., dated as of July 29, 2020, filed as Exhibit 10.7 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.** 10.9 ​ License and Supply Agreement for Targadox, entered into by and between Journey Medical Corporation and Blu Caribe Inc., dated as of March 10, 2015, filed as Exhibit 10.8 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.** 10.10 ​ First Amendment to the License and Supply Agreement for Targadox, entered into by and between Journey Medical Corporation and Blu Caribe Inc., dated as of August 26, 2015, filed as Exhibit 10.9 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.** 10.11 ​ Asset Purchase Agreement for Exelderm, entered into by and between Journey Medical Corporation and Sun Pharmaceutical Industries, Inc., dated as of August 31, 2018, filed as Exhibit 10.10 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.** 10.12 ​ Amendment 1 to the Asset Purchase Agreement for Exelderm, entered into by and between Journey Medical Corporation and Sun Pharmaceutical Industries, Inc., dated as of September 5, 2018, filed as Exhibit 10.11 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. ** 10.13 ​ Asset Purchase Agreement for Ximino, entered into by and between Journey Medical Corporation and Sun Pharmaceutical Industries, Inc., dated as of July 22, 2019, filed as Exhibit 10.12 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.** 10.14 ​ Asset Purchase Agreement for the Anti-itch Product, entered into by and between Journey Medical Corporation and Sun Pharmaceutical Industries, Inc., dated as of December 18, 2020, filed as Exhibit 10.13 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.** 10.15 ​ License, Collaboration, and Assignment Agreement for DFD-29, entered into by and between Journey Medical Corporation and Dr. Reddy’s Laboratories Ltd., dated as of June 29, 2021, filed as Exhibit 10.14 to Form S-1, filed on October 22, 2021 and incorporated herein by reference.** 10.16 ​ Asset Purchase Agreement between Journey Medical Corporation and VYNE Therapeutics Inc., dated as of January 12, 2022, filed as Exhibit 10.1 to the Form 8-K filed on January 13, 2022 and incorporated herein by reference. ** 76 Table of Contents 10.17 ​ Fortress Promissory Note, dated as of June 6, 2015, filed as Exhibit 10.16 to Form S-1, filed on October 22, 2021 and incorporated herein by reference. 10.18 ​ At Market Issuance Sales Agreement, dated as of December 30, 2022, by and between Journey Medical Corporation and B. Riley Securities, Inc., filed as Exhibit 1.2 to Form S-3, filed on December 30, 2022 and incorporated herein by reference. 10.19 ​ 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.** 10.20 ​ 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.** 10.21 ​ Credit Agreement, dated as of December 27, 2023, between Journey Medical Corporation with SWK Funding LLC. *** 21.1 ​ List of Subsidiaries of Journey Medical Corporation.* 23.1 ​ Consent of KPMG LLP.* 31.1 ​ Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 31.2 ​ Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 32.1 ​ Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * * * 32.2 ​ Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** * 97.1 ​ Clawback Policy of Journey Medical Corporation* 101 ​ 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): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements. 104 ​ Cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, formatted in Inline XBRL. * Filed herewith. ** Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. *** Furnished herewith. # Management Compensation Arrangement. ​ ​ Item 16. Form 10-K Summary ​ The Company has elected not to provide summary information. ​ ​ ​ 77 Table of Contents INDEX TO FINANCIAL STATEMENTS ​ Report of Independent Registered Public Accounting Firm ( KPMG LLP , Short Hills, New Jersey ; PCAOB# 185 ) F-2 Consolidated Balance Sheets as of December 31, 2023 and 2022 F-3 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 F-4 Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2023 and 2022 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 F-6 Notes to Consolidated Financial Statements F-7 ​ ​ F-1 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Journey Medical Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Journey Medical Corporation and subsidiary (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the years then ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years then ended December 31, 2023, in conformity with U.S. 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 These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2021. Short Hills, New Jersey March 28, 2024 F-2 Table of Contents JOURNEY MEDICAL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ 2023 2022 ASSETS ​ ​ Current assets ​ ​ Cash and cash equivalents $ 27,439 $ 32,003 Accounts receivable, net of reserves ​ 15,222 ​ 28,208 Inventory ​ 10,206 ​ 14,159 Prepaid expenses and other current assets ​ 3,588 ​ 3,309 Total current assets ​ 56,455 ​ 77,679 ​ ​ ​ ​ ​ ​ ​ Intangible assets, net ​ 20,287 ​ 27,197 Operating lease right-of-use asset, net ​ 101 ​ 189 Other assets ​ 6 ​ 95 Total assets ​ $ 76,849 ​ $ 105,160 ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​ Current liabilities ​ ​ Accounts payable ​ $ 18,149 ​ $ 36,570 Due to related party ​ 195 ​ 413 Accrued expenses ​ 20,350 ​ 19,388 Accrued interest ​ 22 ​ 160 Income taxes payable ​ ​ 53 ​ ​ 35 Line of credit ​ ​ — ​ ​ 2,948 Deferred cash payment, net of discount ​ ​ — ​ ​ 4,991 Installment payments – licenses, short-term ​ 3,000 ​ 2,244 Operating lease liability, short-term ​ 99 ​ 83 Total current liabilities ​ 41,868 ​ 66,832 ​ ​ ​ ​ ​ ​ ​ Term loan, net of discount ​ 14,622 ​ 19,826 Installment payments – licenses, long-term ​ — ​ 1,412 Operating lease liability, long-term ​ 9 ​ 108 Total liabilities ​ 56,499 ​ 88,178 ​ ​ ​ ​ ​ ​ ​ Commitments and contingencies (Note 14) ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity ​ ​ Common stock, $ .0001 par value, 50,000,000 shares authorized, 13,323,952 and 11,765,700 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively ​ 1 ​ 1 Common stock - Class A, $ .0001 par value, 50,000,000 shares authorized, 6,000,000 shares issued and outstanding as of December 31, 2023 and December 31, 2022 ​ 1 ​ 1 Additional paid-in capital ​ 92,703 ​ 85,482 Accumulated deficit ​ ( 72,355 ) ​ ( 68,502 ) Total stockholders’ equity ​ 20,350 ​ 16,982 Total liabilities and stockholders’ equity ​ $ 76,849 ​ $ 105,160 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ F-3 Table of Contents JOURNEY MEDICAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ 2023 2022 Revenue: ​ ​ ​ ​ ​ ​ Product revenue, net ​ $ 59,662 ​ $ 70,995 Other revenue ​ ​ 19,519 ​ ​ 2,674 Total revenue ​ ​ 79,181 ​ ​ 73,669 ​ ​ ​ ​ ​ ​ ​ Operating expenses ​ ​ ​ ​ Cost of goods sold – product revenue ​ 26,660 ​ 30,775 Research and development ​ 7,541 ​ 10,943 Selling, general and administrative ​ 43,910 ​ 59,468 Loss on impairment of intangible assets ​ 3,143 ​ — Total operating expenses ​ 81,254 ​ 101,186 Loss from operations ​ ( 2,073 ) ​ ( 27,517 ) ​ ​ ​ ​ ​ ​ ​ Other expense (income) ​ ​ Interest income ​ ( 322 ) ​ ( 60 ) Interest expense ​ ​ 1,698 ​ ​ 2,019 Foreign exchange transaction losses ​ ​ 183 ​ ​ 89 Total other expense (income) ​ 1,559 ​ 2,048 Loss before income taxes ​ ( 3,632 ) ​ ( 29,565 ) ​ ​ ​ ​ ​ ​ ​ Income tax expense ​ 221 ​ 63 Net Loss ​ $ ( 3,853 ) ​ $ ( 29,628 ) ​ ​ ​ ​ ​ ​ ​ Net loss per common share: ​ ​ ​ ​ ​ ​ Basic and diluted ​ $ ( 0.21 ) ​ $ ( 1.69 ) ​ ​ ​ ​ ​ ​ ​ Weighted average number of common shares: ​ ​ ​ ​ Basic and diluted ​ 18,232,422 ​ 17,531,274 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ F-4 Table of Contents JOURNEY MEDICAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ Total ​ Common Stock Common Stock A ​ Paid-in ​ (Accumulated ​ Shareholders’ ​ Shares Amount Shares Amount Capital Deficit) Equity Balance as of December 31, 2021 ​ 11,316,344 ​ $ 1 ​ 6,000,000 ​ $ 1 ​ $ 80,915 ​ $ ( 38,874 ) ​ $ 42,043 Share-based compensation ​ — ​ ​ — ​ — ​ ​ — ​ ​ 4,425 ​ ​ — ​ ​ 4,425 Exercise of stock options for cash ​ 155,649 ​ ​ — ​ — ​ ​ — ​ ​ 142 ​ ​ — ​ ​ 142 Issuance of common stock for vested restricted stock units ​ 293,707 ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Net loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 29,628 ) ​ ​ ( 29,628 ) Balance as of December 31, 2022 ​ 11,765,700 ​ $ 1 ​ 6,000,000 ​ $ 1 ​ $ 85,482 ​ $ ( 68,502 ) ​ $ 16,982 Share-based compensation ​ — ​ ​ — ​ — ​ ​ — ​ ​ 2,606 ​ ​ — ​ ​ 2,606 Exercise of stock options for cash ​ 82,300 ​ ​ — ​ — ​ ​ — ​ ​ 121 ​ ​ — ​ ​ 121 Issuance of common stock for vested restricted stock units ​ 727,249 ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Issuance of common stock, ATM offering, net of issuance costs of $ 140 ​ 748,703 ​ ​ — ​ — ​ ​ — ​ ​ 4,494 ​ ​ — ​ ​ 4,494 Net loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 3,853 ) ​ ​ ( 3,853 ) Balance as of December 31, 2023 ​ 13,323,952 ​ $ 1 ​ 6,000,000 ​ $ 1 ​ $ 92,703 ​ $ ( 72,355 ) ​ $ 20,350 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ F-5 Table of Contents JOURNEY MEDICAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2023 2022 Cash flows from operating activities ​ ​ ​ ​ ​ ​ Net loss ​ $ ( 3,853 ) ​ $ ( 29,628 ) Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ ​ ​ Bad debt expense ​ 435 ​ 284 Non-cash interest expense ​ 353 ​ 770 Amortization of debt discount ​ 356 ​ 63 Amortization of acquired intangible assets ​ 3,767 ​ 4,277 Amortization of operating lease right-of-use assets ​ 88 ​ 88 Share-based compensation ​ 2,606 ​ 4,425 Loss on impairment of intangible assets ​ 3,143 ​ - Changes in operating assets and liabilities: ​ ​ ​ ​ Accounts receivable ​ 12,551 ​ ( 5,380 ) Inventory ​ 3,953 ​ 1,744 Prepaid expenses and other current assets ​ ( 279 ) ​ ( 871 ) Other assets ​ — ​ 55 Accounts payable ​ ​ ( 18,421 ) ​ ​ 14,343 Related party expenses ​ ( 218 ) ​ ( 228 ) Accrued expenses ​ 962 ​ ( 3,568 ) Accrued interest ​ ( 138 ) ​ 160 Income tax payable ​ 18 ​ 27 Lease liabilities ​ ( 83 ) ​ ( 95 ) Net cash provided by (used in) operating activities ​ 5,240 ​ ( 13,534 ) ​ ​ ​ ​ ​ Cash flows from investing activities ​ ​ ​ ​ Acquired intangible assets ​ ​ ( 5,000 ) ​ ​ ( 20,000 ) Net cash (used in) investing activities ​ ( 5,000 ) ​ ( 20,000 ) ​ ​ ​ ​ ​ Cash flows from financing activities ​ ​ ​ ​ Proceeds from the exercise of stock options ​ 121 ​ 142 Payment of license installment note payable ​ ​ ( 1,000 ) ​ ​ ( 5,000 ) Payment of debt issuance costs associated with convertible preferred shares ​ ​ — ​ ​ ( 214 ) Proceeds from line of credit ​ 28,000 ​ 5,000 Repayment of line of credit ​ ( 30,948 ) ​ ( 2,864 ) Proceeds from term-loan ​ 15,000 ​ 19,763 Repayment of EWB term-loan ​ ​ ( 20,000 ) ​ ​ — Payment of issuance costs associated with EWB term-loan modification ​ ( 91 ) ​ — Payment of issuance costs associated with issuance of SWK term-loan ​ ( 380 ) ​ — Proceeds from issuance of common stock, ATM offering, net of issuance costs ​ 4,494 ​ — Offering costs for the issuance of common stock - initial public offering ​ ​ — ​ ​ ( 371 ) Net cash (used in) provided by financing activities ​ ( 4,804 ) ​ 16,456 ​ ​ ​ ​ ​ ​ ​ Net change in cash ​ ( 4,564 ) ​ ( 17,078 ) Cash at the beginning of the period ​ 32,003 ​ 49,081 Cash at the end of the period ​ $ 27,439 ​ $ 32,003 ​ ​ ​ ​ ​ ​ Supplemental disclosure of cash flow information: ​ ​ ​ ​ ​ Cash paid for interest ​ $ 1,127 ​ $ 993 Cash paid for income taxes ​ $ 181 ​ $ 168 ​ ​ ​ ​ ​ ​ ​ Supplemental disclosure of non-cash financing and investing activities: ​ ​ ​ ​ ​ ​ Deferred payment for asset acquisition ​ $ — ​ $ 4,740 ROU assets obtained in exchange for lease liabilities ​ $ — ​ $ 188 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ ​ ​ F-6 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements ​ NOTE 1. ORGANIZATION AND PLAN OF BUSINESS OPERATIONS 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 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. As of December 31, 2023 and 2022, the Company is a majority-owned subsidiary of Fortress Biotech, Inc. (“Fortress” or “Parent”). Liquidity and Capital Resources 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. 333-269079), which was declared effective by the Securities and Exchange Commission (“SEC”) on January 26, 2023. This shelf registration statement covers the offering, issuance and sale by the Company of up to an aggregate of $ 150.0 million of the Company’s common stock, preferred stock, debt securities, warrants, and units (the “2022 Shelf”). 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 F-7 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements 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. ​ NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s consolidated financial statements include the accounts of the Company and the accounts of the Company’s wholly-owned subsidiary, JG Pharma, Inc. (“JG” or “JG Pharma”). All intercompany balances and transactions have been eliminated. Emerging Growth Company From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s 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. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates made by management include provisions for 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. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected. Segment Information Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one segment, which reflects products for the treatment of dermatological conditions. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash. Periodically, the Company may maintain deposits in financial institutions in excess of government insured limits. Management believes 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. F-8 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements The Company’s accounts receivable primarily represent amounts due from drug wholesalers and specialty pharmacies in the United States. The Company performs periodic credit evaluations of customers and does not require collateral. An allowance for doubtful accounts is maintained for potential credit losses based on the aging of accounts receivable, historical bad debts experience, and the customer’s current ability to pay its obligations to the Company. Accounts receivables balances are written off against the allowance when it is probable that the receivable will not be collected. See Note 17 for significant customers. Cash and Cash Equivalents The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at December 31, 2023 and 2022 consisted entirely of cash and cash equivalents in institutions within the United States. Balances at certain institutions have exceeded Federal Deposit Insurance Corporation insured limits. Accounts Receivable, Net 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 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. The Company reserves against accounts receivable for estimated losses that may arise from a customer’s inability to pay, and any amounts determined to be uncollectible are written off against the reserve when it is probable that the receivable will not be collected. The Company has historically not experienced significant credit losses. The allowance for doubtful accounts was $ 0.5 million and $ 0.4 million at December 31, 2023 and 2022, respectively. Inventories Inventories are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company periodically reviews the composition of inventory in order to identify excess, obsolete, slow-moving or otherwise non-saleable items taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand. If non-saleable items are observed and there are no alternate uses for the inventory, the Company records a write-down to net realizable value in the period that the decline in value is first recognized. The Company’s inventory reserves were $ 0.3 million and $ 0.4 million at December 31, 2023 and 2022, respectively. Leases 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. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. Variable lease expenses are recorded when incurred. In calculating the right-of-use asset and lease liability, the Company elects to combine lease and non-lease components. Research and Development Costs Research and development costs are expensed as incurred. 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. 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. F-9 Table of Contents 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. Fair Value Measurement The Company follows accounting guidance on fair value measurements for financial assets and liabilities measured at fair value on a recurring basis. Under the accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories: Level 1 : Quoted prices in active markets for identical assets or liabilities. Level 2 : Observable inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace. Level 3 : Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. 