| Summary of Significant Accounting Policies | 2.
Summary of Significant Accounting Policies Basis
for Preparation of the Financial Statements The
accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X. The balance
sheet as of December 31, 2020 was derived from the Company’s audited financial statements. These unaudited condensed financial
statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended December 31,
2020, included in the Company’s final prospectus for the Company’s initial public offering, as filed with the Securities
and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, on November 1, 2021 (“Final
Prospectus”). In the opinion of management, the interim unaudited condensed financial statements reflect all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position for the periods presented.
The results for the interim periods presented are not necessarily indicative of future results. The
financial statements are presented in U.S. dollars (“USD”) or thousands of USD. The
Company’s significant accounting policies are discussed in Note 2—Summary of Significant Accounting Policies Recently
Issued Accounting Pronouncements In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), amending accounting guidance to simplify the accounting for income
taxes, as part of its initiative to reduce complexity in the accounting standards. The amendments eliminate certain exceptions related
to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition
of deferred tax liabilities for outside basis differences. The amendments also clarify and simplify other aspects of the accounting for
income taxes. The Company adopted ASU 2019-12 on January 1, 2021. The adoption did not have a material impact on the Company’s
financial statements and disclosures for the nine months ended September 30, 2021. Recently
Issued Accounting Pronouncements Not Yet Effective In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments | 2.
Summary of Significant Accounting Policies Basis
for Preparation of the Financial Statements The
accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”). The information presented reflects the application of significant accounting policies
described below. The
financial statements are presented in U.S. dollars (“USD”) or thousands of USD. Segment
Reporting Operating
segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the
chief operating decision-maker in deciding how to allocate resources and assess performance. The Company’s chief operating
decision maker (determined to be the Chief Financial Officer) does not manage any part of the Company separately, and the allocation
of resources and assessment of performance are based on the Company’s operating results. We
operate in a single reporting segment, the commercialization of pharmaceutical products for the treatment of dermatological conditions
and diseases within the U.S. All business operations focus on the products Ameluz ® ® ® Translation
of Amounts in Foreign Currencies Transactions
realized in currencies other than USD are reported using the exchange rate on the date of the transaction. Assets and liabilities
are translated applying the closing exchange rate for each balance sheet date. Gains and losses arising from such currency translations
are recognized in income. Use
of Estimates The
preparation of the financial statements in accordance with GAAP requires the use of estimates and assumptions by management that
affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities, as reported
on the balance sheet date, and the reported amounts of revenues and expenses arising during the reporting period. The main areas
in which assumptions, estimates and the exercising of judgment are appropriate relate to revenue recognition, valuation of receivables
and inventory, the fair value of assets acquired and liabilities assumed in business combinations, contingent consideration, valuation
of intangible and other long-lived assets, product sales allowances and reserves and income taxes including deferred tax assets
and liabilities. Estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances.
They are continuously reviewed but may vary from the actual values. COVID-19
Related Risks and Uncertainties 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, there has been 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. In order to mitigate the risk from COVID-19, we have taken expedited measures to reduce
operating expenses and preserve cash, including headcount reduction, mandatory furlough, freezing hiring and discretionary spend,
and voluntary salary reductions from the senior leadership. We were granted a one-time employee retention credit (“ERC”)
under CARES Act in the amount of $ 0.3 The
full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial
condition, including sales, expenses, reserves and allowances and the supply of our products, will depend on future developments
that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and variants thereof,
and the actions taken to contain or treat it or vaccinate against it, as well as the economic impact on local, regional, national
and international customers and markets. Given the uncertainty around the extent and timing of the potential future spread or
mitigation of COVID-19, management cannot reasonably estimate the impact to the Company’s future results of operations,
cash flows, or financial condition. Business
Combination Our
financial statements include the operations of acquired businesses after the completion of the acquisition. We account for acquired
businesses using the acquisition method of accounting in accordance with provisions of ASC 805, Business Combinations We
account for measurement-period adjustment in accordance with ASU No. 2015-16, Business Combinations (Topic 805) Simplifying
the Accounting for Measurement-Period Adjustments Contingent
consideration in a business combination is included as part of the acquisition cost and is recognized at fair value as of the
acquisition date. For contingent consideration management is responsible for determining the appropriate valuation model and estimated
fair value, and in doing so, considers a number of factors, including information provided by an outside valuation advisor. Contingent
consideration liabilities are reported at their estimated fair values based on probability-adjusted present values of the consideration
expected to be paid, using significant inputs and estimates. Key assumptions used in these estimates include probability assessments
with respect to the likelihood of achieving certain milestones and discount rates consistent with the level of risk of achievement.
The fair value of these contingent consideration liabilities are remeasured each reporting period, with changes in the fair value
included in current operations. The remeasured liability amount could be significantly different from the amount at the acquisition
date, resulting in material charges or credits in future reporting periods. The
intangible asset in a business combination is included as part of the acquisition cost and recognized at fair value as of the
acquisition date using an income approach with assumed discount rates over the applicable term. Deferred
Offering Costs The
Company capitalizes certain legal, accounting and other third-party fees that are directly associated with the public offering
as deferred offering costs until such public offering is consummated. After consummation of such public offering, these costs
are recorded in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of the
offering. Should the public offering be abandoned, the deferred offering costs will be expensed immediately as a charge to operating
expenses in the statements of operations. Such costs are insignificant as of December 31, 2020. Property,
Plant and Equipment Property,
plant and equipment are recorded at cost less accumulated depreciation. Depreciation is generally applied straight-line over the
estimated useful life of assets. Leasehold improvements are amortized over the shorter of the asset’s estimated useful life
or the lease term. The estimated useful lives of property, plant and equipment are: Schedule of Property, Plant And Equipment Estimated Useful Lives
Estimated
Useful Life in Years
Computer
equipment 3
Computer
software 3
Furniture
and fixtures 3 5
Leasehold
improvements Shorter
of estimated useful lives or the term of the lease
Machinery
& equipment 3 4
Office
Equipment 4 The
cost and accumulated depreciation of assets retired or sold are removed from the respective asset category, and any gain or loss
is recognized in our statements of operations. Intangible
Assets Intangible
assets with finite lives are amortized over their estimated useful lives. Intangible assets with indefinite lives are not amortized. Intangible
assets with finite lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of intangible assets with finite lives and other long-lived
assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected
to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the Company will
recognize an impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related estimated
fair value. Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the
nature of the asset. Fair
Value Measurements The
Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of
the inputs used in determining the reported fair values. Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures Level
1 - Quoted prices in active markets for identical assets or liabilities. Level
2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly. Level
3 - Unobservable inputs using estimates or assumptions developed by the Company, which reflect those that a market participant
would use in pricing the asset or liability. To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is
greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based
on the lowest level of any input that is significant to the fair value measurement. Fair
Value of Financial Instruments The
carrying amounts reflected in the balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other
current assets, accounts payable and accrued expenses and other current liabilities approximate their fair values, due to their
short-term nature. Inventories Finished
goods consist of pharmaceutical products purchased for resale and are stated at the lower of cost or net realizable value. Borrowing
costs are not capitalized. Cost is calculated by applying the first-in-first-out method (FIFO). Inventory costs include the purchase
price of finished goods and freight-in costs. The Company regularly reviews inventory quantities on hand and writes down to its
net realizable value any inventory that it believes to be impaired. Management considers forecast demand in relation to the inventory
on hand, competitiveness of product offerings, market conditions and product life cycles when determining excess and obsolescence
and net realizable value adjustments. Once inventory is written down and a new cost basis is established, it is not written back
up if demand increases. Accounts
Receivable Accounts
receivable are reported at their net realizable value. Any value adjustments are booked directly against the relevant receivable.
We have standard payment terms that generally require payment within approximately 30 to 90 days. Management performs ongoing
credit evaluations of its customers. An allowance for potentially uncollectible accounts is provided based on history, economic
conditions, and composition of the accounts receivable aging. In some cases, the Company makes allowances for specific customers
based on these and other factors. Provisions for the allowance for doubtful accounts are recorded in selling, general and administrative
expenses in the accompanying statements of operations. Concentration
of Credit Risk and Off-Balance Sheet Risk Financial
instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. The Company maintains all of its cash and cash equivalents at a single accredited financial institution,
in amounts that exceed federally insured limits. The Company has no significant off-balance sheet risk such as foreign exchange
contracts, option contracts, or other foreign hedging arrangements. Concentrations
of credit risk with respect to receivables, which are typically unsecured, are somewhat mitigated due to the wide variety of customers
using our products. We monitor the financial performance and creditworthiness of our customers so that we can properly assess
and respond to changes in their credit profile. We continue to monitor these conditions and assess their possible impact on our
business. We
are dependent on two suppliers, Biofrontera Pharma GmbH and Ferrer Internacional S.A., to supply drug products, including all
underlying components, for our commercial efforts. These efforts could be adversely affected by a significant interruption in
the supply of our finished products. Cash
and Cash Equivalents The
Company considers all highly liquid investments purchased with an original maturity of three months or less at the time of purchase
to be cash equivalents. Restricted
Cash Restricted
cash consists primarily of deposits of cash collateral held in accordance with the terms of our corporate credit cards, in addition
to one deposit held for a sublease. Income
Taxes The
Company accounts for income taxes using the asset and liability method in accordance with ASC 740, Income Taxes The
Company accounts for uncertainty in income taxes recognized in the financial statements by applying a two-step process to determine
the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will
be sustained upon external examination by the taxing authorities. If the tax position is deemed more likely-than-not to be sustained,
the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the
benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.
