Please note that certain information discussed during today's call is covered under the safe harbor provisions of the Private Securities Litigation Reform Act. We caution listeners that Biofrontera's management will be making forward-looking statements. And that actual results may differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the Company's business. All risks and uncertainties are detailed in and are qualified by the cautionary statements contained in Biofrontera's press releases and SEC filings.

This conference call contains time-sensitive information that is accurate only as of the date of the live broadcast today, November 30, 2021. Biofrontera undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

During today's call, there will also be a reference to certain non-GAAP financial measures. Biofrontera believes these measures provides useful information for investors, yet should not be considered as a substitute for GAAP, nor should they be viewed as a substitute for operating results determined in accordance with GAAP. A reconciliation of non-GAAP to GAAP results is included in this morning's press release.

And with that, I would like to turn the call over to Hermann Luebbert, Executive Chairman of Biofrontera Inc. Hermann, please go ahead.

Hermann Luebbert - Executive Chairman

Yeah, thank you, Pamela. And good afternoon, everyone. Welcome to Biofrontera, Inc.'s first quarterly conference call. I would like to start the call with a brief background on Biofrontera Inc., which became a publicly traded company just about one month ago.

Biofrontera, Inc. was founded in 2015 as the US commercial arm of the Germany-based parent company, Biofrontera AG. To provide Biofrontera, Inc. with the financial resources necessary to expand its marketing and sales activities, the parent company decided to allow an independent listing on NASDAQ. Our business rests on long-lasting, exclusive licenses to market and sell two prescription drugs in the United States. Both drugs serve multi-billion-dollar accessible markets, and the listing allows raising the resources required to build marketing and sales within Biofrontera, Inc. such that we can address these huge markets effectively. In addition, the listing on NASDAQ offers us the opportunity to flexibly exploit market opportunities or cover short-term financial needs such as, in the case of the recent $15 million private placement we announced yesterday.

The future of the entire Biofrontera Group clearly lies in the US market, as this is where our products face the greatest commercial potential. Significantly increasing marketing and sales efforts here is, therefore, the cornerstone for successful corporate [Phonetic] growth.

As some of you may know, I am the Founder of Biofrontera AG, the German parent company, and have been as CEO since inception. After originally agreeing to extend my term of office on the Management Board of Biofrontera AG until December 31, 2022, I have now decided to remain at the disposal of the Group for a further three years. However, I would like to devote these three years to where I see the greatest benefit for the entire Group, the growth engine Biofrontera, Inc. In view of the separation of the two Biofrontera companies, I feel that I cannot effectively serve on both Boards. Therefore, earlier this month, I submitted my request for early retirement as CEO and Member of the Management Board of the Supervisory Board of the - of Biofrontera AG. Once the Supervisory Board of Biofrontera AG has released me from my duties on the Board of Biofrontera AG, I will fully devote myself to my duties as Executive Chairman of Biofrontera, Inc.

Joining me today is Erica Monaco, Chief Executive Officer of Biofrontera, Inc. Erica will provide a more detailed overview of the business, our strategy, and our third quarter financial results. Erica has shown outstanding leadership, and has been a key contributor to our success in the United States from the earlier stages, from the development of the business structure processes and partnerships required to operate and grow to the launch of our license products and our commercial success in the markets.

With that, I'll turn the call over to Erica.

Erica Monaco - Chief Executive Officer

Thank you, Hermann, and good afternoon, everyone. By way of introduction, I am Erica Monaco, Biofrontera's Chief Executive Officer. Prior to the IPO, I was our Chief Financial and Chief Operating Officer. I've been with the Company since our US product launch in 2016. I'm pleased to be here speaking with you today. And I'm excited for the future of Biofrontera.

Biofrontera, Inc. commercializes pharmaceutical products and medical devices for the treatment of dermatological skin conditions. Our flagship product focuses on the treatment of actinic keratosis, or AKs as we call them, which are skin lesions that can sometimes lead to skin cancer. Actinic keratosis are caused by excessive exposure to sunlight. We also market a topical antibiotics for treatment of impetigo, which is a bacterial skin infection.

