Notes
to Financial Statements
(Unaudited)
1.
Business Overview
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
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 device, the BF-RhodoLED® lamp series, 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.
Liquidity
and Going Concern
The
Company’s primary sources of liquidity are its existing cash balances and cash flows from equity financing transactions. In May
of 2022, we received aggregate proceeds of $9.4 million from the sale of common stock and warrants in a private placement (See Note
18 Stockholders’ Equity). As of June 30, 2022, we had cash and cash equivalents of $31.9 million, compared to $24.5 million
as of December 31, 2021.
Since
we commenced operations in 2015, we have generated significant losses. For the six months ended June 30, 2022 and 2021, we incurred losses
from operations of $9.3 million and $7.2 million, respectively. We incurred net cash outflows from operations of $2.0 million and $4.5
million, for the same periods, respectively. We had an accumulated deficit as of June 30, 2022 of $74.2 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, 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 Ameluz®
and Xepi® 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 expect capital expenditures to increase in 2022 to support the increase in our business needs
including an ERP system.
Our future growth is
dependent on our ability to obtain additional equity financing. On July 26, 2022, pursuant to a warrant exercise inducement offer letter
(the “Inducement Letter”), an investor exercised certain of its existing warrants, issued in a private placement on December
1, 2021, to purchase 2,857,143
shares of common stock, at a price of $1.62
per share, resulting in gross proceeds of $4.6
million (See Note 25 Subsequent Events). Based on current operating plans and financial
forecasts, we expect that our current cash and cash equivalents, along with the proceeds received from the exercise of such warrants
in accordance with the Inducement Letter 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 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 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 June 30, 2022, the Company’s operating results for the three and six months ended June 30, 2022 and 2021,
and the Company’s cash flows for the six months ended June 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 accompanying notes are in thousands, 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 six months ended June 30, 2022.
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, valuation 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.
In
June 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
(in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
Short-term
acquisition contract liabilities: | |
| | | |
| | |
Contingent
consideration | |
$ | - | | |
$ | - | |
Start-up
cost financing | |
| 3,600 | | |
| 3,600 | |
Contract
asset | |
| (358 | ) | |
| (358 | ) |
Acquisition
contract liabilities, net | |
$ | 3,242 | | |
$ | 3,242 | |
| |
| | | |
| | |
Long-term
acquisition contract liabilities: | |
| | | |
| | |
Contingent
consideration | |
$ | 4,300 | | |
$ | 6,200 | |
Start-up
cost financing | |
| 3,700 | | |
| 3,700 | |
Contract
asset | |
| (179 | ) | |
| (358 | ) |
Acquisition
contract liabilities, net | |
$ | 7,821 | | |
$ | 9,542 | |
| |
| | | |
| | |
Total
acquisition contract liabilities: | |
| | | |
| | |
Contingent
consideration | |
$ | 4,300 | | |
$ | 6,200 | |
Start-up
cost financing | |
| 7,300 | | |
| 7,300 | |
Contract
asset | |
| (537 | ) | |
| (716 | ) |
Total
acquisition contract liabilities, net | |
$ | 11,063 | | |
$ | 12,784 | |
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 June 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
(in
thousands) | |
Level | | |
June
30, 2022 | | |
December
31, 2021 | |
| |
| | |
| | |
| |
Liabilities: | |
| | | |
| | | |
| | |
Contingent
Consideration | |
| 3 | | |
$ | 4,300 | | |
$ | 6,200 | |
Warrant
liability – 2021 Common warrant | |
| 3 | | |
$ | 1,743 | | |
$ | 12,854 | |
Warrant
liability - 2022 Common warrant | |
| 3 | | |
$ | 3,385 | | |
$ | - | |
Warrant
liability- 2022 Common warrant (Pre-funded) | |
| 2 | | |
$ | 2,918 | | |
$ | - | |
Warrant
liability | |
| 2 | | |
$ | 2,918 | | |
$ | - | |
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 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
(in
thousands) | |
| | |
Balance
at December 31, 2020 | |
$ | 7,602 | |
Change
in fair value of contingent consideration | |
| 998 | |
Balance at June 30, 2021 | |
$ | 8,600 | |
| |
| | |
Balance
at December 31, 2021 | |
$ | 6,200 | |
Change
in fair value of contingent consideration | |
| (1,900 | ) |
Balance
at June 30, 2022 | |
$ | 4,300 | |
Warrant
Liability
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 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 statements of operations.
Warrants
issued in conjunction with the private placement to an institutional shareholder which closed on December 2, 2021 were accounted for
as liabilities in accordance with ASC 815-40. Pre-funded common stock purchase warrants to purchase up to 1,507,143 shares
of our common stock at a nominal exercise price (the “2021 Pre-funded Warrants”) were exercised in 2021 and the common
stock purchase warrants to purchase up to 2,857,143 shares
of our common stock at an exercise price of $5.25 per
share (the “2021 Purchase Warrants”) are presented within warrant
liability in the accompanying 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 statements of operations.
The
Company utilizes a Black-Scholes option pricing model to estimate the fair value of the 2022
Purchase Warrants and 2021 Purchase Warrants which is considered a Level 3 fair value measurement. 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 statements
of operations.
The value of the
2022 Pre-funded Warrants is assumed to be equal to the per share value of the underlying common stock, given that the strike price is
nominal, and is therefore classified as Level 2.
The
following table presents the changes in the warrant liability measured at fair value (in thousands):
Schedule
of Changes in Fair Value Warrant Liabilities
(in
thousands) | |
| | |
Fair
value at December 31, 2021 | |
$ | 12,854 | |
Issuance
of new derivative liabilities | |
| 9,274 | |
Change
in fair value of warrant liability | |
| (14,082 | ) |
Fair
value at June 30, 2022 | |
$ | 8,046 | |
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
(in
thousands): | |
Returns | | |
Co-pay
assistance program | | |
Prompt
pay discounts | | |
Government
and payor rebates | | |
Total | |
Balance
at December 31, 2020 | |
$ | 217 | | |
$ | 52 | | |
$ | 15 | | |
$ | 43 | | |
$ | 327 | |
Provision
related to current period sales | |
| 2 | | |
| 118 | | |
| 5 | | |
| 78 | | |
| 203 | |
Credit
or payments made during the period | |
| (135 | ) | |
| (170 | ) | |
| (4 | ) | |
| (62 | ) | |
| (371 | ) |
Balance at June 30, 2021 | |
$ | 84 | | |
$ | - | | |
$ | 16 | | |
$ | 59 | | |
$ | 159 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance
at December 31, 2021 | |
$ | 43 | | |
$ | 101 | | |
$ | 48 | | |
$ | 54 | | |
$ | 246 | |
Beginning
balance | |
$ | 43 | | |
$ | 101 | | |
$ | 48 | | |
$ | 54 | | |
$ | 246 | |
Provision
related to current period sales | |
| 5 | | |
| 380 | | |
| 11 | | |
| 129 | | |
| 517 | |
Credit
or payments made during the period | |
| (5 | ) | |
| (300 | ) | |
| (20 | ) | |
| (115 | ) | |
| (440 | ) |
Balance
at June 30, 2022 | |
$ | 43 | | |
$ | 181 | | |
$ | 39 | | |
$ | 68 | | |
$ | 331 | |
Ending
balance | |
$ | 43 | | |
$ | 181 | | |
$ | 39 | | |
$ | 68 | | |
$ | 331 | |
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 $126,000 and $18,000 as of June 30, 2022 and December 31, 2021, respectively.
7.
Other Receivables, Related Party
As
of June 30, 2022, the Company has a receivable of $5.6 million
($2.8 short
term and $2.8 long-term)
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 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 June 30, 2022 or December
31, 2021.
The
remaining $0.3 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 three and six months ended June 30, 2022. We recorded a provision of $34k
for Xepi® inventory obsolescence, for the six months ended June 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
(in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
| |
| | |
| |
Receivable
for common stock warrants proceeds | |
$ | - | | |
$ | 3,258 | |
Prepaid
expenses | |
| 599 | | |
$ | 824 | |
Security
deposits | |
| 128 | | |
| 149 | |
Other | |
| 487 | | |
| 756 | |
Total | |
$ | 1,214 | | |
$ | 4,987 | |
10.
Property and Equipment, Net
Property
and equipment, net consists of the following:
Schedule of Property and Equipment
(in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
Computer
equipment | |
$ | 87 | | |
$ | 85 | |
Computer
software | |
| 27 | | |
| 27 | |
Furniture
& fixtures | |
| 81 | | |
| 81 | |
Leasehold
improvement | |
| 368 | | |
| 368 | |
Machinery
& equipment | |
| 145 | | |
| 112 | |
Property
and equipment, gross | |
| 708 | | |
| 673 | |
Less:
Accumulated depreciation | |
| (460 | ) | |
| (406 | ) |
Property
and equipment, net | |
$ | 248 | | |
$ | 267 | |
Depreciation
expense was $26,000
and $33,000, for the
three months ended June 30, 2022, and 2021, respectively, and $54,000
and $66,000 for
the six months ended June 30, 2022 and 2021, respectively, which was included in selling, general and administrative expense in the
statements of operations.
