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 efficacy and intended use of our technologies under development, the timelines and strategy for bringing such products to market, 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.
59 Overview
We are a
Our principal licensed product is Ameluz®, which is a prescription drug approved
for use in combination with our licensor's FDA approved medical device, the
BF-RhodoLED® lamp, for photodynamic therapy 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 adults and children 2 months and older. We are
currently selling Xepi® for this indication in the
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Our principal objective is to increase the sales of our licensed products in
? expanding our sales in
RhodoLED® lamp for the treatment of minimally to moderately thick actinic
keratoses of the face and scalp and positioning Ameluz® to be a leading
photodynamic therapy product, by growing our dedicated sales and marketing
infrastructure in
? expanding our sales of Xepi® for treatment of impetigo by improving the market
positioning of the licensed product; and
? 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.
Our strategic objectives also include further expansion of our product and business portfolio through various methods to pursue selective strategic investment and acquisition opportunities to expand and support our business growth, including but not limited to:
? in-licensing further products or product opportunities and developing them for
the U.S. market;
? procuring products through asset acquisition from other healthcare companies;
and
? procuring products through share acquisition of some or all shares of other
healthcare companies, including the possible acquisition of shares of our
former parent company and significant stockholder, Biofrontera AG.
We devote a substantial portion of our cash resources to the commercialization
of our licensed products, Ameluz®, the RhodoLED® lamp series and Xepi®. Prior to
the IPO, we financed our operating and capital expenditures through cash
proceeds generated from our product sales and proceeds received in connection
with the Intercompany Revolving Loan Agreement with Biofrontera AG. On
On
During November and December of 2021, investors exercised their Warrants to
purchase a total of 2,647,606 shares of common stock at an exercise price of
On
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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 revenue is sales of products that we license from certain related and unrelated companies. Our long-term financial objectives include consistent revenue growth and expanding operating margins. Accordingly, we are focused on licensed product sales expansion to drive revenue growth and improve operating efficiencies, including effective resource utilization, information technology leverage and overhead cost management.
Key factors affecting our performance
As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting our results of operations.
Seasonality
Because traditional photodynamic therapy treatments using a lamp are performed more frequently during the winter, our revenue is subject to some seasonality and has historically been higher during the first and fourth quarters than during the second and third quarters.
COVID-19
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
Due to the above management initiatives, lifting of some of the government
restrictions and reopening of our customers' businesses, our revenue recovered
quickly since
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
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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 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 RhodoLED® lamps and associated services for the clinical trials performed by Biofrontera Bioscience.
Cost of Revenues,
Cost of revenues, related party, is comprised of purchase costs of our licensed
products, Ameluz® and RhodoLED® lamps from
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. As of
Restructuring Costs
We restructured the business of Cutanea and incurred restructuring costs, 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
Interest Expense, net
Interest expense, net, primarily consists of interest expense incurred under our
Revolving Loan Agreement with Biofrontera AG, amortization of the contract asset
related to the start-up cost financing from
Other Income, net
Other income, net primarily includes (i) reimbursed Share Purchase Agreement costs, (ii) a one-time employee retention credit, or ERC, that we were granted under the CARES Act in 2020, and (iii) 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) 2021 2020 Change %Change
Product revenues, net $ 24,043 $ 18,787 $ 5,256 28.0 %
Related party revenues 57 62 (5 ) -7.7 %
Revenues, net 24,100 $ 18,849 5,251 27.9 %
Operating expenses:
Cost of revenues, related party 12,222 8,313 3,909 47.0 %
Cost of revenues, other 520 753 (233 ) -30.9 %
Selling, general and
administrative 36,512 17,706 18,806 106.2 %
Selling, general and
administrative, related party 697 411 286 69.6 %
Restructuring costs 752 1,132 (380 ) -33.6 %
Change in fair value of
contingent consideration (1,402 ) 140 (1,542 ) -1,101.4 %
Total operating expenses 49,301 28,455 20,846 73.3 %
Loss from operations (25,201 ) (9,606 ) (15,595 ) 162.3 %
Change in fair value of warrant
liabilities (12,801 ) - (12,801 ) n/a
Interest expense, net (344 ) (2,869 ) 2,525 -88.0 %
Other income, net 689 1,552 (863 ) -55.6 %
Loss before income taxes (37,657 ) (10,923 ) (26,734 ) 244.7 %
Income tax expenses 56 64 (8 ) -12.5 %
Net loss $ (37,713 ) $ (10,987 ) $ (26,726 ) 243.3 %
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Product Revenue, net
Net product revenue was
Operating Expenses
Cost of Revenues,
Cost of revenues, related party was
Cost of Revenues, Other
Cost of revenues, other was
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
The increase was primarily driven by legal settlement expense of
Selling, General and Administrative Expenses,
Selling, general and administrative expenses, related party were
Restructuring Costs
Restructuring costs were
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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 an increase of
Interest Expense, net
Interest expense, net was
Other Income, net
Other income, net was
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 Purchase and Pre-funded Warrants 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 statement of operations. We exclude the impact of the change in fair value of warrant liabilities as this is non-cash.
Cost reimbursement from
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.
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.
Employee retention credit: We exclude a one-time ERC that we were granted under the CARES Act, which was recorded as other income. We believe that the exclusion of this item allows for more meaningful analysis of operating results.
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,
2021 2020
Net income/(loss) $ (37,713 ) $ (10,987 )
Interest expense, net 344 2,869
Income tax expenses 56 64
Depreciation and amortization 540 562
EBITDA (36,773 ) (7,492 )
Change in fair value of contingent consideration (1,402 ) 140
Change in fair value of warrant liabilities 12,801 -
Cost reimbursement from Biofrontera Pharma GmbH - (1,500 )
Legal settlement expenses 11,250 -
Employee retention credit ("ERC") - (299 )
Expensed issuance costs 1,383 -
Adjusted EBITDA $ (12,741 ) $ (9,151 )
Adjusted EBITDA margin -52.9 % -48.5 %
Adjusted EBITDA
Adjusted EBITDA decreased from
66
Liquidity and Capital Resources
On
The Company's primary sources of liquidity are its existing cash balances and
cash flows from equity 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 auto leases (see
Note 23, Commitments and Contingencies),
Under the Xepi LSA, we are obligated to make payments to Ferrer upon the
occurrence of certain milestones. Specifically, we must pay Ferrer i)
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 Ameluz® and Xepi® in
These factors raise doubt about our ability to continue as a going concern, which we have determined are mitigated by the following plans. Based on current operating plans and financial forecasts, we expect that our current cash and cash equivalents will be sufficient to fund our operations for at least the next twelve months from the date of issuance of our financial statements. However, we expect to have to obtain either equity or debt financing in the near term to support our future long-term growth and to mitigate the risk of our operating costs significantly exceeding the amounts currently estimated. If our current operating plans or financial forecasts change, or we are unable to obtain additional financing, 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.
The adequacy of our available funds to meet our future operating and capital requirements will depend on many factors, including the amounts of future revenues generated by our products. Due to numerous factors described in more detail under the caption Part I, Item 1A, "Risk Factors" of this Form 10-K and our contractual obligations and commitments, we may require significant additional funds earlier than we currently expect in order to continue to commercialize Ameluz®, BF-RhodoLED® lamp series, and Xepi® and to support the operating, investing, and financing activities of the Company beyond the next twelve months.
Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:
? the costs of our commercialization activities for Ameluz® and Xepi®;
? the extent to which we acquire or invest in licensed products, businesses and
technologies;
? the extent to which we choose to establish collaboration, co-promotion,
distribution or other similar agreements for our licensed products;
? the cost to fulfill our contractual obligations for various operating leases on
vehicles and office space; and
? the requirement to pay back
and make any contingent profit sharing payments to
the Cutanea acquisition.
? the ability to collect a receivable of
accordance with the Settlement Allocation Agreement) for reimbursement of legal
settlement payments made and to be made on their behalf for which we are
jointly and severally liable.
We will continue to assess our operating costs and expenses and our cash and cash equivalents and, if circumstances warrant, we will make appropriate adjustments to our operating plan.
67 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) 2021 2020
Net cash used in operating activities $ (26,715 ) $ (12,369 )
Net cash provided by (used in) investing activities (11 ) -
Net cash provided by financing activities 43,191 13,194
Net increase in cash and restricted cash $ 16,465 $ 825
Operating Activities
During the year ended
Investing Activities
During the year ended
Financing Activities
During the year ended
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Impact of becoming a standalone company
We expect that our transition to operating as a standalone company will have a number of potentially significant effects on our results of operations.
Additional operating costs for becoming a standalone company - In the transition
to becoming a public company and operating as a standalone entity, we have
incurred, and will continue to incur, additional operating expenses that are
expected to be significant as a percentage of our net revenues, including costs
associated with the financial reporting requirements of a standalone public
company, such as salaries associated with building out our accounting
department, legal fees, accounting and valuation services costs associated with
preparing
Additional costs to further business development and expansion - As we seek to
expand the commercialization of Ameluz® and Xepi®, we expect to incur additional
operating costs for significant sales and marketing efforts in
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 Annual Report on Form 10-K.
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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. Due to developments with respect to a third-party manufacturer that
has been providing our supply of Xepi® that impact the timing of sales expansion
and improved market positioning of the Xepi® product, we deemed it necessary to
assess the recoverability of our Xepi® asset group. As of the date of
notification of the third-party manufacturer of Xepi®'s bankruptcy in late
Fair Value - Warrant Liability
The Purchase and Pre-funded Warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities in the accompanying 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 statement of operations.
The Company utilizes a Black-Scholes option pricing model to estimate the fair value of the Purchase 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 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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