Biofrontera Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following section contains statements that are not statements of historical fact and are forward-looking statements within the meaning of the federal securities laws. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievement to differ materially from anticipated results, performance, or achievement, expressed or implied in such forward-looking statements. These statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. We discuss many of these risks and uncertainties at the beginning of this Form 10-K and under the sections captioned “Business” and “Risk Factors.” The following discussion should also be read in conjunction with the financial statements and the Notes thereto appearing elsewhere in this Form 10-K. Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain statements in this Form 10-K constitute “forward-looking statements”. Such statements include statements regarding the timeline for regulatory review and approval of our products, the availability of funding sources for continued development of such products, and other statements that are not historical facts, including statements which may be preceded by the words “intends,” “may,” “will,” “plans,” “expects,” “anticipates,” “projects,” “predicts,” “estimates,” “aims,” “believes,” “hopes,” “potential” or similar words. Forward-looking statements are not guarantees of future performance, are based on certain assumptions and are subject to various known and unknown risks and uncertainties, many of which are beyond our control. Actual results may differ materially from the expectations contained in the forward-looking statements. See Part I, Item 1A, “Risk Factors” of this Form 10-K for a discussion of the factors that could cause such differences. However, other factors besides those listed in Part I, Item 1A, “Risk Factors” or otherwise discussed in this Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. 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. 44 Overview Biofrontera Inc. (the “Company” or “Biofrontera”) is a United States based biopharmaceutical company commercializing a portfolio of pharmaceutical products for the treatment of dermatological conditions with a focus on photodynamic therapy (“PDT”). The Company’s primary licensed products, which include Ameluz ® as well as the BF-RhodoLED ® and RhodoLED ® XL lamps (the “RhodoLED ® Lamps”), are used for the treatment of actinic keratoses, which are pre-cancerous skin lesions. With our national commercial team, we generate revenue by selling our licensed products directly to dermatology offices and groups. We are currently selling Ameluz ® in the United States under a n 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”). The Second A&R Ameluz LSA reduced the Transfer Price of Ameluz ® from 50% to 25% which covers the cost of goods, royalties on sales, and services including all regulatory efforts, agency fees, pharmacovigilance and patent administration for all purchases in 2024 and 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 actinic keratosis and, if approved by 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. 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. The reduced LSA transfer price will allow the Company to finance such R&D activities and continue our commercial growth trajectory. 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. 45 In the third quarter of 2024, the Company reached the decision to divest its Xepi product line and the related intangible asset is currently held for sale. Xepi ® (ozenoxacin cream, 1%), is 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. Our exclusive license and supply agreement, as amended (“Xepi LSA”), with Ferrer Internacional S.A. (“Ferrer”) enables us to market and sell this product in the United Sates. However, the Company did not have any sales of Xepi ® during 2024 and generated limited revenue during 2023 from sales of Xepi due to third-party manufacturing delays that have impacted 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. Nevertheless, the Company is working with a potential purchaser and expects to complete a sale of the asset within the next three to six months. The related intangible asset is presented as held for sale under current assets in the Consolidated Balance Sheets. See Note 9. Assets Held for Sale , for additional information. Our principal objective is to improve patient outcomes through adoption and use 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 actinic keratoses of the face and scalp and positioning Ameluz ® to be the standard of care in the United States by focusing on acquisition of new customers and growth of the therapy in our current customer base; ● leveraging the potential for future approvals and label extensions of our licensed portfolio products that are in the pipeline for the United States market with respect to Ameluz ® and f urthering the clinical development of this product after taking over responsibility for certain ongoing clinical trials since June 1, 2024, pursuant to the Second A&R Ameluz LSA ; and ● strategically managing our licensed portfolio, including opportunistically adding complementary products or services to our portfolio by acquiring or licensing IP to further leverage our commercial infrastructure and customer relationships. By executing these strategic objectives, we will fuel company growth, deepen our trusted relationships in the dermatology community, and above all, help patients live healthier, more fulfilling lives. We devote a substantial portion of our cash resources to the commercialization of our licensed products, Ameluz ® and the BF-RhodoLED ® Lamps. We have financed our operating and capital expenditures through cash proceeds generated from our product sales, short term debt and proceeds received from convertible notes and equity financings. We believe that important measures of our results of operations include product revenue, operating income (loss) and adjusted EBITDA (a non-GAAP measure as defined 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. 