11.
Intangible Asset, Net
Intangible
asset, net consists of the following:
Schedule of Intangible Asset Net
(in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
Xepi®
license | |
$ | 4,600 | | |
$ | 4,600 | |
Less:
Accumulated amortization | |
| (1,359 | ) | |
| (1,150 | ) |
Intangible
asset, net | |
$ | 3,241 | | |
$ | 3,450 | |
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 for the three months ended June 30, 2022 and 2021 was $0.1 million and $0.2 million
for the six months ended June 30, 2022 and 2021.
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. The Company did not recognize any impairment charges during the three or
six months ended June 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 statements
of cash flows:
Schedule of Reconciliation of Cash, Cash Equivalents, and Restricted Cash
(in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
Cash
and cash equivalents | |
$ | 31,913 | | |
$ | 24,545 | |
Short-term
restricted cash | |
| 47 | | |
| 47 | |
Long-term
restricted cash | |
| 150 | | |
| 150 | |
Total
cash, cash equivalent, and restricted cash shown on the statements of cash flows | |
$ | 32,110 | | |
$ | 24,742 | |
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
(in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
Legal
settlement (See note 23) | |
$ | 5,625 | | |
$ | 5,625 | |
Employee
compensation and benefits | |
| 2,302 | | |
| 2,384 | |
Professional
fees | |
| 659 | | |
| 570 | |
Product
revenue allowances and reserves | |
| 331 | | |
| 246 | |
Other | |
| 496 | | |
| 829 | |
Total | |
$ | 9,413 | | |
$ | 9,654 | |
14.
Other Long-Term Liabilities
Other
long-term liabilities consist of the following:
Schedule of Other Long Term Liabilities
(in
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
Legal
settlement – noncurrent (See note 23) | |
$ | 5,625 | | |
$ | 5,625 | |
Other | |
| 25 | | |
| 24 | |
Total | |
$ | 5,650 | | |
$ | 5,649 | |
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 six-month periods ended June 30, 2022 and 2021. Income tax expense incurred for the three and six months ended June
30, 2022 and 2021 relates to state income taxes. At June 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 statements
of operations. As of June 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 six months ended June 30, 2022 were $6.2 million and $11.5 million, respectively, and $1.2
million and $3.9 million for the three and six months ended June 30, 2021. These purchases are recorded in inventories in
the balance sheets, and, when sold, in cost of revenues, related party in the statements of operations. Amounts due and payable to Pharma
as of June 30, 2022 and December 31, 2021 were $1.1 million and $0.3 million, respectively, which were recorded in accounts payable,
related parties in the 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.
If we deem that the Biofrontera Group should continue to provide these services, we will execute a statement of work under the Services
Agreement with respect to such services. 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 $0.3 million and $0.4 million for the three and six months ended June 30, 2022, respectively
and $0.2 million and $0.4 million for the three and six months ended June 30, 2021. These expenses were recorded in selling, general
and administrative, related party. Amounts due to Biofrontera AG related to the service agreement were $0.2 million as of June 30, 2022
and December 31, 2021 which were recorded in accounts payable, related parties in the balance sheets.
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 approximately $16,000 and $31,000 for the three and six months ended June 30,
2022, respectively and $15,000 and $28,000 for the three and six months ended June 30, 2021, and were recorded as revenues, related party.
Amounts due from Bioscience for clinical lamp and other reimbursements were approximately $0.2 million and $92,000 as of June 30, 2022
and December 31, 2021, respectively, which were recorded as other receivables, related party in the 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 six months ended June 30, 2022. For the three and six months ended
June 30, 2021, the amounts reimbursed relating to SPA costs were nil and $0.5 million and were recorded as other income in the statements
of operations as the related expenses were incurred. As of June 30, 2022 and December 31, 2021 amounts due from Maruho, primarily relating
to SPA cost reimbursements, were $67,000 and $56,000 for each of the periods and were recorded in other receivables, related parties
in the balance sheets.
Others
The
Company has recorded a receivable of $5.6 million
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 six months ended June 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 six months ended
June 30, 2022. For the three and six months ended June 30, 2021, restructuring costs were incurred in the amount of $0.5 million.
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 six 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.
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 2,693,311 shares remain eligible for issuance as of June 30,
2022 under the 2021 Plan.
Non-qualified
stock options
During
the quarter ended June 30, 2022, the Company granted non-qualified stock options to certain employees and non-employee directors. The options
were granted on May 18, 2022 with an exercise price of $2.61, a contractual term of ten years and a grant-date fair value of $1.7 million.
Of the total 1,053,434 options granted, 88,000 options were awarded to non-employee directors. The 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.
The employee options vest annually over a three-year period, subject to the recipient’s continued service with the Company through
the applicable vesting dates.
During
the quarter ended March 31, 2022, the Company granted non-qualified stock options to certain employees to purchase 28,378 shares of common
stock under the 2021 Omnibus Incentive Plan. The options were granted to employees on March 2, 2022 with an exercise price of $2.96 and
a contractual term of ten years. These stock options had a grant-date fair value of $44,000 and vest annually over a three-year period,
subject to the recipient’s continued service with the Company through the applicable vesting dates.
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 $0.2 million and $0.3 million was recorded in selling, general and administrative expenses on the
accompanying statement of operations for the three and six months ended June 30, 2022. There was no stock based compensation for the
three and six months ended June 30, 2021.
Options
outstanding and exercisable under the employee share option plan as of June 30, 2022 and a summary of option activity during the six
months then ended is presented below.
Schedule of Stock Unit Activity
| |
Shares | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Contractual
Term | | |
Aggregate
Intrinsic
Value
(1) | |
Outstanding
at December 31, 2021 | |
| 613,614 | | |
$ | 4.77 | | |
| | | |
| | |
Granted | |
| 1,081,812 | | |
$ | 2.62 | | |
| | | |
| | |
Exercised | |
| - | | |
$ | - | | |
| | | |
| | |
Canceled
or forfeited | |
| (63,946 | ) | |
$ | 4.77 | | |
| | | |
| | |
Outstanding at June
30, 2022 | |
| 1,631,480 | | |
$ | 3.34 | | |
| 9.73 | | |
$ | - | |
Exercisable at June
30, 2022 | |
| 7,332 | | |
$ | 2.61 | | |
| 9.88 | | |
$ | - | |
(1) |
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair value
of the common stock for the options that were in the money at June 30, 2022. |
As
of June 30, 2022, there was $2.7 million of unrecognized compensation cost related to unvested stock options, which is expected to be
recognized over a weighted-average period of approximately 2.6 years.
Share-Based
Compensation (RSUs)
During
the quarter ended June 30, 2022, the Company awarded 343,512 Restricted Stock Units (RSUs) to certain members of management. There were
no RSU’s granted during the three months ended March 31, 2022. The fair value of each RSU is estimated based on the closing market
price of the Company’s common stock on the grant date.
The
RSUs had a grant-date fair value of $0.9 million and will vest annually over two years, subject to the recipient’s continued service
with the Company through the applicable vesting dates. Share-based compensation expense of $0.4 million and $0.8 million for the RSUs
was recorded in selling, general and administrative expenses in the accompanying statement of operations for the three and six months
ended June 30, 2022. There was no share-based compensation for the three and six months ended June 30, 2021.
As
of June 30, 2022, there was $0.8 million of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized
over a weighted-average period of approximately 1.9 years.
Schedule of Restricted Stock Units
| |
Shares | | |
Weighted
Average Remaining Contractual Term | | |
Aggregate
Intrinsic
Value | | |
Weighted
Average Grant Date Fair Value |
|
Outstanding
at December 31, 2021 | |
| 170,068 | | |
| | | |
$ | | | |
$ |
4.77 |
|
Awarded | |
| 343,512 | | |
| | | |
$ | | | |
$ |
2.61 |
|
Vested | |
| (170,068 | ) | |
| | | |
$ | | | |
$ |
4.77 |
|
Canceled
or forfeited | |
| - | | |
| | | |
$ | | | |
$ |
- |
|
Outstanding at June
30, 2022 | |
| 343,512 | | |
| 1.38 | | |
$ | 639 | | |
$ |
2.61 |
|
Expected to vest at June 30, 2022 | |
| 343,512 | | |
| 1.38 | | |
$ | 639 | | |
$ |
2.61 |
|
20.
