# Stablecoin Development Corp: Form 10-Q for the period ended Mar 31, 2021

- Company: [Stablecoin Development Corp](/companies/sdev.md) (CIK 1389545)
- Form: 10-Q
- Filed: 2021-05-06
- Accepted by EDGAR: May 6, 2021, 16:11 ET
- Period: 2021-03-31
- Accession: 0001437749-21-011142
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1389545/000143774921011142/nby20210331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1389545/000143774921011142/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-01-01 to 2021-03-31 | $1.8m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2021-01-01 to 2021-03-31 | $455.0k | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2021-01-01 to 2021-03-31 | $1.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2021-01-01 to 2021-03-31 | $5.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2021-01-01 to 2021-03-31 | −$1.5m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2021-01-01 to 2021-03-31 | −$1.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-01-01 to 2021-03-31 | −$0.04 | us-gaap:EarningsPerShareBasicAndDiluted |
| Basic EPS | 3 months, 2021-01-01 to 2021-03-31 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2021-01-01 to 2021-03-31 | −$1.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2021-01-01 to 2021-03-31 | $25.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2021-03-31 | $10.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-03-31 | $13.1m | us-gaap:AssetsCurrent |
| Total assets | at 2021-03-31 | $14.1m | us-gaap:Assets |
| Current liabilities | at 2021-03-31 | $3.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-03-31 | $3.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2021-03-31 | $11.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,707 characters.

*The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1 of this report, and with our consolidated financial statements and related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission (the “SEC”) on March 25, 2021. This discussion contains forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Words such as “expects,” “anticipates,” “intends,” “will,” “may,” “could,” “should,” “goals,” “potential,” “plans,” “believes,” “estimates,” “predicts,” “projects,” variations of these words, and similar expressions are intended to identify these forward-looking statements. These statements reflect our current views with respect to future events, are based on assumptions, estimates and facts as of the date hereof and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:*

- *the ongoing trajectory of COVID-19 and the extent to which and speed at which the global economy recovers, the nature and extent of ongoing governmental measures to contain the pandemic, the speed and efficacy of the vaccine roll out, and our assumptions, estimates and beliefs regarding the possible effect of the COVID-19 pandemic on general economic conditions, public health and consumer demand, and the Company’s results of operations, liquidity, capital resources and general performance in the future;*
- *the potential for forgiveness of the PPP Loan under the terms of the PPP;*
- *our history of losses and our ability to achieve or maintain sustained profitability;*
- *whether demand develops for our proprietary products;*
- *the impact of competitive or alternative products and pricing;*
- *our ability to obtain adequate financing in the future, as and when we need it;*
- *the adequacy of protections afforded to us by the patents that we own and the cost to us of maintaining, enforcing and defending those patents;*
- *our exposure to and ability to defend third-party claims and challenges to our patent and other intellectual property rights;*
- *our success at managing the risks involved in the foregoing items; and*
- *other factors discussed in this report and our other filings with the SEC.*

*As a result of many factors, such as those listed above and set forth under the section entitled “Risk Factors” in Part II, Item 1A elsewhere in this report or otherwise described in our filings with the SEC, you should not place undue reliance on these forward-looking statements. You should read this report and the documents that we reference and have filed as exhibits thoroughly and with the understanding that forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report and our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, even if new information becomes available in the future.*

### Overview

We are a medical device company predominantly focused on eye care. A majority of our revenue comes from Avenova®, an FDA cleared product sold in the United States that has proven in laboratory testing to have broad antimicrobial properties as it removes foreign material including microorganisms and debris from skin around the eye, including the eyelid. Avenova is formulated with our proprietary, stable and pure form of hypochlorous acid. Avenova is available directly to consumers through our online sales channel and is also often prescribed and dispensed by eyecare professionals for blepharitis and dry-eye disease.

We continue to promote Avenova through all four of our primary distribution channels: (1) our over-the-counter direct-to-consumer model, allowing customers to purchase online or off-the-shelf at retailers and forego time-consuming doctor visits and pharmacy wait times; (2) retail pharmacies, selling to consumers through local pharmacies across 50 states; (3) our Partner Pharmacy Program, providing a consistent patient experience at contracted pricing; and (4) our physician dispensed channel, allowing patients to buy Avenova during office visits to their preferred eye care specialist. We achieved record overall Avenova unit sales in 2020 despite the global COVID-19 pandemic and general economic conditions that challenged many businesses throughout 2020.

Avenova was launched as an over-the-counter product during the second quarter of 2019. By creating a product that does not require a doctor’s prescription, we made Avenova available to many more potential customers and broadened our addressable market. Over-the-counter Avenova also capitalizes on a trend to sell pharmaceutical products directly to consumers in response to increased cost shifting to consumers through high-deductible health plans and adds convenience by allowing customers to forego a time-consuming doctor visit and trip to the pharmacy.

The launch of over-the-counter Avenova online proved to be especially fortuitous during the COVID-19 pandemic as it allowed consumers to order Avenova on-line without a prescription and without leaving their homes.

Over-the-counter Avenova is now our leading product by unit sales and net revenue despite having a lower average net selling price than prescription Avenova. This sales performance reflects our ongoing focus and increasing spend on digital marketing and public relations initiatives to promote Avenova directly to the end consumer. Avenova is available on Amazon.com, Walmart.com, and Avenova.com. Late in 2020, we also began working with CVS, one of the nation’s largest retail chains to make Avenova available at CVS store locations throughout the U.S. and on CVS.com beginning in late February 2021.

Although we expect the online sales channel to continue to be our fastest-growing channel, support for Avenova from the medical community is important to maintaining its reputation as a preferred product. The “doctor recommended” halo effect around our brand remains strong due in part to our continued promotion of prescription Avenova.

Late in 2020, we also launched a rebranded CelleRx® into the beauty industry as CelleRx® Clinical Reset™. Prior to this rebranding, our marketing of CelleRx focused on medical professionals only. Clinical Reset is formulated with NovaBay’s patented, pure, prescription-grade hypochlorous acid (HOCl), the same molecule produced by the human body’s immune system to fight infection and heal wounds. It keeps the skin’s natural barrier intact, which when out of balance can allow acne, rosacea and infection to set in. Clinical Reset is complementary to a daily beauty regime for use on clean skin or over makeup. Prior to this relaunch, our marketing of CelleRx focused on medical professionals only. With the rebranding, we intend to leverage new consumer focused messaging and the product’s pharmaceutical pedigree in robust social media and print advertising campaigns marketing CelleRx Clinical Reset in the beauty industry.

Beyond Avenova and CelleRx, we have developed additional products containing our proprietary, stable and pure form of hypochlorous acid, including NeutroPhase® and PhaseOne® for the wound care market.

On March 31, 2021 we also announced the availability of our new warm eye compress as a complement to Avenova and NovaWipes on Amazon.com and on Avenova.com.

In addition to our proprietary products, we responded to the national need for protective personal equipment (PPE) in the first half of 2020 by tapping into our international supply network and launching the sale of KN95 Masks and other PPE. Although sales from the KN95 Masks were significant in the second quarter of 2020, we experienced a significant decrease in PPE sales in the third and fourth quarters of 2020 as supply shortages narrowed, prices declined and distribution competition increased. We have returned our focus to our core business in eyecare and we do not anticipate dedicating significant future Company resources toward the sale of PPE and we do not expect significant future revenue from PPE sales.

### Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. In preparing these condensed consolidated financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, research and development costs, patent costs, stock-based compensation, income taxes and other contingencies. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates.

While our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies” to the Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report, we believe that the following accounting policies are most critical to fully understanding and evaluating our reported financial results.

### Allowance for Doubtful Accounts

The Company charges bad debt expense and records an allowance for doubtful accounts when management believes it to be unlikely that specific invoices will be collected. Management identifies amounts due that are in dispute and it believes are unlikely to be collected. At March 31, 2021, management reserved $18 thousand for accounts receivable. Management recorded a nominal reserve for accounts receivable at December 31, 2020.

### Inventory

Inventory is comprised of (1) raw materials and supplies, such as bottles, packaging materials, labels, boxes and pumps; (2) goods in progress, which are normally filled but unlabeled bottles; and (3) finished goods. We utilize contract manufacturers to produce our products and the price paid to these manufacturers is included in inventory. Inventory is stated at the lower of cost or estimated net realizable value determined by the first-in, first-out method. At both March 31, 2021 and December 31, 2020, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $0.2 million.

### Leases

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use assets may be required for items such as initial direct costs paid or incentives received.

The Company has elected to combine lease and non-lease components as a single component for all leases in which it is a lessee or a lessor. The lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current. As a result, as of the effective date, the Company no longer recognizes deferred rent on the consolidated balance sheets.

### Revenue Recognition

Revenue generated through the Company’s webstores, Avenova.com and CelleRx.com, for Avenova and CelleRx (as well as the KN95 Masks) is recognized upon receipt by the customer through multiple third-party carriers. Shipping and handling costs are expensed as fulfillment costs and are incurred and included in cost of goods sold in the consolidated statements of operations and comprehensive loss. We present revenue net of sales taxes and refunds.

Revenue generated through Amazon.com and Walmart.com for Avenova and other products is recognized upon fulfillment, which generally occurs upon delivery of the related products to a third-party carrier or, in the case of an Amazon or Walmart delivery, to the customer. We present revenue net of commissions and any related fulfillment and shipping fees charged by these partners. Fees paid to partners for promoting our product are expensed as incurred and are included in sales and marketing expenses within the operating expenses in the consolidated statements of operations and comprehensive loss.

The Company also generates Avenova product revenue through product sales to its major distribution partners. Product supply of Avenova is the only performance obligation contained in these arrangements, and the Company recognizes product revenue upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to, generally upon shipment to the distributor on a “sell-in” basis. Upon recognition of product sales, contract liabilities are recorded for invoiced amounts that are subject to significant reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, and product returns. The Company derives its rate of return from historical data and updates its return rate assumption quarterly. Payment for product supply is typically due 30 days after control transfers to the distributor.

Revenue generated through the Company’s partner pharmacies is recognized when control of the product transfers to the end customer.

Revenue for product sales to CVS is recognized upon transfer of control to CVS, net of estimated future product returns.

The following table summarizes the activity in the accounts related to product revenue allowances (in thousands) during the three months ended March 31, 2021:

|  | Wholesaler/ Pharmacy fees | Cash discounts | Rebate | Returns | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Balance at December 31, 2020 | $(91) | $(10) | $55 | $(527) | $(573) |
| Current provision related to sales made during current period | (77) | (13) | (201) | (282) | (573) |
| Payments | 44 | 13 | 133 | 162 | 352 |
| Balance at March 31, 2021 | $(124) | $(10) | $(13) | $(647) | $(794) |

### Cost of Goods Sold

Cost of goods sold includes third-party manufacturing costs, shipping and handling costs, and other costs associated with products sold. Cost of goods sold also includes any necessary allowance for excess and obsolete inventory along with lower of cost and estimated net realizable value.

### Research and Development Costs

The Company charges research and development costs to expense as incurred. These costs include all costs associated with research, development and regulatory activities, including submissions to the Food and Drug Administration (“FDA”).

### Advertising Costs

Advertising costs are expensed in the period in which the costs are incurred. Advertising expenses were $0.7 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively.

### Stock-Based Compensation

The Company’s stock-based compensation includes grants of stock options and restricted stock units (“RSUs”) to employees, consultants and non-employee directors. The expense associated with these grants is recognized in the Company’s consolidated statements of stockholders’ equity based on their fair values as they are earned under the applicable vesting terms. For stock options granted, the fair value of the stock options is estimated using a Black-Scholes option pricing model. See Note 13, “Equity-Based Compensation” for further information regarding stock-based compensation expense and the assumptions used in estimating that expense. The Company accounts for RSUs issued to employees and non-employees (consultants and advisory board members) based on the fair market value of the Company’s common stock as of the date of issuance.

### Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.

### Common Stock Warrant Liabilities

The Company accounts for common stock purchase warrants issued in connection with its equity offerings in accordance with the provisions of ASC 480, *Distinguishing Liabilities from Equity*, and ASC 815, *Derivatives and Hedging.*

The Company accounts for common stock purchase warrants issued in connection with share-based compensation arrangements in accordance with the provisions of ASC 718, *Stock Compensation,* which encompasses the provisions of ASC 480, *Distinguishing Liabilities from Equity.*

The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). Additionally, for common stock purchase warrants accounted for in accordance with ASC 718, *Stock Compensation,* the Company classifies as liabilities any contracts where it believes the warrants are deemed to be probable of issuance.

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 and comprehensive loss. The fair values of these warrants are determined using the Black-Scholes option pricing model, the Binomial Lattice (“Lattice”) valuation model, or the Monte Carlo simulation model where deemed appropriate. These values are subject to a significant degree of management’s judgment.

### Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies” to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for information on recent accounting pronouncements.

