# Stablecoin Development Corp: Form 10-Q for the period ended Mar 31, 2022

- Company: [Stablecoin Development Corp](/companies/sdev.md) (CIK 1389545)
- Form: 10-Q
- Filed: 2022-05-12
- Accepted by EDGAR: May 12, 2022, 16:05 ET
- Period: 2022-03-31
- Accession: 0001437749-22-012124
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1389545/000143774922012124/nby20220331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1389545/000143774922012124/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-01-01 to 2022-03-31 | $2.6m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-01-01 to 2022-03-31 | $1.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-01-01 to 2022-03-31 | $1.5m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-01-01 to 2022-03-31 | $28.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2022-01-01 to 2022-03-31 | −$2.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-01-01 to 2022-03-31 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-01-01 to 2022-03-31 | −$111.0k | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.00 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2022-01-01 to 2022-03-31 | −$2.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-01-01 to 2022-03-31 | $24.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-03-31 | $5.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-03-31 | $12.5m | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-31 | $24.8m | us-gaap:Assets |
| Current liabilities | at 2022-03-31 | $4.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-03-31 | $7.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-03-31 | $17.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,355 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. This discussion contains forward-looking statements that involve risks and uncertainties, 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, 2021, which was filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2022. Words such as "expects," "anticipated," "will," "may," "goals," "plans," "believes," "estimates," "concludes," determines," variations of these words, and similar expressions are intended to identify these forward-looking statements. As a result of many factors, including those set forth in our SEC filings, our actual results may differ materially from those anticipated in these forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions based upon assumptions made that we believed to be reasonable at the time and are subject to risks and uncertainties. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements.*

### Overview

We are a company focused on the development and sale of scientifically-created and clinically-proven eyecare and skincare products. Our portfolio of products includes a number of eyecare products under our Avenova brand, led by Avenova Spray which contains our proprietary, stable and pure form of hypochlorous acid, and over 30 dermatologist-developed skincare products under our DERMAdoctor brand.

On November 5, 2021, we purchased DERMAdoctor, LLC (“DERMAdoctor”) for approximately $12.0 million as well as $3.0 million of contingent consideration payable in cash or our common stock over the next two years upon the achievement of certain contribution margin targets. For additional information regarding the DERMAdoctor Acquisition, see Note 3 “Business Combination” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

The DERMAdoctor Acquisition was funded, in part, through the sale of an aggregate of 15,000 shares of Preferred Stock (convertible into an aggregate of 37,500,000 shares of Common Stock) and the 2021 Warrants (exercisable for 37,500,000 shares of Common Stock) for an aggregate purchase price of $15.0 million. For additional information regarding the Preferred Stock and the 2021 Warrants, see Note 13, “Warrant Liability” and Note 14, “Stockholders’ Equity” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

In 2021, we also continued to expand our Avenova product offerings, including adding the following products under the Avenova eyecare brand: (1) Avenova Moist Heating Eye Compress and (2) the i-Chek. We expanded our distribution efforts through our partnership with ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical businesses to promote Avenova Spray.

### Financial Overview and Outlook

We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue to commercialize our eyecare and skincare products and integrate the DERMAdoctor business. Our net loss was $111 thousand for the three months ended March 31, 2022 and a net loss of $1.5 million for the three months ended March 31, 2021. As of March 31, 2022, we had an accumulated deficit of $142 million and current assets totaling $12.5 million.

We expect to grow commercial sales of Avenova and DERMAdoctor branded products through an expansion of domestic and international market penetration, with a particular focus on online channels, and the development of new product offerings under both brand names.

### 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, earnout contingency, and warrant liability. 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” in the Notes to Condensed Consolidated Financial Statements 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 March 31, 2022 and December 31, 2021.

### Inventory

Inventory is comprised of (1) raw materials and supplies, such as bottles, packaging materials, labels, boxes, and pumps; (2) goods in progress; 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, 2022 and December 31, 2021, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $522 thousand and $641 thousand, respectively.

### Business Combinations

We account for business combinations using the acquisition method of accounting, in accordance with ASC 805, *Business Combinations*. The acquisition method requires identifiable assets acquired and liabilities assumed be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill.

The determination of estimated fair value requires us to make significant estimates and assumptions. These fair value determinations require judgment and involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, and asset lives, among other items. As a result, we may record adjustments to the fair values of assets acquired and liabilities assumed within the measurement period (up to one year from the acquisition date) with the corresponding offset to goodwill.

Transaction costs associated with business combinations are expensed as they are incurred.

### Goodwill and Intangible Assets

Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. Intangible assets are measured at their respective fair values as of the acquisition date and may be subject to adjustment within the measurement period, which may be up to one year from the acquisition date. We do not amortize goodwill and intangible assets with indefinite useful lives. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the assets are impaired.

| Intangible Asset | Fair Value (in thousands) | Useful Life (in years) | Amortization Method |
| --- | ---: | ---: | --- |
| Customer relationships | $290 | 7 | Straight line |
| Trade secrets / product formulations | 2,890 | 9 | Straight line |
| Trade names | 2,080 | Indefinite | N/A |
| Goodwill | 4,528 | Indefinite | N/A |
|  | $9,788 |  |  |

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### Valuation of Contingent Consideration Resulting from a Business Combination

In connection with certain acquisitions, we may be required to pay future consideration that is contingent upon the achievement of specified milestone events. We record contingent consideration resulting from a business combination at its fair value on the acquisition date. Each quarter thereafter, we revalue these obligations and record increases or decreases in their fair value within our condensed consolidated statements of operations and comprehensive loss until such time as the specified milestone achievement period is complete.

Increases or decreases in fair value of the contingent consideration liabilities can result from updates to assumptions such as the expected timing or probability of achieving the specified milestones. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Updates to assumptions could have a significant impact on our results of operations in any given period. Actual results may differ from estimates.

### Impairment of Long-Lived Assets

The Company accounts for long-lived assets, other than goodwill and intangible assets, and operating lease right-of-use assets in accordance with ASC 360, *Property, Plant and Equipment*, which requires that companies consider whether events or changes in facts and circumstances, both internally and externally, may indicate that an impairment of long-lived assets held for use or right-of-use assets are present. The Company reviews long-lived assets and right-of-use assets for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values and the loss is recognized in the condensed consolidated statements of operations and comprehensive loss. There were no impairment charges during the periods ended March 31, 2022 and December 31, 2021, 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.

### Revenue Recognition

Revenue generated through the Company’s webstores, primarily Avenova.com and DERMAdoctor.com, is recognized upon fulfillment, which generally occurs upon delivery of the related products to multiple third-party carriers. Shipping and handling costs are expensed as incurred and included in cost of goods sold in the condensed consolidated statements of operations and comprehensive loss. We present revenue net of sales taxes and refunds.

Revenue generated through third-party online retailers is also recognized upon fulfillment, which generally occurs upon delivery of the related products to a third-party carrier. 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 condensed consolidated statements of operations and comprehensive loss.

The Company also generates Avenova Spray revenue through major pharmacy distribution partners. Product supply of Avenova Spray 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 delivery 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 other retailers is generally recognized upon transfer of control to the retailer, 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 (in thousands) during the three months ended March 31, 2022:

|  | Wholesaler/ Pharmacy fees | Cash discounts | Rebate | Returns | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Balance at December 31, 2021 | $(84) | $(13) | $(375) | $(798) | $(1,270) |
| Current provision related to sales made during current period | (40) | (18) | (328) | (456) | (842) |
| Payments | 16 | 6 | 123 | 56 | 201 |
| Balance at March 31, 2022 | $(108) | $(25) | $(580) | $(1,198) | $(1,911) |

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### 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 $0.6 million and $0.7 million for the three months ended March 31, 2022 and 2021, 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 15, “Equity-Based Compensation” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report 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 warrants issued in connection with its equity offerings in accordance with the provisions of Accounting Standards Codification (“ASC”) 480, *Distinguishing Liabilities from Equity*, and ASC 815, *Derivatives and Hedging.*

The Company accounts for common stock 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).

