Journey Medical (DERM) - 2023 Q2 - Quarterly Report

Filing Information This section details Journey Medical Corporation's Form 10-Q filing, registrant status, and securities information Registrant Details and Securities Journey Medical Corporation filed its Form 10-Q for Q2 2023, with common stock (DERM) on NASDAQ, reporting 18.48 million shares outstanding - Journey Medical Corporation is a Delaware-incorporated entity, filing its quarterly report for the period ended June 30, 2023[1][2] Title of each class and exchange | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | :------------------ | :---------------- | :---------------------------------------- | | Common Stock, par value $0.0001 per share | DERM | NASDAQ Capital Market | Outstanding Shares as of August 10, 2023 | Class of Common Stock | Outstanding Shares as of August 10, 2023 | | :-------------------- | :--------------------------------------- | | Common Stock Class A, $0.0001 par value | 6,000,000 | | Common Stock, $0.0001 par value | 12,475,115 | Filer Status The registrant is classified as a Non-accelerated Filer, a Smaller Reporting Company, and an Emerging Growth Company, having filed all required reports - The registrant has filed all required reports during the preceding 12 months and has been subject to filing requirements for the past 90 days[2] Filer Status Classification | Large Accelerated Filer | ☐ | Accelerated Filer | ☐ | | :---------------------- | :-- | :---------------- | :-- | | Non-accelerated Filer | ☒ | Smaller Reporting Company | ☒ | | Emerging growth company | ☒ | | | - The registrant is not a shell company[3] PART I. FINANCIAL INFORMATION This part presents Journey Medical Corporation's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Condensed Consolidated Financial Statements (unaudited) Unaudited condensed consolidated financial statements, including balance sheets, operations, equity, and cash flows, detail significant net losses and financial position shifts Unaudited Condensed Consolidated Balance Sheets The balance sheets show a decrease in total assets by approximately $35.4 million and a significant reduction in stockholders' equity from December 2022 to June 2023 Condensed Consolidated Balance Sheets (Dollars in thousands) | ASSETS | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $8,230 | $32,003 | | Accounts receivable, net | 16,737 | 28,208 | | Inventory | 12,166 | 14,159 | | Restricted cash | 8,750 | — | | Total current assets | 47,679 | 77,679 | | Intangible assets, net | 21,916 | 27,197 | | Total assets | $69,747 | $105,160 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable | $31,773 | $36,570 | | Accrued expenses | 23,329 | 19,388 | | Term loan, short-term | 9,942 | — | | Total current liabilities | 68,193 | 66,832 | | Total liabilities | 69,742 | 88,178 | | Total stockholders' equity | 5 | 16,982 | | Total liabilities and stockholders' equity | $69,747 | $105,160 | - Total assets decreased by approximately $35.4 million from December 31, 2022, to June 30, 2023, primarily due to reductions in cash and cash equivalents, accounts receivable, and intangible assets[9] - Stockholders' equity significantly decreased from $16.98 million at December 31, 2022, to $5 thousand at June 30, 2023, largely due to accumulated deficit[9] Unaudited Condensed Consolidated Statements of Operations The statements of operations reveal increased net losses for both three-month and six-month periods ended June 30, 2023, driven by lower revenue and an intangible asset impairment Condensed Consolidated Statements of Operations (Dollars in thousands, except per share amounts) | Metric | Three-Month Periods Ended June 30, 2023 | Three-Month Periods Ended June 30, 2022 | Six-Month Periods Ended June 30, 2023 | Six-Month Periods Ended June 30, 2022 | | :-------------------------------- | :-------------------------------------- | :-------------------------------------- | :------------------------------------ | :------------------------------------ | | Total revenue | $17,172 | $18,291 | $29,385 | $41,587 | | Total operating expenses | 24,825 | 25,433 | 46,599 | 49,617 | | Loss from operations | (7,653) | (7,142) | (17,214) | (8,030) | | Total other expense (income) | 710 | 450 | 1,285 | 836 | | Net Loss | $(8,363) | $(7,528) | $(18,499) | $(8,906) | | Net loss per common share (Basic and diluted) | $(0.46) | $(0.43) | $(1.03) | $(0.51) | - Net loss increased by 11% for the three-month period and 108% for the six-month period ended June 30, 2023, compared to the prior year, primarily due to lower revenue and a $3.14 million loss on impairment of intangible assets in 2023[11] - Total revenue decreased by 6% for the three-month period and 29% for the six-month period ended June 30, 2023, driven by a decline in product revenue[11] Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity significantly decreased from $16.98 million to $5 thousand during the six months ended June 30, 2023, primarily due to a net loss Changes in Stockholders' Equity (Six-Month Period Ended June 30, 2023, Dollars in thousands) | Item | Common Stock Shares | Common Stock Amount | Common Stock A Shares | Common Stock A Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | :-------------------- | :------------------------- | :------------------ | :------------------------- | | Balance as of December 31, 2022 | 11,765,700 | $1 | 6,000,000 | $1 | $85,482 | $(68,502) | $16,982 | | Share-based compensation | — | — | — | — | 1,519 | — | 1,519 | | Net loss | — | — | — | — | — | (18,499) | (18,499) | | Balance as of June 30, 2023 | 12,133,890 | $1 | 6,000,000 | $1 | $87,004 | $(87,001) | $5 | - Total stockholders' equity decreased from $16.98 million at December 31, 2022, to $5 thousand at June 30, 2023, primarily due to a net loss of $18.50 million[13] - Share-based compensation contributed $1.52 million to additional paid-in capital during the six-month period ended June 30, 2023[13] Unaudited Condensed Consolidated Statements of Cash Flows Cash flows show improved operating activities but significant outflows from financing due to debt repayments, leading to a net decrease in cash and restricted cash Condensed Consolidated Statements of Cash Flows (Six-Month Periods Ended June 30, Dollars in thousands) | Cash Flow Activity | 2023 | 2022 | | :-------------------------------------- | :----- | :----- | | Net cash provided by (used in) operating activities | $3,013 | $(2,416) | | Net cash used in investing activities | (5,000) | (20,000) | | Net cash (used in) provided by financing activities | (13,036) | 11,477 | | Net change in cash and restricted cash | (15,023) | (10,939) | | Cash and restricted cash at the end of the period | $16,980 | $38,142 | - Operating activities generated $3.01 million in cash in the first six months of 2023, a significant improvement from a $2.42 million cash outflow in the same period of 2022[21] - Investing activities used $5.00 million in cash in 2023, a decrease from $20.00 million in 2022, primarily due to a lower payment for acquired intangible assets[21] - Financing activities resulted in a $13.04 million cash outflow in 2023, a reversal from a $11.48 million cash inflow in 2022, mainly due to debt repayments[21] Notes to Unaudited Condensed Consolidated Financial Statements Detailed notes supporting the unaudited condensed consolidated financial statements cover key areas like organization, accounting policies, assets, liabilities, and subsequent events NOTE 1. ORGANIZATION AND PLAN OF BUSINESS OPERATIONS Journey Medical Corporation, a commercial-stage pharmaceutical company, faces substantial doubt about its going concern ability due to declining liquidity and increased losses, despite debt repayment and cost reductions - Journey Medical Corporation is a commercial-stage pharmaceutical company specializing in FDA-approved dermatological products, with a portfolio of eight branded and three authorized generic drugs[23] - Cash and cash equivalents decreased from $32.0 million at December 31, 2022, to $8.2 million at June 30, 2023, with an additional $8.75 million in restricted cash[25] - The company fully repaid its $10.0 million outstanding term loan in July 2023, satisfying all debt obligations under the EWB Facility[26] - A cost reduction initiative, including salesforce headcount reduction and marketing cuts, was implemented in late 2022/early 2023 to improve operational efficiencies and align costs with revenues[28] - Substantial doubt exists about the company's ability to continue as a going concern for at least twelve months from the financial statement issuance date, necessitating potential additional debt or equity financing[30] NOTE 2. BASIS OF PRESENTATION The unaudited interim financial statements conform to GAAP, with the company operating as a single segment and electing an extended transition period for new accounting standards - The financial statements are prepared in accordance with GAAP and include the accounts of Journey Medical Corporation and its wholly-owned