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. 46 Components of Our Results of Operations Product Revenues, net We generate product revenues through the third-party sales of our licensed products Ameluz ® and RhodoLED ® Lamps . Revenues from product sales are recorded net of trade discounts and allowances and government rebates. 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. Revenues, Related Party 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 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 RhodoLED ® 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 GmbH and insignificant inventory adjustments due to scrapped, expiring and excess products. 47 Effective February 12, 2024, the Second A&R Ameluz LSA, among other things, was amended to change the Transfer Price from 50% 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. Cost of Revenues, Other Cost of revenues, other, is comprised of third-party logistics and distribution costs including packaging, freight, transportation, shipping and handling costs. Selling, General and Administrative Expense Selling, general and administrative expenses consist principally of costs associated with our sales force, commercial support personnel, personnel in executive and other administrative functions, as well as medical affairs professionals. Other selling, general and administrative expenses include marketing, trade, and other commercial costs necessary to support the commercial operation of our licensed products and professional fees for legal, consulting and accounting services. Selling, general and administrative expenses also include the amortization of our intangible 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 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, (the “2021 Services Agreement”), entered into in December 2021. 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, and pharmacovigilance, 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. 48 Change in Fair Value of Contingent Consideration In connection with our acquisition of Cutanea Life Sciences, Inc (“Cutanea”) from Maruho Co., Ltd (“Maruho”) on March 25, 2019, we recorded contingent consideration related to the estimated profits from the sale of Cutanea products to be shared equally with Maruho. The fair value of such contingent consideration was determined to be $6.5 million on the acquisition date and was re-measured at each reporting date until the contingency was resolved. Our obligation relating to contingent consideration was relieved under a Confidential Settlement Agreement and Mutual Release (the “Release”) dated December 27, 2023. 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. Warrant Inducement Expense In connection with the Securities Purchase Agreement (“Purchase Agreement”), dated as of October 30, 2023, entered into with an institutional investor, the Company entered into the Amendment to Common Stock Purchase Warrants, dated as of October 30, 2023 to amend the common stock purchase warrant dated May 16, 2022 and the common stock purchase warrant dated July 26, 2022 (“Existing Warrants”) to (i) revise the exercise price to $3.55 and (ii) extend the date until which the warrants can be exercised until November 2, 2028. As a result of the amendment to the existing warrants, the Company recognized inducement expense which was determined using the Black-Scholes option pricing model before and after the warrant amendment. Excess of Warrant Fair Value Over Offering Proceeds On November 2, 2023, the Company issued common shares and warrants for common shares for net proceeds of $4.1 million. The excess of the fair value of the warrants at the issuance date over the proceeds received was recognized as a loss on the statement of operations. 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. Under the Release, the Company agreed to transfer 5,451,016 shares of Biofrontera AG to Maruho in exchange for the release of our obligations relating to the Cutanea acquisition. Gain on Legal Settlement Under the Release, the Company was released from its obligations to (i) repay $7.3 million in start-up cost financing to Maruho for Cutanea’s redesigned business activities (“start-up cost financing”), and (ii) make certain profit-sharing payments pursuant to the Share Purchase and Transfer Agreement, dated March 25, 2019, entered into with Maruho (as amended, the “Share Purchase Agreement” or “SPA”). In exchange, the Company agreed to transfer 5,451,016 shares of Biofrontera AG to Maruho. The exchange of the shares of Biofrontera AG for the release of the obligations mentioned above, resulted in a gain. 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 convertible notes, and short-term debt including amortization of deferred costs. 49 Other Income (Expense), net Other income, net primarily includes (i) gain 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 Years Ended December 31, 2024 and December 31, 2023 The following table summarizes our results of operations for the years ended December 31, 2024 and December 31, 2023: ( in thousands) 2024 2023 Change Product revenues, net $ 37,303 $ 34,005 3,298 Revenues, related party 18 66 (48 ) Revenues, net 37,321 34,071 (3,250 ) Operating expenses: Cost of revenues, related party 17,855 16,789 1,066 Cost of revenues, other 752 655 97 Selling, general and administrative 33,793 38,975 (5,182 ) Selling, general and administrative, related party 42 152 (110 ) Research and development 2,089 77 2,012 Change in fair value of contingent consideration - 100 (100 ) Total operating expenses 54,531 56,748 (2,217 ) Loss from operations (17,210 ) (22,677 ) 5,467 Change in fair value of warrant liabilities 1,680 6,456 (4,776 ) Warrant inducement expense - (1,045 ) 1,045 Excess of warrant fair value over offering proceeds - (2,272 ) 2,272 Change in fair value of investment, related party (14 ) (7,421 ) 7,407 Loss on debt extinguishment (316 ) - (316 ) Gain on legal settlement - 7,385 (7,385 ) Interest expense, net (2,035 ) (468 ) (1,567 ) Other income (expense), net 158 (75 ) 233 Loss before income taxes (17,737 ) (20,117 ) 2,380 Income tax expenses 22 14 8 Net loss $ (17,759 ) $ (20,131 ) $ 2,372 50 Product Revenues, net Net product revenue for 2024 increased $3.3 million, or 9.7% compared to 2023. The increase was primarily driven by organic growth of Ameluz ® sales volume of $0.5 million, a $1.7 million increase due to an increased Ameluz ® unit price, and the launch of our RhodoLED ® XL Lamp, which resulted in sales of RhodoLED ® XL Lamps of $1.1 million. Operating Expenses Cost of Revenues, Related Party Cost of revenues, related party increased $1.1 million, or 6.3% compared to 2023, driven by the increase in revenue. Cost of revenues, increased at a slower pace as compared to the sales increase of 9.7% due to cost savings under the Second A&R Ameluz LSA and volume discounts under the original license and supply agreement with the Ameluz Licensors. Selling, General and Administrative Expenses Selling, general and administrative expenses for 2024 decreased $5.2 million, or 13.3% compared to 2023. This decrease was primarily driven by a $3.0 million decrease in general and administrative expenses, primarily attributable to a decrease in external legal expenses and expenses relating to financing activities. The decrease was further driven by a decrease in general sales and marketing expenses of $1.8 million, primarily attributable to more targeted trade shows and conference spending and close management of promotional spend, including a $0.8 million reduction in direct sales personnel expenses due to reduction in sales force and a $0.3 million reduction in direct sales travel and lodging. Research and Development Expense R&D expenses for the year ended December 31, 2024 increased $2.0 million as compared to the year ended December 31, 2023. The increase was attributed 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 in R&D expense was and will continue to be offset in 2024 and 2025 by a reduction in the Transfer Price of Ameluz ® from 50% to 25% for inventory purchases. As of December 31, 2024, we generated savings of approximately $0.8 million from inventory purchased in 2024 due to the reduced Transfer Price. The following table summarizes the major categories of our R&D expenses for the years ended December 31, 2024 and 2023: 2024 2023 Actinic keratosis $ 682 $ - Moderate to severe acne 267 - Superficial basal cell carcinoma 148 - Portable devices 94 - Personnel-related costs 756 - Other research and development 142 77 $ 2,089 $ 77 Change in Fair Value of Warrant Liabilities The change in fair value of warrant liabilities was driven primarily by a greater decrease in the underlying value of the Company’s common stock during 2023 as compared to 2024. 51 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, for the year ended December 31, 2024, the net balance of our investment in Biofrontera AG and the related change in fair value was minimal. Gain on Legal Settlement Under the Release, the Company was released from its obligations to repay $7.3 million in start-up cost financing to Maruho for Cutanea’s redesigned business activities and released from having to make certain profit-sharing payments pursuant to the SPA. In exchange, the Company agreed to transfer 5,451,016 shares of Biofrontera AG to Maruho. The exchange pursuant to the Release resulted in a gain of $7.4 million, recorded in December 2023. There were no legal settlements that occurred in 2024. Interest Expense, net The increase of interest expense of $1.6 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. Net Income to Adjusted EBITDA Reconciliation for years ended December 31, 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 GAAP. Our definition of adjusted EBITDA may vary from the use of similarly-titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. Adjusted EBITDA should not be considered as an alternative to net income or loss, operating income/(loss), cash flows from operating activities or any other performance measures derived in accordance with GAAP as measures of operating performance or liquidity. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Change in fair value of contingent consideration: Pursuant to the Share Purchase Agreement, 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 impact of the change in fair value of contingent consideration as this is non-cash. Further, we were relieved of our obligations relating to the contingent consideration under the Release. As such, our future results of operations will not be 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 offering were accounted for as liabilities in accordance with Accounting Standards Codification (“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. Warrant inducement expense: The warrant inducement expense was determined using the Black-Scholes option pricing model and was calculated as the difference between the fair value of the applicable warrants prior to, and immediately after, the reduction in the exercise price on the date of repricing and is presented within the statement of operations. We exclude the impact of the change in fair value of the warrant inducement expense as this is non-cash. Excess of warrant fair value over offering proceeds : The excess of warrant fair value over offering proceeds was determined by the difference between the fair value of the warrants upon issuance on November 2, 2023 and the proceeds received. We exclude the impact of the variance between the warrant fair value and the proceeds 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 (“ASC 321”). Equity securities, which are comprised of investments in common stock, are initially recorded at cost, plus transaction costs, and subsequently measured at fair value, based on quoted market prices, with the gains and losses reported in the Company’s consolidated statement of operations. For the investments held in foreign currencies, the change in fair value attributable to changes in foreign exchange rates is included in gains and losses in the consolidated statement of operations. We exclude the impact of the realized and unrealized change in fair value of investments as this is non-cash. Gain on legal settlement : Under the Release, we were relieved of our obligations relating to the start-up cost financing and profit sharing under the Share Purchase Agreement in exchange for 5,451,016 shares of Biofrontera AG. The exchange of the shares of Biofrontera AG for the release of the liabilities mentioned above, both of which were recorded at their respective fair values at the exchange date, resulted in a gain. We exclude the impact of the gain on legal settlement as this is non-cash and non-recurring. 52 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. Legal settlement expenses : To measure operating performance, we exclude legal settlement expenses. We do not expect to incur these types of legal expenses on a recurring basis and believe the exclusion of such amounts allows management and the users of the financial statements to better understand our financial results. Stock Based Compensation : To measure operating performance, we exclude the impact of costs relating to share-based compensation. Due to the subjective assumptions and a variety of award types, we believe that the exclusion of share-based compensation expense, which is 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 users of the financial statements to better understand our financial results. Adjusted EBITDA margin is adjusted EBITDA for a particular period expressed as a percentage of revenues for that period. Our management uses adjusted EBITDA to measure our performance from period to period and to compare our results to those of our competitors. We believe that adjusted EBITDA provides useful information to investors regarding financial and business trends related to our results of operations and that, when non-GAAP financial information is viewed with GAAP financial information, investors are provided with a more meaningful understanding of our ongoing operating performance. The below table presents a reconciliation from net loss to Adjusted EBITDA for the years ended December 31, 2024 and 2023: Years ended December 31, 2024 2023 Net loss $ (17,759 ) $ (20,131 ) Interest expense, net 2,035 468 Income tax expenses 22 14 Depreciation and amortization 421 504 EBITDA (15,281 ) (19,145 ) Change in fair value of contingent consideration - 100 Change in fair value of warrant liabilities (1,680 ) (6,456 ) Warrant inducement expense - 1,045 Excess of warrant fair value over offering proceeds - 2,272 Change in fair value of investment, related party 14 7,421 Gain on legal settlement - (7,385 ) Loss on debt extinguishment 316 - Legal settlement expenses - 1,225 Stock based compensation 1,019 1,045 Expensed issuance costs 354 422 Adjusted EBITDA $ (15,258 ) $ (19,456 ) Adjusted EBITDA margin -40.9 % -57.1 % Adjusted EBITDA Adjusted EBITDA increased from ($19.5) million for the year ended December 31, 2023 to ($15.3) million for the year ended December 31, 2024. The increase was primarily driven by an increase in gross profit due to the increase in sales and a reduction in purchase price for sales of inventory purchased under the Second A&R Ameluz LSA, and a decrease in selling, general and administrative expenses due to a reduction in financing related activities and legal expenses. These decreases were partially offset by an increase in R&D expenses. Our Adjusted EBITDA margin increased from (57.1%) for the year ended December 31, 2023 to (40.9%) for the year ended December 31, 2024, as the impact of the decrease in cost of revenue and the decrease in selling, general and administrative expenses outweighed the impact of the increase in revenue. Liquidity and Capital Resources 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. Since we commenced operations in 2015, we have generated significant losses. The Company incurred net cash outflows from operations of $10.3 million and $24.9 million for the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, the Company’s accumulated deficit was $117.4 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 December 31, 2024, we had cash and cash equivalents of $5.9 million. The Company cannot provide assurance that it will ultimately achieve profitable operations and become operating cash flow positive or raise additional debt or equity capital. Additionally, the current capital resources are not adequate to