# Stablecoin Development Corp: Form 10-Q for the period ended Jun 30, 2022

- Company: [Stablecoin Development Corp](/companies/sdev.md) (CIK 1389545)
- Form: 10-Q
- Filed: 2022-08-11
- Accepted by EDGAR: Aug 11, 2022, 16:10 ET
- Period: 2022-06-30
- Accession: 0001437749-22-020119
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1389545/000143774922020119/nby20220630_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1389545/000143774922020119/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-04-01 to 2022-06-30 | $3.0m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2022-01-01 to 2022-06-30 | $5.7m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-04-01 to 2022-06-30 | $1.5m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2022-01-01 to 2022-06-30 | $2.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-04-01 to 2022-06-30 | $1.6m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2022-01-01 to 2022-06-30 | $3.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-04-01 to 2022-06-30 | $40.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2022-01-01 to 2022-06-30 | $68.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2022-04-01 to 2022-06-30 | −$2.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-01-01 to 2022-06-30 | −$4.5m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | −$2.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-01-01 to 2022-06-30 | −$2.3m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-01-01 to 2022-06-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 6 months, 2022-01-01 to 2022-06-30 | −$3.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-01-01 to 2022-06-30 | $32.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-06-30 | $3.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-06-30 | $9.5m | us-gaap:AssetsCurrent |
| Total assets | at 2022-06-30 | $21.5m | us-gaap:Assets |
| Current liabilities | at 2022-06-30 | $3.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-06-30 | $5.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-06-30 | $15.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 27,576 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 create science-based, problem-solving, accessible solutions for improved well-being through our two brands, Avenova and DERMAdoctor. Avenova products are scientifically created and clinically proven to help consumers with common eye irritations. DERMAdoctor products are premium dermatologist-developed skincare solutions sold through traditional domestic retailers, digital beauty channels and international distributors. The acquisition of DERMAdoctor, LLC (“DERMAdoctor”) occurred on November 5, 2021, and it now operates as our wholly-owned subsidiary. 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 November 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 November 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.

We expect to grow commercial sales of both 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.

We also manufacture and sell our proprietary form of hypochlorous acid for the wound care market. Consisting of higher concentrations of hypochlorous acid, NeutroPhase and PhaseOne are used for the cleansing and irrigation of intraoperative pocket lavage, before subcutaneous closure, stage I to IV pressure injuries, stasis ulcers, leg ulcers, diabetic foot ulcers, first-degree and second-degree burns, post-surgical wounds, grafted and donor sites, minor burns, superficial abrasions, wounds, and moistening absorbent wound dressings.

Although NeutroPhase and PhaseOne compete in a crowded wound cleanser market, we believe our NeutroPhase and PhaseOne solutions have distinct competitive advantages because they are made without the toxic chemicals found in other products. NeutroPhase and PhaseOne are gentle, non-irritating, and non-sensitizing to skin and new tissue. PhaseOne is distributed through commercial partners in the United States, and NeutroPhase is distributed in China by Pioneer Pharma (Hong Kong) Company Ltd.

### 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 $2.2 million for the three months ended June 30, 2022 as compared to a net loss of $1.9 million for the three months ended June 30, 2021. As of June 30, 2022, we had an accumulated deficit of $144 million and current assets totaling $9.5 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.

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, which is incorporated herein by reference. 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 June 30, 2022 and 2021

*(in thousands)*

| Statement of Operations Sales: | Three Months Ended June 30, 2022 | 2021 | Dollar Change | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Product revenue, net | $3,043 | $2,126 | $917 | 43% |
| Other revenue, net | 2 | 7 | (5) | (71%) |
| Total sales, net | 3,045 | 2,133 | 912 | 43% |
| Product cost of goods sold | 1,495 | 614 | 881 | 143% |
| Gross profit | 1,550 | 1,519 | 31 | 2% |
| Research and development | 40 | 21 | 19 | 90% |
| Sales and marketing | 1,752 | 1,788 | (36) | (2%) |
| General and administrative | 1,910 | 1,569 | 341 | 22% |
| Total operating expenses | 3,702 | 3,378 | 324 | 10% |
| Operating loss | (2,152) | (1,859) | (293) | 16% |
| Other (expense) income, net | (3) | — | (3) | (100%) |
| Loss before provision for income taxes | (2,155) | (1,859) | (296) | 16% |
| Provision for income taxes | — | — | — | — |
| Net loss and comprehensive loss | $(2,155) | $(1,859) | $(296) | 16% |