Before telling you more about our Company strategy and our products, let me introduce you to the financial results of Q3 and the first nine months of the year.

In our third quarter financial update, our total product revenues were $4.3 million for the three months ended September 30, 2021. This is an increase of $1.1 million or 34% from our $3.2 million revenue one year ago. The increase was primarily due to higher sales of Ameluz, reflecting volume increases, and to a lesser extent, higher average selling price.

Total operating expenses were $20.4 million and $5.6 million for the three months ended September 30, 2021 and 2020. Cost of revenue increased primarily due to higher sales of Ameluz. Selling, general and administrative expenses increased $12.9 million, primarily due to an $11.25 million legal settlement expense. And to a lesser extent, selling, general and administrative increased due to marketing campaign expense and increased headcount.

Adjusted EBITDA was negative $3.8 million for the three months ended September 30, 2021 versus a negative $3.1 million during the same period last year. Adjusted EBITDA margin improved from negative 96.2% to negative 88.5%.

Net loss for the 2021 third quarter was $16 million, compared with a net loss for the 2020 third quarter of $3 million.

Cash and cash equivalents as of September 30, 2021 were $1.7 million. As mentioned, following the quarter close, we raised gross proceeds of $18 million from the IPO. Furthermore, the private investment into our Company, that we published yesterday, has provided gross proceeds of another $15 million to the Company. We have also settled through today, outstanding warrants, which will provide another $5.8 million in funds to the Company. As a growth stage company, we intend to be opportunistic in regards to potential financing activities. But we believe that the funds available today provide sufficient capital to support operating, investing, and financing activities through at least the 12 - the next 12 months.

Now moving on to our year-to-date financial results. Our total product revenues were $14.9 million for the nine months ended September 30, 2021 and $10.2 million for the same time in 2020. It's an increase of $4.7 million or 46%. The increase was primarily due to higher sales of Ameluz, and even partially offset by lower sales of Xepi. Our revenue was directly affected by global COVID-19 pandemic starting in mid-March of 2020. From that point on, rising infection rates and the resulting official recommendation by the American Academy of Dermatology to care for patients through remote diagnosis and treatment led to significant decline in patient numbers and widespread, albeit temporary, practice closures.

After negligible product sales in April of 2020, we observed a slow recovery of our business in the summer of 2020. And later, the first signs of stabilization in line with the usual seasonality of the remaining quarters. Doctors' offices reopened during the second half of 2020, at lease in parts, and patients showed increasing willingness to undergo in-office treatment for AKs. In the fourth quarter of 2020, we saw a seasonally strong increase in sales. The 46% increase in product sales year-to-date indicates that our revenue is recovering from this pandemic.

Total operating expenses were $38.2 million for the nine months ended September 30, 2021 and $19.7 million in the same months of 2020. In 2020, we had reduced operating expenses to mitigate the risks to Biofrontera from COVID-19, and preserved cash by multiple measures, including headcount reductions, mandatory furloughs, freezing of hiring and discretionary spend, voluntary salary reductions from the senior leadership.

During the pandemic, we focused our US sales strategy on Ameluz and delayed the targeted relaunch of Xepi to improve product positioning. During 2021, we have resumed hiring, launched various marketing campaigns for our licensed products. And in addition, as mentioned earlier, we have incurred in $11.25 million legal settlement expense during the third quarter of 2021.

Adjusted EBITDA was a negative $9.5 million, and a negative $9.1 million for the nine months ended September 30, 2021 and 2020 respectively. Our adjusted EBITDA margin improved from a negative 89% to a negative 63.9% during the same periods.

Net loss was $23.2 million and $10.8 million for the nine months ended September 30, 2021 and 2020, respectively. I refer you to the table in the news release we issued earlier today for a reconciliation of GAAP to non-GAAP financial measures.

