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Item 7. Management’s Discussion and Analysis

2023-03-13 compared with 2022-04-11 · 453 added, 604 removed, 68 unchanged (94% of the section changed)

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

The following section contains statements that

are not statements of historical fact and are forward-looking statements within the meaning of the federal securities laws.

These statements

involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievement to differ

materially from anticipated results, performance, or achievement, expressed or implied in such forward-looking statements.

These statements

reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties.

many of these risks and uncertainties at the beginning of this Form 10-K and under the sections captioned “Business” and

“Risk Factors.” The following discussion should also be read in conjunction with the financial statements and the Notes thereto

appearing elsewhere in this Form 10-K.

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-K constitute “forward-looking statements”.

Such statements include statements regarding the efficacy and intended use of

our technologies under development, the timelines and strategy for bringing such products to market, the timeline for regulatory review

and approval of our products, the availability of funding sources for continued development of such 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

following section contains statements that are not statements of historical fact and are forward-looking statements within the meaning

of the federal securities laws.

These statements involve known and unknown risks, uncertainties, and other factors that may cause our

actual results, performance, or achievement to differ materially from anticipated results, performance, or achievement, expressed or

implied in such forward-looking statements.

These statements reflect our current views with respect to future events, are based on assumptions,

and are subject to risks and uncertainties.

We discuss many of these risks and uncertainties at the beginning of this Form 10-K and under

the sections captioned “Business” and “Risk Factors.” The following discussion should also be read in conjunction

with the financial statements and the Notes thereto appearing elsewhere in this Form 10-K.

Forward-Looking

Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements.

Certain statements

in this Form 10-K constitute “forward-looking statements”.

Such statements include statements regarding the timeline for

regulatory review and approval of our products, the availability of funding sources for continued development of such 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.

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.

See Part I, Item 1A,

“Risk Factors” of this Form 10-K for list of factors that may cause such differences.

Part I, Item 1A, “Risk Factors” of this Form 10-K for list of factors that may cause such differences.

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.

We are a U.S.-based biopharmaceutical

company specializing in the commercialization of pharmaceutical products for the treatment of dermatological conditions, in particular,

diseases caused primarily by exposure to sunlight that result in sun damage to the skin.

Our principal licensed product focuses

on the treatment of actinic keratoses, which are skin lesions that can sometimes lead to skin cancer.

We also market a topical antibiotic

for treatment of impetigo, a bacterial skin infection.

Our principal licensed product

is Ameluz®, which is a prescription drug approved for use in combination with our licensor’s FDA approved medical device, the

BF-RhodoLED® lamp, for photodynamic therapy in the United States for the lesion-directed and field-directed treatment of actinic

keratoses of mild-to-moderate severity on the face and scalp.

We are currently selling Ameluz® for this indication in the

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

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

are 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.

principal licensed product is Ameluz ® , which is a prescription drug approved for use in combination with the BF-RhodoLED ®

lamp series, for photodynamic therapy, or PDT (when used together, “Ameluz ® 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.

AKs are premalignant lesions of the skin that can potentially develop into skin cancer (squamous cell

carcinoma) if left untreated.

International treatment guidelines list photodynamic therapy as the “gold standard” for treating

AK, especially multiple AK and the surrounding photodamaged skin.

3 We are currently selling Ameluz ® for this

indication in the U.S.

under the Ameluz LSA.

Under the Ameluz LSA, we hold the exclusive license to sell Ameluz® and the BF-RhodoLED® lamp in the

United States for all indications currently approved by the FDA as well as all future FDA-approved indications that the Ameluz Licensor

We have the authority under the Ameluz LSA in certain circumstances to take over clinical development, regulatory work

and manufacturing from the Ameluz Licensor, with respect to the indications the Ameluz Licensor is currently pursuing with

the FDA (as well as certain other clinical studies identified in the Ameluz LSA).

However, the Ameluz Licensor does not have any

obligation under the Ameluz LSA, as amended, to perform or finance clinical trials to promote new indications beyond those they are currently

pursuing with the FDA (as well as certain other clinical studies identified in the Ameluz LSA).

Under the Ameluz LSA, further extensions

of the approved indications for Ameluz® photodynamic therapy in the United States are anticipated.

Our second prescription

drug licensed product in our portfolio is Xepi® (ozenoxacin cream, 1%), a topical non-fluorinated quinolone that inhibits bacterial

Currently, no antibiotic resistance against Xepi® is known and it has been specifically approved by the FDA for the treatment

of impetigo, a common skin infection, due to Staphylococcus aureus or Streptococcus pyogenes.

It is approved for use in adults and children

2 months and older.

We are currently selling Xepi® for this indication in the U.S.

under the Xepi LSA that was acquired by Biofrontera

on March 25, 2019 through our acquisition of Cutanea Life Sciences, Inc.

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 RhodoLED ® lamp for the treatment of minimally to moderately thick actinic keratoses

of the face and scalp and positioning Ameluz ® to be a leading photodynamic therapy product, by growing our

dedicated sales and marketing infrastructure in the United States;

expanding our sales of Xepi ® for treatment of impetigo by improving the market positioning of the licensed product;

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.

Our strategic objectives

also include further expansion of our product and business portfolio through various methods to pursue selective strategic investment

and acquisition opportunities to expand and support our business growth, including but not limited to:

in-licensing further products or product opportunities and developing them for the U.S.

procuring products through asset acquisition from other healthcare companies;

procuring products through share acquisition of some or all shares of other healthcare companies, including the possible acquisition of shares of our former parent company and significant stockholder, Biofrontera AG.

We devote a substantial

portion of our cash resources to the commercialization of our licensed products, Ameluz ® , the RhodoLED ® lamp

series and Xepi ® .

Prior to the IPO, we financed our operating and capital expenditures through cash

proceeds generated from our product sales and proceeds received in connection with the Intercompany Revolving Loan Agreement with Biofrontera

On December 31, 2020, the outstanding principal balance on the intercompany loan was converted into shares of common stock.

On November 2, 2021, we completed

an initial public offering (“IPO”) and issued and sold 3,600,000 units (“Units”), each consisting of (i) one share

of our common stock, par value $0.001 per share (the “Shares”) and (ii) one warrant of the Company (the “Warrants”)

entitling the holder to purchase one Share at an exercise price of $5.00 per Share.

In addition, the underwriters exercised in full their

option to purchase an additional 540,000 Warrants to cover over-allotments.

The Units were sold at a price of $5.00 per Unit, and the

net proceeds from the IPO were $14.9 million.

In connection with the IPO, the Company also issued to the underwriters Unit Purchase Options

to purchase, in the aggregate, (a) 108,000 Units and (b) an additional 16,200 Warrants (relating to the underwriters’ exercise of

the over-allotment option in full with respect to the Warrants).

During November and December

of 2021, investors exercised their Warrants to purchase a total of 2,647,606 shares of common stock at an exercise price of $5.00

per share, resulting in net proceeds of $13.2 million.

December 1, 2021, the Company settled the private placement with a single institutional investor pursuant to that certain

securities purchase agreement dated November 29, 2021.

The Company issued an aggregate amount of approximately $15,000,000 in securities

consisting of (i) 1,350,000 shares of our common stock, (ii) a common stock purchase warrant to purchase up to 2,857,143 shares of our

common stock and (iii) a pre-funded common stock purchase warrant to purchase up to 1,507,143 shares of our common stock.

common warrant and the pre-funded warrant is exercisable immediately and has a term of exercise equal to five (5) years with an exercise

(a) $5.25 per share with respect to the common warrant and (b) a nominal exercise price of $0.0001 per share with respect to

the pre-funded warrant.

The combined purchase price for one share of common stock and one common warrant was $5.25 and the combined purchase

price for one pre-funded warrant and one common warrant was $5.24.

Proceeds net of issuance costs were approximately $13.6 million.

We believe that important

measures of our results of operations include product revenue, operating income/(loss) and adjusted EBITDA (a non-GAAP measure as defined

Our sole source of revenue is sales of products that we license from certain related and unrelated companies.

Our long-term financial

objectives include consistent revenue growth and expanding operating margins.

Accordingly, we are focused on licensed product sales expansion

to drive revenue growth and improve operating efficiencies, including effective resource utilization, information technology leverage

and overhead cost management.

Key factors affecting our performance

As a result of a number of factors, our historical

results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly

comparable from period to period.

Set forth below is a brief discussion of the key factors impacting our results of operations.

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.

Since the beginning of 2020, COVID-19 has become a

global pandemic.

As a result of the measures implemented by governments around the world, our business operations have been directly affected.

In particular, we experienced a significant decline in demand for our licensed products as a result of different priorities for medical

treatments emerging, thereby causing a delay of actinic keratosis treatment for most patients.

Our revenue was directly affected by the

global COVID-19 pandemic starting in mid-March of 2020.

From that point on, rising infection rates and the resulting American Academy

of Dermatology’s official recommendation to care for patients through remote diagnosis and treatment (telehealth) led to significantly

declining patient numbers and widespread, albeit temporary, physician practice closures.

Revenue from product sales for the twelve months

of 2020 declined by about $7.3 million, or 28.0%, when compared to the same period in 2019.

In order to mitigate the risk from COVID-19,

we took expedited measures to reduce operating expenses and preserve cash, including headcount reductions, mandatory furloughs, freezing

of hiring and discretionary spend, and voluntary salary reductions from the senior leadership.

During the COVID-19 pandemic, we focused

our sales strategy in the U.S.

market on our flagship product Ameluz ® and delayed the targeted re-launch to improve the

positioning of our licensed product Xepi ® .

Due to the above management initiatives, lifting

of some of the government restrictions and reopening of our customers’ businesses, our revenue recovered quickly since March 2021.

second prescription drug licensed product in our portfolio is Xepi ® (ozenoxacin cream, 1%), a topical non-fluorinated

quinolone that inhibits bacterial growth.

Currently, no antibiotic resistance against Xepi ® is known and it has been specifically

approved by the FDA for the treatment of impetigo, a common skin infection, due to Staphylococcus aureus or Streptococcus pyogenes.

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 that was assumed by Biofrontera on March 25, 2019 through our acquisition of Cutanea Life

Sciences, Inc.

principal objective is to increase the sales of our licensed products in the United States.

The key elements of our strategy include

the following:

our 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;

sales of Xepi ® for treatment of impetigo by improving the market positioning of the licensed product;

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;

o pportunistically

adding complementary products or services to our portfolio by acquiring or licensing IP to further leverage our commercial infrastructure

and customer relationships.

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.

believe that important measures of our results of operations include product revenue, operating income (loss) and adjusted EBITDA (a

non-GAAP measure as defined below).

Our sole source of 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.

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.

factors affecting our performance

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.

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.

the beginning of 2020, COVID-19 has become a global pandemic.

As a result of the measures implemented by governments around the world,

our business operations have been directly affected.

In particular, we experienced a significant decline in demand for our licensed products

as a result of different priorities for medical treatments emerging, thereby causing a delay of actinic keratosis treatment for most

Our revenue was directly affected by the global COVID-19 pandemic starting in mid-March of 2020.

From that point on, rising

infection rates and the resulting American Academy of Dermatology’s official recommendation to care for patients through remote

diagnosis and treatment (telehealth) led to significantly declining patient numbers and widespread, albeit temporary, physician practice

As COVID-19 vaccines started to roll-out to the general public in March 2021, we experienced an increase in patients willing

to undergo treatment for actinic keratosis.

In the fourth quarter of 2021, we again saw a seasonally strong increase in sales.

Revenue from product sales was $24.0 million for the year end December 31, 2021, as compared to $18.8 million for year-end December 31,

2020, indicating a revenue recovery from the global COVID-19 pandemic.

Due to the speed and fluidity with which the COVID-19

pandemic continues to evolve, and the emergence of highly contagious variants, we do not yet know the full extent of the impact of COVID-19

on our business operations.

The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our

business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be

predicted, including new information that may emerge concerning the severity of such epidemic, pandemic, outbreak, or other public health

crisis and actions taken to contain or prevent the further spread, including the effectiveness of vaccination and booster vaccination

campaigns, among others.

Accordingly, we cannot predict the extent to which our business, financial condition and results of operations

will be affected.

