Biofrontera Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; interim financial statements are unaudited. Amounts below are in U.S. dollars unless noted. Biofrontera is a U.S. biopharmaceutical company commercializing licensed dermatology products, principally Ameluz for actinic keratosis and Xepi for impetigo.
Financial performance and liquidity
- Revenue: Q2 net revenue was $4.46 million, down 23.9% from $5.86 million a year earlier, mainly because Ameluz order volume fell; a price increase partly offset the decline. First-half revenue was $14.21 million, up 34.1% from $10.60 million, primarily on higher Ameluz volume.
- Profitability: Q2 operating loss was $6.21 million versus $3.69 million; net loss was $0.85 million versus $3.66 million. First-half operating loss widened to $9.32 million from $7.22 million, while reported net income was $4.71 million versus a $7.20 million loss. First-half net income included a $14.08 million noncash gain from the change in warrant fair value; it should not be read as evidence of operating profitability.
- Adjusted EBITDA: The company-reported non-GAAP measure was negative $7.95 million in Q2 versus negative $2.89 million, and negative $11.26 million for the first half versus negative $5.71 million. Reported margins were negative 178.4% and negative 78.6%, respectively, compared with negative 49.4% and negative 53.9% in 2021.
- Margins and costs: Calculated gross margin, using reported product and related-party revenue less cost of revenue, was approximately 42.7% in Q2 versus 46.9% a year earlier; first-half margin was approximately 45.8% versus 46.4%. Q2 SG&A rose 74.2% to $9.67 million; first-half SG&A rose 67.7% to $17.29 million, driven by legal and insurance costs, hiring, stock compensation, financing-related issuance costs, consulting and travel.
- Cash flow: First-half operating cash use was $1.99 million, improving from $4.51 million used in 2021. Investing cash use was $0.04 million. Financing provided $9.39 million, primarily from the May private placement. Cash and cash equivalents were $31.91 million at June 30, compared with $24.55 million at year-end; the cash-flow statement reports $32.11 million including restricted cash.
- Balance sheet and obligations: Total assets were $53.63 million, current assets $46.98 million and current liabilities $14.88 million. Total liabilities were $36.39 million. The filing does not identify conventional interest-bearing debt; material obligations include acquisition contract liabilities, warrant liabilities and legal-settlement liabilities. Maruho start-up financing of $3.6 million is due December 2022 and $3.7 million December 2023. The balance sheet includes an $11.25 million remaining settlement liability and a $5.6 million related-party reimbursement receivable.
Material changes and notable items
- May’s private placement generated $9.4 million gross proceeds and issued 1.85 million common shares, plus warrants. Common shares issued and outstanding increased to 19.01 million at June 30 from 17.10 million at December 31, 2021.
- Q2 revenue fell despite the first-half increase, consistent with management’s description of seasonal strength in the first and fourth quarters and softer second and third quarters.
- Warrant fair-value changes materially affected reported results: the company recorded a $5.37 million Q2 gain and a $14.08 million first-half gain. These are noncash and depend on valuation assumptions and the share price. The contingent-consideration remeasurement reduced expense by $1.9 million in the first half.
- After quarter-end, an investor exercised 1.569 million pre-funded warrants for nominal proceeds. In July, the company also repriced and induced exercise of 2.857 million 2021 warrants at $1.62 per share, receiving approximately $4.3 million net proceeds, and issued a new warrant for up to 4.286 million shares. These transactions add potential dilution.
Outlook, risks and contingencies
- Management expects continued operating losses as it invests in sales and marketing, personnel, public-company requirements and systems, including an ERP system. No specific revenue or earnings guidance is provided.
- Management stated that cash on hand and the July warrant-exercise proceeds were expected to fund operations for at least 12 months from issuance of the financial statements, based on current plans and forecasts. It cautioned that changed plans or inability to raise additional funds could require cuts to promotional spending and delayed hiring; additional funding may be needed sooner than expected.
- Xepi supply is at risk following manufacturing delays and the former manufacturer’s bankruptcy. A replacement manufacturer was selected, but ramp-up is expected to take time; management anticipated shipment delays for the next 18 months and estimated a $0.5 million net Xepi revenue impact over the next 12 months. Ameluz and RhodoLED supply also depend on licensors and manufacturers.
- The company relies on licensed products and related-party supply arrangements. Other stated risks include competition, reimbursement and insurance coverage, COVID-19 effects, product demand, and the need for additional financing.
- Biofrontera and Biofrontera AG are jointly and severally liable for a $22.5 million settlement. Biofrontera’s stated share is $11.25 million plus interest, with payment in installments; Biofrontera AG owes reimbursement for its share. The company could be required to pay amounts owed by Biofrontera AG if that party fails to pay. The filing reports a $5.6 million reimbursement receivable.
- Disclosure controls were not effective at June 30, 2022 because a previously identified material weakness in management review of third-party specialist work was not fully remediated. Management said remediation remained in progress.
Important facts for investors to verify
- Whether Ameluz demand and revenue recover after the Q2 year-over-year decline, and how seasonality affects subsequent quarters.
- Whether Xepi manufacturing resumes on schedule and whether the projected supply delays and $0.5 million revenue impact remain accurate.
- Cash burn, financing needs and the company’s ability to meet the Maruho installments and other contractual commitments.
- Timely reimbursement by Biofrontera AG of its settlement share, given joint-and-several liability and the recorded receivable.
- The dilution and warrant terms arising from the May financing and July warrant inducement, and the progress of remediation of the material weakness.