Biofrontera Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2022

OR

For the transition period from           to

Commission file number 001-40943

Biofrontera Inc.

(Exact name of registrant as specified in its charter)

(781) 245-1325

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 10, 2022, there were 26,699,002 shares outstanding of the registrant’s common stock, par value $0.001 per share.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BIOFRONTERA INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

BIOFRONTERA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts and number of shares)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

BIOFRONTERA INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except number of shares)

(Unaudited)

Three and Nine Months Ended September 30, 2022

Three and Nine Months Ended September 30, 2021

The accompanying notes are an integral part of these consolidated financial statements.

BIOFRONTERA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

Biofrontera Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Business Overview

Biofrontera Inc. (the “Company”) includes its wholly owned subsidiary Bio-FRI GmbH (“Bio-FRI” or “subsidiary”).

Biofrontera Inc. is a U.S.-based biopharmaceutical company specializing in the commercialization of pharmaceutical products for the treatment of dermatological conditions, in particular, diseases caused primarily by exposure to sunlight that result in sun damage to the skin. Our principal licensed products focus on the treatment of actinic keratoses, which are skin lesions that can sometimes lead to skin cancer. We also market a licensed topical antibiotic for treatment of impetigo, a bacterial skin infection.

Our principal product is Ameluz®, which is a prescription drug approved for use in combination with our licensor’s FDA-approved medical devices, the BF-RhodoLED® lamp series, consisting of the BF-RhodoLED® and the RhodoLED® XL lamps, for photodynamic therapy (“PDT”) (when used together, “Ameluz^® PDT”) in the U.S. for the lesion-directed and field-directed treatment of actinic keratosis of mild-to-moderate severity on the face and scalp. We are currently selling Ameluz® for this indication in the U.S. under an exclusive license and supply agreement (“Ameluz LSA”), by and among us and Biofrontera Pharma GmbH and Biofrontera Bioscience GmbH (collectively, the (“Ameluz Licensor”) originally dated as of October 1, 2016, and as subsequently amended on October 8, 2021. Refer to Note 16, Related Party Transactions, for further details.

Our second prescription drug product is Xepi® (ozenoxacin cream, 1%), a topical non-fluorinated quinolone that inhibits bacterial growth. Currently, no antibiotic resistance against Xepi® is known and it has been specifically approved by the FDA for the treatment of impetigo due to staphylococcus aureus or streptococcus pyogenes. The approved indication is impetigo, a common skin infection. It is approved for use in adults and children 2 months and older. We are currently selling Xepi® for this indication in the U.S. under an exclusive license and supply agreement (“Xepi LSA”) with Ferrer Internacional S.A. (“Ferrer”) that was acquired by Biofrontera Inc. on March 25, 2019 through our acquisition of Cutanea Life Sciences, Inc. Refer to Note 16, Related Party Transactions, for further details.

Our subsidiary, Bio-FRI was formed on February 9, 2022, as a German presence to facilitate our relationship with the Ameluz Licensor.

Liquidity and Going Concern

The Company’s primary sources of liquidity are its existing cash balances and cash flows from equity financing transactions. In July of 2022, we received proceeds of $4.6 million from the exercise of common stock warrants (See Note 18 Stockholders’ Equity). As of September 30, 2022, we had cash and cash equivalents of $27.5 million, compared to $24.5 million as of December 31, 2021.

Since we commenced operations in 2015, we have generated significant losses. For the nine months ended September 30, 2022 and 2021, we incurred losses from operations of $13.0 million and $23.3 million, respectively. We incurred net cash outflows from operations of $7.9 million and $5.7 million for the same periods, respectively. We had an accumulated deficit as of September 30, 2022 of $76.7 million.

The Company’s short-term material cash requirements include working capital needs and satisfaction of contractual commitments including auto leases (see Note 23, Commitments and Contingencies), Maruho start-up payments of $7.3 million (see Note 3. Acquisition Contract Liabilities), and legal settlement expenses after reimbursement from Biofrontera AG (“Biofrontera AG”), a significant shareholder and our former parent company, of $5.6 million (see Note 13. Accrued Expenses and Other Current Liabilities). Long-term material cash requirements include potential milestone payments to Ferrer Internacional S.A (see Note 23. Commitments and Contingencies) and contingent consideration payments to Maruho (see Note 3. Acquisition Contract Liabilities). 

Additionally, we expect to continue to incur operating losses due to significant discretionary sales and marketing efforts as we seek to expand the commercialization of our licensed products in the United States. We also expect to incur additional expenses to add and improve operational, financial and information systems and personnel, including personnel to support our product commercialization efforts. In addition, we expect to incur significant costs to continue to comply with corporate governance, regulatory reporting and other requirements applicable to us as a public company in the U.S. We also intend to be opportunistic in our business plans which may include acquiring additional shares of Biofrontera AG as a strategic measure.

Our future growth is dependent on our ability to obtain additional equity financing. Based on current operating plans and financial forecasts, we expect that our current cash and cash equivalents will be sufficient to fund our operations for at least the next twelve months from the date of issuance of our financial statements. However, if our current operating plans or financial forecasts change, or we are unable to obtain additional financing, we may need to reduce the discretionary spend on promotional expenses, branding, marketing consulting and defer some hiring. While we expect to continue being flexible in our spending over the next twelve months, we do not consider there to be a need to significantly revise our operations currently.

2. Summary of Significant Accounting Policies

Basis for Preparation of the Financial Statements

The accompanying unaudited interim consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the Company’s opinion, the unaudited consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly the Company’s financial position as of September 30, 2022, the Company’s operating results for the three and nine months ended September 30, 2022 and 2021, and the Company’s cash flows for the nine months ended September 30, 2022 and 2021. The accompanying financial information as of December 31, 2021 is derived from audited financial statements. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on April 11, 2022.

All amounts shown in these financial statements and tables are in thousands and amounts in the notes are in millions, except percentages and per share and share amounts.

The Company’s significant accounting policies are discussed in Note 2—Summary of Significant Accounting Policies within the notes to financial statements for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K. There have been no significant changes to these policies during the nine months ended September 30, 2022 other than the following.

Consolidation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements include the accounts of our wholly owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions by management that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities, as reported on the balance sheet date, and the reported amounts of revenues and expenses arising during the reporting period. The main areas in which assumptions, estimates and the exercising of judgment are appropriate relate to, valuation allowances for receivables and inventory, valuation of contingent consideration and warrant liabilities, realization of intangible and other long-lived assets, product sales allowances and reserves, share-based payments and income taxes including deferred tax assets and liabilities. Estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances. They are continuously reviewed but may vary from the actual values.

Recently Issued Accounting Pronouncements   

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance requires that a lessee recognize assets and liabilities for leases with lease terms of more than twelve months and recognition, presentation and measurement in the financial statements will depend on the lease classification as a finance or operating lease. In addition, the new guidance will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The JOBS ACT provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows us to delay the adoption of this new standard until it would otherwise apply to private companies. The new standard will be effective for us for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of adopting this guidance. Upon adoption of Topic 842, the Company expects to recognize a right-of-use asset and lease liability for all financing and operating leases with terms greater than twelve months.

In September 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity’s current estimate of credit losses expected to be incurred. The new standard will be effective for us on January 1, 2023. The Company is currently evaluating the impact of adopting this guidance.

3. Acquisition Contract Liabilities

On March 25, 2019, we entered into an agreement (as amended, the “Share Purchase Agreement”) with Maruho Co, Ltd. (“Maruho”) to acquire 100% of the shares of Cutanea Life Sciences, Inc. (“Cutanea”). As of the date of the acquisition, Maruho Co, Ltd. owned approximately 29.9% of Biofrontera AG through its fully owned subsidiary Maruho Deutschland GmbH. Biofrontera AG is our former parent, and currently a significant shareholder.

Pursuant to the Share Purchase Agreement, Maruho agreed to provide $7.3 million in start-up cost financing for Cutanea’s redesigned business activities (“start-up costs”). These start-up costs are to be paid back to Maruho by the end of 2023 in accordance with contractual obligations related to an earn-out arrangement. In addition, as part of the earn-out arrangement with Maruho, the product profit amount from the sale of Cutanea products as defined in the share purchase agreement will be shared equally between Maruho and Biofrontera until 2030 (“contingent consideration”).

In connection with this acquisition in 2019, we recorded the $7.3 million in start-up cost financing, a $1.7 million contract asset related to the benefit associated with the non-interest-bearing start-up cost financing and $6.5 million of contingent consideration related to the estimated profits from the sale of Cutanea products to be shared equally with Maruho.

The contract asset related to the start-up cost financing is amortized on a straight-line basis using a 6.0% interest rate over the 57-month term of the financing arrangement, which ends on December 31, 2023. The contract asset is shown net of the related start-up cost financing within acquisition contract liabilities, net.

The contingent consideration was recorded at acquisition-date fair value using a Monte Carlo simulation with an assumed discount rate of approximately 6.0% over the applicable term. The contingent consideration is recorded within acquisition contract liabilities, net. The amount of contingent consideration that could be payable is not subject to a cap under the agreement. The Company re-measures contingent consideration and re-assesses the underlying assumptions and estimates at each reporting period utilizing a scenario-based method.

Acquisition contract liabilities, net consist of the following:

Schedule of Acquisition Contract Liabilities 

4. Fair Value Measurements

The following table presents information about the Company’s assets that are measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:

Schedule of Fair Value Hierarchy Valuation Inputs 

Contingent Consideration

Contingent consideration, which relates to the estimated profits from the sale of Cutanea products to be shared equally with Maruho, is reflected at fair value within acquisition contract liabilities, net on the consolidated balance sheets. The fair value is based on significant inputs not observable in the market, which represent a Level 3 measurement within the fair value hierarchy. The valuation of the contingent consideration utilizes a scenario-based method under which a set of payoffs are calculated using the term of the earnout, projections, and an appropriate metric risk premium. These payoffs are then discounted back from the payment date to the valuation date using a payment discount rate. Finally, the discounted payments are summed together to arrive at the value of the contingent consideration. The scenario-based method incorporates the following key assumptions: (i) the forecasted product profit amounts, (ii) the remaining contractual term, (iii) a metric risk premium, and (iv) a payment discount rate. The Company re-measures contingent consideration and re-assesses the underlying assumptions and estimates at each reporting period.

The following table provides a roll forward of the fair value of the contingent consideration:

 Schedule of Fair Value of Contingent Consideration

Warrant Liability

Exercise of 2021 Purchase Warrant and Issuance of July 2022 Inducement Warrant. On July 26, 2022, the Company entered into an Inducement Letter with the holder of the Company’s 2021 Purchase Warrants (the “Investor”). The 2021 Purchase Warrants were originally issued on December 1, 2021 to purchase up to 2,857,143 shares of common stock, par value $0.001 per share. The Investor agreed to exercise for cash, the 2021 Purchase Warrants, in exchange for the Company’s agreement to (i) lower the exercise price of the 2021 Purchase Warrants from $5.25 to $1.62 per share and (ii) issue a new warrant (the “Inducement Warrant”) to purchase up to 4,285,715 shares of common stock. The Company received proceeds of $4.6 million from the exercise of the 2021 Purchase Warrants and expensed $0.3 million of related financial advisory fees.

This price modification triggered the requirement for modification accounting of these warrants.  Based on the applicable guidance for liability classified warrants, the warrants issued during the three months ended September 2022 in connection with the modification and exercise of the 2021 Purchase Warrants were considered inducement warrants and their fair value of $3.9 million at issuance was considered part of the modification transaction and included in the change in fair value and recognized in the consolidated statement of operations. The fair value was determined using a Black-Scholes option pricing model with the following assumptions: fair value of the underlying common stock of $1.64, expected volatility of 70%, risk free rate of 2.84%, remaining contractual term of 4.34 years and a dividend yield of 0%. The expected life of the warrants is assumed to be equivalent to their remaining contractual term.

The Inducement Warrant is exercisable on or after January 27, 2023 at a price per share of $1.66 and expires on December 1, 2026.

May 2022 Pre-Funded and Purchase Stock Warrants. Warrants issued on May 16, 2022 in conjunction with the private placement to an institutional shareholder were accounted for as liabilities in accordance with ASC 815-40. Pre-funded common stock purchase warrants to purchase up to 1,569,000 shares of our common stock at a nominal exercise price of $0.001 per share (the “2022 Pre-funded Warrants”) and common stock purchase warrants to purchase up to 3,419,000 shares of our common stock at an exercise price of $2.77 per share (the “2022 Purchase Warrants”) are presented within warrant liability in the accompanying consolidated balance sheets. The warrant liability is measured at fair value at inception and on a recurring basis, with changes in fair value presented within the consolidated statements of operations. On July 14, 2022, the 2022 Pre-funded Warrants were exercised resulting in net proceeds of $2,000. The estimated fair value of the May 2022 Purchase Warrant at September 30, 2022 was determined using the Black-Scholes Option Pricing Model with the following assumptions: fair value of the underlying common stock of $1.05, expected volatility of 75%, risk free rate of 4.01%, remaining contractual term of 5.13 years and a dividend yield of 0%. The expected life of the warrants is assumed to be equivalent to their remaining contractual term.

The Company utilized a Black-Scholes option pricing model to estimate the fair value of the Inducement Warrant at September 30, 2022 with the following assumptions: fair value of the underlying common stock of $1.05, expected volatility of 80%, risk free rate of 4.10%, remaining contractual term of 4.17 years and a dividend yield of 0%. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. Certain inputs utilized in our Black-Scholes pricing model may fluctuate in future periods based upon factors which are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of fair value may cause a significant change to the fair value of our warrant liability which could also result in material non-cash gain or loss being reported in our consolidated statements of operations.

The following table presents the changes in the warrant liability measured at fair value (in thousands):

 Schedule of Changes in Fair Value Warrant Liabilities

5. Revenue

We generate revenue primarily through the sales of our licensed products Ameluz®, BF-RhodoLED® lamps and Xepi®. Revenue from the sales of our BF-RhodoLED® lamp and Xepi® are relatively insignificant compared with the revenues generated through our sales of Ameluz®.

Related party revenue relates to an agreement with Biofrontera Bioscience GmbH (“Bioscience”) for BF-RhodoLED® leasing and installation service. Refer to Note 16, Related Party Transactions.

An analysis of the changes in product revenue allowances and reserves is summarized as follows:

 Schedule of Revenue Allowance and Accrual Activities

6. Accounts Receivable, net

Accounts receivables are mainly attributable to the sale of Ameluz^®, the BF-RhodoLED^® and Xepi®. It is expected that all trade receivables will be settled within twelve months of the balance sheet date.

The allowance for doubtful accounts was $0.1 million and negligible as of September 30, 2022 and December 31, 2021, respectively.

7. Other Receivables, Related Party

As of September 30, 2022, the Company has a receivable of $6.3 million ($3.5 short term and $2.8 long-term) due from Biofrontera AG of which $6.1 million is due from Biofrontera AG for its 50% share of the balance of a legal settlement for which both parties are jointly and severally liable. The Company has a contractual right to repayment of its share of the settlement payment, plus other miscellaneous settlement costs, from Biofrontera AG under the Settlement Allocation Agreement entered into on December 9, 2021 and as amended on March 31, 2022, which provided that the settlement payments would first be made by the Company and then reimbursed by Biofrontera AG for its share. The March 31, 2022 Amended Settlement Allocation Agreement provides certain remedies to the Company, if Biofrontera AG fails to make timely reimbursements, which the Company may implement in its sole discretion, including the ability to charge interest at a rate of 6.0% per annum for each day that any reimbursement is past due and the ability to offset any overdue reimbursement amounts against payments owed to Biofrontera AG by the Company (including amounts owed under the Company’s license and supply agreement for Ameluz^®). As such, no reserve for the receivable has been recorded as of September 30, 2022 or December 31, 2021.

The remaining $0.2 million of other receivables, related party pertains to service agreements and chargebacks. See Note 16- Related Party Transactions.

8. Inventories

Inventories are comprised of Ameluz^®, Xepi® and the BF-RhodoLED^® finished products.

In assessing the consumption of inventories, the sequence of consumption is assumed to be based on the first-in-first-out (FIFO) method. We recorded a provision of $0.1 million related to BF-RhodoLED^® devices for the nine months ended September 30, 2022. The provision for Xepi® inventory obsolescence was negligible, for the three months ended September 30, 2022 and for the three and nine months ended September 30, 2021.

9. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

Schedule of Prepaid Expenses and Other Current Assets 

On September 23, 2022. the Company entered into a loan agreement with Quirin PrivatBank AG in the amount of 3.1 million Euros. The loan receivable bears interest at 1.0% from date of disbursement, is due on December 6, 2022 and is repayable at the option of the holder, in cash or in shares of Biofrontera AG acquired with the funds disbursed from the loan.

10. Property and Equipment, Net

Property and equipment, net consists of the following:

Schedule of Property and Equipment 

Depreciation expense was $0.1, for the nine months ended September 30, 2022 and 2021. which was included in selling, general and administrative expense in the consolidated statements of operations. Depreciation expense for the three months ended September 30, 2022 and 2021 was negligible.

11. Intangible Asset, Net

Intangible asset, net consists of the following:

Schedule of Intangible Asset Net 

The Xepi® license intangible asset was recorded at acquisition-date fair value of $4.6 million and is amortized on a straight-line basis over the useful life of 11 years. Amortization expense was $0.1 million and $0.3 million, for the three and nine months ended September 30, 2022, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2021, respectively.

We review the Xepi^® license intangible asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. In October 2022, upon receiving notification of further third-party manufacturing delays that impacted the timing of sales expansion and improved market positioning of the Xepi^® product, we deemed it necessary to assess the recoverability of our Xepi^® asset group. Future cash flows were estimated over the expected remaining useful life of the asset group, and we determined that, on an undiscounted basis, expected cash flows exceeded the carrying amount of the asset group.

The Company did not recognize any impairment charges during the three or nine months ended September 30, 2022 or 2021.

12. Statement of Cash Flows Reconciliation

The following table provides a reconciliation of cash, cash equivalents, and restricted cash that sum to the total shown in the consolidated statements of cash flows:

Schedule of Reconciliation of Cash, Cash Equivalents, and Restricted Cash 

13. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

Schedule of Accrued Expenses and Other Current Liabilities 

14. Other Long-Term Liabilities

Other long-term liabilities consist of the following:

Schedule of Other Long Term Liabilities 

15. Income Taxes

As a result of the net losses, we have incurred in each fiscal year since inception, we have recorded no provision for federal income taxes for the three- or nine-month periods ended September 30, 2022 and 2021. Income tax expense incurred for the three and nine months ended September 30, 2022 and 2021 relates to state income taxes. At September 30, 2022 and December 31, 2021, the Company had no unrecognized tax benefits.

The Company continues to be in a cumulative loss position and as such, is maintaining a full valuation allowance.

Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying consolidated statements of operations. As of September 30, 2022, and December 31, 2021, the Company has no accrued interest related to uncertain tax positions. Since the Company is in a loss carryforward position, it is generally subject to examination by the U.S. federal, state, and local income tax authorities for all tax years in which a loss carryforward is available.

16. Related Party Transactions

License and Supply Agreement

On October 1, 2016, the Company executed an exclusive license and supply agreement with Biofrontera Pharma GmbH (“Pharma”), which was amended in July 2019 to increase the Ameluz^® transfer price per unit from 35.0% to 50.0% of the anticipated net selling price per unit as defined in the agreement. It was further amended on October 8, 2021 so that the price we pay per unit will be based upon our sales history, although the minimum number of units to purchase per year remains unchanged. As a result of this amendment, the purchase price we pay Biofrontera Pharma for Ameluz^® will range from 30% to 50% of the anticipated net price per unit based on our level of annual revenue. Refer to Item I. Business - Commercial Partners and Agreements in our Annual Report on Form 10-K for the year ended December 31, 2021 for further details. Under the agreement, the Company obtained an exclusive, non-transferable license to use the Pharma’s technology to market and sell the licensed products, Ameluz^® and BF-RhodoLED^® and must purchase the licensed products exclusively from Pharma. There was no consideration paid for the transfer of the license.

