Earnings Transcript for BFRI - Q3 Fiscal Year 2023

Operator: Good day, and welcome to the Biofrontera Inc. Third Quarter 2023 Financial Results and Business Update Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tirth Patel with LHA Investor Relations. Please go ahead.

Tirth Patel: Good morning, and welcome to Biofrontera Inc's third quarter 2023 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 the live broadcast today, November 10, 2023. 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 these measures provide useful information for investors, yet they 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 yesterday afternoon'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, amortization and certain other nonrecurring or noncash items. With that said, I would now like to turn the call over to Hermann Luebbert, Chairman and CEO and Founder of Biofrontera. Hermann?

Hermann Luebbert: Thank you, Tirth, and many thanks to everyone joining us this morning. On today's call, I'll provide an update on Biofrontera's growth strategy and detail how improvements to our organization have positively impacted the top and bottom line. Fred Leffler, our CFO, will follow with a discussion of our Q3 financial results, and we will conclude with questions and answers. During the third quarter of 2023, we continued to execute on our strategy to optimize our organization. This initiative has been transformative for the company. We have shifted resources and costs from administration to sales, sales training, marketing, medical and reimbursement support. Specifically, we increased the size of our sales force by nearly 30%, and this not only expanded our coverage to 40 territories, but also bought over 140 years of health care and dermatology experience into our hands. Furthermore, we grew our medical liaison team to 7, working alongside sales on medical education. Lastly, we initiated building an in-house field reimbursement team, helping doctors' offices on site to solve issues they may face with reimbursement, and we increased our staff for sales training. The investment in our commercial organization is a cornerstone of our growth strategy and our path towards becoming cash flow positive. It is an ongoing effort in any commercial organization to find the optimal balance between sales and sales support for the respective state of the organization, and we have made significant adaptations this year, which we believe drove our revenue growth. This expansion has been crucial for continued education of dermatologists and patients about actinic keratosis and the many benefits of treatment with Ameluz-PDT. With the expansion, we significantly improved our reach in strategic accounts across the United States. The key elements of our strategy include the following

Fred Leffler: Thank you, Hermann, and good morning, everyone. So it's good to be chatting here and looking at a strong third quarter, beating our estimates. So starting with the top line. Net revenue for the three months ended September 30, 2023, was $8.9 million, an increase of $4.3 million or about 106% over the prior year. For the first nine months of 2023, net revenue was $23.5 million, up from $18.5 million last year. This growth was driven by the commercial expansion that Hermann described, increased adoption by dermatologists and buy-in ahead of a price increase for Ameluz on October 1. Operating expenses were 13.5% for the third quarter of 2023 compared with $8 million for the third quarter of 2022. The $5.2 million increase included approximately $3 million due to our commercial expansion, increased investment in medical affairs and reimbursement, along with some severance as we pivoted resources to more revenue-generating roles and, of course, the addition and the increase of cost of revenue, which I'll touch on in a moment. Year-to-date operating expenses were $42.3 million and this compares with $31.5 million for the first nine months of last year. About $2.2 million of this increase was due to legal fees, primarily from settlement of litigation in the first half of 2023, along with severance expenses in the commercial expansion that's mentioned earlier and the increased cost of revenue. So moving to cost of revenue. For the third quarter, it was $4.6 million compared to $2.2 million this year, which reflects the higher sales of Ameluz. Cost of revenue for the first nine months was $12.1 million compared to $9.9 million last year. SG&A expenses were $8.7 million for the third quarter of 2023 compared with $7.9 million for the third quarter of 2022, with the increase primarily driven by higher personnel costs due to the commercial expansion, severance and some legal expense. The net loss for the third quarter was - sorry, the net loss for the third quarter of 2023 was $6.3 million or $4.64 per share, and this compares with a net loss of $2.6 million or $2.26 per share for the prior year quarter. I will note that these figures are in a split adjusted basis. Net loss for the first nine months of 2023 was $23.7 million compared with net income of $2.1 million for the first nine months of 2022. As net income or loss comprises of multiple noncash items, I'll refer you to - or we refer to the adjusted EBITDA as a clear reflection of the business' status. Adjusted EBITDA was negative $3.9 million for the quarter compared with negative $5 million last year. The decrease was primarily driven by increased revenues, partially offset by higher SG&A expense. Adjusted EBITDA for the first nine months of the year was negative $15.8 million compared with negative $4.1 million during the same period in 2022. I refer you to the table in the press release that was issued yesterday afternoon for a reconciliation of GAAP to non-GAAP financial measures. Turning to our balance sheet. As of September 30, 2023, we had cash and cash equivalents of $3.4 million compared with $17.2 million as of December 31, 2022. In addition, we had a $3.3 million investment in shares of Biofrontera AG as of September 30. Subsequent to the close of the quarter, we raised $4.5 million in a registered direct offering priced at the market. As we'll end the year with a significant stock of inventory, we are not anticipating making any inventory purchases for at least the first half of 2024, and we'll continue to manage our working capital very closely. Based on the quarter's strong results, we are on track to hit our previously announced goals with the seasonally strongest quarter ahead of us, which is fourth quarter. And based on multiple positive indicators, such as lamp placements that Hermann mentioned, we expect revenue for the full year of 2023 to be at least 25% compared with 2022, and we expect to be cash flow positive within approximately one to 1.5 years. So with that overview of our business, and the recent financial performance, Hermann and I are now ready to take questions from our covering analysts. Operator?