Interest Expense, net
Interest
expense, net consists of the following:
Schedule of Interest Expense
(in
thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
For
three months ended June 30, | | |
For
six months ended June 30, | |
(in
thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Interest
expense | |
$ | (3 | ) | |
$ | - | | |
$ | (7 | ) | |
$ | - | |
Contract
asset interest expense | |
| (89 | ) | |
| (89 | ) | |
| (179 | ) | |
| (179 | ) |
Interest
income – related party | |
| 53 | | |
| - | | |
| 110 | | |
| - | |
Interest income – other | |
| 1 | | |
| 4 | | |
| 5 | | |
| 10 | |
Interest
expense, net | |
$ | (38 | ) | |
$ | (85 | ) | |
$ | (71 | ) | |
$ | (169 | ) |
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, net
Other
income, net consists of the following:
Schedule of Other Income, Net
(in
thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
For
three months ended June
30, | | |
For
six months ended June
30, | |
(in
thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Reimbursed
SPA costs | |
$ | - | | |
$ | 185 | | |
$ | - | | |
$ | 284 | |
Other,
net | |
| 29 | | |
| (30 | ) | |
| 52 | | |
| (50 | ) |
Other
income, net | |
$ | 29 | | |
$ | 155 | | |
$ | 52 | | |
$ | 234 | |
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
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three
Months Ended | | |
Six
Months Ended | |
| |
June
30, | | |
June
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Net
income (loss) | |
$ | (850 | ) | |
$ | (3,661 | ) | |
$ | 4,711 | | |
$ | (7,195 | ) |
| |
| | | |
| | | |
| | | |
| | |
Shares: | |
| | | |
| | | |
| | | |
| | |
Basic
weighted average common shares outstanding | |
| 18,823,497 | | |
| 8,000,000 | | |
| 17,968,870 | | |
| 8,000,000 | |
Add:
Effect of dilutive securities | |
| | | |
| | | |
| | | |
| | |
Stock
options and restricted stock units | |
| - | | |
| - | | |
| 75,304 | | |
| - | |
Diluted
weighted average common shares outstanding | |
| 18,823,497 | | |
| 8,000,000 | | |
| 18,044,174 | | |
| 8,000,000 | |
| |
| | | |
| | | |
| | | |
| | |
Net
earnings (loss) per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.05 | ) | |
$ | (0.46 | ) | |
$ | 0.26 | | |
$ | (0.90 | ) |
Diluted | |
$ | (0.05 | ) | |
$ | (0.46 | ) | |
$ | 0.26 | | |
$ | (0.90 | ) |
The
following table sets forth the potential common shares that were not included in the diluted per share calculations for the six months
ended June 30, 2022 because they would be anti-dilutive:
Schedule of Anti-dilutive Securities Excluded From Computation of Earnings Per Share
Six
Months Ended June 30, | |
2022 | |
Common
stock warrants | |
| 7,768,537 | |
Common stock options | |
| 848,550 | |
Unit Purchase Options | |
| 403,628 | |
Total anti-dilutive securities | |
| 403,628 | |
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 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 $0.2 million for the three months ended June 30, 2022 and 2021, and $0.2 million and $0.4 million for the six months ended
June 30, 2022 and 2021, which was included in selling, general, and administrative expenses.
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 for the three months ended June 30, 2022 and 2021 and $0.3 million and $0.2 million for the six months ended June 30, 2022
and 2021.
The
minimum aggregate payments of all future lease commitments as of June 30, 2022, are as follows:
(in
thousands)
Schedule of Future Commitments and Sublease Income
Years
ending December 31, | |
Future
lease commitments | |
Remainder
of 2022 | |
$ | 414 | |
2023 | |
| 609 | |
2024 | |
| 474 | |
2025 | |
| 352 | |
Thereafter | |
| - | |
Total | |
$ | 1,849 | |
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 six months ended June 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 $11.25 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 June 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 months ended June 30, 2022 and 2021, matching contribution costs paid by the Company were $47,000 and $67,000, respectively.
For the six months ended June 30, 2022 and 2021, matching contribution costs paid by the Company were $0.1 million.
25.
Subsequent Events
We
have completed an evaluation of subsequent events after the balance sheet date of June 30, 2022 through the date this Quarterly Report
on Form 10-Q was submitted to the SEC.
On
July 14, 2022, an investor exercised the 2022 Pre-funded warrants and purchased a total of 1,569,000
shares of common stock at an exercise price of $.001
per share, resulting in net proceeds of $1,569.
On
July 26, 2022, the Company entered into the Inducement Letter with the holder (the “Investor”) of the
Company’s 2021 Purchase Warrants. 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 net proceeds of approximately $4.3 million,
after deducting the financial advisory fees, from the exercise of the 2021 Purchase Warrants by the Investor.
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. The Investor has contractually agreed
to restrict its ability to exercise the Inducement Warrant such that the number of shares of the Company’s common stock held by
the Investor and its affiliates after such exercise does not exceed either 4.99% of the then issued and outstanding shares of the Company’s
common stock. The Investor may increase or decrease these limitations upon notice to the Company, but in no event will any such limitation
exceed 9.99%. The Company has agreed, as soon as practicable (but in no event later than 30 days after the date of the Inducement
Letter) to file a registration statement on Form S-1 to register the resale of the shares of Common Stock underlying the Inducement Warrant
and to have such registration statement declared effective within 90 days of its initial filing.