The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered
appropriate as well as the related net interest and penalties. Net
Loss per Share Basic
net loss per share is calculated by dividing net loss by the weighted average number of outstanding shares during the year. The
Company does not have dilutive securities. Therefore, the weighted average number of common shares outstanding used to calculate
both basic and diluted net loss per share is the same. Revenue
Recognition The
Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from
Contracts with Customers To
determine revenue recognition, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any;
(iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we
satisfy a performance obligation. We only apply the five-step model to contracts when collectability of the consideration to which
we are entitled in exchange for the goods or services we transfer to the customer is determined to be probable. The
Company realizes its revenue primarily through the sale of its pharmaceutical products. Sales of Ameluz ® Xepi®
is sold directly to specialty pharmacies. Sales are recognized net of sales deductions when ownership and control are transferred
to the customer. Sales deductions include expected returns, discounts and incentives such as payments made under patient assistance
programs. These rebates are estimated at the time of sale based on the amounts incurred or expected to be received for the related
sales. The
payment terms for sales of our pharmaceutical products are generally short-term payment terms with the possibility of volume-based
discounts and co-pay assistance discounts. BF
RhodoLED ® Variable
Consideration Revenues
from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration
for which reserves are established and which result from discounts, rebates and other incentives that are offered within contracts
between the Company and its customers relating to the Company’s sales of its products. Components of variable consideration
include trade discounts and allowances, product returns, government rebates, and other incentives such as patient co-pay assistance.
Variable consideration is recorded on the balance sheet as either a reduction of accounts receivable, if payable to a customer,
or as a current liability, if payable to a third party other than a customer. These reserves are based on the amounts earned or
expected to be claimed on the related sales. Where appropriate, these estimates take into consideration relevant factors such
as the Company’s historical experience, current contractual and statutory requirements, specific known market events and
trends, industry data and forecasted customer buying and payment patterns. These reserves reflect the Company’s best estimates
of the amount of consideration to which it is entitled based on the terms of the contract. Actual amounts of consideration ultimately
received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates,
the Company will adjust these estimates, and record any necessary adjustments in the period such variances become known. Trade
Discounts and Allowances Government
and Payor Rebates Other
Incentives Royalties For
arrangements that include sales-based royalties, the Company recognizes royalty expense at the later of (i) when the related sales
occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially
satisfied). Royalty expense is recognized as cost of revenues. Product
Warranty The
Company generally provides a 36-month warranty for sales of BF-RhodoLED ® ® 29,000 73,000 Contract
Costs We
recognize the incremental costs of obtaining a contract with a customer as an asset if the costs are expected to be recovered.
As a practical expedient, we recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization
period of the asset that we otherwise would have recognized is one year or less. Sales commissions earned by the Company’s
sales force are considered incremental costs of obtaining a contract. To date, we have expensed sales commissions as these costs
are generally attributed to periods shorter than one year. Sales commissions are included in selling, general and administrative
expenses. Cost
of Revenues Cost
of revenues is comprised of purchase costs of our products, third party logistics and distribution costs including packaging,
freight, transportation, shipping and handling costs, and inventory adjustment due to expiring products, as well as sales-based
royalties. Logistics and distribution costs totaled $ 0.5 0.3 Subsequent
Events The
Company has evaluated events or transactions that occurred after the balance sheet date for potential recognition or disclosure
through May 7, 2021, which is the date the financial statements were available to be issued. Refer to Note 21, Subsequent
Events Recently
Issued Accounting Pronouncements Not Yet Effective In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments |
