Biofrontera Inc. 10-Q

Item 1. Financial Statements BIOFRONTERA INC. BALANCE SHEETS ( In thousands, except par value and share amounts ) March 31, 2022 December 31, 2021 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 22,428 $ 24,545 Accounts receivable, net 5,172 3,784 Other receivables, related party 8,686 8,647 Inventories 4,872 4,458 Prepaid expenses and other current assets 1,373 4,987 Total current assets 42,531 46,421 Other receivables long term, related party 2,813 2,813 Property and equipment, net 245 267 Intangible asset, net 3,345 3,450 Other assets 268 268 Total assets $ 49,202 $ 53,219 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 302 $ 658 Accounts payable, related parties 269 282 Acquisition contract liabilities, net 3,242 3,242 Accrued expenses and other current liabilities 8,546 9,654 Total current liabilities 12,359 13,836 Long-term liabilities: Acquisition contract liabilities, net 9,632 9,542 Warrant liability 4,143 12,854 Other liabilities 5,652 5,649 Total liabilities $ 31,786 $ 41,881 Commitments and contingencies (see Note 23) - Stockholders’ equity: Preferred Stock, $ 0.001 par value, 20,000,000 shares authorized, zero shares issued and outstanding as of March 31, 2022 and December 31, 2021 $ - $ - Common Stock, $ 0.001 par value, 300,000,000 shares authorized; 17,104,749 shares issued and outstanding as of March 31, 2022 and December 31, 2021 17 17 Additional paid-in capital 90,717 90,200 Accumulated deficit ( 73,318 ) ( 78,879 ) Total stockholders’ equity 17,416 11,338 Total liabilities and stockholders’ equity $ 49,202 $ 53,219 The accompanying notes are an integral part of these financial statements. 3 BIOFRONTERA INC. STATEMENTS OF OPERATIONS ( In thousands, except per share amounts and number of shares ) (Unaudited) 2022 2021 Three Months Ended March 31, 2022 2021 Products revenues, net $ 9,736 $ 4,731 Revenues, related party 15 13 Total revenues, net 9,751 4,744 Operating expenses Cost of revenues, related party 4,975 2,408 Cost of revenues, other 175 163 Selling, general and administrative 7,616 4,758 Selling, general and administrative, related party 95 164 Restructuring costs - 281 Change in fair value of contingent consideration - 498 Total operating expenses 12,861 8,272 Loss from operations ( 3,110 ) ( 3,528 ) Other income (expense) Change in fair value of warrant liabilities 8,711 - Interest expense, net ( 33 ) ( 84 ) Other income, net 23 79 Total other income (expense) 8,701 ( 5 ) Income (loss) before income taxes 5,591 ( 3,533 ) Income tax expense 30 1 Net income (loss) $ 5,561 $ ( 3,534 ) Income (loss) per common share: Basic $ 0.33 $ ( 0.44 ) Diluted $ 0.32 $ ( 0.44 ) Weighted-average common shares outstanding: Basic 17,104,749 8,000,000 Diluted 17,133,218 8,000,000 The accompanying notes are an integral part of these financial statements. 4 BIOFRONTERA INC. STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except number of shares) (Unaudited) Three Months Ended March 31, 2022 and 2021 Shares Amount In Capital Deficit Total Common Stock Additional Paid- Accumulated Shares Amount In Capital Deficit Total Balance, January 1, 2021 8,000,000 $ 8 $ 46,986 $ ( 41,166 ) $ 5,828 Net loss - - - ( 3,534 ) ( 3,534 ) Balance, March 31, 2021 8,000,000 $ 8 $ 46,986 $ ( 44,700 ) $ 2,294 Balance, January 1, 2022 17,104,749 $ 17 $ 90,200 $ ( 78,879 ) $ 11,338 Stock-based compensation - - 517 - 517 Net income - - - 5,561 5,561 Net income (loss) - - - 5,561 5,561 Balance, March 31, 2022 17,104,749 $ 17 $ 90,717 $ ( 73,318 ) $ 17,416 The accompanying notes are an integral part of these financial statements. 5 BIOFRONTERA INC. STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) 2022 2021 Three Months Ended March 31, 2022 2021 Cash Flows From Operating Activities: Net income (loss) $ 5,561 $ ( 3,534 ) Adjustments to reconcile net income (loss) to cash flows used in operations Depreciation 26 33 Amortization of acquired intangible assets 105 105 Change in fair value of contingent consideration - 498 Change in fair value of warrant liabilities ( 8,711 ) - Stock-based compensation 517 - Provision for inventory obsolescence - 35 Provision for (recovery of) doubtful accounts 42 - Non-cash interest expense 89 89 Changes in operating assets and liabilities: Accounts receivable ( 1,430 ) 1,509 Other receivables, related party ( 38 ) - Prepaid expenses and other assets 3,614 ( 83 ) Inventories ( 414 ) ( 1,366 ) Accounts payable and related party payables ( 366 ) ( 922 ) Accrued expenses and other liabilities ( 1,107 ) 193 Cash flows used in operating activities ( 2,112 ) ( 3,443 ) Cash flows from investing activities Purchases of property and equipment ( 5 ) - Cash flows used in investing activities ( 5 ) - Net decrease in cash and cash equivalents ( 2,117 ) ( 3,443 ) Cash, cash equivalents and restricted cash, at the beginning of the period 24,742 8,277 Cash, cash equivalents and restricted cash, at the end of the period $ 22,625 $ 4,834 Supplemental disclosure of cash flow information Interest paid $ 4 $ - Income tax paid, net $ 30 $ 1 Supplemental non-cash investing and financing activities Deferred offering costs included in accrued expenses and other liabilities $ - $ 312 The accompanying notes are an integral part of these financial statements. 6 Biofrontera Inc. 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 results 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 received in 2021. As of March 31, 2022, we had cash and cash equivalents of $ 22.4 million, compared to $ 24.5 million as of December 31, 2021. Since we commenced operations in 2015, we have generated significant losses. For the three months ended March 31, 2022 and 2021, we incurred losses from operations of $ 3.1 million and $ 3.5 million, respectively. We incurred net cash outflows from operations of $ 2.1 million and $ 3.4 million, for the same periods, respectively. We had an accumulated deficit as of March 31, 2022 of $ 73.3 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, internal controls and similar 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. These factors raise doubt about our ability to continue as a going concern, which we have determined are mitigated by the following plans. Based on current operating plans and financial forecasts, we expect that our current cash and cash equivalents will be sufficient to fund our operations for at least the next twelve months from the date of issuance of our financial statements. However, we expect to have to obtain either equity or debt financing to support our future long-term growth and to mitigate the risk of our operating costs significantly exceeding the amounts currently estimated. 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. 7 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 March 31, 2022, the Company’s operating results for the three months ended March 31, 2022 and 2021, and the Company’s cash flows for the three months ended March 31, 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 three months ended March 31, 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. 8 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) March 31, 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 $ 6,200 $ 6,200 Start-up cost financing 3,700 3,700 Contract asset ( 268 ) ( 358 ) Acquisition contract liabilities, net $ 9,632 $ 9,542 Total acquisition contract liabilities: Contingent consideration $ 6,200 $ 6,200 Start-up cost financing 7,300 7,300 Contract asset ( 626 ) ( 716 ) Acquisition contract liabilities, net $ 12,874 $ 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 March 31, 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 March 31, 2022 December 31, 2021 Liabilities: Contingent Consideration 3 $ 6,200 $ 6,200 Warrant liability- Purchase warrant 3 $ 4,143 $ 12,854 9 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 498 Balance at March 31, 2021 $ 8,100 Balance at December 31, 2021 $ 6,200 Change in fair value of contingent consideration - Balance at March 31, 2022 $ 6,200 Warrant Liability 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 “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 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 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 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 Change in fair value of warrant liability ( 8,711 ) Fair value at March 31, 2022 $ 4,143 10 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®. We generated $ 9.6 million of Ameluz® revenue, $ 0.1 million Xepi® revenue, and $ 0.1 million of BF-RhodoLED® lamps revenue during the three months ended March 31, 2022. We generated $ 4.5 million of Ameluz® revenue, minimal Xepi® revenue, and $ 0.2 million of BF-RhodoLED® lamps revenue during the three months ended March 31, 2021. 