Biofrontera Inc. 10-Q

Item 1. Financial Statements BIOFRONTERA INC. CONDENSED CONSOLIDATED BALANCE SHEETS ( In thousands, except par value and share amounts ) June 30, 2024 December 31, 2023 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 4,379 $ 1,343 Investment, related party 10 78 Accounts receivable, net 3,504 5,162 Inventories, net 3,946 10,908 Prepaid expenses and other current assets 473 425 Other assets, related party 5,159 5,159 Total current assets 17,471 23,075 Property and equipment, net 101 134 Operating lease right-of-use assets 1,230 1,612 Intangible asset, net 2,448 2,629 Other assets 324 482 Total assets $ 21,574 $ 27,932 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable 2,413 3,308 Accounts payable, related parties 2,265 5,698 Operating lease liabilities 701 691 Accrued expenses and other current liabilities 3,593 4,487 Short term debt 296 3,904 Total current liabilities 9,268 18,088 Long-term liabilities: Warrant liabilities 921 4,210 Operating lease liabilities, non-current 443 804 Other liabilities 31 37 Total liabilities 10,663 23,139 Commitments and contingencies (Note 18) - - Stockholders’ equity: Series B Convertible Preferred stock, $ 0.001 par value, 20,000,000 shares authorized, no Series B-1, 4,806 Series B-2 and 7,998 Series B-3 shares issued and outstanding as of June 30, 2024 and no shares issued and outstanding as of December 31, 2023 - - Common stock, $ 0.001 par value, 35,000,000 shares authorized; 5,094,184 and 1,517,628 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively 5 2 Additional paid-in capital 121,250 104,441 Accumulated deficit ( 110,344 ) ( 99,650 ) Total stockholders’ equity 10,911 4,793 Total liabilities and stockholders’ equity $ 21,574 $ 27,932 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 BIOFRONTERA INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ( In thousands, except per share amounts and number of shares ) (Unaudited) 2024 2023 2024 2023 Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Product revenues, net $ 7,831 $ 5,830 $ 15,732 $ 14,544 Revenues, related party 8 18 18 36 Total revenues, net 7,839 5,848 15,750 14,580 Operating expenses Cost of revenues, related party 4,092 2,772 8,038 7,319 Cost of revenues, other 250 116 421 167 Cost of revenues 250 116 421 167 Selling, general and administrative 7,915 11,456 17,163 21,254 Selling, general and administrative, related party 32 92 29 119 Research and development 621 11 637 11 Change in fair value of contingent consideration - 100 - ( 100 ) Total operating expenses 12,910 14,547 26,288 28,770 Loss from operations ( 5,071 ) ( 8,699 ) ( 10,538 ) ( 14,190 ) Other income (expense) Change in fair value of warrants 5,438 375 2,009 1,403 Change in fair value of investment, related party ( 14 ) ( 1,482 ) ( 11 ) ( 4,424 ) Loss on debt extinguishment - - ( 316 ) - Interest expense, net ( 596 ) ( 79 ) ( 2,003 ) ( 114 ) Other income, net 6 62 186 30 Total other income (expense) 4,834 ( 1,124 ) ( 135 ) ( 3,105 ) Loss before income taxes ( 237 ) ( 9,823 ) ( 10,673 ) ( 17,295 ) Income tax expense 20 14 21 20 Net loss $ ( 257 ) $ ( 9,837 ) $ ( 10,694 ) $ ( 17,315 ) Loss per common share: Basic and diluted $ ( 0.05 ) $ ( 7.23 ) $ ( 2.45 ) $ ( 12.73 ) Weighted-average common shares outstanding: Basic and diluted 5,091,353 1,360,739 4,357,474 1,359,894 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 BIOFRONTERA INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except number of shares) (Unaudited) Shares Amount Shares Amount Capital Deficit Total Three and Six Months Ended June 30, 2024 Preferred Stock Common Stock Additional Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total Balance, April 1, 2024 - $ - 5,089,413 $ 5 $ 104,666 $ ( 110,087 ) $ ( 5,416 ) Balance - $ - 5,089,413 $ 5 $ 104,666 $ ( 110,087 ) $ ( 5,416 ) Conversion of Series B-1 Preferred into Series B-2 Preferred 4,806 - - - 3,570 - 3,570 Issuance of Series B-3 upon exercise of warrants 7,998 - - - 12,810 - 12,810 Issuance of RSUs - - 4,771 - - - - Stock based compensation - - - - 204 - 204 Net loss - - - - - ( 257 ) ( 257 ) Balance, June 30, 2024 12,804 $ - 5,094,184 $ 5 $ 121,250 $ ( 110,344 ) $ 10,911 Balance 12,804 $ - 5,094,184 $ 5 $ 121,250 $ ( 110,344 ) $ 10,911 Balance, January 1, 2024 - $ - 1,517,628 $ 2 $ 104,441 $ ( 99,650 ) $ 4,793 Balance - $ - 1,517,628 $ 2 $ 104,441 $ ( 99,650 ) $ 4,793 Exercise of pre-funded warrants - - 1,055,000 1 ( 1 ) - - Conversion of Series B-1 Preferred into Series B-2 Preferred and common stock 4,806 - 2,516,785 2 3,568 - 3,570 Issuance of Series B-3 upon exercise of warrants 7,998 - - - 12,810 - 12,810 Issuance of RSUs - - 4,771 - - - - Stock based compensation - - - - 432 - 432 Net loss - - - - - ( 10,694 ) ( 10,694 ) Balance, June 30, 2024 12,804 $ - 5,094,184 $ 5 $ 121,250 $ ( 110,344 ) $ 10,911 Balance 12,804 $ - 5,094,184 $ 5 $ 121,250 $ ( 110,344 ) $ 10,911 Shares Amount Capital Deficit Total Three and Six Months Ended June 30, 2023 Common Stock Additional Paid-In Accumulated Shares Amount Capital Deficit Total Balance, April 1, 2023 1,334,950 $ 1 $ 103,747 $ ( 86,997 ) $ 16,751 Issuance of shares for vested restricted stock units 8,588 - - - - Stock based compensation - - 259 - 259 Net loss - - - ( 9,837 ) ( 9,837 ) Balance, June 30, 2023 1,343,538 $ 1 $ 104,006 $ ( 96,834 ) $ 7,173 Balance, January 1, 2023 1,334,950 $ 1 $ 103,396 $ ( 79,519 ) $ 23,878 Balance 1,334,950 $ 1 $ 103,396 $ ( 79,519 ) $ 23,878 Issuance of shares for vested restricted stock units 8,588 - - - - Stock based compensation - - 610 - 610 Net loss - - - ( 17,315 ) ( 17,315 ) Balance, June 30, 2023 1,343,538 $ 1 $ 104,006 $ ( 96,834 ) $ 7,173 Balance 1,343,538 $ 1 $ 104,006 $ ( 96,834 ) $ 7,173 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 BIOFRONTERA INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) 2024 2023 Six Months Ended June 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 10,694 ) $ ( 17,315 ) Adjustments to reconcile net loss to cash flows used in operations: Depreciation 42 44 Amortization of right-of-use assets 358 265 Amortization of acquired intangible assets 216 209 Realized/unrealized (gain)/ loss in investment, related party 11 4,424 Change in fair value of contingent consideration - ( 100 ) Change in fair value of warrant liabilities ( 2,009 ) ( 1,403 ) Stock-based compensation 432 610 Allowance for credit losses 77 64 Loss on debt extinguishment 316 - Non-cash interest expense 246 190 Changes in operating assets and liabilities: Accounts receivable 1,581 1,491 Other receivables, related party 3 2,397 Prepaid expenses and other assets ( 28 ) ( 302 ) Inventories 6,961 ( 7,617 ) Accounts payable and related party payables ( 4,330 ) 3,380 Operating lease liabilities ( 334 ) ( 255 ) Accrued expenses and other liabilities ( 893 ) ( 107 ) Cash flows used in operating activities ( 8,045 ) ( 14,025 ) Cash flows from investing activities Sales of equity investment, related party 57 178 Purchase of intangible assets ( 50 ) - Purchases of property and equipment ( 9 ) ( 14 ) Cash flows provided by (used) in investing activities ( 2 ) 164 Cash flows from financing activities Proceeds from issuance of series B-1 preferred stock and warrants to purchase series B-3 preferred stock, net of issuance costs 7,662 - Proceeds from issuance of series B-3 from exercise of warrants 7,438 - Proceeds from line of credit - 5,700 Payment to extinguish line of credit ( 357 ) - Payment of principal short-term debt ( 3,660 ) ( 4,594 ) Cash flows provided by financing activities 11,083 1,106 Net increase (decrease) in cash and cash equivalents 3,036 ( 12,755 ) Cash, cash equivalents and restricted cash, at the beginning of the period 1,543 17,408 Cash, cash equivalents and restricted cash, at the end of the period $ 4,579 $ 4,653 Supplemental disclosure of cash flow information Interest paid $ 1,701 $ - Income taxes paid, net $ 21 $ - Supplemental non-cash financing activities Conversion of warrant liability to equity $ 5,372 $ - The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Biofrontera Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Organization and Business Overview Biofrontera Inc., a Delaware Corporation (the “Company” or “Biofrontera”), is a U.S.