continue operating and maintaining the business strategy for a period of twelve months from the issuance date of this report. Management believes that these conditions raise substantial doubt about the Company’s ability to continue as a going concern for at least twelve months from the date of this Annual Report on Form 10-K. Management’s plans that are intended to mitigate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern include expanding the commercialization of Ameluz ® in the United States while controlling expenses and limiting capital expenditures, as well as capitalizing on the reduced cost of inventory in line with the terms of the Second A&R Ameluz LSA. The Company also plans to secure additional capital through equity or debt financings, or the sale of assets to carry out the Company’s planned commercial and development activities. However, there can be no assurance that the Company will be successful in executing the aforementioned commercial strategies and/or obtaining sufficient funding on acceptable terms, if at all, and that the substantial doubt will be alleviated. If the Company is unable to raise capital when needed, the Company will not have sufficient cash resources and liquidity to fund its business operations and the Company may be forced to delay or reduce continued commercialization efforts or R&D programs which could have a material adverse effect on the Company and its financial statements. 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, that might be necessary should the Company be unable to continue as a going concern. Cash Flows The following table summarizes our cash provided by (and used in) operating, investing and financing activities: For the Year Ended December 31, (in thousands) 2024 2023 Net cash used in operating activities $ (10,270 ) $ (24,895 ) Net cash provided by (used in) investing activities (3 ) 619 Net cash provided by financing activities 14,835 8,411 Net increase (decrease) in cash and restricted cash $ 4,562 $ (15,865 ) 53 Operating Activities During the year ended December 31, 2024, operating activities used $10.3 million of cash, primarily resulting from our net loss of $17.8 million, adjusted for the add back of non-cash income of $1.3 million and offset by net cash used by changes in our operating assets and liabilities of $6.2 million. Non-cash income includes a change in fair value of warrant liabilities of $1.7 million offset by stock-based compensation of $1.0 million, non-cash interest expense of $0.3 million, loss on debt extinguishment of $0.3 million, provision for doubtful accounts of $0.2 million and depreciation and amortization in the aggregate of $1.1 million. During the year ended December 31, 2023, operating activities used $24.9 million of cash, primarily resulting from our net loss of $20.1 million, adjusted for the add back of non-cash income of $0.4 million and offset by net cash used by changes in our operating assets and liabilities of $4.4 million. Non-cash income includes a gain on legal settlement of $7.4 million and a change in fair value of warrant liabilities of $6.5 million offset by a change in fair value of equity securities of $7.4 million, loss on warrant fair value over offering proceeds of $2.3 million, warrant inducement expense of $1.1 million, stock-based compensation of $1.1 million, non-cash interest expense of $0.4 million, change in fair value of contingent consideration of $0.1 million, provision for doubtful accounts of $0.1 million and depreciation and amortization in the aggregate of $1.1 million. Investing Activities During the year ended December 31, 2024, the Company had minimal investing activities which consisted of proceeds from the sales of equity investments which were partially offset by capitalized software and computer purchases. During the year ended December 31, 2023, investing activities provided $0.6 million, primarily resulting from the sale of shares of Biofrontera AG. Financing Activities During the year ended December 31, 2024, net cash provided by financing activities was $14.8 million which consisted of proceeds of $7.7 million, net of capitalized issuance costs, from the issuance of preferred stock and warrants, $7.4 million from the exercise of warrants for preferred stock, plus $4 million, net of issuance costs received from the issuance of convertible notes, offset by repayments of $4.2 million on our short-term debt, and prepayment fees of $0.2 million to extinguish our line of credit. See Note 11. Debt, for additional information. During the year ended December 31, 2023, net cash provided by financing activities was $8.4 million which consisted of net proceeds received from our loan and line of credit of $3.9 million and net proceeds of $4.5 million from the issuance of common stock and warrants in a public offering. 54 Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles of the United States, or GAAP. The preparation of the financial statements in accordance with GAAP requires the use of estimates and assumptions by management that affect the value of assets and liabilities, as well as contingent assets and liabilities, as reported on the balance sheet date, and revenues and expenses arising during the reporting period. 