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. Intangible Assets Intangible assets are reported at cost, less accumulated amortization and impairments. Intangible assets with finite lives are amortized over their estimated useful lives, which represents the estimated life of the product. Amortization is calculated using the straight-line method. During the ordinary course of business, the Company has entered into certain licenses and asset purchase agreements. Potential milestone payments for achieving sales targets or regulatory development milestones are recorded when it is probable of achievement. Upon a milestone payment being achieved, the milestone payment will be capitalized and amortized over the remaining useful life for approved products and expensed for milestones prior to FDA approval. Royalty payments are recorded as cost of goods sold as sales are recognized. Impairment of Long-Lived Assets The Company reviews long-lived assets, including intangible assets with finite useful lives, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable (a “triggering event”). Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the long-lived asset in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. During the year ended December 31, 2023, the Company recorded an impairment F-10 Table of Contents 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 The Company has a share-based compensation plan in place and records the associated share-based compensation expense over the requisite service period. The share-based compensation plan and related compensation expense are discussed more fully in Note 16 to the Company’s consolidated financial statements. Compensation expense for service-based stock options is charged against operations on a straight-line basis over the vesting period, which is generally four years. Forfeitures are recorded as they occur. Share-based compensation costs are recorded in both research and development and selling, general and administrative expense in the Company’s consolidated statements of operations. Options granted have a term of 10 years from the grant date. The Company estimates the fair value of all service-based stock option awards as of the grant date by applying the Black-Scholes option pricing valuation model. The application of this valuation model involves assumptions, including the fair value of the common stock, expected volatility, risk-free interest rate, expected dividends and the expected term of the option. The assumptions used in calculating the fair value of share-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. The following inputs are used in the Black-Scholes calculation. Expected term—The Company has elected to use the “simplified method” for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years). Expected volatility— Historical information is the primary basis for the selection of the expected volatility of options granted. However, as the Company has limited trading history for its common shares, the expected volatility was estimated based on the average volatility for comparable guideline publicly traded biotechnology companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty. Risk-free interest rate— The risk-free interest rate is selected based upon yields of United States Treasury issues with a term equal to the expected life of the option being valued. Expected dividend yield—The Company has not issued any dividends in our history and do not expect to issue dividends over the life of the options; therefore, the Company has estimated the dividend yield to be zero. Restricted stock units (“RSU’s”) that are service based are recorded as deferred compensation and amortized into compensation expense on a straight-line basis over the vesting period, which ranges from three to four years in duration. Compensation cost for service based RSU’s is based on the grant date fair value of the award, which is the closing market price of the Company’s common stock on the grant date multiplied by the number of shares awarded. Net (Loss) Income Per Share Basic net (loss) income per share of common stock is calculated by dividing net (loss) income by the weighted-average number of shares of common stock outstanding during the reporting period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the reporting period after giving effect to dilutive potential common shares for stock options and restricted stock units, determined using the treasury stock method. See Note 19 below. Revenue Recognition The Company records and recognizes revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company’s revenues primarily result from contracts with customers, which are generally short-term and have a single performance obligation – the delivery of product. 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 F-11 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements products. 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. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. 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, 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 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: Coupons — The Company offers coupons on products for qualified commercially-insured parties with prescription drug co-payments. Such product sales flow through both traditional wholesaler and specialty pharmacy channels. Coupons are processed and redeemed at the time of prescription fulfilment by the pharmacy. 