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

Product revenue, net, increased by $0.9 million, or 43%, to $3.0 million for the three months ended June 30, 2022, from $2.1 million for the three months ended June 30, 2021.

The increase in product revenue, net, was primarily the result of $0.6 million from the sale of DERMAdoctor products during the three months ended June 30, 2022 with no comparable revenue during the three months ended June 30, 2021.

Revenue from Avenova Spray decreased by $0.3 million for the three months ended June 30, 2022 from $1.9 million for the three months ended June 30, 2021 to $1.6 million for the three months ended June 30, 2022. The decrease was due to a decrease in physician dispensed Avenova Spray units sold and a decrease in Avenova Spray units sold through the pharmacy channels. This decrease in prescription Avenova Spray units was partially offset by a continued increase in the number of over-the-counter Avenova Spray units sold through online channels.

Additionally, product revenue, net, from the Company’s NeutroPhase and PhaseOne branded wound care products was $0.5 million higher during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Cost of goods sold increased by 143%, to $1.5 million for the three months ended June 30, 2022, from $0.6 million for the three months ended June 30, 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 June 30, 2022 with no comparable cost of goods sold for the three months ended June 30, 2021 and cost of goods sold associated with the increase in wound care products sold during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Gross profit increased by 2%, to $1.6 million for the three months ended June 30, 2022, from $1.5 million for the three months ended June 30, 2021.

### Research and Development

Research and development expenses increased by $19 thousand to $40 thousand for the three months ended June 30, 2022, from $21 thousand for the six months ended June 30, 2021.

### Sales and marketing

Sales and marketing expenses decreased by $36 thousand, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The decrease was primarily due to lower digital advertising and related consulting costs incurred in the 2022 period. Additionally, results for the 2021 period include marketing costs incurred in conjunction with the Company’s CelleRx Clinical Reset product with no comparable expenditures during the three months ended June 30, 2022. Going forward, the Company anticipates focusing sales and marketing resources on the DERMAdoctor brand instead of driving growth of CelleRx Clinical Reset. The decreases in digital marketing and CelleRx costs were offset by $0.7 million in sales and marketing costs incurred for DERMAdoctor products during the three months ended June 30, 2022, with no comparable expenditures in the 2021 period.

### General and administrative

General and administrative expenses increased by $0.3 million, or 22%, to $1.9 million for the three months ended June 30, 2022, from $1.6 million for the three months ended June 30, 2021.

Results for the three months ended June 30, 2022 include $0.5 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. These increases were partially offset by a decrease in professional services, consultants and employee costs incurred by the Company during the three months ended June 30, 2022 as compared to June 30, 2021.

### Other (expense) income, net

Other expense, net, was $3 thousand for the three months ended June 30, 2022, with no comparable expense in the 2021 period.

### Comparison of the Six Months Ended June 30, 2022 and 2021

*(in thousands)*

| Statement of Operations Sales: | Six Months Ended June 30, 2022 | 2021 | Dollar Change | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Product revenue, net | $5,666 | $3927 | $1,739 | 44% |
| Other revenue, net | 8 | 13 | (5) | (38%) |
| Total sales, net | 5,674 | 3,940 | 1,734 | 44% |
| Product cost of goods sold | 2,608 | 1,069 | 1,539 | 144% |
| Gross profit | 3,066 | 2,871 | 195 | 7% |
| Research and development | 68 | 26 | 42 | 162% |
| Sales and marketing | 3,439 | 3,468 | (29) | (1%) |
| General and administrative | 4,093 | 2,756 | 1,337 | 49% |
| Total operating expenses | 7,600 | 6,250 | 1,350 | 22% |
| Operating loss | (4,534) | (3,379) | (1,155) | 34% |
| 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 | (7) | 2 | (9) | (450%) |
| Loss before provision for income taxes | (2,266) | (3,377) | 1,111 | (33%) |
| Provision for income taxes | — | — | — | — |
| Net loss and comprehensive loss | $(2,266) | $(3,377) | $1,111 | (33%) |

