Biofrontera Inc. 10-Q

Item 1. Financial Statements BIOFRONTERA INC. CONSOLIDATED BALANCE SHEETS ( In thousands, except par value and share amounts ) March 31, 2023 December 31, 2022 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 13,505 $ 17,208 Investment in equity securities 7,596 10,548 Accounts receivable, net 4,116 3,748 Other receivables, related party 3,750 3,658 Inventories 6,670 7,168 Prepaid expenses and other current assets 1,586 810 Total current assets 37,223 43,140 Other receivables long term, related party - 2,813 Property and equipment, net 197 204 Operating lease right-of-use assets 1,234 1,375 Intangible asset, net 2,927 3,032 Other assets 384 320 Total assets $ 41,965 $ 50,884 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable 887 1,278 Accounts payable, related parties 912 1,312 Acquisition contract liabilities, net 7,032 6,942 Operating lease liabilities 484 498 Accrued expenses and other current liabilities 11,135 10,864 Total current liabilities 20,450 20,894 Long-term liabilities: Acquisition contract liabilities, net 2,200 2,400 Warrant liabilities 1,815 2,843 Operating lease liabilities, non-current 725 848 Other liabilities 24 21 Total liabilities 25,214 27,006 Commitments and contingencies (see Note 21) - - Stockholders’ equity: Preferred Stock, $ 0.001 par value, 20,000,000 shares authorized, zero shares issued and outstanding as of March 31, 2023 and December 31, 2022 - - Common Stock, $ 0.001 par value, 300,000,000 shares authorized; 26,699,002 shares issued and outstanding as of March 31, 2023 and December 31, 2022 27 27 Additional paid-in capital 103,721 103,370 Accumulated deficit ( 86,997 ) ( 79,519 ) Total stockholders’ equity 16,751 23,878 Total liabilities and stockholders’ equity $ 41,965 $ 50,884 The accompanying notes are an integral part of these consolidated financial statements. 3 BIOFRONTERA INC. CONSOLIDATED STATEMENTS OF OPERATIONS ( In thousands, except per share amounts and number of shares ) (Unaudited) 2023 2022 Three Months Ended March 31, 2023 2022 Products revenues, net $ 8,715 $ 9,736 Revenues, related party 18 15 Total revenues, net 8,733 9,751 Operating expenses Cost of revenues, related party 4,547 4,975 Cost of revenues, other 51 175 Selling, general and administrative 9,800 7,616 Selling, general and administrative, related party 27 95 Change in fair value of contingent consideration ( 200 ) - Total operating expenses 14,225 12,861 Loss from operations ( 5,492 ) ( 3,110 ) Other income (expense) Change in fair value of warrant liabilities 1,028 8,711 Change in fair value of investments ( 2,941 ) - Interest expense, net ( 35 ) ( 33 ) Other income (expense), net ( 33 ) 23 Total other income (expense) ( 1,981 ) 8,701 Income (loss) before income taxes ( 7,473 ) 5,591 Income tax expense 5 30 Net income (loss) $ ( 7,478 ) $ 5,561 Income (loss) per common share: Basic $ ( 0.28 ) $ 0.33 Diluted $ ( 0.28 ) $ 0.32 Weighted-average common shares outstanding: Basic 26,699,002 17,104,749 Diluted 26,699,002 17,133,218 The accompanying notes are an integral part of these consolidated financial statements. 4 BIOFRONTERA INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except number of shares) (Unaudited) Three Months Ended March 31, 2023 and 2022 Shares Amount In Capital Deficit Total Common Stock Additional Paid- Accumulated Shares Amount In Capital Deficit Total Balance, December 31, 2022 26,699,002 $ 27 $ 103,370 $ ( 79,519 ) $ 23,878 Stock based compensation - - 351 - 351 Net loss - - - ( 7,478 ) ( 7,478 ) Balance, March 31, 2023 26,699,002 $ 27 $ 103,721 $ ( 86,997 ) $ 16,751 Balance, December 31, 2021 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 consolidated financial statements. 5 BIOFRONTERA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) 2023 2022 Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net income (loss) $ ( 7,478 ) $ 5,561 Adjustments to reconcile net income (loss) to cash flows used in operations Depreciation 22 26 Amortization of right-of-use assets 139 - Amortization of acquired intangible assets 105 105 Change in fair value of investment in equity securities 2,941 - Change in fair value of contingent consideration ( 200 ) - Change in fair value of warrant liabilities ( 1,028 ) ( 8,711 ) Stock-based compensation 351 517 Provision for doubtful accounts 14 42 Non-cash interest expense 89 89 Changes in operating assets and liabilities: Accounts receivable ( 381 ) ( 1,430 ) Other receivables, related party 2,720 ( 38 ) Prepaid expenses and other assets ( 830 ) 3,614 Inventories 499 ( 414 ) Accounts payable and related party payables ( 792 ) ( 366 ) Operating lease liabilities ( 134 ) - Accrued expenses and other liabilities 274 ( 1,107 ) Cash flows used in operating activities ( 3,689 ) ( 2,112 ) Cash flows from investing activities Purchases of property and equipment ( 14 ) ( 5 ) Cash flows used in investing activities ( 14 ) ( 5 ) Net decrease in cash and cash equivalents ( 3,703 ) ( 2,117 ) Cash, cash equivalents and restricted cash, at the beginning of the period 17,408 24,742 Cash, cash equivalents and restricted cash, at the end of the period $ 13,705 $ 22,625 Supplemental disclosure of cash flow information Interest paid $ - $ 4 Income taxes paid, net $ 22 $ 30 The accompanying notes are an integral part of these consolidated financial statements. 