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 1 87 3 23 114 Credit or payments made during the period ( 120 ) ( 88 ) ( 2 ) ( 25 ) ( 235 ) Balance at March 31, 2021 $ 98 $ 51 $ 16 $ 41 $ 206 Balance at December 31, 2021 $ 43 $ 101 $ 48 $ 54 $ 246 Provision related to current period sales 3 165 5 45 218 Credit or payments made during the period ( 5 ) ( 150 ) ( 17 ) ( 52 ) ( 224 ) Balance at March 31, 2022 $ 41 $ 116 $ 36 $ 47 $ 240 6. Accounts Receivable, net Accounts receivable 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 $ 60,000 and $ 18,000 as of March 31, 2022 and December 31, 2021, respectively. 7. Other Receivables, Related Party The Company has recorded a receivable of $ 11.3 million due from Biofrontera AG for its 50% share of a legal settlement for which both parties are jointly and severally liable for the total settlement amount of $ 22.5 million. 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 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. Of the total receivable $ 8.4 million is short-term and $ 2.8 million is long-term. As of May 11, Biofrontera AG has not paid the first reimbursement amount to the Company. We determined that the potential of Biofrontera AG to default on its obligation was less than probable. This is supported by the March 31, 2022 Amended Settlement Allocation Agreement between the Company and Biofrontera AG. The Amended 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 ® ). A s such , no reserve for the receivable has been recorded as of March 31, 2022 or December 31, 2021. 11 The remaining $ 0.2 million of other receivables, related party pertains to service agreements and chargebacks. See Note 16- Related Party Transactions . 8. Inventories Inventories are comprised of Ameluz ® , Xepi® and the BF-RhodoLED ® finished products. In assessing the consumption of inventories, the sequence of consumption is assumed to be based on the first-in-first-out (FIFO) method. There was no provision for obsolescence recorded for the three months ended March 31, 2022. We recorded a provision of $ 35,000 for Xepi® inventory obsolescence, for the three months ended March 31, 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) March 31, 2022 December 31, 2021 Receivable for common stock warrants proceeds $ - $ 3,258 Prepaid expenses 723 $ 824 Security deposits 128 149 Other 522 756 Total $ 1,373 $ 4,987 10. Property and Equipment, Net Property and equipment, net consists of the following: Schedule of Property and Equipment (in thousands) March 31, 2022 December 31, 2021 Computer equipment $ 87 $ 85 Computer software 27 27 Furniture & fixtures 81 81 Leasehold improvement 368 368 Machinery & equipment 114 112 Property and equipment, gross 677 673 Less: Accumulated depreciation ( 432 ) ( 406 ) Property and equipment, net $ 245 $ 267 Depreciation expense was $ 26,000 and $ 33,000 , for the three months ended March 31, 2022, and 2021, respectively, which was included in selling, general and administrative expense on the statements of operations. 11. Intangible Asset, Net Intangible asset, net consists of the following: Schedule of Intangible Asset Net (in thousands) March 31, 2022 December 31, 2021 Xepi® license $ 4,600 $ 4,600 Less: Accumulated amortization ( 1,255 ) ( 1,150 ) Intangible asset, net $ 3,345 $ 3,450 12 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 March 31, 2022 and 2021 was $ 0.1 million. 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 months ended March 31, 2022 or March 31, 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) March 31, 2022 December 31, 2021 Cash and cash equivalents $ 22,428 $ 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 $ 22,625 $ 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) March 31, 2022 December 31, 2021 Legal settlement (See note 23) $ 5,625 $ 5,625 Employee compensation and benefits 1,440 2,384 Professional fees 514 570 Product revenue allowances and reserves 240 246 Other 727 829 Total $ 8,546 $ 9,654 14. Other Long-Term Liabilities Other long-term liabilities consist of the following: Schedule of Other Long Term Liabilities (in thousands) March 31, 2022 December 31, 2021 Legal settlement – noncurrent (See note 23) $ 5,625 $ 5,625 Other 27 24 Total $ 5,652 $ 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-month periods ended March 31, 2022 and 2021. Income tax expense incurred for the three months ended March 31, 2022 and 2021 relates to state income taxes. At March 31, 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 March 31, 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. 