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

Product revenue, net, increased by $1.7 million, or 44%, to $5.7 million for the six months ended June 30, 2022, from $3.9 million for the six months ended June 30, 2021.

The increase in product revenue, net, was primarily the result of $1.5 million from the sale of DERMAdoctor products during the six months ended June 30, 2022 with no comparable revenue during the six months ended June 30, 2021.

Revenue from Avenova Spray decreased by $0.4 million for the six months ended June 30, 2022, from $3.5 million for the six months ended June 30, 2021 to $3.1 million for the six months ended June 30, 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 also due to an overall decrease in physician dispensed units sold and units sold through the pharmacy channels. This decrease was partially offset by a continued increase in the number of over-the-counter Avenova Spray units sold through online channels. Additionally, product revenue, net, from the Company’s NeutroPhase and PhaseOne branded wound care products was $0.5 million higher during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Cost of goods sold increased by $1.5 million, or 144%, to $2.6 million for the six months ended June 30, 2022, from $1.1 million for the six months ended June 30, 2021. This increase was primarily due to $1.0 million in cost of goods sold recognized from the sales of DERMAdoctor products for the six months ended June 30, 2022, with no comparable cost of goods sold for the six months ended June 30, 2021 and cost of goods sold associated with the increase in wound care products sold during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Gross profit increased by $0.2 million, to $3.1 million for the six months ended June 30, 2022, from $2.9 million for the six months ended June 30, 2021, which is a result of the increase in total sales, net, largely offset by the increase in the cost of goods sold.

### Research and Development

Research and development expenses increased by $42 thousand to $68 thousand for the six months ended June 30, 2022, from $26 thousand for the six months ended June 30, 2021.

### Sales and Marketing

Sales and marketing expenses decreased by $29 thousand, or 1%, to $3.4 million for the six months ended June 30, 2022, from $3.5 million for the six months ended June 30, 2021. The decrease was due to lower digital advertising and related consulting costs incurred in the 2022 period. Additionally, results for the 2021 period include marketing costs incurred in conjunction with the Company’s CelleRx Clinical Reset product with no comparable expenditures during the three months ended June 30, 2022. Going forward, the Company anticipates focusing sales and marketing resources on the DERMAdoctor brand instead of driving growth of CelleRx Clinical Reset. The decrease also reflects fewer sales representative headcount employed during the six months ended June 30, 2022 as compared to the 2021 period. These decreases were offset by $1.1 million in sales and marketing costs incurred for DERMAdoctor products during the six months ended June 30, 2022, with no comparable expenditures in the 2021 period.

### General and Administrative

General and administrative expenses increased by $1.3 million, or 49%, to $4.1 million for the six months ended June 30, 2022, from $2.8 million for the six months ended June 30, 2021.

Results for the six months ended June 30, 2022 include $0.7 million in DERMAdoctor general and administrative costs and $0.2 million from the amortization of intangibles related to the DERMAdoctor Acquisition with no comparable expenses in the 2021 period.

Additionally, during the six months ended June 30, 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.

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.

### Non-cash gain 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 six months ended June 30, 2022. The warrant liability was reclassified to equity during the six months ended June 30, 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.

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

Adjustments to the fair value of contingent liability resulted in a gain of $0.2 million for the six months ended June 30, 2022 with no comparable adjustment for the six months ended June 30, 2021.

### Other (expense) income, net

The other expense, net, was $7 thousand for the six months ended June 20, 2022 and other income, net, of $2 thousand for the six months ended June 30, 2021, respectively.