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 condensed 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.

### Segment Reporting

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (the “CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer is the Company’s CODM. The CODM reviews financial information presented on a business line basis in making operating decisions, allocating resources, and evaluating financial performance. The Company has determined that it operates as two operating segments.

### Recent Accounting Pronouncements

For information regarding recent accounting pronouncements that could affect our business, results of operations, financial condition, and liquidity, see Note 2, “Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 29, 2022. The Company continues to evaluate the potential impact of adopting the new accounting guidance on its consolidated financial position, results of operations and cash flows.

### Results of Operations

### Comparison of the Three Months Ended March 31, 2022 and 2021

| Statement of Operations Sales: | Three Months Ended March 31, 2022 | 2021 | Dollar Change | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Product revenue, net | $2,623 | $1,801 | $822 | 46% |
| Other revenue, net | 6 | 6 | — | 0% |
| Total sales, net | 2,629 | 1,807 | 822 | 46% |
| Product cost of goods sold | 1,113 | 455 | 658 | 145% |
| Gross profit | 1,516 | 1,352 | 164 | 12% |
| Research and development | 28 | 5 | 23 | 460% |
| Sales and marketing | 1,687 | 1,680 | 7 | 0% |
| General and administrative | 2,183 | 1,187 | 996 | 84% |
| Total operating expenses | 3,898 | 2,872 | 1.026 | 36% |
| Operating loss | (2,382) | (1,520) | (862) | 57% |
| Non-cash gain on changes in fair value of warrant liability | 2,056 | — | 2,056 | 100% |
| Non-cash gain on changes in fair value of contingent liability | 219 | — | 219 | 100% |
| Other (expense) income, net | (4) | 2 | (6) | (300%) |
| Loss before provision for income taxes | (111) | (1,518) | 1,407 | (93%) |
| Provision for income taxes | — | — | — | — |
| Net loss and comprehensive loss | $(111) | $(1,518) | $1,407 | (93%) |

### Impact of DERMAdoctor Acquisition

The Acquisition Closing for DERMAdoctor took place on November 5, 2021 (see Note 3, “Business Combination” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report) Accordingly, the above results for the three months ended March 31, 2022 include the financial results of DERMAdoctor, which includes product revenue, net, of $0.9 million, goods sold of $0.5 million, $0.4 million in sales and marketing costs and $0.2 million in general and administrative costs, with no comparable operating results for the three months ended March 31, 2021.

### Total Net Sales, Cost of Goods Sold and Gross Profit

Product revenue, net, increased by $0.8 million, or 46%, to $2.6 million for the three months ended March 31, 2022, from $1.8 million for the three months ended March 31, 2021.

Revenue from Avenova Spray decreased by $0.2 million in 2022 from $1.6 million for the three months ended March 31, 2021 to $1.4 million for the three months ended March 31, 2022. The decrease reflects an unanticipated increase in expired Avenova Spray units returned from retail pharmacies for product purchased prior to the launch of our over-the-counter Avenova Spray product in 2019 and the beginning of the COVID-19 pandemic in 2020. The decrease was partially offset by an overall increase in the number of Avenova Spray units sold during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase in units sold reflects continued higher number of over-the-counter and physician dispensed units sold, partially offset by a continued decrease in the number of units sold through pharmacy channels. 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 and physician dispensed units as compared to units sold through our pharmacy channels.

We also recognized product revenue, net, of $0.9 million from the sale of DERMAdoctor products during the three months ended March 31, 2022 with no comparable revenue during the three months ended March 31, 2021.

Cost of goods sold increased by 145%, to $1.1 million for the three months ended March 31, 2022, from $0.5 million for the three months ended March 31, 2021. This increase was primarily due to $0.5 million in cost of goods sold recognized from the sales of DERMAdoctor products for the three months ended March 31, 2022 with no comparable cost of goods sold for the three months ended March 31, 2021.

Gross profit increased by 12%, to $1.5 million for the three months ended March 31, 2022, from $1.4 million for the three months ended March 31, 2021.

### Sales and marketing

Sales and marketing expenses increased by $7 thousand, for the three months ended March 31, 2022. The increase was due to $0.4 million in sales and marketing costs incurred for DERMAdoctor products for the three months ended March 31, 2022, with no comparable expenditures in the 2021 period. The increase was offset by fewer sales representative headcount employed during the three months ended March 31, 2022 period as compared to the 2021 period. Additionally, results for the 2021 period include costs incurred in conjunction with the relaunch of the Company’s CelleRx Clinical Reset product with no comparable expenditures during the three months ended March 31, 2022. Going forward, the Company anticipates focusing sales and marketing resources on the DERMAdoctor brand instead of driving growth of CelleRx Clinical Reset.

### General and administrative

General and administrative expenses increased by $1.0 million, or 84%, to $2.2 million for the three months ended March 31, 2022, from $1.2 million for the three months ended March 31, 2021.

Results for the three months ended March 31, 2022 include $0.2 million in DERMAdoctor general and administrative costs and $0.1 million from the amortization of intangibles related to the DERMAdoctor Acquisition with no comparable expenses in the 2021 period. The Company also incurred one-time costs related to a special meeting of stockholders held in January 2022 with no comparable expenditures in the 2021 period. Employee-related costs, including non-cash stock-based compensation costs, were also higher for the three months ended March 31, 2022 as compared to the 2021 period.

Additionally, during the three months ended March 31, 2021, the Company received an insurance reimbursement for costs incurred in conjunction with a dispute with the Company’s former Interim President and Chief Executive Officer and Chief Financial Officer which reduced general and administrative costs in the 2021 period.

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

Adjustments to the fair value of warrant liability resulted in a gain of $2.1 million for the three months ended March 31, 2022. The warrant liability was reclassified to equity during the three months ended March 31, 2022 and will no longer require fair value adjustments which will impact our results of operations. For additional information regarding the warrant liability and their valuation, please see Note 13, “Warrant Liability”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

### Other (expense) income, net

Other (expense) income, net, was $215 thousand for the three months ended March 31, 2022 as compared to $2 thousand for the three months ended March 31, 2021. During the three months ended March 31, 2022, the Company recorded $219 thousand in income for an adjustment to the fair value of a contingent earnout liability. For additional information regarding the contingent earnout liability, please see Note 4, “Fair Value Measurements”, in the Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report.

### Liquidity and Capital Resources

As of March 31, 2022, our cash and cash equivalents were $5.6 million, compared to $7.5 million as of December 31, 2021. Based primarily on the funds available at March 31, 2022, 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 12, 2023. 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 that impact the broader economy such as the COVID-19 pandemic and the conflict between Russia and Ukraine.

### Cash Used in Operating Activities

Net cash used in operating activities was $2.1 million for the three months ended March 31, 2022, which consisted primarily of a net loss of $111 thousand, adjusted primarily by non-cash gain of $2.1 million on the change in fair value of warrant liability, non-cash gain of $219 thousand on the change in fair value of contingent liability, stock-based compensation expenses of $184 thousand, and a net increase of $24 thousand in our net operating assets and liabilities.

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.

### Cash Used in Investing Activities

Net cash used in investing activities for the purchase of property and equipment was $24 and $25 thousand, for the three months ended March 31, 2022 and 2021, respectively.

### Net Cash Used in Financing Activities

Net cash used in financing activities for the repayment of the DERMAdoctor line of credit, which was subsequently terminated in the first quarter of 2022, was $0.1 million for the three months ended March 31, 2022.