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 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. The Company’s provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels as well as historical chargeback rates. The Company continually monitors its reserve for chargebacks and adjusts the reserve accordingly when expected chargebacks differ from actual experience. Wholesaler fees — The Company provides allowances to its wholesale customers for sales order management, data, and distribution services. The Company also pays administrative and other fees to certain wholesale customers consistent with pharmaceutical industry practices. The Company records a provision for these fees based on contracted rates. Assumptions used to establish the provision include contract sales volumes and average contract pricing. The Company regularly reviews the information related to these estimates and adjusts the provision accordingly. 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. F-12 Table of Contents 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. The Company estimates its managed care rebates based on the Company’s estimated payer mix and the applicable contractual rebate rate. The Company’s accrual for managed care rebates is based on an estimate of future claims that the Company expects to receive, which considers an estimate for inventory in the distribution channel. The accrual is recognized at the time of sale, resulting in a reduction of gross product revenue. Product Returns — Consistent with industry practice, the Company offers customers a right to return any unused product. The customer’s right of return commences six months prior to product expiration date and ends one year after product expiration date. Products returned for expiration are reimbursed at current wholesale acquisition cost or indirect contract price. The Company estimates the amount of its product sales that may be returned by the Company’s customers and accrues this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company estimates products returns as a percentage of sales to its customers. Income Taxes As of December 31, 2023, the Company was 52.01 % owned by Fortress Biotech, Inc. (“Fortress”) and was filing consolidated federal tax returns and consolidated or combined state tax returns in multiple jurisdictions with Fortress for tax years prior to 2021. As the Company completed its initial public offering on November 12, 2021, it deconsolidated from the Fortress consolidated group for federal income tax purpose. The financial statements recognize the current and deferred income tax consequences that result from the activities during the current and preceding periods, as if the Company were a separate taxpayer rather than a member of the Fortress consolidated income tax return group. Fortress has agreed that the Company does not have to make payments to Fortress for the use of net operating losses (“NOLs”) of Fortress (including other Fortress group members). Since Fortress does not require the Company to pay in any form for the utilization of the consolidated group’s NOLs, the tax benefit realized have been recorded as a capital contribution. The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company establishes a valuation allowance if it believes it is more likely than not that the deferred tax assets will not be recovered based on an evaluation of objective verifiable evidence. The Company has considered its history of cumulative tax and book income/loss incurred since inception, and the other positive and negative evidence, and has concluded that it is not more likely than not that it will realize the benefits of the net deferred tax assets as of December 31, 2023 and 2022 and therefore a full valuation allowance on all of the deferred tax assets is required. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50 % likely of being realized. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit. For the years ended December 31, 2023 and 2022, the Company had no unrecognized tax benefits and does not anticipate any significant change to the unrecognized tax benefit balance. The Company classifies interest and penalties related to uncertain tax positions as income tax expense, if applicable. There was no interest expense or penalties related to unrecognized tax benefits recorded through December 31, 2023 and 2022. Comprehensive Income The Company has no components of other comprehensive income, and therefore, comprehensive income equals net income. 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. and F-13 Table of Contents 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. NOTE 3. INVENTORY The Company’s inventory consisted of the following at December 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ($’s in thousands) 2023 2022 ​ ​ ​ ​ ​ ​ ​ Raw materials ​ $ 4,640 ​ $ 6,454 Work-in-process ​ 884 ​ 395 Finished goods ​ 4,987 ​ 7,739 Inventory at cost ​ ​ 10,511 ​ ​ 14,588 Inventory reserves ​ ​ ( 305 ) ​ ​ ( 429 ) Total Inventories ​ $ 10,206 ​ $ 14,159 ​ ​ NOTE 4. ASSET ACQUISITION In January 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 APA”). The Company also acquired the associated inventory related to the products. 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. 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 APA. The following table summarizes the aggregate consideration transferred for the assets acquired by the Company in connection with the Vyne APA: ​ ​ ​ ​ ​ ​ Aggregate ​ ​ Consideration ($’s in thousands) ​ Transferred Consideration transferred to Vyne at closing ​ $ 20,000 Fair Value of deferred cash payment due January 2023 ​ 4,740 Transaction costs ​ 223 Total consideration transferred at closing ​ $ 24,963 ​ 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. F-14 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements The following table summarizes the assets acquired in the Vyne APA: ​ ​ ​ ​ ​ ​ Assets ($’s in thousands) ​ Recognized Inventory ​ $ 6,041 Identifiable intangibles: ​ Amzeeq intangible ​ 15,162 Zilxi intangible ​ 3,760 Fair value of net identifiable assets acquired ​ $ 24,963 ​ The intangible assets were valued using an income approach, while