Biofrontera Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Dollar figures are in millions unless stated otherwise. Biofrontera commercializes licensed dermatology products, principally Ameluz and RhodoLED for photodynamic treatment of actinic keratosis, and Xepi for impetigo.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $4.32 | $4.33 | $18.53 | $14.93 |
| Operating loss | $(3.64) | $(16.11) | $(12.96) | $(23.32) |
| Net income (loss) | $(2.57) | $(16.01) | $2.15 | $(23.21) |
| Operating cash flow | Not stated separately | Not stated separately | $(7.93) | $(5.73) |
| Adjusted EBITDA (non-GAAP) | $(5.01) | $(3.84) | $(14.12) | $(9.55) |
Nine-month product revenue rose 24% year over year, mainly from higher Ameluz order volume and a smaller price increase. Q3 revenue was essentially flat. Gross profit, calculated as revenue less reported cost of revenue, was approximately $2.10 million in Q3 2022 (48.5% margin) and $8.60 million for the first nine months (46.4% margin).
Nine-month net income included noncash gains from fair-value changes: $15.27 million on warrant liabilities and $4.10 million on contingent consideration. These items helped move reported net income into positive territory despite the operating loss; they should not be read as operating profit. Adjusted EBITDA worsened year over year in both periods.
Balance sheet, liquidity and financing
- At September 30, cash and cash equivalents were $27.52 million, total current assets $48.49 million, current liabilities $17.14 million, and total liabilities $32.46 million. Current assets were approximately 2.8 times current liabilities.
- Cash increased from $24.55 million at year-end 2021. Nine-month cash flows included $7.93 million used in operations, $3.07 million used in investing (principally a loan receivable), and $14.02 million provided by financing.
- Financing included $9.39 million net proceeds from a May private placement and $4.63 million from warrant exercises. Common shares outstanding increased from 17.10 million at December 31, 2021 to 23.55 million at September 30, 2022.
- The balance sheet reports acquisition contract liabilities of $8.95 million, including $7.30 million of Maruho start-up financing and $2.10 million of contingent consideration, net of a contract asset. The start-up financing is payable in installments of $3.6 million in December 2022 and $3.7 million in December 2023. The filing reports no conventional interest-bearing debt balance.
- The company recorded an $11.3 million remaining legal-settlement liability and a related $5.6 million receivable from Biofrontera AG. The parties are jointly and severally liable for the settlement, creating collection and payment exposure for Biofrontera Inc.
Changes, outlook and risks
- Lower reported operating expenses improved the operating loss versus 2021, principally because 2021 included $11.25 million of legal-settlement expense. The 2022 nine-month SG&A decrease was partly offset by higher hiring, legal, insurance, consulting, travel and stock-compensation costs.
- Management expected existing cash to fund operations for at least 12 months from issuance of the statements, while stating future growth depends on additional equity financing. It anticipated continuing operating losses and said it could reduce promotional spending, marketing consulting or hiring if plans or financing changed. No numerical revenue or earnings guidance was provided.
- Xepi supply has been disrupted following the former manufacturer’s bankruptcy. A replacement manufacturer was selected, but the filing anticipated shipment delays for approximately 15 months and said available inventory might not support the original commercialization timeline. An October 2022 impairment review found expected undiscounted cash flows exceeded the Xepi asset group’s carrying amount; no impairment was recorded.
- Ameluz is the principal revenue source and is purchased exclusively from related-party licensors. The company also relies on licensors and contract manufacturers for product supply, and seasonality typically makes first and fourth quarters stronger than the second and third.
- Management concluded disclosure controls were not effective at September 30, 2022 because a material weakness involving review of third-party specialist work remained unremediated. The filing warns this could impair timely or accurate reporting.
- Subsequent events: a stockholder rights plan adopted in October 2022 can be triggered by an unapproved acquisition of 20% or more of common stock and is scheduled to expire October 13, 2023. In November, the company reported acquiring 4,224,683 Biofrontera AG shares, or 7.45%, through a loan-related transaction and exchange of 3,148,042 Biofrontera Inc. shares for AG share options.
Important facts for investors to verify
- Whether the $5.6 million settlement reimbursement receivable from Biofrontera AG is collected on time, and the company’s exposure to the remaining settlement payments.
- Whether Ameluz revenue growth and product margins can offset operating costs, and how much additional financing may be required.
- Progress and timing of replacement Xepi manufacturing, inventory sufficiency, and any subsequent effect on commercialization or impairment assessments.
- The effect of warrant and contingent-consideration fair-value changes on reported earnings, and the terms and potential dilution associated with outstanding warrants and equity awards.
- Remediation of the material weakness in internal control and any further developments related to the rights plan or Biofrontera AG investment.