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, 2021, we had net operating loss carryforwards for federal and state income tax purposes of $125.9 million and $106.8 million, respectively. The federal net operating loss carryforwards consist of $94.9 million generated before January 1, 2018, which will begin to expire in 2024 and $31.0 million that will carryforward indefinitely but are subject to an 80% limitation for years following December 31, 2021. The state net operating loss carryforwards will begin to expire in 2028. As of December 31, 2021, 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

Our costs are subject to fluctuations, particularly due to change in the price of raw and packing materials and the cost of labor, transportation and operating supplies. Therefore, our business results depend, in part, on our continued ability to manage these fluctuations through pricing actions, costs savings projects and sourcing decisions, while maintaining and improving margins and market share. Failure to manage these fluctuations could adversely impact our results of operations or cash flows.

### Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements at March 31, 2022.

### Seasonality

#### Avenova Branded Products

Consistent with our peers in the United States pharmaceutical industry, prescriptions for Avenova Spray experience 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. Sales of Avenova Spray through non-prescription channels, along with the other Avenova branded products, experience less seasonality with demands consistent throughout the year.

#### Dermatology/Skincare Products

Our DERMAdoctor products are sold through third parties such as Costco, Amazon and others; therefore, we may receive periodic large orders that result in large chunks of revenue that are received in irregular intervals during the year. Historically sales of DERMAdoctor products that contain sunscreen and antiperspirants are higher in the summer seasons and sales of DERMAdoctor products that contain moisturizers are higher in the fall and winter months. In addition, DERMAdoctor products will typically experience an uptick in sales during the fourth quarter around the holidays of each country in which its products are sold, particularly in the United States and China.

### Contractual Obligations

Our contractual cash commitments as of March 31, 2022 were as follows (in thousands):

| Contractual Obligations | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Facility leases | $525 | $1,490 | $656 | $— | $2,671 |
| Equipment leases | 9 | — | — | — | 9 |
| Total | $534 | $1,490 | $656 | $— | $2,680 |

Our commitments as of March 31, 2022 consisted primarily of facility operating leases and an operating lease for two copiers.

The total commitment for the facility leases as of March 31, 2022 was $2.7 million due over the leases’ terms, compared to $0.5 as of December 31, 2021.

We had an operating lease for two copiers as of March 31, 2022. The total commitment for the lease as of March 31, 2022 was $9 thousand due over the lease terms, compared to $13 thousand as of December 31, 2021.

See Note 12, “Commitments and Contingencies” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further information regarding these leases.

## Market risk

As filed, 2,007 characters.

Our market risk consists principally of interest rate risk on our cash and cash equivalents. Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in interest rates, particularly because our current liquid assets at March 31, 2022 were held in cash and cash equivalents.

Our investment policy restricts our investments to high-quality investments and limits the amounts invested with any one issuer, industry, or geographic area. The goals of our investment policy are as follows: preservation of capital, assurance of liquidity needs, best available return on invested capital, and minimization of capital taxation. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with an interest rate fixed at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, in accordance with our investment policy, we maintain our cash and cash equivalents in short-term marketable securities, including money market mutual funds, Treasury bills, Treasury notes, certificates of deposit, commercial paper, and corporate and municipal bonds. The risk associated with fluctuating interest rates is limited to our investment portfolio. Due to the short-term nature of our investment portfolio, we believe we have minimal interest rate risk arising from our investments. As of March 31, 2022 and December 31, 2021, a 10% change in interest rates would have had an immaterial effect on the value of our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We do not hold any instruments for trading purposes.

With most of our focus on the domestic U.S. market, we have not had 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, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 493 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, 2021, which was filed with the SEC on March 29, 2022. 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 May 12, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-012124. Last ingested by Listed: Oct 29, 2026, 17:47 ET. No prices; not investment advice.