the inventory was valued using a final sales value less cost to dispose approach. NOTE 5. INTANGIBLES 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Estimated December 31, ($’s in thousands) ​ Useful Lives (Years) ​ 2023 2022 Intangible assets - product licenses 3 - 9 ​ $ 37,925 ​ $ 37,925 Accumulated amortization ​ ( 14,495 ) ​ ( 10,728 ) Accumulated impairment loss ​ ( 3,143 ) ​ — Total intangible assets ​ $ 20,287 ​ $ 27,197 ​ 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. Future amortization of the Company’s intangible assets is as follows: ​ ​ ​ ​ ​ ​ Total For the years ended Amortization December 31, 2024 ​ $ 3,257 December 31, 2025 ​ 3,257 December 31, 2026 ​ 2,471 December 31, 2027 ​ 1,775 Thereafter ​ 5,585 Subtotal ​ ​ 16,345 Asset not yet placed in service ​ 3,942 Total ​ $ 20,287 ​ ​ F-15 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements NOTE 6. LICENSES ACQUIRED DFD-29 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. 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. Qbrexza 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. Accutane 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. ​ NOTE 7: FAIR VALUE MEASUREMENTS Financial assets and liabilities measured at fair value on a recurring basis are summarized below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 ($’s in thousands) Level 1 Level 2 Level 3 Total Assets ​ ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 27,439 ​ $ — ​ $ — ​ $ 27,439 Total ​ $ 27,439 ​ $ — ​ $ — ​ $ 27,439 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ($’s in thousands) Level 1 Level 2 Level 3 Total Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 32,003 ​ $ — ​ $ — ​ $ 32,003 Total ​ $ 32,003 ​ $ — ​ $ — ​ $ 32,003 ​ ​ ​ F-16 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements NOTE 8. 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 (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. ​ NOTE 9. ACCRUED EXPENSES Accrued expenses for the years ended December 31, 2023 and 2022 consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ($’s in thousands) 2023 2022 Accrued expenses and other short-term liabilities: ​ ​ Accrued coupons and rebates $ 9,987 $ 7,604 Accrued compensation ​ ​ 3,374 ​ ​ 2,586 Accrued royalties payable ​ ​ 2,015 ​ ​ 2,627 Return reserve ​ 4,077 ​ 3,689 Accrued inventory ​ 352 ​ 112 Accrued research and development ​ 20 ​ 1,404 Accrued legal, accounting and tax ​ ​ 185 ​ ​ 334 Accrued iPledge program ​ ​ 174 ​ ​ 447 Other ​ 166 ​ 585 Total accrued expenses ​ $ 20,350 ​ $ 19,388 ​ ​ NOTE 10. INSTALLMENT PAYMENTS — LICENSES The following tables show the details of the Company’s installment payments – licenses for the years ended December 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 ($’s in thousands) Short-Term Long-Term Total Installment payments - licenses ​ $ 3,000 ​ $ — ​ $ 3,000 Less: imputed interest ​ — ​ — ​ — Sub-total installment payments - licenses ​ $ 3,000 ​ $ — ​ $ 3,000 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ($’s in thousands) ​ Short-Term ​ Long-Term ​ Total Installment payments - licenses ​ $ 2,500 ​ $ 1,500 ​ $ 4,000 Less: imputed interest ​ ( 256 ) ​ ( 88 ) ​ ( 344 ) Sub-total installment payments - licenses ​ $ 2,244 ​ $ 1,412 ​ $ 3,656 ​ ​ F-17 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements NOTE 11. OPERATING LEASE OBLIGATIONS The Company leases 3,681 square feet of office space in Scottsdale, Arizona. The lease was set to expire on December 31, 2022. In September 2022, the Company amended the lease to extend the lease term for an additional 25 months at an annual rate of approximately $ 0.1 million. The amended lease will expire on January 31, 2025. The Company recorded rent expense as follows (dollars in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31, ​ 2023 ​ 2022 Operating lease cost ​ $ 97 ​ $ 93 Variable lease cost ​ ​ 5 ​ ​ 4 Total lease cost ​ $ 102 ​ $ 97 ​ The following table summarizes quantitative information about the Company’s operating leases (dollars in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31, ​ 2023 2022 Cash paid for amounts included in the measurement of lease liabilities ​ $ 92 ​ $ 100 ​ Right-of-use assets exchanged for new operating lease liabilities ​ $ — ​ $ 188 ​ Weighted-average remaining lease term - operating leases ​ 1.1 ​ 2.1 ​ Weighted-average discount rate - operating leases ​ 6.25 % 6.25 % ​ As of December 31, 2023, future payments of operating lease liabilities are as follows: ​ ​ ​ ​ ​ ​ ​ For the year ended December 31, ($’s in thousands) 2024 ​ $ 102 2025 ​ 9 Total lease payments ​ ​ 111 Less: present value discount ​ ​ ( 3 ) Total operating lease liabilities ​ $ 108 ​ ​ F-18 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements NOTE 12. DEBT The Company’s Debt obligations at December 31, 2023 and 2022 were as follows: ​ ​ ​ ​ ​ ​ December 31, ($’s in thousands) ​ 2023 ​ ​ ​ ​ Principal balance ​ $ 15,000 Plus: Exit fee ​ 750 Less: Debt discount and fees ​ ​ ( 1,128 ) Net carry amount (Long-term) ​ $ 14,622 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ ​ ​ ​ Net ​ ​ Principal ​ Unamortized ​ Carry ($’s in thousands) ​ Balance ​ Discount & Fees ​ Amount ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deferred cash payment ​ $ 5,000 ​ $ 9 $ 4,991 EWB Revolving LOC ​ 2,948 ​ — 2,948 Total Short-Term Debt ​ $ 7,948 ​ $ 9 $ 7,939 EWB Term Loan (Long-term) ​ $ 20,000 ​ $ 174 $ 19,826 Total Debt & Obligations ​ $ 27,948 ​ $ 183 $ 27,765 ​ 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. 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, with any remaining principal balance due on the maturity date. 