### Results of Operations

### Comparison of the Three Months Ended March 31, 2021 and 2020

| Statement of Operations Sales: | Three Months Ended March 31, 2021 | 2020 | Dollar Change | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Product revenue, net | $1,801 | $1,892 | $(91) | (5%) |
| Other revenue, net | 6 | — | 6 | 100% |
| Total sales, net | 1,807 | 1,892 | (85) | (4%) |
| Product cost of goods sold | 455 | 581 | (126) | (22%) |
| Gross profit | 1,352 | 1,311 | 41 | 3% |
| Research and development | 5 | 9 | (4) | (44%) |
| Sales and marketing | 1,680 | 1,560 | 120 | 8% |
| General and administrative | 1,187 | 1,277 | (90) | (7%) |
| Total operating expenses | 2,872 | 2,846 | 26 | 1% |
| Operating loss | (1,520) | (1,535) | 15 | (1%) |
| Non-cash gain on changes in fair value of warrant liability | — | 137 | (137) | (100%) |
| Non-cash gain on changes in fair value of embedded derivative liability | — | 2 | (2) | (100%) |
| Other income (expense), net | 2 | (186) | 188 | (101%) |
| Loss before provision for income taxes | (1,518) | (1,582) | 64 | (4%) |
| Provision for income taxes | — | — | — | — |
| Net loss and comprehensive loss | $(1,518) | $(1,582) | $64 | (4%) |

### Sales, Product Cost of Goods Sold and Gross Profit

Product revenue, net, decreased by $0.1 million, or 5%, to $1.8 million for the three months ended March 31, 2021, from $1.9 million for the three months ended March 31, 2020. The change in product revenue, net, is primarily the result of an overall decrease in revenue generated from products other than Avenova during the three months ended March 31, 2021 when compared to the three months ended March 31, 2020. Avenova revenue increased by 2% to $1.6 million for the three months ended March 31, 2021 from $1.5 million for the three months ended March 31, 2020. The increase reflects continued higher number of over-the-counter units sold, partially offset by a decrease in the net number of units sold through our pharmacy channels. The increase in revenue due to unit sales was partially offset by the lower average net selling price associated with over-the-counter units.

Cost of goods sold decreased by $0.1 million, or 22%, to $0.5 million for the three months ended March 31, 2021, from $0.6 million for the three months ended March 31, 2020. The decrease was the net result of a decrease in the cost of products other than Avenova sold during the 2021 period which was partially offset by an increase in the relatively lower cost of Avenova products sold.

Gross profit increased by 3%, to $1.4 million for the three months ended March 31, 2021, from $1.3 million for the three months ended March 31, 2020. The increase was the net result of the changes in product revenue, net, and product costs of goods sold discussed above.

### Sales and marketing

Sales and marketing expenses increased by $0.1 million, or 8%, to $1.7 million for the three months ended March 31, 2021, from $1.6 million for the three months ended March 31, 2020. The increase was primarily due to an increase in Avenova and CelleRx digital advertising and was partly off-set by a decrease in sales representative headcount.

### General and administrative

General and administrative expenses decreased by $0.1 million, or 7%, to $1.2 million for the three months ended March 31, 2021, from $1.3 million for the three months ended March 31, 2020. The decrease was primarily the result of an insurance reimbursement for costs incurred in conjunction with an arbitration with the Company’s former Interim President & Chief Executive Officer and Chief Financial Officer as further described in Note 8, “Commitments and Contingencies”, to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

### Non-cash gain on changes in fair value of warrant liability

The Company recorded a non-cash gain on a change in fair value of warrant liability of $0.1 million for the three months ended March 31, 2020. There was no comparable result for the three months ended March 31, 2021. For additional information regarding the warrants and their valuation, please see Note 11, “Warrant Liability”, to the Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report.

### Non-cash gain on changes in fair value of embedded derivative liability

The Company recorded a non-cash gain on a change in the fair value of embedded derivative liability of $2 thousand for the three months ended March 31, 2020. There was no comparable result for the three months ended March 31, 2021. For additional information, please see Note 10, “Convertible Note”, to the Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report.

### Other income (expense), net

Other income, net was $2 thousand for the three months ended March 31, 2021, compared to other expense, net, of $0.2 million for the three months ended March 31, 2020. The 2020 result was due primarily to interest due on the Promissory Note issued in February 2019 and the amortization of discount and issuance cost related to the Convertible Note issued in March 2019. For additional information regarding the Promissory Note and Convertible Note, please see Note 9, “Related Party Note Payable” and Note 10, “Convertible Note”, to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

### Financial Condition, Liquidity and Capital Resources

As of March 31, 2021, our cash and cash equivalents were $10.5 million, compared to $12.0 million as of December 31, 2020. Based primarily on the funds available at March 31, 2021, management believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to enable the Company to meet its planned operating expenses at least through May 6, 2022. However, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control. Additionally, our future results, cash expenditures and ability to obtain additional external financing could be adversely affected by the COVID-19 pandemic and general adverse economic conditions.

### Net Cash Used in Operating Activities

Net cash used in operating activities was $1.4 million for the three months ended March 31, 2021, which consisted primarily of a net loss of $1.5 million, adjusted by stock-based compensation expenses of $0.2 million, and a net change of $0.1 million in our net operating assets and liabilities.

Net cash used in operating activities was $0.9 million for the three months ended March 31, 2020, which consisted primarily of a net loss of $1.6 million, adjusted by non-cash gain of $0.1 million on the change in fair value of warrant liability, stock-based compensation expenses of $0.1 million, non-cash interest expense related to amortization of debt issuance cost and debt discount of $0.1 million, and a net change of $0.7 million in our net operating assets and liabilities.

### Net Cash Used in Investing Activities

For the three months ended March 31, 2021, net cash used in investing activities for the purchase of property and equipment was $25 thousand, with no comparable result for the three months ended March 31, 2020.

### Net Cash Used in Financing Activities

Net cash used in financing activities was $0.4 million for the three months ended March 31, 2020. The Company received an additional $0.2 million from the exercise of warrants, which was offset by repayments of $0.6 million on the Convertible Note issued to Iliad Research and Trading L.P. during the first quarter of 2020.

There was no cash used in, or provided by, financing activities during the three months ended March 31, 2021.

### Net Operating Losses and Tax Credit Carryforwards

As of December 31, 2020, we had net operating loss carryforwards for federal and state income tax purposes of $117.3 million and $96.2 million, respectively. The federal net operating loss carryforwards consist of $100.1 million generated before January 1, 2018, which will begin to expire in 2024 and $17.2 million that will carryforward indefinitely but are subject to an 80% limitation for years following December 31, 2020. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) changed net loss carryforward provisions, allowing a full utilization of net operating loss carryforwards through December 31, 2020. The state net operating loss carryforwards will begin to expire in 2028. The state net operating loss carryforwards will begin to expire in 2028. As of December 31, 2020, we also had tax credit carryforwards for federal income tax purposes of $1.3 million and $0.3 million for state tax purposes. If not utilized, the federal tax credits will begin expiring in 2026. The state tax credits have an indefinite carryover period.

Current federal and California tax laws include substantial restrictions on the utilization of net operating loss carryforwards in the event of an ownership change of a corporation. Accordingly, our ability to utilize net operating loss carryforwards may be limited as a result of such ownership changes. Such a limitation could result in the expiration of carryforwards before they are utilized.

### Inflation

We do not believe that inflation has had a material impact on our business and operating results during the periods presented, and we do not expect it to have a material impact in the near future, although there can be no assurances that our business will not be affected by inflation in the future.

### Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of March 31, 2021.

### Seasonality

Consistent with our peers in the United States pharmaceutical industry, our business experiences seasonality with the first quarter of each year typically being the lowest revenue quarter. This annual phenomenon is due to consumers facing the need to satisfy health insurance deductibles and changes to copays as each new insurance year begins.

### Contractual Obligations

Our contractual cash commitments as of March 31, 2021 were as follows (in thousands):

| Contractual Obligations | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Facility leases | $404 | $— | $— | $— | $404 |
| Equipment leases | 16 | 9 | — | — | 25 |
| Total | $420 | $9 | $— | $— | $429 |

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Our commitments as of March 31, 2021 consisted primarily of a facility operating lease and an operating lease for two copiers.

The total commitment for the facility lease as of March 31, 2021 was $0.4 million due over the lease term, compared to $0.5 million as of December 31, 2020.

We had an operating lease for 2 copiers as of March 31, 2021. The total commitment for the lease as of March 31, 2021 was $25 thousand due over the lease terms, compared to $29 thousand as of December 31, 2020.

See Note 8, “Commitments and Contingencies” to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further information regarding these leases.

### Recent Events

The disclosure set forth in Part II, Item 5 of this report regarding certain compensation related decisions by the Company’s Board of Directors is incorporated herein by reference.

## Market risk

As filed, 232 characters.

Our market risk consists principally of interest rate risk on our cash and cash equivalents.

With most of our focus on Avenova in the domestic U.S. market, we do not have any material exposure to foreign currency rate fluctuations.

## Controls and procedures

As filed, 2,141 characters.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Assessing the costs and benefits of such controls and procedures necessarily involves the exercise of judgment by management. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

### Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during the quarter ended March 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 305 characters.

For information regarding factors that could affect our business, results of operations, financial condition and liquidity, see the risk factors discussed under Part I, Item 1A included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 25, 2021.

Filed May 6, 2021.
Source: SEC EDGAR, the filing index for accession 0001437749-21-011142. Last ingested by Listed: Nov 12, 2026, 18:38 ET. No prices; not investment advice.