13 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 months ended March 31, 2022 and 2021 were $ 5.2 million and $ 3.0 million, respectively, and 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 March 31, 2022 and December 31, 2021 were $ 0.3 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 $ 0.1 million and $ 0.2 million for the three months ended March 31, 2022 and 2021, respectively which were recorded in selling, general and administrative, related party. There were no amounts due to Biofrontera AG related to the service agreement as of March 31, 2022. Amounts due to Biofrontera AG related to the service agreement were $ 0.2 million as of 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 $ 15,000 and $ 13,000 for the three months ended March 31, 2022 and 2021, respectively and recorded as revenues, related party. Amounts due from Bioscience for clinical lamp and other reimbursements were approximately $ 99,000 and $ 92,000 as of March 31, 2022 and December 31, 2021, respectively, which were recorded as other receivables, related party in the balance sheets. 14 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 months ended March 31, 2022. For the three months ended March 31, 2021, the amounts reimbursed relating to SPA costs were $ 0.1 million and were recorded as other income in the statements of operations as the related expenses were incurred. As of March 31, 2022 and December 31, 2021 amounts due from Maruho, primarily relating to SPA cost reimbursements, were $ 56,000 for each of the periods and were recorded in other receivables, related parties in the balance sheets. Others The Company receives expense reimbursement from Biofrontera AG and Biofrontera Bioscience on a quarterly basis for costs incurred on behalf of these entities. Total expense reimbursements were $ 0.1 million for the three months ended March 31, 2022 and 2021, which were netted against expenses incurred within selling, general and administrative expenses. The Company has recorded a receivable of $ 11.3 million due from Biofrontera AG for its 50 % share of a legal settlement for which both parties are jointly and severally liable for the total settlement amount of $ 22.5 million. 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 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 amended 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®). The Company has accrued $ 56,000 of interest income as of March 31, 2022. Of the total receivable of $ 11.3 million, $ 8.5 million is short-term and $ 2.8 million is a long-term 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 months ended March 31, 2022. For the three months ended March 31, 2021, restructuring costs were incurred in the amount of $ 0.3 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. 15 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 reserved and authorized for awards and the maximum contractual term is 10 years for stock options issued under the 2021 Plan. Non-qualified stock options 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. The fair value of each option grant was estimated on the grant date of March 2, 2022, using the Black-Scholes option pricing model with the following assumptions: fair value of the underlying unit of $ 2.96 , expected volatility of 55.0 % , risk free rate of 1.79 % , term of 6 years and a dividend yield of 0 . Share-based compensation expense of approximately $ 0.1 million was recorded in selling, general and administrative expenses on the accompanying statement of operations for the three months ended March 31, 2022. There was no stock based compensation for the three months ended March 31, 2021. Options outstanding and exercisable under the employee share option plan as of March 31, 2022 and a summary of option activity during the three 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) (in 000’s) Outstanding at December 31, 2021 613,614 $ 4.77 9.94 1,687 Granted 28,378 $ 2.96 Exercised - $ - Canceled or forfeited ( 38,096 ) $ 4.77 Outstanding at March 31, 2022 603,896 $ 4.68 9.53 $ 10 Exercisable at March 31, 2022 - $ - - $ - (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 March 31, 2022. As of March 31, 2022, there was $ 1.3 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately 2.70 years. Share-Based Compensation (RSUs) There were no RSU’s granted during the three months ended March 31, 2022. During the year ended December 31, 2021, the Company granted to certain members of management 170,068 restricted stock units, or RSUs. 