Biofrontera Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s discussion and analysis (“MD&A”) provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Condensed Consolidated Financial Statements and related notes. The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during the first quarter of 2024 compares with prior-year periods. Throughout this section, Biofrontera Inc., including its wholly owned subsidiary, Biofrontera Discovery GmbH (“Discovery” or “subsidiary”), is referred to as “Company,” “we,” “us,” or “our.” 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. The words “intends,” “may,” “will,” “plans,” “expects,” “anticipates,” “projects,” “predicts,” “estimates,” “aims,” “believes,” “hopes,” “potential”, “target”, “goal”, “assume”, “would”, “could” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. You should read this Form 10-Q and the documents that we have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we expect. While we have based these forward-looking statements on our current expectations and projections about future events, we may not actually achieve the plans, intentions or expectations disclosed in or implied by our forward-looking statements, and you should not place undue reliance on our forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions about us and accordingly, actual results or events could differ materially from the plans, intentions and expectations disclosed in or implied by the forward-looking statements we make. Factors that may cause such differences include, but are not limited to: ● the success of our principal licensed product Ameluz ® ; ● our reliance on sales of products we license from other companies as our sole source of revenue; ● the ability of Biofrontera Pharma GmbH (“Biofrontera Pharma”), Biofrontera Bioscience GmbH (“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 ® , 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 impact of legislative and regulatory changes; ● our ability to obtain additional financing as needed to implement our growth strategy; ● our success in achieving profitability; ● our ability to retain and recruit key personnel; ● our ability to effectively manage and control costs associated with our clinical trial operations ● the success of our competitors in developing generic topical dermatological products that successfully compete with our licensed products; ● the availability of insurance coverage and medical expense reimbursement for our licensed products; 24 ● competition from other pharmaceutical and medical device companies and existing treatments, such as simple curettage and cryotherapy; and ● such other risks identified in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (as filed with the Securities and Exchange Commission (“SEC”) on March 15, 2024, the “Form 10-K”), Item 1A of Part II of this Quarterly Report on Form 10-Q and any other filings with the SEC. 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 Form 10-K. 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 We are a U.S.-based biopharmaceutical company commercializing a portfolio of pharmaceutical products for the treatment of dermatological conditions with a focus on photodynamic therapy (“PDT”) and topical antibiotics. The Company’s licensed products are used for the treatment of actinic keratoses (“AKs”), which are pre-cancerous skin lesions, as well as impetigo, a bacterial skin infection. Our subsidiary, Discovery, was formed on February 9, 2022, as a German presence that manages our clinical trial work and facilitates our relationship with Biofrontera Pharma and Biofrontera Bioscience (together, the “Ameluz Licensor”), both of which are related parties as they are wholly owned subsidiaries of Biofrontera AG. 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 AKs of mild-to-moderate severity on the face and scalp. AKs are premalignant lesions of the skin that can potentially develop into skin cancer (squamous cell carcinoma) if left untreated. International treatment guidelines list PDT as the “gold standard” for treating AK, especially multiple AKs and the surrounding photodamaged skin. 1 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 as of February 13, 2024 with the Ameluz Licensor (the “Second A&R Ameluz LSA”). Effective June 1, 2024, we assumed control of all clinical trials relating to Ameluz ® in the United States, allowing for more effective cost management and direct oversight of trial efficiency. Our research and development (“R&D”) program is focused on label expansion for Ameluz ® as well as supporting PDT growth by improving the capabilities of our RhodoLED ® Lamps to better fulfill the needs of dermatologists. Our goal is to improve the effectiveness of our commercial team by allowing sales representatives to carry approved devices with them allowing for easier product demonstrations and evaluations. In October 2024, the FDA approved the Company’s Supplemental New Drug Application to increase the maximally approved dosage of Ameluz ® from one to three tubes per treatment. This approval allows healthcare professionals greater flexibility in addressing larger or multiple treatment areas for patients undergoing PDT for AK on the face and scalp, leading to greater convenience for both healthcare providers and their patients. In combination with the RhodoLED ® XL Lamp, providers can now treat a patient’s face more efficiently. Additionally, the change to the label and the RhodoLED ® XL are both foundational to support trunk and extremities which we expect to add to the label in the next couple years. Also, in October 2024, the Company received results in its Phase III trial evaluating its drug-device therapy, Ameluz ® with the BF-RhodoLED lamp, as a treatment for superficial basal cell carcinoma (“sBCC”). The primary endpoint was a composite of complete clinical and histological clearance of one preselected “main target” BCC lesion per patient 12 weeks after the start of the last PDT cycle. According to the phase III ALA-BCC-CT013 study, Ameluz®-PDT achieved 65.5% success, compared to 4.8% success achieved with placebo-PDT. Complete histological clearance was seen in 75.9% of these lesions in the Ameluz® arm, compared to 19.0% with placebo. Complete clinical clearance was achieved in 83.4% of patients treated with Ameluz® compared to 21.4% with placebo. Effective with the Second A&R Ameluz LSA, the price we pay per unit, based on certain percentages of the anticipated net selling price, (the “Transfer Price”) of Ameluz ® was reduced from 50% to 25% for all purchases through 2025. Starting on January 1, 2026, until 2032 there will be stepwise increases in the Transfer Price from 25% to 35% for sales related to AK and, if approved by the Food and Drug Administration (the “FDA”), basal cell carcinoma and squamous cell carcinoma. The Transfer Price for sales related to acne, another indication currently in development, will remain at 25% indefinitely. The Transfer Price covers the cost of goods, royalties on sales, and services including all regulatory efforts, agency fees, pharmacovigilance, and patent administration. The reduced LSA Transfer Price will allow the Company to finance the R&D activities assumed as of June 1, 2024, and continue our commercial growth trajectory. 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. Our exclusive license and supply agreement, as amended (“Xepi LSA”), with Ferrer that we assumed on March 25, 2019 through our acquisition of Cutanea Life Sciences, Inc. (“Cutanea”) enables us to market and sell this product in the United States. The Company has generated limited revenue from sales of Xepi due to third-party manufacturing delays that have hampered our commercialization of the product. Ferrer is now in the process of qualifying a new contract manufacturer. If the new contract manufacturer is qualified, we believe that it will be able to supply enough of the Xepi ® product line to meet market demand for as long as we maintain it. However, in the third quarter of 2024, the Company reached the decision to divest its Xepi product line and determined that it met the held for sale accounting criteria. The Company has entered into a letter of intent and expects to complete the sale within the next six to twelve months. The related intangible asset is presented as held for sale under current assets in the Condensed Consolidated Balance Sheets. See Note 7. Assets Held for Sale , for additional information. 1 Werner RN, Stockfleth E, Connolly SM, et al. Evidence- and consensus-based (S3) Guidelines for the Treatment of Actinic Keratosis - International League of Dermatological Societies in cooperation with the European Dermatology Forum - Short version. J Eur Acad Dermatol Venereol. 2015;29(11):2069-2079. doi:10.1111/jdv.13180. 25 Our principal objective is to increase the sales of our licensed products in the United States. The key elements of our strategy include the following: ● expanding our sales in the United States of Ameluz ® in combination with the RhodoLED ® Lamps for the treatment of minimally to moderately thick AKs 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; ● 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 license and supply agreements 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 RhodoLED ® Lamps. We have financed our operating and capital expenditures through cash proceeds generated from our product sales, our line of credit, short-term debt 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. 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. We have historically experienced delays in delivery times of our RhodoLED ® Lamps due to supply chain issues and there is a possibility that there may be additional supply chain challenges, or our orders are fulfilled at a slower rate than expected. Despite these historic and possible future delays, we expect total revenues will not be significantly impacted (i.e., we experience less growth than expected vs. declining sales) since the majority of our revenues are from sales of Ameluz ® and we have RhodoLED ® Lamps on hand and on order. 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 RhodoLED ® Lamps. 26 Components of Our Results of Operations Product Revenue, net We generate product revenues through the third-party sales of our licensed products Ameluz ® , RhodoLED ® Lamps and to a much lesser extent Xepi ® covered by our exclusive license and supply agreements with our Licensors . 