-based biopharmaceutical company commercializing a portfolio of pharmaceutical products for the treatment of dermatological conditions with a focus on photodynamic therapy (“PDT”) and topical antibiotics. The Company’s licensed products are used for the treatment of actinic keratoses, which are pre-cancerous skin lesions as well as impetigo, a bacterial skin infection. The Company includes its wholly owned subsidiary, Biofrontera Discovery GmbH (“Discovery”), formerly known as Bio-FRI GmbH, a limited liability company organized under the laws of Germany, formed on February 9, 2022, as a German presence to facilitate our relationship with Biofrontera Pharma GmbH (“Biofrontera Pharma”) and Biofrontera Bioscience GmbH (“Biofrontera Bioscience,” and, together with Biofrontera Pharma, the “Ameluz Licensor”), both of which are related parties as they are wholly owned subsidiaries of Biofrontera AG, a company holding more than five percent of the Company’s common stock. Our principal licensed product is Ameluz ® , which is a prescription drug approved for use in combination with PDT (when used together, “Ameluz ® PDT”) using the BF-RhodoLED ® and the RhodoLED ® XL lamps (the “RhodoLED ® Lamps”). In the United States, the PDT treatment is used 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 U.S. under an exclusive license and supply agreement, the Second Amended and Restated License and Supply Agreement, effective February 13, 2024 (the “Second A&R Ameluz LSA”), with the Ameluz Licensor. Our second prescription drug licensed product is Xepi ® (ozenoxacin cream, 1%), a topical non-fluorinated quinolone that inhibits bacterial growth. Currently, no antibiotic resistance against Xepi ® is known and it has been specifically approved by the Food and Drug Administration (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. Our exclusive license and supply agreement, as amended (“Xepi LSA”) with Ferrer Internacional S.A. (“Ferrer”), assumed by the Company on March 25, 2019 through our acquisition of Cutanea Life Sciences, Inc. (“Cutanea”), enables the Company to market and sell this product in the United States. The Company has generated limited revenue from sales of Xepi during the current reporting periods and recent developments with the third-party manufacturer that was providing our supply of Xepi ® have resulted in further delays of our commercialization of the product. However, Ferrer is in the process of qualifying a new contract manufacturer. Once the new contract manufacturer is qualified, we expect the supply of Xepi ® will meet the future market demand. Liquidity and Going Concern Pursuant to the requirements of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date the consolidated financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Since we commenced operations in 2015, we have generated significant losses. We incurred net cash outflows from operations of $ 8.0 million and $ 14.0 million for the six months ended June 30, 2024 and 2023, respectively. The Company had an accumulated deficit as of June 30, 2024 of $ 110.3 million. The Company’s primary sources of liquidity are its cash collected from the sales of its products, and cash flows from financing transactions. As of June 30, 2024, we had cash and cash equivalents of $ 4.4 million, compared to $ 1.3 million as of December 31, 2023. These conditions and current cash flow projections raise substantial doubt about our ability to continue as a going concern for at least twelve months from the issuance date of this report. However, management believes that its plan alleviates the substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date these financial statements are issued. Management’s plans include adhering to the 2024 budget approved by the Board of Directors (the “Board”), which includes significant sales and marketing, medical affairs, and dermatology community outreach efforts as we seek to expand the commercialization of Ameluz ® in the United States while decreasing discretionary expenses by approximately $ 5.5 million when compared to 2023. In addition, the terms of the Second A&R Ameluz LSA are expected to reduce our cost of inventory in the future (See Note 12 Related Party Transactions ), with gross margins of its primary product, Ameluz®, anticipated to be approximately 75% as opposed to the current 50%, beginning with inventory purchases after the execution date. This should reduce our cash needs for inventory, which will be partially offset by increased R&D costs, resulting in expected net savings of $ 2.7 million through August 2025. The Company also has discretionary marketing, personnel, software, and other expenses budgeted in fiscal year 2024, which the Company has the ability and intent, commencing in January 2025, to reduce such spending and cash outflows by $ 5.8 million through August 31, 2025 without materially impacting planned revenues. Based on the plans described above, management believes that the Company will have sufficient liquidity to meet its funding requirements for at least one year from the date these financial statements are issued. However, this will depend on several factors, including executing on its sales plan and planned cost reductions within the time period needed, as well as other possible challenges and unforeseen circumstances. A lack of execution or unforeseen circumstances may require the Company to raise additional capital or debt, which may not be available on acceptable terms, or at all, which could result in a material adverse effect on the Company, as well as its business, financial condition, results of operations, growth prospects and financial statements. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above. 7 2. Summary of Significant Accounting Policies Basis for Preparation of the Financial Statements The accompanying unaudited interim condensed 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 condensed 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 June 30, 2024, the Company’s operating results for the three and six months ended June 30, 2024 and 2023, and the Company’s cash flows for the six months ended June 30, 2024 and 2023. The accompanying financial information as of December 31, 2023 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, 2023, filed with the SEC on March 15, 2024. 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. Reverse Stock Split On July 3, 2023, the Company effected a 1-for-20 reverse stock split (the “Reverse Stock Split”) of the issued and outstanding shares of the Company’s common stock, $ 0.001 par value (the “Common Stock”). The Common Stock began trading on the Nasdaq Capital Market on a post-split basis on July 5, 2023. All information included in these consolidated financial statements has been adjusted, on a retrospective basis, to reflect the Reverse Stock Split as if it had been effective from the beginning of the earliest period presented, unless otherwise stated. All outstanding securities entitling their holders to purchase shares of Common Stock or acquire shares of Common Stock, including stock options, restricted stock units, and warrants, were adjusted as a result of the Reverse Stock Split, as required by the terms of those securities. With the exception of the accounting policies below, there have been no new or material changes to the significant accounting policies discussed in the Company’s Form 10-K for the year ended December 31, 2023. Research and Development Costs Research and development expenses include costs directly attributable to the clinical development of Ameluz ® , including personnel-related expenses, the cost of services provided by outside contractors, including services related to the Company’s clinical trials, facilities, depreciation, and other direct and allocated expenses. All costs associated with research and development are expensed as incurred. Clinical trial costs are a significant component of our research and development expenses and include costs associated with third-party contractors. The Company outsources a substantial portion of its clinical trial activities, utilizing external entities such as Clinical Research Organizations (“CROs”), independent clinical investigators, and other third-party service providers to assist the Company with the execution of its clinical trials. We record accruals for estimated costs under these contracts. When evaluating the adequacy of the accrued liabilities, we analyze the progress of the studies or clinical trials, including the phase or completion of events, invoices received, contracted costs and purchase orders. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period based on the facts and circumstances known at that time. Although we do not expect the estimates to be materially different from the amounts actually incurred, if the estimates of the status and timing of services performed differs from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period. Actual results could differ from our estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates and record any necessary adjustments in the period such variances become known. 8 We estimate clinical trial and research agreement related expenses based on the services performed, pursuant to contracts with the CROs, independent clinical investigators, and other vendors that conduct clinical trials and research on our behalf. In accruing clinical and research related fees, we estimate the period over which services will be performed and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Payments made under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered. 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, accrual of research and development expenses and income taxes including deferred tax assets and liabilities. Estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances. They are continuously reviewed but may vary from the actual values. Recently Issued Accounting Pronouncements In August 2020, the FASB issued ASU 2020-06, Debt- Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The guidance is effective for the Company in the first quarter of fiscal year 2024. The adoption of ASU 2020-06 did not have a material impact on our results of operations or financial position. In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures . This standard update requires additional interim and annual disclosures about a reportable segment’s expenses, even for companies with only one reportable segment. The Company is required to adopt the guidance for its 2024 annual report filed on Form 10-K, though early adoption is permitted. The Company is currently evaluating the impact of these amendments on its disclosures, but this standard update will not impact the Company’s results of operations or financial position. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures . The ASU requires that an entity disclose specific categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold. Further, the ASU requires certain disclosures of state versus federal income tax expense and taxes paid. The amendments in this ASU are required to be adopted for fiscal years beginning after December 15, 2024. Early adoption is permitted and the amendments should be applied on a prospective basis. We are currently evaluating the effect of adopting the ASU on our disclosures. 3. Fair Value Measurements The following table presents information about the Company’s assets that are measured at fair value on a recurring basis at June 30, 2024 and December 31, 2023 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 June 30, 2024 December 31, 2023 Assets: Investment, related party 1 $ 10 $ 78 Liabilities: Warrant liability – 2022 Purchase Warrants 3 $ 72 $ 328 Warrant liability - 2022 Inducement Warrants 3 $ 90 $ 412 Warrant liability – 2023 Purchase Warrants 3 $ 759 $ 3,470 Warrant liability 3 $ 759 $ 3,470 Total Liabilities $ 921 $ 4,210 9 Investment, related party A s of June 30, 2024 and December 31, 2023, the Company held as an investment, 3,019 (as adjusted for a reverse stock split on May 14, 2024) and 177,465 , respectively, common shares of Biofrontera, AG, a company who holds a greater than five percent of our Common Stock and is traded on the Frankfurt Stock Exchange. The fair values of these investments were determined with Level 1 inputs through references to quoted market prices. See Note 12. Related Party Transactions. Warrant Liabilities The warrant liabilities are comprised of (i) outstanding warrants to purchase 170,950 shares of Common Stock originally issued in a private placement on May 16, 2022, as amended on November 2, 2023 to extend the expiration date until November 2, 2028 and revise the exercise price to $ 3.55 per share (the “2022 Purchase Warrants”), (ii) warrants to purchase 214,286 shares of Common Stock issued on July 26, 2022, as amended on November 2, 2023 to extend the expiration date until November 2, 2028 and revise the exercise price to $ 3.55 per share (the “2022 Inducement Warrants”), and (iii) warrants to purchase 1,807,500 shares of Common Stock issued on November 2, 2023 expiring five years following the date of issuance and with an exercise price of $ 3.55 per share ( the “2023 Purchase Warrants”). The 2022 Purchase Warrants, the 2022 Inducement Warrants and the 2023 Purchase Warrants were accounted for as liabilities as these warrants provide for a redemption right in the case of a fundamental transaction which fails the requirement of the indexation guidance under ASC 815-40. The warrant liabilities are re-measured at each balance sheet date until their exercise or expiration, and any change in fair value is recognized in the Company’s consolidated statement of operations. The fair value for the Level 3 2022 Purchase Warrants, 2022 Inducement Warrants and the 2023 Purchase Warrants was estimated using a Black-Scholes-Merton (“BSM”) model. Certain inputs utilized in our BSM 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 liabilities which could also result in material non-cash gain or loss being reported in our consolidated statement of operations. The fair value of these warrants was determined using the BSM option pricing model based on the following assumptions for the three and six months ended June 30, 2024: fair value of the underlying common stock of $ 0.90 to $ 1.54 , expected volatility of 95 % to 100 %, risk free rate of 4.20 % to 4.35 %, remaining contractual term of 4.34 to 4.59 years and a dividend yield of 0 %. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The warrants to purchase 8,000 shares of Series B-3 Convertible Preferred Stock, par value $ 0.001 per share (the “2024 Preferred Warrants”), were also accounted for as liabilities, as they were redeemable in the event of a change in control, which was not solely within the control of the Company (see Note 13. Stockholders’ Equity ). The 2024 Preferred Warrants were issued in the first quarter of 2024 and exercised prior to the end of the second quarter of 2024. The fair value for the Level 3 2024 Preferred Warrants was estimated utilizing a probability weighted average approach, which incorporated two scenarios. In scenario one, the warrant value was based on the underlying value of the convertible preferred stock, using an option-pricing model backsolve that solved for the value of our publicly traded equity on the valuation date to obtain the valuation date fair value of the Series B-3 Convertible Preferred Stock, then applied the Series B-3 Convertible Preferred Stock value into the BSM model equation to determine the value of the Series B-3 convertible warrants. In scenario two, the warrant value was based on the underlying value of the publicly traded common equity value. Scenario two assumes the preferred stock will be converted into Common Stock prior to a liquidity event. A simple BSM model was utilized to value the warrant under scenario two, using the closing price of our Common Stock as an input to the model. The BSM model used the following range of inputs and assumptions for the 2024 Preferred Warrants at the issuance date of February 22, 2024, for the three months ended March 31, 2024 and at the exercise date of May 13, 2024: (i) expected stock price volatility of 79.3 % to 105 %; (ii) risk-free interest rate of 5.39 %; to 5.54 %; (iii) expected life of the warrants of 0.003 to 0.21 years; and (iv) dividend yield of 0.0 %. The following table presents the changes in the Level 3 warrant liabilities measured at fair value (in thousands): Schedule of Changes in Fair Value Warrant Liabilities 2024 2023 Six Months Ended June 30, 2024 2023 Fair value at beginning of period $ 4,210 $ 2,843 Issuance of new warrants 4,092 - Exercise of warrants ( 5,372 ) - Change in fair value of warrant liabilities ( 2,009 ) ( 1,403 ) Fair value at end of period $ 921 $ 1,440 10 4. Revenue We generate revenue primarily through the sales of our licensed products Ameluz ® , RhodoLED ® Lamps, and Xepi ® . Revenue from the sales of our lamps 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 for BF-RhodoLED ® leasing and installation service associated with the clinical lamps, which, due to the Second A&R Ameluz LSA is no longer effective as of June 30, 2024. Refer to Note 12, 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, 2022 $ 48 $ 9 $ 5 $ 20 $ 82 Provision related to current period sales 3 62 3 134 202 Credit or payments made during the period - ( 71 ) ( 2 ) ( 59 ) ( 132 ) Balance at June 30, 2023 $ 51 $ - $ 6 $ 95 $ 152 Balance at December 31, 2023 $ 52 $ - $ 6 $ 54 $ 112 Balance $ 52 $ - $ 6 $ 54 $ 112 Provision related to current period sales 32 - - 112 144 Credit or payments made during the period ( 7 ) - ( 6 ) ( 90 ) ( 103 ) Balance at June 30, 2024 $ 77 $ - $ - $ 76 $ 153 Balance $ 77 $ - $ - $ 76 $ 153 5. Investment, Related Party A s of June 30, 2024 and December 31, 2023, our investments in equity securities consisted solely of 3,019 shares (as adjusted for a 1 for 21 reverse stock split on May 14, 2024) and 177,465 shares, respectively, of common shares of Biofrontera AG. (See Note 12. Related Party Transactions ). Equity securities gains and losses include unrealized gains and losses from changes in fair values during the period on equity securities we still own, as well as gains and losses on securities we sold during the period. As reflected in the consolidated statements of cash flows, we received proceeds from sales of equity securities of approximately $ 0.1 million and $ 0.2 million during the six months ended June 30, 2024 and 2023, respectively. Gain/(loss) on investment, related party, was comprised of the following: Schedule of Unrealized Gains and Losses on Investments in Equity Securities (in thousands) 2024 2023 2024 2023 Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Net loss recognized during the period on equity securities $ ( 14 ) $ ( 1,482 ) $ ( 11 ) $ ( 4,424 ) Less: net realized loss on equity securities sold - 75 98 75 Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date $ ( 14 ) $ ( 1,407 $ 87 $ ( 4,349 ) 6. Accounts Receivable, net Accounts receivables are mainly attributable to the sale of Ameluz ® . 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. In determining the reserve percentages for each pool of trade accounts receivable, we considered our historical experience with certain customers, regulatory and legal environments and other relevant current and future forecasted macroeconomic factors. If we become aware of any customer-specific factors that impact credit risk, specific allowances for these known troubled accounts are recorded. The allowance for credit losses was $ 0.3 million and $ 0.2 million as of June 30, 2024 and December 31, 2023, respectively. 11 7. Inventories Inventories are comprised of Ameluz ® , RhodoLED ® Lamps, and immaterial amounts of Xepi ® finished products. There was no provision for obsolescence recorded for the three and six months ended June 30, 2024 and 2023. As of December 31, 2023, in connection with the voluntary recall by the Ameluz Licensor, we recorded an inventory write-off of $ 5.2 million with a corresponding asset for the anticipated replacement from the licensor to other assets, related party, as the recalled lots of Ameluz ® products were to be replaced by the Ameluz Licensor at no additional cost in accordance with the Ameluz License and Supply Agreement (the “Ameluz LSA”). See Note 12. Related Party Transactions for further discussion of the voluntary recall. As of July 23, 2024, we have received the full amount of the replacement inventory for the recalled Ameluz ® . See Note: 19. Subsequent Events. 8. Intangible Asset, Net Intangible asset, net consists of the following: Schedule of Intangible Asset Net (in thousands) June 30, 2024 December 31, 2023 Capitalized software $ 50 $ 15 Xepi ® license $ 4,600 $ 4,600 Less: Accumulated amortization ( 2,202 ) ( 1,986 ) Intangible asset, net $ 2,448 $ 2,629 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 was $ 0.1 million for each of the three-month periods ended June 30, 2024 and 2023 and $ 0.2 million for the six months ended June 30, 2024 and 2023. The Company capitalizes the application development phase costs of internal use software in accordance with ASC 350-40, “ Intangibles-Goodwill and Other-Internal Use Software.” Capitalized costs will be amortized on a straight-line basis over the estimated useful life of the asset upon completion. There was minimal amortization expense for the three and six months ended June 30, 2024 and none for the three and six months ended June 30, 2023. 9. Cash Balances and Statement of Cash Flows Reconciliation The Company maintains its cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”). At June 30, 2024, approximately $ 4.0 million of the Company’s cash balances were in excess of FDIC limits. The Company has not experienced any losses on these accounts and management does not believe that the Company is exposed to any significant risks with respect to these accounts. Restricted cash consists primarily of deposits of cash collateral held in accordance with the terms of our corporate credit cards. Long-term restricted cash was recorded in other assets in the consolidated balance sheet. The following table provides a reconciliation of cash, cash equivalents, and restricted cash that sum to the total shown in the statements of cash flows: Schedule of Reconciliation of Cash, Cash Equivalents, and Restricted Cash (in thousands) June 30, 2024 December 31, 2023 Cash and cash equivalents $ 4,379 $ 1,343 Long-term restricted cash 200 200 Total cash, cash equivalents, and restricted cash shown on the consolidated statements of cash flows $ 4,579 $ 1,543 Long-term restricted cash was recorded in other assets in the consolidated balance sheet. 12 10. 