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 $ 0.8 million and will be fully vested on June 9, 2022, six months after the grant date, subject to the recipient’s continued service with the Company through the applicable vesting dates. Share-based compensation expense of $ 0.4 million for the RSUs was recorded in selling, general and administrative expenses in the accompanying statement of operations for the three months ended March 31, 2022. There was no share-based compensation for the three months ended March 31, 2021. 16 As of March 31, 2022, there was $ 0.3 million of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately 0.19 years. 20. Interest Expense, net Interest expense, net consists of the following: Schedule of Interest Expense (in thousands) 2022 2021 Three Months Ended March 31, (in thousands) 2022 2021 Interest expense ( 4 ) - Contract asset interest expense ( 89 ) ( 89 ) Interest income 60 5 Interest expense, net $ ( 33 ) $ ( 84 ) 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 Three Months Ended March 31, (in thousands) 2022 2021 Reimbursed SPA costs $ - $ 98 Other, net 23 ( 19 ) Other income, net $ 23 $ 79 Other, net, primarily includes gain (loss) on foreign currency transactions and gain on termination of operating leases. 22. Net Loss 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. Basic and diluted net income (loss) per share attributable to common stockholders is calculated as follows: Schedule of Basic and Diluted Net Loss Per Share Attributable to Common Stockholders 2022 2021 Three Months Ended March 31, (only dollars are in thousands) 2022 2021 Net income (loss) $ 5,561 $ ( 3,534 ) Shares Basic weighted average common shares outstanding 17,104,749 8,000,000 Add: Effect of dilutive securities Stock options and restricted stock units 28,469 - Diluted weighted average common shares outstanding 17,133,218 8,000,000 Net earnings (loss) per share: Basic $ 0.33 $ ( 0.44 ) Diluted $ 0.32 $ ( 0.44 ) 17 The following table sets forth the potential common shares that were not included in the diluted per share calculations for the three months ended March 31, 2022 because the exercise price was greater than their average market value and they would be anti-dilutive: Schedule of Anti-dilutive Securities Excluded From Computation of Earnings Per Share March 31, 2022 2021 Common stock warrants 4,349,537 4,349,537 Common stock options 575,518 613,614 Restricted Stock Units - 170,068 Total anti-dilutive securities - 170,068 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 March 31, 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 March 31, 2022 and 2021. The minimum aggregate payments of all future lease commitments as of March 31, 2022, are as follows: (in thousands) Schedule of Future Commitments and Sublease Income Years ending December 31, Future lease commitments Remainder of 2022 $ 665 2023 522 2024 473 2025 352 Thereafter - Total $ 2,012 Cutanea earnout 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 . 18 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 annual net sales of Xepi® under the Xepi LSA exceed $ 50,000,000 . No payments were made for the three months ended March 31, 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 March 31, 2021, we have recorded a legal settlement liability in the amount of $ 11.3 million for the remaining payments due and a related receivable from related party of $ 11.3 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 March 31, 2022 and 2021, matching contribution costs paid by the Company were $ 64,000 and $ 61,000 , respectively. 25. Subsequent Events We have completed an evaluation of subsequent events after the balance sheet date of March 31, 2022 through the date this Quarterly Report on Form 10-Q was submitted to the SEC. We have concluded that no subsequent events have occurred that require recognition in the financial statements or disclosure in the notes to the financial statements. 19