Annual Report for Fiscal Year Ending DECEMBER 31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following section contains statements that are not statements of historical fact and are forward-looking statements within the meaning of the federal securities laws. We discuss many of these risks and uncertainties at the beginning of this Form 10-K and under the sections captioned "Business" and "Risk Factors." For more information on forward-looking statement, see the section titled "Special Note Regarding Forward-Looking Statements" included in Part 1 of this Form 10-K. The following discussion should also be read in conjunction with the financial statements and the Notes thereto appearing elsewhere in this Form 10-K.

Overview and Recent Developments

Biofrontera Inc. (the "Company" or "Biofrontera") is a United States based biopharmaceutical company engaging in the development, manufacturing, and commercialization of pharmaceutical products for the treatment of dermatological conditions with a focus on photodynamic therapy ("PDT"). The Company's products, which include Ameluz as well as the BF-RhodoLED and RhodoLED XL lamp series (together, the "RhodoLED Lamps"), are used for the treatment of actinic keratosis ("AK"), a common skin condition characterized by the growth of pre-cancerous skin lesions ("AKs"). With our national commercial team, we generate revenue by selling our products directly to dermatology offices and groups.

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.

Strategic Transaction

On October 20, 2025, we entered into i) an Asset Purchase Agreement (the "Transfer Agreement") and ii) an Earnout Agreement (together with the Transfer Agreement, the "Agreements"), with Biofrontera AG and its consolidated subsidiaries (the "Biofrontera Group"), pursuant to which the Company finalized the agreements to acquire all rights in the United States (the "U.S. Rights") to Ameluz and RhodoLED (the "Strategic Transaction"). Pursuant to the terms of the Agreements, retroactive to June 1, 2025, the Company will pay a monthly earnout of 12% of United States revenues of Ameluz in years when United States net sales are $65.0 million or less and an earnout of 15% on all revenue in years when United States net sales of Ameluz exceed $65.0 million, continuing until the expiration of patent protection on Ameluz allows for generic competition in the United States (if not terminated sooner by agreement of the parties). The earnout replaces a transfer pricing model under the Company's Second A&R Ameluz LSA by and among the Company and the Biofrontera Group, which has now been terminated pursuant to the Agreements. The new structure reduces overall cost for the Company and is expected to accelerate the Company's timeframe to reach break-even.

In exchange for the U.S. Rights, in addition to the aforementioned earnout and an agreement to transfer all costs associated with the U.S. business, Biofrontera AG received 3,019 shares of Series D Convertible Preferred Stock, par value $0.001 per share (the "Series D Preferred Stock").

With the completion of the Strategic Transaction, the Company assumed full control of the Ameluz New Drug Application and Investigational New Drug, enabling the Company to manage ongoing and future clinical development activities independently, and to take full responsibility for all aspects of manufacturing and marketing Ameluz and the RhodoLED lamps in the U.S. The patent and trademark transfers further strengthen the Company's intellectual property portfolio and market position in the U.S.

On November 6, 2025, the Company entered into an Asset Purchase Agreement with an unaffiliated party, providing for the sale of the intangible asset relating to the Company's product, Xepi, for initial proceeds of $3 million with the potential for up to an additional $7 million in milestone payments. This divestiture does not represent a strategic shift that will have a major effect on our consolidated results of operations. See Note 9. Assets Held for Sale, for additional information.

Compliance with Nasdaq Listing Standards

On December 31, 2025, the Company received a letter from Nasdaq notifying the Company that the listing of the Common Stock was not in compliance with Nasdaq Listing Rule 5550(a)(2) as the closing bid price of the Common Stock was less than $1.00 per share for the previous 34 consecutive business days. The notice has no present impact on the listing or trading of the Company's securities on Nasdaq. Under Nasdaq Listing Rule 5810(c)(3)(A), the Company has a period of 180 calendar days, or until June 30, 2026, to regain compliance with the rule referred to in this paragraph.

