Biofrontera Inc.: Form 10-Q for the period ended Sep 30, 2023

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:

• our reliance on sales of products we license from other companies as our sole source of revenue;
• the success of our competitors in developing generic topical dermatological products that successfully compete with our licensed products;
• the success of our principal licensed product Ameluz®;
• the ability of Biofrontera Pharma, Biofrontera Bioscience and Ferrer Internacional S.A. (“Ferrer”), referred to collectively as our (“licensors”) to establish and maintain relationships with contract manufacturers that are able to supply us with enough of the licensed products to meet our demand;
• the ability of our licensors or our licensors’ manufacturing partners, as applicable, to supply Ameluz®, BF-RhodoLED® lamps, Xepi® or other licensed products that we market in sufficient quantities and at acceptable quality and cost levels, and to fully comply with current good manufacturing practice or other applicable manufacturing regulations;
• the ability of our licensors to successfully defend or enforce patents related to our licensed products;

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• the availability of insurance coverage and medical expense reimbursement for our licensed products;
• the impact of legislative and regulatory changes;
• competition from other pharmaceutical and medical device companies and existing treatments, such as simple curettage and cryotherapy;
• our success in achieving profitability;
• our ability to obtain additional financing as needed to implement our growth strategy;
• the effect of the COVID-19 global pandemic, including mitigation efforts and economic effects;
• our ability to retain and recruit key personnel;
• such other risks identified in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, Item 1A of Part II of this Quarterly Report on Form 10-Q and any other filings with the SEC.

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, 2022. We urge investors and security holders to read those documents free of charge at the SEC’s web site at www.sec.gov (http://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.

Note About Reverse Stock Split

All information included in these consolidated financial statements has been adjusted, on a retrospective basis, to reflect our 1-for-20 Reverse Stock Split as if it had been effective from the beginning of the earliest period presented, unless otherwise stated.

Overview

Biofrontera Inc (the “Company” or “Biofrontera”). is a U.S.-based biopharmaceutical company commercializing a portfolio of pharmaceutical products for the treatment of dermatological conditions with a focus on photodynamic therapy (“PDT”) and topical antibiotics. The Company’s licensed products are used for the treatment of actinic keratoses, which are pre-cancerous skin lesions as well as impetigo, a bacterial skin infection. In May 2023, the Company began research and development (“R&D”) activities to support PDT growth and will continue to opportunistically invest in these activities going forward. Our research and development program currently aims to improve the capabilities of our BF-RhodoLED® lamps to better fulfill the needs of dermatologists and improve the effectiveness of our commercial team by letting sales representatives carry approved devices with them allowing for easier product demonstrations and evaluations.

Biofrontera includes its wholly owned subsidiary Bio-FRI GmbH (“Bio-Fri”), a limited liability company organized under the laws of Germany. Our subsidiary, Bioi-FRI was formed on February 9, 2022, as a German presence to facilitate our relationship with the Ameluz Licensor.

Our principal licensed product is Ameluz®, which is a prescription drug approved for use in combination with the RhodoLED® lamp series, for PDT. In the United States, the PDT treatment is used for the lesion-directed and field-directed treatment of actinic keratoses (“AK”) 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”) between Biofrontera and the Ameluz Licensors.

Our second prescription drug licensed 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, a common skin infection, due to Staphylococcus aureus or Streptococcus pyogenes. It is approved for use in the United States in adults and children 2 months and older. We are currently selling Xepi® for this indication in the United States. under an exclusive license and supply agreement, as amended (“Xepi LSA”) with Ferrer Internacional S.A. (“Ferrer”) that was assumed by Biofrontera on March 25, 2019 through our acquisition of Cutanea Life Sciences, Inc.(“Cutanea”). There has been limited revenue during the current reporting periods and recent developments with the third-party manufacturer that was providing our supply of Xepi® have resulted in further delays of our commercialization of the product. However, Ferrer is qualifying a new Contract manufacturer, Cambrex, which is expected to begin production early 2024.

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:

• expanding our sales in the United States of Ameluz® in combination with the BF-RhodoLED® lamp for the treatment of minimally to moderately thick actinic keratoses of the face and scalp and positioning Ameluz® to be the standard of care in the United States by growing our dedicated sales and marketing infrastructure in the United States;
• leveraging the potential for future approvals and label extensions of our portfolio products that are in the pipeline for the U.S. market through the LSAs with our Licensors; and
• opportunistically adding complementary products or services to our portfolio by acquiring or licensing IP to further leverage our commercial infrastructure and customer relationships.

