Biofrontera Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain statements in this Form 10-Q constitute “forward-looking statements”. Such statements include estimates of our expenses, future revenue, capital requirements, our need for additional financing, statements regarding the efficacy and intended use of our technologies under development, the timelines and strategy for bringing licensed products to market, the timeline for regulatory review and approval of our licensed products, and other statements that are not historical facts, including statements which may be preceded by the words “intends,” “may,” “will,” “plans,” “expects,” “anticipates,” “projects,” “predicts,” “estimates,” “aims,” “believes,” “hopes,” “potential” or similar words. Forward-looking statements are not guaranties of future performance, are based on certain assumptions and are subject to various known and unknown risks and uncertainties, many of which are beyond our control. Actual results may differ materially from the expectations contained in the forward-looking statements. Factors that may cause such differences include, but are not limited to: ● our reliance on sales of products we license from other companies as our sole source of revenue; ● the success of our competitors in developing generic topical dermatological products that successfully compete with our licensed products; ● the success of our principal licensed product Ameluz ® ; ● the ability of Biofrontera Pharma, Biofrontera Bioscience and Ferrer Internacional S.A. (“Ferrer”) , referred to collectively as our (“licensors”) to establish and maintain relationships with contract manufacturers that are able to supply us with enough of the licensed products to meet our demand; ● the ability of our licensors or our licensors’ manufacturing partners, as applicable, to supply Ameluz®, BF-RhodoLED® lamps, Xepi® or other licensed products that we market in sufficient quantities and at acceptable quality and cost levels, and to fully comply with current good manufacturing practice or other applicable manufacturing regulations; ● the ability of our licensors to successfully defend or enforce patents related to our licensed products; ● the availability of insurance coverage and medical expense reimbursement for our licensed products; ● the impact of legislative and regulatory changes; ● competition from other pharmaceutical and medical device companies and existing treatments, such as simple curettage and cryotherapy; ● our success in achieving profitability; ● our ability to obtain additional financing as needed to implement our growth strategy; ● the effect of the COVID-19 global pandemic, including mitigation efforts and economic effects; ● our ability to retain and recruit key personnel; ● such other risks identified in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and any other filings with the SEC. 20 More detailed information about us and the risk factors that may affect the realization of forward-looking statements, including the forward-looking statements in this Quarterly Report on Form 10-Q, is set forth in our filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. We urge investors and security holders to read those documents free of charge at the SEC’s web site at www.sec.gov. We do not undertake to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise, except as required by law. 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. AKs are premalignant lesions of the skin that can potentially develop into skin cancer (squamous cell carcinoma) if left untreated. 1 International treatment guidelines list photodynamic therapy as the “gold standard” for treating AK, especially multiple AKs and the surrounding photodamaged skin. 2 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”). 21 Our principal objective is to increase the sales of our licensed products in the United States. The key elements of our strategy include the following: ● expanding our sales in the United States of Ameluz ® in combination with the BF-RhodoLED ® lamp for the treatment of minimally to moderately thick actinic keratoses of the face and scalp and positioning Ameluz ® to be the standard of care in the United States by growing our dedicated sales and marketing infrastructure in the United States; ● expanding 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; and ● opportunistically adding complementary products or services to our portfolio by acquiring or licensing IP to further leverage our commercial infrastructure and customer relationships. We devote a substantial portion of our cash resources to the commercialization of our licensed products, Ameluz ® and the BF-RhodoLED ® lamp series. We have financed our operating and capital expenditures through cash proceeds generated from our product sales and proceeds received in equity financings. We believe that important measures of our results of operations include product revenue, operating income (loss) and adjusted EBITDA (a non-U.S. GAAP measure as defined below). Our sole source of product revenue is sales of products that we license from certain related and unrelated companies. Our long-term financial objectives include consistent revenue growth and expanding operating margins. Accordingly, we are focused on licensed product sales expansion to drive revenue growth and improve operating efficiencies, including effective resource utilization, information technology leverage, and overhead cost management. Key factors affecting our performance As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting our results of operations. Seasonality Because traditional photodynamic therapy treatments using a lamp are performed more frequently during the winter, our revenue is subject to some seasonality and has historically been higher during the first and fourth quarters than during the second and third quarters. COVID-19 The COVID-19 global pandemic still affects our business and presents challenges. However, we are optimistic that our business will continue to thrive throughout 2023 as a result of the COVID-19 Public Health Emergency (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 to 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. 22 Supply Chain While our Licensors take reasonable precautions to ensure the successful production of our commercially licensed products, their contract manufacturers may experience a myriad of business difficulties (i.e., workforce instability, supply chain issues, erosion of customer base, etc.) that could impact their financial solvency. In December 2021, we were notified by Ferrer of third-party manufacturing delays for the Xepi ® product. Although we have inventory of Xepi ® on hand, we expect a delay in further shipments of Xepi ® for the next 8 to 12 months . Despite these delays, our total revenues will not be significantly impacted since the majority of our revenues are from sales of Ameluz ® . We continue to monitor the impacts of the supply chain on our business and are focused on ensuring the stability of the supply chains for Ameluz ® and BF-RhodoLED ® . Components of Our Results of Operations Product Revenue, net We generate product revenues through the third-party sales of our licensed products Ameluz ® , BF-RhodoLED ® lamps and Xepi ® . Revenues from product sales are recorded net of discounts, rebates and other incentives, including trade discounts and allowances, product returns, government rebates, and other incentives such as patient co-pay assistance. Revenue from the sales of our BF-RhodoLED ® lamp and Xepi ® are relatively insignificant compared with revenues generated through our sales of Ameluz ® . The primary factors that determine our revenue derived from our licensed products are: ● the level of orders generated by our sales force; ● the level of prescriptions and institutional demand for our licensed products; and ● unit sales prices. Related Party Revenues We also generate insignificant related party revenue in connection with an agreement with Biofrontera Bioscience to provide RhodoLED ® lamps and associated services for the clinical trials performed by Biofrontera Bioscience. Cost of Revenues, Related Party Cost of revenues, related party, is comprised of purchase costs of our licensed products, Ameluz ® and BF-RhodoLED ® lamps from Biofrontera Pharma GmbH and insignificant inventory adjustments due to scrapped, expiring and excess products. On October 8, 2021, we entered into an amendment to the Ameluz LSA under which the price we pay per unit will be based upon our sales history. As a result of this amendment, the purchase price we pay the Ameluz Licensor for Ameluz ® will be determined in the following manner: ● fifty percent of the anticipated net price per unit until we generate $30 million in revenue from sales of the products we license from the Ameluz Licensor during a given Commercial Year (as defined in the Ameluz LSA); ● forty percent of the anticipated net price per unit for all revenues we generate between $30 million and $50 million from sales of the products we license from the Ameluz Licensor; and ● thirty percent of the anticipated net price per unit for all revenues we generate above $50 million from sales of the products we license from the Ameluz Licensor. Cost of Revenues, Other Cost of revenues, other, is comprised of purchase costs of our licensed product, Xepi ® , third-party logistics and distribution costs including packaging, freight, transportation, shipping and handling costs, inventory adjustment due to expiring Xepi ® products, as well as sales-based Xepi ® royalties. 23 Selling, General and Administrative Expense Selling, general and administrative expenses consist principally of costs associated with our sales force, commercial support personnel, personnel in executive and other administrative functions, as well as medical affairs professionals. Other selling, general and administrative expenses include marketing, trade, and other commercial costs necessary to support the commercial operation of our licensed products and professional fees for legal, consulting and accounting services. Selling, general and administrative expenses also include the amortization of our intangible asset and our legal settlement expenses. Selling, General and Administrative Expenses, Related Party Selling, general and administrative expenses, related party, primarily relate to the services provided by our significant stockholder, Biofrontera AG, for IT support, and pharmacovigilance. In December 2021, we entered into an Amended and Restated Master Contract Services Agreement, or “Services Agreement”, which provides for the execution of statements of work that supersede the applicable provisions of the 2016 Services Agreement. The Services Agreement enables us to continue relying on Biofrontera AG and its subsidiaries for various services it has historically provided to us, including IT and pharmacovigilance support for as long as we deem necessary. We currently have statements of work in place regarding IT, regulatory affairs, medical affairs, pharmacovigilance, and Investor Relations services, and are continuously assessing the other services historically provided to us by Biofrontera AG to determine 1) if they will be needed, and 2) whether they can or should be obtained from other third-party providers. As of March 31, 2023, we have migrated most of our significant IT services from Biofrontera AG to third party providers. Change in Fair Value of Contingent Consideration In connection with the Cutanea acquisition, we recorded contingent consideration related to the estimated profits from the sale of Cutanea products to be shared equally with Maruho. The fair value of such contingent consideration was determined to be $6.5 million on the acquisition date of March 25, 2019 and is re-measured at each reporting date, with changes in fair value presented in the consolidated statement of operations, until the contingency is resolved. Change in Fair Value of Warrant Liabilities Common stock warrants issued in conjunction with private placement financing transactions are accounted for as liabilities in accordance with ASC 815-40. The warrant liability is measured at fair value at inception and on a recurring basis, with changes in fair value presented within the consolidated statements of operations. Change in Fair Value of Investment in Equity Securities Our investments are comprised of equity securities in shares of Biofrontera AG, which are initially recorded at cost, plus transaction costs, and subsequently measured at fair value, based on quoted market prices, with the gains and losses reported in the Company’s consolidated statement of operations. 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. The Company may sell its equity securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or other factors. Interest Expense, net Interest expense, net, primarily consists of amortization of the contract asset related to the start-up cost financing from Maruho under the Share Purchase and Transfer Agreement dated March 25, 2019 (as amended, the “Share Purchase Agreement”) offset by interest income of 6% per annum for each day that any reimbursement is past due related to the Amended Settlement Allocation Agreement with Biofrontera AG , and immaterial amounts of interest income earned on our financing of customer purchases of BF-RhodoLED ® lamps. 24 Other Income (Expense), net Other income (expense), net primarily includes (i) gain (loss) on sale of leased assets and (ii) gain (loss) on foreign currency transactions. Income Taxes As a result of the net losses, we have incurred in each fiscal year since inception, we have recorded no provision for federal income taxes during such periods. Income tax expense incurred relates to state income taxes. Results of Operations Comparison of the Three Months ended March 31, 2023 and 2022 The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022: ( in thousands) 2023 2022 Change Product revenues, net $ 8,715 $ 9,736 $ (1,021 ) Related party revenues 18 15 3 Revenues, net 8,733 $ 9,751 (1,018 ) Operating expenses: Cost of revenues, related party 4,547 4,975 (428 ) Cost of revenues, other 51 175 (124 ) Selling, general and administrative 9,800 7,616 2,184 Selling, general and administrative, related party 27 95 (68 ) Change in fair value of contingent consideration (200 ) - (200 ) Total operating expenses 14,225 12,861 1,364 Loss from operations (5,492 ) (3,110 ) (2,382 ) Change in fair value of warrant liabilities 1,028 8,711 (7,683 ) Change in fair value of investments (2,941 ) - (2,941 ) Interest expense, net (35 ) (33 ) (2 ) Other income (expense), net (33 ) 23 (56 ) Loss before income taxes (7,473 ) 5,591 (13,064 ) Income tax expenses 5 30 (25 ) Net income (loss) $ (7,478 ) $ 5,561 $ (13,039 ) Product Revenue, net Net product revenue was $8.7 million and $9.8 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $1.02 million, or 10.5%, This decrease is driven by a higher volume of Ameluz revenue in Q1 2022 caused by customer buy-in prior to a price increase on April 1, 2022. Unlike 2022, the Company did not increase the price of Ameluz in 2023, and therefore did not see a similar buy-in effect from customers anticipating a price increase. 25 Operating Expenses Cost of Revenues, Related Party Cost of revenues, related party was $4.5 million and $5.0 million for the three months ended March 31, 2023 and 2022, respectively, a decrease of $0.4 million, or 8.6%, which was driven by the decrease in Ameluz product revenue. Cost of revenues, related party, is directly correlated to the selling price of Ameluz under the Ameluz LSA. Selling, General and Administrative Expenses Selling, general and administrative expenses were $9.8 million and $7.6 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $2.2 million, or 28.7%. The increase was primarily driven by $1.2 million of increased personnel cost due to increased headcount primarily in the sales team as well as $1.0 million of increased legal expenses resulting primarily from a legal settlement. Change in Fair Value of Contingent Consideration The change in fair value of contingent consideration was a decrease of $0.2 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The change in fair value of contingent consideration is driven by the estimated profit share the Company is required to pay under the Share Purchase Agreement. Change in Fair Value of Warrant Liabilities The change in fair value of warrant liabilities was a decrease of $7.7 million for three months ended March 31, 2023. The change in fair value of warrant liabilities was driven by changes in the underlying value of the common stock. Change in fair value of investments in equity securities The change in fair value of investments in equity securities was a decrease of $2.9 million, driven by changes in the quoted market price of the common stock of Biofrontera AG. Net Income (Loss) to Adjusted EBITDA Reconciliation for the Three Months Ended March 31, 2023 and 2022 We define adjusted EBITDA as net income or loss before interest income and expense, income taxes, depreciation and amortization, and other non-operating items from our consolidated statements of operations as well as certain other items considered outside the normal course of our operations specifically described below. Adjusted EBITDA is not a presentation made in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Our definition of adjusted EBITDA may vary from the use of similarly-titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. Adjusted EBITDA should not be considered as an alternative to net income or loss, operating income/(loss), cash flows from operating activities or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance or liquidity. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Change in fair value of contingent consideration: Pursuant to the Share Purchase Agreement, the profits from the sale of Cutanea products will be shared equally between Maruho and Biofrontera until 2030. The fair value of the contingent consideration was determined to be $6.5 million on the acquisition date and is re-measured at each reporting date, with changes in fair value presented within the consolidated statements of operations. We exclude the impact of the change in fair value of contingent consideration as this is non-cash. Change in fair value of warrant liabilities: The Warrants issued in conjunction with our private placement offerings were accounted for as liabilities in accordance with ASC 815-40. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the consolidated statements of operations. We exclude the impact of the change in fair value of warrant liabilities as this is non-cash. Change in fair value of investment in equity securities: The 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 operations. For the investments held in foreign currencies, the change in fair value attributable to changes in foreign exchange rates is included in gains and losses in the consolidated statements of operations. We exclude the impact of the change in fair value of investments as this is non-cash. Legal settlement expenses : To measure operating performance, we exclude legal settlement expenses. We do not expect to incur these types of legal expenses on a recurring basis and believe the exclusion of such amounts allows management and the users of the financial statements to better understand our financial results. Stock Based Compensation : To measure operating performance, we exclude the impact of costs relating to share-based compensation. Due to the subjective assumptions and a variety of award types, we believe that the exclusion of share-based compensation expense, which is typically non-cash, allows for more meaningful comparisons of our operating results to peer companies. Share-based compensation expense can vary significantly based on the timing, size and nature of awards granted. 26 Adjusted EBITDA margin is adjusted EBITDA for a particular period expressed as a percentage of revenues for that period. We use adjusted EBITDA to measure our performance from period to period and to compare our results to those of our competitors. In addition to adjusted EBITDA being a significant measure of performance for management purposes, we also believe that this presentation provides useful information to investors regarding financial and business trends related to our results of operations and that when non-U.S. GAAP financial information is viewed with U.S. GAAP financial information, investors are provided with a more meaningful understanding of our ongoing operating performance. The below table presents a reconciliation from net income (loss) to Adjusted EBITDA for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 Net income (loss) $ (7,478 ) $ 5,561 Interest expense, net 35 33 Income tax expenses 5 30 Depreciation and amortization 266 131 EBITDA (7,172 ) 5,755 Change in fair value of contingent consideration (200 ) - Change in fair value of warrant liabilities (1,028 ) (8,711 ) Change in fair value of investments 2,941 - Legal settlement expenses 1,118 - Stock based compensation 351 517 Adjusted EBITDA $ (3,990 ) $ (2,439 ) Adjusted EBITDA margin -45.7 % -25.0 % Adjusted EBITDA Adjusted EBITDA decreased from ($2.4) million during the three months ended March 31, 2022 to ($4.0) million for the three months ended March 31, 2023 driven by an increase in personnel costs and lower revenues. Our adjusted EBITDA margin decreased from (25%) to (45.7%) during the same periods. Liquidity and Capital Resources 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 Biofrontera AG 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 or the proceeds from the sale of our holdings in Biofrontera AG is lower than expected or we are not able to complete the sale within our planned timeline, 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. 27 Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following: ● the costs of our commercialization activities for Ameluz ® ; ● the extent to which we acquire or invest in licensed products, businesses and technologies; ● the extent to which we choose to establish collaboration, co-promotion, distribution or other similar agreements for our licensed products; ● the cost to fulfill our contractual obligations for various operating leases on vehicles and office space; ● the 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; and ● the ability to collect a receivable of $3.7 million from Biofrontera AG (in accordance with the Settlement Allocation Agreement) for reimbursement of legal settlement payments to be made on their behalf for which both parties are jointly and severally liable. We will continue to assess our operating costs and expenses and our cash and cash equivalents and, if circumstances warrant, we will make appropriate adjustments to our operating plan. Cash Flows The following table summarizes our cash provided by and (used in) operating, investing and financing activities: Three Months Ended March 31, (in thousands) 2023 2022 Net cash used in operating activities $ (3,689 ) $ (2,112 ) Net cash used in investing activities (14 ) (5 ) Net decrease in cash and restricted cash $ (3,703 ) $ (2,117 ) Operating Activities During the three months ended March 31, 2023, operating activities used $3.7 million of cash, primarily resulting from our loss from operations of $5.5 million, adjusted for non-cash expense of stock-based compensation of $0.4 million, non-cash interest expense of $0.1 million, and depreciation and amortization in the aggregate of $0.3 million, and net cash used by changes in our operating assets and liabilities of $1.4 million, offset by change in fair value of contingent consideration of $0.2 million. During the three months ended March 31, 2022, operating activities used $2.1 million of cash, primarily resulting from our loss from operations of $3.1 million, adjusted for non-cash expense of stock-based compensation of $0.5 million, non-cash interest expense of $0.1 million, and depreciation and amortization in the aggregate of $0.1 million and net cash used by changes in our operating assets and liabilities of $0.3 million. Investing Activities During the three months ended March 31, 2023 net cash used in investing activities consisted of the purchase of machinery & computer equipment. During the three months ended March 31, 2022, net cash used in investing activities consisted of the purchase of computer equipment. Financing Activities During the three months ended March 31, 2023 and 2022, there was no net cash provided by or used in financing activities. 28 Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles of the United States, or U.S. GAAP. The preparation of the financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions by management that affect the value of assets and liabilities, as well as contingent assets and liabilities, as reported on the balance sheet date, and revenues and expenses arising during the reporting period. The main areas in which assumptions, estimates and the exercising of a degree of judgment are appropriate relate to fair value measurements of contingent consideration, warrant liabilities, and stock compensation. Estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances. They are continuously reviewed but may vary from the actual values. Our significant accounting policies are described in more detail in Note 2 – Summary of Significant Accounting Policies , to our consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data ,” our Annual Report on Form 10-K. Critical Accounting Estimates A summary of our critical accounting estimates is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There were no material changes to our critical accounting estimates for the three months ended March 31, 2023. Off-balance Sheet Arrangements Besides the contractual obligations and commitments as discussed in the section titled 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk As a “smaller reporting company,” we are not required to provide the information required by this Item.