If, for any reason, Nasdaq should delist our common stock from trading on its exchange and we are unable to obtain listing on another reputable national securities exchange, a reduction in some or all of the following may occur, each of which could materially adversely affect our stockholders:

	●	the liquidity and marketability of our common stock and/or publicly-traded warrants;
	●	the market price of our common stock;
	●	our ability to obtain financing for the continuation of our operations;
	●	the number of institutional and general investors that will consider investing in our common stock;
	●	the number of market makers in our common stock;
	●	the availability of information concerning the trading prices and volume of our common stock; and
	●	the number of broker-dealers willing to execute trades in shares of our common stock.

In addition, if we fail to regain compliance to be eligible to trade on Nasdaq or obtain listing on another reputable national securities exchange, we may have to pursue trading on a less recognized or accepted market, such as the over the counter markets, our stock may be traded as a "penny stock" which would make transactions in our stock more difficult and cumbersome, and we may be unable to access capital on favorable terms or at all, as companies trading on alternative markets may be viewed as less attractive investments with higher associated risks, such that existing or prospective institutional investors may be less interested in, or prohibited from, investing in our common stock. This may also cause the market price of our common stock to further decline.

Strategy

Our principal objective is to improve patient outcomes through adoption and use of our products in the United States. The key elements of our strategy include the following:

●	expanding our sales in the United States of Ameluz in combination with the RhodoLED Lamps for the treatment of minimally to moderately thick AKs of the face and scalp and positioning Ameluz to be the standard of care in the United States by focusing on acquisition of new customers and growth of the therapy in our current customer base;
●	leveraging the potential for future approvals and label extensions of our portfolio products that are in the pipeline for the United States market with respect to Ameluz and furthering the clinical development of this product after taking over responsibility for certain ongoing clinical trials since June 1, 2024; and
●	strategically managing our portfolio, including opportunistically adding complementary products or services to our portfolio by acquiring or licensing IP to further leverage our commercial infrastructure and customer relationships.

By executing these strategic objectives, we will fuel company growth, deepen our trusted relationships in the dermatology community, and above all, help patients live healthier, more fulfilling lives.

We devote a substantial portion of our cash resources to the commercialization of Ameluz and the BF-RhodoLED Lamps. We have financed our operating and capital expenditures through cash proceeds generated from our product sales, proceeds received from convertible notes and equity financings.

We believe that important measures of our results of operations include product revenue, operating income (loss) and adjusted EBITDA (a non-GAAP measure as defined below). Our sole source of product revenue is sales of Ameluz and the BF-RhodoLED Lamps. Our long-term financial objectives include consistent revenue growth and expanding operating margins. Accordingly, we are focused on product sales expansion to drive revenue growth and improve operating efficiencies, including effective resource utilization, information technology leverage, and overhead cost management.

¹Werner RN, Stockfleth E, Connolly SM, et al. Evidence- and consensus-based (S3) Guidelines for the Treatment of Actinic Keratosis - International League of Dermatological Societies in cooperation with the European Dermatology Forum - Short version. J Eur Acad Dermatol Venereol. 2015;29(11):2069-2079. doi:10.1111/jdv.13180.

Components of Our Results of Operations

Product Revenues, net

We generate product revenues through the sales of our products Ameluz and RhodoLED Lamps. Revenues from product sales are recorded net of trade discounts and allowances and government rebates.

The primary factors that determine our revenue derived from our products are:

●	the level of orders generated by our sales force;
●	the level of prescriptions and institutional demand for our products; and
●	unit sales average sales price.

Cost of Revenues, Related Party

Cost of revenues, related party, relating to inventory purchased before the Strategic Transaction, is comprised of purchase costs of our products, Ameluz and RhodoLED Lamps from Biofrontera Pharma GmbH and insignificant inventory adjustments due to scrapped, expiring and excess products.

Cost of Revenues, Other

Cost of revenues, other, is comprised of third-party logistics and distribution costs including packaging, freight, transportation, shipping and handling costs.

Selling, General and Administrative Expense

Selling, general and administrative expenses consist principally of costs 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, trade, and other commercial costs necessary to support the commercial operation of our products and professional fees for legal, consulting and accounting services, as well as depreciation and amortization.

