# Stablecoin Development Corp: Form 10-Q for the period ended Sep 30, 2021

- Company: [Stablecoin Development Corp](/companies/sdev.md) (CIK 1389545)
- Form: 10-Q
- Filed: 2021-11-12
- Accepted by EDGAR: Nov 12, 2021, 08:34 ET
- Period: 2021-09-30
- Accession: 0001437749-21-026313
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1389545/000143774921026313/nby20210930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1389545/000143774921026313/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-07-01 to 2021-09-30 | $1.8m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2021-01-01 to 2021-09-30 | $5.8m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2021-07-01 to 2021-09-30 | $493.0k | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2021-01-01 to 2021-09-30 | $1.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2021-07-01 to 2021-09-30 | $1.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2021-01-01 to 2021-09-30 | $4.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2021-07-01 to 2021-09-30 | $10.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2021-01-01 to 2021-09-30 | $36.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2021-07-01 to 2021-09-30 | −$2.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2021-01-01 to 2021-09-30 | −$5.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2021-07-01 to 2021-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2021-01-01 to 2021-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-07-01 to 2021-09-30 | −$2.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2021-01-01 to 2021-09-30 | −$5.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-07-01 to 2021-09-30 | −$0.05 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2021-01-01 to 2021-09-30 | −$0.13 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2021-01-01 to 2021-09-30 | −$4.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2021-01-01 to 2021-09-30 | $44.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2021-09-30 | $9.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-09-30 | $11.5m | us-gaap:AssetsCurrent |
| Total assets | at 2021-09-30 | $12.2m | us-gaap:Assets |
| Current liabilities | at 2021-09-30 | $2.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-09-30 | $2.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2021-09-30 | $9.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 41,203 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:*

- *costs relating to the acquisition of DERMAdoctor and the Company recognizing the anticipated benefits of the acquisition and integrating DERMAdoctor’s business into the Company’s business, which may be affected by, among other things, competition, and our ability to grow and manage growth profitability and retain our key employees;*
- *receipt of the stockholder approvals required by the Private Placement, which, if not received, will cause the Company to be subject to ongoing restrictions on its ability to raise additional capital as may be needed in the future;*
- *the ongoing trajectory of COVID-19, including its variants, 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;*
- *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 either online or at select brick and mortar stores; (2) retail pharmacies, dispensing Avenova to patients through national pharmacy chains across all 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.

Avenova was launched as a prescription only product in 2016. To expand our addressable market, we launched Avenova as an over-the-counter product during the second quarter of 2019. By creating a consumer driven product that does not require a doctor’s prescription, we made Avenova available to many more potential customers. Over-the-counter Avenova also capitalizes on a trend to sell over-the-counter pharmaceutical products directly to consumers 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 online 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 Avenova sold through pharmacy channels. This sales performance reflects our ongoing focus and spend on digital marketing, social media and public relations initiatives to promote Avenova directly to the end consumer. Avenova is available on Amazon.com, Walmart.com, and Avenova.com. Beginning in February 2021, Avenova became available at CVS store locations throughout the U.S. and on CVS.com, one of the nation’s largest retail chains.

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.

Earlier this year, we launched a rebranded CelleRx® into the beauty industry as CelleRx® Clinical Reset™. Clinical Reset is formulated with NovaBay’s patented, pure, prescription-grade hypochlorous acid, a naturally occurring oxidant that is also produced by white blood cells within the human body. 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.

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. NeutroPhase is only sold in China through our exclusive distributor, Pioneer Pharma Co. Ltd. PhaseOne is only sold in the United States through our exclusive distributor, PhaseOne Health, LLC.

Last year, we responded to the national need for PPE 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 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 future Company resources toward the sale of PPE and we do not expect future revenue from PPE sales.

During the second quarter of this year, we introduced two complementary products to support the use of Avenova. Our Warm Eye Compress not only provides effective heat therapy for many eye conditions, but it also improves Avenova’s ability to restore the eyes’ natural defenses against tear evaporation. Additionally, the i-Chek Illuminated Eye Examination Mirror allows Avenova customers to get a closer look at common eye conditions that are often of concern to Avenova customers. These eye conditions include blepharitis, chalazion and styes. The i-Chek also helps Avenova users who suffer from dry eye to identify dirt, oil or debris that need to be removed from the eyelids and eyelashes for optimum ocular health. The use of Avenova and both products is meant to provide Avenova customers with a holistic approach to lid and lash hygiene.

### 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. Management recorded no reserve for accounts receivable at September 30, 2021 and 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 September 30, 2021 and December 31, 2020, management recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $0.1 million and $0.2 million, respectively.

### 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 previously offered and sold) 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, which generally occurs upon delivery of the related products to a third-party carrier, net of estimated future product returns.

The following table summarizes the activity in the accounts related to product revenue allowances during the nine months ended September 30, 2021 (in thousands):

|  | 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 | (188) | (38) | (564) | (423) | (1,213) |
| Payments | 194 | 41 | 499 | 517 | 1,250 |
| Balance at September 30, 2021 | $(85) | $(7) | $(10) | $(433) | $(536) |

### 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”).

### Stock-Based Compensation

The Company’s stock-based compensation includes grants of stock options and restricted stock units (“RSUs”) to employees, non-employee directors and consultants. The expense associated with these grants is recognized in the Company’s consolidated statements of operations and comprehensive loss 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 (board members and consultants) 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 September 30, 2021 and 2020

*(in thousands)*

| Statement of Operations Sales: | Three Months Ended September 30, 2021 | 2020 | Dollar Change | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Product revenue, net | $1,834 | $2,167 | $(333) | (15%) |
| Other revenue, net | 6 | 3 | 3 | 100% |
| Total sales, net | 1,840 | 2,170 | (330) | (15%) |
| Product cost of goods sold | 493 | 536 | (43) | (8%) |
| Gross profit | 1,347 | 1,634 | (287) | (18%) |
| Research and development | 10 | 125 | (115) | (92%) |
| Sales and marketing | 1,855 | 1,692 | 163 | 10% |
| General and administrative | 1,771 | 1,879 | (109) | (6%) |
| Total operating expenses | 3,636 | 3,696 | (60) | (2%) |
| Operating loss | (2,289) | (2,062) | (226) | 11% |
| Non-cash loss on changes in fair value of warrant liability | - | (1,589) | 1,589 | (100%) |
| Non-cash gain on changes in fair value of embedded derivative liability | - | 1 | (1) | (100%) |
| Other income, net | - | 429 | (429) | (100%) |
| Loss before provision for income taxes | (2,289) | (3,221) | 933 | (29%) |
| Provision for income taxes | - | - | - | - |
| Net loss and comprehensive loss | $(2,289) | $(3,221) | $933 | (29%) |

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

Product revenue, net, decreased by $0.3 million, or 15%, to $1.8 million for the three months ended September 30, 2021, from $2.2 million for the three months ended September 30, 2020. The change in product revenue, net, is primarily the result of $0.2 million in revenue, net, generated from sales of PhaseOne, a private label prescription skin and wound care product, and $0.1 million in revenue, net, generated from the sale of PPE, during the three months ended September 30, 2020 with no comparable revenue in the 2021 period. We do not anticipate dedicating future Company resources toward the sale of KN95 Masks or other PPE and we do not expect any 2021 or future revenue from KN95 Masks or other PPE.

Avenova revenue, net, was $1.8 million for both the three months ended September 30, 2021 and 2020.

Cost of goods sold decreased by $43 thousand or 8%, to $493 thousand for the three months ended September 30, 2021, from $536 thousand for the three months ended September 30, 2020. The decrease was primarily the result of cost of goods sold from the sale of PhaseOne and PPE during the three months ended September 30, 2020, with no comparable result in the 2021 period. This decrease was partially offset by the overall increase in the number of Avenova units sold during the three months ended September 30, 2021, as compared to the 2020 period.

Gross profit decreased by $0.3 million, to $1.3 million for the three months ended September 30, 2021, from $1.6 million for the three months ended September 30, 2020. The decrease was primarily due to the lack of sales of the KN95 Masks and other PPE in the 2021 period, partially offset by the increase in overall Avenova revenue.