subsidiary, JG Pharma, Inc[32] - The company is an emerging growth company and has elected the extended transition period for complying with new or revised accounting standards[33] - Management makes significant estimates for revenue recognition (coupons, rebates, returns), inventory realization, intangible asset valuation, and share-based compensation[34] - The company views its operations and manages its business as one segment, focusing on products for dermatological conditions[35] NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The company's significant accounting policies remain consistent with its 2022 Form 10-K, with no material impact from new accounting pronouncements - Significant accounting policies are consistent with the 2022 Form 10-K[36] - No new accounting pronouncements or updates materially affected the company's financial condition, results of operations, liquidity, or disclosures during the three-month period ended June 30, 2023[37] NOTE 4. INVENTORY Total inventories decreased from $14.16 million to $12.17 million, primarily due to reduced raw materials and finished goods, alongside increased inventory reserves Inventory (Dollars in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--------------- | :------------ | :---------------- | | Raw materials | $5,261 | $6,454 | | Work-in-process | 993 | 395 | | Finished goods | 6,880 | 7,739 | | Inventory at cost | 13,134 | 14,588 | | Inventory reserves | (968) | (429) | | Total inventories | $12,166 | $14,159 | - Inventory reserves increased from $429 thousand to $968 thousand, indicating higher provisions for potential obsolescence or excess inventory[38] NOTE 5. ASSET ACQUISITION In January 2022, Journey Medical acquired two FDA-approved topical minocycline products and a platform from VYNE Therapeutics for $20.0 million upfront, with potential milestone payments up to $450 million - In January 2022, Journey Medical acquired Amzeeq® and Zilxi® products and a Molecule Stabilizing Technology™ platform from VYNE Therapeutics for $20.0 million upfront and a $5.0 million deferred payment[39] - The acquisition agreement includes contingent net sales milestone payments totaling up to $450 million, triggered at various annual sales thresholds per product[40] Aggregate Consideration Transferred for VYNE Product Acquisition (Dollars in thousands) | Item | Amount | | :------------------------------------ | :----- | | 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 | Assets Recognized in VYNE Product Acquisition (Dollars in thousands) | Item | Amount | | :------------------------ | :----- | | Inventory | $6,041 | | Amzeeq intangible | 15,162 | | Zilxi intangible | 3,760 | | Fair value of net identifiable assets acquired | $24,963 | NOTE 6. INTANGIBLE ASSETS A $3.1 million impairment charge was recorded for Ximino products, contributing to a decrease in total net intangible assets from $27.2 million to $21.9 million - A $3.14 million intangible asset impairment charge was recorded for Ximino products during the three months ended June 30, 2023, due to revised financial outlook[43] Intangible Assets (Dollars in thousands) | Category | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Intangible assets - product licenses | $37,925 | $37,925 | | Accumulated amortization | (12,866) | (10,728) | | Accumulated impairment loss | (3,143) | — | | Total intangible assets | $21,916 | $27,197 | - Amortization expense for intangible assets was $1.1 million for the three-month period and $2.1 million for the six-month period ended June 30, 2023[44] NOTE 7. LICENSES ACQUIRED Journey Medical holds global rights for DFD-29, Qbrexza, and Accutane, involving significant potential milestone payments and royalties - Obtained global rights for DFD-29 (rosacea treatment) in June 2021, with potential contingent regulatory and commercial milestone payments up to $158.0 million and royalties of 10-15% on net sales[46] - Acquired global rights to Qbrexza in March 2021 for an upfront fee of $12.5 million, with up to $144 million in net sales milestones and tiered royalties (40-30% for first two years, then 12-19%)[47] - Entered an exclusive license for Accutane in July 2020, involving $5.0 million in initial payments ($3.0 million paid) and $17.0 million in contingent sales milestones, plus low-double digit royalties[48] NOTE 8. FAIR VALUE MEASUREMENTS All financial assets measured at fair value (cash and restricted cash) are classified as Level 1, reflecting quoted prices in active markets - Fair value is defined as an exit price, classified into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[49][50][51] Financial Assets Measured at Fair Value (Dollars in thousands) | Asset | June 30, 2023 (Level 1) | December 31, 2022 (Level 1) | | :------------------------ | :---------------------- | :-------------------------- | | Cash and cash equivalents | $8,230 | $32,003 | | Restricted cash | 8,750 | — | | Total | $16,980 | $32,003 | - No Level 2 or Level 3 assets or liabilities were held at June 30, 2023, or December 31, 2022, and no transfers occurred between levels[53] NOTE 9. RELATED PARTY AGREEMENTS Journey Medical, a majority-owned subsidiary of Fortress Biotech, Inc., incurs shared service expenses and has an outstanding balance due to its parent - Journey Medical is a majority-owned subsidiary of Fortress Biotech, Inc., which owned 55.35% of its outstanding Common Stock as of June 30, 2023[24][55] - Under a Shared Services Agreement, Journey Medical reimburses Fortress for shared employee and various payroll/SG&A costs[54] Related Party Expenses (Dollars in thousands) | Period | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Three-month periods ended June 30 | $21 | $12 | | Six-month periods ended June 30 | $36 | $100 | Outstanding Balance Due to Related Party (Dollars in thousands) | Date | Amount | | :---------------- | :----- | | June 30, 2023 | $603 | | December 31, 2022 | $413 | NOTE 10. ACCRUED EXPENSES Total accrued expenses increased to $23.33 million, mainly due to higher accrued coupons, rebates, and a new severance obligation Accrued Expenses (Dollars in thousands) | Category | June 30, 2023 | December 31, 2022 | | :------------------------------ | :------------ | :---------------- | | Accrued coupons and rebates | $12,509 | $7,604 | | Return reserve | 4,545 | 3,689 | | Accrued compensation | 2,064 | 2,586 | | Accrued royalties payable | 2,199 | 2,627 | | Accrued severance | 133 | — | | Accrued research and development | 111 | 1,404 | | Total accrued expenses | $23,329 | $19,388 | - A severance obligation of $133 thousand remained to be paid at June 30, 2023, following a salesforce headcount reduction[57] NOTE 11. INSTALLMENT PAYMENTS — LICENSES Installment payments for licenses, net of imputed interest, slightly increased to $3.82 million, with a rise in the short-term portion Installment Payments – Licenses (Dollars in thousands) | Category | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Short-Term | $2,333 | $2,244 | | Long-Term | 1,490 | 1,412 | | Sub-total installment payments - licenses | $3,823 | $3,656 | NOTE 12. OPERATING LEASE OBLIGATIONS The company's office lease in Scottsdale, Arizona, was extended to January 2025, with total lease costs of $25 thousand and $50 thousand for the three and six-month periods, respectively - The company's office lease in Scottsdale, Arizona, was amended to extend the term until January 31, 2025[59] Total Lease Cost (Dollars in thousands) | Period | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Three-Month Periods Ended June 30 | $25 | $28 | | Six-Month Periods Ended June 30 | $50 | $55 | Operating Lease Quantitative Information | Metric | Three-Month Periods Ended June 30, 2023 | Six-Month Periods Ended June 30, 2023 | | :-------------------------------------- | :-------------------------------------- | :------------------------------------ | | Weighted-average remaining lease term | 1.6 years | 1.6 years | | Weighted-average discount rate | 6.25 % | 6.25 % | Future Minimum Lease Payments (Dollars in thousands) | Year | Amount | | :---------------- | :----- | | Remainder of 2023 | $50 | | 2024 | 102 | | 2025 | 9 | | Total operating lease liabilities | $154 | NOTE 13. DEBT AND INTEREST EXPENSE Total debt obligations significantly decreased to $9.94 million due to reclassification and subsequent repayment of the EWB Term Loan, while interest expense increased by 67% Debt Obligations (Dollars in thousands) | Category | June 30, 2023 (Net Carry Amount) | December 31, 2022 (Net Carry Amount) | | :-------------------------- | :------------------------------- | :--------------------------------- | | EWB Term Loan (Short-term) | $9,942 | — | | Deferred cash payment | — | $4,991 | | EWB Revolving LOC | — | 2,948 | | EWB Term Loan (Long-term) | — | 19,826 | | Total Debt & Obligations | $9,942 | $27,765 | - The company fully repaid the $10.0 million EWB term loan in July 2023, eliminating all outstanding debt obligations to EWB[63] Interest Expense and Financing Fees (Dollars in thousands) | Category | Three-Month Periods Ended June 30, 2023 | Three-Month Periods Ended June 30, 2022 | Six-Month Periods Ended June 30, 2023 | Six-Month Periods Ended June 30, 2022 | | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | :------------------------------------ | :------------------------------------ | | Interest payments on EWB term loan and LOC | $399 | $216 | $932 | $377 | | Amortization/Accretion | 272 | 87 | 297 | 167 | | Imputed interest on acquired intangible assets | 85 | 151 | 177 | 299 | | Total Interest Expense and Financing Fees | $756 | $454 | $1,406 | $843 | NOTE 14. COMMITMENTS AND CONTINGENCIES The company has commitments for contingent milestone payments and royalties to licensors of its drug products and candidates - The company is obligated to make contingent milestone payments and pay royalties to licensors based on net sales of drug products and candidates[67] NOTE 15. SHARE-BASED COMPENSATION Share-based compensation expense totaled $873 thousand and $1.52 million for the three and six-month periods, respectively, with $4.0 million in unrecognized costs remaining - The 2015 Stock Plan authorized 7,642,857 shares, with 1,322,932 shares available for issuance as of June 30, 2023[68] Share-Based Compensation Expense (Dollars in thousands) | Category | Three-Month Periods Ended June 30, 2023 | Three-Month Periods Ended June 30, 2022 | Six-Month Periods Ended June 30, 2023 | Six-Month Periods Ended June 30, 2022 | | :-------------------------------------- | :-------------------------------------- | :-------------------------------------- | :------------------------------------ | :------------------------------------ | | Research and development | $30 | $0 | $64 | $0 | | Selling, general and administrative | 843 | 774 | 1,455 | 1,547 | | Total non-cash compensation expense | $873 | $774 | $1,519 | $1,547 | - As of June 30, 2023, unrecognized stock-based compensation expense for unvested options was $1.5 million (over ~2.2 years) and for RSUs was $2.5 million (over ~1.8 years)[71][73] NOTE 16. REVENUES FROM CONTRACTS WITH CUSTOMERS Net product revenues decreased by 7% for the three-month period and 25% for the six-month period, primarily due to lower legacy product volumes and higher gross-to-net allowances Net Product Revenues (Dollars in thousands) | Product | Three-Month Periods Ended June 30, 2023 | Three-Month Periods Ended June 30, 2022 | Six-Month Periods Ended June 30, 2023 | Six-Month Periods Ended June 30, 2022 | | :---------------- | :-------------------------------------- | :-------------------------------------- | :------------------------------------ | :------------------------------------ | | Qbrexza® | $8,079 | $6,111 | $12,173 | $13,487 | | Accutane® | 5,579 | 5,200 | 10,227 | 10,107 | | Amzeeq® | 1,374 | 1,265 | 2,568 | 4,731 | | Zilxi® | 572 | 555 | 886 | 1,297 | | Targadox® | 664 | 2,756 | 1,457 | 5,390 | | Exelderm® | 538 | 1,313 | 1,049 | 2,017 | | Ximino® | 155 | 1,035 | 766 | 2,002 | | Total product revenues | $16,961 | $18,235 | $29,126 | $39,031 | - Other revenue, primarily royalties from Rapifort® Wipes in Japan, increased to $211 thousand for the three-month period ended June 30, 2023, but decreased significantly for the six-month period due to a one-time milestone payment in 2022[76] - Two customers accounted for more than 10% of total accounts receivable at June 30, 2023 (22.0% and 17.3%)[75] NOTE 17. INCOME TAXES The company uses the asset and liability method for income taxes and maintains a valuation allowance against deferred tax assets due to a history of losses - The company uses the asset and liability method for income taxes and has a valuation allowance against deferred tax assets due to a history of losses[77] - No unrecognized tax benefits were present as of June 30, 2023, and no significant change is anticipated[78] NOTE 18. NET LOSS PER COMMON SHARE Basic and diluted net loss per common share are computed using the treasury stock method, with potentially dilutive securities excluded due to their anti-dilutive effect - Basic and diluted net loss per common share are computed by dividing net loss by the weighted-average number of common shares outstanding[79] Weighted Average Number of Common Shares (Basic and Diluted) | Period | 2023 | 2022 | | :-------------------------------- | :----------- | :----------- | | Three-Month Periods Ended June 30 | 18,005,055 | 17,455,894 | | Six-Month Periods Ended June 30 | 17,906,671 | 17,386,538 | - Potentially dilutive securities (unvested RSUs and stock options) were excluded from diluted loss per share calculations as their effect would be anti-dilutive[80] NOTE 19. SUBSEQUENT EVENT In July 2023, Journey Medical fully repaid its $10.0 million EWB term loan, satisfying all debt obligations under the EWB Facility - In July 2023, the company fully repaid the $10.0 million EWB term loan, eliminating all debt obligations under the EWB Facility[81] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis covers Journey Medical's financial condition and operational results, highlighting increased net losses, revenue decline, cost reduction, and going concern doubts Forward-Looking Statements The report contains forward-looking statements subject to various risks, including regulatory hurdles, generic competition, and reliance on third parties, with safe harbor protection claimed - The report contains forward-looking statements subject to known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially[83] - Key risks include regulatory hurdles, generic competition, heavily regulated industry, dependence on dermatology product sales, market acceptance, reliance on third parties, and the ability to acquire/develop new products[84] - The company claims safe harbor protection for forward-looking statements under the Private Securities Litigation Reform Act of 1995[87] Overview Journey Medical Corporation is a commercial-stage pharmaceutical company focused on selling and marketing FDA-approved prescription dermatological products in the U.S - Journey Medical Corporation is a commercial-stage pharmaceutical company founded in October 2014, focused on selling and marketing FDA-approved prescription dermatological products[88] - The current portfolio includes eight branded and three authorized generic prescription drugs marketed in the U.S[88] - The company aims to acquire rights to future products through licensing or acquisition, funding R&D, and commercializing them via its field sales force[88] Critical Accounting Polices and Uses of Estimates The financial statements are prepared in accordance with GAAP, requiring management judgment and estimates, with no material changes from December 31, 2022 - The company's financial statements are prepared in accordance with GAAP, requiring management judgment and estimates[89] - There were no material changes in critical accounting estimates or policies from December 31, 2022[90] Accounting Pronouncements No new accounting pronouncements or updates are expected to materially affect the company's financial statements for the six-month period ended June 30, 2023 - No new accounting pronouncements or updates during the six-month period ended June 30, 2023, are expected to materially affect the company's financial statements[91] Emerging Growth Company and Smaller Reporting Company Status The company qualifies as an emerging growth company and a smaller reporting company, allowing for reduced reporting and disclosure requirements - The company is an emerging growth company (EGC) under the JOBS Act, allowing for delayed adoption of new accounting standards and reduced reporting requirements[92][95] - The company is also a 'smaller reporting company,' which permits reduced disclosure obligations, including presenting only two years of audited financial statements[96] Results of Operations This section compares the company's financial performance for the three-month and six-month periods ended June 30, 2023 and 2022, detailing revenue and expense changes Comparison of the Three-Month Periods Ended June 30, 2023 and 2022 Total revenue decreased by 6% to $17.17 million, and net loss increased by 11% to $8.36 million, driven by lower product revenue and an intangible asset impairment Results of Operations (Three-Month Periods Ended June 30, Dollars in thousands, except per share data) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Product revenue, net | $16,961 | $18,235 | $(1,274) | -7% | | Other revenue | 211 | 56 | 155 | 277% | | Total revenue | $17,172 | $18,291 | $(1,119) | -6% | | Cost of goods sold – product revenue | 7,767 | 7,633 | 134 | 2% | | Research and development | 1,774 | 2,609 | (835) | -32% | | Selling, general and administrative | 12,141 | 15,191 | (3,050) | -20% | | Loss on impairment of intangible assets | 3,143 | — | 3,143 | 100% | | Total operating expenses | 24,825 | 25,433 | (608) | -2% | | Loss from operations | $(7,653) | $(7,142) | $(511) | 7% | | Interest expense | 756 | 454 | 302 | 67% | | Net Loss | $(8,363) | $(7,528) | $(835) | 11% | - Net product revenues decreased by $1.3 million (7.0%) due to lower unit volumes from legacy products (Targadox, Ximino, Exelderm) but were partially offset by increased volumes from core products (Qbrexza, Accutane, Amzeeq, Zilxi)[98] - R&D expenses decreased by $0.8 million (32%) due to the winding down of DFD-29 clinical trials, and SG&A expenses decreased by $3.0 million (20%) due to cost reduction initiatives[105][106][108] Comparison of the Six-Month Periods Ended June 30, 2023 and 2022 Total revenue decreased by 29% to $29.39 million, and net loss more than doubled to $18.50 million, primarily due to revenue decline and an intangible asset impairment Results of Operations (Six-Month Periods Ended June 30, Dollars in thousands, except per share data) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Product revenue, net | $29,126 | $39,031 | $(9,905) | -25% | | Other revenue | 259 | 2,556 | (2,297) | -90% | | Total revenue | $29,385 | $41,587 | $(12,202) | -29% | | Cost of goods sold – product revenue | 14,216 | 15,836 | (1,620) | -10% | | Research and development | 3,807 | 3,875 | (68) | -2% | | Selling, general and administrative | 25,433 | 29,906 | (4,473) | -15% | | Loss on impairment of intangible assets | 3,143 | — | 3,143 | 100% | | Total operating expenses | 46,599 | 49,617 | (3,018) | -6% | | Loss from operations | $(17,214) | $(8,030) | $(9,184) | 114% | | Interest expense | 1,406 | 843 | 563 | 67% | | Net Loss | $(18,499) | $(8,906) | $(9,593) | 108% | - Net product revenues decreased by $9.9 million (25.0%) due to lower unit volumes from legacy products (Targadox, Ximino, Exelderm) and higher gross-to-net allowances (coupon rebates, managed care rebates, product returns, government rebates)[112] - Cost of goods sold decreased by $1.6 million (10%) due to lower product royalties and a contractual decrease in Qbrexza royalty percentage, partially offset by higher inventory reserves and amortization[117] - SG&A expenses decreased by $4.5 million (15%) due to cost reduction efforts, including salesforce headcount reduction and marketing cuts[119][120] Liquidity and Capital Resources Cash and cash equivalents significantly decreased, raising substantial doubt about the company's going concern ability, necessitating further financing or operational adjustments - Cash and cash equivalents decreased from $32.0 million at December 31, 2022, to $8.2 million at June 30, 2023, with $8.75 million in restricted cash used to repay the EWB Facility in July 2023[123] - The company has a shelf registration statement (2022 Shelf) for up to $150.0 million in securities, with no shares issued as of June 30, 2023, and may use it for future equity financing[124] - Cost reduction initiatives, including salesforce headcount reduction and marketing cuts, are expected to reduce annual SG&A costs by over $12.0 million[125] - Substantial doubt exists about the company's ability to continue as a going concern, requiring new borrowing relationships or additional debt/equity financing[126] Cash Flows for the Six-Month Periods Ended June 30, 2023 and 2022 Operating cash flows improved, while investing cash used decreased, and financing cash flows shifted to a significant outflow due to debt repayments Cash Flows (Six-Month Periods Ended June 30, Dollars in thousands) | Cash Flow Activity | 2023 | 2022 | Increase (Decrease) | | :-------------------------------------- | :----- | :----- | :------------------ | | Net cash provided by (used in) operating activities | $3,013 | $(2,416) | $5,429 | | Net cash used in investing activities | (5,000) | (20,000) | 15,000 | | Net cash provided by (used in) financing activities | (13,036) | 11,477 | (24,513) | | Net change in cash and cash equivalents | $(15,023) | $(10,939) | $(4,084) | - Operating cash flows improved by $5.4 million, turning from a net use of $2.4 million in 2022 to a net provision of $3.0 million in 2023, driven by non-cash impairment and changes in operating assets/liabilities[128] - Investing cash used decreased by $15.0 million, reflecting a lower deferred cash payment for the VYNE Product Acquisition in 2023 compared to the upfront payment in 2022[129] - Financing cash flows shifted from a $11.5 million inflow in 2022 to a $13.0 million outflow in 2023, primarily due to the repayment of the EWB term loan and net cash outflows from the revolving line of credit[130] Material Cash Requirements The company's material cash requirements include contingent