Forward-Looking Statements
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this Form 10-K. Our consolidated financial statements have been prepared in accordance withU.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Please see the section titled "Special Cautionary Note Regarding Forward-Looking Statements" elsewhere in this Annual Report on Form 10-K for more information. In evaluating our business, you should carefully consider the information set forth under the heading "Risk Factors" herein and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . As used below, the words "we," "us" and "our" refer toJourney Medical Corporation and its consolidated subsidiaries.
Overview
We are a commercial-stage pharmaceutical company founded inOctober 2014 that focuses on the development and commercialization of pharmaceutical products for the treatment of dermatological conditions. Our current portfolio includes eight branded and three authorized generic prescription drugs for dermatological conditions that are marketed in theU.S. We are managed by experienced life science executives with a track record of creating value for their stakeholders and bringing novel medicines to the market, enabling patients to experience increased quality of life, and enabling physicians and other licensed medical professionals to provide better care for their patients. We aim to acquire rights to future products by licensing or otherwise acquiring an ownership interest in, funding the research and development of, and eventually commercializing, the products through our field sales organization. Since inception, we have made significant investments to build out our commercial product portfolios, which we believe, coupled with our experienced dermatology sales leadership team and our recently expanded field sales force, will position our business for growth. We are a majority-owned subsidiary of Fortress.
2022 Highlights and Events
OnDecember 30, 2022 , we filed a shelf registration statement on Form S-3 (File No. 333-269079), which was declared effective by theSEC onJanuary 26, 2023 . This 2022 Shelf covers the offering, issuance and sale by us of up to an aggregate of$150.0 million of our common stock, preferred stock, debt securities, warrants, and units (the "2022 Shelf"). AtDecember 31, 2022 ,$150.0 million remains available under the 2022 Shelf. In connection with the 2022 shelf, we have entered into the Sales Agreement withB. Riley , relating to shares of our common stock. In accordance with the terms of the Sales Agreement, we may offer and sell up to 4,900,000 shares of our common stock, par value$0.0001 per share, from time to time through or toB. Riley acting as our agent or principal. OnMarch 14, 2022 , we dosed the first patient in our Phase 3 clinical trial evaluating DFD-29 (Minocycline Modified Release Capsules 40 mg) for the Treatment of Rosacea. As ofJanuary 10, 2023 , we achieved 100% enrollment in the trial, with a top-line data readout expected in the second quarter of 2023. We plan to submit the NDA for DFD-29 in the second half of 2023 and FDA approval is anticipated in the second half of 2024. The Phase 2 clinical trials, DFD-29 (40mg) concluded with results indicating improved treatment by the investigational drug when compared to Oraycea® (European equivalent of Oracea®) on both co-primary endpoints. For the first co-primary endpoint, IGA treatment success, Oraycea only had a 33.33% IGA treatment success rate, while DFD-29 achieved a 66.04% IGA treatment success rate. For the second co-primary endpoint, the change in total inflammatory lesion count, Oraycea only had a 10.5 reduction in inflammatory lesions, while DFD-29 achieved a 19.2 reduction in inflammatory lesions. OnFebruary 11, 2022 , we announced that our exclusive licensing partner inJapan ,Maruho Co., Ltd. ("Maruho"), received marketing and manufacturing approval for Rapifort® Wipes 2.5% (Qbrexza®), for the treatment of primary axillary hyperhidrosis, triggering a net$2.5 million milestone payment to us. The net payment reflects a milestone payment of$10 million to us from our exclusive licensing partnerMaruho , offset by a$7.5 million payment toDermira , pursuant to the terms of the Asset Purchase Agreement between us andDermira . We acquired global rights to Qbrexza fromDermira in 2021. The period endedDecember 31, 2022 also reflects total year-to-date royalties of$174,000 fromMaruho on sales of Rapifort® Wipes 2.5% inJapan . OnJanuary 12, 2022 , we acquired Amzeeq® (minocycline) topical foam, 4%, and Zilxi® (minocycline) topical foam, 1.5%, two FDA-approved topical minocycline products and Molecule Stabilizing Technology (MST)™ from VYNE Therapeutics Inc., which expanded our product portfolio to eight actively marketed branded dermatology products. 