We remain focused on maintaining a strong balance sheet, liquidity and financial flexibility and continue to monitor

developments as we deal with the disruptions and uncertainties from a business and financial perspective relating to COVID-19 and variants

Licensors take reasonable precautions to ensure the successful production of our commercially licensed products, their contract

manufacturers may experience a myriad of business difficulties (i.e.

workforce instability, supply chain issues, erosion of customer

base, etc.) that could impact their financial solvency.

In December 2021, we were notified by Ferrer of third-party manufacturing

delays for the Xepi® product and of their

manufacturer’s (Teligent, Inc.) Chapter 11 bankruptcy filing on October 14, 2021 and in February 2022, Teligent filed a motion

to convert the proceedings into a Chapter 7 liquidation.

We understand that Ferrer has concluded that whatever the outcome of the

bankruptcy or liquidation, whoever acquires the relevant assets of Teligent, Inc.

will not continue to manufacture

Ferrer is evaluating options for a new contract manufacturer for Xepi ® , but the process of

engaging one or more new contract manufacturers to replace Teligent, Inc.

will require significant time, including the time it will

take the new contract manufacturer(s) to reach a level of production to meet our commercial needs.

Although we have inventory of

Xepi ® on hand, we do not expect it will be enough to complete the commercialization of Xepi ® in

accordance with the originally planned timeline.

Due to the uncertainty of supply chain, we expect a delay in shipments of

Xepi ® for the next 18 months, however, the Company expects Ferrer to perform its obligations under the Xepi LSA to

use its commercially reasonable efforts to

qualify an alternative supplier during this period of time.

Despite these delays, our total revenues will not be significantly

impacted since the majority of our revenues are from sales of Ameluz ® .

After adjusting our forecast due to supply

chain issues, we expect our net Xepi revenues impact to be $0.5 million over the next twelve months.

continue to monitor the impacts of the supply chain on our business and are focused on ensuring the stability of the supply chains

for Ameluz ® and RhodoLED ® .

Components of Our Results of Operations

Product Revenue, net

generate product revenues through the third-party sales of our licensed products Ameluz ® , RhodoLED ® lamps

and Xepi ® covered

by our exclusive LSAs with our Licensors as described in the section “ Business — Commercial

Partners and Agreements.” 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.

from the sales of our RhodoLED ® lamp and Xepi ® are relatively insignificant compared with revenues generated

through our sales of Ameluz ® .

The primary factors that

determine our revenue derived from our licensed products are:

the level of orders generated by our sales force;

the level of prescriptions and institutional demand for our licensed products;

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

Cost of revenues, related

party, is comprised of purchase costs of our licensed products, Ameluz ® and RhodoLED ® lamps from Biofrontera

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

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

Selling, General and Administrative Expenses,

Related Party

Selling, general and administrative expenses, related

party, primarily relate to the services provided by our significant stockholder, Biofrontera AG, for accounting consolidation, IT support,

and pharmacovigilance.

These expenses were charged to us based on costs incurred plus 6% in accordance with the 2016 Services Agreement.

As of December 31, 2021, we entered into the Services Agreement which provides for the execution of statements

of work that supersedes the applicable provisions of the 2016 Services Agreement.

In the fourth quarter of 2021 continuing through 2022, we again saw a seasonally strong increase

in sales, indicating a revenue recovery from the global COVID-19 pandemic, despite some residual effects such as reduced capacity or

staffing shortages at physicians’ offices.

We are optimistic that our business will continue to thrive throughout 2023 as a result

of the COVID-19 PHE sunsetting on May 11, 2023.

However, the ultimate extent of the impact of any epidemic, pandemic, outbreak,

or other public health crisis on our business, financial condition and results of operations will depend on future developments, which

are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic,

outbreak, or other public health crisis and actions taken to contain or prevent the further spread, including the effectiveness of vaccination

and booster vaccination campaigns, among others.

Accordingly, we cannot predict the extent to which our business, financial condition

and results of operations will continue be affected.

We remain focused on maintaining a strong balance sheet, liquidity and financial

flexibility and continue to monitor developments as we deal with the disruptions and uncertainties from a business and financial perspective

relating to COVID-19 and variants thereof.

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 ®

Although we have inventory of Xepi ® on hand, we expect a delay in further shipments of Xepi ® for

the next 9 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 ® .

of Our Results of Operations

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

lamps and Xepi ® covered by our exclusive LSAs with our Licensors as

described in the section “ Business — Commercial Partners and Agreements.” 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 ® .

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

level of orders generated by our sales force;

level of prescriptions and institutional demand for our licensed products;

sales prices.

Party Revenues

also generate insignificant related party revenue in connection with an agreement with Biofrontera Bioscience to provide BF-RhodoLED ®

lamps, associated services for the clinical trials performed by Biofrontera Bioscience and accounting services provided to Biofrontera

of Revenues, Related Party

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.

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

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);

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;

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.

of Revenues, Other

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.

General and Administrative Expense

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.

General and Administrative Expenses, Related Party

general and administrative expenses, related party, primarily relate to the services provided by our significant stockholder, Biofrontera

AG, for accounting consolidation, IT support, and pharmacovigilance.

These expenses were charged to us based on costs incurred plus 6%

in accordance with the 2016 Services Agreement.

During 2021, we entered into the 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

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) following our initial public offering whether they can or should be obtained from other third-party providers.

Restructuring Costs

We restructured the business of Cutanea and incurred

restructuring costs, which were subsequently reimbursed by Maruho.

Restructuring costs primarily relate to Aktipak ® discontinuation,

personnel costs related to the termination of all Cutanea employees, and the winding down of Cutanea’s operations.

Change in Fair Value of Contingent Consideration

In connection with the Cutanea acquisition, we recorded

contingent consideration related to the estimated profits from the sale of Cutanea products to be shared equally with Maruho.

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 until the contingency is resolved.

Interest Expense, net

Interest expense, net, primarily consists of interest

expense incurred under our Revolving Loan Agreement with Biofrontera AG, amortization of the contract asset related to the start-up cost

financing from Maruho under the Share Purchase Agreement, and immaterial amounts of interest income earned on our financing of customer

purchases of RhodoLED ® lamps.

Other Income, net

Other income, net primarily includes (i) reimbursed

Share Purchase Agreement costs, (ii) a one-time employee retention credit, or ERC, that we were granted under the CARES Act in 2020, and

(iii) gain (loss) on foreign currency transactions.

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 Years Ended December

31, 2021 and December 31, 2020

The following table summarizes our results of operations

for the years ended December 31, 2021 and December 31, 2020:

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

During 2022, we hired additional IT personnel and developed our IT infrastructure, enabling us to commence work on our IT

separation from Biofrontera AG.

Restructuring

restructured the business of Cutanea and incurred restructuring costs through 2021, which were subsequently reimbursed by Maruho Co.,

Ltd, (“Maruho”).

Restructuring costs primarily relate to Aktipak ® discontinuation, personnel costs related

to the termination of all Cutanea employees, and the winding down of Cutanea’s operations.

in Fair Value of Contingent Consideration

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 until the contingency is resolved.

in Fair Value of Warrant Liabilities

stock warrants issued in conjunction with private placement financing transactions are accounted for as liabilities in accordance with

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.

in Fair Value of Investment in Equity Securities

investments are comprised of equity securities, 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.

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 statement of operations.

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

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”) 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 ®

income, net primarily includes (i) gain on sale of leased assets, and (ii) gain (loss) on foreign currency transactions.

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.

of Operations

of the Years Ended December 31, 2022 and December 31, 2021

following table summarizes our results of operations for the years ended December 31, 2022 and December 31, 2021:

For the Year Ended December 31,

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Change in fair value of warrant liabilities

Change in fair value of investments

Interest expense, net

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Income tax expenses

Product Revenue, net

Net product revenue was

$24.1 million and $18.8 million for 2021 and 2020, respectively, an increase of $5.3 million, or 27.9%.

The increase was primarily driven

net revenue was $28.7 million and $24.1 million 2022 and 2021, respectively, an increase of $4.6 million, or 19.0%.

Net product revenue

was $28.5 million and $24.0 million for 2022 and 2021, respectively, an increase of $4.5 million, or 18.7%.

The increase was primarily

(i) higher volume of Ameluz ® orders, which resulted in an increase in Ameluz ® revenue of $3.7

million, and (ii) an increase in the price of Ameluz ® , which further increased Ameluz ® revenue by $0.6

Operating Expenses

Cost of Revenues, Related

Cost of revenues, related

party was $12.2 million and $8.3 million for 2021 and 2020, respectively, an increase of $3.9 million, or 47.0%.

$2.8 million of such

increase was driven by the increase in Ameluz ® product revenue.

Cost of Ameluz ®

is directly correlated to the selling price under the Ameluz LSA.

In addition, we received cost reimbursement from the

Ameluz Licensor in 2020, which resulted in $1.1 million reduction in cost of revenues, related party during the year ended

December 31, 2020.

Cost of Revenues, Other

Cost of revenues, other

was $0.5 million and $0.8 million for 2021 and 2020, respectively, a decrease of $0.2 million, or 30.9%.

The decrease was primarily

driven by the change in Xepi inventory obsolescence of $0.4 million, netted against an increase in logistics distribution expense of

$0.2 million.

A $0.3 million reserve was recorded for the year ended December 31, 2021 and a $0.4 million reserve was recorded

for the year ended December 31, 2020 for Xepi ® inventory obsolescence due to product expiry.

Selling, General and

Administrative Expenses

Selling, general and administrative

expenses were $36.5 million and $17.7 million for 2021 and 2020, respectively, an increase of $18.8 million, or 106.2%.

increase was primarily driven by legal settlement expense of $11.3 million and legal expense associated with the settlement of

$0.4 million.

The increase was further driven by $1.8 million increase in marketing expense as we launched various marketing campaigns

for our licensed products.

Headcount costs also increased $2.7 million as a result of (i) resumed hiring in 2021 and (ii) higher commission

expenses related to improved sales performance.

Issuance cost related to the private placement of our stock accounted for $1.4 million.

Business insurance increased by $0.4 million for risk management services regarding employment practice liability, fiduciary and

service fees and insurance expense while sales force travel and in-person trainings expenses increased $0.5 million.

In addition, we

incurred franchise tax expense of $0.2 million and stock compensation expense of $0.1 million for the year ended December 31,

Selling, General and

Administrative Expenses, Related Party

Selling, general and administrative expenses, related

party were $0.7 million and $0.4 million for 2021 and 2020, respectively, an increase of $0.3 million or 69.6%.

Related party

expense is based on costs incurred by Biofrontera AG plus 6% for services provided to us related to accounting consolidation, IT support

and pharmacovigilance.

Increase of $0.3 million is mainly related to IT development and quality assurance services.

Biofrontera AG provides

IT development application services as well as any network issues and hosts Biofrontera, Inc.’s servers.

Restructuring Costs

Restructuring costs were

$0.8 million and $1.1 million for 2021 and 2020, respectively, a decrease of $0.4 million, or 33.6%, both of which related to

facility exit costs.

Change in Fair Value

of Contingent Consideration

The change in fair value

of contingent consideration was a decrease of $1.4 million and an increase of $0.1 million for 2021 and 2020, respectively.

in fair value of contingent consideration is driven by the estimated profit share the Company is required to pay under the Share Purchase

of Revenues, Related Party

of revenues, related party was $14.6 million and $12.2 million for 2022 and 2021, respectively, an increase of $2.4 million, or 19.6%.

The increase was primarily driven by the increase in Ameluz ® product revenue.

Cost of Ameluz ® is directly

correlated to the selling price under the Ameluz LSA.

General and Administrative Expenses

general and administrative expenses were $35.1 million and $36.5 million for 2022 and 2021, respectively, a decrease of $1.4 million,

This decrease was driven by the one-time legal settlement expense of $11.3 million recognized in 2021.

This decrease was offset

by an increase in headcount costs as a result of resumed hiring in 2022 and a broad increase in the costs

to comply with corporate governance, regulatory reporting, risk management and other requirements applicable to us as a public company.

Restructuring

were no restructuring costs for the twelve months ended December 31, 2022.

Restructuring costs were $0.8 million for the twelve months

ended December 31, 2021, all of which related to facility exit costs.

in Fair Value of Contingent Consideration

change in fair value of contingent consideration was a decrease of $3.8 million and a decrease of $1.4 million for 2022 and 2021, respectively.

The change in fair value of contingent consideration is driven by the estimated profit share the Company is required to pay under the

Share Purchase Agreement.

During 2022, the estimated profit share was reduced in response to supply chain delays experienced by the supplier.

in Fair Value of Warrant Liabilities

change in fair value of warrant liabilities was an increase of $12.8 million for 2021.

The change in fair value of warrant liabilities

was driven by changes in the underlying value of the common stock.

Interest Expense, net

Interest expense, net was $0.3 million and

$2.9 million for 2021 and 2020, respectively.

The decrease in interest expense was mainly driven by the fact that the intercompany loan

was fully converted into common stock at the end of 2020.

Interest expense from the straight-line amortization of the contract

asset related to start-up cost financing received from Maruho under the Cutanea acquisition purchase agreement was $0.4 million during

both periods.

Other Income, net

Other income, net was $0.7

million and $1.6 million in 2021 and 2020, respectively, a decrease of $0.9 million or 55.6%.

Decrease is primarily related to the decrease

in reimbursed costs under the Share Purchase Agreement with Maruho of $0.6 million.

In addition, we were granted a one-time employee retention

credit (“ERC”) under CARES Act in the amount of $0.3 million, which was recorded as other income during the year ended December

Net Income to Adjusted

EBITDA Reconciliation for years ended December 31, 2021 and 2020

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 statements of operations as well as certain other items considered outside the normal course of

our operations specifically described below.

change in fair value of warrant liabilities was a decrease of $29.2 million and an increase of $12.8 million for 2022 and 2021,

respectively.

The change was driven by changes in the underlying value of the common stock.

The change in 2022 was also driven by the modification and exercise

of the 2021 Purchase Warrant.

in fair value of investments in equity securities

change in fair value of investments in equity securities of $1.7 million was driven by changes in the quoted

market price of the common stock.

income, net was negligible and $0.7 million in 2022 and 2021, respectively, a decrease of $0.7 million or 95.2%.

The decrease is

primarily related to the decrease in reimbursed costs under the Share Purchase Agreement with Maruho of $0.5 million.

Income to Adjusted EBITDA Reconciliation for years ended December 31, 2022 and 2021

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 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 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 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 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 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 GAAP.

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.

We exclude the impact of the

change in fair value of contingent consideration as this is non-cash.

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.

We exclude the impact of the change in fair value of

contingent consideration as this is non-cash.

in fair value of warrant liabilities:

The Purchase and Pre-funded Warrants were accounted for as liabilities in accordance with ASC

The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented

within the statement of operations.

We exclude the impact of the change in fair value of warrant liabilities as this is non-cash.

Cost reimbursement from Biofrontera

On August 27, 2020, we received $1.5 million cash consideration from Biofrontera Pharma GmbH to support our marketing

effort to grow the sales of our licensed products we purchase from Biofrontera Pharma GmbH.

Of the $1.5 million, $1.1 million was recorded

as a reduction of cost of revenues and the remaining $0.4 million was recorded as a reduction to marketing expense.

consideration is one-time and non-operating in nature.

We believe that exclusion of this item more closely correlates the reality

of our operating performance.

Legal settlement expenses :

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 statement of operations.

We exclude the impact of the change in

fair value of warrant liabilities as this is non-cash.

in fair value of investment in equity securities:

T he Company accounts for its investments in equity securities 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

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 statement of operations.

We exclude the impact of the change in

fair value of investments as this is non-cash.

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.

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.

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.

issuance costs:

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users of the financial statements to better understand our financial results.

Employee retention credit :

We exclude a one-time ERC that we were granted under the CARES Act, which was recorded as other income.

We believe that the exclusion of this item allows for more meaningful analysis of operating results.

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-GAAP financial information is viewed with

GAAP financial information, investors are provided with a more meaningful understanding of our ongoing operating performance.

The below table presents

a reconciliation from net loss to Adjusted EBITDA for the years ended December 31, 2021 and 2020:

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

use adjusted EBITDA to measure our performance from period to period and to compare our results to those of our competitors.

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-GAAP financial

information is viewed with GAAP financial information, investors are provided with a more meaningful understanding of our ongoing operating

below table presents a reconciliation from net loss to Adjusted EBITDA for the years ended December 31, 2022 and 2021:

Years ended December 31,

Net income/(loss)

Interest expense, net

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Change in fair value of warrant liabilities

Cost reimbursement from Biofrontera Pharma GmbH

Change in fair value of investments

Legal settlement expenses

Employee retention credit (“ERC”)

Stock based compensation

Expensed issuance costs

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Adjusted EBITDA margin

Adjusted EBITDA

Adjusted EBITDA decreased

from ($9.2) million for the year ended December 31, 2020 to ($12.7) million for the year ended December 31,

Our adjusted EBITDA margin decreased to (52.9%) for the year ended December 31, 2021 from (48.5%) for the year ended

December 31, 2020.

EBITDA decreased from ($12.7) million for the year ended December 31, 2021 to ($18.1) million for the year ended December 31, 2022.

The decrease was primarily driven by an increase in Selling, general, and administrative

expenses (excluding legal settlement expenses) due to increased headcount and compliance costs.

Our adjusted EBITDA margin decreased

from (52.8%) for the year ended December 31, 2021 to (63.0%) for the year ended December 31, 2022, as the decline in our Adjusted EBITDA outpaced our increase in revenues.

and Capital Resources

December 31, 2020, we converted the outstanding principal balance of our revolving debt with our then parent, Biofrontera

AG in the amount of $47.0 million into an aggregate of 7,999,000 shares of our common stock at a price of $5.875 per share, which

was based on our internal assessment and agreement with Biofrontera AG, for an aggregate gross capital contribution of $47.0 million.

The Company’s primary sources of liquidity

are its existing cash balances and cash flows from equity financing transactions.

Company’s primary sources of liquidity are its existing cash balances, cash collected from the sales of its products, and cash

flows from financing transactions.

During the year ended December 31, 2022, we received

aggregate proceeds of $43.2 million, including $14.9 million from the sale of common stock in our IPO, $15.0 million from a private placement,

and $13.3 million from warrants exercised for our common stock (See Note 18.

proceeds of $9.4 million from the issuance of common stock and warrants in private placement, net of issuance costs, and $4.6

million from the exercise of common stock warrants (See Note 19.

Stockholders’ Equity ).

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we had cash and cash equivalents of $17.2 million, compared to $24.5 million as of December 31, 2021.

Since we commenced

operations in 2015, we have generated significant losses.

the years ended December 31, 2021 and 2020, we incurred net losses of $37.7 million and $11.0 million, respectively .

We incurred net cash outflows from operations of $26.7 million

and $12.4 million, for the same periods, respectively.

We had an accumulated deficit as of December 31, 2021 of $78.9 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 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 and contingent consideration payments to Maruho.

the Xepi LSA, we are obligated to make payments to Ferrer upon the occurrence of certain milestones.

Specifically, we must pay Ferrer

i) $2,000,000 upon the first occasion when annual net sales of Xepi® under the Xepi LSA exceed $25,000,000, and ii) $4,000,000 upon

the first occasion when annual net sales of Xepi® under the Xepi LSA exceed $50,000,000.

No payments were made in 2021 or 2020 related

to Xepi® milestones.

As of December 31, 2021, we were unable to estimate the timing or likelihood of achieving these milestones.

we commenced operations in 2015, we have generated significant losses.

For the years ended December 31, 2022 and 2021, we incurred net

losses of $0.6 million and $37.7 million, respectively .

We incurred net cash outflows from operations

of $16.2 million and $26.7 million, for the same periods, respectively.

We had an accumulated deficit as of December 31, 2022 of $79.5

Company’s short-term material cash requirements include working capital needs and satisfaction of contractual commitments

including facility and auto leases (see Note 24, Commitments and Contingencies ), Maruho start-up payments of $7.3 million

Acquisition Contract Liabilities ), and legal settlement expenses after reimbursement from Biofrontera AG of $2.5

Long-term material cash requirements include potential milestone payments to Ferrer Internacional S.A and contingent

consideration payments to Maruho connected with Xepi sales.

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.

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 in the near term 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

The adequacy of our available funds to meet our future

operating and capital requirements will depend on many factors, including the amounts of future revenues generated by our products.

to numerous factors described in more detail under the caption Part I, Item 1A, “Risk Factors” of this Form 10-K and our

contractual obligations and commitments, we may require significant additional funds earlier than we currently expect in order to continue

to commercialize Ameluz®, BF-RhodoLED® lamp series, and Xepi® and to support the operating, investing, and financing

activities of the Company beyond the next twelve months.

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

costs of our commercialization activities for Ameluz ® and Xepi ® ;

extent to which we acquire or invest in licensed products, businesses and technologies;

extent to which we choose to establish collaboration, co-promotion, distribution or other similar agreements for our licensed products;

cost to fulfill our contractual obligations for various operating leases on vehicles and office space;

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.

the ability to collect a receivable of $11.3 million from Biofrontera AG

(in accordance with the Settlement Allocation Agreement) for reimbursement of legal settlement payments made and to be made on their behalf

for which we are jointly and severally liable.

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.

The following table summarizes our cash provided by

and (used in) operating, investing and financing activities:

we expect to continue to incur operating losses due to significant discretionary sales and marketing efforts as we seek to expand the

commercialization of our licensed products in the United States.

We also expect to incur additional expenses to add and improve operational,

financial and information systems and personnel, including personnel to support our product commercialization efforts.

In addition, we

expect to incur costs to continue to comply with corporate governance, regulatory reporting and other requirements applicable to us as

a public company in the U.S.

future growth is dependent on our ability to obtain additional equity or debt financing.

Based on current operating plans and financial

forecasts, we expect that our current capital resources, including investments in equity securities which we intend to liquidate within the next twelve months, and availability under a working capital line of credit, will be sufficient to fund

our operations for at least the next twelve months from the date of issuance of our financial statements.

However, if our current operating

plans or financial forecasts change, or we are unable to obtain additional financing, we may need to reduce the discretionary spend on

promotional expenses, branding, marketing consulting and defer some hiring.

While we expect to continue being flexible in our spending

over the next twelve months, we do not consider there to be a need to significantly revise our operations currently.

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

For the Year Ended

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Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash used in investing activities

Net cash provided by financing activities

Net increase in cash and restricted cash

Operating Activities

the year ended December 31, 2022, operating activities used $16.2 million of cash, primarily resulting from our net loss of $0.6

million, adjusted for non-cash expense of $12.5 million as an offset and net cash provided

by changes in our operating assets and liabilities of $1.5 million .

Non-cash items include stock-based compensation

of $0.1 million, non-cash interest expense of $0.4 million, and depreciation and amortization in the aggregate of $0.5 million, netted

against a change in fair value of contingent consideration of $1.4 million.

Investing Activities

During the year ended December 31, 2021, net

cash used in investing activities in the amount of $11,000 consisted of the purchase of computer equipment.

Financing Activities

During the year ended December 31, 2021 and 2020,

net cash provided by financing activities was $43.2 million and $13.2 million, respectively.

Financing activities during year

ended December 31, 2021 consisted of proceeds from the issuance of common stock upon an initial public offering of $14.9 million, issuance

of common stock in private placement of $15.0 million, and the exercise of warrants of $13.2 million.

Financing activities during

year ended December 31, 2020 related to the proceeds from related party indebtedness and start-up cost financing related to the Cutanea

Impact of becoming a standalone company

We expect that our transition to operating

as a standalone company will have a number of potentially significant effects on our results of operations.

Additional operating costs for becoming a standalone

company — In the transition to becoming a public company and operating as a standalone entity, we have incurred, and will

continue to incur, additional operating expenses that are expected to be significant as a percentage of our net revenues,

including costs associated with the financial reporting requirements of a standalone public company, such as salaries associated with

building out our accounting department, legal fees, accounting and valuation services costs associated with preparing U.S.

GAAP financial

statements and external audit fees.