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. Critical Accounting Estimates We believe that the following are the most critical estimates which required significant judgments in the preparation of our financial statements. Fair Value – Warrant Liabilities The warrants issued in conjunction with our private placement offerings, including warrants for common stock, preferred stock and warrants issued to induce conversion, 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. The Company utilizes a Black-Scholes-Merton (“BSM”) option pricing model to estimate the fair value of the warrants for common stock which is considered a Level 3 fair value measurement. Due to the uncertainty of the how the convertible preferred warrants would ultimately settle, the Company used a probability-weighted approach along with a 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 option-pricing model considers several variables and assumptions in estimating the fair value of financial instruments, including the per-share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected stock price volatility over the expected term, and expected annual dividend yield. Certain inputs utilized in our BSM pricing model may fluctuate in future periods based upon factors which are outside of the Company’s control. Most significantly, due to the relatively limited period during which our stock has been publicly traded, volatility is based on a weighted average of our historical volatility and of a selected peer group of publicly traded companies within a similar industry. A significant change in one or more of the aforementioned inputs used in the calculation of the fair value may cause a significant change to the fair value of our warrant liability which could also result in material non-cash gain or loss being reported in our consolidated statement of operations. 55 Contingencies and Litigation In the ordinary course of our business, we are subject to various legal proceedings, claims and other regulatory matters, the outcomes of which are subject to significant uncertainty. At least quarterly, we review the status of each significant matter and assess its potential financial exposure considering all available information including, but not limited to, the impact of negotiations, settlements, rulings, advice of internal and external legal counsel and other updated information and events pertaining to a particular matter. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in assessing the likelihood of a loss being incurred and in estimating the loss or range of loss in each matter. Due to the uncertainty of litigation and the preliminary stage of the claims, we cannot estimate the possibility of a material loss, nor the potential range of loss that may result from the actions discussed in Note 19. Commitments and Contingencies – Legal Claims . As additional information becomes available, we reassess the potential liability related to our pending litigation and other contingencies and revise our estimates as applicable. Revisions of our estimates of the potential liability could materially impact our results of operations. Additionally, if the final outcome of such litigation and contingencies differs adversely from that currently expected, it would result in a charge to operating results when determined. See Note 19. Commitments and Contingencies – Legal Claims for more details . Impairment Assessment-Intangible Assets and Asset Held for Sale In the third quarter of 2024, the Xepi intangible asset was classified as held for sale. Subsequent to the major asset being classified as held for sale, impairment assessment is no longer considered a critical estimate, and the Company does not consider the accounting under ASC 360-10-35-37 to 43 for assets held for sale to be a critical accounting estimate because of the simplistic nature of the basis of the fair value measurement. See Note 9. Assets Held for Sale. Prior to the classification as held for sale, the Company regularly reviewed the carrying amount of its long-lived assets to determine whether indicators of impairment may have existed that warranted adjustments to carrying values or estimated useful lives. In connection with this review, assets were grouped at the lowest level at which identifiable cash flows were largely independent of other asset groupings. If indications of impairment existed, projected future undiscounted cash flows associated with the asset grouping were compared to the carrying amount to determine whether the asset’s value was recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset group were less than its carrying amount and if the carrying value was also determined to be greater than its fair value. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flows. In determining future cash flows, various factors were taken into account, including the remaining useful life of each asset group, forecasted growth rates, pricing, working capital, capital expenditures, and other cash needs specific to the asset group. Additional considerations when assessing impairment included changes in our strategic, operational, and financial decisions, economic conditions, demand for our product, and other corporate initiatives that may have eliminated or significantly decreased the realization of future benefits from our long-lived assets. Since the determination of future cash flows is an estimate of future performance, future impairments may arise in the event that future cash flows do not meet expectations. Recently issued accounting pronouncements A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is included in Note 2, Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements . Off-balance Sheet Arrangements Besides the contractual obligations and commitments discussed in the section entitled “Liquidity and Capital Resources” above, 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 7A. Quantitative and Qualitative Disclosures About Market Risk As a “smaller reporting company,” we are not required to provide the information required by this Item. 56