Earnings Call Transcript - BFRI Q2 2024

Operator, Operator

Good day, and welcome to the Biofrontera Inc. Second Quarter 2024 Financial Results and Business Update Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Andrew Barwicki. Please go ahead.

Andrew Barwicki, Head of Investor Relations

Thank you. Good morning, and welcome to Biofrontera's Second Quarter Fiscal Year 2024 financial results and business update conference call. Please note that certain information discussed during today's call by management 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. Also, this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 15, 2024. Biofrontera undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call except as required by law. During today's call, there will be references to certain non-GAAP financial measures. Biofrontera believes that these measures provide 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 week's press release. More specifically, management will be referencing adjusted EBITDA, a non-GAAP financial measure defined as net income or loss excluding interest income and expense, income taxes, depreciation and amortization, and certain other non-recurring or non-cash items. With that said, I'm pleased now to turn the call over to Hermann Luebbert, CEO, Chairman and Founder of Biofrontera. Hermann?

Hermann Luebbert, CEO

Yes. Thank you, Andrew, and my thanks to everyone joining us this morning. On today's call, I'll provide an overview of our accomplishments during the second quarter and first half of 2024. Fred Leffler, our CFO, will follow with a discussion on financial results, and then both of us will be happy to answer questions after our prepared remarks. Starting with the business update. We have made tremendous progress across three critical areas, including, one, first and foremost, our sales report. Increasing sales during the second quarter and first half of the year has been accomplished; we grew our sales by 34% for the quarter. In Q2, we managed to compensate for the negative influence of the reimbursement challenges stemming from the healthcare cybersecurity event and the consecutive sales decline in Q1, achieving a little over 8% growth compared to 2023 for the half year. Two, managing our total operating expenses. For example, during the second quarter of 2024, total operating expenses were $12.9 million compared to $14.5 million in the second quarter of last year. Another example relates to our SG&A expenses; in Q2 this year, the SG&A was $7.9 million compared to $11.6 million last year. Three, strengthening our balance sheet by paying down all outstanding debt in the second quarter. I believe these three significant accomplishments on the commercial side of the company have enhanced our day-to-day operations and put us in a position for long-term growth. Together with the raise of gross $8 million in May from exercising warrants, the company is in a stable financial condition. The second quarter was also a very anticipated time for us as we began to sell the FDA-approved RhodoLED XL. Keep in mind, sales only began on June 10, which is at the end of the quarter, but we feel very optimistic about the potential as we continue rolling it out and making it available to all our customers. It is important to understand the benefits for doctors and patients as we look to increase sales. The BF-RhodoLED XL lamp is designed to facilitate the treatment of extended photo damaged thin areas with actinic keratosis, which may require several illuminations with the original small BF-RhodoLED lamp. While Ameluz makes up most of our revenue, we are also proud to announce that in addition to the initial RhodoLED XL lamp sales, 57 of the original BF-RhodoLED lamps were placed at physician offices during the first half of the year compared to 52 in the same period last year. The growing number of lamps in the field reflects both first-time installations and additional lamps among dermatology practices already familiar with Ameluz PDT, facilitating growth through new and existing customers. Although we are very pleased with some reductions in costs such as SG&A and total operating expenses, we continue to invest in our commercial and support teams by increasing our sales force to focus on marketing, strategic accounts, medical and reimbursement support. We believe this approach will increase Ameluz purchases by the doctors' offices, which then require unproblematic patient treatment and reimbursement to make this process financially viable for them. Although the RhodoLED XL lamp began selling at the end of the quarter, which we sell the minimal, it is important to understand the benefits for patients as we look to increase sales. The RhodoLED XL is for the treatment of extended photo damaged thin areas with actinic keratosis. To eliminate restrictions on reimbursement for the use of more than one tube of Ameluz in a single treatment, a three-tube Phase 1 safety study was completed, and the data was submitted to the FDA and accepted for review. We expect that FDA approval for including the use of up to three tubes per treatment into the Ameluz label during Q4 of 2024. In combination with the launch of the XL lamp, this will allow PDT of larger skin areas, constituting a crucial requirement for our further growth. As previously announced, the U.S. Food and Drug Administration (FDA) has approved a new formulation of Ameluz lacking propylene glycol for the treatment of actinic keratosis. First stretches with this formulation have now reached the market. The formulation will improve tolerability for some of our patients while also reducing the generation of impurities over time, which may result in an extended shelf life. Between all our patents currently granted by the U.S. Patent Office, PDT with Ameluz and BF-RhodoLED is currently protected until 2040. A patent application for the new formulation is still pending and may extend the protection of our products until 2043 or even further. A transforming event for our company was the successful renegotiation of our license and supply agreement for Ameluz and RhodoLED lamps in February. According to the agreement, we purchase Ameluz and the lamps from the German Biofrontera Pharma, and upon arrival in the United States, we pay a percentage of our anticipated net sales price for Ameluz and the actual cost of manufacturing plus 10% for the lamps. The cost of Ameluz in the new license and supply agreement has been reduced to almost half of what we have paid thus far. This will become effective when we order new batches, which we did not have to do in the first half of this year due to an overstock situation by the end of 2023. However, we will need to purchase more Ameluz in the second half of the year. Only then will the beneficial effects of the new license and supply agreement become effective, lowering our cost of Ameluz from about 50% to 25% of our net sales price for all orders in 2024 and 2025. On June 1, we transferred all clinical research with Ameluz from Biofrontera Bioscience to our wholly-owned German subsidiary, Biofrontera Discovery. While all our clinical products are performed at centers in the U.S., the trials will nevertheless be organized and managed out of Biofrontera Discovery. We are planning to complete all ongoing trials and in parallel decide on new trials based on maximum commercial benefit for Biofrontera Inc. Three ongoing trials are close to completion. The last patient in the one-year follow-up period for a Phase III trial for superficial basal cell carcinoma will be complete in November or December. This time point provides the data required for FDA approval for this new indication for Ameluz. Enrollment in the Phase III study for actinic keratosis on the extremities, neck, and trunk, and a Phase II trial for moderate to severe acne is expected around the turn of the year. Currently, the extremity study is 69% enrolled, and the acne is at 78%. As the cost savings due to the renegotiated license and supply agreement has not started, but we consume the cost of the clinical trials since June, we will, for a few months, have an increased run rate until the reduced cost of goods balances dissolve towards the end of the year. With that, I'll turn the call over to Fred to walk through the financial details of the second quarter and first half.

Fred Leffler, CFO

Thank you, Hermann, and it's a pleasure to speak with everyone again. I'll begin by discussing our strong second quarter results for 2024. We generated total revenues of $7.8 million in the second quarter, up from $5.8 million in the same period last year, representing a 34% year-over-year increase. This growth comes partly from a recovery in sales after lower performance in the first quarter, which was impacted by reimbursement challenges due to recent healthcare cybersecurity events, as well as our initiatives to boost sales force productivity. Our total operating expenses were $12.9 million in the second quarter of 2024, down from $14.5 million a year earlier. The cost of revenues rose to $4.3 million in the second quarter of 2024, compared to $2.9 million in the prior year, driven by higher sales and associated volume. Selling, general, and administrative expenses fell to $7.9 million this quarter, down from $11.5 million in the previous year, due to our ongoing efforts to manage costs and lower legal expenses. The net loss for the second quarter was $257,000, a significant improvement from a net loss of $9.8 million a year prior, attributed to lower administrative costs and adjustments in non-cash P&L items, including the fair value of warrants and related party investments. Our adjusted EBITDA stood at negative $4.7 million for the second quarter, compared to negative $7.9 million a year ago, reflecting reduced administrative costs. As Andrew indicated, we view adjusted EBITDA as a more accurate representation of our ongoing operations, defined as net income or loss excluding interest, taxes, depreciation, amortization, and specific non-recurring or non-cash items. Please reference the table in yesterday's news release or 10-Q for a reconciliation of GAAP to non-GAAP financial measures. Now, summarizing our first half of 2024 results, total revenues reached $15.8 million, up from $14.6 million in the first half of 2023, a growth of 8% driven by ongoing penetration and adoption of PDT in the AK markets. Total operating expenses for this period were $26.3 million, compared to $28.8 million the prior year. The cost of revenues increased to $8.5 million in the first six months of 2024, up from $7.5 million in the previous year, again fueled by increased volume. Selling, general, and administrative expenses dropped to $17.2 million from $21.4 million as we continued to see benefits from our cost control initiatives and reduced legal expenses. The net loss for this six-month period was $10.7 million, compared to a net loss of $17.3 million last year, with adjusted EBITDA at negative $9.3 million compared to negative $11.9 million for the same period in 2023. Please consult the table in our 10-Q for details on GAAP and non-GAAP financial measures. Now, regarding our balance sheet as of June 30, 2024, we had cash and cash equivalents of $4.4 million, up from $1.3 million at the end of 2023. We've been concentrating on collecting accounts receivable and enhancing our production process. Additionally, with the anticipated summer seasonality, we lowered our accounts receivable from $5.2 million at the end of 2023 to $3.5 million by June 30, 2024. As of July 10, we have fully paid off our short-term debt obligations. We are actively reducing our inventory, which Hermann previously mentioned, and we expect to deplete this excess stock in the coming months. While we will maintain safety stock, it will be kept to a lower amount within industry norms. Following an Ameluz recall in the first quarter, which was not our responsibility, we have received three batches of replacement inventory in July at no cost to us. In May, our shareholders approved an increase in our authorized common shares to 35 million, and upon this approval, the redemption rights and preferred liquidation rights for Series B preferred and any remaining B1 preferred stock were eliminated, leading to the automatic conversion of remaining B1 preferred stock to Series B2 preferred stock. Consequently, all Series B convertible preferred stock has been reclassified from mezzanine to permanent equity. On May 13 and 14, we had 7,998 preferred warrants exercised to purchase B3 convertible preferred stock, generating net proceeds of $7.4 million. Due to the reclassification of the Series B convertible preferred stock to permanent equity, along with the warrant exercises, our shareholders' equity rose to $10.9 million as of June 30, 2024. Finally, let me discuss our capital structure and our fully diluted common share total. As of August 12, we had 5.5 million common shares outstanding, with B1 and B3 convertible preferred shares convertible to 17.7 million common shares. Our warrants, if exercised, would correspond to 2.3 million common shares. Of these warrants, 77,000 are significantly out of the money with a strike price of $100. The more recent warrants have a strike price of $3.55, translating into 2.2 million common shares upon exercise. Lastly, common shares converted through awards under our Omnibus plan would total 1.8 million common shares if fully realized and exercised. Therefore, management estimates our fully diluted common share total at approximately 27.3 million shares. With this overview of our business and recent financial performance, Hermann and I are now ready to take questions from our covering analysts.

Operator, Operator

The first question comes from Jonathan Aschoff with ROTH. Please go ahead.

Jonathan Aschoff, Analyst

Thank you. Good morning, guys. I was curious if I could just drill down on a quarter for sales of each type of lamp in the second quarter and so far in this quarter. Can you give me numbers for each type of lamp, how many you placed in the second quarter and so far in the third quarter?

Hermann Luebbert, CEO

In the second quarter, we placed 57 of the original lamps, and we shipped four of the XL lamps in the last weeks of June. We haven't published anything on the third quarter.

Jonathan Aschoff, Analyst

That's no problem. Thank you. What would be the price hike percentage on October 1?

Fred Leffler, CFO

Price increase for Ameluz will be 5%.

Jonathan Aschoff, Analyst

Got it. Thank you. And by the way, for the acne and the AK extremity trial, do you still expect to publicly release data when you originally said in mid-'25 and second half '25, respectively, for acne and AK? Is that still holding?

Hermann Luebbert, CEO

Yes, it will be in the second half of '25 for both of them.

Jonathan Aschoff, Analyst

Okay. That's very helpful. So when will the royalty savings from the renegotiated LSA become higher than the costs of the trials? When does that whole LSA redo turn positive for you?

Fred Leffler, CFO

Yes. So that's obviously attached to our ordering of inventory, which we will start to do in the fourth quarter of 2024. And then depending on when the shipments come in and everything either late Q1 or early Q2, we'll sort of flip and have more savings than we spent on the clinical trials.

Jonathan Aschoff, Analyst

Okay. And lastly, is there any update on the timing of that low-cost portable lamp development? Or even what has just happened irrespective of timing?

Hermann Luebbert, CEO

Well, we are nearing a first prototype, and after that, we have to go into more formal development according to the design control rules of the FDA.

Jonathan Aschoff, Analyst

All right. That's all I had. Thank you very much.

Operator, Operator

The next question comes from Bruce Jackson with Benchmark Company. Please go ahead.

Bruce Jackson, Analyst

Hi, good morning. And thank you for taking my questions. I wanted to look at the sales numbers for the quarter in a little bit more detail. Generally, the second quarter is seasonally a little bit weaker than the rest of them. And I'm kind of curious to know with the ordering patterns, how much of the results in the quarter were a rebound because of the change health incident? And how much of that is organic growth? And then the second part of that question would be looking forward, how do you expect the rest of the year Q1 to play out in terms of seasonality?

Hermann Luebbert, CEO

Most of the recovery we saw in April. Therefore, we can view May and June as relatively normal months. In all three months, we experienced considerable growth compared to last year. If I had to estimate, I would suggest that at most, half of this is due to a rebound effect.

Bruce Jackson, Analyst

Okay. And then in terms of the R&D spend going forward, what's the run rate on the R&D expense going to be, do you think, for the next couple of quarters?

Fred Leffler, CFO

Yes. Hermann, I can take that. So we're expecting to spend a couple million or so this year in R&D spend. That is correct.

Bruce Jackson, Analyst

So that's for the entire year?

Fred Leffler, CFO

That is correct.

Bruce Jackson, Analyst

From June 1. So then we'd be looking at okay, I got it.

Fred Leffler, CFO

Yes, we have, I would say, maybe $1 million each quarter. I think as of right now, we believe it's going to be used, but that does depend on the recruiting and if there are a pop there, etc. But we do think that over the next six months, it will be somewhere in that ballpark.

Bruce Jackson, Analyst

Okay. You mentioned the data from the AK and the acne trials in the second half with the basal cell carcinoma. Will you be releasing data on that as well?

Hermann Luebbert, CEO

Yes. We expect to release data from the clinical part of the BCC trial this year, followed by the follow-up part in the first half of next year.

Bruce Jackson, Analyst

Okay. All right, great. That’s it for me. Thank you.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Hermann Luebbert for any closing remarks.

Hermann Luebbert, CEO

Yes. Thank you, operator. The second quarter and first half of the year have been a thriving and very encouraging time for us with significant growth in our revenues. I would like all of you to participate in this call, and I would also take the opportunity to thank all our employees for the tremendous effort that went into this process. We look forward to speaking with you then when we report our third quarter 2024 results. Thank you, and have a nice day.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.