In addition, we will incur additional operating expenses, including costs related to the build out

of treasury and investor relations functions, additional non-executive board expenses, shareholder administration and insurance costs.

In the short term, we expect general and administrative expenses to increase (both in absolute terms and as a percentage of net revenues)

as a result of the costs associated with becoming a public company and operating as a standalone entity.

Additional costs to further business development

and expansion – As we seek to expand the commercialization of Ameluz ® and Xepi ® , we expect

to incur additional operating costs for significant sales and marketing efforts 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.

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 financial statements, which have been prepared in accordance with

generally accepted accounting principles of the United States, or GAAP.

The preparation of the financial statements in accordance with

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.

areas in which assumptions, estimates and the exercising of a degree of judgment are appropriate relate to contingent consideration,

fair value measurements, valuation of intangible assets and impairment assessment, and stock compensation.

million, adjusted for the add back of non-cash income of $18.3 million and offset by net

cash provided by changes in our operating assets and liabilities of $2.7 million .

Non-cash items include stock-based

compensation of $1.9 million, non-cash interest expense of $0.4 million, and depreciation and amortization in the aggregate of $1.2

million, netted against a change in fair value of investment of warrant liabilities of $16.4 million, change in fair value of

contingent consideration of $3.8 million, and change in fair value of equity securities of $1.7 million.

the year ended December 31, 2022, investing activities used $5.2 million, primarily resulting from the purchase of shares

of Biofrontera AG (See Note 4.

Fair Value Measurements and Note 6.

Investment in Equity Securities)

the years ended December 31, 2022 and 2021, net cash provided by financing activities was $14.0 million and $43.2 million, respectively.

Financing activities during year ended December 31, 2022 consisted of proceeds of $9.4 million

from the issuance of common stock and warrants in private placement, net of issuance costs, and $4.6 million from the exercise of common

stock warrants .

Financing activities during year ended December 31, 2021 consisted of proceeds

from the issuance of common stock upon an initial public offering of $14.9 million, issuance of common stock in private placement of

$15.0 million, and the exercise of warrants of $13.2 million .

March 9, 2023, we entered into the Commitment Letter with MidCap, in respect of MidCap’s commitment to provide us with the Revolving

Facility, subject to the borrowing base formula, minimum excess availability and other terms and conditions thereof, in the aggregate

principal amount of up to $6.5 million.

The Revolving Facility shall be secured by a lien on substantially all of the assets of the Company,

subject to customary exceptions and, if drawn upon, the proceeds of the Revolving Facility will be used for working capital.

For additional

details regarding the Revolving Facility see Item 9.B.

Other Information in this Form 10-K.

into the Revolving Facility will be subject to customary closing conditions, including the execution and delivery of appropriate definitive

documentation related to the Revolving Facility, to include customary representations, warranties, covenants, events of default and other

terms and conditions.

Policies and Significant Judgments and Estimates

management’s discussion and analysis of our financial condition and results of operations are based on our financial statements,

which have been prepared in accordance with generally accepted accounting principles of the United States, or GAAP.

The preparation of

the financial statements in accordance with 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 contingent consideration, fair value measurements, valuation of intangible assets and impairment assessment, and stock compensation.

Estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances.

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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 Item 8, “Financial Statements and Supplementary Data ,” of this Annual Report on Form 10-K.

Critical Accounting Estimates

We believe that the following accounting policies are those that are

most critical to the judgments and estimates used in the preparation of our financial statements

Contingent Consideration

We record contingent consideration resulting

from a business combination at its fair value on the acquisition date.

Each reporting period thereafter, we revalue the remaining obligations

and record increases or decreases in their fair value as an adjustment to contingent consideration expense in our statements of operations.

We considered a number of factors, including information provided by an outside valuation advisor in performing the valuation.

Contingent consideration is reported at the estimated fair values based on the probability-adjusted present value of the consideration

expected to be paid, using significant inputs and estimates.

Changes in the fair value of our contingent consideration obligations

can result from changes to one or multiple inputs, including forecasted product profit amounts, metric risk premium and discount

rates consistent with the level of risk of achievement as further discussed in Note 4, Fair Value Measurements to the audited

financial statements as of and for the years ended December 31, 2021 and 2020 as included in this Annual Report on Form 10-K.

value of the contingent consideration is remeasured each reporting period, with changes in the fair value included in current operations.

These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market.

Significant judgment is employed in determining

the appropriateness of these assumptions as of the acquisition date and for each subsequent period.

Accordingly, changes in assumptions

described above, could have a material impact on the amount of contingent consideration expense we record in any given period.

Intangible Assets and Impairment Assessment

The Company regularly reviews the carrying amount

of its long-lived assets to determine whether indicators of impairment may exist, which warrant adjustments to carrying values or estimated

useful lives.

In connection with this review, assets are grouped at the lowest level at which identifiable cash flows are largely

independent of other asset groupings.

If indications of impairment exist, projected future undiscounted cash flows associated with

the asset grouping are compared to the carrying amount to determine whether the asset’s value is recoverable.

An impairment

loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset group are less than

its carrying amount.

The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair

value, determined based on discounted cash flows.

In determining future cash flows, we take various

factors into account, including the remaining useful life of each asset group, forecasted growth rates, pricing, working capital, capital

expenditures, and other cash needs specific to the asset group.

Additional considerations when assessing impairment include changes in

our strategic operational and financial decisions, economic conditions, demand for our product and other corporate initiatives which may

eliminate or significantly decrease the realization of future benefits from our long-lived assets.

Since the determination of future cash

flows is an estimate of future performance, future impairments may arise in the event that future cash flows do not meet expectations.

We perform an impairment

assessment in accordance with FASB ASC Topic 360-10-S99, Impairment or Disposal of Long-Lived Assets .

Management’s review

for the presence of indicators of impairment include events or changes in circumstances that indicate the carrying amount of an asset

may not be recoverable.

Due to developments with respect to a third-party manufacturer that has been providing our supply of Xepi ®

that impact the timing of sales expansion and improved market positioning of the Xepi® product, we deemed it necessary to assess

the recoverability of our Xepi® asset group.

As of the date of notification of the third-party manufacturer of Xepi ® ’s

bankruptcy in late December 2021, future undiscounted cash flows were estimated over the expected remaining useful life using revenue

and operating expense growth rates .

Also, the expected

cash flows were based on the assumption that sales levels would grow considerably for the first four years as a result of expanding the

sales force and marketing efforts related to the asset group.

While we believe these assumptions were reasonable, the level of future

sales may vary significantly from the levels assumed.

significant accounting policies are described in more detail in Note 2 – Summary of Significant Accounting Policies , to

our consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data ,” of this Form 10-K.

Accounting Estimates

believe that the following accounting policies are those that are most critical to the judgments and estimates used in the preparation

of our financial statements.

Consideration

record contingent consideration resulting from a business combination at its fair value on the acquisition date.

Each reporting period

thereafter, we revalue the remaining obligations and record increases or decreases in their fair value as an adjustment to contingent

consideration expense in our statements of operations.

We considered a number of factors, including information provided by an outside

valuation advisor in performing the valuation.

Contingent consideration is reported at the estimated fair values based on the probability-adjusted

present value of the consideration expected to be paid, using significant inputs and estimates.

Changes in the fair value of our contingent

consideration obligations can result from changes to one or multiple inputs, including forecasted product profit amounts, metric risk

premium and discount rates consistent with the level of risk of achievement as further discussed in Note 4, Fair Value Measurements

to the audited financial statements as of and for the years ended December 31, 2022 and 2021 as included in this Form 10-K.

The fair value of the contingent consideration is remeasured each reporting period, with changes in the fair value included

in current operations.

These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable

in the market.

judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period.

Accordingly, changes in assumptions described above, could have a material impact on the amount of contingent consideration expense we

record in any given period.

Assets and Impairment Assessment

Company regularly reviews the carrying amount of its long-lived assets to determine whether indicators of impairment may exist, which

warrant adjustments to carrying values or estimated useful lives.

In connection with this review, assets are grouped at the lowest level

at which identifiable cash flows are largely independent of other asset groupings.

If indications of impairment exist, projected future

undiscounted cash flows associated with the asset grouping are compared to the carrying amount to determine whether the asset’s

value is recoverable.

An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the

use of an asset group are less than its carrying amount.

The impairment loss would be based on the excess of the carrying value of the

impaired asset group over its fair value, determined based on discounted cash flows.

determining future cash flows, we take various factors into account, including the remaining useful life of each asset group, forecasted

growth rates, pricing, working capital, capital expenditures, and other cash needs specific to the asset group.

Additional considerations

when assessing impairment include changes in our strategic operational and financial decisions, economic conditions, demand for our product

and other corporate initiatives which may eliminate or significantly decrease the realization of future benefits from our long-lived

Since the determination of future cash flows is an estimate of future performance, future impairments may arise in the event

that future cash flows do not meet expectations.

perform an impairment assessment in accordance with FASB ASC Topic 360-10-S99, Impairment or Disposal of Long-Lived Assets .

review for the presence of indicators of impairment include events or changes in circumstances that indicate the carrying amount of an

asset may not be recoverable.

In October 2022, upon receiving notification of further third-party manufacturing delays that impacted

the timing of sales expansion and improved market positioning of the Xepi ® product, we deemed it necessary to assess the

recoverability of our Xepi ® asset group.

As of the date of notification, future undiscounted cash flows were estimated

over the expected remaining useful life using revenue and operating expense growth rates.

Also, the expected cash flows were based on

the assumption that sales levels would grow considerably for the first two years after resolution of the manufacturing delays as a result

of expanding the sales force and marketing efforts related to the asset group.

While we believe these assumptions were reasonable, the

level of future sales may vary significantly from the levels assumed.

Also, the timeframe over which activity levels grow is highly uncertain.

events that could affect our assumptions are affected by factors such as those described in “ Risks Related to Our Business and

After the assessment we performed, we determined that, on an undiscounted basis, expected cash flows exceeded the

carrying amount of the asset group.

Potential events that could affect our assumptions are affected by factors such as those described in “ Risks Related to Our

Business and Strategy ”.

After the assessment we performed, we determined that, on an undiscounted basis, expected cash flows

exceeded the carrying amount of the asset group.

For additional information on our impairment assessment, refer Note 12 , “Intangible

1 unchanged sentence

Value – Warrant Liability

Purchase and Pre-funded Warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities

in the accompanying balance sheet.

The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes

in fair value presented within the statement of operations.

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.

Warrants issued in conjunction with our private placement offerings were accounted for as liabilities in accordance with ASC 815-40

and are presented within warrant liabilities in the accompanying consolidated balance

The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value

presented within the consolidated statement of operations.

Company utilizes a Black-Scholes option pricing model to estimate the fair value of the Warrants which is considered a Level 3 fair

value measurement.

The Black-Scholes option-pricing

model considers several variables and assumptions in estimating the fair value of financial instruments, including the per-share fair

value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected stock price volatility over the

expected term, and expected annual dividend yield.

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 the 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 statement of operations.

Recently issued accounting pronouncements

A description of recently issued accounting pronouncements

that may potentially impact our financial position and results of operations is disclosed in Note 2, Summary of Significant Accounting

Policies—Recently Issued Accounting Pronouncements Not Yet Effective .

Off-balance Sheet Arrangements

Besides the contractual obligations and commitments

as discussed in the Liquidity and Capital Resources , 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.

Quantitative and Qualitative Disclosures

About Market Risk

As a “smaller reporting company,” we are

not required to provide the information required by this Item.

model considers several variables and assumptions in estimating the fair value of financial instruments, including the per-share

fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected stock price volatility

over the expected term, and expected annual dividend yield.

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.

significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the

fair value of our warrant liability which could also result in material non-cash gain or loss being reported in our consolidated

statement of operations.

issued accounting pronouncements

description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations

is disclosed in Note 2, Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements Not Yet Effective .

Sheet Arrangements

the contractual obligations and commitments as discussed in the Liquidity and Capital Resources , 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.

Growth Company Status

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.

Quantitative and Qualitative Disclosures About Market Risk

a “smaller reporting company,” we are not required to provide the information required by this Item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis