Journey Medical (DERM) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides Journey Medical Corporation's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents Journey Medical Corporation's unaudited condensed consolidated financial statements, offering a detailed financial overview for the specified periods Unaudited Condensed Consolidated Balance Sheets This table presents the company's unaudited condensed consolidated balance sheets, detailing assets, liabilities, and equity Unaudited Condensed Consolidated Balance Sheets (in thousands): | Category | September 30, 2021 | December 31, 2020 | | :---------------------------------- | :----------------- | :---------------- | | ASSETS | | | | Cash | $21,689 | $8,246 | | Accounts receivable, net | $31,738 | $23,928 | | Inventory | $11,614 | $1,404 | | Prepaid expenses and other current assets | $1,754 | $1,664 | | Total current assets | $66,795 | $35,242 | | Intangible asset, net | $13,043 | $15,029 | | Operating lease right-of-use asset, net | $111 | $175 | | Deferred tax assets | $8,361 | $1,454 | | Other assets | $749 | $6 | | Total assets | $89,059 | $51,906 | | LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | Accounts payable | $28,180 | $1,839 | | Accounts payable - related party | $600 | $117 | | Accrued expenses | $26,048 | $21,498 | | Accrued expenses – related party | $433 | $0 | | Installment payments – licenses, short-term | $4,433 | $4,522 | | Operating lease liabilities, short-term | $96 | $85 | | Total current liabilities | $59,790 | $28,061 | | Note payable, related party | $14,972 | $5,220 | | Installment payments – licenses, long-term | $3,539 | $8,137 | | Derivative warrant liability | $4,365 | $0 | | Convertible class A preferred stock settled note | $18,078 | $0 | | Operating lease liabilities, long-term | $24 | $97 | | Total liabilities | $100,768 | $41,614 | | Total stockholders' (deficit) equity | ($11,709) | $10,292 | | Total liabilities and stockholders' equity | $89,059 | $51,906 | Unaudited Condensed Consolidated Statements of Operations This table presents the company's unaudited condensed consolidated statements of operations, detailing revenues, expenses, and net income/loss Unaudited Condensed Consolidated Statements of Operations (in thousands, except per share amounts): | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Product revenue, net | $19,610 | $9,447 | $45,617 | $30,808 | | Cost of goods sold - product revenue | $11,167 | $3,379 | $22,559 | $10,313 | | Research and development | $718 | $0 | $747 | $0 | | Research and development - licenses acquired | $76 | $0 | $13,819 | $0 | | Selling, general and administrative | $10,755 | $5,829 | $24,776 | $16,270 | | Wire transfer fraud loss | $9,540 | $0 | $9,540 | $0 | | Total operating expenses | $32,256 | $9,208 | $71,441 | $26,583 | | (Loss) income from operations | ($12,646) | $239 | ($25,824) | $4,225 | | Interest expense | $1,373 | $187 | $2,936 | $492 | | Change in fair value of derivative liability | $2 | $0 | $184 | $0 | | Total other expense | $1,375 | $187 | $3,120 | $492 | | Net (loss) income before income taxes | ($14,021) | $52 | ($28,944) | $3,733 | | Income tax (benefit) expense | ($3,375) | $23 | ($6,701) | $952 | | Net (loss) income | ($10,646) | $29 | ($22,243) | $2,781 | | Net (loss) income per common share - basic | ($1.16) | $0.00 | ($2.43) | $0.30 | | Net (loss) income per common share - diluted | ($1.16) | $0.00 | ($2.43) | $0.26 | Unaudited Condensed Consolidated Statements of Cash Flows This table presents the company's unaudited condensed consolidated statements of cash flows, detailing operating, investing, and financing activities Unaudited Condensed Consolidated Statements of Cash Flows (in thousands): | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :------------------------------------------------------------------------------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income | ($22,243) | $2,781 | | Net cash provided by operating activities | $1,025 | $78 | | Purchase of research and development licenses | ($8,800) | ($1,000) | | Net cash used in investing activities | ($8,800) | ($1,000) | | Proceeds from the exercise of stock options | $7 | $0 | | Proceeds from Fortress note | $9,540 | $0 | | Payment of license note payable | ($5,300) | $0 | | Proceeds from convertible preferred shares | $18,967 | $0 | | Payment of debt issuance costs associated with convertible preferred shares | ($1,996) | $0 | | Net cash provided by financing activities | $21,218 | $0 | | Net increase (decrease) in cash | $13,443 | ($922) | | Cash at beginning of period | $8,246 | $4,801 | | Cash at end of period | $21,689 | $3,879 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed disclosures and explanations for the unaudited condensed consolidated financial statements, offering crucial context for reported figures NOTE 1. ORGANIZATION AND PLAN OF BUSINESS OPERATIONS This note describes Journey Medical Corporation's business, financing, and recent initial public offering - Journey Medical Corporation is a commercial-stage pharmaceutical company focused on the development and commercialization of dermatological products, marketing five branded and three authorized generic prescription drugs in the U.S.[44] - The Company is a majority-owned subsidiary of Fortress Biotech, Inc. ('Fortress')[45] - Operations are primarily financed through a working capital note from Fortress, cash from customers, and proceeds from the Company's 8% Cumulative Convertible Class A Preferred Offering[46] - The Company completed an initial public offering (IPO) on November 16, 2021, generating approximately $31.2 million in net proceeds after deducting underwriting discounts and other offering costs[47] NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details the basis of financial statement presentation and significant accounting policies applied - The unaudited interim condensed consolidated financial statements are prepared in conformity with GAAP, reflecting all necessary normal recurring adjustments[50] - The Company views its operations and manages its business as a single segment[54] - Revenue recognition follows ASC Topic 606, with revenues recorded net of provisions for variable consideration including trade discounts, rebates, coupons, and product returns[58][61] - Inventories are valued at the lower of cost and net realizable value on a first-in, first-out basis[72] - Research and development costs, including costs incurred for technology licenses that have not reached commercial feasibility, are expensed as incurred[85][87] - The Company is included in Fortress's consolidated federal and state tax returns, and tax benefits from the utilization of consolidated group's Net Operating Losses (NOLs) are recorded as capital contributions[89] NOTE 3. INVENTORY This note provides a breakdown of inventory balances and related valuation adjustments Inventory Breakdown (in thousands): | Category | September 30, 2021 | December 31, 2020 | | :--------------- | :----------------- | :---------------- | | Raw materials | $5,453 | $0 | | Finished goods | $6,161 | $1,404 | | Total inventories | $11,614 | $1,404 | - The acquired Qbrexza finished goods inventory includes a fair value step-up of $6.5 million, which is expected to be expensed within cost of sales as the inventory is sold in 2021[101] NOTE 4. PROPERTY AND EQUIPMENT This note details the company's property and equipment, including depreciation information Property and Equipment, Net (in thousands): | Category | September 30, 2021 | December 31, 2020 | | :----------------------- | :----------------- | :---------------- | | Leasehold improvements | $11 | $11 | | Less: Accumulated depreciation | ($11) | ($11) | | Property and equipment, net | $0 | $0 | - Depreciation expense was nil for the three and nine months ended September 30, 2021, compared to $1,000 and $4,000, respectively, for the same periods in 2020[102] NOTE 5. INTANGIBLES This note details intangible assets, including acquisitions, patent litigation, and amortization - On March 31, 2021, the Company acquired the rights to Qbrexza® for an upfront fee of $12.5 million, with potential for up to $144 million in aggregate sales milestones[103] - The Qbrexza® acquisition included U.S. patent litigation against Perrigo Pharma International DAC, challenging Qbrexza® patents, with a 30-month stay preventing generic sales until March 9, 2023[105] Net Intangible Assets (in thousands): | Product | Estimated Useful Lives (Years) | September 30, 2021 | December 31, 2020 | | :-------------------- | :----------------------------- | :----------------- | :---------------- | | Ceracade® | 3 | $300 | $300 | | Luxamend® | 3 | $50 | $50 | | Targadox® | 3 | $1,250 | $1,250 | | Ximino® | 7 | $7,134 | $7,134 | | Exelderm® | 3 | $1,600 | $1,600 | | Accutane | 5 | $4,727 | $4,727 | | Anti-itch product | 3 | $3,942 | $3,945 | | Total intangible assets | | $19,003 | $19,006 | | Accumulated amortization | | ($5,960) | ($3,977) | | Net intangible assets | | $13,043 | $15,029 | - Amortization expense increased to approximately $0.7 million and $2.0 million for the three and nine months ended September 30, 2021, respectively, from $0.4 million and $1.1 million for the same periods in 2020[108] NOTE 6. LICENSES ACQUIRED This note describes the acquisition of DFD-29 global rights and related R&D expenses - On June 29, 2021, the Company entered into an agreement with Dr. Reddy's Laboratories, Ltd. to obtain global rights for DFD-29 (rosacea treatment) for $10.0 million upfront, with additional contingent regulatory and commercial milestone payments up to $163.0 million and royalties[111] - The $10.0 million purchase price for DFD-29 was expensed as research and development-licenses acquired, as the technology had not reached technological feasibility and had no alternative future use[112] - The Company is required to fund and oversee Phase 3 clinical trials for DFD-29, with an estimated cost of approximately $24.0 million[113] NOTE 7: FAIR VALUE MEASUREMENTS This note explains the company's fair value measurements, including Level 3 financial instruments - The Company classifies fair value measurements into a three-level hierarchy, with Level 3 inputs being unobservable and supported by little or no market activity[117] - Placement Agent Warrants, valued at $0.5 million as of September 30, 2021, converted into 111,567 shares of common stock upon the Company's IPO[119][120] - A contingent payment derivative related to the DFD Agreement, valued at $3.8 million as of September 30, 2021, was settled by issuing 545,131 unregistered common shares to DRL upon the IPO[121][125] Roll-Forward of Changes in Fair Value of Level 3 Financial Instruments (in thousands): | Category | Warrants liabilities | | :------------------------------------ | :------------------- | | Balance at December 31, 2020 | $0 | | Additions: Contingent payment warrant | $3,819 | | Additions: Placement agent warrant | $362 | | Change in fair value of warrant liability | $184 | | Balance at September 30, 2021 | $4,365 | NOTE 8. RELATED PARTY AGREEMENTS This note details agreements and transactions with related parties, primarily Fortress Biotech, Inc - The Company has a shared services agreement with Fortress, reimbursing for legal, finance, regulatory, and R&D employee costs; approximately $0.5 million in services converted into 52,438 shares of common stock upon IPO[127][129] - Fortress increased the working capital promissory note by $9.5 million due to a cyber incident, bringing the total outstanding balance to $14.7 million as of September 30, 2021, which converted into 1,476,044 common shares upon IPO[132][133] - Fortress satisfied the Company's $1.9 million tax liabilities for 2020 using Fortress's NOLs, recorded as a capital contribution[134] NOTE 9. ACCRUED EXPENSES This note provides a detailed breakdown of accrued expenses as of the reporting dates Accrued Expenses (in thousands): | Category | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :----------------- | :---------------- | | Accrued employee compensation | $2,411 | $2,041 | | Research and development - license fees | $629 | $0 | | Accrued royalties payable | $4,496 | $2,682 | | Accrued coupon and rebates | $12,449 | $12,869 | | Reserve for product returns | $3,652 | $2,580 | | Other | $2,411 | $1,326 | | Total accrued expenses | $26,048 | $21,498 | NOTE 10. INSTALLMENT PAYMENTS — LICENSES This note details installment payments for licenses, including short-term and long-term obligations Installment Payments - Licenses (in thousands): | Category | September 30, 2021 | December 31, 2020 | | :------------------------------------------ | :----------------- | :---------------- | | Installment payments - licenses, short-term | $4,433 | $4,522 | | Installment payments - licenses, long-term | $3,539 | $8,137 | | Total installment payments - licenses | $7,972 | $12,659 | - Installment payments are related to Ximino, Accutane, and an anti-itch product, with imputed interest rates ranging from 4.03% to 11.96%[139] NOTE 11. OPERATING LEASE OBLIGATIONS This note describes the company's operating lease obligations for office space - The Company leases 3,681 square feet of office space in Scottsdale, Arizona, with an amended lease term expiring on December 31, 2022[141] Lease Cost (in thousands): | Category | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Operating lease cost | $23 | $23 | $67 | $70 | | Variable lease cost | $1 | $0 | $3 | $0 | | Total lease cost | $24 | $23 | $70 | $70 | - As of September 30, 2021, the weighted-average remaining lease term was 1.1 years, with a weighted-average discount rate of 4.0%[142] NOTE 12. LINE OF CREDIT This note details the working capital line of credit established with East West Bank - On March 31, 2021, the Company entered into a $7.5 million working capital line of credit with East West Bank, secured by receivables and cash, maturing in 36 months[143] - No amounts were drawn upon this line of credit during the three or nine months ended September 30, 2021[143] NOTE 13. INTEREST EXPENSE AND FINANCING FEES This note provides a breakdown of interest expense and financing fees incurred Interest Expense and Financing Fees (in thousands): | Category | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Convertible preferred shares | $828 | $0 | $1,682 | $0 | | Dividend payable | $365 | $0 | $628 | $0 | | Installment payments - licenses | $170 | $187 | $616 | $492 | | Anti-itch product Note 10 | $10 | $0 | $10 | $0 | | Total Interest Expense and Financing Fee | $1,373 | $187 | $2,936 | $492 | - The increase in interest expense is primarily attributable to interest, fees, and dividends payable related to the Company's convertible preferred shares[146][147] NOTE 14. COMMITMENTS AND CONTINGENCIES This note outlines the company's contingent milestone payments and royalty obligations - The Company has contingent milestone payments and royalty obligations to licensors of its drug products and candidates[149] NOTE 15. STOCKHOLDERS' EQUITY AND CLASS A PREFERRED STOCK This note details stockholders' equity, Class A Preferred Stock, and related voting rights - Fortress Biotech, Inc. holds Class A Common Stock, which grants it a voting majority (1.1 times the fraction of total common shares over Class A shares)[152][154] - The 8% Cumulative Convertible Class A Preferred Stock offering, which terminated on July 18, 2021, raised $19.0 million gross proceeds ($17.0 million net) and automatically converted into common stock upon a qualified financing or sale of the Company[158][159] - Dividends on the Class A Preferred Stock are paid quarterly in Fortress common stock, with the Company issuing additional common stock or debt to Fortress as consideration[161] NOTE 16. REVENUES FROM CONTRACTS AND SIGNIFICANT CUSTOMERS This note provides a breakdown of net product revenue by product and significant customer concentrations Net Product Revenue by Product (in thousands): | Product | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Targadox® | $5,184 | $7,214 | $18,110 | $22,195 | | Ximino® | $2,864 | $1,031 | $6,277 | $5,854 | | Exelderm® | $1,366 | $1,226 | $4,319 | $2,913 | | Accutane® | $3,531 | $0 | $5,672 | $0 | | Qbrexza® | $6,636 | $0 | $11,204 | $0 | | Other branded revenue | $29 | ($24) | $35 | ($154) | | Total Product revenue, net | $19,610 | $9,447 | $45,617 | $30,808 | - For the three months ended September 30, 2021, one customer accounted for more than 10% of total gross product revenue. As of September 30, 2021, two customers accounted for 20.7% and 14.9% of total accounts receivable[168] NOTE 17. INCOME TAXES This note details income tax benefit/expense and effective tax rates - Income tax (benefit) expense was ($6.7 million) for the nine months ended September 30, 2021, compared to $1.0 million for the same period in 2020, with effective tax rates of 23.19% and 25.43%, respectively[170] - The change in effective tax rate is primarily due to changes in unfavorable permanent book tax differences[170] - No unrecognized tax benefits were reported as of September 30, 2021, and no interest or penalties related to uncertain tax positions were recorded[171] NOTE 18. NET INCOME PER COMMON SHARE This note presents net income per common share, both basic and diluted Net (Loss) Income Per Common Share (in thousands, except per share amounts): | Metric | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 | | :--------------------------------------- | :------------------------------ | :----------------------------- | | Net (loss) income | ($10,646) | ($22,243) | | Net (loss) income per common share - basic | ($1.16) | ($2.43) | | Net (loss) income per common share - diluted | ($1.16) | ($2.43) | - Potentially dilutive securities (unvested restricted stock units and outstanding options) were excluded from diluted EPS calculation for 2021 as their effect would be anti-dilutive due to the net loss[174] NOTE 19. SUBSEQUENT EVENT This note describes the company's initial public offering completed in November 2021 - The Company completed its IPO on November 16, 2021, issuing 3,520,000 shares at $10.00 per share, resulting in approximately $31.2 million in net proceeds[175] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operational results, covering business overview, critical accounting policies, and performance analysis Overview This section provides an overview of Journey Medical Corporation's business, financing, and recent IPO - Journey Medical Corporation is a commercial-stage pharmaceutical company founded in October 2014, specializing in dermatological products with a portfolio of five branded and three authorized generic prescription drugs in the U.S.[178] - The company's operations have been primarily financed by a working capital note from Fortress Biotech, Inc., cash generated by operations, and cash raised in its private offering of Class A Preferred Stock[179] - An initial public offering (IPO) was completed on November 16, 2021, generating approximately $31.2 million in net proceeds[180] - The company is a majority-owned subsidiary of Fortress Biotech, Inc.[181] Critical Accounting Polices and Uses of Estimates This section outlines critical accounting policies and significant estimates used in financial reporting - Key accounting policies requiring significant estimates and judgments include accrued expenses, estimated useful lives for intangible assets, and stock-based compensation[183] - Revenue recognition adheres to ASC Topic 606, with net sales reflecting deductions for variable consideration such as trade discounts, rebates, coupons, and product returns[188][189] - Intangible assets are amortized over their estimated useful lives, and research and development costs for technology licenses without commercial feasibility are expensed as incurred[198][201] - The company is included in Fortress's consolidated federal and state tax returns, with tax benefits from the utilization of consolidated group's Net Operating Losses (NOLs) recorded as capital contributions[204] Results of Operations This section summarizes operational performance, highlighting revenue growth, increased costs, and a significant wire fraud loss, leading to an accumulated deficit Net Product Revenue (in millions): | Period | 2021 | 2020 | Change ($) | Change (%) | | :------------------------ | :--- | :--- | :--------- | :--------- | | Three Months Ended Sep 30 | $19.6 | $9.4 | $10.2 | 108% | | Nine Months Ended Sep 30 | $45.6 | $30.8 | $14.8 | 48% | - Revenue increases were primarily driven by incremental revenues from newly launched products, Accutane (Q1 2021) and Qbrexza (Q2 2021), and continued momentum in legacy products Exelderm and Ximino[211] - Cost of goods sold increased significantly due to a $3.0 million (three months) and $4.2 million (nine months) step-up charge for Qbrexza inventory and higher royalty expenses related to Qbrexza[212] - The company reported an accumulated deficit of $17.1 million as of September 30, 2021, and expects to incur substantial losses in the foreseeable future due to business development, new product commercialization, and public company operating costs[215] Comparison of the Three Months Ended September 30, 2021 and 2020 This section compares financial performance for the three months ended September 30, 2021 and 2020 Key Financials (Three Months Ended Sep 30, in thousands): | Metric | 2021 | 2020 | Change ($) | Change (%) | | :-------------------------------------- | :------- | :----- | :--------- | :--------- | | Product revenue, net | $19,610 | $9,447 | $10,163 | 108% | | Cost of goods sold – product revenue | $11,167 | $3,379 | $7,788 | 230% | | Research and development | $718 | $0 | $718 | 100% | | Research and development – licenses acquired | $76 | $0 | $76 | 100% | | Selling, general and administrative | $10,755 | $5,829 | $4,926 | 85% | | Wire transfer fraud loss | $9,540 | $0 | $9,540 | 100% | | Total operating expenses | $32,256 | $9,208 | $23,048 | 250% | | (Loss) income from operations | ($12,646) | $239 | ($12,885) | (5,391)% | | Interest income | $1,373 | $187 | $1,186 | 634% | | Net (Loss) income before income taxes | ($14,021) | $52 | ($14,073) | (27,063)% | | Income tax (benefit) expense | ($3,375) | $23 | ($3,398) | (14,774)% | | Net (loss) income | ($10,646) | $29 | ($10,675) | (36,810)% | - Net revenue increased by $10.2 million (108%) due to newly launched products Accutane and Qbrexza, and increases in legacy products Exelderm and Ximino, partially offset by a $2.0 million decrease in Targadox sales[218] - Cost of goods sold increased by $7.8 million (230%) primarily due to a $3.0 million step-up charge for Qbrexza inventory and a $3.1 million increase in royalty expense related to Qbrexza and Accutane[219] - Selling, general and administrative expenses rose by $4.9 million (85%) due to increased sales and marketing costs associated with an expanded product portfolio and sales headcount[221] - A wire transfer fraud loss of approximately $9.5 million significantly contributed to the net loss for the period[222] Comparison of the Nine Months Ended September 30, 2021 and 2020 This section compares financial performance for the nine months ended September 30, 2021 and 2020 Key Financials (Nine Months Ended Sep 30, in thousands): | Metric | 2021 | 2020 | Change ($) | Change (%) | | :-------------------------------------- | :------- | :----- | :--------- | :--------- | | Product revenue, net | $45,617 | $30,808 | $14,809 | 48% | | Cost of goods sold – product revenue | $22,559 | $10,313 | $12,246 | 119% | | Research and development | $747 | $0 | $747 | 100% | | Research and development – licenses acquired | $13,819 | $0 | $13,819 | 100% | | Selling, general and administrative | $24,776 | $16,270 | $8,506 | 52% | | Wire transfer fraud loss | $9,540 | $0 | $9,540 | 100% | | Total operating expenses | $71,441 | $26,583 | $44,858 | 169% | | (Loss) income from operations | ($25,824) | $4,225 | ($30,049) | -771% | | Interest income | $2,936 | $492 | $2,444 | 497% | | Net (Loss) income before income taxes | ($28,944) | $3,733 | ($32,677) | (875)% | | Income tax (benefit) expense | ($6,701) | $952 | ($7,653) | (804)% | | Net (loss) income | ($22,243) | $2,781 | ($25,024) | (900)% | - Net revenue increased by $14.8 million (48%) due to newly launched products Accutane and Qbrexza, and increases in legacy products Exelderm and Ximino, partially offset by a $4.1 million decrease in Targadox sales[230][231] - Cost of goods sold increased by $12.2 million (119%) primarily due to a $4.2 million step-up charge for Qbrexza inventory and a $4.9 million increase in royalty expense related to Qbrexza and Accutane[232] - Research and development - licenses acquired expenses increased by $13.8 million, primarily from a $10.0 million upfront payment for the DFD-29 license and a $3.8 million non-cash contingent payment[233] - Selling, general and administrative expenses rose by $8.5 million (52%) due to increased sales and marketing costs associated with an expanded product portfolio and sales headcount[234] - A wire transfer fraud loss of approximately $9.5 million significantly contributed to the net loss for the period[235] Liquidity and Capital Resources This section discusses the company's sources and uses of cash, including financing activities and the impact of a cybersecurity incident - Operations are primarily financed through a Fortress Note, cash received from operations, and the Class A Preferred Stock offering[239] - The Company completed an IPO on November 16, 2021, generating approximately $31.2 million in net proceeds[242] - The outstanding Fortress Note of approximately $14.7 million as of September 30, 2021, was settled by issuing 1,476,044 shares of common stock to Fortress upon the IPO[242] - A $7.5 million working capital line of credit with East West Bank was established on March 31, 2021, but no amounts were drawn during the reported periods[243] - A cybersecurity incident in September 2021 resulted in a $9.5 million wire transfer fraud loss, which was recorded as an expense. Fortress provided $9.5 million to ensure smooth operations, recorded as a related party payable note that converted to common stock upon IPO[248][249] Cash Flows (Nine Months Ended Sep 30, in thousands): | Activity | 2021 | 2020 | | :------------------------------------------------- | :--- | :--- | | Operating activities | $1,025 | $78 | | Investing activities | ($8,800) | ($1,000) | | Financing activities | $21,218 | $0 | | Net increase (decrease) in cash and cash equivalents | $13,443 | ($922) | Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements during the reported periods - The Company did not have any off-balance sheet arrangements during the periods presented[254] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Journey Medical Corporation is not required to provide detailed quantitative and qualitative disclosures about market risk - The Company is a smaller reporting company and is not required to provide detailed quantitative and qualitative disclosures about market risk[257] Item 4. Controls and Procedures This section details the evaluation of disclosure controls, identifying a material weakness from a cybersecurity incident, with remediation efforts underway Evaluation of Disclosure Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures - A material weakness was identified in September 2021 due to internal controls not being adequately designed to prevent or timely detect unauthorized cash disbursements, following a $9.5 million wire fraud incident[259] - Management concluded that disclosure controls and procedures were not effective as of September 30, 2021, but immediate remediation actions, including enhancing cash disbursement