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) June 30, 2024 December 31, 2023 Employee compensation and benefits 1,989 2,185 Professional fees 391 1,064 Research and development 376 - Product revenue allowances and reserves 188 149 Distribution and Storage 50 118 Legal settlement - 403 Other 599 568 Total $ 3,593 $ 4,487 11. Debt Line of Credit Effective as of January 4, 2024, we voluntarily terminated the Loan and Security Agreement with Midcap Business Credit LLC (the “Loan Agreement”), paying a total of approximately $ 0.4 million, consisting of (1) the outstanding principal of and interest balance due under the Loan Agreement, aggregating approximately $ 0.2 million, and (2) early termination fees of approximately $ 0.2 million. As a result of the termination of the Loan Agreement, the Company recognized a $ 0.3 million loss related to prepayment fees and the write-off of deferred financing costs, in the accompanying consolidated statement of operations for the six months ended June 30, 2024. Loan Facilities On December 21, 2023, we entered into credit facilities with two different lenders (the “Loans”), each pursuant to a Business Loan and Security Agreement providing for a term loan in the principal amount of $ 2,000,000 . Each of the Loans is evidenced by a Secured Promissory Note, effective as of December 21, 2023. Each of the Loans requires the Company to make weekly payments of principal and interest in the amount of approximately $ 102,857 through July 5, 2024 , the maturity date. There were approximately $ 0.3 million of related issuance costs, recognized as a debt discount (contra liability against the debt balance), that are being amortized as interest expense over the life of the loan using the effective interest method. During the three and six months ended June 30, 2024 the Company recognized interest expense of approximately $ 0.2 million and $ 1.7 million, respectively and discount amortization of $ 0.1 million and $ 0.3 million, respectively. As of June 30, 2024 the aggregate amount of principal outstanding under the Loans was $ 0.3 million, which is shown net of the remaining unamortized issuance cost. Each of the Loans is secured by a security interest in substantially all of the Company’s assets (the “Collateral”). The Company will pay interest in the aggregate amount of $ 880,000 on each of the Loans, assuming all payments under the Loans are made on a timely basis. Each of the Business Loan and Security Agreements includes limitations on the Company’s ability to sell, lease, transfer, or otherwise dispose of its assets outside the ordinary course of its business; or to create, incur, allow or suffer to exist any lien on any of its assets other than liens in favor of either lender and certain other permitted liens. Each of the Business Loan and Security Agreements also contains customary representations and warranties and customary events of default, upon the occurrence of which, after any applicable grace period, the applicable lender would have the ability to accelerate its loan and exercise remedies with respect to the Collateral. Interest expense is recognized using the effective interest method, such that a constant effective interest rate is applied to the carrying amount of the debt at the beginning of each period until maturity. 13 12. Related Party Transactions License and Supply Agreement Under the Ameluz LSA, the Company obtained an exclusive, non-transferable license to use Biofrontera Pharma’s technology to market and sell the licensed products, Ameluz ® and RhodoLED ® Lamps and must purchase the licensed products exclusively from Biofrontera Pharma. The Second A&R Ameluz LSA, among other things, amended the Ameluz LSA to: (i) update the price we pay per unit, based on certain percentages of the anticipated net selling price, (the “Transfer Price”) that covers the cost of goods, royalties on sales, and services, including all regulatory efforts, agency fees, pharmacovigilance, and patent administration, as follows: ● Twenty-five percent of the anticipated net selling price per unit through 2025; ● Thirty percent of the anticipated net selling price per unit for 2026 to 2028; ● Thirty-two percent of the anticipated net selling price per unit for 2029 to 2031; ● Thirty-five percent of the anticipated net selling price per unit for 2032 and beyond, subject to a minimum dollar amount per unit; and ● The Transfer Price for sales related to acne, another indication currently in development, will remain at twenty-five percent of the anticipated net selling price per unit indefinitely. (ii) provide for the transfer of responsibilities for clinical trials relating to Ameluz ® in the US on or before June 1, 2024, including the Company assuming related contracts and transferring key personnel from the Ameluz Licensor to the Company. Also, in connection with the Second A&R Ameluz LSA, the Company entered into a Release of Claims, with the Ameluz Licensor, dated February 13, 2024, pursuant to which the Company agreed to release the Ameluz Licensor from all claims and liabilities arising out of or relating to any failure by the Ameluz Licensor to perform certain obligations under the Second A&R Ameluz LSA with respect to clinical trials for which the Company assumed responsibility under the Second A&R Ameluz LSA. Purchases of the licensed products during the three and six months ended June 30, 2024 were $ 0.8 million and $ 1.1 million, respectively, and $ 10.4 million and $ 13.7 million for the three and six months ended June 30, 2023, respectively. Amounts due and payable to Biofrontera Pharma as of June 30, 2024 and December 31, 2023 were $ 2.2 million and $ 8.5 million, respectively, which were recorded net in accounts payable, related parties in the consolidated balance sheets. On February 9, 2024, Biofrontera was notified that the Ameluz Licensor had initiated a voluntary recall of a limited number of lots of Ameluz ® due to a manufacturing defect in the impacted product’s packaging, which is provided by an unaffiliated supplier. In its communications, the Ameluz Licensor confirmed that the recalled product is not likely to cause adverse health consequences. Pursuant to the Ameluz LSA, the Company will not bear any financial responsibility for the costs associated with this recall. As such, the Company does not anticipate a material financial impact on its business as a result of the recall. As of December 31, 2023, in connection with the voluntary recall by the Ameluz Licensor, the Company recorded an inventory write-off of $ 5.2 million with a corresponding asset for the anticipated replacement from the licensor to other assets, related party. As of July 23, 2024, we received the full amount of the replacement inventory for the recalled Ameluz ® . See Note: 1 9. Subsequent Events. Service Agreements In December 2021, we entered into an Amended and Restated Master Contract Services Agreement (the “Services Agreement”), which provides for the execution of statements of work, by and among the Company, Biofrontera AG, Biofrontera Pharma and Biofrontera Bioscience, primarily for regulatory support and pharmacovigilance. The Services Agreement enables us to continue relying on Biofrontera AG and its subsidiaries for various services it has historically provided to us for as long as we deem necessary. We currently have statements of work in place regarding pharmacovigilance, regulatory affairs, medical affairs, and investor relations services and are continuously assessing the other services historically provided to us by Biofrontera AG to determine (i) if they will be needed, and (ii) whether they can or should be obtained from other third-party providers. W e have migrated away from Biofrontera AG to third party providers for most of our significant information technology services. Expenses related to the Services Agreement were negligible for the three and six months ended June 30, 2024 and $ 0.1 million for the three and six months ended June 30, 2023 , which were recorded in selling, general and administrative, related party. Amounts due to Biofrontera AG related to the Services Agreement were negligible and $ 0.1 million as of June 30, 2024 and December 31, 2023, which were recorded in accounts payable, related parties in the consolidated balance sheets. Clinical Lamp Lease Agreement On August 1, 2018, the Company executed a clinical lamp lease agreement with Biofrontera Bioscience to provide lamps and associated services. Due to the Second A&R Ameluz LSA, this agreement is no longer effective as of June 30, 2024. Total revenue related to the clinical lamp lease agreement was minimal for the three and six months ended June 30, 2024 and 2023, and was recorded as revenues, related party. Amounts due from Biofrontera Bioscience for clinical lamp and other reimbursements were negligible and $ 0.2 million as of June 30, 2024 and December 31, 2023, respectively, which were recorded as other receivables, related party in the consolidated balance sheets. 14 Others The Company receives expense reimbursement from Biofrontera AG and Biofrontera Bioscience on a quarterly basis for costs incurred on behalf of these entities, which are netted against expenses incurred within selling, general and administrative expenses. Total expense reimbursements were $ 0.2 million and $ 0.3 million for the three and six months ended June 30, 2024 respectively. Total expense reimbursements for the three and six months ended June 30, 2023 were $ 0.2 million and $ 0.4 million, respectively. The Company recorded a receivable of $ 2.8 million as of December 31, 2023, due from Biofrontera AG (presented net in accounts payable, related party) for its 50 % share of the balance of a legal settlement for which both parties are jointly and severally liable. T he Company had 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 entered into on December 9, 2021 and as amended on June 30, 2022, which provides that the settlement payments would first be made by the Company and then reimbursed by Biofrontera AG for its share. There was no interest income recognized for the three and six months ended June 30, 2024 and 2023, in connection with this receivable and the $ 2.8 million balance was net settled against payments for inventory in February 2024. As of June 30, 2024, our investment, related party was valued at a negligible amount and consisted of 3,019 common shares of Biofrontera AG ( as adjusted for a reverse stock split on May14, 2024) . As of December 31, 2023, our investment in equity securities was valued at $ 0.1 million and consisted of 177,465 common shares of Biofrontera AG. See Note 5. Investment, Related Party. 13. Stockholders’ Equity Under the Company’s Certificate of Second Amendment to the Amended and Restated Certificate of Incorporation (“Certificate”), effective April 25, 2024, the Company is authorized to issue 35,000,000 shares of Common Stock and 20,000,000 shares of preferred stock, par value $ .001 per share. On February 19, 2024, the Company entered into the Preferred Purchase Agreement, pursuant to which the Company agreed to issue and sell, in a private placement (the “Offering”), (i) 6,586 shares of Series B-1 Convertible Preferred Stock, par value $ 0.001 per share (the “Series B-1 Preferred Stock”), and (ii) the 2024 Preferred Warrants to purchase 8,000 shares of Series B-3 Convertible Preferred Stock, par value $ 0.001 per share (the “Series B-3 Preferred Stock”) for an aggregate offering price of $ 8.0 million. Each share of Series B-1 Preferred Stock was sold for $ 1,000 per share and the consideration for each 2024 Preferred Warrant was $ 0.125 per share of common stock that each share of Series B-3 Preferred Stock may be converted into (or 11,309,019 common stock shares). The conversion price of Series B Preferred Stock is $ 0.7074 per share of Common Stock, such that each Series B share is convertible into 1,413.6 shares of the Common Stock. The net proceeds received were approximately $ 7.3 million, after deducting fees paid to the placement agent and other offering expenses payable by the Company. On February 22, 2024, concurrent with the closing of the Offering, in exchange for the conversion of 1,780 shares of Series B-1 Preferred Stock, the Company issued 2,516,785 shares of common stock. Pursuant to the Certificate, upon the Company’s stockholders’ May 2024 approval of an increase in the authorized shares of Common Stock (“Stockholder Approval”), the remaining 4,806 shares of Series B-1 Preferred Stock automatically converted into Series B-2 Preferred Stock (as a conversion to common stock would have caused the holders to exceed their respective beneficial ownership limitations), with 6,793,893 shares of common stock issuable upon conversion of the Series B-2 Preferred Stock. Also, following the Stockholder Approval, upon any liquidation event, the assets of the Company available for distribution to its stockholders will be distributed among the holders of the shares of Series B Preferred Stock and Common Stock, pro rata, based on the number of shares held by each such holder, treating for this purpose, all shares of Series B Preferred Stock as if they had been converted to Common Stock. With the removal of the liquidation preference to Series B Preferred, the requirement for mezzanine classification was eliminated and the Series B Preferred Stock is classified as permanent equity as of June 30, 2024. (See Note 14. Redeemable Preferred Stock. ) On May 13 and 14, 2024, of the 8,000 2024 Preferred Warrants, 7,998 were exercised to purchase shares of the Company’s Series B-3 Convertible Preferred stock, par value $ 0.001 per share, for net proceeds of $ 7.4 million, net of fees paid to the placement agent, while two warrants expired due to non-issuance of fractional shares. All 2024 Preferred Warrants issued in the Offering have now been exercised or expired, with 11,306,192 shares of common stock issuable upon conversion of the 7,998 shares of Series B-3 Convertible Preferred Stock. Pursuant to the Preferred Purchase Agreement, the Company is entitled to appoint two independent directors designated by Rosalind Advisors, Inc to the Company’s Board. 15 Amendment to Articles of Incorporation – Series B Preferred Stock Pursuant to the terms of the Preferred Purchase Agreement, on February 20, 2024, the Company filed the Certificate of Designation with the Delaware Secretary of State designating 6,586 shares of its authorized and unissued preferred stock as Series B-1 Preferred Stock, 6,586 shares as Series B-2 Preferred Stock and 8,000 shares as Series B-3 Convertible Preferred Stock, with a par value of $ 0.001 per share (collectively the “Series B Preferred Stock”). Series B Preferred Stock Rights: Voting Rights . Subject to certain limitations described in the Certificate of Designation, the Series B Preferred Stock is voting stock. Holders of the Series B Preferred Stock are entitled to vote together with the Common Stock on an as-if-converted-to-Common-Stock basis. Holders of Common Stock are entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders. Accordingly, holders of Series B Preferred Stock will be entitled to one vote for each whole share of Common Stock into which their Series B Preferred Stock is then convertible on all matters submitted to a vote of stockholders. Conversion . Subject to certain beneficial ownership limitations, at the option of the Holder, each share of Series B Preferred Stock is convertible into shares of Common Stock at the applicable Conversion Price, rounded down to the nearest whole share. The conversion price for the Series B Preferred Stock is $ 0.7074 per share of Common Stock, subject to adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization. Following the Stockholder Approval, each share of Series B-1 Preferred Stock was automatically converted into either Common Stock or, to the extent the conversion would cause a holder to exceed its beneficial ownership limitation, shares of Series B-2 Preferred Stock. Liquidation . Following the Stockholder Approval, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, including a change of control transaction, or Deemed Liquidation Event, as defined in the Certificate of Designation (any such event, a “ Liquidation ”), the assets of the Company available for distribution to its stockholders shall be distributed among the holders of the shares of Series B Preferred Stock and Common Stock, pro rata based on the number of shares held by each such holder, treating for this purpose all shares of Series B Preferred Stock as if they had been converted to Common Stock pursuant to the terms of the Certificate of Designation immediately prior to such Liquidation, without regard to any limitations on conversion set forth in the Certificate of Designation or otherwise. Participation Right . For a period of one year following the closing of the Offering, the purchasers will have the right to participate as an investor in any securities offering consummated by the Company. Common Stock: 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. 