6 Biofrontera Inc. Notes to Consolidated Financial Statements (Unaudited) 1. Business Overview Biofrontera Inc (the “Company”). is a U.S.-based biopharmaceutical company commercializing a portfolio of pharmaceutical products for the treatment of dermatological conditions with a focus on photodynamic therapy (“PDT”) and topical antibiotics. The Company’s licensed products are used for the treatment of actinic keratoses, which are pre-cancerous skin lesions as well as impetigo, a bacterial skin infection. Biofrontera Inc. includes its wholly owned subsidiary Bio-FRI GmbH, a limited liability company organized under the laws of Germany. Our subsidiary, Bioi-FRI was formed on February 9, 2022, as a German presence to facilitate our relationship with the Ameluz Licensor. Our principal licensed product is Ameluz ® , which is a prescription drug approved for use in combination with the RhodoLED ® lamp series, for PDT (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. We are currently selling Ameluz ® for this indication in the U.S. under an exclusive license and supply agreement (“Ameluz LSA”) between Biofrontera, Inc. and the Ameluz Licensors. Our second prescription drug licensed product in our portfolio is Xepi® (ozenoxacin cream, 1%), a topical non-fluorinated quinolone that inhibits bacterial growth. Currently, no antibiotic resistance against Xepi® is known and it has been specifically approved by the FDA for the treatment of impetigo, a common skin infection, due to Staphylococcus aureus or Streptococcus pyogenes. It is approved for use in the United States in adults and children 2 months and older. We are currently selling Xepi® for this indication in the United States. under an exclusive license and supply agreement, as amended (“Xepi LSA”) with Ferrer Internacional S.A. (“Ferrer”) that was assumed by Biofrontera on March 25, 2019 through our acquisition of Cutanea Life Sciences, Inc.(“Cutanea”). Liquidity and Going Concern The Company’s primary sources of liquidity are its existing cash balances, cash collected from the sales of its products, and cash flows from equity financing transactions received in 2022. As of March 31, 2023, we had cash and cash equivalents of $ 13.5 million, compared to $ 17.2 million as of December 31, 2022. Since we commenced operations in 2015, we have generated significant losses. For the three months ended March 31, 2023 and 2022, we incurred loss from operations of $ 5.5 million and $ 3.1 million, respectively . We incurred net cash outflows from operations of $ 3.7 million and $ 2.1 million, for the same periods, respectively. We had an accumulated deficit as of March 31, 2023 of $ 87.0 million. The Company’s short-term material cash requirements include working capital needs and satisfaction of contractual commitments including facility and auto leases (see Note 21. Commitments and Contingencies ), Maruho start-up cost financing repayments of $ 7.3 million (see Note 3. Acquisition Contract Liabilities ), and legal settlement expenses after reimbursement from Biofrontera AG of $ 2.5 million. Long-term material cash requirements include potential milestone payments to Ferrer Internacional S.A, and contingent consideration payments to Maruho connected with Xepi sales (see Note 21. Commitments and Contingencies) . Additionally, we expect to continue to incur operating losses due to significant discretionary sales and marketing , medical affairs, and dermatology community outreach efforts as we seek to expand the commercialization of our licensed products in the United States. 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. 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 revolving line of credit and expected proceeds from the sale of our investment in equity securities in addition to 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 additional 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 consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the Company’s opinion, the unaudited consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly the Company’s financial position as of March 31, 2023, the Company’s operating results for the three months ended March 31, 2023 and 2022, and the Company’s cash flows for the three months ended March 31, 2023 and 2022. The accompanying financial information as of December 31, 2022 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, 2022, filed with the SEC