The long-term financial objectives include consistent revenue growth and operating margin expansion. Accordingly, we are focused on rapid market expansion, balanced with improved operating efficiencies, including effective resource utilization, information technology leverage, and overhead cost management, because traditional PDT treatments using our lamp are performed more frequently during the winter. Our revenue is subject to some seasonality, and has historically been higher during this first and fourth quarters than during the second and third quarters. Given that, we are pleased to see strong revenue growth in the third quarter. And we expect maintain that momentum as we strengthen our sales efforts and continue transitioning out of the COVID-19 pandemic.

We're also pleased that our expenses have normalized for a growth focused company. Overall, marketing and development goals align to form a commercial strategy that has uniquely positioned Biofrontera the leadership in the treatment of dermatological conditions.

And with that, I'll briefly illustrate our commercial strategy. As Hermann mentioned on November 2, we completed an initial public offering with gross proceeds of $18 million. The IPO proceeds, along with the $15 million private placement that we announced yesterday, and the $5.8 million in cash proceeds from outstanding warrants exercise through today, afford Biofrontera the flexibility and strength to advance our position as a leading commercial dermatology company.

Our principal objective is to grow sales of our licensed products in the United States. Three key elements to our strategy include the following. First, expanding sales of our principal product, Ameluz, in combination with the BF-RhodoLED lamps for the treatment of AKs on the face and scalp, and positioning Ameluz as the leading PDT product by growing our sales and marketing infrastructure. Second, expanding sales of Xepi for treatment of impetigo by improving the market positioning of our licensed product. And third, leveraging the potential for future approvals and label extensions of our pipeline products through our existing license agreements.

Our market expansion strategy is based on bolstering awareness of our products through medical recognition, data-driven sales strategies, and a robust and dynamic commercial infrastructure. We intend to optimize our salesforce through more sales territories, strengthening of our medical affairs, and becoming a trusted partner in the medical communities through scientific data publication, KOL interaction, and industry support.

Now, let me introduce you to our in-licensed products, starting with Ameluz. As mentioned, our principal product is Ameluz. Prescription drug is approved for use in combination with our BF-RhodoLED lamp for photodynamic therapy or PDT as we call it. For the lesion-directed and field-directed treatment of actinic keratosis of mild-to-moderate severity on the face and scalp. Actinic keratosis are superficial potentially pre-cancerous skin lesions caused by chronic sun exposure that may, if left untreated, develop into potentially life-threatening skin cancer called squamous cell carcinoma. AK lesions typically appear on sun-exposed areas, such as the face, bald scalp, arms or the back of the hands. It appears hyperpigmented spots and are often elevated, flaky, and rough in texture.

According to the Skin Cancer Foundation, actinic keratosis affects approximately 58 million people in the United States, and, if left untreated, up to 1% of those AK lesions could develop into squamous cell carcinoma every year. In 2020, an estimated 12.7 million treatments were performed for actinic keratosis. The most common treatment remains cryotherapy, with an approximate market share of 86%. Topical drugs for the treatment of AKs had a market share of about 12% in 2020, followed by PDT treatments with a 2% share of the market. Despite its market dominance, cryotherapy poses significant disadvantages as a treatment option for AKs as compared for AK - sorry, as a treatment option for AKs compared to PDT therapy. As such the opportunity to strategically target cryotherapy market share is a key focus in our commercial efforts. We see the opportunity to expand the PDT market as a treatment for AK as particularly attractive in patients with more than 15 lesions. We believe there is a treatment guideline pressure towards field-directed therapy, as opposed to single lesion therapy, such as with cryotherapy, which may also help further our sales of Ameluz.

Our second licensed prescription drug product is Xepi. Topical antibiotic for the treatment of impetigo, a common skin infection caused by bacteria. Currently, no antibiotic resistance against Xepi is known, and Xepi has been specifically approved by the FDA for resistant strains, such as MRSA. And the FDA label covers the use in adults and children two months and older. Impetigo is a highly contagious bacterial skin infection. It occurs most frequently in children ages two to five, but people of any age can be affected. Impetigo causes red sores that most often appear on the face, neck, arms and legs. Anyone can contract impetigo and people can get it more than once. Although impetigo is a year-round disease, it occurs most often during the warmer weather months. There are more than 3 million cases of impetigo in the United States every year.