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. As of June 30, 2024, there were 5,094,184 shares of Common Stock outstanding. Issuance of Common Stock Pursuant to the Exercise of 2023 Pre-Funded Warrants and Conversion of Series B-1 Preferred Stock On January 8, 2024 and February 2, 2024, an investor exercised 167,000 and 888,000 pre-funded warrants to purchase the Company’s common stock, par value $ 0.001 per share (the “Pre-Funded Warrants”), respectively, and purchased a total of 1,055,000 shares of common stock at an exercise price of $ .0001 per share, resulting in negligible net proceeds. 16 14. Redeemable Preferred Stock Prior to the Stockholder Approval, Series B-1 Preferred Stock was redeemable at the option of the holder and Series B-2 and B-3 Preferred Stock were redeemable in the event of a change in control. ASC 480-10-S99-3A(2) of the SEC’s Accounting Series Release No. 268 (“ASR 268”) requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (i) at a fixed or determinable price on a fixed or determinable date, (ii) at the option of the holder, or (iii) upon the occurrence of an event that is not solely within the control of the issuer. Preferred securities that are mandatorily redeemable are required to be classified by the issuer as liabilities whereas under ASR 268, an issuer should classify a preferred security whose redemption is contingent on an event not entirely in control of the issuer as mezzanine equity. The Series B-1 Preferred Stock was redeemable at the option of the holder, B-2 and B-3 were redeemable, upon a change in control that was not solely within control of the Company. Prior to the Stockholder Approval, the Series B Preferred Stock was considered senior to the Common Stock and all other series of the Company with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. As such, the Company determined that mezzanine treatment was appropriate for the Series B Preferred Stock at issuance in February 2024 and as of March 31, 2024, and the Series B Preferred Stock was presented as such in our consolidated balance sheets and consolidated statements of changes in stockholders’ equity and mezzanine equity for periods prior to the Stockholder Approval. The Series B Preferred Stock was not considered mandatorily redeemable. Upon the Stockholder Approval, each share of Series B-1 Preferred Stock automatically converted into either Common Stock or, to the extent the conversion would cause a holder to exceed its beneficial ownership limitation, shares of Series B-2 Preferred Stock, thereby removing the redemption feature at the option of the holder (which was only present for Series B-1) and eliminating one of the requirements for classification as mezzanine equity. Following the Stockholder Approval, upon any liquidation, the assets of the Corporation available for distribution to its stockholders will be distributed among the holders of the shares of Series B Preferred Stock and Common Stock, pro rata based on the number of shares held by each such holder, treating for this purpose all shares of Series B Preferred Stock as if they had been converted to Common Stock pursuant to the terms of the Certificate of Designation filed on February 20, 2024. Accordingly, the Series B Preferred stock is classified as permanent equity on our consolidated balance sheets and consolidated statements of change in stockholders’ equity as of June 30, 2024, due to the limited exception under ASC 480-10-S99-3A(3)(f). 15. Equity Incentive Plans and Share-Based Payments 2021 Omnibus Incentive Plan In 2021, our Board adopted, and our shareholders approved, the 2021 Omnibus Incentive Plan (“2021 Plan”), under which the maximum contractual term is 10 years for stock options issued. On June 12, 2024, the stockholders of the Company approved an amendment to the Biofrontera Inc. 2021 Omnibus Incentive Plan to increase the number of shares authorized for issuance by 3,483,010 shares, from 266,990 shares to 3,750,000 shares. As of June 30, 2024, there were 3,636,788 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 BSM 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. There were no equity grants during the three and six months ended June 30, 2024. Share-based compensation expense related to stock options of approximately $ 0.2 million and $ 0.3 million was recorded in selling, general and administrative expenses, with a negligible amount recorded as research and development on the accompanying consolidated statement of operations for the three and six months ended June 30, 2024, respectively. Share-based compensation expense of $ 0.2 million and $ 0.4 million related to stock options for the three and six months ended June 30, 2023, respectively, was recorded in selling, general and administrative expenses. Options outstanding and exercisable under the employee share option plan as of June 30, 2024, and a summary of option activity during the six 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, 2023 99,486 $ 39.26 Granted - $ - Exercised - $ - Canceled or forfeited ( 11,954 ) $ 11.58 Outstanding at June 30, 2024 87,532 $ 42.64 8.26 $ - Exercisable at June 30, 2024 39,809 $ 58.47 7.86 $ - (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 June 30, 2024. As of June 30, 2024, there was $ 0.6 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately 1.51 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 determined based on the closing market price of the Company’s Common Stock on the grant date. Share-based compensation expense for the RSUs was negligible and $ 0.1 million for the three and six months ended June 30, 2024, respectively, and $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2023 respectively, and was recorded in selling, general and administrative expenses in the accompanying consolidated statements of operations. 17 Schedule of Restricted Stock Units Shares Weighted Average Remaining Contractual Term Weighted Average Grant Date Fair Value Outstanding at December 31, 2023 4,771 - $ 52.20 Awarded - - $ - Vested ( 4,771 ) - $ 52.20 Canceled or forfeited - - $ - Outstanding at June 30, 2024 - - $ - As of June 30, 2024, there was no unrecognized compensation cost related to RSUs. 16. Interest Expense, net Interest expense, net consists of the following: Schedule of Interest Expense (in thousands) 2024 2023 2024 2023 Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Interest expense $ ( 620 ) $ ( 32 ) $ ( 2,041 ) $ ( 33 ) Contract asset interest expense - ( 89 ) - ( 179 ) Interest income 24 42 38 98 Interest expense, net $ ( 596 ) $ ( 79 ) $ ( 2,003 ) $ ( 114 ) Interest expense is comprised primarily of interest on our short-term loans and line of credit, including amortization of deferred costs. Contract asset interest expense related to a $ 1.7 million contract asset in connection with a $ 7.3 million start-up cost financing received from Maruho Co., Ltd. (“Maruho”) under a share purchase agreement. The contract asset was amortized on a straight-line basis using a 6 % interest rate over the financing arrangement contract term, which ended on December 31, 2023 . Interest income relates primarily to interest earned on funds deposited in our bank accounts. 17. Net Earnings (Loss) per Share The Company uses the two-class method to calculate net income (loss) per share. No dividends were declared or paid for the three and six months ended June 30, 2024 and 2023. Undistributed earnings for each period are allocated equally to common shareholders and participating securities based on the contractual participation rights of the security to share in the current earnings as if all current period earnings had been distributed. Under the two-class method, the undistributed losses will be allocated entirely to the common stock shareholders. Basic net earnings (loss) 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 (loss) 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 earnings (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 2024 2023 2024 2023 Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 Net loss $ ( 257 ) $ ( 9,837 ) $ ( 10,694 ) $ ( 17,315 ) Weighted average common shares outstanding, basic and diluted 5,091,353 1,360,739 4,357,474 1,359,894 Net loss per share, basic and diluted $ ( 0.05 ) $ ( 7.23 ) $ ( 2.45 ) $ ( 12.73 ) 18 The following table sets forth the 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 June 30, 2024 2023 Common stock warrants 2,269,356 1,877,630 Common stock options and RSUs 87,532 106,034 Unit Purchase Options 20,182 20,182 Shares related to Series B-2 convertible preferred stock 6,793,893 - Shares related to Series B-3 convertible preferred stock 11,306,191 - Total 20,477,154 2,003,846 Anti-dilutive securities 20,477,154 2,003,846 Common Stock warrants include Purchase Warrants, Inducement Warrants and warrants issued in the Company’s initial public offering. 18. 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 varying expiration dates through March 2027. Future lease payments under non-cancelable leases as of June 30, 2024 were as follows (in thousands): Schedule of Future Commitments and Sublease Income Years ending December 31, Future lease commitments Remainder of 2024 $ 382 2025 582 2026 238 2027 31 Thereafter - Total future minimum lease payments $ 1,233 Less imputed interest ( 89 ) Total lease liability $ 1,144 Schedule of Operating Lease Liability Reported as: Operating lease liability, current $ 701 Operating lease liability, non-current 443 Total $ 1,144 19 Ameluz LSA Sales Commitment The term shall renew automatically for a period of five years, in perpetuity, so long as we have earned revenues from Ameluz product and lamps equal to or greater than $ 150 million over the preceding five years. If we fail to earn $ 150 million in revenues from Ameluz ® and t he RhodoLED ® L amp s over the preceding five (5) year period prior to the Ameluz LSA’s termination date, Biofrontera Pharma has the right to terminate the Ameluz LSA by providing one (1) year written notice. In addition, starting in 2025, under the Second A&R Ameluz LSA, we agree to purchase the higher of a minimum quantity of tubes of Ameluz ® per year or at least a minimum 75% of the annual average of audited Ameluz ® tubes sold during the preceding four (4) full calendar years (“Annual Minimum Sales”). If we fail to achieve the respective Annual Minimum Sales for any calendar year, such failure will constitute a termination event, unless waived by the Ameluz Licensor. Ameluz ® Minimum Research and Development Costs (“Minimum R&D Costs”) During the years 2025 through 2030, we will be required to fund Minimum R&D Costs in an amount that is at least 85% of the difference between (i) the Transfer Price for product, effective February 13, 2024 and (ii) the Transfer Price for product as it would have been determined under the previous Ameluz LSA, dated October 8, 2021. If we fail to meet the minimum requirement, the difference shall be paid to Biofrontera Pharma on February 15, 2031, in either cash or our Common Stock, at our discretion. Licensing Agreement with Optical Tools On December 2, 2022, the Company entered into the technology transfer agreement with Optical Tools LLC (“Optical Tools”), Stephen Tobin and Paul Sowyrda (the “Agreement”). The Agreement allowed for the transfer of the assigned patents and trademarks, and upon notification by the Company to Optical Tools, the research and development of certain prototypes. The Company paid a licensing fee of $ 0.2 million which was expensed during the year ended December 31, 2022. On May 28, 2023, the Company authorized Optical Tools to design, develop, manufacture, and deliver at least two portable photodynamic therapy lamp prototypes (“PDT Device”) using the technology in the assigned patents. The PDT Device provides illumination, based on different light profiles, to the external skin surface of the human body. The Company is to reimburse Optical Tools for all reasonable out-of-pocket, material and labor costs per the Agreement. As part of the Agreement, Optical Tools will be eligible to receive regulatory and sales milestone payments totaling up to $ 1.0 million, and royalties of up to 3 % of net revenue of certain products developed under this Agreement. The Company did not make any milestone or royalty payments or accruals for such payments during the three and six months ended June 30, 2024 or 2023. 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 or accruals for such payments were made during the three and six months ended June 30, 2024 or 2023 related to Xepi ® milestones. 20 Research and Development Arrangements In the course of normal business operations, the Company enters into agreements with contract research organizations (“CROs”) to assist in the performance of research and development activities. Expenditures to CROs represent a significant cost in clinical development for the Company. The Company may be obligated to make future payments should certain developments be achieved. Costs for certain research and development activities are recognized based on the terms of the individual arrangements, which may differ from the timing of receipt of invoices and payment of invoices and are reflected in the financial statements as a prepaid or accrued expense. The Company could also enter into additional contract research agreements in the future, which may require upfront payments and long-term commitments of cash. 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. Legal Claims On September 13, 2023, Biofrontera was served with a complaint filed by DUSA Pharmaceuticals, Inc., Sun Pharmaceutical Industries, Inc. (“Sun”), and Sun Pharmaceutical Industries LTD in which DUSA alleges breach of contract, violation of the Lanham Act, and unfair trade practices. All claims stem from allegations that Biofrontera has promoted its Ameluz ® product in a manner that is inconsistent with its approved FDA labeling. Though this complaint was originally filed in the U.S. District Court for the District of Massachusetts, this matter has been transferred by agreement of the parties to the U.S. District Court for the District of New Jersey. Biofrontera filed a partial motion to dismiss the Lanham Act and unfair trade practices claims on April 8, 2024. This motion remains pending, and fact discovery commenced on August 1, 2024. On June 26, 2024 and June 27, 2024, Sun filed two additional complaints against Biofrontera, Biofrontera AG, Biofrontera Pharma, and Biofrontera Bioscience with the United States District Court for the District of Massachusetts and the International Trade Commission, respectively, both alleging infringement of two patents held by Sun. The Company denies these claims and intends to defend these matters vigorously. Based on the Company’s assessment of the facts underlying the above claims, the uncertainty of litigation and the preliminary stage of the case, the Company cannot estimate the possibility of a material loss, nor the potential range of loss that may result from this action. If the final resolution of the matter is adverse to the Company, it could have a material impact on the Company’s financial position, results of operations, or cash flows. 19. Subsequent Events We have completed an evaluation of subsequent events after the balance sheet date of June 30, 2024 through the date this Quarterly Report on Form 10-Q was submitted to the SEC, and determined that the following material subsequent event required disclosure. As of July 23, 2024, we have received the full amount of replacement inventory for the recalled Ameluz® (See Note 12 Related Party Transactions ). 21