62 Table of Contents These proprietary foam-based products optimize the topical delivery of minocycline, an active pharmaceutical ingredient that was previously available only in oral form. Approved by the FDA nearly 50 years ago, minocycline is a well-established molecule that has been prescribed, in oral formulation, over 30 million times in the past decade. Amzeeq (minocycline) topical foam, 4%, is the first and only topical formulation of minocycline to be approved by the FDA for the treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in adults and children 9 years and older. According to theAmerican Academy of Dermatology ("AAD"), acne is the most common skin condition inthe United States , affecting up to 50 million Americans annually. Approved by the FDA inMay 2020 , Zilxi (minocycline) topical foam, 1.5%, is the first and only topical minocycline treatment for inflammatory lesions due to rosacea in adults. Rosacea is a common skin disease that affects 16 million Americans, according to AAD. Market research shows that over 70% of patients with rosacea are seeking better alternatives to current treatments. OnJanuary 12, 2022 , we entered into a third amendment of the loan and security agreement with EWB (the "Amendment"), which increased the borrowing capacity of our revolving line of credit to$10.0 million ,$2.9 million of which was outstanding atDecember 31, 2022 , and added a term loan not to exceed$20.0 million . Both the revolving line of credit and the term loan mature onJanuary 12, 2026 . InJanuary 2022 andAugust 2022 , the Company borrowed$15.0 million and$5.0 million , respectively, against the term loan. The term loans bear interest at a floating rate equal to 1.73% above the prime rate and are payable monthly. The term loans contain an interest-only payment period throughJanuary 12, 2024 , with an extension throughJuly 12, 2024 if certain covenants are met, after which the outstanding balance of each term loan is payable in equal monthly installments of principal, plus all accrued interest, through the term loan maturity date. We may elect to prepay all or any part of the term loan without penalty or premium, but we may not re-borrow any amount, once repaid. Any outstanding borrowing against the revolving line of credit bears interest at a floating rate equal to 0.70% above the prime rate. The Amendment includes customary financial covenants such as collateral ratios and minimum liquidity provisions. We are in compliance with all applicable financial covenants under the Amendment. The remaining$7.1 million revolving line of credit is fully available to us without any restrictions, other than certain customary and ordinary closing conditions. InSeptember 2021 , we were the victim of a cybersecurity incident that affected our accounts payable function and led to approximately$9.5 million in wire transfers being misdirected to fraudulent accounts. The matter was reported to the FBI and remains under their investigation. The cybersecurity incidenct does not appear to have compromised any personally identifiable information or protected health information. Fortress, as our controlling stockholder and supporting partner in our back-office functions, provided us with$9.5 million to ensure our accounts payable operations continued to function smoothly. The$9.5 million of support was in the form of a related party note which the boards of both companies have agreed and converted into 1,476,044 shares of our common stock upon the consummation of our IPO inNovember 2021 at the IPO price. The federal government has been able to trace and seize the fraudulently transferred cryptocurrency assets associated with the breach. The seized cryptocurrency has been transferred intoU.S. government-controlled custodial wallets. Subsequently, the forfeiture process will be initiated by theU.S. Attorney's Office . The process includes mandatory waiting periods for filing of claims. Once the cryptocurrency has been converted back intoU.S. dollars, we expect to receive a notification letter to initiate the return of the cash to the Company. This process could take several months to a year or possibly longer to complete before funds can be returned. Given the recent market declines, volatility, and liquidity issues with cryptocurrency, there is no certainty as to the amount we will ultimately recover. See "Risk Factors - Risks Related to our Platform and Data - Our business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our or third parties' cybersecurity."
Critical Accounting Policies and Uses of Estimates
Our consolidated financial statements have been prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make difficult, subjective or complex judgments, often as a result of the need to make estimates and assumptions about the effect of matters that are inherently uncertain in the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 63 Table of Contents While our significant accounting policies are described in greater detail in Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K, we believe that the following accounting policies and estimates are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements in understanding our historical and future performance. These policies relate to the more significant areas involving management's judgments and estimates. Revenue Recognition Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, coupons, discounts, other sales allowances, governmental rebate programs and sales returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on gross sales for a reporting period. Historically, adjustments to these estimates to reflect actual results or updated expectations have not been material to our overall business. Coupons, however, can have a significant impact on year-over-year individual product revenue growth trends. If any of our ratios, factors, assessments, experiences, or judgments are not indicative or accurate estimates of our future experience, our results could be materially affected. The potential of our estimates to vary differs by program, product, type of customer and geographic location. In addition, estimates associated withU.S. Medicare and Medicaid governmental rebate programs are at risk for material adjustment because of the extensive time delay.
Recent Accounting Pronouncements
See Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption, if applicable, and our assessment, if any, of their potential impact on our financial condition and results of operations.
Emerging Growth Company and Smaller Reporting Company Status
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). Under the JOBS Act, emerging growth companies can delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years of audited financial statements in our annual reports on Form 10-K, an exemption from the requirement to provide an auditor's report on internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, an exemption from any requirement that may be adopted by thePublic Company Accounting Oversight Board regarding mandatory audit firm rotation and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. We are also a "smaller reporting company," meaning that either (i) the market value of our shares held by non-affiliates is less than$250 million or (ii) the market value of our shares held by non-affiliates is less than$700 million and our annual revenue was less than$100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than$250 million or (ii) our annual revenue was less than$100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than$700 million . As a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K, have reduced disclosure obligations regarding executive compensation, and smaller reporting companies are permitted to delay adoption of certain recent accounting pronouncements discussed in Note 2 See Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" in our consolidated financial statements, appearing under Part II, Item 8 and beginning at page F-1 of this Annual Report on Form 10-K. 64 Table of Contents Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years endedDecember 31, 2022 and 2021: For the Years Ended December 31, Change ($ in thousands, except per share data) 2022 2021 $ % Revenue: Product revenue, net $ 70,995 $ 63,134$ 7,861 12 % Other revenue 2,674 - 2,674 100 % Total revenue 73,669 63,134 10,535 17 % Operating expenses
Cost of goods sold - product revenue 30,775 32,084 (1,309) (4) % Research and development 10,943 2,739 8,204 300 % Research and development - licenses acquired - 13,819 (13,819) (100) % Selling, general and administrative 59,468 39,833 19,635 49 % Wire transfer fraud loss - 9,540 (9,540) (100) % Total operating expenses 101,186 98,015 3,171 3 % Loss from operations (27,517) (34,881) 7,364 (21) % Other expense Interest income (60) (2) (58) 2,900 % Interest expense 2,019 7,034 (5,015) (71) %
Foreign exchange transaction losses 89 - 89 100 % Change in fair value of derivative liability - 447 (447) (100) % Total other expense 2,048 7,479 (5,431) (73) % Loss before income taxes (29,565) (42,360) 12,795 (30) % Income tax expense 63 1,634 (1,571) (96) % Net Loss$ (29,628) $ (43,994) $ 14,366 (33) % Revenues The following table reflects our revenue by product for the years endedDecember 31, 2022 and 2021: For the Years Ended December 31, Change ($in thousands) 2022 2021 $ % Qbrexza® $ 26,715 $ 17,056$ 9,659 57 % Accutane® 18,373 10,053 8,320 83 % Targadox® 7,972 22,378 (14,406) (64) % Amzeeq® 7,242 - 7,242 100 % Ximino® 4,957 8,247 (3,290) (40) % Zilxi® 2,273 - 2,273 100 % Exelderm® 3,463 5,363 (1,900) (35) % Other branded revenue - 37 (37) (100) % Total net product revenue $ 70,995 $ 63,134$ 7,861 12 % Other revenue 2,674 - 2,674 100 % Total revenue $ 73,669 $ 63,134$ 10,535 17 % Total revenues increased$10.5 million , or 17%, to$73.7 million for the year endedDecember 31, 2022 , from$63.1 million for the year endedDecember 31, 2021 . Total net product revenue increased$7.9 million , or 12%, to$71.0 million for the year endedDecember 31, 2022 , from$63.1 million for the year endedDecember 31, 2021 . The increase is primarily due to revenue growth from our newly acquired products, Qbrexza and Accutane, acquired and launched in the second quarter of 2021, as well as incremental growth from 65
Table of Contents
Amzeeq and Zilxi (acquired inJanuary 2022 ). Qbrexza, Accutane, Amzeeq and Zilxi reflected approximately 77% of our total net product revenues for the year endedDecember 31, 2022 . Offsetting the increases is a decrease in the net product revenue of Targadox and its authorized generic as a result of continued generic competition. Additionally, net product revenues of Ximino and Exelderm and their authorized generics were negatively impacted by contract manufacturer product shortages earlier in the year. These shortages were resolved in the third quarter of 2022 and sales continue to normalize although they are not back to pre-shortage levels. We expect sales of Ximino and Exelderm to reach pre-shortage levels through 2023. The above table includes the authorized generic product within the line items for Targadox, Ximino and Exelderm.
Other revenue
The year endedDecember 31, 2022 includes a net$2.5 million milestone payment fromMaruho . InJanuary 2022 ,Maruho received manufacturing and marketing approval inJapan for Rapifort® Wipes 2.5%, triggering the net payment. The net payment reflects a milestone payment of$10.0 million to the Company fromMaruho , offset by a$7.5 million payment toDermira . The year endedDecember 31, 2022 also reflects total year-to-date royalties of$174,000 fromMaruho on sales of Rapifort® Wipes 2.5% inJapan . We record gross-to-net sales accruals for chargebacks, distributor service fees, prompt pay discounts, sales returns, coupons, managed care rebates, government rebates, and other allowances customary to the pharmaceutical industry.
Gross-to-net sales accruals and the balance in the related allowance accounts
for the years ended
Chargebacks Distrubutor Prompt Managed and other Service Pay Care Gov't ($'s in thousands) allowances Fees Discounts Returns Coupons Rebates Rebates Total Balance as of December 31, 2020 $ - $ - $
-
622 791
197 3,564 140,871 9,025 690 155,760 Checks/credits issued to third parties
- - - (2,589) (148,963) (5,633) - (157,185) Reclassifications between liability accounts - - - (315) 315 - - - Balance as of December 31, 2021 $ 622 $ 791 $
197
2,663 5,868 1,104 5,387 117,883 22,654 3,651 159,210 Checks/credits issued to third parties (3,032) (5,730) (1,094) (4,938) (121,179) (22,552) (3,331) (161,856) Balance as of December 31, 2022 $ 253 $ 929$ 207 $ 3,689 $ 1,696 $ 3,594 $ 1,010 $ 11,378 The change in our reserve from period-to-period is driven by the decrease in our reserve for coupons. The provision for coupons was$1.7 million atDecember 31, 2022 compared to$5.0 million atDecember 31, 2021 . The change in the coupon reserve is primarily due to a decrease in sales of Minocycline as well as an increase primarily associated with initial program prefunding payments for Amzeeq and Zilxi.
Cost of Goods Sold
Cost of goods sold decreased by$1.3 million , or 4%, to$30.8 million for the year endedDecember 31, 2022 , from$32.1 million for the year endedDecember 31, 2021 . The decrease is primarily due to a$5.9 million decrease in inventory step-up costs. Approximately$6.5 million of inventory step-up costs were charged against operations through cost of goods sold for the year endedDecember 31, 2021 as a result of the Qbrexza product acquisition in the second quarter of 2021, compared to$0.6 million of inventory step-up costs for the year endedDecember 31, 2022 , as a result of the Amzeeq and Zilxi product acquisitions inJanuary 2022 . In addition, royalty expenses decreased by$1.7 million , or 12%, mainly due to the decrease in Targadox sales from period-to-period. The above decreases are offset in part by higher product costs of$1.8 million driven by sales volumes, increased license amortization of$1.8 million and increased Prescription Drug User Fee Act fees of$0.6 million driven by the acquisition of Amzeeq and Zilxi. The decreases are also offset by increased costs of approximately$2.1 million related to freight, destruction, product validation, stability testing costs, and the establishment of expired product and other inventory reserves for the year endedDecember 31, 2022 .