on March 13, 2023. All amounts shown in these financial statements and tables are in thousands and amounts in the notes are in millions, except percentages and per share and share amounts. The Company’s significant accounting policies are discussed in Note 2—Summary of Significant Accounting Policies within the notes to financial statements for the year ended December 31, 2022, 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, 2023. Use of Estimates The preparation of the financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions by management that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities, as reported on the balance sheet date, and the reported amounts of revenues and expenses arising during the reporting period. The main areas in which assumptions, estimates and the exercising of judgment are appropriate relate to, valuation allowances for receivables and inventory, valuation of contingent consideration and warrant liabilities, realization of intangible and other long-lived assets, product sales allowances and reserves, share-based payments and income taxes including deferred tax assets and liabilities. Estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances. They are continuously reviewed but may vary from the actual values. Recently Adopted Accounting Pronouncements In September 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity’s current estimate of credit losses expected to be incurred. The new standard was effective for us on January 1, 2023, and did not have a material effect on our consolidated financial statements. 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 (see Note 21. Commitment and contingencies – Cutanea payments) . 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, 2023 December 31, 2022 Short-term acquisition contract liabilities: Contingent consideration $ 2,200 $ 2,400 Start-up cost financing 7,300 7,300 Contract asset ( 268 ) ( 358 ) Acquisition contract liabilities, net $ 7,032 $ 6,942 Long-term acquisition contract liabilities: Contingent consideration $ 2,200 $ 2,400 Total acquisition contract liabilities: Contingent consideration $ 2,200 $ 2,400 Start-up cost financing 7,300 7,300 Contract asset ( 268 ) ( 358 ) Total acquisition contract liabilities, net $ 9,232 $ 9,342 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, 2023 and December 31, 2022 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, 2023 December 31, 2022 Assets: Investment in equity securities 1 $ 7,596 $ 10,548 Liabilities: Contingent Consideration 3 $ 2,200 $ 2,400 Warrant liability – 2022 Purchase Warrants 3 $ 786 $ 1,129 Warrant liability - 2022 Inducement Warrants 3 $ 1,029 $ 1,714 Warrant liability 3 $ 1,029 $ 1,714 9 Investment in equity securities A s of March 31, 2023, the Company had an investment in shares of Biofrontera AG . The fair value of th is investment was determined with Level 1 inputs through references to quoted market prices. Contingent Consideration Contingent consideration, which relates to the estimated profits from the sale of Cutanea products to be shared equally with Maruho, is reflected at fair value within acquisition contract liabilities, net on the consolidated balance sheets. The fair value is based on significant inputs not observable in the market, which represent a Level 3 measurement within the fair value hierarchy. The valuation of the contingent consideration utilizes a scenario-based method under which a set of payoffs are calculated using the term of the earnout, projections, and an appropriate metric risk premium. These payoffs are then discounted back from the payment date to the valuation date using a payment discount rate. Finally, the discounted payments are summed together to arrive at the value of the contingent consideration. The scenario-based method incorporates the following key assumptions: (i) the forecasted product profit amounts, (ii) the remaining contractual term, (iii) a metric risk premium, and (iv) a payment discount rate. The Company re-measures contingent consideration and re-assesses the underlying assumptions and estimates at each reporting period. The following table provides a roll forward of the fair value of the contingent consideration: Schedule of Fair Value of Contingent Consideration (in thousands) Balance at December 31, 2021 $ 6,200 Change in fair value of contingent consideration - Balance at March 31, 2022 $ 6,200 Balance at December 31, 2022 $ 2,400 Change in fair value of contingent consideration ( 200 ) Balance at March 31, 2023 $ 2,200 Warrant Liabilities The warrant liabilities, comprised of warrants to purchase one share of common stock issued in a private placement on May 16, 2022, expiring five and one-half years after the issue date and with an exercise price of $ 2.77 per share (the “ Purchase Warrants”) and warrants to purchase one share of common stock issued on July 26, 2022, expiring on December 1, 2026 with an exercise price of $ 1.66 per share (the “ Inducement Warrants”), were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities in the accompanying consolidated balance sheets. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the consolidated statements of operations. The Company utilizes a Black-Scholes option pricing model to estimate the fair value of the Purchase Warrants and Inducement 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 liabilities which could also result in material non-cash gain or loss being reported in our consolidated statements of operations. The fair value at March 31, 2023 was estimated using a Black-Scholes pricing model based on the following assumptions: Schedule of Fair value Warrant by Using Black-Scholes Pricing Model Assumptions Purchase Inducement Stock price $ 0.61 $ 0.61 Expiration term (in years) 4.63 3.67 Volatility 85.0 % 85.0 % Risk-free Rate 3.61 % 3.71 % Dividend yield 0.0 % 0.0 % The following table presents the changes in the warrant liabilities measured at fair value (in thousands): Schedule of Changes in Fair Value Warrant Liabilities 2023 2022 Three Months Ended March 31, 2023 2022 Fair value at beginning of period $ 2,843 $ 12,854 Change in fair value of warrant liability ( 1,028 ) ( 8,711 ) Fair value at end of period $ 1,815 $ 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®. Related party revenue relates to an agreement with Biofrontera Bioscience GmbH (“Bioscience”) for BF-RhodoLED® leasing and installation service. Refer to Note 15, 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, 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 Balance at December 31, 2022 $ 48 $ 9 $ 5 $ 20 $ 82 Beginning Balance $ 48 $ 9 $ 5 $ 20 $ 82 Provision related to current period sales 1 62 3 33 99 Credit or payments made during the period - ( 71 ) ( 2 ) ( 39 ) ( 112 ) Balance at March 31, 2023 $ 49 - 6 14 69 Ending Balance $ 49 - 6 14 69 6. Accounts Receivable, net Accounts receivables are mainly attributable to the sale of Ameluz ® , the BF-RhodoLED ® and Xepi®. It is expected that all trade receivables will be settled within twelve months of the balance sheet date. Trade accounts receivable are stated at their net realizable value. The allowance for credit losses reflects our best estimate of expected credit losses of the receivables determined on the basis of historical experience and current information. In developing the estimate for expected credit losses, trade accounts receivables are segmented into pools of assets depending primarily on delinquency status, and fixed reserve percentages are established for each pool of trade accounts receivables. The allowance for credit losses was $ 0.1 million as of March 31, 2023 and December 31, 2022. 7. Other Receivables, Related Party As of March 31, 2023 the Company has a receivable of $ 3.8 million due from the Biofrontera Group of which $ 3.7 million is due from Biofrontera AG for its 50 % share of the balance of a legal settlement (see Note 21. Commitments and Contingencies – Legal proceedings ) for which both parties are jointly and severally liable. The Company has a contractual right to repayment of its share of the settlement payments, plus interest and other miscellaneous settlement costs, from Biofrontera AG under the Settlement Allocation Agreement (“Allocation Agreement”) entered into on December 9, 2021 and as amended on March 31, 2022, which provides that the settlement payments would first be made by the Company and then reimbursed by Biofrontera AG for its share. The Allocation Agreement, as amended, 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, 2023 or December 31, 2022. 11 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, 2023 and 2022. 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, 2023 December 31, 2022 Prepaid expenses $ 593 $ 240 Prepaid insurance 512 15 Prepaid licenses 423 317 Security deposits - 85 Other 58 153 Total $ 1,586 $ 810 10. Property and Equipment, Net Property and equipment, net consists of the following: Schedule of Property and Equipment (in thousands) March 31, 2023 December 31, 2022 Computer equipment $ 94 $ 89 Computer software 27 27 Furniture & fixtures 81 81 Leasehold improvement 368 368 Machinery & equipment 155 145 Property and equipment, gross 725 710 Less: Accumulated depreciation ( 528 ) ( 506 ) Property and equipment, net $ 197 $ 204 Depreciation expense for the three months ended March 31, 2023 and 2022 was negligible and was included in selling, general and administrative expense in the consolidated statements of operations. 11. Intangible Asset, Net Intangible asset, net consists of the following: Schedule of Intangible Asset Net (in thousands) March 31, 2023 December 31, 2022 Xepi® license $ 4,600 $ 4,600 Less: Accumulated amortization ( 1,673 ) ( 1,568 ) Intangible asset, net $ 2,927 $ 3,032 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, 2023 and 2022 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, 2023 or 2022. 