Purchases of the licensed products during the three and nine months ended September 30, 2022 were $5.2 million and $16.6 million, respectively, and $1.0 million and $5.7 million for the three and nine months ended September 30, 2021. These purchases are recorded in inventories in the consolidated balance sheets, and, when sold, in cost of revenues, related party in the consolidated statements of operations. Amounts due and payable to Pharma as of September 30, 2022 and December 31, 2021 were $4.2 million and $0.3 million, respectively, which were recorded in accounts payable, related parties in the consolidated balance sheets.

Service Agreements

In December 2021, we entered into an Amended and Restated Master Contract Services Agreement, or “Services Agreement”, which provides for the execution of statements of work that will replace the applicable provisions of our previous intercompany services agreement dated January 1, 2016, or 2016 Services Agreement, by and among us, Biofrontera AG, Biofrontera Pharma and Biofrontera Bioscience, enabling us to continue to use the IT resources of Biofrontera AG and its wholly owned subsidiaries (the “Biofrontera Group”) as well as providing access to the Biofrontera Group’s resources with respect to quality management, regulatory affairs and medical affairs. We currently have statements of work in place regarding IT, regulatory affairs, medical affairs, pharmacovigilance, and investor relations services, and are continuously assessing the other services historically provided to us by Biofrontera AG to determine 1) if they will be needed, and 2) whether they can or should be obtained from other third-party providers. Expenses related to the service agreement were $0.2   million and $0.6 million for the three and nine months ended September 30, 2022, respectively and $0.2 million and $0.5 million for the three and nine months ended September 30, 2021. These expenses were recorded in selling, general and administrative, related party. Amounts due to Biofrontera AG related to the service agreement as of September 30, 2022 and December 31, 2021 were $0.2 million and $0.2 million, respectively, which were offset against other receivables, related party in the consolidated balance sheet.

Clinical Lamp Lease Agreement

On August 1, 2018, the Company executed a clinical lamp lease agreement with Biofrontera Bioscience GmbH (“Bioscience”) to provide lamps and associated services.

Total revenue related to the clinical lamp lease agreement was minimal for the three and nine months ended September 30, 2022, and for the three and nine months ended September 30, 2021, and was recorded as revenues, related party. Amounts due from Bioscience for clinical lamp and other reimbursements were approximately $0.2 million and $0.1 as of September 30, 2022 and December 31, 2021, respectively, which were recorded as other receivables, related party in the consolidated balance sheets.

Reimbursements from Maruho Related to Cutanea Acquisition

Pursuant to the Cutanea acquisition share purchase agreement, we received start-up cost financing and reimbursements for certain costs. These restructuring costs Maruho agreed to pay are referred to as “SPA costs” under the arrangement and are to be accounted for as other income. Refer to Note 3, Acquisition Contract Liabilities.

There were no amounts reimbursed relating to SPA costs for the three and nine months ended September 30, 2022. For the three and nine months ended September 30, 2021, the amounts reimbursed relating to SPA costs were $0.2 million and $0.5 million and were recorded as other income in the consolidated statements of operations as the related expenses were incurred. As of September 30, 2022 and December 31, 2021 amounts due from Maruho, primarily relating to SPA cost reimbursements, were $0.1 for each of the periods and were recorded in other receivables, related parties in the consolidated balance sheets.

Others

The Company has recorded a receivable of $6.1 million and $11.3 million as of September 30, 2022 and December 31, 2021 due from Biofrontera AG for its 50% share of the balance of a legal settlement for which both parties are jointly and severally liable. Refer to Note 7, Other Receivables, Related Party. The Company has recognized $0.1 million of interest income for the nine months ended September 30, 2022 in connection with this receivable.

17. Restructuring costs

We restructured the business of Cutanea and incurred restructuring costs which were subsequently reimbursed by Maruho. Restructuring costs primarily relate to the winding down of Cutanea’s operations. There were no restructuring costs for the three and nine months ended September 30, 2022. For the three and nine months ended September 30, 2021, restructuring costs were incurred in the amount of $0.2 and $0.7 million, respectively.

18. Stockholders’ Equity

Under the Company’s amended and restated certificate of incorporation, dated December 21, 2020, the Company is authorized to issue 300,000,000 shares of common stock, par value $0.001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share.

The holders of common stock are entitled to one vote for each share held. Common stockholders are not entitled to receive dividends, unless declared by the Board of Directors. The Company has not declared dividends since inception. In the event of liquidation of the Company, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. The outstanding shares of common stock are fully paid and non-assessable.

Private Placement - On May 16, 2022, the Company entered into a Securities Purchase Agreement (“May 2022 PIPE”). In the May 2022 PIPE, the Company issued for the gross cash receipts of $9.4 million (i) 1,850,000 shares of the common stock, (ii) a warrant to purchase up to 3,419,000 shares of the common stock (“2022 Purchase Warrant”) and (iii) a warrant to purchase up to 1,569,000 shares of the common stock (“2022 Pre-Funded Warrant”). The purchase price for one share of common stock (or common stock equivalent) and a warrant to purchase one share of common stock was $2.75. The 2022 Purchase Warrant will be exercisable nine months after the issue date, expires five and one-half years after the issue date and has an exercise price of: $2.77 per share. The Pre-Funded Warrant is exercisable immediately and has a term of exercise equal to five (5) years with a nominal exercise price of $0.001 per share.

Because the warrants are accounted for as liabilities, the May 2022 PIPE proceeds were allocated between the fair value of the warrants with the remaining proceeds allocated to common stock and additional paid in capital.

Exercise of 2022 Pre-Funded Warrant - On July 14, 2022, an investor exercised the 2022 Pre-Funded Warrant and purchased a total of 1,569,000 shares of common stock at an exercise price of $.001 per share, resulting in negligible net proceeds,

Exercise of 2021 Purchase Warrant and Issuance of July 2022 Inducement Warrant - On July 26, 2022, the Company entered into the Inducement Letter with the holder of the Company’s 2021 Purchase Warrants (the “Investor”). The 2021 Purchase Warrants were originally issued on December 1, 2021 to purchase up to 2,857,143 shares of common stock, par value $0.001 per share. The Investor agreed to exercise for cash, the 2021 Purchase Warrants, in exchange for the Company’s agreement to (i) lower the exercise price of the 2021 Purchase Warrants from $5.25 to $1.62 per share and (ii) issue a new warrant (the “Inducement Warrant”) to purchase up to 4,285,715 shares of common stock. The Company received proceeds of $4.6 million, from the exercise of the 2021 Purchase Warrants and expensed the related issuance costs of $0.3 million.

The Inducement Warrant is exercisable on or after January 27, 2023 at a price per share of $1.66 and expires on December 1, 2026.