milestone payments, royalties, and installment payments for acquired licenses, with EWB debt fully repaid - The EWB Facility debt obligations were fully repaid in July 2023, eliminating future payments under that agreement[131] - Contingent net sales milestone payments up to $450 million are due under the VYNE Product Acquisition Agreement upon products reaching specified annual sales thresholds[131] - DFD-29 development involves potential contingent regulatory and commercial milestone payments totaling up to $158.0 million, plus royalties, and an expected $3.2 million FDA filing fee in Q4 2023[131] Installment Milestone Payments on Acquired Licenses (Dollars in thousands) | Product | Total | 2023 | 2024 | | :-------- | :---- | :--- | :--- | | Ximino | $3,000 | $1,500 | $1,500 | | Accutane | 1,000 | 1,000 | — | | Total | $4,000 | $2,500 | $1,500 | - The company is contractually obligated to make sales-based royalty payments to Dermira (Qbrexza), Sun Pharmaceutical Industries (Exelderm and Ximino), and PuraCap Caribe (Targadox), with amounts contingent on sales[132] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Journey Medical Corporation is exempt from providing quantitative and qualitative disclosures about market risk - Journey Medical Corporation is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[133] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023[135] - No material changes in internal control over financial reporting occurred during the most recent quarter[136] PART II. OTHER INFORMATION This part addresses legal proceedings, risk factors, equity security sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings No legal proceedings are pending that are expected to have a material adverse effect on the company's financial condition, results of operations, or cash flows - No legal proceedings are pending that are expected to have a material adverse effect on the company's financial condition, results of operations, or cash flows[138] - The company may be subject to insured and uninsured litigation in the ordinary course of business[138] Item 1A. Risk Factors Substantial doubt about the company's going concern ability persists, necessitating additional funding or operational adjustments, with risks including dilution and restricted development - Substantial doubt exists regarding the company's ability to continue as a going concern for at least 12 months from the issuance date of the financial statements[140] - The company may need to raise additional funding (debt or equity) or delay/limit product development and commercialization efforts[140] - Efforts to raise funding may divert management, and financing terms could negatively impact stockholders (dilution) or business operations (restrictive covenants)[141] - Failure to secure funding could lead to curtailing DFD-29 programs, selling assets, or inability to expand operations, materially affecting the business[142] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the reporting period, Journey Medical Corporation did not engage in unregistered sales or purchases of its equity securities - No unregistered sales of equity securities occurred during the period covered by the report[144] - Neither the company nor its affiliates purchased any of its equity securities[144] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - There were no defaults upon senior securities[145] Item 4. Mine Safety Disclosures This item is not applicable to Journey Medical Corporation - Mine Safety Disclosures are not applicable to the company[146] Item 5. Other Information No other information was reported under this item - No other information was disclosed under this item[147] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, debt agreements, stock plans, and certifications - The exhibits include the Third Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, and Form of Common Stock Certificate[149] - Key agreements such as the Fifth Amendment to Loan and Security Agreement and the 2023 Employee Stock Purchase Plan are filed as exhibits[149] - Certifications from the Chief Executive Officer and Principal Financial Officer (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act) and XBRL financial data are also included[149] SIGNATURES The report was duly signed on August 10, 2023, by the President and CEO, and the Interim CFO of Journey Medical Corporation - The report was signed on August 10, 2023, by Claude Maraoui (President and CEO) and Joseph Benesch (Interim CFO)[153]