12. Statement of Cash Flows Reconciliation The following table provides a reconciliation of cash, cash equivalents, and restricted cash that sum to the total shown in the consolidated statements of cash flows: Schedule of Reconciliation of Cash, Cash Equivalents, and Restricted Cash (in thousands) March 31, 2023 December 31, 2022 Cash and cash equivalents $ 13,505 $ 17,208 Long-term restricted cash 200 200 Total cash, cash equivalent, and restricted cash shown on the consolidated statements of cash flows $ 13,705 $ 17,408 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, 2023 December 31, 2022 Legal settlement (See note 21) $ 6,094 $ 6,207 Employee compensation and benefits 3,155 2,850 Professional fees 1,303 1,353 Product revenue allowances and reserves 69 82 Other 514 372 Total $ 11,135 $ 10,864 14. 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, 2023 and 2022. Income tax expense incurred for the three months ended March 31, 2023 and 2022 relates to state income taxes. At March 31, 2023 and December 31, 2022, the Company had no unrecognized tax benefits. The Company continues to be in a cumulative loss position and as such, is maintaining a full valuation allowance. Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying consolidated statements of operations. As of March 31, 2023, and December 31, 2022, 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 15. 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. Under the agreement, the Company obtained an exclusive, non-transferable license to use 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, 2023 and 2022 were $ 4.6 million and $ 5.2 million, respectively and recorded in inventories in the consolidated balance sheets, and, when sold, in cost of revenues, related party in the consolidated statements of operations. Amounts due and payable to Pharma as of March 31, 2023 and December 31, 2022 were $ 0.9 million and $ 1.3 million, respectively, which were recorded in accounts payable, related parties in the consolidated balance sheets. Service Agreements In December 2021, we entered into an Amended and Restated Master Contract Services Agreement, or “Services Agreement”, which provides for the execution of statements of work that will replace the applicable provisions of our previous intercompany services agreement dated January 1, 2016, or 2016 Services Agreement, by and among us, Biofrontera AG, Biofrontera Pharma and Biofrontera Bioscience, enabling us to continue to use the IT resources of Biofrontera AG and its wholly owned subsidiaries (the “Biofrontera Group”) as well as providing access to the Biofrontera Group’s resources with respect to quality management, regulatory affairs and medical affairs. We currently have statements of work in place regarding IT, regulatory affairs, medical affairs, and pharmacovigilance, and are continuously assessing the other services historically provided to us by Biofrontera AG to determine 1) if they will be needed, and 2) whether they can or should be obtained from other third-party providers. As of March 31, 2023, we have migrated away from Biofrontera AG to third party providers for most of our significant IT services . Expenses related to the service agreement were negligible for the three months ended March 31, 2023 and $ 0.1 million for the three months ended March 31, 2022, which were recorded in selling, general and administrative, related party. Amounts due to Biofrontera AG related to the service agreement as of March 31, 2023 and December 31, 2022 were $ 0.2 million and $ 0.2 million, respectively, which were offset against other receivables, related party in the consolidated balance sheet. Clinical Lamp Lease Agreement On August 1, 2018, the Company executed a clinical lamp lease agreement with Biofrontera Bioscience GmbH (“Bioscience”) to provide lamps and associated services. Total revenue related to the clinical lamp lease agreement was minimal for the three months ended March 31, 2023 and 2022, respectively and was recorded as revenues, related party. Amounts due from Bioscience for clinical lamp and other reimbursements were approximately $ 0.2 million and $ 0.1 as of March 31, 2023 and December 31, 2022, respectively, which were recorded as other receivables, related party in the consolidated balance sheets. 14 Others The Company has recorded a receivable of $ 3.7 million and $ 6.4 million as of March 31, 2023 and December 31, 2022, respectively, due from Biofrontera AG for its 50 % share of the balance of a legal settlement for which both parties are jointly and severally liable. Refer to Note 7, Other Receivables, Related Party . There was no interest income recognized for the three months ended March 31, 2023 and $ 0.1 million of interest income for the three months ended March 31, 2022, in connection with this receivable. As of March 31, 2023, our investment in equity securities is valued at $ 7.6 million and consists of 6,466,946 common shares of Biofrontera AG, a significant shareholder of the Company. 16. 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 $ .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 17. 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 original 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. On December 12, 2022, the 2021 Plan was amended by our stockholders and the number of shares authorized for awards under the 2021 Plan was increased by 2,589,800 to 5,339,800 . As of March 31, 2023, there were 2,946,988 shares available for future awards under the amended 2021 Plan. Non-qualified stock options We maintain the 2021 Plan for the benefit of our officers, directors and employees. Employee stock options granted under the 2021 Plan generally vest in equal annual installments over three years and are exercisable for a period of up to ten years from the grant date. Non-employee director options vest in equal monthly installments following the date of grant and will be fully vested on the one-year anniversary of the date of grant. All stock options are exercisable at a price as set by the Company at the time of the grant but shall not be less than the market value of the common shares underlying the option on the grant date. The Company recognizes the grant-date fair value of share-based awards granted as compensation expense on a straight-line basis over the requisite service period. The fair value of stock options is estimated at the time of grant using the Black-Scholes option pricing model, which requires the use of inputs and assumptions such as the fair value of the underlying stock, exercise price of the option, expected term, risk-free interest rate, expected volatility and dividend yield. The Company elects to account for forfeitures as they occur. The fair value of each option was estimated on the date of the grant using the BSM option pricing model with the following assumptions: Schedule of Stock Options Assumptions Three Months Ended March 31, 2023 2022 Expected volatility 70 % 55 % Expected term (in years) 6.0 6.0 Risk-free interest rate 3.5 % - 3.7 % 1.79 % Expected dividend yield 0.0 % 0.0 % Share-based compensation expense of approximately $ 0.3 million and $ 0.1 million was recorded in selling, general and administrative expenses on the accompanying consolidated statement of operations for the three months ended March 31, 2023 and March 31, 2022, respectively. Options outstanding and exercisable under the employee share option plan as of March 31, 2023 and a summary of option activity during the three months then ended is presented below. Schedule of Stock Option Activity Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (1) Outstanding at December 31, 2022 1,737,344 $ 3.11 Granted 200,692 $ 0.99 Exercised - $ - Canceled or forfeited ( 58,804 ) $ 2.42 Outstanding at March 31, 2023 1,879,232 $ 2.90 9.09 $ - Exercisable at March 31, 2023 251,496 $ 4.07 8.73 $ - (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, 2023. As of March 31, 2023, there was $ 2.0 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately 2.1 years. Share-Based Compensation (RSUs) Restricted Stock Units (“RSUs”) will vest annually over two years, subject to the recipient’s continued service with the Company through the applicable vesting dates. The fair value of each RSU is estimated based on the closing market price of the Company’s common stock on the grant date. Share-based compensation expense of $ 0.1 million and $ 0.4 million for the RSUs was recorded in selling, general and administrative expenses in the accompanying consolidated statements of operations for the three months ended March 31, 2023 and March 31, 2022, respectively. 16 As of March 31, 2023, there was $ 0.5 million of unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately 1.1 years. Schedule of Restricted Stock Units Shares Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Weighted Average Grant Date Fair Value Outstanding at December 31, 2022 343,512 $ $ 2.61 Awarded - $ $ - Vested - $ $ - Canceled or forfeited - $ $ - Outstanding at March 31, 2023 343,512 0.63 $ 210 $ 2.61 Expected to vest at March 31, 2023 343,512 0.63 $ 210 $ 2.61 18. Interest Expense, net Interest expense, net consists of the following: Schedule of Interest Expense Three Months Ended March 31, (in thousands) 2023 2022 Interest expense ( 2 ) ( 4 ) Contract asset interest expense ( 89 ) ( 89 ) Interest income 56 60 Interest expense, net $ ( 35 ) $ ( 33 ) 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 . 19. Other Income (expense), net Other income (expense), net primarily includes (i) gain (loss) on sale of leased assets and (ii) gain (loss) on foreign currency transactions. 20. Net Earnings (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. In periods where a net loss is recorded, no effect is given to potentially dilutive securities, since the effect would be anti-dilutive. The following table sets forth the computation of the Company’s basic and diluted net loss per share attributable to common stockholders. (in thousands, except share and per share data): Schedule of Basic and Diluted Net Loss Per Share Attributable to Common Stockholders 2023 2022 Three Months Ended March 31, 2023 2022 Net income (loss) $ ( 7,478 ) $ 5,561 Shares Basic weighted average common shares outstanding 26,699,002 17,104,749 Add: Effect of dilutive securities Stock options and restricted stock units - 28,469 Diluted weighted average common shares outstanding 26,699,002 17,133,218 Net earnings (loss) per share: Basic $ ( 0.28 ) $ 0.33 Diluted $ ( 0.28 ) $ 0.32 17 The following table sets forth securities that were anti-dilutive for diluted EPS for the periods presented but which could potentially dilute EPS in the future: Schedule of Anti-dilutive Securities Excluded From Computation of Earnings Per Share March 31, 2023 2022 Common stock warrants 9,197,109 4,349,537 Common stock options and RSUs 2,198,745 575,518 Unit Purchase Options 403,628 403,628 Anti-dilutive securities excluded from computation of earnings per share 403,628 403,628 Common stock warrants include Purchase Warrants, Inducement Warrants and warrants issued in the Initial Public Offering. 21. Commitments and Contingencies Leases The Company leases its corporate headquarters under an operating lease that expires in August 2025. The Company has the option to extend the term of the lease for one five (5) year period upon written notice to the landlord. The extension period has not been included in the determination of the ROU asset or the lease liability as the Company concluded that it is not reasonably certain that it would exercise this option. The Company provided the landlord with a security deposit in the amount of $ 0.1 million, which was recorded as other assets in the consolidated balance sheets. The Company has also entered into a master lease agreement for its vehicles. After an initial non-cancelable twelve-month period, each vehicle is leased on a month to month basis. Based on historical retention experience of approximately three years, the vehicles have expiration dates ranging from February 2023 through September 2025. The components of lease expense for the three months ended March 31, 2023 were as follows (in thousands except lease term and discount rate): Schedule of Components of Lease Expense and Other Information Lease expense Operating Leases Amortization of ROU assets (operating lease cost) $ 139 Interest on lease liabilities 20 Total lease expense $ 159 Other Information Operational cash flow used for operating leases $ 154 ROU assets obtained in exchange for lease liabilities - Weighted -average remaining lease term (in years) 2.33 Weighted -average discount rate 6.31 % Future lease payments under non-cancelable leases as of March 31, 2023 were as follows (in thousands): Schedule of Future Commitments and Sublease Income Years ending December 31, Future lease commitments 2023 $ 409 2024 541 2025 349 Thereafter - Total future minimum lease payments 1,299 Less imputed interest ( 90 ) Total lease liability $ 1,209 Schedule of Operating Lease Liability Reported as: Operating lease liability, current $ 484 Operating lease liability, non-current 725 Total $ 1,209 Cutanea payments We have a contract in which we agreed 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 have filed for arbitration against Maruho with the International Chamber of Commerce (“ICC”) regarding issues with Maruho’s contract manufacturer that were not disclosed at the time of the Agreement and therefore are withholding the repayment of the start-up cost financing until a decision is reached through the arbitration process. The arbitration notes that Maruho breached the agreement with Cutanea due to the undisclosed manufacturing issues and seeks damages as well as a declaration that we are not obligated to repay Maruho. 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 have been made related to Xepi ® milestones. Contingent liability related to shares of Biofrontera AG acquired from Maruho through subscription rights Dependent on the outcome of the arbitration process between Biofrontera AG and Maruho, the Company may be liable for an additional payout of $ 0.9 million in relation to the shares of Biofrontera AG acquired from Maruho through a subscription rights agreement. In accordance with ASC 450-20-50-3, Contingencies, we have not accrued any liability associated with the subscription rights purchase, as the liability is not considered probable. 