19. Equity Incentive Plans and Share-Based Payments

2021 Omnibus Incentive Plan

In 2021, our Board of Directors adopted, and our shareholders approved the 2021 Omnibus Incentive Plan (“2021 Plan). Under the 2021 Plan, 2,750,000 shares are authorized for awards and the maximum contractual term is 10 years for stock options granted. A total of 2,579,932 shares remain eligible for issuance as of September 30, 2022 under the 2021 Plan.

Non-qualified stock options

We maintain the 2021 Plan for the benefit of our officers, directors and employees. Employee stock options granted under the 2021 Plan generally vest in equal annual installments over three years and are exercisable for a period of up to ten years from the grant date. Non-employee director options vest in equal monthly installments following the date of grant and will be fully vested on the one-year anniversary of the date of grant. All stock options are exercisable at a price equal to the market value of the common shares underlying the option on the grant date.

The Company recognizes the grant-date fair value of share-based awards granted as compensation expense on a straight-line basis over the requisite service period. The fair value of stock options is estimated at the time of grant using the Black-Scholes option pricing model, which requires the use of inputs and assumptions such as the fair value of the underlying stock, exercise price of the option, expected term, risk-free interest rate, expected volatility and dividend yield. The Company elects to account for forfeitures as they occur.

Share-based compensation expense of approximately $0.3 million and $0.6 million was recorded in selling, general and administrative expenses on the accompanying consolidated statement of operations for the three and nine months ended September 30, 2022. There was no stock based compensation for the three and nine months ended September 30, 2021.

Options outstanding and exercisable under the employee share option plan as of September 30, 2022 and a summary of option activity during the nine months then ended is presented below.

Schedule of Stock Unit Activity 

As of September 30, 2022, there was $2.6 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately 2.5 years.

Share-Based Compensation (RSUs)

Restricted Stock Units (“RSUs”) will vest annually over two years, subject to the recipient’s continued service with the Company through the applicable vesting dates. The fair value of each RSU is estimated based on the closing market price of the Company’s common stock on the grant date.

Share-based compensation expense of $0.1 million and $0.9 million for the RSUs was recorded in selling, general and administrative expenses in the accompanying consolidated statement of operations for the three and nine months ended September 30, 2022. There was no share-based compensation for the three and nine months ended September 30, 2021.

As of September 30, 2022, there was $0.7 million of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately 1.6 years.

Schedule of Restricted Stock Units

20. Interest Expense, net

Interest expense, net consists of the following:

Schedule of Interest Expense 

Contract asset interest expense relates to the $1.7 million contract asset in connection with the $7.3 million start-up cost financing received from Maruho under the Cutanea acquisition share purchase agreement. The contract asset is amortized on a straight-line basis using a 6% interest rate over the financing arrangement contract term, which ends on December 31, 2023.

21. Other Income (Expense), net

Other income (expense), net consists of the following:

Schedule of Other Income, Net 

Other, net, primarily includes gain (loss) on foreign currency transactions and gain on termination of operating leases.

22. Net Earnings per Share

Basic net earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net earnings per common share are calculated by dividing net income by the diluted weighted average number of common shares outstanding during the period. The diluted shares include the dilutive effect of stock-based awards based on the treasury stock method.

The following table sets forth the computation of the Company’s basic and diluted net loss per share attributable to common stockholders. (in thousands, except share and per share data):

Schedule of Basic and Diluted Net Loss Per Share Attributable to Common Stockholders 

The following table sets forth the potential common shares that were not included in the diluted per share calculations for the three and nine months ended September 30, 2022 because they would be anti-dilutive:

Schedule of Anti-dilutive Securities Excluded From Computation of Earnings Per Share 

23. Commitments and Contingencies

Facility Leases

The Company leases its corporate headquarters under an operating lease that expires in November 2025. The Company provided the landlord with a security deposit in the amount of $0.1 million, which was recorded as other assets in the consolidated balance sheets.

Rent expense is recorded on a straight-line basis through the end of the lease term. The Company incurred rent expense, in the amount of $0.1 million and $0.4 million for the three and nine months ended September 30, 2022 which was included in selling, general, and administrative expenses. The rent expense, net of sublease income for the three and nine months ended September 30, 2021 was $0.2 million and $0.6 million.

Auto Leases

The Company also leases autos for its field sales force with a lease payment term of 40 months. The Company incurred auto lease expense of $0.1 million and $0.3 million for the three and nine months ended September 30, 2022 and $0.1 million and $0.4 million for the three and nine months ended September 30, 2021.

The minimum aggregate payments of all future lease commitments as of September 30, 2022, are as follows:

(in thousands)

Schedule of Future Commitments and Sublease Income 

Cutanea payments

We are obligated to repay to Maruho $3.6 million on December 31, 2022 and $3.7 million on December 31, 2023 in start-up cost financing paid to us in connection with the Cutanea acquisition.     

We are also obligated to share product profits with Maruho equally from January 1, 2020 through October 30, 2030. Refer to Note 3, Acquisition Contract Liabilities.

Milestone payments with Ferrer Internacional S.A.

Under the Xepi LSA, we are obligated to make payments to Ferrer upon the occurrence of certain milestones. Specifically, we must pay Ferrer i) $2,000,000 upon the first occasion when annual net sales of Xepi® under the Xepi LSA exceed $25,000,000, and ii) $4,000,000 upon the first occasion when annual net sales of Xepi® under the Xepi LSA exceed $50,000,000. No payments were made for the three and nine months ended September 30, 2022 or 2021 related to Xepi® milestones.

Legal proceedings

At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of FASB ASC Topic 450, Contingencies. The Company expenses as incurred the costs related to such legal proceedings. We are not presently a party to any pending legal proceedings.

On November 29, 2021, the Company entered into a settlement and release agreement with respect to a lawsuit filed March 23, 2018 in the United States District Court for the District of Massachusetts in which we were alleged to have infringed on certain patents and misappropriated certain trade secrets. In the settlement, the Company and Biofrontera AG together agreed to make an aggregate payment of $22.5 million to settle the claims in the litigation. The Company will be responsible for $11.3 million of the aggregate settlement amount, plus interest accrued at a rate equal to the weekly average one-year constant maturity Treasury yield and agreed to pay in three annual installments. The first installment of $11.3 million (of which $5.6 million was Biofrontera AG’s portion) was paid in December 2021 by the Company.

While Biofrontera AG has agreed to pay a portion of the settlement, both parties remain jointly and severally liable for the full settlement amount, meaning that in the event Biofrontera AG does not pay all or a portion of the amount it owes under the agreement, the claimant could compel the Company to pay Biofrontera AG’s share. If either the Company or Biofrontera AG violates the terms of the settlement agreement, this could nullify the settlement and the Company may lose the benefits of the settlement and be liable for a greater amount. As of September 30, 2022 we have reflected a legal settlement liability in the amount of $11.3 million for the remaining payments due and a related receivable from related party of $5.6 million, in accordance with the Settlement Allocation Agreement entered into on December 9, 2021, which provided that the settlement payments would first be made by the Company and then reimbursed by Biofrontera AG for its share.

