Biofrontera Inc

Previous wording

Management’s discussion and analysis (“MD&A”) provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Condensed Consolidated Financial Statements and related notes. The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during the first quarter of 2024 compares with prior-year periods. Throughout this section, Biofrontera Inc., including its wholly owned subsidiary, Bio-FRI GmbH (“Bio-FRI” or “subsidiary”), is referred to as “Company,” “we,” “us,” or “our.”

Current wording

Management’s discussion and analysis (“MD&A”) provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Condensed Consolidated Financial Statements and related notes. The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during the first quarter of 2024 compares with prior-year periods. Throughout this section, Biofrontera Inc., including its wholly owned subsidiary, Biofrontera Discovery GmbH (“Discovery” or “subsidiary”), is referred to as “Company,” “we,” “us,” or “our.”

Previous wording

We are a U.S.-based biopharmaceutical company commercializing a portfolio of pharmaceutical products for the treatment of dermatological conditions with a focus on photodynamic therapy (“PDT”) and topical antibiotics. The Company’s licensed products are used for the treatment of actinic keratoses (“AKs”), which are pre-cancerous skin lesions, as well as impetigo, a bacterial skin infection. Our subsidiary, Bio-FRI was formed on February 9, 2022, as a German presence to facilitate our relationship with Biofrontera Pharma and Biofrontera Bioscience (together, the “Ameluz Licensor”), both of which are related parties as they are wholly owned subsidiaries of Biofrontera AG.

Current wording

We are a U.S.-based biopharmaceutical company commercializing a portfolio of pharmaceutical products for the treatment of dermatological conditions with a focus on photodynamic therapy (“PDT”) and topical antibiotics. The Company’s licensed products are used for the treatment of actinic keratoses (“AKs”), which are pre-cancerous skin lesions, as well as impetigo, a bacterial skin infection. Our subsidiary, Discovery, was formed on February 9, 2022, as a German presence to facilitate our relationship with Biofrontera Pharma and Biofrontera Bioscience (together, the “Ameluz Licensor”), both of which are related parties as they are wholly owned subsidiaries of Biofrontera AG.

Previous wording

Our principal licensed product is Ameluz®, which is a prescription drug approved for use in combination with the BF-RhodoLED®lamp series, for PDT (when used together, “Ameluz® PDT”). In the United States, the PDT treatment is used for the lesion-directed and field-directed treatment of AKs of mild-to-moderate severity on the face and scalp. AKs are premalignant lesions of the skin that can potentially develop into skin cancer (squamous cell carcinoma) if left untreated. International treatment guidelines list PDT as the “gold standard” for treating AK, especially multiple AKs and the surrounding photodamaged skin.1 We are currently selling Ameluz® for this indication in the U.S. under an exclusive license and supply agreement, (the “Ameluz LSA”) with the Ameluz Licensor.

Current wording

Our principal licensed product is Ameluz®, which is a prescription drug approved for use in combination with PDT (when used together, “Ameluz® PDT”) using the BF-RhodoLED®and the RhodoLED®XL lamps (the “RhodoLED®Lamps”). In the United States, the PDT treatment is used for the lesion-directed and field-directed treatment of AKs of mild-to-moderate severity on the face and scalp. AKs are premalignant lesions of the skin that can potentially develop into skin cancer (squamous cell carcinoma) if left untreated. International treatment guidelines list PDT as the “gold standard” for treating AK, especially multiple AKs and the surrounding photodamaged skin.1 We are currently selling Ameluz®for this indication in the U.S. under an 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”).

Previous wording

In May 2023, we began research and development (“R&D”) activities to support PDT growth and will continue to opportunistically invest in these activities going forward. Our R&D program currently aims to improve the capabilities of our BF-RhodoLED® lamps to better fulfill the needs of dermatologists. Our goal is to improve the effectiveness of our commercial team by allowing sales representatives to carry approved devices with them allowing for easier product demonstrations and evaluations.

Current wording

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. Our goal is to improve the effectiveness of our commercial team by allowing sales representatives to carry approved devices with them allowing for easier product demonstrations and evaluations.

Previous wording

On February 19, 2024, we entered into the Second A&R Ameluz LSA with the Ameluz Licensor under which, with immediate effect, the Transfer Price of Ameluz®was reduced from 50% to 25% for all purchases through 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 AK 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. The Transfer Price covers the cost of goods, royalties on sales, and services including all regulatory efforts, agency fees, pharmacovigilance, and patent administration.

Current wording

Effective with the Second A&R Ameluz LSA, the price we pay per unit, based on certain percentages of the anticipated net selling price, (the “Transfer Price”) of Ameluz®was reduced from 50% to 25% for all purchases through 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 AK and, if approved by the Food and Drug Administration (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. The Transfer Price covers the cost of goods, royalties on sales, and services including all regulatory efforts, agency fees, pharmacovigilance, and patent administration. The reduced LSA Transfer Price will allow the Company to finance the R&D activities assumed as of June 1, 2024, and continue our commercial growth trajectory.

Previous wording

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, our line of credit, short term debt and proceeds received in equity financings.

Current wording

We devote a substantial portion of our cash resources to the commercialization of our licensed products , Ameluz® and the RhodoLED®Lamps. We have financed our operating and capital expenditures through cash proceeds generated from our product sales, our line of credit, short-term debt and proceeds received in equity financings.

Previous wording

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. As previously disclosed since 2021, the Xepi product has experienced manufacturing delays at Ferrer’s third-party manufacturer, which have not yet been resolved. We expect to receive commercial product in the fourth quarter of 2024. In addition, we are expecting to launch the RhodoLED® XL in the second quarter of 2024 and have begun production activities for that product. However, we have historically experienced delays due to supply chain issues, and there is a possibility that there are additional supply chain challenges, or our orders are fulfilled at a slower rate than expected. Despite these historic and possible future delays, we expect total revenues will not be significantly impacted (i.e., we experience less growth than expected vs. declining sales) since the majority of our revenues are from sales of Ameluz® and we have BF-RhodoLED® lamps on hand and on order. We continue to monitor the impacts of the supply chain on our business and are focused on ensuring the stability of the supply chains for Ameluz® and BF-RhodoLED® lamp series.

Current wording

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. As previously disclosed since 2021, the Xepi product has experienced manufacturing delays at Ferrer’s third-party manufacturer, which have not yet been resolved. We expect to receive commercial product in the second or third quarter of 2025. In addition, we launched the commercial distribution of the RhodoLED® XL on June 10, 2024. However, we have historically experienced delays due to supply chain issues, and there is a possibility that there are additional supply chain challenges, or our orders are fulfilled at a slower rate than expected. Despite these historic and possible future delays, we expect total revenues will not be significantly impacted (i.e., we experience less growth than expected vs. declining sales) since the majority of our revenues are from sales of Ameluz® and we have RhodoLED® Lamps on hand and on order. We continue to monitor the impacts of the supply chain on our business and are focused on ensuring the stability of the supply chains for Ameluz® and RhodoLED®Lamps.

Previous wording

We generate product revenues through the third-party sales of our licensed products Ameluz®, BF-RhodoLED® lamps and to a much lesser extent Xepi®covered by our exclusive license and supply agreements with our Licensors*.*Revenues from product sales are recorded net of discounts, rebates and other incentives, including trade discounts and allowances, product returns, government rebates, and other incentives such as patient co-pay assistance. Revenue from the sales of our BF-RhodoLED®lamp and Xepi®are relatively insignificant compared with revenues generated through our sales of Ameluz®.

Current wording

We generate product revenues through the third-party sales of our licensed products Ameluz®, RhodoLED® Lamps and to a much lesser extent Xepi®covered by our exclusive license and supply agreements with our Licensors*.*Revenues from product sales are recorded net of discounts, rebates and other incentives, including trade discounts and allowances, product returns, government rebates, and other incentives such as patient co-pay assistance. Revenue from the sales of our RhodoLED®Lamps and Xepi®are relatively insignificant compared with revenues generated through our sales of Ameluz®.

Previous wording

We also generate insignificant related party revenue in connection with an agreement with Biofrontera Bioscience to provide BF-RhodoLED®lamps and associated services for the clinical trials performed by Biofrontera Bioscience.

Current wording

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 BF-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 lamps and associated services for clinical trials.

Previous wording

Cost of revenues, related party, is comprised of purchase costs of our licensed products, Ameluz® and BF-RhodoLED®lamps from Biofrontera Pharma and insignificant inventory adjustments due to scrapped, expiring and excess products.

Current wording

Cost of revenues, related party, is comprised of purchase costs of our licensed products, Ameluz® and RhodoLED®Lamps from Biofrontera Pharma and insignificant inventory adjustments due to scrapped, expiring and excess products.

Previous wording

The price we paid for inventory purchased through February 12, 2024, was based on the Ameluz LSA as amended on October 8, 2021, under which the price paid per unit was based upon our sales history. The purchase price we paid the Ameluz Licensor for Ameluz® was determined in the following manner:

Current wording

The Transfer Price we paid for inventory purchased through February 12, 2024, was based on the Ameluz LSA as amended on October 8, 2021, under which the price paid per unit was based upon our sales history. The purchase price we paid the Ameluz Licensor for Ameluz® was determined in the following manner:

Previous wording

Effective February 12, 2024, the Second A&R Ameluz LSA, among other things, was amended to change the Transfer Price to 25% 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% starting in 2032, subject to a minimum dollar amount per unit.

Current wording

Effective February 12, 2024, the Second A&R Ameluz LSA, among other things, was amended to change the Transfer Price 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.

Previous wording

Selling, general and administrative expenses, related party, relate to the services provided by our significant stockholder, 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 entered into on December 2021 (the “2021 Services Agreement”). 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 information technology, 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 (i) if they will be needed, and (ii) whether they can or should be obtained from other third-party providers. As of March 31, 2024, we have migrated most of our significant information technology and investor relation services from Biofrontera AG to third-party providers.

Current wording

Selling, general and administrative expenses, related party, relate to the services provided by our significant stockholder, 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 entered into on December 2021 (the “2021 Services Agreement”). 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, pharmacovigilance, and investor relations services, 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. As of June 30, 2024, we have eliminated the need for information technology services from Biofrontera AG.

Previous wording

Our current R&D programs aim to improve the capabilities of our BF-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.

Current wording

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.

Previous wording

Net product revenue for the three months ended March 31, 2024 decreased by $0.8 million, or 9.3% as compared to the three months ended March 31, 2023. This decrease was driven by a relatively lower volume of Ameluz revenue in the first quarter of 2024. This was caused in part by the impact of the Change Healthcare cybersecurity attack that occurred in the first quarter of 2024, which caused reimbursement delays for our customers which in turn delayed or reduced orders in the short term.

Current wording

Net product revenue for the three months ended June 30, 2024 increased by $2.0 million, or 34.3% as compared to the three months ended June 30, 2023. This increase was driven by both a 5% higher unit sale price and a higher volume of Ameluz® revenue in the second quarter of 2024. The higher sales volume was primarily caused by (i) the impact of the Change Healthcare cybersecurity attack that occurred in the first quarter of 2024 causing reimbursement delays for our customers, which in turn shifted sales from the first quarter of 2024 to the second quarter of 2024; and (ii) more promotions and corresponding discounts offered in the second quarter of 2024, compared to the same period in 2023.

Previous wording

In accordance with the Settlement Agreement and Mutual Release (the “Release”), dated December 27, 2023, by and between Maruho and the Company, the Company transferred substantially all of its investment in Biofrontera AG to Maruho in exchange for the release of certain obligations. As a result, during the first quarter of 2024, the net balance of our investment in Biofrontera AG was minimal as was the related change in fair value.

Current wording

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 Settlement Agreement and Mutual Release (the “Release”), dated December 27, 2023. As a result, during the second quarter of 2024, the net balance of our investment in Biofrontera AG was minimal as was the related change in fair value.

Previous wording

The increase of interest expense of $1.4 million is driven by the interest and debt discount recognized on the loans issued on December 21, 2023, with two different lenders, for an aggregate principal balance of $4.0 million. Each of the loans requires the Company to make weekly payments of principal and interest in the amount of approximately $102,857 through July 5, 2024, the maturity date. Interest expense is recognized using the effective interest method, such that a constant effective interest rate is applied to the carrying amount of the debt at the beginning of each period until maturity.

Current wording

The increase of interest expense of $0.5 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. Interest expense is recognized using the effective interest method, such that a constant effective interest rate is applied to the carrying amount of the debt at the beginning of each period until maturity.

Previous wording

Cost of revenues, related party for the three months ended March 31, 2024 decreased by $0.6 million, or 13.2% as compared to the three months ended March 31, 2023. This was driven by the decrease in Ameluz product revenue. Cost of revenues, related party, is directly correlated to the selling price of Ameluz under the Ameluz LSA.

Current wording

Cost of revenues, related party for the six months ended June 30, 2024 increased by $0.7 million, or 9.8% as compared to the six months ended June 30, 2023. This was driven by the increase in Ameluz® product revenue. Cost of revenues, related party, is directly correlated to the selling price of Ameluz® under the Ameluz® LSA.

Previous wording

Selling, general and administrative expenses for the three months ended March 31, 2024 decreased by $0.6 million, or 5.6% as compared to the three months ended March 31, 2023. The decrease was primarily driven by a $1.1 million decrease in non-recurring legal costs due to the settlement with Biofrontera AG in April 2023, and a decrease of non-personnel sales and marketing expenses of $0.3 million. The decrease was offset by a $0.4 million increase in accounting and general business consulting expenses, a $0.3 million increase in personnel costs, and another $0.3 million increase in issuance costs.

Current wording

Selling, general and administrative expenses for the six months ended June 30, 2024 decreased by $4.1 million, or 19.2% as compared to the six months ended June 30, 2023. The decrease was primarily driven by a $2.5 million decrease in non-recurring legal costs due to the settlement with Biofrontera AG in April 2023, a decrease of non-personnel sales and marketing expenses of $1.1 million, and a net decrease of $0.3 million in personnel expenses.

Previous wording

The change in fair value of warrant liabilities was $(3.4) million for three months ended March 31, 2024, as compared to $1.0 million for the three months ended March 31, 2023. The change in fair value of warrant liabilities was driven primarily by an increase in the underlying value of the Company’s Common Stock.

Current wording

The change in fair value of warrant liabilities was $2.0 million for six months ended June 30, 2024, as compared to $1.4 million for the six months ended June 30, 2023. The change in fair value of warrant liabilities was driven primarily by a decrease in the underlying value of the Company’s Common Stock paired with a higher population of warrants outstanding for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.

Previous wording

Net Income (Loss) to Adjusted EBITDA Reconciliation for the Three Months Ended March 31, 2024 and 2023

Current wording

Net Loss to Adjusted EBITDA Reconciliation for the Three and Six Months Ended June 30, 2024 and 2023

Previous wording

Loss on debt extinguishment: Effective as of January 4, 2024, we voluntarily terminated the Loan Agreement. The Company recognized a $0.3 million loss on debt extinguishment upon the early termination of the Loan Agreement. 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.

Current wording

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.

Previous wording

Change in fair value of contingent consideration: Pursuant to a share purchase agreement with Maruho, 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 historical impact of the change in fair value of contingent consideration as this is non-cash. We were relieved of our obligations relating to the contingent consideration under the Release. As such, our Q1 2024 results of operations were not impacted by the change in fair value.

Current wording

Change in fair value of contingent consideration: Pursuant to a share purchase agreement with Maruho, 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 historical impact of the change in fair value of contingent consideration as this is non-cash. We were relieved of our obligations relating to the contingent consideration under the Release. As such, our results of operations for the three and six months ended June 30, 2024 were not impacted by the change in fair value.

Previous wording

Change in fair value of warrant liabilities: The warrants issued in conjunction with our private placement offerings and registered public 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.

Current wording

Change in fair value of warrant liabilities: The warrants issued in conjunction with our private placement offerings and registered public offerings are 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.

Previous wording

The below table presents a reconciliation from net loss to Adjusted EBITDA for the three months ended March 31, 2024 and 2023:

Current wording

The below table presents a reconciliation from net loss to Adjusted EBITDA for the three and six months ended June 30, 2024 and 2023:

Previous wording

Adjusted EBITDA decreased from ($4.1) million for the three months ended March 31, 2023 to ($4.6) million for the three months ended March 31, 2024. The decrease was driven by a decrease in revenue of $0.8 million and an increase of $0.2 million in various sales, general and administrative expenses, partially offset by a decrease in our cost of revenues of $0.5 million.

Current wording

Adjusted EBITDA increased from ($7.9) million for the three months ended June 30, 2023 to ($4.7) million for the three months ended June 30, 2024. The increase was driven by an increase in revenue of $2.0 million and a decrease of $3.0 million in various sales, general and administrative expenses, partially offset by an increase in our cost of revenues of $1.5 million.

Previous wording

Pursuant to the requirements of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date the consolidated financial statements included in this Form 10-Q are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statement are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

Current wording

Pursuant to the requirements of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date the consolidated financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

Previous wording

Since we commenced operations in 2015, we have generated significant losses. We incurred net cash outflows from operations of $3.3 million and $3.7 million for the three months ended March 31, 2024 and 2023, respectively. The Company had an accumulated deficit as of March 31, 2024 of $110.1 million. The Company’s primary sources of liquidity are its cash collected from the sales of its products, and cash flows from financing transactions. During the three months ended March 31, 2024, we received net proceeds of $7.3 million from the issuance of preferred stock and warrants, net of issuance costs (SeeNote 13. Mezzanine Equity and Stockholders’ Equity in our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q (“Note 13”)). As of March 31, 2024, we had cash and cash equivalents of $3.8 million, compared to $1.3 million as of December 31, 2023. These conditions raise substantial doubt about our ability to continue as a going concern for at least twelve months from the issuance date of this report, which management believes has been alleviated through its plans to mitigate these conditions and obtain additional liquidity.

Current wording

Since we commenced operations in 2015, we have generated significant losses. We incurred net cash outflows from operations of $8.0 million and $14.0 million for the six months ended June 30, 2024 and 2023, respectively. The Company had an accumulated deficit as of June 30, 2024 of $110.3 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 June 30, 2024, we had cash and cash equivalents of $4.4 million, compared to $1.3 million as of December 31, 2023. These conditions and current cash flow projections raise substantial doubt about our ability to continue as a going concern for at least twelve months from the issuance date of this report. However, management believes that its plan alleviates the substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date these financial statements are issued.

Previous wording

In an effort to alleviate these conditions, management’s plans include adhering to the 2024 budget approved by the Board of Directors (“Board”), which includes significant sales and marketing, medical affairs, and dermatology community outreach efforts as we seek to expand the commercialization of Ameluz® in the United States while decreasing discretionary expenses by approximately $5.5 million when compared to the year ended 2023. We have reduced spending at both the commercial and general and administrative level but do not expect these reductions to impact our ability to grow and achieve our revenue targets.

Current wording

Management’s plans include adhering to the 2024 budget approved by the Board of Directors, which includes significant sales and marketing, medical affairs, and dermatology community outreach efforts as we seek to expand the commercialization of Ameluz® in the United States while decreasing discretionary expenses by approximately $5.5 million when compared to 2023.

Previous wording

On February 19, 2024, the Company entered into the Second Amended and Restated License and Supply Agreement (“Second A&R Ameluz LSA”) with the Ameluz Licensor, effective as of February 13, 2024. The terms of the Second A&R Ameluz LSA is expected to significantly reduce our cost of inventory in the future. The Company will begin to see gross margins of its primary product, Ameluz®, of approximately 75% as opposed to the prior 50% beginning with inventory purchases after the execution date. This will reduce our cash needs for inventory which will be partially offset by increased R&D costs, resulting in expected net savings of $1.5 million through May 2025 and continuing in subsequent years.

Current wording

In addition, the terms of the Second A&R Ameluz LSA are expected to reduce our cost of inventory in the future (SeeNote 12 Related Party Transactions), with gross margins of its primary product, Ameluz®, anticipated to be approximately 75% as opposed to the current 50% beginning with inventory purchases after the execution date. This should reduce our cash needs for inventory which will be partially offset by increased R&D costs, resulting in expected net savings of $2.7 million through August 2025.

Previous wording

Based on management’s plans described above, combined with the impact of the Second A&R Ameluz LSA and Preferred Purchase Agreement, the Company’s management believes that the Company will have sufficient liquidity and probable financing to meet its funding requirements for at least one year from the date the financial statements in this Form 10-Q are issued. However, this will depend on several factors, including executing on its sales plan within the time period needed and controlling our operating costs, as well as other possible challenges and unforeseen circumstances. A lack of execution or unforeseen circumstances may require the Company to raise additional capital or debt which may not be available on acceptable terms, or at all which could result in a material adverse effect on the Company, as well as its business, financial condition, results of operations, growth prospects and financial statements.

Current wording

Based on the plans described above, management believes that the Company will have sufficient liquidity to meet its funding requirements for at least one year from the date these financial statements are issued. However, this will depend on several factors, including executing on its sales plan and planned cost reductions within the time period needed, as well as other possible challenges and unforeseen circumstances. A lack of execution or unforeseen circumstances may require the Company to raise additional capital or debt which may not be available on acceptable terms, or at all, which could result in a material adverse effect on the Company, as well as its business, financial condition, results of operations, growth prospects and financial statements.

Previous wording

During the three months ended March 31, 2024, operating activities used $3.3 million of cash, primarily resulting from our loss from operations of $10.4 million, adjusted for the change in fair value of warrant liabilities of $3.4 million, non-cash expense of stock-based compensation of $0.2 million, non-cash interest expense of $0.2 million, loss on debt extinguishment of $0.3 million, depreciation and amortization in the aggregate of $0.3 million, and net cash used by changes in our operating assets and liabilities of $2.6 million.

Current wording

During the six months ended June 30, 2024, operating activities used $8.0 million of cash, primarily resulting from our loss from operations of $10.7 million, adjusted for non-cash expense of stock-based compensation of $0.4 million, non-cash interest expense of $0.2 million, loss on debt extinguishment of $0.3 million, depreciation and amortization in the aggregate of $0.6 million, and net cash used by changes in our operating assets and liabilities of $3.0 million, offset by the change in fair value of warrant liabilities of $2.0 million,.

Previous wording

During the three months ended March 31, 2023, operating activities used $3.7 million of cash, primarily resulting from our loss from operations of $7.5 million, adjusted for change in fair value of investment, related party of $2.9 million, non-cash expense of stock-based compensation of $0.4 million, non-cash interest expense of $0.1 million, depreciation and amortization in the aggregate of $0.3 million, and net cash used by changes in our operating assets and liabilities of $1.4 million, offset by change in fair value of warrants of $1.0 million and change in contingent consideration of $0.2 million.

Current wording

During the six months ended June 30, 2023, operating activities used $14.0 million of cash, primarily resulting from our loss from operations of $17.3 million, adjusted for non-cash expense of stock-based compensation of $0.6 million, non-cash interest expense of $0.2 million, depreciation and amortization in the aggregate of $0.5 million, and the change in fair value of investment, related party of $4.4 million, offset by net cash used by changes in our operating assets and liabilities of $1.0 million, the change in fair value of contingent consideration of $0.1 million and the change in fair value of warrant liabilities of $1.4 million.

Previous wording

During the three months ended March 31, 2024, net cash provided by investing activities consisted of $0.1 million of proceeds from the sales of equity investments, which was offset by the purchase of capitalized software.

Current wording

During the six months ended June 30, 2024, net cash used in investing activities consisted of $0.1 million of capitalized software and computer purchases, which were partially offset by the proceeds from the sales of equity investments.

Previous wording

During the three months ended March 31, 2023 net cash used in investing activities consisted of the purchase of machinery & computer equipment.

Current wording

During the six months ended June 30, 2023, net cash provided by investing activities consisted of the proceeds from the sales of equity investments, partially offset by the purchase of machinery & computer equipment.

Previous wording

During the three months ended March 31, 2024, net cash from financing activities consisted of proceeds of $7.7 million, net of capitalized issuance costs, from the issuance of preferred stock and warrants, offset by repayments of $1.5 million on our short-term loan, repayments of $0.2 million on our line of credit and prepayment fees of $0.2 million to extinguish our line of credit. See Note 13*.*

Current wording

During the six months ended June 30, 2024, net cash from financing activities consisted of proceeds of $7.7 million, net of capitalized issuance costs, from the issuance of preferred stock and warrants, and $7.4 million from the exercise of warrants for preferred stock, offset by repayments of $3.7 million on our short-term loan, repayments of $0.2 million on our line of credit and prepayment fees of $0.2 million to extinguish our line of credit. SeeNote 11 Debt.

Previous wording

A summary of our critical accounting estimates is discussed in the section entitled “Critical Accounting Estimates” inItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K. There were no material changes to our critical accounting estimates for the three months ended March 31, 2024, except for the following:

Current wording

A summary of our critical accounting estimates is discussed in the section entitled “Critical Accounting Estimates” inItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K. There were no material changes to our critical accounting estimates for the six months ended June 30, 2024, except for the following:

Previous wording

The warrants for convertible preferred stock issued in conjunction with our private placement offering conducted pursuant to the securities purchase agreements entered into on February 19, 2024 with institutional investors 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. Due to the uncertainty of the how the convertible preferred warrants will ultimately settle, the Company used a probability-weighted approach along with a Black-Scholes-Merton (“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 model also 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. 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.

Current wording

The warrants for convertible preferred stock issued in conjunction with our private placement offering conducted pursuant to the securities purchase agreements entered into on February 19, 2024 with institutional investors 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. Due to the uncertainty of the how the convertible preferred warrants would ultimately settle, the Company used a probability-weighted approach along with a Black-Scholes-Merton (“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 model also 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. A significant change in one or more of these inputs used in the calculation of the fair value may have caused a significant change to the fair value of our warrant liability which could also have resulted in material non-cash gain or loss being reported in our consolidated statement of operations.