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 RhodoLED ® Lamps 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 Prior to June 1, 2024, the date on which we took over clinical trials, we generated insignificant related party revenue in connection with an agreement with Biofrontera Bioscience to provide BF-RhodoLED ® lamps and associated services for the clinical trials performed by Biofrontera Bioscience. In the future, we do not expect to receive related party revenue regarding lamps and associated services for clinical trials. Cost of Revenues, Related Party Cost of revenues, related party, is comprised of purchase costs of our licensed products, Ameluz ® and RhodoLED ® Lamps from Biofrontera Pharma and insignificant inventory adjustments due to scrapped, expiring and excess products. The Transfer Price we paid for inventory purchased through February 12, 2024, was based on the Ameluz LSA as amended on October 8, 2021, under which the price paid per unit was based upon our sales history. The purchase price we paid the Ameluz Licensor for Ameluz ® was determined in the following manner: ● fifty percent of the anticipated net selling 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 selling 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 selling price per unit for all revenues we generate above $50 million from sales of the products we license from the Ameluz Licensor. Effective February 12, 2024, the Second A&R Ameluz LSA, among other things, was amended to change the Transfer Price to 25% of the anticipated net selling price per unit through 2025 and then increasing over time pursuant to the schedule set forth in the Second A&R Ameluz LSA to a maximum of 35% of the anticipated net selling price starting in 2032, subject to a minimum dollar amount per unit. We expect to see an impact from the change in the transfer pricing under the Second A&R Ameluz LSA in the fourth quarter as we receive product under the new pricing. 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, and inventory adjustment due to expiring Xepi ® products. 27 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, and 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 assets and our legal settlement expenses. Selling, General and Administrative Expenses, Related Party Selling, general and administrative expenses, related party, relate to the services provided by our significant stockholder, Biofrontera AG, primarily for regulatory support and pharmacovigilance. These expenses are charged to us based on costs incurred plus 6% in accordance with the Amended and Restated Master Contact Services Agreement entered into on December 2021 (the “2021 Services Agreement”). The 2021 Services Agreement enables us to continue relying on Biofrontera AG and its subsidiaries for various services it has historically provided to us, including regulatory and pharmacovigilance support for as long as we deem necessary. We currently have statements of work in place regarding 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 (i) if they will be needed, and (ii) whether they can or should be obtained from other third-party providers. Research and Development Effective June 1, 2024, we took control of all clinical trials for Ameluz ® in the Unites States, allowing for more effective cost management and direct oversight of trial efficiency. Our R&D 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. Along with our Ameluz ® clinical trials, our R&D program also aims to improve the capabilities of our RhodoLED ® Lamps to better fulfill the needs of dermatologists and improve the effectiveness of our commercial team by letting sales representatives carry approved devices with them, allowing for easier product demonstrations and evaluations. All costs associated with research and development are expensed as incurred. Change in Fair Value of Warrant Liabilities For warrants that are classified as liabilities, the Company records the fair value of the warrants at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations until the warrants are exercised, expire or other facts and circumstances lead the warrant liabilities to be reclassified to stockholders’ equity or deficit. Change in Fair Value of Investment, Related Party 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. Loss on Debt Extinguishment On May 8, 2023, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with MidCap Business Credit LLC, providing us with a revolving line of credit in the aggregate principal amount of up to $6.5 million. Effective as of January 4, 2024, we voluntarily terminated the Loan Agreement and recognized a $0.3 million loss on debt extinguishment upon the early termination related to prepayment fees and the write-off of deferred financing costs. Interest Income (Expense), net Interest expense, net, primarily consists of interest on our debt instruments, offset by immaterial amounts of interest income earned on our cash balances at financial institutions and financing of customer purchases of BF-RhodoLED ® lamps. 28 Other Income (Expense), net Other income (expense), net primarily includes (i) gain (loss) on return 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 September 30, 2024 and 2023 The following table summarizes our results of operations for the three months ended September 30, 2024 and 2023: ( in thousands) 2024 2023 Change Product revenues, net $ 9,012 $ 8,879 $ 133 Related party revenues - 17 (17 ) Revenues, net $ 9,012 $ 8,896 $ 116 Operating expenses: Cost of revenues, related party 4,801 4,495 306 Cost of revenues, other 76 95 (19 ) Selling, general and administrative 8,425 8,619 (194 ) Selling, general and administrative, related party 1 74 (73 ) Research and development 669 33 636 Change in fair value of contingent consideration - 200 (200 ) Total operating expenses 13,972 13,516 456 Loss from operations ( 4,960 ) (4,620 ) (340 ) Change in fair value of warrant liabilities (680 ) 598 (1,278 ) Change in fair value of investment, related party (2 ) (2,212 ) 2,210 Interest income (expense), net 8 (142 ) 150 Other income (expense), net (32 ) 35 (67 ) Loss before income taxes (5,666 ) (6,341 ) 675 Income tax expenses 3 1 2 Net loss $ (5,669 ) $ (6,342 ) $ 673 Product Revenue, net Net product revenue for the three months ended September 30, 2024 increased by $0.1 million, or 1.5% as compared to the three months ended September 30, 2023. This increase was driven by $0.6 million increase from sales of devices, specifically RhodoLED ® XL Lamp, since its launch in June 2024, offset by net decrease in sales of Ameluz of $0.5 million. The decrease of Ameluz sales in units in the three months ended September 30, 2024 was impacted by the delayed shipment of about 4,600 units at the end of September 2024 due to Hurricane Milton, which forced office closures and shipping delays through the Southeast. All shipments were delivered, and revenue for these sales have been recognized in October 2024. 29 Operating Expenses Cost of Revenues, Related Party Cost of revenues, related party for the three months ended September 30, 2024 increased by $0.3 million, or 6.8% as compared to the three months ended September 30, 2023. This was driven by an increase of $0.5 million due to the increase in RhodoLED ® XL product revenue, partially offset by a decrease of $0.2 million, due to decrease in sales of Ameluz ® . We expect to see an impact from the change in the transfer pricing under the Second A&R Ameluz LSA in the fourth quarter as we are receiving product under the new pricing. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended September 30, 2024 decreased by $0.2 million, or 2.3% as compared to the three months ended September 30, 2023. The decrease was primarily driven by a $0.5 million decrease in general business administration expenses, as well as a decrease of non-personnel sales and marketing expenses of $0.2 million, and a $0.3 million decrease in personnel costs due to change in headcount and reduced severance, which was offset by a $0.8 million increase in legal expenses related to the complaints filed by DUSA Pharmaceuticals, Inc., Sun Pharmaceutical Industries, Inc., and Sun Pharmaceutical Industries LTD (collectively “SUN”) with the International Trade Commission (“ITC”) and the US District Court for the district of Massachusetts. Research and Development Expenses R&D expenses for the three months ended September 30, 2024 increased by $0.6 million as compared to the three months ended September 30, 2023. The increase was attributable to our assumption of all clinical trial activities for Ameluz ® in the United States effective June 1, 2024, allowing for more effective cost management and direct oversight of trial efficiency. This increase to R&D expenses should be offset by a reduction in the Transfer Price of Ameluz ® from 50% to 25% for all future purchases made in 2024 and 2025. No such inventory purchases were made as of September 30, 2024. The following table summarizes our research and development expenses: Three Months Ended September 30, 2024 2023 Actinic keratosis $ 206 $ - Moderate to severe acne 129 - Superficial basal cell carcinoma 44 - Portable devices 33 - Personnel-related costs 203 - Other research and development 54 33 $ 669 $ 33 Change in Fair Value of Warrant Liabilities The change in fair value of warrant liabilities was ($0.7) million for the three months ended September 30, 2024, as compared to $0.6 million for the three months ended September 30, 2023. The change in fair value of warrant liabilities was driven primarily by changes in the quoted market price of the common stock. From June 30, 2024 to September 30, 2024, the underlying value of the Company’s Common Stock increased, leading to a corresponding increase in the value of warrant liabilities and additional expense recognized on the statements of operations. From June 30, 2023 to September 30, 2023, the market price decreased, causing a decrease in the value of warrant liabilities, and a gain in in the statement of operations. 30 Change in Fair Value of Investment, Related Party As of December 31, 2023, the Company had transferred substantially all of its investment in Biofrontera AG to Maruho in exchange for the release of certain obligations, in accordance with the Settlement Agreement and Mutual Release (the “Release”), dated December 27, 2023. As a result, during the third quarter of 2024, the net balance of our investment in Biofrontera AG was minimal as was the related change in fair value. Comparison of the Nine Months ended September 30, 2024 and 2023 The following table summarizes our results of operations for the nine months ended September 30, 2024 and 2023: ( in thousands) 2024 2023 Change Product revenues, net $ 24,744 $ 23,423 $ 1,321 Related party revenues 18 52 (34 ) Revenues, net $ 24,762 $ 23,475 $ 1,287 Operating expenses: Cost of revenues, related party 12,839 11,814 1,025 Cost of revenues, other 496 262 234 Selling, general and administrative 25,589 29,874 (4,285 ) Selling, general and administrative, related party 30 193 (163 ) Research and development 1,306 44 1,262 Change in fair value of contingent consideration - 100 (100 ) Total operating expenses 40,260 42,287 (2,027 ) Loss from operations (15,498) (18,812 ) 3,314 Change in fair value of warrant liabilities 1,329 2,001 (672 ) Change in fair value of investment, related party (12 ) (6,635 ) 6,623 Loss on debt extinguishment (316 ) - (316 ) Interest expense, net (1,995 ) (256 ) (1,739 ) Other income (expense), net 154 65 89 Loss before income taxes (16,338 ) (23,637 ) 7,299 Income tax expenses 25 20 5 Net loss $ (16,363 ) $ (23,657 ) $ 7,294 Product Revenue, net Net product revenue for the nine months ended September 30, 2024 increased by $1.3 million, or 5.6% as compared to the nine months ended September 30, 2023. This increase was mainly driven by a $1.1 million increase in the average sale price of Ameluz for the nine months ended September 30, 2024, as well as an increase in device sales of $0.6 million due to the launch of the RhodoLED ® XL Lamp in June 2024. This was offset by a sales volume decrease of approximately $0.5 million of Ameluz ® driven by the office closures and shipping delays associated with Hurricane Milton. As mentioned above, these delayed shipments have been delivered and revenue recognized in the fourth quarter. 31 Operating Expenses Cost of Revenues, Related Party Cost of revenues, related party for the nine months ended September 30, 2024 increased by $1.0 million, or 8.7% as compared to the nine months ended September 30, 2023. This was driven by the increase in both Ameluz ® and RhodoLED ® XL Lamp product revenue. Selling, General and Administrative Expenses Selling, general and administrative expenses for the nine months ended September 30, 2024 decreased by $4.3 million, or 14.3% as compared to the nine months ended September 30, 2023. The decrease was primarily driven by a $1.7 million decrease in legal costs due to the settlement with Biofrontera AG in April 2023, a $1.3 million decrease of non-personnel sales and marketing expenses due to a lower level of marketing activities in general, a $0.6 million decrease in general business administration, and a net decrease of $0.6 million in personnel expenses, partially offset by costs relating to the complaints filed by SUN. Research and Development Expenses R&D expenses for the nine months ended September 30, 2024 increased by $1.3 million as compared to the nine months ended September 30, 2023. The increase was attributable to our assumption of all clinical trial activities for Ameluz ® in the United States effective June 1, 2024. The following table summarizes our research and development expenses: Nine Months Ended September 30, 2024 2023 Actinic keratosis $ 338 $ - Moderate to severe acne 221 - Superficial basal cell carcinoma 153 - Portable devices 83 - Personnel-related costs 435 - Other research and development 76 44 $ 1,306 $ 44 Change in Fair Value of Warrant Liabilities The change in fair value of warrant liabilities was $1.3 million for nine months ended September 30, 2024, as compared to $2.0 million for the nine months ended September 30, 2023. The change in fair value of warrant liabilities was driven primarily by a decrease in the underlying value of the Company’s Common Stock paired with a higher population of warrants outstanding for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. Change in Fair Value of Investment, Related Party As of December 31, 2023, the Company had transferred substantially all of its investment in Biofrontera AG to Maruho in exchange for the release of certain obligations, in accordance with the Release. As a result, during the third quarter of 2024, the net balance of our investment in Biofrontera AG was minimal as was the related change in fair value. Loss on Debt Extinguishment Effective as of January 4, 2024, we voluntarily terminated the Loan Agreement with Midcap Business Credit LLC. The Company recognized a $0.3 million loss on debt extinguishment upon the early termination of the Loan Agreement related to prepayment fees and the write-off of deferred financing costs. 32 Interest income (expense), net The increase of interest expense of $1.7 million was driven by the interest and debt discount recognized on the loans issued on December 21, 2023, for an aggregate principal balance of $4.0 million. The loans required the Company to make weekly payments of principal and interest in the amount of approximately $0.2 million through July 5, 2024, the maturity date. Interest expense was recognized using the effective interest method, such that a constant effective interest rate was applied to the carrying amount of the debt at the beginning of each period until maturity. Net Loss to Adjusted EBITDA Reconciliation for the Three and Nine Months Ended September 30, 2024 and 2023 We define adjusted EBITDA as net income or loss before interest income and expense, income taxes, depreciation and amortization, and other non-operating items from our statements of operations as well as certain other items considered outside the normal course of our operations specifically described below. Adjusted EBITDA is not a presentation made in accordance with 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. Loss on debt extinguishment: Effective as of January 4, 2024, we voluntarily terminated the Loan Agreement and recognized a $0.3 million loss on debt extinguishment upon the early termination of the loan. We exclude the impact of this loss as it is attributed to the prepayment fee, which is considered non-recurring, and the write-off of deferred financing costs, which is considered non-cash. Change in fair value of contingent consideration: Pursuant to a share purchase agreement with Maruho, the profits from the sale of Cutanea products were to 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 was re-measured at each reporting date. We exclude the historical impact of the change in fair value of contingent consideration as this is non-cash. We were relieved of our obligations relating to the contingent consideration under the Release. As such, our results of operations for the three and nine months ended September 30, 2024 were not impacted by the change in fair value. Change in fair value of warrant liabilities: The warrants issued in conjunction with our private placement offerings and registered public offerings are accounted for as liabilities in accordance with ASC 815-40. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the consolidated statement of operations. We exclude the impact of the change in fair value of warrant liabilities as this is non-cash. Change in fair value of investment, related party: The Company accounts for its investment, related party in accordance with ASC 321, Investments — Equity Securities . 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 statement of operations. We exclude the impact of the realized gain as this is non-recurring and the unrealized change in fair value of investments is excluded 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 the variety of award types, we believe that the exclusion of share-based compensation expense, which is 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. Expensed issuance costs: To measure operating performance, we exclude the portion of issuance costs allocated to our warrant liabilities. We do not expect to incur this type of expense on a recurring basis and believe the exclusion of these costs allows management and the viewers of the financial statements to better understand our financial results. 33 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 table below presents a reconciliation from net loss to Adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net loss $ (5,669 ) $ (6,342 ) $ (16,363 ) $ (23,657 ) Interest expense, net (8 ) 142 1,995 256 Income tax expenses 3 1 25 20 Depreciation and amortization 129 251 387 769 EBITDA (5,545 ) (5,948 ) (13,956 ) (22,612 ) Loss on debt extinguishment - - 316 - Change in fair value of contingent consideration - 200 - 100 Change in fair value of warrant liabilities 680 (598 ) (1,329 ) (2,001 ) Change in fair value of investment, related party 2 2,212 12 6,635 Legal settlement expenses - - - 1,225 Stock based compensation 288 207 720 817 Expensed issuance costs - - 354 - Adjusted EBITDA $ (4,575 ) $ (3,927 ) $ (13,883 ) $ (15,836 ) Adjusted EBITDA margin -50.8 % -44.1 % -56.1 % -67.5 % Adjusted EBITDA Adjusted EBITDA decreased from ($3.9) million for the three months ended September 30, 2023 to ($4.6) million for the three months ended September 30, 2024. The decrease was primarily driven by an increase in R&D expenses of $0.6 million. Adjusted EBITDA increased from ($15.8) million during the nine months ended September 30, 2023 to ($13.9) million for the nine months ended September 30, 2024. The increase in Adjusted EBITDA was primarily driven by a decrease in selling, general and administrative expenses of $3.2 million, due primarily to a decreased level of marketing activities and savings in legal expenses. This is partially offset by an increase in R&D expense of $1.3 million. Liquidity and Capital Resources 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 $9.3 million and $16.0 million for the nine months ended September 30, 2024 and 2023, respectively. The Company had an accumulated deficit as of September 30, 2024 of $116.0 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 September 30, 2024, we had cash and cash equivalents of $2.9 million, compared to $1.3 million as of December 31, 2023. 34 As a result of our losses and projected cash needs, the Company’s management has determined that substantial doubt exists about our ability to continue as a going concern for at least twelve months from the issuance date of these financial statements. The Company’s ability to continue as a going concern is contingent upon successful execution of management’s intended plan over the next twelve months to improve the Company’s liquidity and profitability, which includes without limitation: ● Expanding the commercialization of Ameluz ® in the United States while decreasing discretionary expenses. ● Actively pursuing additional capital through the issuance of equity securities, debt or the sale of assets. ● Controlling expenses and limiting capital expenditures. ● Realizing the benefit of the reduced cost of inventory in line with the terms of the Second A&R Ameluz LSA. The company believes that the implementation of such plans will provide the opportunity for the Company to continue as a going concern. However, no assurance can be given that the Company will be successful in these efforts and 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. Cash Flows The following table summarizes our cash provided by and (used in) operating, investing and financing activities: Nine Months Ended September 30, (in thousands) 2024 2023 Net cash used in operating activities $ (9,253 ) $ (16,029 ) Net cash provided by (used) in investing activities (2 ) 546 Net cash provided by financing activities 10,785 1,697 Net increase (decrease) in cash and restricted cash $ 1,530 $ (13,786 ) Operating Activities During the nine months ended September 30, 2024, operating activities used $9.3 million of cash, primarily resulting from our loss from operations of $16.4 million, adjusted for non-cash expense of stock-based compensation of $0.7 million, non-cash interest expense of $0.2 million, loss on debt extinguishment of $0.3 million, depreciation and amortization in the aggregate of $0.9 million, and net cash used by changes in our operating assets and liabilities of $6.1 million, offset by the change in fair value of warrant liabilities of $1.3 million,. During the nine months ended September 30, 2023, operating activities used $16.0 million of cash, primarily resulting from our loss from operations of $23.7 million, adjusted for non-cash expense of stock-based compensation of $0.8 million, non-cash interest expense of $0.3 million, depreciation and amortization in the aggregate of $0.8 million, net cash used by changes in our operating assets and liabilities of $0.9 million, the change in fair value of contingent consideration of $0.1 million and the change in fair value of investment, related party of $6.6 million; partially offset by the change in fair value of warrant liabilities of $2.0 million. Investing Activities During the nine months ended September 30, 2024, net cash used in investing activities consisted of $0.1 million of capitalized software and computer purchases, which were partially offset by the proceeds from the sales of equity investments. During the nine months ended September 30, 2023, net cash provided by investing activities of $0.5 million consisted of the proceeds from the sales of equity investments of $0.6 million, partially offset by the purchase of machinery and computer equipment. Financing Activities During the nine months ended September 30, 2024, net cash from financing activities consisted of proceeds of $7.7 million, net of capitalized issuance costs, from the issuance of preferred stock and warrants, and $7.4 million from the exercise of warrants for preferred stock, offset by repayments of $4.0 million on our short-term loan, repayments of $0.2 million on our line of credit and prepayment fees of $0.2 million to extinguish our line of credit. See Note 10 Debt. During the nine months ended September 30, 2023, net cash from financing activities consisted of a net $1.7 million of proceeds from our line of credit. 35 Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles of the United States, or 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 contingent consideration, fair value measurements, valuation of intangible assets and impairment assessment, and stock compensation. Estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances. 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 in our Form 10-K. Critical Accounting Estimates A summary of our critical accounting estimates is discussed in the section entitled “Critical Accounting Estimates” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K. There were no material changes to our critical accounting estimates for the nine months ended September 30, 2024, except for the following: The warrants for convertible preferred stock issued in conjunction with our private placement offering conducted pursuant to the securities purchase agreements entered into on February 19, 2024 with institutional investors were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities in the accompanying consolidated balance sheet. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the consolidated statement of operations. Due to the uncertainty of the how the convertible preferred warrants would ultimately settle, the Company used a probability-weighted approach along with a Black-Scholes-Merton (“BSM”) model equation to estimate the fair value of the preferred warrants under different scenarios. While we believe these assumptions were reasonable, the manner or timeframe in which the warrants ultimately settle may differ. The BSM model also considers several variables and assumptions in estimating the fair value of financial instruments, including the per-share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected stock price volatility over the expected term, and expected annual dividend yield. Certain inputs utilized in our BSM pricing model may fluctuate in future periods based upon factors which are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may have caused a significant change to the fair value of our warrant liability which could also have resulted in material non-cash gain or loss being reported in our consolidated statement of operations. Off-balance Sheet Arrangements Other than those items reflected in Note 17. Commitments and Contingencies 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.