24. Retirement Plan

The Company has a defined-contribution plan under Section 401(k) of Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company matches 50% of employee contributions up to a maximum of 6% of employees’ salary.

For the three and nine months ended September 30, 2022, matching contribution costs paid by the Company were $0.1 million and $0.2 million, respectively. For the three and nine months ended September 30, 2021, matching contribution costs paid by the Company were $0.1 million and $0.2 million.

25. Subsequent Events  

We have completed an evaluation of subsequent events after the balance sheet date of September 30, 2022 through the date this Quarterly Report on Form 10-Q was submitted to the SEC.

Adoption of a stockholder rights plan. On October 13, 2022 the Board of Directors (“Board”) authorized and declared a dividend distribution of one Preferred Stock Purchase Right (a “Right”) for each outstanding share of common stock to stockholders of record as of the close of business on October 24, 2022. In addition, one Right will automatically attach to each share of Common Stock issued between the record date of the distribution and the earlier of the distribution date and the expiration date of the Rights. Each Right entitles the registered holder to purchase from the Company a unit consisting of one ten-thousandth of a share (a “Unit”) of Series A Junior Participating Cumulative Preferred Stock, par value $0.001 per share, of the Company at a cash exercise price of $5.00 per Unit, subject to adjustment, under certain conditions. The complete terms of the Rights are set forth in the Stockholder Rights Agreement (“Rights Agreement”), dated October 13, 2022, between the Company and Computershare Trust Company, N.A, as rights agent.

While the stockholder rights plan described above (the “Rights Plan”) is effective immediately, the Rights would become exercisable only if a person or group, or anyone acting in concert with such a person or group, acquires beneficial ownership, as defined in the Rights Agreement, of 20% or more of the Company’s issued and outstanding common stock in a transaction not approved by the Company’s Board of Directors. The Rights Plan will expire on October 13, 2023.

Under the Rights Plan, a person or group who beneficially owned 20% or more of the Company’s outstanding Common Stock prior to the first public announcement of the Rights Plan on October 14, 2022 will not trigger the Rights so long as they do not acquire beneficial ownership of any additional shares of Common Stock at a time when they still beneficially own 20% or more of such Common Stock.

Full details about the Rights Agreement are contained in a Form 8-K filed by the Company with the U.S. Securities and Exchange Commission on October 14, 2022.

Series A Junior Participating Cumulative Preferred Stock. In connection with the adoption of the Rights Plan, the Board approved a Certificate of Designations of Series A Junior Participating Cumulative Preferred Stock which designates the rights, preferences and privileges of 5,000 shares of Preferred Stock. The Certificate of Designations was filed with the Secretary of State of Delaware and became effective on October 13, 2022.

Acquisition of Biofrontera AG Shares. On October 25, 2022. the Company entered into private exchange agreements with certain holders of options to acquire ordinary shares, nominal value €1.00 per share (the “AG Options”), of Biofrontera AG, pursuant to which the parties agreed to a negotiated private exchange of 3,148,042 shares of the Company’s common stock in exchange for the AG Options. The AG Options represent the right to acquire 2,623,365 ordinary shares of Biofrontera AG held by the shareholders, representing an exchange ratio of approximately 1 AG share to 1.2 shares of the Company’s common stock. There was no additional cost to exercise the AG Options. As of November 8, 2022, the Company exercised the AG options in full to acquire 2,623,365 shares of Biofrontera AG.

Also, on November 8, 2022, the Company entered into an amendment to the Loan Agreement with Convertible Repayment Obligation dated September 23,2022. In the Amendment, Quirin PrivatBank AG assigned the acquired 1,601,318 shares of AG, including all associated rights, to the Company with shares to be delivered promptly thereafter. The parties agreed to terminate the loan in part in exchange for noted shares.

As a result of these transactions, the Company now owns a total of 4,224,683 shares, which is 7.45% of Biofrontera AG’s outstanding ordinary shares as of November 8, 2022. These shares were acquired in accordance with the loan receivable agreement (as amended on November 8, 2022) disclosed in Note 9- Prepaid Expenses and Other Current Assets and the Private Exchange Agreement entered into October 25, 2022 as detailed above.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain statements in this Form 10-Q constitute “forward-looking statements”. Such statements include estimates of our expenses, future revenue, capital requirements, our need for additional financing, statements regarding the efficacy and intended use of our technologies under development, the timelines and strategy for bringing licensed products to market, the timeline for regulatory review and approval of our licensed products, and other statements that are not historical facts, including statements which may be preceded by the words “intends,” “may,” “will,” “plans,” “expects,” “anticipates,” “projects,” “predicts,” “estimates,” “aims,” “believes,” “hopes,” “potential” or similar words. Forward-looking statements are not guaranties of future performance, are based on certain assumptions and are subject to various known and unknown risks and uncertainties, many of which are beyond our control. Actual results may differ materially from the expectations contained in the forward-looking statements.

Factors that may cause such differences include, but are not limited to:

More detailed information about us and the risk factors that may affect the realization of forward-looking statements, including the forward-looking statements in this Quarterly Report on Form 10-Q, is set forth in our filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. We urge investors and security holders to read those documents free of charge at the SEC’s web site at www.sec.gov. We do not undertake to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise, except as required by law.

Overview

Biofrontera Inc. (the “Company”) includes its wholly owned subsidiary Bio-FRI GmbH (“Bio-FRI” or “subsidiary”). Our subsidiary, Bio-FRI was formed on February 9, 2022, as a German presence to facilitate our relationship with our Ameluz Licensor.

We are a U.S.-based   biopharmaceutical company specializing in the commercialization of pharmaceutical products for the treatment of dermatological conditions, in particular, diseases caused primarily by exposure to sunlight that result in sun damage to the skin. Our principal licensed product focuses on the treatment of actinic keratoses, which are skin lesions that can sometimes lead to skin cancer. We also market a topical antibiotic for treatment of impetigo, a bacterial skin infection.

Our principal licensed product is Ameluz®, which is a prescription drug approved for use in combination with our licensor’s FDA-approved medical devices, the BF-RhodoLED® lamp series consisting of the BF-RhodoLED® and the RhodoLED® XL lamps, for photodynamic therapy in the United States for the lesion-directed and field-directed treatment of actinic keratoses of mild-to-moderate severity on the face and scalp. We are currently selling Ameluz® for this indication in the U.S. under an exclusive license and supply agreement (“Ameluz LSA”), by and among us and Biofrontera Pharma GmbH and Biofrontera Bioscience GmbH (collectively, the “Ameluz Licensor”) originally dated as of October 1, 2016, and as subsequently amended on October 8, 2021. Under the Ameluz LSA, we hold the exclusive license to sell Ameluz® and the BF-RhodoLED® lamp in the United States for all indications currently approved by the FDA as well as all future FDA-approved indications that the Ameluz Licensor may pursue. We are obliged to purchase Ameluz® and the RhodoLED® devices exclusively from the Licensor. Under the Ameluz LSA, the Licensor is obliged to manufacture, perform regulatory work and sponsor certain clinical trials on its own expense. In consideration, we are obligated to pay a transfer price of 30-50% of our net sales of Ameluz®. We have the authority under the Ameluz LSA in certain circumstances to i) take over clinical development with respect to the indications the Ameluz Licensor is currently pursuing with the FDA (as well as certain other clinical studies identified in the Ameluz LSA), ii) take over the regulatory and manufacturing responsibilities from the Ameluz Licensor, and iii) to offset the costs of such operations by adjusting the transfer price for Ameluz® or to reduce the transfer price at a fixed ratio. The Ameluz Licensor does not have any obligation under the Ameluz LSA, as amended, to perform or finance clinical trials to promote new indications beyond those they are currently pursuing with the FDA (as well as certain other clinical studies identified in the Ameluz LSA). Under the Ameluz LSA, further extensions of the approved indications for Ameluz® photodynamic therapy in the United States are anticipated.

Our second prescription drug licensed product in our portfolio is Xepi® (ozenoxacin cream, 1%), a topical non-fluorinated quinolone that inhibits bacterial growth. Currently, no antibiotic resistance against Xepi® is known and it has been specifically approved by the FDA for the treatment of impetigo, a common skin infection, due to Staphylococcus aureus or Streptococcus pyogenes. It is approved for use in adults and children 2 months and older. We are currently selling Xepi® for this indication in the U.S. under an exclusive license and supply agreement (“Xepi LSA”) with Ferrer that was acquired by Biofrontera on March 25, 2019 through our acquisition of Cutanea Life Sciences, Inc. (“Cutanea”). 

Our principal objective is to increase the sales of our licensed products in the United States. The key elements of our strategy include the following:

Our strategic objectives also include further expansion of our product and business portfolio through various methods to pursue selective strategic investment and acquisition opportunities to expand and support our business growth, including but not limited to:

We devote a substantial portion of our cash resources to the commercialization of our licensed products, Ameluz^®, the RhodoLED^® lamp series. We have financed our operating and capital expenditures through cash proceeds generated from our product sales and proceeds received in equity financings.

We believe that important measures of our results of operations include product revenue, operating income (loss) and adjusted EBITDA (a non-GAAP measure as defined below). Our sole source of revenue is sales of products that we license from certain related and unrelated companies. Our long-term financial objectives include consistent revenue growth and expanding operating margins. Accordingly, we are focused on licensed product sales expansion to drive revenue growth and improve operating efficiencies, including effective resource utilization, information technology leverage and overhead cost management.

Key factors affecting our performance

As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting our results of operations.

Seasonality

Because traditional photodynamic therapy treatments using a lamp are performed more frequently during the winter, our revenue is subject to some seasonality and has historically been higher during the first and fourth quarters than during the second and third quarters.

COVID-19

Since the beginning of 2020, COVID-19 has become a global pandemic. As a result of the measures implemented by governments around the world, our business operations have been directly affected. In particular, we experienced a significant decline in demand for our licensed products as a result of different priorities for medical treatments emerging, thereby causing a delay of actinic keratosis treatment for most patients. Our revenue was directly affected by the global COVID-19 pandemic starting in mid-March of 2020. From that point on, rising infection rates and the resulting American Academy of Dermatology’s official recommendation to care for patients through remote diagnosis and treatment (telehealth) led to significantly declining patient numbers and widespread, albeit temporary, physician practice closures. As COVID-19 vaccines started to roll-out to the general public in March 2021, we experienced an increase in patients willing to undergo treatment for actinic keratosis. In the fourth quarter of 2021 continuing through the first quarter of 2022, we again saw a seasonally strong increase in sales, indicating a revenue recovery from the global COVID-19 pandemic. However, due to the speed and fluidity with which the COVID-19 pandemic continues to evolve, and the emergence of highly contagious variants, we do not yet know the full extent of the impact of COVID-19 on our business operations. The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic, outbreak, or other public health crisis and actions taken to contain or prevent the further spread, including the effectiveness of vaccination and booster vaccination campaigns, among others. Accordingly, we cannot predict the extent to which our business, financial condition and results of operations will be affected. We remain focused on maintaining a strong balance sheet, liquidity and financial flexibility and continue to monitor developments as we deal with the disruptions and uncertainties from a business and financial perspective relating to COVID-19 and variants thereof.

Supply Chain

While our Licensors take reasonable precautions to ensure the successful production of our commercially licensed products, their contract manufacturers may experience a myriad of business difficulties (i.e. workforce instability, supply chain issues, erosion of customer base, etc.) that could impact their financial solvency. In December 2021, we were notified by Ferrer of third-party manufacturing delays for the Xepi® product and of their manufacturer’s (Teligent, Inc.) Chapter 11 bankruptcy filing on October 14, 2021 and, in February 2022, Teligent Inc. filed a motion to convert the proceedings into a Chapter 7 liquidation. As Teligent, Inc, is no longer a viable manufacturing option, Ferrer has selected a new contract manufacturer for Xepi^®, but the process will require significant time, including the time it will take the new contract manufacturer to reach a level of production to meet our commercial needs. Although we have inventory of Xepi^® on hand, we do not expect it will be enough to complete the commercialization of Xepi^® in accordance with the originally planned timeline. Due to the uncertainty of supply chain, we expect a delay in shipments of Xepi^® for the next 15 months from the new contract manufacturer. Despite these delays, our total revenues will not be significantly impacted since the majority of our revenues are from sales of Ameluz^®. We continue to monitor the impacts of the supply chain on our business and are focused on ensuring the stability of the supply chains for Ameluz^® and RhodoLED^®.

Components of Our Results of Operations

Product Revenue, net

We generate product revenues through the third-party sales of our licensed products Ameluz^®, RhodoLED^® lamps and Xepi^®. Revenues from product sales are recorded net of discounts, rebates and other incentives, including trade discounts and allowances, product returns, government rebates, and other incentives such as patient co-pay assistance. Revenue from the sales of our RhodoLED^® lamp and Xepi^® are relatively insignificant compared with revenues generated through our sales of Ameluz^®.

The primary factors that determine our revenue derived from our licensed products are:

Related Party Revenues

We also generate insignificant related party revenue in connection with an agreement with Biofrontera Bioscience to provide RhodoLED^® lamps and associated services for the clinical trials performed by Biofrontera Bioscience.

Cost of Revenues, Related Party

Cost of revenues, related party, is comprised of purchase costs of our licensed products, Ameluz^® and RhodoLED^® lamps from Biofrontera Pharma GmbH.

Cost of Revenues, Other

Cost of revenues, other, is comprised of purchase costs of our licensed product, Xepi^®, third-party logistics and distribution costs including packaging, freight, transportation, shipping and handling costs, inventory adjustment due to expiring Xepi^® products, as well as sales-based Xepi^® royalties.

Selling, General and Administrative Expense

Selling, general and administrative expenses consist principally of costs associated with our sales force, commercial support personnel, personnel in executive and other administrative functions, as well as medical affairs professionals. Other selling, general and administrative expenses include marketing, trade, and other commercial costs necessary to support the commercial operation of our licensed products and professional fees for legal, consulting, accounting services and the amortization of our intangible asset.

Selling, General and Administrative Expenses, Related Party

Selling, general and administrative expenses, related party, primarily relate to the services provided by our significant stockholder, Biofrontera AG, for accounting consolidation, IT support, and pharmacovigilance. These expenses were previously charged to us based on costs incurred plus 6% in accordance with the 2016 Services Agreement. As of December 31, 2021, we entered into the Services Agreement which provides for the execution of statements of work that supersedes the applicable provisions of the 2016 Services Agreement. The Services Agreement enables us to continue relying on Biofrontera AG and its subsidiaries for various services it has historically provided to us, including IT and pharmacovigilance support. We currently have statements of work in place regarding IT, regulatory affairs, medical affairs, pharmacovigilance, and investor relations services, and are continuously assessing the other services historically provided to us by Biofrontera AG to determine 1) if they will be needed, and 2) whether they can or should be obtained from other third-party providers.

Restructuring Costs

We restructured the business of Cutanea and incurred restructuring costs, which were subsequently reimbursed by Maruho. Restructuring costs primarily relate to Aktipak^® discontinuation, personnel costs related to the termination of all Cutanea employees, and the winding down of Cutanea’s operations.

Change in Fair Value of Contingent Consideration

In connection with the Cutanea acquisition, we recorded contingent consideration related to the estimated profits from the sale of Cutanea products to be shared equally with Maruho. The fair value of such contingent consideration was determined to be $6.5 million on the acquisition date of March 25, 2019 and is re-measured at each reporting date, with changes in fair value presented within the consolidated statements of operations, until the contingency is resolved.

Change in Fair Value of Warrant Liabilities

Common stock warrants issued in conjunction with private placement financing transactions are accounted for as liabilities in accordance with ASC 815-40.

The warrant liability is measured at fair value at inception and on a recurring basis, with changes in fair value presented within the consolidated statements of operations.

Interest Expense, net

Interest expense, net, primarily consists of amortization of the contract asset related to the start-up cost financing from Maruho Co. Ltd’s. (“Maruho”) agreement (“Share Purchase Agreement”) to acquire 100% of the Shares of Cutanea Life Sciences, Inc. (“Cutanea”), offset by interest income of 6% per annum for each day that any reimbursement is past due related to the Amended Settlement Allocation Agreement with Biofrontera AG and immaterial amounts of interest income earned on our financing of customer purchases of RhodoLED^® lamps.

Other Income, net

Other income, net primarily includes (i) reimbursed Share Purchase Agreement costs, and (ii) gain (loss) on foreign currency transactions.

Income Taxes

As a result of the net losses, we have incurred in each fiscal year since inception, we have recorded no provision for federal income taxes during such periods. Income tax expense incurred relates to state income taxes.

Results of Operations

Comparison of the Three Months ended September 30, 2022 and 2021

The following table summarizes our results of operations for the three months ended September 30, 2022 and 2021:

Operating Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $7.8 million and $17.1 million for the three months ended September 30, 2022 and 2021, respectively, a decrease of $9.3 million, or 54.6%.

The decrease was primarily driven by legal settlement expense incurred in 2021 of $11.3 million. This decrease was partially offset by an increase in headcount costs of $0.8 million as a result of resumed hiring in 2022 plus additional business insurance of $0.5 million, general consulting expense of $0.4 million and stock compensation expense of $0.4 million.

Restructuring Costs

There were no restructuring costs for the three months ended September 30, 2022. Restructuring costs were $0.2 million for three months ended September 30, 2021, which were related to facility exit costs.

Change in Fair Value of Contingent Consideration

The change in fair value of contingent consideration was a decrease of $2.2 million and an increase of $0.7 million for the three months ended September 30, 2022 and 2021, respectively. The change in fair value of contingent consideration is driven by the estimated profit share the Company is required to pay under the Share Purchase Agreement.

Change in Fair Value of Warrant Liabilities

The change in fair value of warrant liabilities was a decrease of $1.2 million for three months ended September 30, 2022. The change in fair value of warrant liabilities was driven by changes in the underlying value of the common stock, as well as the modification of the 2021 Purchase Warrant. There were no warrant liabilities as of September 30, 2021.

Comparison of the Nine Months ended September 30, 2022 and 2021

The following table summarizes our results of operations for the nine months ended September 30, 2022 and 2021:

Product Revenue, net

Net product revenue was $18.5 million and $14.9 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $3.6 million, or 24.0%. The increase was primarily driven by (i) higher volume of Ameluz^® orders, which resulted in an increase in Ameluz^® revenue of $3.2 million, and (ii) an Ameluz^® price increase which further increased Ameluz^® revenue by $0.2 million.

Operating Expenses

Cost of Revenues, Related Party

Cost of revenues, related party was $9.5 million and $7.6 million for the nine months ended September 30, 2022 and 2021, respectively, an increase of $1.9 million, or 24.6% which was driven by the increase in Ameluz^® product revenue. Cost of revenues, related party is directly correlated to the selling price under the Ameluz LSA.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $25.1 million and $27.4 million for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $2.4 million, or 8.6%.

The decrease was primarily driven by legal settlement expense incurred in 2021 of $11.3 million. This decrease was partially offset by legal expenses of $1.4 million, issuance costs related to a private placement financing of $1.0 million and business insurance of $1.5 million. Headcount costs also increased $2.0 million as a result of resumed hiring in 2022. The increase was further driven by stock compensation expense of $1.5 million, consulting expenses of $1.1 million and resumed travel of $0.5 million.

Restructuring Costs

There were no restructuring costs for the nine months ended September 30, 2022. Restructuring costs were $0.7 million for the nine months ended September 30, 2021, which was related to facility exit costs.

Change in Fair Value of Contingent Consideration

The change in fair value of contingent consideration was a decrease of $4.1 million and an increase of $1.7 million for the nine months ended September 30, 2022 and 2021, respectively. The change in fair value of contingent consideration is driven by the estimated profit share the Company is required to pay under the Share Purchase Agreement.

Change in Fair Value of Warrant Liabilities