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. F-19 Table of Contents 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, Term Loan 2024 ​ $ — 2025 ​ — 2026 ​ 4,500 2027 ​ 11,250 Total ​ 15,750 Debt discount ​ ( 1,128 ) Total, net ​ 14,622 Current portion ​ — Term-loan (long-term) ​ $ 14,622 ​ 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. ​ NOTE 13. INTEREST EXPENSE AND FINANCING FEES Interest expense and financing fees for the years ended December 31, 2023 and 2022 consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2023 ​ 2022 Interest payments on term loans and LOC ​ $ 989 ​ $ 1,153 Amortization/accretion ​ ​ 356 ​ ​ 347 Imputed interest on acquired intangible assets ​ ​ 353 ​ ​ 519 Total interest expense and financing fees ​ $ 1,698 ​ $ 2,019 ​ ​ NOTE 14. COMMITMENTS AND CONTINGENCIES License Agreements The Company has undertaken to make contingent milestone payments to the licensors of its portfolio of drug products and candidates. 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. ​ NOTE 15. STOCKHOLDERS’ EQUITY Common Stock 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. F-20 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements Voting Rights Each holder of Common Stock is entitled to one vote per share of Common Stock held on all matters submitted to a vote of the stockholders, including the election of directors. The Company’s Certificate of Incorporation and bylaws do not provide for cumulative voting rights. Each holder of Class A Common Stock is entitled to a number of votes that is equal to 1.1 times a fraction, the numerator of which is the sum of the shares of outstanding Common Stock, including the Class A Common Stock, and the denominator of which is the number of outstanding shares of Class A Common Stock. Thus, the holders of the Class A Common Stock will at all times constitute a voting majority. Dividends 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. Liquidation 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. Rights and Preference Holders of the Company’s Common Stock and Class A Common Stock have no preemptive, conversion or subscription rights, and there is no redemption or sinking fund provisions applicable to either the Common Stock or the Class A Common Stock. 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. NOTE 16. SHARE-BASED COMPENSATION In 2015, the Company’s Board of Directors adopted, and stockholders approved, the Journey Medical Corporation 2015 Stock Plan (the “Plan”) authorizing the Company to grant up to 4,642,857 shares of Common Stock to eligible employees, directors, and consultants in the form of restricted stock, restricted stock units (“RSUs”), stock options and other types of grants. The amount, terms, and exercisability provisions of grants are determined by the Board of Directors. At the Company’s 2022 Annual Meeting, held on June 21, 2022, the Company’s stockholders approved, among other matters, an amendment to the Plan to increase the number of shares of Common Stock issuable under the Plan by 3,000,000 to 7,642,857 . At December 31, 2023 there were 1,487,994 shares available for issuance under the Plan. The Company grants stock options to employees, non-employees and Directors with exercise prices equal to the closing price of the underlying shares of the Company’s common stock on the Nasdaq Capital Market on the date that the options are granted. Options granted have a term of ten years from the grant date. Options granted generally vest over four-year period. Compensation cost for stock options is charged against operations on a straight-line basis over the vesting period. The Company estimates the fair value of stock options on the grant date by applying the Black-Scholes option pricing valuation model. F-21 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ($’s in thousands) ​ 2023 2022 Research and development ​ $ 110 ​ $ 73 Selling, general and administrative ​ 2,496 ​ 4,352 Total non-cash compensation expense related to share-based compensation included in operating expense ​ $ 2,606 ​ $ 4,425 ​ Stock Options The weighted-average key assumptions used in determining the fair value of options granted for the year ended December 31, 2023 are as follows: ​ ​ ​ ​ ​ 2023 Risk-free interest rate 3.45 % - 4.44 % Expected volatility 89.09 % - 101.75 % Weighted average expected volatility 91.08 % Expected term (years) 5.37 - 6.25 Expected dividend yield 0 % ​ The weighted average grant-date fair value of stock options issued during the year ended December 31, 2023 was $ 1.27 per share. 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ Weighted ​ average ​ ​ Number ​ average ​ Aggregate ​ remaining ​ ​ of ​ exercise ​ intrinsic ​ contractual ​ Shares price value life (years) Outstanding options at December 31, 2022 ​ 2,960,000 ​ $ 1.76 ​ $ 2,217,815 ​ 5.65 Granted ​ 430,756 ​ ​ 1.64 ​ ​ — ​ — Exercised ​ ( 82,300 ) ​ ​ 1.46 ​ ​ — ​ — Forfeited ​ ( 504,687 ) ​ ​ 3.06 ​ ​ — ​ — Expired ( 33,900 ) ​ 3.58 ​ — — Outstanding options at December 31, 2023 2,769,869 ​ $ 1.49 ​ $ 3,441,146 4.53 Options vested and exercisable at December 31, 2023 1,984,475 ​ $ 0.96 ​ $ 1,758,134 2.83 ​ 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, 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. F-22 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements Restricted Stock Units The following table summarizes the Company’s RSU activity for the year ended December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ average ​ ​ Number of ​ grant date ​ units Fair value Unvested balance at December 31, 2022 ​ 2,261,048 ​ $ 4.05 Granted ​ 119,888 ​ ​ 1.82 Vested ​ ( 727,249 ) ​ ​ 3.96 Forfeited ​ ( 346,764 ) ​ ​ 4.10 Unvested balance at December 31, 2023 ​ 1,306,923 ​ $ 3.88 ​ For the years ended December 31, 2023 and 2022 the Company issued 727,249 and 293,707 shares of Common Stock, respectively, upon the vesting of RSU’s amounting to $ 2.9 million and $ 0.9 million, respectively, in total aggregate fair market value. 