Operator: [Operator Instructions] The first question today comes from Jonathan Aschoff with ROTH. Please go ahead.

Jonathan Aschoff: Close enough. Thanks. Hi, guys. Good morning. I have a bunch of lamp questions. Just kind of wondering the extent to which the lamp is the thing other than Ameluz that might be more hindering of any growth that could otherwise be if there were more lamps out there. So are there any residual supply chain constraints that hinder the XL lamp production? Is the smaller lamp production hindered also by any similar issues, if any such issues still exist?

Hermann Luebbert: No, we are not aware of any supply chain issues with the small lamp, so that has always been delivered according to our orders. With the large lamps, the supply chain issues should all be solved and there are still two, three minor corrections out there. But we are confident that we'll be able to launch that lamp in Q2 next year.

Jonathan Aschoff: Okay. And when you say in the first nine months of 2023, you increased the smaller lamp, BF-RhodoLED by 101, up sharply from 55 in the preceding quarter. That preceding quarter is at the end of the year last year, it was 55, to which you added 101, and now you have 156 lamps out there commercially as of the end of September. Is that correct?

Hermann Luebbert: No, we have lamps out there before. So the total number of lamps we have out there is actually much higher.

Jonathan Aschoff: Okay. But what -

Fred Leffler: Yes, Jonathan, as of the end of the quarter, we had approximately 650 lamps out in the field.

Hermann Luebbert: Okay. Because that statement then is quite confusing. It makes it sound there's far fewer lamps out there than there actually are.

Fred Leffler: Well, we play - sorry, we placed 101 additional new lamps year-to-date in 2023 as of September 30. So the - my takeaway is that we're really pushing that as a catalyst for adding new customers, growing those customers and the field therapy. So we want to get our footprint and our RhodoLEDs and XLs out in the field as much as possible.

Jonathan Aschoff: So is there - with that in mind, is there immediate market demand for every single LED and every single LED XL lamp you make? I mean are they just hoovered up by the derms? Or do any of them sit around after manufacture?

Hermann Luebbert: Well, it's - go ahead, Fred.

Fred Leffler: I was going to say we've been placing them pretty quickly. And last year - well, we have definitely had a push this year on lamps. And I will say we are moving them very quickly. And we are expecting to sort of ramp down on the RhodoLEDs as we're planning the launch of the XLs. I would not characterize it as they're sitting around. We're trying to deploy everything we have in stock. And at least this is, just hearing from the field, we haven't taken any orders obviously, but there is decent excitement and we believe that we're going to be able to move the XLs quickly next year as well. They're not going to be sitting around in a warehouse, if that's the question.

Jonathan Aschoff: So as far as like manufacturing ratio of small to XLs, it's still overwhelmingly small because of a little bit of supply chain residual on the XLs? Or what's kind of that manufacturing ratio?

Hermann Luebbert: You mean on the XLs or the small lamps? So for the...

Jonathan Aschoff: What's the ratio of small to XLs that you're getting to the field over any period of time?

Hermann Luebbert: Would you expect that next year, the majority of the lamps that we will get into the field are actually the XLs because many doctors are waiting for that. I would like to add one more statement to your further question. So there has never been an out-of-stock situation for the small lamp.

Jonathan Aschoff: That's helpful. And the portable lamps, did you say earlier in the call when they were to be available? Or is it still kind of hard to tell when they'll first be available?

Hermann Luebbert: Well, that's still hard to tell. It's also a question of the amount of money that we can invest into this project. We could certainly speed it up if we have the funds available for that, so that is still at least one or two years out.

Jonathan Aschoff: And you would expect the portable to eclipse the two currently available lamps, right? Or is the surface area not as big as the XL?

Hermann Luebbert: It's not quite as big, but it's also much bigger than with the current with the small lamp, so it's somewhere two-thirds in between towards the XL.

Jonathan Aschoff: Okay. Thanks. It sounds like that's moving along nicely. Thank you.

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

Bruce Jackson: Hi. Good morning, and thank you for taking my questions. I wanted to start off with XEPI. So is the new contract manufacturer qualified yet?

Hermann Luebbert: The new manufacturer is qualified, so the pilot batches have been done, and the manufacturer has been - the pilot batches have been submitted to the FDA and approved. And so what comes next is the qualification batches, and they will be produced this month. And with three months stability on these batches, we can actually start selling them.

Bruce Jackson: And that was going to be my next question about XEPI, so we said you were contemplating a relaunch. Do you have any more specificity on are you going to relaunch the product and when during 2024 would you be doing that, if you do it?

Hermann Luebbert: That hasn't been fully determined yet, how to like best use of the product in our portfolio. And there are many options that we are currently looking at or several options that we are looking at. So this will be decided relatively shortly in preparation for the ability to launch.

Bruce Jackson: Okay. Great. And then a quick question about the 3-tube data. Has that been submitted to the FDA yet?

Hermann Luebbert: Not yet. It will be submitted in the course of this month.

Bruce Jackson: Okay. Great. And then last question about the price increase and then the 25% - or better guidance for the year. So how much of the revenue gap pulled forward is due to the price increase do you think in the third quarter?

Hermann Luebbert: That's - it's always difficult to say how much was pulled forward. When we look at our historical experience with price increases and buy-in into that, then it's almost a couple of thousand tubes. However, given the fact that Q4 is our strongest quarter, we don't expect that Q4 now will be a bad quarter because everybody bought everything in Q3, I assume that this is where your question is heading at. So we still expect a significant increase in the fourth quarter, but not anything like the 100% we saw in Q3.

Bruce Jackson: Got it. So still up year-over-year and sequentially over the third quarter.

Hermann Luebbert: Yes.

Bruce Jackson: Okay, great. All right. Thank you very much.

Hermann Luebbert: Thank you, Bruce.

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: Thank you all for the questions, to analysts, and thanks to everybody again for listening in. To summarize, I'm very encouraged for the strong sales growth we delivered this past quarter and by the increase in the number of Ameluz tube orders and RhodoLED lamp installations. As I mentioned, we remain on track to grow the revenues at least 25% this year, driven primarily by Ameluz sales and a maturing commercial organization. So we look forward to speaking with you again when we report our fourth quarter and full year 2024 results. Thank you, and have a nice day.

Fred Leffler: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.