66 Table of Contents Research and Development Research and Development expense increased to$10.9 million for the year endedDecember 31, 2022 from$2.7 million for the year endedDecember 31, 2021 due to clinical trial expenses to develop our DFD-29 product, for which our Phase 3 clinical trial is 100% enrolled as ofJanuary 10th, 2023 . We expect these expenses to increase through 2023 as the now fully enrolled two Phase 3 trials are completed and we incur other associated cost of the development program.
Research and Development - licenses acquired
Research and development expenses - licenses acquired decreased$13.8 million , or 100%, from the year endedDecember 31, 2021 . The year endedDecember 31, 2021 reflects the acquisition of our development stage asset from DRL, DFD-29, for$10.0 million and the fair value of the contingent payment due DRL of$3.8 million . We did not have any research and development license acquisition costs for the year endedDecember 31, 2022 .
Selling, General and Administrative Expenses ("SG&A")
Selling, general and administrative expenses increased by$19.6 million , or 49%, to$59.5 million for the year endedDecember 31, 2022 , from$39.8 million for the year endedDecember 31, 2021 . The increase is primarily attributable to the expansion of our salesforce and marketing expenses related to expanding our product portfolio by four products, additional headcount costs (including non-cash stock compensation expenses), legal expenses associated with patent litigation, and compliance and other professional fees associated with being a public company that we did not incur as a privately held company prior to our IPO inNovember 2021 . Wire Transfer Fraud Loss InSeptember 2021 , wire fraud-related costs totaled approximately$9.5 million . These costs were attributable to funds erroneously wired to fraudulent accounts as a result of a sophisticated business email compromise fraud scheme. Please see "Risk Factors - Our business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our or third parties' cybersecurity" for more information.
Interest Expense
Interest expense decreased$5.0 million to$2.0 million for the year endedDecember 31, 2022 , from$7.0 million for the year endedDecember 31, 2021 . The year endedDecember 31, 2021 includes dividends and interest on our convertible preferred stock that converted in full, into shares of our common stock upon the closing of our IPO inNovember 2021 . Interest expense for the year endedDecember 31, 2022 reflects interest and fees related to our EWB term loan and installment licenses.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities reflects the derivative mark-to-market accounting to mark to fair value the contingent payment liability toDr. Reddy , the liability classified warrants and the placement agent warrants issued as partial compensation to the placement agent in our 2021 private financing as a result of the settlement and conversion of these warrant liabilities to our common stock. In connection with the our IPO we issued 111,567 shares of common stock for settlement of all of the placement agent warrants. In addition, we issued 545,131 shares of common stock toDr. Reddy in a transaction exempt from registration under the Securities Act in settlement of the contingent payment. We have no derivative liabilities outstanding atDecember 31, 2022 .
Income tax expense
Our effective tax rate for 2022 and 2021 was (0.21%) and (3.86)%, respectively. The negative effective tax rate of 0.21% for the year endedDecember 31, 2022 varies from the statutory rate principally due to our full valuation allowance position. The increase in the effective tax rate from 2021 to 2022 is primarily due to change in valuation allowance and state taxes. Our tax rate is affected by valuation allowances, recurring items, such as theU.S. federal and state statutory tax rates and the relative amounts of income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. 67
Table of Contents
Liquidity and Capital Resources
At
OnDecember 30, 2022 , we filed a shelf registration statement on Form S-3 (File No. 333-269079), which was declared effective by theSEC onJanuary 23, 2023 . This shelf registration statement covers the offering, issuance and sale by us of up to an aggregate of$150.0 million of our common stock, preferred stock, debt securities, warrants, and units (the "2022 Shelf"). AtDecember 31, 2022 ,$150.0 million remains available under the 2022 Shelf. In connection with the 2022 shelf, we have entered into the Sales Agreement withB. Riley , relating to shares of our common stock. In accordance with the terms of the Sales Agreement, we may offer and sell up to 4,900,000 shares of our common stock, par value$0.0001 per share, from time-to-time throughB. Riley acting as our agent or principal. We are party to a Loan and Security Agreement, datedMarch 31, 2021 , with EWB (as amended, the "EWB Facility"), under which EWB made a$7.5 million line of credit available to us. OnJanuary 12, 2022 , we entered into a third amendment of the loan and security agreement with EWB, which increased the borrowing capacity of our revolving line of credit to$10.0 million , of which$2.9 million was outstanding atDecember 31, 2022 , and added a term loan not to exceed$20.0 million . Both the revolving line of credit and the term loan mature onJanuary 12, 2026 . InJanuary 2022 andAugust 2022 , we borrowed$15.0 million (to facilitate the Vyne Product Acquisition Agreement) and$5.0 million , respectively, against the term loan. The term loans bear interest at a floating rate equal to 1.73% above the prime rate and are payable monthly. The term loans contain an interest-only payment period throughJanuary 12, 2024 , with an extension throughJuly 12, 2024 , if certain covenants are met, after which the outstanding balance of each term loan is payable in equal monthly installments of principal, plus all accrued interest, through the term loan maturity date. We may elect to prepay all or any part of the term loan without penalty or premium, but we may not re-borrow any amount, once repaid. Any outstanding borrowing against the revolving line of credit bears interest at a floating rate equal to 0.70% above the prime rate. The EWB Facility includes customary financial covenants such as collateral ratios and minimum liquidity provisions. We are in compliance with all applicable financial covenants under the EWB Facility. The remaining$7.1 million revolving line of credit is fully available to us without any restrictions, other than certain customary and ordinary closing conditions. We expect that our expenses will increase substantially for the foreseeable future as we pursue business development opportunities, commercialize and market new products and incur additional costs associated with operating as a public company. To date, our business has not been materially impacted by COVID-19; however, depending on the extent of the ongoing pandemic, it is possible that our business, financial condition and results of operations could be materially and adversely affected by COVID-19 in the future. Additionally, theFederal Reserve has raised and is expected to continue to raise the federal funds interest rate throughout 2023 in its effort to take action against domestic inflation. Because our borrowings under the facility with EWB bear interest at a floating rate, rising interest rates affect the amount of the regular payments we are required to make to EWB. Accordingly, we may experience materially higher borrowing costs in future fiscal quarters than we historically have to date. We may require additional financing to pursue both development stage and commercial opportunities. In addition, we anticipate increased commercialization expenses related to the launch of newly acquired products, as well as increased costs related to development and regulatory approval of potential development stage product acquisitions, including DFD-29. As we continue to expand our product portfolio, we may need to fund possible future operating losses, and, if deemed appropriate, establish or secure through additional third-party manufacturing for our products, and expanded sales and marketing capabilities related to recent product acquisitions. For the next twelve months from the issuance of these financial statements, we will be able to fund our operations through a combination of existing cash and cash equivalents generated from operations, and the EWB borrowing facility. In addition, we may seek to raise capital through additional debt or equity financing, which may include sales of securities under our 2022 Shelf or under a new registration statement. If such funding is not available or not available on terms acceptable to us, our current plans for expansion of our product portfolio may be scaled back, limited or curtailed. We regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure.
Cash Flows for the Years Ended
For the Years ended December 31, Increase ($'s in thousands) 2022 2021 (Decrease) Net cash used in operating activities$ (13,534) $ (2,181)$ 11,353 Net cash used in investing activities (20,000) (10,000) 10,000 Net cash provided by financing activities 16,456 53,016 (36,560) Net change in cash and cash equivalents$ (17,078) $
40,835$ 57,913 68 Table of Contents Operating Activities
Net cash used in operating activities increased by$11.4 million , to$13.5 million for the year endedDecember 31, 2022 , from$2.2 million for the year endedDecember 31, 2021 . The increase was driven primarily by vendor, supplier, and other payments in the ordinary course of business, which were generally higher as a result of additional headcount costs, inventory purchases and marketing expenses related to our expanded product portfolio, legal expenses and compliance and other costs associated with being a public company that were not present in the prior year, pre-IPO, offset by accounts receivable cash collections.
Investing Activities
Net cash used in investing activities increased by$10.0 million , to$20.0 million for the year endedDecember 31, 2022 , from$10.0 million for the year endedDecember 31, 2021 . The increase is primarily due to the$20.0 million in consideration paid for the products acquired in the Vyne Product Acquisition Agreement inJanuary 2022 , compared to payments of$10.0 million for the year endedDecember 31, 2021 for research and development licenses.
Financing Activities
Net cash provided by financing activities decreased by$36.6 million , to$16.5 million for the year endedDecember 31, 2022 , from$53.0 million for the year endedDecember 31, 2021 . The decrease is primarily related to$30.6 million and$17.0 million of net proceeds received from the completion of our IPO inNovember 2021 and the issuance of our convertible preferred stock, respectively. In addition, we received proceeds of$9.5 million from the Fortress note for the year endedDecember 31, 2021 . This is compared to borrowings under the EWB term loan of$20 million and net borrowings under the EWB revolving line of credit of$2.1 million during the year endedDecember 31, 2022 .
Material Cash Requirements
In the normal course of business, we enter into contractual obligations that contain cash requirements of which the most significant to date include the following:
We are required to make regular payments under the EWB Facility, which was
recently amended to increase the borrowing capacity of our revolving line of
credit to
? 2022, and to add a term loan not to exceed
currently outstanding under the EWB facility and current interest rates, and
assuming we do not make further draws under the EWB Facility, we expect to make the following payments: Payments by Period Total 2023 2024 2025 2026 ($'s in thousands) Interest$ 4,448 $ 1,877 $ 1,790 $ 777 $ 4 Principal 22,948 2,948 5,556 13,333 1,111 Total$ 27,396 $ 4,825 $ 7,346 $ 14,110 $ 1,115
Should we elect to make further borrowings under the EWB facility, we would expect to repay additional amounts each year until maturity.
Pursuant to the Vyne Product Acquisition Agreement, we agreed to pay to Vyne an
additional
12, 2023, completing our obligation to pay the full purchase price. Upon the
achievement of net sales milestones with respect to the products purchased in
the Vyne Product Acquisition, we are also required to pay contingent
? consideration consisting of a one-time payment, per product, of
reaching annual net sales of
million and
one time following the first achievement of the applicable annual net sales milestone amount. 69 Table of Contents
Pursuant to the DFD-29 Agreement with DRL, we paid an upfront payment of
million. Additional contingent regulatory and commercial milestone payments
totaling up to
? percent to twenty percent are payable on net sales of the product.
Additionally, we are required to fund and oversee the Phase 3 clinical trials,
which we anticipate will cost approximately
current development plan and budget.
? We are contractually obligated to make installment milestone payments on our
acquired licenses as follows:
Payments by Period
Product Total 2023 2024
($'s in thousands) Ximino$ 3,000 $ 1,500 $ 1,500 Accutane 1,000 1,000 - Total$ 4,000 $ 2,500 $ 1,500
We are contractually obligated to make sales-based royalty payments to
? (for Qbrexza), Sun Pharmaceutical Industries (for Exelderm and Ximino) and
PuraCap Caribe (for Targadox). Due to the contingent nature of these
obligations, the amounts of these payments cannot be reasonably predicted.
© Edgar Online, source