In 2020, more than 13 million prescriptions were written for drugs and indications for Xepi can be effective. And one of our key advantages is that about 80% of patients with commercial insurance are likely covered with Xepi. Xepi is distributed through specialty pharmacies and is generally covered by most commercial payers without pre-approval or similar requirements. We believe there is considerable market potential for Xepi in the coming years.

Moving on to an update on our ongoing clinical studies. Our clinical development program is designed to complement our commercial strategy by expanding the market positioning of our PDT product Ameluz, providing more value to patients, broadening the total addressable market and offering more favorable treatment options. Studies are performed by the Biofrontera Group and indirectly financed by us to the license and supply agreement by Ameluz existing between our companies.

We recently announced clinical site initiations for two studies. These include seven sites for a Phase 2b study for the treatment of moderate-to-severe acne in adults with Ameluz, as well as eight sites for Phase 1 study evaluating the safety of PDT with simultaneous application of three tubes of Ameluz. The acne study will enroll 126 adults with moderate-to-severe acne who will be treated with Ameluz PDT or placebo. The efficacy of Ameluz PDT will be tested with the incubation durations of one hours and three hours compared with placebo. The primary endpoint is the change in number of inflammatory lesions and improvement in symptoms as assessed by the physicians conducting the study.

The second study will evaluate the safety and tolerability of Ameluz in the treatment of AK, located on the face and scalp with PDT together with our new larger RhodoLED XL lamp. That study will enroll 100 patients with mild-to-severe AKs. Each patient will receive the content of three tubes of Ameluz for field-directed treatment. This study follows a maximum - maximal usage pharmacokinetic study completed in early 2021. As we announced in June, the results of the PK study were presented to the FDA. In that meeting, the FDA requested another safety study focusing on transient application sites' effects before allowing the amendment of the product information to be changed to three tubes per treatment. Currently the product information limits the use to one tube of Ameluz per treatment.

Both studies are focused on optimizing market positioning and expanding market share for Ameluz. And both studies have commenced with site initiations underway. We expect patient recruitment to begin before the end of the year. In addition, we have an ongoing Phase 3 study in the United States to evaluate Ameluz in combination with PDT for the treatment of superficial basal cell carcinoma. We look forward to these studies concluding.

And with that, I would like to conclude our business updates. Thank you to our shareholders and to all who are taking the time to participate in this conference call. I would like to now open the line to questions.

Question & Answers

Operator

We will now begin the question-and-answer session. [Operator Instructions] While we assemble our roster, please let me pass the call to Erica Monaco for some remarks.

Erica Monaco - Chief Executive Officer

Thanks, Matt. Yeah, while we're waiting for the first question, I would just like to mention that as we establish our authority in the medical dermatology community, we look forward to our clinical trial results being published and expanding our market presence through supporting medical conferences and meeting with physicians and investors alike. This coming January, Biofrontera will be participating at both the Winter Clinical Dermatology Conference and the Maui Derm for Dermatologists Conference, both in-person meetings in Hawaii. We look forward to announcing more news about our participation there as we get closer to these conferences.

Thank you. Okay, so thanks Matt. We can - I'm ready for the questions now.

Operator

Thank you. Our first question will come from Bruce Jackson with The Benchmark Company. Please go ahead.

Bruce Jackson - The Benchmark Company - Analyst

Hi, good afternoon. Thanks for taking my questions. If you could just start-off with maybe a housekeeping question on the share count. So, after the IPO, we started 11.6 million. Can you tell us what the base number of shares are right now? And then how many warrants are still outstanding?

Erica Monaco - Chief Executive Officer

So settled as of - we're still in the mix of settling, but it should be somewhere around 12.245 million [Phonetic] I believe. There's still a bit of activity swirling today that we're not sure if it has settled.

Bruce Jackson - The Benchmark Company - Analyst

Okay. And then do you have a rough number for the outstanding number of warrants?

Erica Monaco - Chief Executive Officer

I don't have that readily available. As I said, there have been a handful coming in live, so we can certainly get that to you.

Bruce Jackson - The Benchmark Company - Analyst

Okay. And so, you mentioned in the press release that the share of Biofrontera AG is going to be around 52%, 53%, something like that in the press release?

Hermann Luebbert - Executive Chairman

We think that with some of the warrants now exercised, this is a moving target. And right now we - the question is, of course, does it go below 50%? And we don't know that yet.

Bruce Jackson - The Benchmark Company - Analyst

Okay. Fair enough. And then just to wrap up with the litigation expenses. Is that all of litigation expense that's going to be in the Biofrontera income statement? Or is there anything left to recognize in the future?

Erica Monaco - Chief Executive Officer

That is everything.

Bruce Jackson - The Benchmark Company - Analyst

Okay. Perfect. All right. I'll hop back in queue.

Operator

[Operator Instructions] Our next question will come from Jonathan Aschoff with ROTH Capital Partners. Please go ahead.

Jonathan Aschoff - ROTH Capital Partners - Analyst

Thank you. Hello and congrats guys on the spin out, and a severe balance sheet fortification. Can you tell us some specifics as you're willing to get about what you plan to do, and spend to increase the sales effort from now to maybe year-round '22?

Hermann Luebbert - Executive Chairman

Jonathan, we cannot hear you. We heard you well when you started, and then you sort of disappeared.

Jonathan Aschoff - ROTH Capital Partners - Analyst

Okay. Can you hear me now?

Hermann Luebbert - Executive Chairman

Yes.

Jonathan Aschoff - ROTH Capital Partners - Analyst

Okay. So, can you tell me some specifics to whatever extent you can, about what you plan to do and how much you plan to spend to increase the sales effort in the US from here, let's say to the end of next year?

Erica Monaco - Chief Executive Officer

Sure. I don't know how specific I can be, because it is sort of a moving target based on the timing of the funds coming in. So, we are at - we're definitely looking to expand the sales force. We're at 32 heads right now, and over time we want to get that above 50. I don't know if we will expand as rapidly - perhaps mid-year, next year we will see a good chunk of that eaten away at. The idea is to demonstrate rapid growth and expansion, but the timing should be structured such that it doesn't impact our ongoing operations.

Jonathan Aschoff - ROTH Capital Partners - Analyst

Okay. And can you say much about the BCC trial timing, or is the trial design just very, very difficult to make predictions with?

Hermann Luebbert - Executive Chairman

The trial design is certainly a very difficult trial design because the FDA has requested the entire region of the skin where the BCC was to be dissected, and then sliced up and looked at by histology. So that leaves the patient with the scar. So it's difficult to find patients who want to go through the process and then they have a scar anyway. This is why recruitment has been slow. We started patient recruitment, the first patient in - I think, in the end of 2018. So, we are already three years into the study. But we do think that we will be completing patient recruitment next year.

Jonathan Aschoff - ROTH Capital Partners - Analyst

Okay. That's helpful. So, guys, as per my model, I have your pro forma cash that I have it about $36.7 million, that's the warrants, the private, as well as the IPO and the little bit you had at the end of the quarter. I mean, I've got that going much longer than 2022. So, what am I missing is at least the next 12 months, just a lawyer statement, or does it actually have any bearing to how long that cash might last?

Erica Monaco - Chief Executive Officer

Say that again just the - what's the specific question about the lawyer statement?

Jonathan Aschoff - ROTH Capital Partners - Analyst

I'm just saying to say it lasts at least the next 12 months, is that your some boilerplate legal statement, or do you clearly have cash that's going to last substantially more than the next 12 months?

Erica Monaco - Chief Executive Officer

Yes. With the IPO [Phonetic] investment that's settled, that we announced yesterday and the warrants that have been exercised, we are - we have enough funds to last the next 12 months. That's not a boilerplate.

Jonathan Aschoff - ROTH Capital Partners - Analyst

Okay. So you would anticipate on spending that - the cash on hand that roughly $36-some-odd million over the next 12 months?

Erica Monaco - Chief Executive Officer

So I don't know that we - as I said, this is a moving target. Our ultimate goal is to grow the business as rapidly as possible, but with the balancing act to make sure that our operating funds are sufficient. So the growth strategy needs to be able to be supported by the funds. So, the timing of that, I don't want to commit to any specifics.

Jonathan Aschoff - ROTH Capital Partners - Analyst

Okay. And well, that is it. Thank you very much.

Operator

Our next question is a follow-up from Bruce Jackson with the Benchmark Company. Please go ahead.

Bruce Jackson - The Benchmark Company - Analyst

Hi, thanks for the follow-up. I wanted to talk about the sales force just a little bit more. So, once you get the new people hired, how long does it take for them to become seasoned and fully productive?

Erica Monaco - Chief Executive Officer

Yes, so that's a good question, actually. Minimum it takes extensive training over a couple of months. We like to have somebody fully functioning by the six-month mark. But to become a fully saturated rep in the marketplace, I think, we're still learning that. As we grow the business, as we - we really don't know the answer of what the true potential is of a fully seasoned rep. So, we hope to grow not only our new reps to a certain level, but our existing reps as well.

Bruce Jackson - The Benchmark Company - Analyst

Okay. And then, so as we're looking ahead to 2022 then, in terms of putting together the way that sales might ramp, we should - should we be assuming that things start out kind of the current growth trajectory and then as the new sales people get added in, then we could see some acceleration at some point after that?

Erica Monaco - Chief Executive Officer

I think that's a fair question. I would say, yes. We are - we have a really nice strategy to focus on our existing customer base plus expansion of the - into the cryotherapy space as we discussed. So, in terms of growth, it's not as critical that our people are trained, it's more critical that our strategy is aligned, and how we target them with our existing sales force versus our new should be similar.

So I would think the growth will be a little bit more linear than you are thinking.

Bruce Jackson - The Benchmark Company - Analyst

Okay. Okay, great. Thank you very much.

Operator

Our next question will come from Thomas Flaten with Lake Street Capital Markets. Please go ahead.

Thomas Flaten - Lake Street Capital Markets - Analyst

Hey, guys. Thanks for taking the question. Just I was curious, given that Biofrontera AG is charged with the clinical development, what obligations do you have under your - or what obligations do they have under your license agreement for Ameluz to continue to fulfill those obligations? Or do they have the power to pull the plug on any of those development projects at their discretion? Or is there some joint operating committee that runs those?

Erica Monaco - Chief Executive Officer

So, I'll let Hermann comment as well since he is here with and can speak for both. But they are obligated to fulfil under the license and supply agreement because there is a beneficial need for our future success here. And if they are to not produce under our expectations for this, we do have rights within the agreement to come in and take control of either relationships, or processes as needed to ensure that these continue on.

Hermann Luebbert - Executive Chairman

Yes. So, if they don't - if they discontinue the clinical trials or don't start them, then Biofrontera, Inc. can actually take over through the clinical trials and then simply subtract all the cost that Biofrontera, Inc. has because of those trials from the transfer trails [Phonetic] for Ameluz.

Thomas Flaten - Lake Street Capital Markets - Analyst

Great. And then just a mechanical question. So the legal settlement announcement came out this week, but you posted the charge for September 30. Can you just explain the timing of the settlement and the accounting around that?

Erica Monaco - Chief Executive Officer

Sure, yeah. So, we - the settlement took place yesterday morning. But because we had not yet filed our Q3 earnings and this was an unknown probable estimatable number, we needed to book it as a contingency at September 30. So that was just an accounting rule and requirement. But this settlement did take place yesterday.

Thomas Flaten - Lake Street Capital Markets - Analyst

Great. Appreciate it. Thank you, guys.

Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Erica Monaco - Chief Executive Officer

Thank you, Matt. And thank you again, everyone for joining us this afternoon for our first quarterly conference call as a publicly traded US company. I trust that we've shared our enthusiasm for the future of our product portfolio and Biofrontera's position within the dermatology community. We look forward to speaking with you all again, when we report our annual results in March. In the meantime, thank you and have a nice evening.

Hermann Luebbert - Executive Chairman

Thank you also from Hermann.

Operator

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Q3 2021

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