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 legal costs related to such 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 and engage a forensic expert to destroy data at issue in the litigation to settle the claims in the litigation. While Biofrontera AG has agreed to pay fifty percent of the settlement costs, we remain jointly and severally liable to DUSA for the full cash settlement amount, meaning that in the event Biofrontera AG does not pay all or a portion of the amount it owes under the Agreement, DUSA could compel us to pay Biofrontera AG’s share. If either we or Biofrontera AG violates the terms of the settlement agreement, we or Biofrontera AG may be liable for a greater amount. If we become liable for more than our agreed share of the aggregate settlement amount, either of these events could have a material adverse effect on our business, prospects, financial condition and/or results of operations. As of March 31, 2023, we have reflected a legal settlement liability in the amount of $ 6.1 million for the remaining payments due under the settlement, including the estimated remaining cost of the forensic expert and a related receivable from related party of $ 3.7 million for the remaining legal settlement costs to be reimbursed in accordance with the Settlement Allocation Agreement, which provided that the settlement payments, including the cost of the forensic expert, would first be made by the Company and then reimbursed by Biofrontera AG for its share. 22. 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, 2023 and 2022, matching contribution costs paid by the Company were $ 0.1 million. 23. Subsequent Events We have completed an evaluation of subsequent events after the balance sheet date of March 31, 2023 through the date this Quarterly Report on Form 10-Q was submitted to the SEC. Settlement Agreement On April 11, 2023, Biofrontera Inc. and each member of its Board of Directors, in their individual capacities, entered into a settlement agreement (the “Settlement Agreement”) with Biofrontera AG, a significant stockholder of the Company. Pursuant to the terms of the Settlement Agreement, the major provisions are as follows: ● the Company and a member of its Board of Directors withdrew their challenges to the resolutions passed at the Biofrontera AG stockholder meeting on January 9, 2023 ● the Company will increase the Board of Directors from five to six members and appoint as a Class I Director a director nominated by Biofrontera AG to fill the vacancy, subject to certain restrictions as described in the Settlement Agreement; ● the Company will begin a search for an additional director candidate, who is fully independent, to be nominated for election as a Class II Director at the Company’s 2023 annual meeting of stockholders; at which point the Company will increase the size of the Board of Directors to seven members; ● the Board established a Related Party Transactions Committee to approve all contracts and transactions between the Company and Biofrontera AG, including any of its affiliates; ● the Company amended on April 26, 2023 that certain Stockholder Rights Agreement dated October 13, 2022, between the Company and Computershare Trust Company, N.A., as Rights Agent to increase the threshold of beneficial ownership before being deemed an Acquiring Person, solely with respect to Biofrontera AG, from 20% to 29.96%. Loan and Security Agreement On May 8, 2023, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with MidCap Business Credit LLC, providing us with a revolving line of credit in the aggregate principal amount of up to $ 6.5 million, subject to a borrowing base. The Loan Agreement allows the Company to request advances thereunder and to use the proceeds of such advances for working capital purposes until the maturity date of May 8, 2026. The Loan Agreement is secured by a lien on substantially all of the assets of the Company, subject to customary exceptions. Advances under the Loan Agreement shall bear interest at the 30-Day Adjusted Term SOFR Rate, set monthly on the first day of the month based on 30-Day Term SOFR plus a spread adjustment of 15 basis points and subject to a floor of 2.25 %, plus 4.00 % calculated and charged monthly in arrears. In the event of a called event of default, a default interest rate of 3.00 % percent shall be added to the aforementioned rate. Under the terms of the Loan Agreement, amounts available for advances would be subject to a borrowing base, which is a formula based on certain eligible receivables and inventory. The Loan Agreement also includes an Unused Line Fee Rate of 0.375 % of the Credit Limit less all outstanding advances, which shall be paid on a monthly basis. Currently, our borrowing capacity is limited to our eligible receivables, pending consent from Biofrontera AG to allow Midcap to obtain title to Biofrontera Inc.’s inventory in the event of bankruptcy. 19