| Summary of Significant Accounting Policies | 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”). 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 Executive 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 ® ® ® 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, valuation allowances for receivables and inventory, contingent consideration, valuation of intangible and other
long-lived assets, product sales allowances and reserves, share-based payments 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. 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. Accounts
Receivable Accounts
receivables 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, accounts receivable and other receivables,
related party. 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. Other receivables,
related party consists of a receivable due from Biofrontera AG for its 50% 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. Inventories Finished
goods consist of pharmaceutical products purchased for resale and are stated at the lower of cost or net realizable value. 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. 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 Estimated Useful Lives of Property, Plant and Equipment
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 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. Contingent
Consideration 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 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. Contingencies Loss
contingency provisions are recorded if the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable
and the amount can be reasonably estimated or a range of loss can be determined. These accruals represent management’s best estimate
of probable loss. Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible
that the amount of a loss will exceed the recorded provision. On a quarterly basis, we review the status of each significant matter and
assess its potential financial exposure. Significant judgment is required in both the determination of probability and as to whether
an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information
available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and
litigation and may change our estimates. Legal costs associated with legal proceedings are expensed when incurred. Derivative
Instruments The
Company accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of
the specific terms of the warrants and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC
815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments
pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification
under ASC 815, including whether the warrants are indexed to the Company’s own stock and whether the holders of the warrants could
potentially require net cash settlement in a circumstance outside of the Company’s control, among other conditions for equity classification.
This assessment, which requires the use of professional
judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. At
their issuance date and as of December 31, 2021,
the IPO Warrants (see Note 18) were accounted for as equity as these instruments meet all of the requirements for equity classification
under ASC 815-40. The
Purchase Warrant and Pre-funded Warrant issued in connection with the private placement offering completed on December 1 , ASC 815-40. The resulting warrant liabilities are re-measured at each balance sheet
date until their exercise or expiration, and any change in fair value is recognized in the Company’s statement of operations. The
fair values of the Purchase Warrant and Pre-funded Warrant as of December 1, 2021, the issuance date, were $ 5.7 6.5 0.0001 Schedule
of Fair value Warrant by Using Black-Scholes Pricing Model Assumptions
At Issuance Date
Stock price $ 4.33
Expiration term (in years) 5
Volatility 60.0 %
Risk-free Rate 1.15 %
Dividend yield 0.0 % The
private placement offering costs of $ 1.7 1.4 selling, general and administrative
expense On
December 28, 2021, the warrant holder exercised the Pre-funded Warrant. The Company revalued the Pre-funded Warrant at
fair value of $ 12.2 5.7 The
fair value of the Purchase Warrant that remained outstanding at December 31, 2021 was $ 12.9
million. The change in the fair value
of $ 7.1 The fair value was estimated using Black-Scholes
pricing model based on the following assumption:
December 31, 2021
Stock price $ 7.52
Expiration term (in years) 4.92
Volatility 60.0 %
Risk-free Rate 1.25 %
Dividend yield 0.0 % 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. 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, other receivables, 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. Revenue
Recognition The
Company accounts for revenue in accordance with 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, which is generally upon delivery. 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,co-pay
assistance discounts, or other rebates. 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 sales
reserves are established and which result from discounts, rebates and other incentives that are offered within contracts between
the Company and its customers. 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 expected to be
claimed by a customer, or as a current liability, if expected to be payable to a third party other than a customer. 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 ® ® 20,000 73,000 Contract
Costs Incremental
costs of obtaining a contract with a customer may
be recorded 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 $ 0.4 0.3 Share-Based
Compensation The
Company measures and recognizes share-based compensation expense for equity awards based on fair value at the grant date. The Company
uses the Black-Scholes-Merton (“BSM”) option pricing model to calculate fair value of its stock option grants. The compensation
cost for restricted stock awards is based on the closing price of the Company’s common stock on the date of grant. Share-based
compensation expense recognized in the statements of operations is based on the period the services are performed and recognized as compensation
expense on a straight-line basis over the requisite service period. The Company accounts for forfeitures as they occur. The
BSM option pricing model requires the input of subjective assumptions, including the risk-free interest rate, the expected volatility
of the value of the Company’s common stock, and the expected term of the option. These estimates involve inherent uncertainties
and the application of management’s judgment. If factors change and different assumptions are used, the share-based compensation
expense could be materially different in the future. These assumptions are estimated as follows: Risk-Free
Interest Rate. The risk-free rate is based on the interest rate payable on United States Treasury securities in effect at the time of
grant for a period that is commensurate with the assumed expected term. Expected Volatility.
The Company based the volatility assumption on a weighted average of the peer group re-levered equity volatility with 80% 20 The peer
group was developed based on companies in the biotechnology industry whose shares are publicly traded. Due to our limited historical
data and the long-term nature of the awards, the peer group volatility was much more heavily weighted. Expected
Term. The expected term represents the period of time that options are expected to be outstanding. Due to the lack of historical exercise
data and given the plain vanilla nature of the options granted by the Company, the expected term is determined using the “simplified”
method, as prescribed in SEC Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”), whereby the expected life
equals the average of the vesting term and the original contractual term. Dividend
Yield. The dividend yield is 0% as the Company has never declared or paid, and for the foreseeable future does not expect to declare
or pay, a dividend on its common stock. Foreign
Currency Transactions Transactions
realized in currencies other than USD are reported using the exchange rate on the date of the transaction. Selling, General and Administrative Expense Selling, general and administrative expenses
are primarily comprised of compensation and benefits 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, advertising, and other commercial costs to support the commercial operation of our product and professional fees for legal,
consulting, and other general and administrative costs. Advertising costs are expensed as incurred.
For the years ended December 31, 2021 and 2020, advertising costs totaled $ 0.5 0.3 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
and diluted net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted
average number of common shares outstanding. When the effects are not anti-dilutive, diluted earnings per share is computed by dividing
the Company’s net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding
and the impact of all dilutive potential common shares outstanding during the period, including stock options, restricted stock units,
and warrants, using the treasury stock method. Recently
Issued Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740) 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 |