### Research and Development

Research and development expenses decreased by $115 thousand to $10 thousand for the three months ended September 30, 2021, from $125 thousand for the three months ended September 30, 2020. The decrease was primarily the result of one-time regulatory expenses incurred in the 2020 period with no comparable expenditures in the 2021 period.

### Sales and Marketing

Sales and marketing expenses increased by $0.2 million, or 10%, to $1.9 million for the three months ended September 30, 2021, from $1.7 million for the three months ended September 30, 2020. The increase was primarily due to an increase in Avenova digital advertising and related consulting costs and was partly off-set by a decrease in sales representative headcount.

### General and Administrative

General and administrative expenses decreased by $0.1 million, to $1.8 million for the three months ended September 30, 2021, from $1.9 million for the three months ended September 30, 2020. The decrease was primarily the result of legal expenses and the settlement amount incurred in conjunction with a dispute with the Company’s former Interim President & Chief Executive Officer and Chief Financial Officer (see Note 8, “Commitments and Contingencies”) in the 2020 period with no comparable costs incurred in the 2021 period. This decrease was partially offset by legal costs incurred in the 2021 period in conjunction with the Company’s acquisition of DERMAdoctor (see Item 1, Note 18, “DERMAdoctor LLC Transaction”) with no comparable cost incurred in the 2020 period. The Company expects general and administrative expenses to increase temporarily due to continued costs to close the acquisition and costs to integrate DERMAdoctor’s operations, primarily in the fourth quarter of 2021 and the first quarter of 2022.

### Non-Cash Loss on Changes in Fair Value of Warrant Liability

The Company recorded a non-cash loss on a change in fair value of warrant liability of $1.6 million for the three months ended September 30, 2020. There was no comparable result for the three months ended September 30, 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 adjustment to the fair value of embedded derivative liability resulted in a gain of $1 thousand for the three months ended September 30, 2020. There was no comparable adjustment for the nine months ended September 30, 2021. For additional information, please see Note 10, “Convertible Note”, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

### Other Income, Net

The Company recorded other income, net of $429 thousand for the three months ended September 30, 2020. There was no comparable result for the three months ended September 30, 2021. The 2020 result consisted primarily of income of $432 thousand representing qualifying expenses incurred under the PPP loan program. For additional information, see Note 17 “Paycheck Protection Program” The income was partially offset by the 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 1, Item 1 of this report.”

### Comparison of the Nine Months Ended September 30, 2021 and 2020

*(in thousands)*

| Statement of Operations Sales: | Nine Months Ended September 30, 2021 | 2020 | Dollar Change | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Product revenue, net | $5,761 | $8,038 | $(2,277) | (28%) |
| Other revenue, net | 19 | 8 | 11 | 138% |
| Total sales, net | 5,780 | 8,046 | (2,266) | (28%) |
| Product cost of goods sold | 1,562 | 3,157 | (1,595) | (51%) |
| Gross profit | 4,218 | 4,889 | (671) | (14%) |
| Research and development | 36 | 249 | (213) | (86%) |
| Sales and marketing | 5,323 | 4,675 | 648 | 14% |
| General and administrative | 4,527 | 4,633 | (106) | (2%) |
| Total operating expenses | 9,886 | 9,557 | 329 | 3% |
| Operating loss | (5,668) | (4,668) | (1,000) | 21% |
| Non-cash loss on changes in fair value of warrant liability | - | (5,224) | 5,224 | (100%) |
| Non-cash gain on changes in fair value of embedded derivative liability | - | 3 | (3) | (100%) |
| Other income, net | 2 | 605 | (602) | (100%) |
| Loss before provision for income taxes | (5,666) | (9,284) | 3,619 | (39%) |
| Provision for income taxes | - | (1) | 1 | (100%) |
| Net loss and comprehensive loss | $(5,666) | $(9,285) | $3,620 | (39%) |

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

Product revenue, net, decreased by $2.3 million, or 28%, to $5.8 million for the nine months ended September 30, 2021, from $8.0 million for the nine months ended September 30, 2020. The change in product revenue, net, is primarily the result of revenue generated from the sale of KN95 Masks and other PPE resulting in $3.1 million in product revenue, net, during the nine months ended September 30, 2020 with no comparable revenue in the 2021 period. We do not anticipate dedicating future Company resources toward the sale of KN95 Masks or other PPE and we do not expect any 2021 or future revenue from KN95 Masks or other PPE.

Avenova revenue increased by 16% to $5.2 million for the nine months ended September 30, 2021, from $4.5 million for the nine months ended September 30, 2020. The increase reflects a continued higher number of overall Avenova units sold, primarily a result of an increase in the number of over-the-counter units. The increase in over-the-counter units includes the impact of our ongoing focus and increasing spend on digital marketing and social media initiatives to promote Avenova directly to end consumers. The overall increase in revenue due to unit sales was also partially offset by the lower average net selling price associated with over-the-counter units as compared to units sold through our pharmacy channels.

Cost of goods sold decreased by $1.6 million, or 51%, to $1.6 million for the nine months ended September 30, 2021, from $3.2 million for the nine months ended September 30, 2020. The decrease was primarily the result of cost of goods sold from the sale of KN95 Masks and other PPE during the nine months ended September 30, 2020, with no comparable result in the 2021 period. This decrease was partially offset by the overall increase in the number of Avenova units sold during the nine months ended September 30, 2021, as compared to the 2020 period.

Gross profit decreased by $0.7 million, to $4.2 million for the nine months ended September 30, 2021, from $4.9 million for the nine months ended September 30, 2020. The decrease was primarily due to the lack of sales of the KN95 Masks and other PPE in the 2021 period, partially offset by the increase in overall Avenova revenue.

### Research and Development

Research and development expenses decreased by $213 thousand to $36 thousand for the nine months ended September 30, 2021, from $249 thousand for the nine months ended September 30, 2020. The decrease was primarily the result of one-time regulatory expenses incurred in the 2020 period with no comparable expenditures in the 2021 period.

### Sales and Marketing

Sales and marketing expenses increased by $0.6 million, or 14%, to $5.3 million for the nine months ended September 30, 2021, from $4.7 million for the nine months ended September 30, 2020. The increase was primarily due to an increase in Avenova and CelleRx digital advertising and related consulting costs and was partly off-set by a decrease in sales representative headcount.

### General and Administrative

General and administrative expenses remained consistent for the nine months ended September 30, 2021 and 2020.

### Non-Cash Loss on Changes in Fair Value of Warrant Liability

The adjustment to the fair value of warrant liability resulted in a loss of $5.2 million for the nine months ended September 30, 2020. There was no comparable adjustment for the nine months ended September 30, 2021. For additional information regarding the warrants and their valuation, please see Note 11, “Warrant Liability”, in 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 adjustment to the fair value of embedded derivative liability resulted in a gain of $3 thousand for the nine months ended September 30, 2020. There was no comparable adjustment for the nine months ended September 30, 2021. For additional information, please see Note 10, “Convertible Note”, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

### Other Income, Net

The other income, net, was $2 thousand and $605 thousand for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2020, we recognized income of $901 thousand which was a result of income recognized as a qualifying expense incurred under the PPP Loan. For additional information, see Note 17, “Paycheck Protection Program”. This income was partially offset by the 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 1, Item 1 of this report.

### Financial Condition, Liquidity and Capital Resources

As of September 30, 2021, our cash and cash equivalents were $9.0 million, compared to $12.0 million as of December 31, 2020. Based on our funds available on September 30, 2021, and proceeds from the Company’s private placement of its Series B Non-Voting Convertible Preferred Stock and common stock warrants that was completed on November 2, 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 November 12, 2022, including the cost to acquire and integrate DERMAdoctor (see Item 1, Note 18, “DERMAdoctor LLC Acquisition”). 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. The Company also may consider other plans to fund operations including raising additional capital through debt and equity financings or from other sources. The Company may issue securities, including common stock and warrants, through private placement transactions or registered public offerings (including the ATM Program), which may require the filing of a Form S-1 or Form S-3 registration statement with the Securities and Exchange Commission (the “SEC”). Notably, the Company has completed the Private Placement for gross proceeds of $15.0 million, and the terms of such Private Placement include certain restrictions regarding the Company’s right to raise further capital, including the Company being restricted from (i) issuing or entering into any agreement to issue any shares of common stock or common stock equivalents, (ii) incurring, entering into any agreement to incur or announcing the incurrence or proposed incurrence of any indebtedness, or (iii) filing any registration statement or any amendment or supplement thereto, until ninety (90) days after certain stockholder approval has been received in connection with the Private Placement and certain registration statements for the securities issued in the Private Placement have been declared effective. 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 $4.9 million for the nine months ended September 30, 2021, which consisted primarily of a net loss of $5.7 million, adjusted by stock-based compensation expenses of $0.7 million, and a net change of $42 thousand in our net operating assets and liabilities.

Net cash used in operating activities was $3.3 million for the nine months ended September 30, 2020, which consisted primarily of a net loss of $9.3 million, adjusted by non-cash loss of $5.2 million on the change in fair value of warrant liability, stock compensation expenses of $0.4 million, issuance of RSUs for services of $0.2 million, non-cash interest expense related to amortization of debt issuance cost and debt discount of $0.1 million, and a net increase of $0.1 million in our net operating assets and liabilities.

### Net Cash Used in Investing Activities

For the nine months ended September 30, 2021, net cash used in investing activities for the purchase of property and equipment was $44 thousand and $5 thousand for the nine months ended September 30, 2021 and 2020, respectively.

### Net Cash Provided By Financing Activities

Net cash provided by financing activities was $2.0 million for the nine months ended September 30, 2021. The Company received net proceeds of $1.8 million raised from the ATM program pursuant to the ATM Agreement, dated May 14, 2021, with Ladenburg.

Net cash provided by financing activities was $9.8 million for the nine months ended September 30, 2020. The Company received net proceeds of $5.2 million from the ATM Program, and an additional $7.1 million from exercise of warrants, which was offset by repayments of $1.6 million on the Convertible Note issued to Iliad Research and Trading L.P. and repayment of $1.0 million on the Promissory Note using proceeds raised through the ATM program pursuant to the ATM Agreement, dated April 27, 2020, with Ladenburg.

### 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 September 30, 2021.

### Seasonality

Consistent with our peers in the United States pharmaceutical industry, our prescription 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 September 30, 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 | $185 | $— | $— | $— | $185 |
| Equipment leases | 16 | 1 | — | — | 17 |
| Total | $201 | $1 | $— | $— | $202 |

-40-

Our commitments as of September 30, 2021 consisted primarily of a facility operating lease and an operating lease for two copiers.

The total commitment for the facility lease as of September 30, 2021 was $0.2 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 September 30, 2021. The total commitment for the lease as of September 30, 2021 was $17 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

On October 29, 2021, the Company entered into a Securities Purchase Agreement with the Purchasers. Pursuant to such Securities Purchase Agreement, the Company agreed to sell in a private placement an aggregate of 15,000 shares of the Preferred Stock convertible into an aggregate of 37,500,000 Conversion Shares and Warrants exercisable for 37,500,000 Warrant Shares for an aggregate purchase price of $15,000,000. The Company closed the Private Placement on November 2, 2021. In connection with the Private Placement, the Company is seeking stockholder approval of the conversion of all of the Preferred Stock into the Conversion Shares and the exercisability of all of the Warrants into the Warrant Shares.

On November 5, 2021, the Company completed the acquisition of DERMAdoctor in accordance with the terms of the Membership Unit Purchase Agreement. Following the acquisition of DERMAdoctor, DERMAdoctor is now a wholly-owned subsidiary of the Company.

## 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, 2,145 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 September 30, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 617 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, and the section titled “Risk Factors” in the Company’s Preliminary Proxy Statement, filed with the SEC on November 2, 2021. We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide updated quarterly information under this Item.

Filed Nov 12, 2021.
Source: SEC EDGAR, the filing index for accession 0001437749-21-026313. Last ingested by Listed: Oct 29, 2026, 17:47 ET. No prices; not investment advice.