BIOFRONTERA INC. 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 guaranties of future performance, are based on certain assumptions and are subject to various known and unknown risks and uncertainties, many of which are beyond our control. Actual results may differ materially from the expectations contained in the forward-looking statements.
See Part I, Item 1A, "Risk Factors" of this Form 10-K for list of factors that may cause such differences.
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.
46 Overview
We are a
Our principal licensed product is Ameluz®, which is a prescription drug approved
for use in combination with the BF-RhodoLED® lamp series, for photodynamic
therapy, or PDT (when used together, "Ameluz® PDT"). In
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
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Our principal objective is to increase the sales of our licensed products in
? expanding our sales in
BF-RhodoLED® lamp for the treatment of minimally to moderately thick actinic
keratoses of the face and scalp and positioning Ameluz® to be the standard of
care in
infrastructure in
? expanding sales of Xepi® for treatment of impetigo by improving the market
positioning of the licensed product;
? leveraging the potential for future approvals and label extensions of our
portfolio products that are in the pipeline for the U.S. market through the
LSAs with our Licensors; and
? opportunistically adding complementary products or services to our portfolio by
acquiring or licensing IP to further leverage our commercial infrastructure and
customer relationships.
We devote a substantial portion of our cash resources to the commercialization of our licensed products, Ameluz® and the BF-RhodoLED® lamp series. We have financed our operating and capital expenditures through cash proceeds generated from our product sales and proceeds received in equity financings.
We believe that important measures of our results of operations include product revenue, operating income (loss) and adjusted EBITDA (a non-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.
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Key factors affecting our performance
As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting our results of operations.
Seasonality
Because traditional photodynamic therapy treatments using a lamp are performed more frequently during the winter, our revenue is subject to some seasonality and has historically been higher during the first and fourth quarters than during the second and third quarters.
COVID-19
Since the beginning of 2020, COVID-19 has become a global pandemic. As a result
of the measures implemented by governments around the world, our business
operations have been directly affected. In particular, we experienced a
significant decline in demand for our licensed products as a result of different
priorities for medical treatments emerging, thereby causing a delay of actinic
keratosis treatment for most patients. Our revenue was directly affected by the
global COVID-19 pandemic starting in mid-March of 2020. From that point on,
rising infection rates and the resulting
Supply Chain
While our Licensors take reasonable precautions to ensure the successful
production of our commercially licensed products, their contract manufacturers
may experience a myriad of business difficulties (i.e., workforce instability,
supply chain issues, erosion of customer base, etc.) that could impact their
financial solvency. In
49
Components of Our Results of Operations
Product Revenue, net
We generate product revenues through the third-party sales of our licensed
products Ameluz®, BF-RhodoLED®lamps and Xepi® covered by our exclusive LSAs with
our Licensors as described in the section "
The primary factors that determine our revenue derived from our licensed products are:
? the level of orders generated by our sales force;
? the level of prescriptions and institutional demand for our licensed products;
and ? unit sales prices. Related Party Revenues
We also generate insignificant related party revenue in connection with an agreement with Biofrontera Bioscience to provide BF-RhodoLED® lamps, associated services for the clinical trials performed by Biofrontera Bioscience and accounting services provided to Biofrontera AG.
Cost of Revenues,
Cost of revenues, related party, is comprised of purchase costs of our licensed
products, Ameluz® and BF-RhodoLED® lamps from
On
? fifty percent of the anticipated net price per unit until we generate
million in revenue from sales of the products we license from the Ameluz
Licensor during a given Commercial Year (as defined in the Ameluz LSA);
? forty percent of the anticipated net price per unit for all revenues we
generate between
license from the Ameluz Licensor; and
? thirty percent of the anticipated net price per unit for all revenues we
generate above
Ameluz Licensor. Cost of Revenues, Other
Cost of revenues, other, is comprised of purchase costs of our licensed product, Xepi®, third-party logistics and distribution costs including packaging, freight, transportation, shipping and handling costs, inventory adjustment due to expiring Xepi® products, as well as sales-based Xepi® royalties.
Selling, General and Administrative Expense
Selling, general and administrative expenses consist principally of costs associated with our sales force, commercial support personnel, personnel in executive and other administrative functions, as well as medical affairs professionals. Other selling, general and administrative expenses include marketing, trade, and other commercial costs necessary to support the commercial operation of our licensed products and professional fees for legal, consulting and accounting services. Selling, general and administrative expenses also include the amortization of our intangible asset and our legal settlement expenses.
Selling, General and Administrative Expenses,
Selling, general and administrative expenses, related party, primarily relate to the services provided by our significant stockholder, Biofrontera AG, for accounting consolidation, IT support, and pharmacovigilance. These expenses were charged to us based on costs incurred plus 6% in accordance with the 2016 Services Agreement. During 2021, we entered into the Services Agreement which provides for the execution of statements of work that supersede the applicable provisions of the 2016 Services Agreement. The Services Agreement enables us to continue relying on Biofrontera AG and its subsidiaries for various services it has historically provided to us, including IT and pharmacovigilance support for as long as we deem necessary. We currently have statements of work in place regarding IT, regulatory affairs, medical affairs, pharmacovigilance, and Investor Relations services, and are continuously assessing the other services historically provided to us by Biofrontera AG to determine 1) if they will be needed, and 2) whether they can or should be obtained from other third-party providers. During 2022, we hired additional IT personnel and developed our IT infrastructure, enabling us to commence work on our IT separation from Biofrontera AG.
Restructuring Costs
We restructured the business of Cutanea and incurred restructuring costs through
2021, which were subsequently reimbursed by
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Change in Fair Value of Contingent Consideration
In connection with the Cutanea acquisition, we recorded contingent consideration
related to the estimated profits from the sale of Cutanea products to be shared
equally with
Change in Fair Value of Warrant Liabilities
Common stock warrants issued in conjunction with private placement financing transactions are accounted for as liabilities in accordance with ASC 815-40.
The warrant liability is measured at fair value at inception and on a recurring basis, with changes in fair value presented within the consolidated statements of operations.
Change in Fair Value of Investment in
Our investments are comprised of equity securities, which are initially recorded at cost, plus transaction costs, and subsequently measured at fair value, based on quoted market prices, with the gains and losses reported in the Company's consolidated statement of operations. For the investments held in foreign currencies, the change in fair value attributable to changes in foreign exchange rates is included in gains and losses in the consolidated statement of operations.
The Company may sell its equity securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or other factors.
Interest Expense, net
Interest expense, net, primarily consists of amortization of the contract asset
related to the start-up cost financing from
Other Income, net
Other income, net primarily includes (i) gain on sale of leased assets, and (ii) gain (loss) on foreign currency transactions.
Income Taxes
As a result of the net losses we have incurred in each fiscal year since inception, we have recorded no provision for federal income taxes during such periods. Income tax expense incurred relates to state income taxes.
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
For the Year Ended December 31,
(in thousands) 2022 2021 Change %Change
Product revenues, net $ 28,541 $ 24,043 $ 4,498 18.7 %
Related party revenues 133 57 76 132.5 %
Revenues, net 28,674 $ 24,100 4,574 19.0 %
Operating expenses:
Cost of revenues, related party 14,618 12,222 2,396 19.6 %
Cost of revenues, other 567 520 47 9.1 %
Selling, general and
administrative 35,137 36,512 (1,375 ) -3.8 %
Selling, general and
administrative, related party 733 697 36 5.1 %
Restructuring costs - 752 (752 ) -100.0 %
Change in fair value of
contingent consideration (3,800 ) (1,402 ) (2,398 ) 171.0 %
Total operating expenses 47,255 49,301 (2,046 ) -4.1 %
Loss from operations (18,581 ) (25,201 ) 6,620 -26.3 %
Change in fair value of warrant
liabilities 16,388 (12,801 ) 29,189 -228.0 %
Change in fair value of
investments 1,747 - 1,747 n/a
Interest expense, net (195 ) (344 ) 149 -43.3 %
Other income, net 33 689 (656 ) -95.2 %
Loss before income taxes (608 ) (37,657 ) 37,049 -98.4 %
Income tax expenses 32 56 (24 ) -42.9 %
Net loss $ (640 ) $ (37,713 ) $ 37,073 -98.3 %
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Revenues, net
Our net revenue was
Operating Expenses
Cost of Revenues,
Cost of revenues, related party was
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
Restructuring Costs
There were no restructuring costs for the twelve months ended
Change in Fair Value of Contingent Consideration
The change in fair value of contingent consideration was a decrease of
Change in Fair Value of Warrant Liabilities
The change in fair value of warrant liabilities was a decrease of
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Change in fair value of investments in equity securities
The change in fair value of investments in equity securities of
Other Income, net
Other income, net was negligible and
Net Income to Adjusted EBITDA Reconciliation for years ended
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 will be shared equally
between
Change in fair value of warrant liabilities: The Warrants issued in conjunction with our private placement offerings were accounted for as liabilities in accordance with ASC 815-40. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the consolidated 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 in equity securities: The Company accounts
for its investments in equity securities in accordance with ASC 321, Investments
-
Legal settlement expenses: To measure operating performance, we exclude legal settlement expenses. We do not expect to incur these types of legal expenses on a recurring basis and believe the exclusion of such amounts allows management and the users of the financial statements to better understand our financial results.
Stock Based Compensation: To measure operating performance, we exclude the impact of costs relating to share-based compensation. Due to the subjective assumptions and a variety of award types, we believe that the exclusion of share-based compensation expense, which is typically non-cash, allows for more meaningful comparisons of our operating results to peer companies. Share-based compensation expense can vary significantly based on the timing, size and nature of awards granted.
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.
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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-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
Years ended December 31,
2022 2021
Net loss $ (640 ) $ (37,713 )
Interest expense, net 195 344
Income tax expenses 32 56
Depreciation and amortization 519 540
EBITDA 106 (36,773 )
Change in fair value of contingent consideration (3,800 ) (1,402 ) Change in fair value of warrant liabilities
(16,388 ) 12,801
Change in fair value of investments (1,747 ) -
Legal settlement expenses 870 11,250
Stock based compensation 1,852 129
Expensed issuance costs 1,045 1,383
Adjusted EBITDA $ (18,062 ) $ (12,612 )
Adjusted EBITDA margin -63.0 % -52.3 %
Adjusted EBITDA
Adjusted EBITDA decreased from
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Liquidity and Capital Resources
The Company's primary sources of liquidity are its existing cash balances, cash
collected from the sales of its products, and cash flows from financing
transactions. During the year ended
Since we commenced operations in 2015, we have generated significant losses. For
the years ended
The Company's short-term material cash requirements include working capital
needs and satisfaction of contractual commitments including facility and auto
leases (see Note 24, Commitments and Contingencies),
Additionally, we expect to continue to incur operating losses due to significant
discretionary sales and marketing efforts as we seek to expand the
commercialization of our licensed products in
Our future growth is dependent on our ability to obtain additional equity or debt financing. Based on current operating plans and financial forecasts, we expect that our current capital resources, including investments in equity securities which we intend to liquidate within the next twelve months, and availability under a working capital line of credit, will be sufficient to fund our operations for at least the next twelve months from the date of issuance of our financial statements. However, if our current operating plans or financial forecasts change, or we are unable to obtain additional financing, we may need to reduce the discretionary spend on promotional expenses, branding, marketing consulting and defer some hiring. While we expect to continue being flexible in our spending over the next twelve months, we do not consider there to be a need to significantly revise our operations currently.
55 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) 2022 2021
Net cash used in operating activities
Operating Activities
During the year ended
Investing Activities
During the year ended
Financing Activities
During the years ended
On
Entry into the Revolving Facility will be subject to customary closing conditions, including the execution and delivery of appropriate definitive documentation related to the Revolving Facility, to include customary representations, warranties, covenants, events of default and other terms and conditions.
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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
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," of this Form 10-K.
Critical Accounting Estimates
We believe that the following accounting policies are those that are most critical to the judgments and estimates used in the preparation of our financial statements.
Contingent Consideration
We record contingent consideration resulting from a business combination at its
fair value on the acquisition date. Each reporting period thereafter, we revalue
the remaining obligations and record increases or decreases in their fair value
as an adjustment to contingent consideration expense in our statements of
operations. We considered a number of factors, including information provided by
an outside valuation advisor in performing the valuation. Contingent
consideration is reported at the estimated fair values based on the
probability-adjusted present value of the consideration expected to be paid,
using significant inputs and estimates. Changes in the fair value of our
contingent consideration obligations can result from changes to one or multiple
inputs, including forecasted product profit amounts, metric risk premium and
discount rates consistent with the level of risk of achievement as further
discussed in Note 4, Fair Value Measurements to the audited financial statements
as of and for the years ended
Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions described above, could have a material impact on the amount of contingent consideration expense we record in any given period.
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Intangible Assets and Impairment Assessment
The Company regularly reviews the carrying amount of its long-lived assets to determine whether indicators of impairment may exist, which warrant adjustments to carrying values or estimated useful lives. In connection with this review, assets are grouped at the lowest level at which identifiable cash flows are largely independent of other asset groupings. If indications of impairment exist, projected future undiscounted cash flows associated with the asset grouping are compared to the carrying amount to determine whether the asset's value is recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. 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, we take various factors 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 include changes in our strategic operational and financial decisions, economic conditions, demand for our product and other corporate initiatives which may eliminate or significantly decrease 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.
We perform an impairment assessment in accordance with FASB ASC Topic
360-10-S99, Impairment or Disposal of Long-Lived Assets. Management's review for
the presence of indicators of impairment include events or changes in
circumstances that indicate the carrying amount of an asset may not be
recoverable. In
Fair Value - Warrant Liability
The Warrants issued in conjunction with our private placement offerings 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 option pricing model to estimate the fair value of the Warrants which is considered a Level 3 fair value measurement. The Black-Scholes 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 Black-Scholes pricing model may fluctuate in future periods based upon factors which are outside of the Company's control. A significant change in one or more of these inputs used in the calculation of 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.
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Recently issued accounting pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2, Summary of Significant Accounting Policies-Recently Issued Accounting Pronouncements Not Yet Effective.
Off-balance Sheet Arrangements
Besides the contractual obligations and commitments as discussed in the
Liquidity and Capital Resources, we did not have during the periods presented,
and we do not currently have, any other off-balance sheet arrangements, as
defined in the rules and regulations of the
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.
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