Selling, General and Administrative Expenses, Related Party

Selling, general and administrative expenses, related party, relate to the services provided by the Biofrontera Group, primarily for regulatory support and pharmacovigilance. These expenses were charged to us based on costs incurred plus 6% in accordance with the Amended and Restated Master Contact Services Agreement, (the "2021 Services Agreement"), entered into in December 2021.

Research and Development

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 trial sites, 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 R&D are expensed as incurred.

Change in Fair Value of Warrant Liabilities

For warrants that are classified as liabilities, the Company records the fair value of the warrants at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations until the warrants are exercised, expire or other facts and circumstances lead the warrant liabilities to be reclassified to stockholders' equity or deficit.

Change in Fair Value of Investment, Related Party

Our investments are comprised of equity securities in shares of Biofrontera AG, which are initially recorded at cost, plus transaction costs, and subsequently measured at fair value, based on quoted market prices, with the gains and losses reported in the Company's consolidated statement of operations. For the investments held in foreign currencies, the change in fair value attributable to changes in foreign exchange rates is included in gains and losses in the consolidated statement of operations.

Interest Income (Expense), net

Interest expense, net, primarily consists of interest on our convertible notes, and short-term debt including amortization of deferred costs.

Other Income (Expense), net

Other income, net primarily includes (i) gain on return of leased assets, (ii) gain on sale of asset held for sale, and (iii) gain (loss) on foreign currency transactions.

Income Taxes

As a result of the net losses we have incurred in each fiscal year since inception, we have recorded no provision for federal income taxes during such periods. Income tax expense incurred relates to state income taxes.

Results of Operations

Comparison of the Years Ended December 31, 2025 and December 31, 2024

The following table summarizes our results of operations for the years ended December 31, 2025 and December 31, 2024:

(in thousands)		2025				2024				Change
Product revenues, net		$	41,705			$	37,303				4,402
Revenues, related party			-				18				(18	)
Revenues, net			41,705				37,321				4,384
Operating expenses:
Cost of revenues, related party			10,111				17,855				(7,744	)
Cost of revenues, other			853				752				101
Selling, general and administrative			37,751				33,793				3,958
Selling, general and administrative, related party			619				42				577
Research and development			3,719				2,089				1,630
Total operating expenses			53,053				54,531				(1,478	)
Loss from operations			(11,348	)			(17,210	)			5,862
Change in fair value of warrant liabilities			899				1,680				(781	)
Change in fair value of investment, related party			2				(14	)			16
Loss on debt extinguishment			-				(316	)			316
Interest expense, net			(452	)			(2,035	)			1,583
Other income (expense), net			388				158				230
Loss before income taxes			(10,511	)			(17,737	)			7,226
Income tax expenses			25				22				3
Net loss		$	(10,536	)		$	(17,759	)		$	7,223

Product Revenues, net

Net product revenue for 2025 increased $4.4 million, or 11.8% compared to 2024. The increase was primarily driven by organic growth of Ameluz sales volume of $4.1 million and a $0.7 million increase due to an increased Ameluz unit price. We still continued to grow net revenues despite the impact of group purchasing organizations for independent dermatology offices' efforts to erode prices. The Ameluz driven revenue increase was offset by a $0.3 million decline in sales of RhodoLED Lamps due to the initial surge of sales of BF-RhodoLED XL in 2024 in connection with its launch. BF-RhodoLED sales have been consistent with expectations and we plan to continue to sell both the BF-RhodoLED and RhodoLED XL.

Operating Expenses

Cost of Revenues, Related Party

Cost of revenues, related party decreased $7.7 million, or 43.4% compared to 2024 driven by changes in the purchase price of Ameluz primarily due to changes in the Company's commercial arrangements with the Biofrontera Group. In connection with the Strategic Transaction, the Company transitioned from the transfer pricing model in place under the now terminated Second A&R Ameluz LSA to a significantly lower cost structure. Under the new arrangement, the cost of revenues per unit reduced to approximately 5% beginning in July 2025, compared to a range of approximately 25% to 50% of revenue applying to sales in 2024 and from January 1, 2025 through June 1, 2025. Sales subject to the new rate of approximately 5% represented approximately 45% of total Ameluz sales volume for 2025. In addition, $2.1 million of purchase price accrued relating to units purchased in 2025 under the Second A&R Ameluz LSA was forgiven in connection with the Strategic Transaction, further reducing the cost of revenues in 2025. These decreases were partially offset by earnout payments made in 2025 under the Agreements to the Biofrontera Group of $2.2 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2025 increased $4.0 million, or 11.7% compared to 2024. The increase was primarily driven by a $6.6 million rise in general and administrative expenses, largely attributable to higher external legal costs and expenses related to patent claims. See Note 20. Commitments and Contingencies - Legal Proceedings. This increase was partially offset by a $1.1 million reduction in direct sales personnel expenses resulting from a decrease in headcount from 2024 to 2025, $1.0 million in savings related to lower sales support activity levels, including $0.4 million due to Xepi Prescription Drug User fee write-off, a $0.3 million decrease in intangible asset amortization, and a $0.2 million decrease in bad debt expense.

Selling, General and Administrative Expenses, Related Party

Selling, general and administrative expenses, related party increased by $0.6 million in 2025 compared to 2024, primarily due to the commercialization, regulatory and manufacturing-related expenses incurred following the Strategic Transaction. See Note 3. Asset Acquisition.

Research and Development Expense

R&D expenses for the year ended December 31, 2025 increased $1.6 million as compared to the year ended December 31, 2024. The increase was attributable to our responsibility over clinical trial activities for Ameluz in the United States for the full year 2025, which we assumed control of starting June 1, 2024.

The following table summarizes the major categories of our R&D expenses for the years ended December 31, 2025 and 2024:

		2025				2024
Actinic keratosis		$	1,486			$	682
Moderate to severe acne			349				267
Superficial basal cell carcinoma			320				148
Portable devices			22				94
Personnel-related costs			1,527				756
Other research and development			15				142
		$	3,719			$	2,089

Change in Fair Value of Warrant Liabilities

The change in fair value of warrant liabilities was driven primarily by the decrease in the underlying value of the Company's common stock during 2025 as compared to 2024.

Interest Expense, net

Interest expense decreased by $1.6 million due to the decrease in the interest rate applicable to the outstanding convertible notes issued in November of 2024 (with an original balance of $4.2 million), as compared to the term loan with a balance of $4.0 million that matured on July 5, 2024.

Net Income to Adjusted EBITDA Reconciliation for years ended December 31, 2025 and 2024

We define adjusted EBITDA as net income or loss before interest income and expense, income taxes, depreciation and amortization, and other non-operating items from our statements of operations as well as certain other items considered outside the normal course of our operations specifically described below. Adjusted EBITDA is not a presentation made in accordance with GAAP. Our definition of adjusted EBITDA may vary from the use of similarly-titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. Adjusted EBITDA should not be considered as an alternative to net income or loss, operating income/(loss), cash flows from operating activities or any other performance measures derived in accordance with GAAP as measures of operating performance or liquidity. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

Change in fair value of warrant liabilities:The Warrants issued in conjunction with our private placement offerings and registered public offering were accounted for as liabilities in accordance with Accounting Standards Codification("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.

Change in fair value of investment, related party:The Company accounts for its investment, related party in accordance with ASC 321, Investments - Equity Securities ("ASC 321"). Equity securities, which are comprised of investments in common stock, are initially recorded at cost, plus transaction costs, and subsequently measured at fair value, based on quoted market prices, with the gains and losses reported in the Company's consolidated statement of operations. For the investments held in foreign currencies, the change in fair value attributable to changes in foreign exchange rates is included in gains and losses in the consolidated statement of operations. We exclude the impact of the realized and unrealized change in fair value of investments as this is non-cash.

Loss on debt extinguishment: Effective as of January 4, 2024, we voluntarily terminated the Loan and Security Agreement dated May 8, 2023 with MidCap Business Credit LLC 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.

Stock Based Compensation: To measure operating performance, we exclude the impact of costs relating to share-based compensation. Due to the subjective assumptions and a variety of award types, we believe that the exclusion of share-based compensation expense, which is non-cash, allows for more meaningful comparisons of our operating results to peer companies. Share-based compensation expense can vary significantly based on the timing, size and nature of awards granted.

Expensed issuance costs:To measure operating performance, we exclude the portion of issuance costs allocated to our warrant liabilities. We do not expect to incur this type of expense on a recurring basis and believe the exclusion of these costs allows management and the users of the financial statements to better understand our financial results.

Gain on sale of asset held for sale: The gain on the sale of an asset held for sale increases net income but is excluded from adjusted EBITDA because it is a non-recurring, non-operating item. While it may appear in other income, net, it is subtracted when calculating adjusted EBITDA to reflect normalized, recurring operational performance and avoid overstating operational profitability.

Adjusted EBITDA margin is adjusted EBITDA for a particular period expressed as a percentage of revenues for that period.

Our management uses adjusted EBITDA to measure our performance from period to period and to compare our results to those of our competitors. We believe that adjusted EBITDA provides useful information to investors regarding financial and business trends related to our results of operations and that, when non-GAAP financial information is viewed with GAAP financial information, investors are provided with a more meaningful understanding of our ongoing operating performance.

The below table presents a reconciliation from net loss to Adjusted EBITDA for the years ended December 31, 2025 and 2024:

		Years ended December 31,
		2025				2024
Net loss		$	(10,536	)		$	(17,759	)
Interest expense, net			452				2,035
Income tax expenses			25				22
Depreciation and amortization			138				421
EBITDA			(9,921	)			(15,281	)
Gain on sale of asset held for sale			(700	)			-
Change in fair value of warrant liabilities			(899	)			(1,680	)
Change in fair value of investment, related party			(2	)			14
Loss on debt extinguishment			-				316
Stock based compensation			951				1,019
Expensed issuance costs			-				354
Adjusted EBITDA		$	(10,571	)		$	(15,258	)
Adjusted EBITDA margin			-25.4	%			-40.9	%

Adjusted EBITDA

Adjusted EBITDA increased from ($15.3) million for the year ended December 31, 2024 to ($10.6) million for the year ended December 31, 2025. The improvement was primarily driven by higher gross profit resulting from increased sales and a reduction in cost of revenues following the Strategic Transaction. Adjusted EBITDA also benefited from lower selling, general and administrative expenses, reflecting more disciplined cost management, lower commercial activity levels, and optimization of personnel resources during the year. These improvements were partially offset by higher legal expenses related to patent claims and increased research and development expenses. Our Adjusted EBITDA margin increased from (40.9%) for the year ended December 31, 2024 to (25.4%) for the year ended December 31, 2025, as the favorable impact of the higher gross profit and improved operating cost discipline outweighed the effect of the increased legal and research and development expenses.

Liquidity and Capital Resources

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. Since we commenced operations in 2015, we have generated significant losses. The Company incurred net cash outflows from operations of $13.4 million and $10.3 million for the years ended December 31, 2025 and 2024, respectively. As of December 31, 2025, the Company's accumulated deficit was $127.9 million. The Company's primary sources of liquidity are its cash collected from the sales of its products and cash flows from financing transactions, including $11.0 million of gross proceeds received in a private placement of Series C Preferred Stock in 2025. As of December 31, 2025, we had cash and cash equivalents of $6.4 million. The Company cannot provide assurance that it will ultimately achieve profitable operations and become operating cash flow positive or raise additional debt or equity capital. Additionally, the current capital resources are not adequate to continue operating and maintaining the business strategy for a period of twelve months from the issuance date of this report. Management believes that these conditions raise substantial doubt about the Company's ability to continue as a going concern for at least twelve months from the date of this Annual Report on Form 10-K.

The Company plans to address the conditions that raise substantial doubt regarding its ability to continue as a going concern by, among other things, continuing to expand the commercialization of Ameluz in the United States while controlling expenses, expected realization of an additional $1.0 million in milestone payments from the sale of the Xepi intangible asset, and, if necessary, securing additional capital through equity or debt financings. However, there can be no assurance that the Company will be successful in obtaining sufficient funding on acceptable terms, if at all. If the Company is unable to raise additional capital when needed, it will not have sufficient cash resources and liquidity to fund its business operations and may be forced to delay or reduce continued commercialization efforts or R&D programs, which could have a material adverse effect on the Company and its financial statements.

The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

Cash Flows

The following table summarizes our cash provided by (and used in) operating, investing and financing activities:

		For the Year Ended December 31,
(in thousands)		2025				2024
Net cash used in operating activities		$	(13,361	)		$	(10,270	)
Net cash provided by (used in) investing activities			2,998				(3	)
Net cash provided by financing activities			10,850				14,835
Net increase in cash and restricted cash		$	487			$	4,562

Operating Activities

During the year ended December 31, 2025, operating activities used $13.4 million of cash, primarily resulting from our net loss of $10.5 million, and net cash used by changes in our operating assets and liabilities of $3.5 million, adjusted for the add back of non-cash expense of $0.7 million. Non-cash expense includes stock-based compensation of $1.0 million, non-cash interest expense of $0.5 million, reduction of right of use assets of $0.7 million and depreciation and amortization in the aggregate of $0.1 million, offset by a change in fair value of warrant liabilities of $0.9 million, gain on asset held for sale of $0.7 million, and allowance for credit losses of $0.1 million.

During the year ended December 31, 2024, operating activities used $10.3 million of cash, primarily resulting from our net loss of $17.8 million, and net cash used by changes in our operating assets and liabilities of $6.2 million, adjusted for the add back of non-cash expense of $1.3 million. Non-cash expense includes stock-based compensation of $1.0 million, non-cash interest expense of $0.3 million, loss on debt extinguishment of $0.3 million, provision for doubtful accounts of $0.2 million and depreciation and amortization in the aggregate of $1.1 million offset by a change in fair value of warrant liabilities of $1.7 million.

Investing Activities

During the year ended December 31, 2025, the Company received $3.0 million in proceeds from the sale of the intangible asset relating to its Xepi product line, which was previously classified as held for sale. See Note 10. Asset Held for Sale for additional details.

During the year ended December 31, 2024, the Company had minimal investing activities which consisted of proceeds from the sales of equity investments which were partially offset by capitalized software and computer purchases.

Financing Activities

During the year ended December 31, 2025, net cash from financing activities of $10.9 million consisted of proceeds received in accordance with a securities purchase agreement dated June 27, 2025, for the issuance of 11,000 shares of Series C Convertible Preferred Stock. See Note 17. Stockholders' Equity- Series C Convertible Preferred Stock, for additional details.

During the year ended December 31, 2024, net cash provided by financing activities was $14.8 million which consisted of proceeds of $7.7 million, net of capitalized issuance costs, from the issuance of preferred stock and warrants, $7.4 million from the exercise of warrants for preferred stock, plus $4 million, net of issuance costs received from the issuance of convertible notes, offset by repayments of $4.2 million on our short-term debt, and prepayment fees of $0.2 million to extinguish our line of credit.

Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles of the United States, or GAAP. The preparation of the financial statements in accordance with GAAP requires the use of estimates and assumptions by management that affect the value of assets and liabilities, as well as contingent assets and liabilities, as reported on the balance sheet date, and revenues and expenses arising during the reporting period. The main areas in which assumptions, estimates and the exercising of a degree of judgment are appropriate relate to contingent consideration, fair value measurements, valuation of intangible assets and impairment assessment, and stock compensation. 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.

Our significant accounting policies are described in more detail in Note 2 - Summary of Significant Accounting Policies, to our consolidated financial statements.

Critical Accounting Estimates

We believe that the following are the most critical estimates which required significant judgments in the preparation of our financial statements.

Contingencies and Litigation

In the ordinary course of our business, we are subject to various legal proceedings, claims and other regulatory matters, the outcomes of which are subject to significant uncertainty. At least quarterly, we review the status of each significant matter and assess its potential financial exposure considering all available information including, but not limited to, the impact of negotiations, settlements, rulings, advice of internal and external legal counsel and other updated information and events pertaining to a particular matter. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in assessing the likelihood of a loss being incurred and in estimating the loss or range of loss in each matter. Due to the uncertainty of litigation and the preliminary stage of the claims, we cannot estimate the possibility of a material loss, nor the potential range of loss that may result from the actions discussed in Note 20. Commitments and Contingencies - Legal Claims. As additional information becomes available, we reassess the potential liability related to our pending litigation and other contingencies and revise our estimates as applicable. Revisions of our estimates of the potential liability could materially impact our results of operations. Additionally, if the final outcome of such litigation and contingencies differs adversely from that currently expected, it would result in a charge to operating results when determined. See Note 20. Commitments and Contingencies - Legal Claims for more details.

Intangible Assets and Impairment Assessment

The Company regularly reviews the carrying amount of its long-lived assets to determine whether indicators of impairment may exist that warrant adjustments to carrying values or estimated useful lives. In connection with this review, assets are grouped at the lowest level at which identifiable cash flows are largely independent of other asset groupings. If indications of impairment exist, projected future undiscounted cash flows associated with the asset grouping are compared to the carrying amount to determine whether the asset's value is recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount and if the carrying value is also determined to be greater than its fair value. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flows.

In determining future cash flows, we take various factors into account, including the remaining useful life of each asset group, forecasted growth rates, pricing, working capital, capital expenditures, and other cash needs specific to the asset group. Additional considerations when assessing impairment include changes in our strategic, operational, and financial decisions, economic conditions, demand for our product and other corporate initiatives which may eliminate or significantly decrease the realization of future benefits from our long-lived assets. Since the determination of future cash flows is an estimate of future performance, future impairments may arise in the event that future cash flows do not meet expectations.

Contingent Consideration

In evaluating whether variable consideration should be included in the transaction price (in the sale of asset held for sale and the sales-based earnout consideration in the Strategic Transaction), the Company applies judgement in assessing whether it is probable that milestones or expected timing or magnitude of future net sales will be met. The Company will recognize the constrained variable consideration, if any, in the period in which the associated uncertainty is resolved.

In connection with the sale of the Company's intangible asset related to Xepi, the $7.0 million of potential milestone payments related to achieving annual net sales thresholds were fully constrained at the sale date due to significant uncertainty regarding the buyer's future sales performance. This uncertainty is driven by factors outside the Company's control including the buyer's commercialization strategy, pricing decisions, and general market conditions. Additionally, the asset lacked sufficient historical revenue performance to reliably predict the likelihood of achievement.

In connection with certain asset acquisition transactions, the Company may agree to pay contingent consideration based on the future performance of the assets acquired. Pursuant to the terms of the Agreements, the Company will pay an earnout of 12% in years where Ameluz revenues in the United States are less than $65.0 million and an earnout of 15% in years when Ameluz revenues in the United States exceed $65.0 million, continuing until the expiration of patent protection on Ameluz. The accounting for contingent consideration requires management to assess whether the obligation should be recognized and measured at the acquisition date. In certain circumstances, the Company may determine that the fair value of the earnout obligation cannot be reasonably estimated at the acquisition date due to significant uncertainties regarding the timing and magnitude of future net sales. Changes in actual net sales relative to expectations could result in the recognition of material expense in future periods when the contingency is resolved.

Recently issued accounting pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is included in Note 2. Summary of Significant Accounting Policies-Recently Issued Accounting Pronouncements.

Off-balance Sheet Arrangements

Besides the contractual obligations and commitments discussed in the section entitled "Liquidity and Capital Resources" above, we did not have during the periods presented, and we do not currently have, any other off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012 permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to take advantage of such extended transition period, which means that when an accounting standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to "opt out" of such extended transition period or (ii) no longer qualify as an emerging growth company.