We devote a substantial portion of our cash resources to the commercialization of our licensed products, Ameluz® and the BF-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-U.S. GAAP measure as defined below). Our sole source of product 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.

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. Although we have inventory of Xepi® on hand, we expect a delay in further shipments of Xepi® for the next 6 to 12 months. 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 BF-RhodoLED®.

Components of Our Results of Operations

Product Revenue, net

We generate product revenues through the third-party sales of our licensed products Ameluz®, BF-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 BF-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:

• the level of orders generated by our sales force;
• the level of prescriptions and institutional demand for our licensed products; and
• unit sales prices.

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 BF-RhodoLED® lamps from Biofrontera Pharma GmbH and insignificant inventory adjustments due to scrapped, expiring and excess products.

On October 8, 2021, we entered into an amendment to the Ameluz LSA under which the price we pay per unit will be based upon our sales history. As a result of this amendment, the purchase price we pay the Ameluz Licensor for Ameluz® will be determined in the following manner:

• fifty percent of the anticipated net price per unit until we generate $30 million in revenue from sales of the products we license from the Ameluz Licensor during a given Commercial Year (as defined in the Ameluz LSA);
• forty percent of the anticipated net price per unit for all revenues we generate between $30 million and $50 million from sales of the products we license from the Ameluz Licensor; and
• thirty percent of the anticipated net price per unit for all revenues we generate above $50 million from sales of the products we license from the Ameluz Licensor.

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 and accounting services. Selling, general and administrative expenses also include the amortization of our intangible asset and our legal settlement expenses.

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 IT support, and pharmacovigilance. 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 supersede 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 for as long as we deem necessary. 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. As of September 30, 2023, we have migrated most of our significant IT services from Biofrontera AG to third party providers.

Research and Development

Our current research and development programs aim to improve the capabilities of our BF-RhodoLED® lamps to better fulfill the needs of dermatologists and improve the effectiveness of our commercial team.

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 in the consolidated statement 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.

Warrant Inducement Expense

The warrant inducement expense represents the accounting fair value of consideration issued to induce conversion of the 2021 Purchase Warrant. On July 26, 2022, the Company entered into the Inducement Letter, in which the Company agreed to lower the exercise price of the 2021 Purchase Warrant and issue a new warrant (the “Inducement Warrant”) in exchange for $4.6 million in proceeds.

Change in Fair Value of Investment, Related Party

Our investment is comprised of equity securities in shares of Biofrontera AG, which are initially recorded at cost, plus transaction costs, and subsequently measured at fair value, based on quoted market prices, with the gains and losses reported in the Company’s consolidated statement of operations along with gains and losses on securities we sold during the period. For the investments held in foreign currencies, the change in fair value attributable to changes in foreign exchange rates is also included in gains and losses in the consolidated statement of operations.

The Company may sell its equity securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or other factors.

Interest Expense, net

Interest expense, net, primarily consists of amortization of the contract asset related to the start-up cost financing from Maruho under the Share Purchase and Transfer Agreement dated March 25, 2019 (as amended, the “Share Purchase Agreement”), and interest expense related to our Loan and Security Agreement with MidCap Business Credit LLC, 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 BF-RhodoLED® lamps.

Other Income (Expense), net

Other income (expense), net primarily includes (i) gain (loss) on sale of leased assets 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, 2023 and 2022

The following table summarizes our results of operations for the three months ended September 30, 2023 and 2022:

(in thousands)

Product Revenue, net

Net product revenue for the three months ended September 30, 2023 increased by $4.6 million, or 107.0% as compared to the three months ended September 30, 2022. This increase was driven by a higher volume of Ameluz revenue in Q3 2023, caused in part by an expansion of our sales force in 2023, higher adoption of Ameluz by dermatologists, as well as the buy-in impact due to a price increase. Our price for Ameluz increased by 5% on October 1, 2023, causing some dermatologists to accelerate their purchases of Ameluz in Q3 2023. We increased our price on April 1, 2022, and thus revenues in Q3 2022 were not impacted by the effects of the previous increase.

Operating Expenses

Cost of Revenues, Related Party

Cost of revenues, related party for the three months ended September 30, 2023 increased by $2.4 million, or 111.3% as compared to the three months ended September 30, 2022. This was driven by the increase in Ameluz product revenue. Cost of revenues, related party, is directly correlated to the selling price of Ameluz under the Ameluz LSA.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2023 increased by $0.9 million, or 11.0% as compared to the three months ended September 30, 2022. The increase was primarily driven by $0.8 million of personnel costs, due to higher sales and medical headcount. This increase reflects a realignment of our workforce strategy to reduce selling, general and administrative costs and deploy some of these costs to revenue generating functions. The increase was further driven by $0.4 million of legal expenses and $0.1 million of increase sales and marketing expense. These expenses were offset by a decrease of $0.3 million in non-recurring issuance costs, related to our liability classified warrants incurred in Q3 2022.

Change in Fair Value of Contingent Consideration

The change in fair value of contingent consideration was an increase of $0.2 million for the three months ended September 30, 2023 compared to a decrease of $2.2 million for the three months ended September 30, 2022. 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. The estimated profit share was reduced in Q3 2022 after receiving notification of third-party manufacturing delays that impacted the timing of sales expansion and improved market positioning of the Xepi® product.

Change in Fair Value of Warrant Liabilities

The change in fair value of warrant liabilities was $0.6 million for three months ended September 30, 2023 compared to $3.8 million for the three months ended September 30, 2022. The change in fair value of warrant liabilities was driven primarily by changes in the underlying value of the Common Stock.

Warrant Inducement Expense

The warrant inducement expense was $2.6 million for the three months ended September 30, 2022. The change was driven by changes in the underlying value of the Common Stock, related to the modification and exercise of the 2021 Purchase Warrant in Q3 2022.

Change in fair value of investment, related party

The change in fair value of investment, related party was a decrease of $2.2 million, driven by changes in the quoted market price of the common stock of Biofrontera AG and losses on such securities we sold during the period.

Comparison of the nine months ended September 30, 2023 and 2022

The following table summarizes our results of operations for the nine months ended September 30, 2023 and 2022:

(in thousands)

Product Revenue, net

Net product revenue for the nine months ended September 30, 2023 increased by $4.9 million, or 26.8% as compared to the nine months ended September 30, 2022. The increase was primarily driven by a higher volume of Ameluz sales in Q3 2023 due to the expansion of the sales team and higher adoption of Ameluz by dermatologists of $4.8 million and the impact of a higher average Ameluz selling price in 2023 of $0.1 million.

Cost of Revenues, Related Party

Cost of revenues, related party for the nine months ended September 30, 2023 increased by $2.3 million, or 24.3% as compared to the nine months ended September 30, 2022. This was driven by the increase in Ameluz product revenue. Cost of revenues, related party, is directly correlated to the selling price of Ameluz under the Ameluz LSA.

Operating Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended September 30, 2023 increased by $4.8 million, or 19.3% as compared to the nine months ended September 30, 2022. The increase was primarily driven by personnel-related expenses of $2.9 million, reflecting a realignment of our workforce strategy to reduce selling, general and administrative costs and deploy some of these costs to revenue generating functions. The increase is further driven by sales related travel and medical education expenses of $0.7 million, external legal expenses related to a legal settlement of $1.2 million and other non-recurring legal costs of $1.2 million; partially offset by issuance costs related to liability classified warrants of $1.0 million incurred in 2022 and a decrease of $0.6 million in business insurance.

Selling, General and Administrative Expenses, Related Party

Selling, general and administrative expenses for the nine months ended September 30, 2023 decreased by $0.4 million, or 68.5% as compared to the nine months ended September 30, 2022. Related party expenses are based on statements of work issued under the Services Agreement with the Biofrontera Group. We currently have statements of work in place regarding IT, regulatory affairs, medical affairs, pharmacovigilance, and investor relations services. The decrease is driven by the Company utilizing fewer IT services from the Biofrontera Group in the current year when compared to the prior year.

Change in Fair Value of Contingent Consideration

The change in fair value of contingent consideration was an increase of $0.1 million for the nine months ended September 30, 2023, compared to a decrease of $4.1 million for the nine months ended September 30, 2022. 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. The estimated profit share was reduced in Q3 2022 after receiving notification of third-party manufacturing delays that impacted the timing of sales expansion and improved market positioning of the Xepi® product.

Change in Fair Value of Warrant Liabilities

The change in fair value of warrant liabilities was a decrease of $2.0 million for the nine months ended September 31, 2023 and a decrease of $17.9 million for the nine months ended September 30, 2022. The change in fair value of warrant liabilities was driven primarily by a decrease in the underlying value of our Common Stock.

Warrant Inducement Expense

The warrant inducement expense was $2.6 million for the nine months ended September 30, 2022. The change was driven by changes in the underlying value of the Common Stock, related to the modification and exercise of the 2021 Purchase Warrant in July 2022.

Change in fair value of investment, related party

The change in fair value of investment, related party was a decrease of $6.6 million, driven by changes in the quoted market price of the common stock of Biofrontera AG and losses on such securities we sold during the period.

Net Income (Loss) to Adjusted EBITDA Reconciliation for the Three and Nine Months Ended September 30, 2023 and 2022

We define adjusted EBITDA as net income or loss before interest income and expense, income taxes, depreciation and amortization, and other non-operating items from our consolidated statements of operations as well as certain other items considered outside the normal course of our operations specifically described below. Adjusted EBITDA is not a presentation made in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Our definition of adjusted EBITDA may vary from the use of similarly titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. Adjusted EBITDA should not be considered as an alternative to net income or loss, operating income/(loss), cash flows from operating activities or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance or liquidity. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.

Change in fair value of contingent consideration: Pursuant to the Share Purchase Agreement, the profits from the sale of Cutanea products will be shared equally between Maruho and Biofrontera until 2030. The fair value of the contingent consideration was determined to be $6.5 million on the acquisition date and is re-measured at each reporting date, with changes in fair value presented within the consolidated statements of operations. We exclude the impact of the change in fair value of contingent consideration as this is not currently payable and is a non-cash adjustment.

Change in fair value of warrant liabilities: The Warrants issued in conjunction with our private placement offerings were accounted for as liabilities in accordance with ASC 815-40. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the consolidated statements of operations. We exclude the impact of the change in fair value of warrant liabilities as this is non-cash.

Warrant inducement expense: The warrant inducement expense was determined using the Black-Scholes option pricing model and was calculated as the difference between the fair value of the 2021 Purchase Warrant prior to, and immediately after, the reduction in the exercise price on the date of repricing in addition to the fair value of the Inducement Warrant issued and is presented within the statement of operations. We exclude the impact of the change in fair value of the warrant modification as this is non-cash.

Change in fair value of investment, related party: The Company accounts for its investment, related party in accordance with ASC 321, *Investments — Equity Securities (“*ASC 321”). Equity securities, which are comprised of investments in common stock, are initially recorded at cost, plus transaction costs, and subsequently measured at fair value, based on quoted market prices, with the gains and losses reported in the Company’s consolidated statement of operations. For the investments held in foreign currencies, the change in fair value attributable to changes in foreign exchange rates is included in gains and losses in the consolidated statements of operations. We exclude the impact of the change in fair value of investments as this is non-cash.

Legal settlement expenses: To measure operating performance, we exclude legal settlement expenses. We do not expect to incur these types of legal expenses on a recurring basis and believe the exclusion of such amounts allows management and the users of the financial statements to better understand our financial results.

Stock Based Compensation: To measure operating performance, we exclude the impact of costs relating to share-based compensation. Due to the subjective assumptions and a variety of award types, we believe that the exclusion of share-based compensation expense, which is typically non-cash, allows for more meaningful comparisons of our operating results to peer companies. Share-based compensation expense can vary significantly based on the timing, size and nature of awards granted.

Adjusted EBITDA margin is adjusted EBITDA for a particular period expressed as a percentage of revenues for that period.

We use adjusted EBITDA to measure our performance from period to period and to compare our results to those of our competitors. In addition to adjusted EBITDA being a significant measure of performance for management purposes, we also believe that this presentation provides useful information to investors regarding financial and business trends related to our results of operations and that when non-U.S. GAAP financial information is viewed with U.S. GAAP financial information, investors are provided with a more meaningful understanding of our ongoing operating performance.

The below table presents a reconciliation from net income (loss) to Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022:

Adjusted EBITDA

Adjusted EBITDA increased from ($5.0) million during the three months ended September 30, 2022 to ($3.9) million for the three months ended September 30, 2023. The increase in Adjusted EBITDA is primarily driven by higher revenues of $4.6 million, net of increased cost of revenues of $2.4 million; partially offset by an increase in our selling, general, and administrative costs of $1.2 million.

Adjusted EBITDA decreased from ($14.1) million during the nine months ended September 30, 2022 to ($15.8) million for the nine months ended September 30, 2023. The decrease in Adjusted EBITDA is primarily driven by an increase in selling, general and administrative costs of $4.5 million, due primarily to increased personnel costs related to increased headcount to expand key customer facing roles and severance agreements relating to the realignment of our workforce strategy. This is partially offset by an increase in our revenues of $4.9 million, net of increased cost of revenues of $2.1 million. We expect our revenues to continue to increase throughout the remainder of the year as our commercial team increases productivity after an expansion earlier in the year.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are its existing cash balances, cash collected from the sales of its products, proceeds from the sale of our investment, related party, and cash flows from a revolving line of credit. As of September 30, 2023, we had cash and cash equivalents of $3.4 million and investment, related party of $3.3 million, compared to $17.2 million and $10.5 million as of December 31, 2022, respectively.

Since we commenced operations in 2015, we have generated significant losses. For the nine months ended September 30, 2023 and 2022, we incurred loss from operations of $18.8 million and $13.0 million, respectively. We incurred net cash outflows from operations of $16.0 million and $7.9 million, for the same periods, respectively. We had an accumulated deficit as of September 30, 2023 of $103.2 million. Additionally, we expect to continue to incur operating losses due to significant discretionary sales and marketing, medical affairs, and dermatology community outreach efforts as we seek to expand the commercialization of our licensed products in the United States.

In connection with our assessment of going concern considerations under applicable accounting standards, the Company’s management has determined that substantial doubt exists about our ability to continue as a going concern for at least one year from the date the unaudited condensed consolidated financial statements were issued.

The future viability of the Company is dependent on its ability to continue to execute its growth plan and raise additional capital or find alternative methods of financing to fund its operations during the first half of 2024, and until cash flow from operations is sufficient, if ever. We have implemented plans to improve our working capital position, particularly around inventory levels. We have not placed any orders nor plan to place any orders for 2024 deliveries in 2023. We expect to need a delivery sometime in Q3 2024, depending on sales between now and then, and will place the appropriate orders in early 2024. Management believes that the anticipated implementation of such plans, together with the recent net capital raise of $4.1 million will provide the opportunity for the Company to continue as a going concern. However, no assurance can be given that the Company will be successful in these efforts.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above. There could be a material adverse effect on the Company and its financial statements if management’s plans are not achieved on a timely basis.

Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:

• the costs of our commercialization activities for Ameluz®;
• the extent to which we acquire or invest in licensed products, businesses and technologies;
• the extent to which we choose to establish collaboration, co-promotion, distribution or other similar agreements for our licensed products;
• the cost to fulfill our contractual obligations for various operating leases on vehicles and office space;
• the ability to liquidate our investment in equity securities on a timely basis; and
• the requirement to pay back $7.3 million of start-up cost financing to Maruho and make any contingent profit- sharing payments to Maruho in connection with the Cutanea acquisition.

We will continue to assess our operating costs and expenses and our cash and cash equivalents and, if circumstances warrant, we will make appropriate adjustments to our operating plan.

Cash Flows

The following table summarizes our cash provided by and (used in) operating, investing and financing activities:

(in thousands)

Operating Activities

During the nine months ended September 30, 2023, operating activities used $16.0 million of cash, primarily resulting from our loss from operations of $23.7 million, adjusted for non-cash expense of stock-based compensation of $0.8 million, non-cash interest expense of $0.3 million, depreciation and amortization in the aggregate of $0.8 million, net cash used by changes in our operating assets and liabilities of $0.9 million, the change in fair value of contingent consideration of $0.1 million and the change in fair value of investment, related party of $6.6 million; partially offset by the change in fair value of warrant liabilities of $2.0 million.

During the nine months ended September 30, 2022, operating activities used $7.9 million of cash, primarily resulting from our net income of $1.1 million, decreased by the non-cash change in fair value of warrant liabilities of $15.3 million and the change in fair value of contingent consideration of $3.4 million and offset by the non-cash expense of stock-based compensation of $1.5 million, $0.4 million depreciation and amortization, $0.3 million interest expense as well as $7.3 million of working capital changes.

Investing Activities

During the nine months ended September 30, 2023, net cash provided by investing activities of $0.5 million consisted of the proceeds from the sales of equity investments, partially offset by the purchase of machinery & computer equipment.

During the nine months ended September 30, 2022 investing activities used $3.1 million, primarily resulting from the distribution of a short-term loan of $3.1 million, which was repayable at the option of the holder, Quirin PrivatbankAG, in cash or in shares of Biofrontera AG acquired with the funds from the loan.

Financing Activities

During the nine months ended September 30, 2023, net cash from financing activities consisted of a net $1.7 million of proceeds from our line of credit.

During the nine months ended September 30, 2022, net cash from financing activities was $14 million driven entirely by proceeds from the sale of Common Stock and warrants in a private placement, as well as the exercise of warrants.

Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles of the United States, or U.S. GAAP. The preparation of the financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions by management that affect the value of assets and liabilities, as well as contingent assets and liabilities, as reported on the balance sheet date, and revenues and expenses arising during the reporting period. The main areas in which assumptions, estimates and the exercising of a degree of judgment are appropriate relate to fair value measurements of contingent consideration, warrant liabilities, and stock compensation. 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.

Our significant accounting policies are described in more detail in Note 2 – Summary of Significant Accounting Policies, to our consolidated financial statements included in our reaudited consolidated financial statements for the fiscal years ended December 31, 2022 and 2021 (“reaudited Consolidated Financial Statements”), filed in a Current Report on From 8-K with the SEC on October 3, 2023.

Critical Accounting Estimates

A summary of our critical accounting estimates is included in the Company’s revised Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal years ended December 31, 2022 and December 31, 2021 (“revised MD&A”), filed in a Current Report on From 8-K with the SEC on October 3, 2023 for the year ended December 31, 2022. There were no material changes to our critical accounting estimates for the nine months ended September 30, 2023.

Off-balance Sheet Arrangements

Other than those items reflected in Note 18. Commitments and Contingencies we did not have during the periods presented, and we do not currently have, any other off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to take advantage of such extended transition period, which means that when an accounting standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the most recent fiscal quarter ended September 30, 2023 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).

As a smaller reporting company, we are not required to provide disclosure pursuant to this item in this Form 10-Q. However, as of the date of this Quarterly Report, other than as set forth below, there have been no material changes with respect to those risk factors previously disclosed under “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the Securities and Exchange Commission on March 13, 2023 (the “Form 10-K”). The following should be carefully considered, together with other information in this Quarterly Report on Form 10-Q, our Form 10-K, and our other filings with the SEC before making investment decisions regarding our Common Stock.

The results of our research and development efforts are uncertain and there can be no assurance they will enhance the commercial success of our products.

We believe that we will need to incur additional research and development expenditures to improve the capabilities of our BF-RhodoLED® lamps to better fulfill the needs of dermatologists and may also incur research and development expenditures to develop new products. The products we are developing and may develop in the future may not be technologically successful. At this time, we have limited internal research and development personnel, which makes us dependent on consulting relationships.

In addition, the length of our product development cycle may be greater than we originally expected, and we may experience delays in product development. If our resulting products are not technologically successful, they may not achieve market acceptance or compete effectively with our competitors’ products and services.

There is substantial doubt about our ability to continue as a “going concern.”

In connection with our assessment of going concern considerations under applicable accounting standards, the Company’s management has determined that our growth plans, upcoming inventory purchases and a final settlement payment to DUSA Pharmaceuticals, Inc. substantial doubt exists about our ability to continue as a going concern through approximately one year from the date the unaudited condensed financial statements included in Item 1. “Financial Statements” were issued. The future viability of the Company is dependent on its ability to continue to execute its growth plan and raise additional capital or find alternative methods of financing to fund its operations. There can be no guarantee that the actions presently being taken by the Company will be successful in raising additional capital or finding alternative methods of financing. If the Company is not successful in these endeavors, it would likely have a material adverse effect on the Company’s business, results of operations and financial condition.

For additional discussion of the risks and uncertainties that affect our business, see “Item 1A. Risk Factors” included in our Form 10-K.