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. 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. ​ ​ NOTE 17. REVENUES FROM CONTRACTS WITH CUSTOMERS Disaggregation of Net Revenues 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. ​ F-23 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements Revenues by product are summarized as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ($ in thousands) 2023 2022 Qbrexza® ​ $ 25,410 ​ $ 26,715 Accutane® ​ ​ 20,168 ​ ​ 18,373 Amzeeq ​ ​ 6,201 ​ ​ 7,242 Targadox® ​ ​ 3,204 ​ ​ 7,972 Exelderm® ​ 2,395 ​ 3,463 Zilxi ​ 1,962 ​ 2,273 Ximino® ​ 287 ​ 4,957 Luxamend® ​ 35 ​ — Total product revenues ​ $ 59,662 ​ $ 70,995 ​ The Company recognized other revenue as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ($in thousands) ​ 2023 2022 Non-refundable upfront payment from Maruho $ 19,000 ​ $ — Net milestone payment from Maruho ​ ​ — ​ ​ 2,500 Royalties on sales of Rapifort® Wipes 2.5 % ​ $ 519 ​ ​ 174 Total other revenue ​ $ 19,519 ​ $ 2,674 ​ 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. F-24 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements 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, 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 %. ​ For the year ended December 31, 2023 and 2022, none of the Company’s customers accounted for more than 10.0% of its total gross product revenue. ​ NOTE 18. INCOME TAXES The components of the income tax provision are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Years Ended December 31, ($’s in thousands) 2023 2022 Current: ​ ​ ​ ​ Federal ​ $ 34 ​ $ — State ​ 187 ​ 63 Total current ​ 221 ​ 63 ​ ​ ​ ​ ​ ​ ​ Deferred: ​ ​ Federal ​ ( 753 ) ​ ( 6,701 ) State ​ ( 94 ) ​ ( 1,737 ) Total deferred ​ ( 847 ) ​ ( 8,438 ) Valuation allowance ​ ​ 847 ​ ​ 8,438 Total income tax expense ​ $ 221 ​ $ 63 ​ F-25 Table of Contents JOURNEY MEDICAL CORPORATION Notes to Financial Statements 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. The significant components of the Company’s deferred tax assets consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ($’s in thousands) 2023 2022 Deferred tax assets: ​ ​ ​ ​ Net operating loss carryforwards ​ $ 4,376 ​ $ 6,553 Amortization of license fees ​ 5,603 ​ 4,951 R&D capitalization ​ 3,312 ​ 2,462 Stock compensation ​ 1,081 ​ 1,293 Lease liability ​ ​ 27 ​ ​ 48 Reserve on sales return, discount and bad debt ​ 3,566 ​ 2,988 Accruals and reserves ​ 723 ​ 574 Tax credits ​ 1,491 ​ 1,152 Business interest expense deduction limit ​ — ​ 322 State taxes ​ — ​ 13 Total deferred tax assets ​ 20,179 ​ 20,356 Less: valuation allowance ​ ​ ( 20,154 ) ​ ​ ( 19,307 ) Deferred tax assets, net ​ $ 25 ​ $ 1,049 ​ ​ ​ ​ ​ ​ ​ Deferred tax liability: ​ ​ ​ ​ ​ ​ Section 481(a) adjustment on reserve on sales return, discount and bad debt ​ ​ — ​ ​ ( 1,001 ) Right-of-use asset ​ ​ ( 25 ) ​ ​ ( 48 ) Deferred tax assets, net ​ $ — ​ $ — ​ A reconciliation of the statutory tax rates and the effective tax rates is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Years Ended December 31, ​ 2023 2022 Percentage of pre-tax income: ​ ​ ​ U.S. federal statutory income tax rate 21 % 21 % State taxes, net of federal benefit ( 1 ) % 4 % Non-deductible items ( 4 ) % ( 0 ) % Provision to return ( 1 ) % 0 % State tax adjustments ( 1 ) % 0 % Change in valuation allowance ​ ( 23 ) % ( 28 ) % Share-based compensation ​ ( 10 ) % 0 % Tax credits 13 % 3 % Effective income tax rate ( 6 ) % ( 0 ) % ​ 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. F-26 Table of Contents 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 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. ​ NOTE 19. NET (LOSS) INCOME PER COMMON SHARE The Company accounts for and discloses net earnings (loss) per share using the treasury stock method. Net earnings (loss) per common share, or basic earnings (loss) per share, is computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding. Net earnings (loss) per common share assuming dilutions, or diluted earnings (loss) per share, is computed by reflecting the potential dilution from the exercise of in-the-money stock options, and non-vested restricted stock units. The Company’s basic and diluted weighted-average number of common shares outstanding for years ended December 31, 2023 and 2022 were as follows: ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ ​ 2023 2022 Basic and diluted ​ 18,232,422 ​ 17,531,274 Potentially dilutive securities: ​ ​ ​ ​ Unvested restricted stock units ​ 1,306,923 ​ 2,261,048 Stock options ​ 1,345,193 ​ 1,566,131 Total potentially dilutive securities ​ 20,884,538 ​ 21,358,453 ​ 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. NOTE 20. 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. ​ ​ ​ ​ F-27 Table of Contents SIGNATURES 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. ​ Journey Medical Corporation By: /s/ Claude Maraoui Name: Claude Maraoui Title: President, Chief Executive Officer, and Director March 28, 2024 ​ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. ​ Signature Title Date /s/ Claude Maraoui President, Chief Executive Officer and Director March 28, 2024 Claude Maraoui (Principal Executive Officer) ​ ​ ​ /s/ Lindsay A. Rosenwald, M.D. ​ Executive Chairman ​ March 28, 2024 Lindsay A. Rosenwald, M.D. ​ ​ ​ ​ ​ ​ ​ ​ ​ /s/ Joseph Benesch Interim Chief Financial Officer March 28, 2024 Joseph Benesch (Principal Financial Officer) ​ ​ ​ ​ ​ /s/ Neil Herskowitz Director March 28, 2024 Neil Herskowitz ​ ​ ​ ​ ​ /s/ Justin Smith Director March 28, 2024 Justin Smith ​ ​ ​ 78