| Summary of Significant Accounting Policies | 2.
Summary of Significant Accounting Policies Basis
for Preparation of the Financial Statements The
accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information
and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted
accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the
Company’s opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which
are of a normal and recurring nature, necessary to present fairly the Company’s financial position as of June 30, 2023, the
Company’s operating results for the three and six months ended June 30, 2023 and 2022, and the Company’s cash flows for
the six months ended June 30, 2023 and 2022. The accompanying financial information as of December 31, 2022 is derived from audited
financial statements. Interim results are not necessarily indicative of results for a full year. The information included in this
Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended
December 31, 2022, filed with the SEC on March 13, 2023. All
amounts shown in these financial statements and tables are in thousands and amounts in the notes are in millions, except percentages
and per share and share amounts. The
Company’s significant accounting policies are discussed in Note 2—Summary of Significant Accounting Policies Research
and Development Costs Research
and development costs are expensed as incurred. Research and development costs include external costs of outside vendors engaged to conduct
research and development activities, and other operational costs related to the Company’s research and development activities. Reverse
Stock Split On
July 3, 2023 Biofrontera Inc. effected a 1-for-20 0.001 All
information included in these consolidated financial statements has been adjusted, on a retrospective basis, to reflect the Reverse
Stock Split as if it had been effective from the beginning of the earliest period presented, unless otherwise stated. All outstanding securities entitling their holders to purchase shares of Common Stock or
acquire shares of Common Stock, including stock options, restricted stock units, and warrants, were adjusted as a result of the
Reverse Stock Split, as required by the terms of those securities. Use
of Estimates The
preparation of the financial statements in accordance with U.S. 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, valuation of
contingent consideration and warrant liabilities, realization 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. Recently
Adopted Accounting Pronouncements In
September 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 Consolidated Financial Statements The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”). These consolidated financial statements include the accounts of our wholly owned
subsidiary. All intercompany balances and transactions have been eliminated in consolidation. The information presented reflects the
application of significant accounting policies described below. All
amounts shown in these financial statements and tables are in thousands and amounts in the notes are in millions, except percentages
and per share and share amounts. 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 ® ® ® Reverse Stock Split On July 3, 2023 Biofrontera Inc. effected a 1-for-20 0.001 All information included in these consolidated financial
statements has been adjusted, on a retrospective basis, to reflect the Reverse Stock Split as if it had been effective from the beginning
of the earliest period presented, unless otherwise stated. All outstanding securities entitling their holders to purchase shares of Common
Stock or acquire shares of Common Stock, including stock options, restricted stock units, and warrants, were adjusted as a result of the
Reverse Stock Split, as required by the terms of those securities. Use
of Estimates The
preparation of the consolidated financial statements in accordance with U.S. 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,
valuation of contingent consideration and warrant liabilities, realization 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. The Company maintains its cash balances at financial institutions that
are insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC provides coverage of up to $ 250,000 16.8 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 (see Note 13. Statement of Cash Flows Reconciliation) Investment, Related Party T he
Company accounts for its investment, related party in accordance with ASC 321, Investments — Equity Securities 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% share of a legal settlement and related
costs for which they are jointly and severally liable for the total settlement amount. The Company has a contractual right to
repayment of its share of the settlement payment from Biofrontera AG under the Settlement Allocation Agreement entered into on
December 9, 2021, which provided that the settlement payments would first be made by the Company and then reimbursed by Biofrontera
AG for its share. Although this receivable has credit risk, it is mitigated by the Settlement Allocation Agreement as amended on
March 31, 2022, which provides certain remedies to the Company, if Biofrontera AG fails to make timely reimbursements, which the
Company may implement in its sole discretion, including the ability to charge interest at a rate of 6.0% per annum for each day that
any reimbursement is past due and the ability to offset any overdue reimbursement amounts against payments owed to Biofrontera AG by
the Company ® 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
and Equipment Property
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 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. Leases In
February 2016, the Financial Accounting Standards Board (“ 1.8 At
the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and
circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value
of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable.
As such, the Company utilizes its incremental borrowing rate (“IBR”), which is the rate incurred to borrow on a collateralized
basis over a similar term an amount equal to the lease payments in a similar economic environment. Given
the absence of an outstanding debt agreement, a synthetic credit rating analysis was used in estimating the Company’s IBR. Based on a synthetic credit rating of Ba3 and a term of 3.33 to six years, the IBR was determined to be 6% for lease liabilities at inception and 8.5% for 2022 lease liabilities No adjustments to the right-of-use
asset were required for items such as initial direct costs paid or incentives received. The
Company has elected to adopt the practical expedient provided in ASC 842 and not reassess leases that existed prior to
the commencement date, 1). Whether any expired or existing contracts are or contain leases, 2). Lease classification, or 3).
Initial indirect costs for any existing leases. The Company has elected to combine lease and non-lease components as a single
component for certain asset classes, when applicable. Operating leases are recognized on the balance sheet as operating lease
right-of-use assets, operating lease liabilities current and operating lease liabilities non-current. Impairment
of Long-Lived Assets The
Company considers whether events or changes in facts and circumstances, both internally and externally, may indicate that an impairment
of long-lived assets held for use, including right-of-use assets, are present. To the extent indicators or impairment exist, the determination
of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition.
In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written
down to their estimated fair values and the loss is recognized in the statements of operations. Refer to Note 12. Intangible Asset, Net. 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 FASB Accounting Standards Codification (“ASC”)
480, Distinguishing Liabilities from Equity (“ASC 480”) and Derivatives and Hedging (“ASC 815”). Warrants
classified as equity are recorded at fair value as of the date of issuance on the Company’s consolidated balance sheets and no
further adjustments to their valuation are made. Warrants classified as derivative liabilities that require separate accounting as liabilities
are recorded on the Company’s consolidated balance sheets at their fair value on the date of issuance and are revalued on each
subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods
recorded as other income or expense. Management estimates the fair value of these liabilities using the Black-Scholes-Merton (“BSM”)
model and assumptions that are based on the individual characteristics of the warrants or instruments on the valuation date, as well
as assumptions for future financings, expected volatility, expected life, yield, and risk-free interest rate. At
their issuance date in October 2021, the IPO Warrants (see Note 19. Stockholders’ Equity) were
accounted for as equity as these instruments met all of the requirements for equity classification under ASC 815-40. The
Purchase Warrants issued in connection with the private placement offerings 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 consolidated statement of operations. Refer to Note 4. Fair Value
Measurements. 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 consolidated balance sheets for cash and cash equivalents, accounts receivable, other receivables,
accounts payable and start-up cost financing included in acquisition contract 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 sales of its Ameluz ® Xepi ®
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 ® ® 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 $ 0.5 0.4 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 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 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, 2022 and 2021, advertising costs totaled $ 0.1 0.5 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 loss per common share is computed by dividing net 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 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
September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments |
