Journey Medical Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Amounts below are in U.S. dollars. The company is a commercial-stage dermatology pharmaceutical business and a majority-owned subsidiary of Fortress Biotech. The filing was signed December 15, 2021.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net product revenue | $19.6 million | $9.4 million | $45.6 million | $30.8 million |
| Cost of goods sold | $11.2 million | $3.4 million | $22.6 million | $10.3 million |
| Gross profit / margin | $8.4 million / 43.1% | $6.1 million / 64.2% | $23.1 million / 50.5% | $20.5 million / 66.5% |
| Operating loss (income) | $(12.6) million | $0.2 million | $(25.8) million | $4.2 million |
| Net loss (income) | $(10.6) million | $0.03 million | $(22.2) million | $2.8 million |
| Operating cash flow | Not provided by quarter | $1.0 million | $0.1 million |
At September 30, 2021, cash was $21.7 million, accounts receivable $31.7 million, inventory $11.6 million, and current assets $66.8 million. Current liabilities were $59.8 million; total liabilities were $100.8 million and stockholders’ deficit was $11.7 million. The company reported a $7.5 million East West Bank revolving credit facility, with no draws through September 30. License installment obligations were $8.0 million, and the Fortress-related note was $15.0 million before its subsequent IPO conversion.
Nine-month cash flows included $8.8 million used in investing, primarily for research and development licenses, and $21.2 million provided by financing. Cash increased by $13.4 million to $21.7 million. Management said available resources, including the credit line, were expected to fund operations for at least 12 months from the filing date; the November IPO subsequently added approximately $31.2 million of net proceeds.
Material changes versus the prior period
- Revenue rose 108% in Q3 and 48% in the first nine months, primarily reflecting 2021 launches of Accutane and Qbrexza, plus growth in Ximino and Exelderm. Targadox revenue declined 28% in Q3 and 18% year to date, amid increased promotional focus on Accutane and reimbursement pressure.
- Gross margin fell year over year. Cost of sales included Qbrexza inventory fair-value step-up charges of $3.0 million in Q3 and $4.2 million year to date, as well as higher royalties, including $3.1 million in Q3 and $4.9 million year to date related to Qbrexza and Accutane.
- Operating expenses included a $9.5 million wire-fraud loss. Nine-month expenses also included $13.8 million of acquired research and development license costs associated with DFD-29, including a non-cash contingent-payment valuation.
- SG&A increased 85% in Q3 and 52% year to date, principally due to sales and marketing costs and expanded sales headcount. Interest expense increased, largely due to the convertible preferred financing and associated fees and dividends.
Outlook, risks and unusual items
- Outlook: Management expects expenses to increase as it pursues product acquisitions, commercializes products, develops candidates, and incurs public-company costs. It expects losses from operations for the foreseeable future; no specific revenue or earnings guidance was provided.
- DFD-29: The company licensed global development and commercialization rights for a rosacea candidate from Dr. Reddy’s. It must fund Phase 3 trials estimated at approximately $24 million, with additional contingent regulatory and commercial milestones of up to $163 million and royalties of approximately 10%–15%. The acquired license cost was expensed because the candidate had not reached technological feasibility and had no alternative future use.
- Qbrexza: Perrigo is challenging patents covering the product in Hatch-Waxman litigation. A 30-month stay was scheduled to expire March 9, 2023; trial was scheduled for September 19, 2022. The company said it could not predict the outcome or timing.
- Cybersecurity incident and controls: A business-email compromise redirected approximately $9.5 million of payments to fraudulent accounts. Fortress provided a $9.5 million related-party advance, later converted into common shares at the IPO. Recovery or insurance proceeds were not recognized; any insurance recovery would be recorded when considered probable. The company identified a material weakness in controls over cash disbursements and said remediation actions had been taken; management considered the weakness remediated as of the filing date. Disclosure controls were ineffective as of September 30, 2021.
- IPO and capital structure: The November 16 IPO issued 3.52 million shares at $10 per share and generated approximately $31.2 million net proceeds. The preferred shares and Fortress note converted into common shares at the IPO. Fortress retains voting control through Class A common stock.
- Other risks: The filing highlights generic competition—particularly for products without patent protection—reimbursement and pricing pressure, reliance on third parties, clinical and regulatory uncertainty, and potential COVID-19 effects. Management reported minimal COVID-19 impact to date.
Most important facts for investors to verify
- Whether any amount of the $9.5 million fraud loss is recovered, insured, or offset, and whether the remedial cash-disbursement controls remain effective.
- Qbrexza patent litigation progress, the outcome of the Perrigo challenge, and the product’s revenue and margin after the inventory step-up is exhausted.
- Whether new product sales can offset Targadox declines and potential generic competition, while sustaining revenue deductions and gross margins.
- DFD-29 Phase 3 timing, funding needs, results, regulatory prospects, and potential milestone and royalty obligations.
- Post-IPO cash use, public-company and commercialization costs, share dilution, and the implications of Fortress’s voting control.