controls and IT security, have been taken, and the material weakness is believed to be remediated as of the filing date[260] Changes in Internal Control over Financial Reporting This section reports on any changes in internal control over financial reporting - Except for the remediation efforts taken to address the material weakness, there were no other material changes in internal control over financial reporting during the most recent quarter[261] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other required disclosures Item 1. Legal Proceedings This section details ongoing U.S. patent litigation concerning Qbrexza® against Perrigo Pharma International DAC - The Company is actively litigating a U.S. patent infringement case against Perrigo Pharma International DAC regarding Qbrexza® patents, which Perrigo challenges to market a generic version[262][264] - A 30-month stay preventing Perrigo from selling a generic version of Qbrexza® is set to expire on March 9, 2023, with the trial scheduled for September 19, 2022[264] Item 1A. Risk Factors This section outlines various risks that could materially affect the company's business, financial condition, and operating results Risks Related to Our Business, Industry and Existing Operating Revenue Stream This section outlines risks related to the company's business, industry, and existing revenue streams - Future revenue from dermatology products may be lower than expected due to issues like supply chain disruptions, demand fluctuations, manufacturing problems, regulatory changes, and competition[266][267] - A majority of sales derive from products without patent protection (Accutane, Targadox, Exelderm) or those facing generic competition, which could significantly impact operating income[268][270][271] - The company operates in a heavily regulated industry, and future legislation or administrative actions could adversely affect operations[10] - Disruptions to the field sales force or inability to establish new sales and marketing capabilities for future products could adversely impact revenue[274][276] - Product candidates may not receive timely regulatory approval, or approved products may face post-marketing requirements or limited indications, hindering commercialization[277][283][285] - Reliance on contract manufacturers for product supply and compliance with cGMP regulations poses risks of delays, inability to meet demand, and regulatory non-compliance[286][288][291] - Serious adverse side effects identified during development or post-market could lead to product abandonment, labeling changes, withdrawal from the market, or product liability claims[292][294] - Accutane, an isotretinoin product, carries a black box warning for pregnant women and warnings for psychiatric disorders and inflammatory bowel disease, historically leading to product liability claims[363] - Non-compliance with environmental, health, and safety laws and regulations could result in fines, penalties, or significant costs[364][365] - System failures, cyber-attacks, or deficiencies in cybersecurity could disrupt operations, lead to data loss, and incur liabilities[368][370] Risks Related to Our Reliance on Third Parties This section details risks associated with the company's reliance on third-party agreements and services - Inability to maintain or establish sales, marketing, and distribution capabilities, or to secure agreements with third parties, could hinder revenue generation from current or future products[338][339] - Dependence on third parties for raw materials, manufacturing, warehousing, distribution, and other core services exposes the company to risks of supply interruptions, regulatory non-compliance, and contractual failures[341][342][345] - Reliance on third-party contract manufacturing organizations (CMOs) for commercial production means limited direct control over manufacturing practices, potentially leading to delays, increased costs, and regulatory issues[346][347] - Reliance on third-party CROs and other parties to conduct clinical trials and regulatory submissions poses risks if they fail to perform satisfactorily, meet deadlines, or comply with regulations, potentially delaying approvals[349][351][354] - The company relies on clinical data and results obtained by third parties, which if inaccurate or unreliable, could compromise research and development efforts[356][357] - Product liability claims, especially for products like isotretinoin (Accutane) with known side effects, could result in substantial liabilities, litigation costs, and harm to reputation[358][359][362] Risks Related to Our Growth This section discusses risks pertinent to the company's growth strategies and operational expansion - Future growth is highly dependent on the ability to identify, acquire, or in-license new products and integrate them, which carries operational and financial risks including unknown liabilities, business disruption, and financing difficulties[371][372] - Limited resources may lead to foregoing or delaying more profitable opportunities, and R&D spending on specific indications may not yield commercially viable products[373] - The company's limited operating history (since 2014) makes it difficult to evaluate future performance, particularly regarding clinical trials and regulatory approvals[375][376] - Inability to attract and retain key management and personnel due to intense competition could impede business objectives and capital raising[378][379] - Asset sales, if undertaken, could reduce business scope, market share, or opportunities