### Financial Condition, Liquidity and Capital Resources

As of June 30, 2022, our cash and cash equivalents were $3.9 million, compared to $7.5 million as of December 31, 2021. Based primarily on the funds available on June 30, 2022, the Company believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund its existing operations and meet its planned operating expenses into at least the first quarter of 2023. The Company has sustained operating losses for the majority of its corporate history and expects that its 2022 expenses will exceed its 2022 revenues, as the Company continues to invest in both its Avenova and DERMAdoctor commercialization efforts. The Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Accordingly, the Company’s planned operations raise substantial doubt about its ability to continue as a going concern. Additionally, 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 periods of inflation, supply chain issues, the continuation of the COVID-19 pandemic international conflicts (e.g., the conflict between Russia and Ukraine).

The Company’s liquidity needs will be largely determined by the success of commercialization efforts. The Company also may consider other plans to fund operations including: (1) raising additional capital through debt and equity financings or from other sources; (2) reducing spending on operations, including reducing spend on one or more of its sales and marketing programs or restructuring operations to change its overhead structure; (3) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee; and/or (4) entering into license agreements to sell new products. The Company may issue securities, including common stock and warrants through private placement transactions or registered public offerings, which may require the filing of a Form S-1 or Form S-3 registration statement with the SEC. In the absence of the Company’s completion of one or more of such transactions or substantial revenue growth from its commercialization efforts, there will be substantial doubt about the Company's ability to continue as a going concern within one year after the date these unaudited financial statements are issued, and the Company will be required to scale back or terminate operations and/or seek protection under applicable bankruptcy laws. The accompanying unaudited financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to its ability to continue as a going concern.

### Cash Used in Operating Activities

Net cash used in operating activities was $3.8 million for the six months ended June 30, 2022, which consisted primarily of a net loss of $2.3 million, 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 $338 thousand, and a net increase of $156 thousand in our net operating assets and liabilities.

Net cash used in operating activities was $3.4 million for the six months ended June 30, 2021, which consisted primarily of a net loss of $3.4 million, stock-based compensation expenses of $479 thousand, and a net change of $539 thousand 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 $32 thousand and $27 thousand, for the six months ended June 30, 2022 and 2021, respectively.

### Net Cash Used in Financing Activities

Net cash used in financing activities for the six months ended June 30, 2022 of $0.1 million was for the repayment of the DERMAdoctor line of credit, which was terminated in the first quarter of 2022.

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

### 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 as of June 30, 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 June 30, 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 | $529 | $1,468 | $534 | $— | $2,531 |
| Equipment leases | 5 | — | — | — | 5 |
| Total | $534 | $1,468 | $534 | $— | $2,536 |

Our commitments as of June 30, 2022 consisted primarily of facility operating leases and an operating lease for two copiers.

The total commitment for the facility leases as of June 30, 2022 was $2.5 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 June 30, 2022. The total commitment for the lease as of June 30, 2022 was $5 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, 2,005 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 June 30, 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 June 30, 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, 2,143 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 Controls Over Financial Reporting

There was no change in our internal controls over financial reporting during the quarter ended June 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

## Risk factors

As filed, 1,580 characters.

While, as a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, we are not required to provide updated quarterly information under this Item, we are providing the below disclosure as a material risk we face:

### There is uncertainty about our ability to continue as a going concern.

We have sustained operating losses for the majority of our corporate history and expect that our 2022 expenses will exceed our 2022 revenues, as we continue to invest in our Avenova and DERMAdoctor commercialization efforts. Our operating cash flow is not sufficient to support our ongoing operations, and we expect to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Any additional financing that we are able to secure in the near-term may be limited and may only provide working capital sufficient into the first quarter of 2023. As such, additional funding or substantial revenue growth will be needed in both the short- and long-term in order to pursue our business plan. These circumstances raise doubt about our ability to continue as a going concern, which depends on our ability to raise capital to fund our current operations.

For additional 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.

Filed Aug 11, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-020119. Last ingested by Listed: Oct 29, 2026, 17:47 ET. No prices; not investment advice.