with respect to certain markets, products, or therapeutic categories[380] Risks Related to Development and Regulatory Approval of Our Product Candidates (DFD-29) This section outlines risks associated with the development and regulatory approval of product candidates like DFD-29 - The business is dependent on the successful development and regulatory approval of DFD-29 and any future product candidates[381][384] - Clinical drug development is very expensive, time-consuming, and uncertain, with most product candidates failing to achieve regulatory approval[388][389] - Clinical trials can be suspended or terminated at any time due to adverse events, lack of effectiveness, slow patient recruitment, manufacturing delays, or changes in regulatory policies[390][391] - Reliance on third-party CROs and other parties for clinical trials and regulatory submissions means the company has limited control over these activities and remains responsible for compliance with GCP and GLP requirements[394][395][396] - The company is currently dependent on DRL for the manufacture and clinical supply of DFD-29 drug product, posing risks of supply interruptions and delays[400][401] - Regulatory approval for product candidates is uncertain and can be delayed, limited, or denied by the FDA and foreign authorities due to various factors, including disagreement with trial design or insufficient data[402][405][407] - Conducting clinical trials outside the U.S. carries the risk that the FDA or applicable foreign regulatory authority may not accept the data, leading to additional costs and delays[410][411] Risks Related to Intellectual Property, Generic Competition and Paragraph IV Litigation This section details risks concerning intellectual property, generic competition, and patent litigation - Inability to obtain and maintain broad patent protection for technology and products could allow competitors to commercialize similar products, impairing the company's market position[412][413] - The patent prosecution process is expensive and uncertain, with potential for challenges, reexaminations, or invalidation of patent rights, which could reduce their scope or enforceability[414][417][419] - Generic drug approvals and successful challenges against patent validity (e.g., Paragraph IV litigation for Qbrexza) could lead to loss of product exclusivity and significant price competition[423][425] - Enforcing proprietary rights is difficult and costly, and competitors may infringe patents or independently develop similar technologies, requiring expensive and time-consuming litigation[426][427][431] - Some of the company's products (Accutane, Targadox, Exelderm) do not have patent protection, increasing the risk of generic competition[429][270] - Reliance on trade secrets carries the risk of disclosure or independent development by competitors, harming competitive position[430] - Being sued for infringing intellectual property rights of third parties would be costly, time-consuming, and could result in substantial damages or injunctions[431][433] - The company may need to license certain intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms[440][441] - Failure to comply with obligations in intellectual property licenses could lead to loss of rights important to the business[442][443] Risks Related to our Platform and Data This section outlines risks related to the company's information technology systems, data security, and cyber threats - The company is highly dependent on information technology systems, infrastructure, and data, making it vulnerable to computer system failures, cyber-attacks, and security breaches[444][445][448] - A cybersecurity incident in September 2021 resulted in a $9.5 million wire transfer fraud loss, highlighting the risk of financial, legal, business, and reputational harm from such events[449] - Loss or corruption of clinical trial data due to security breaches could result in delays in regulatory approval efforts and significantly increase costs[450] - The company expects to incur significant costs to detect and prevent security incidents, and insurance policies may not be adequate to compensate for potential losses[451][454] Risks Related to the COVID-19 Pandemic This section discusses the ongoing and potential impacts of the COVID-19 pandemic on the company's operations - The COVID-19 pandemic has impacted and may continue to impact product revenues, future clinical trials, and overall financial condition due to global economic disruption, supply chain issues, and market volatility[455][457] - Continued reliance on remote work may negatively impact productivity, regulatory application preparation, data analysis, and increase cybersecurity risks[458] - Factors such as changes in buying patterns, adverse effects on manufacturing and distribution, and potential shutdowns of CMOs could delay clinical trials and product supply[459] Risks Related to Our Finances and Capital Requirements This section details risks concerning the company's financial condition and future capital requirements - Despite being cash-generating, the company expects to incur substantial losses in the foreseeable future due to development, commercialization, and public company costs, and may not maintain profitability[462][463][466] - The company may need to raise additional capital to fund operations, commercial-scale manufacturing, and in-license additional product candidates[467] - Future funding requirements are dependent on many factors, including regulatory approval delays, commercialization costs, R&D progress, intellectual property defense, and market developments[468] - Raising additional capital through equity or convertible debt securities could dilute existing stockholders' ownership and impose restrictive covenants[471][472] - Failure to raise the additional funds needed could force delays, reductions, or elimination of future product development and commercialization efforts[473][474] Risks Relating to Owning our Common Stock This section outlines risks associated with owning the company's common stock, including market volatility and governance - Failure to maintain or implement effective internal controls could lead to inaccurate financial reporting, fraud, and a material adverse effect on the business and stock price[475][477] - The company's charter documents and Delaware law contain provisions that could discourage takeover attempts and make corporate governance changes difficult for stockholders[481][482] - The Second Amended and Restated Certificate of Incorporation designates Delaware courts as the sole forum for certain stockholder litigation, potentially limiting stockholders' choice of judicial forum[483][484][488] - Being a public company strains resources, diverts management attention, and increases compliance costs, potentially affecting the ability to attract and retain qualified board members[489][490][491] - As an emerging growth company (EGC), reduced reporting and disclosure requirements might make common stock less attractive to investors, leading to a less active trading market and more volatile stock price[492][495] - Failure to maintain Nasdaq listing requirements could lead to delisting, making it harder for shareholders to sell securities and negatively impacting stock price[496][497] - The company does not anticipate paying any cash dividends in the foreseeable future, making capital appreciation the sole source of gains for stockholders[498][499] - The trading price of common stock is likely to be volatile due to various factors, including industry trends, company announcements, financial performance, litigation, and economic conditions[500][501][503] Risks Related to our Relationship with Fortress Biotech, Inc. This section details risks arising from the company's relationship and dependence on Fortress Biotech, Inc - Fortress controls a voting majority of the company's common stock through its Class A Common Stock, which could be detrimental to other shareholders and delay or prevent a change in control[504][505] - As a 'controlled company' under Nasdaq standards, the company qualifies for exemptions from certain corporate governance requirements, which, if utilized, could reduce protections for stockholders[506][507] - Termination of the shared services agreement with Fortress could result in significant costs, operational challenges, and difficulty retaining key personnel[508][509][511] - Arrangements with Fortress for management and administration services might not reflect arm's-length terms, potentially being less favorable than those from unaffiliated third parties[512][513] - Executive officers' and directors' ownership of Fortress equity could create conflicts of interest[514][515] - Fortress's financial obligations or default could change the ownership dynamic, as Fortress has pledged company equity as collateral to creditors[516][517] General Risks This section covers general risks that could broadly impact the company's business and financial performance - Failure to effectively manage rapid growth could adversely affect business, operating results, and financial condition[518][519] - Lack of research coverage or unfavorable reports from securities analysts could cause the share price and trading volume to decline[521][522] - Changes in GAAP or incorrect estimates/judgments related to critical accounting policies could adversely affect reported financial results[523][524][525] - Global and national financial events (e.g., credit crisis, recession) could negatively impact the business and ability to raise capital[526][527] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on unregistered sales of 8% Cumulative Convertible Class A Preferred Stock through private placements in July 2021 - In July 2021, the Company completed two closings of a private placement for its 8% Cumulative Convertible Class A Preferred Stock, issuing 177,400 shares and 8,000 shares, respectively[532][533] - These sales generated total gross proceeds of approximately $4,435,000 and $200,000, respectively, and were made in reliance on an exemption from registration set forth in Section 4(a)(2) of the Securities Act[532][533][534] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reported period - No defaults upon senior securities were reported[535] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable to the Company[537] Item 5. Other Information This section states that there is no other information to report - No other information was reported[538] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL financial information - The exhibits include certifications from the Chief Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[540] - Financial information from the quarterly report is provided in Inline Extensible Business Reporting Language (XBRL) format[540] SIGNATURES The report is officially certified by Journey Medical Corporation's President and CEO and CFO as of December 15, 2021 - The report is signed by Claude Maraoui, President and Chief Executive Officer, and Ernest De Paolantonio, Chief Financial Officer, on December 15, 2021[544]