# Stablecoin Development Corp: Form 10-Q for the period ended Mar 31, 2023

- Company: [Stablecoin Development Corp](/companies/sdev.md) (CIK 1389545)
- Form: 10-Q
- Filed: 2023-05-11
- Accepted by EDGAR: May 11, 2023, 16:10 ET
- Period: 2023-03-31
- Accession: 0001437749-23-013945
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1389545/000143774923013945/nby20230331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1389545/000143774923013945/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $3.1m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2023-01-01 to 2023-03-31 | $1.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-01-01 to 2023-03-31 | $1.9m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-01-01 to 2023-03-31 | $26.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | −$1.7m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | −$1.7m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.85 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | −$1.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $13.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-03-31 | $3.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $9.9m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $14.8m | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $4.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $5.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $8.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 29,682 characters.

*This discussion contains forward-looking statements that involve risks and uncertainties. The following discussion of our financial condition and results of operations should be read together with our unaudited condensed 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, 2022, which was filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023. 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 under the section entitled “Risk Factors” and other sections 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 after the date of this report, even if new information becomes available in the future.*

### Overview

We are a company focused on the development and commercialization of scientifically-created and clinically-proven eyecare, skincare and wound care products.

Our leading product, Avenova Spray, is proven in laboratory testing to have broad antimicrobial properties as it removes foreign material including microorganisms and debris from the skin around the eye, including the eyelid. Avenova Spray is formulated with our proprietary, stable and pure form of hypochlorous acid and is cleared by the FDA for sale in the United States. Avenova Spray is available direct to consumers primarily through online distribution channels and is also available by prescription and dispensed by eyecare professionals for blepharitis and dry-eye disease. Other eyecare products offered under the Avenova eyecare brand include our Novawipes, Lubricant Eye Drops, Moist Heating Eye Compress, i-Chek lash mirror, and the Eye Health Support Oral Supplement with MaquiBright.

Through our subsidiary DERMAdoctor, LLC (“DERMAdoctor”), we offer over 30 dermatologist-developed products targeting common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris. DERMAdoctor branded products are marketed and sold through the DERMAdoctor website, well-known traditional and digital beauty retailers, and a network of international distributors. We acquired DERMAdoctor in November 2021, and since completing the DERMAdoctor Acquisition we have been working to integrate and expand the DERMAdoctor business in order to achieve strategic objectives that we expected by completing this acquisition, including revenue growth, cost reductions and achieving overall profitability. We have not been able to achieve these objectives to date, as DERMAdoctor’s product revenue declined in 2022 compared to 2021, while operating costs relating to these products remained substantially the same. We are working to achieve our overall objectives, as well as continuing to evaluate additional strategies for our Company and its business to address our capital and liquidity needs.

We also manufacture and sell our proprietary form of hypochlorous acid for the wound care market with our NeutroPhase and PhaseOne branded products. NeutroPhase and PhaseOne are used for cleansing and irrigation as part of surgical procedures, as well as treating certain wounds, burns, ulcers and other injuries. We currently sell these products through distributors.

### Recent Developments

### 2023 Private Placement

On April 27, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with existing accredited institutional investors of the Company that provided for the issuance and sale in a private placement (the “2023 Private Placement”) of (i) $3.3 million aggregate principal amount of Original Issue Discount Senior Secured Convertible Debentures Due November 1, 2024 (the “Debentures”), which may be converted or redeemed into up to an aggregate of 2,538,464 shares of Common Stock (the “Conversion Shares”), (ii) a new long-term Series B-1 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a five year period (“Long-Term Warrants”), and (iii) a new short-term Series B-2 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a two year period (“Short-Term Warrants” and, together with the Long-Term Warrants, the “2023 Warrants”). The 2023 Private Placement closed on May 1, 2023 (the “Private Placement Closing”) and the Company received gross proceeds of $3.0 million, before deducting placement agent fees and other offering expenses. In connection with the closing of the 2023 Private Placement, common stock purchase warrants that the Company previously issued to the Purchasers and to other existing investors in prior private placements and warrant reprice transactions were amended to lower the exercise price of the previously issued warrants exercisable for an aggregate of 1,724,455 shares of Common Stock from $6.30 to $1.30 per share pursuant to Warrant Amendment Agreements entered into by the Company.

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Due to the number of shares of common stock that may be issued upon conversion or redemption of the Debentures and the exercise of the 2023 Warrants, the Company is required to obtain stockholder approval for the issuance of these shares of common stock in accordance with Section 713(a) and 713(b) of the NYSE American Company Guide (the “Stockholder Approval”) and the Company expects to seek the Stockholder Approval at its 2023 Annual Meeting of Stockholders. Until the Stockholder Approval is obtained, the conversion of the Debentures by the holders into shares of common stock is currently limited a holder’s pro rata share of 19.99% of the Company’s outstanding shares of Common Stock, or into an aggregate of 438,669 shares (the “Issuable Maximum”), and none of the 2023 Warrants will be exercisable until the Stockholder Approval is obtained.

### Anti-Dilution Adjustment to Series B Preferred Stock and the Series C Preferred Stock

The Certificate of Designation of Preferences, Rights and Limitations for the Company’s outstanding Series B Preferred Stock (the “Series B Certificate of Designation”) and the Certificate of Designation of Preferences, Rights and Limitations for the Company’s outstanding Series C Preferred Stock (the “Series C Certificate of Designation”) provides for anti-dilution protections in the event that the Company grants any right to reprice any Company security or issue a new Company security that would entitle the holder to acquire Common Stock at an effective price per share that is lower than the conversion price of the Series B Preferred Stock and the Series C Preferred Stock, which is referred to as “full-ratchet” anti-dilution protection. As a result of the consummation of the 2023 Private Placement the Conversion Price of the Debentures and the exercise price of the 2023 Warrants at $1.30 per share triggered this anti-dilution protection in the Series B Certificate of Designation and the Series C Certificate of Designation. As a result, the conversion price of each share of Series B Preferred Stock and each share of Series C Preferred Stock, which were each $6.30 convertible into 159 shares of Common Stock, were both automatically adjusted downward to now be $1.30 convertible into 770 shares of Common Stock resulting in an additional 7,863,570 shares of common stock issuable upon conversion of the outstanding Series B Preferred Stock and Series C Preferred Stock.

For additional information regarding the 2023 Private Placement, the Debentures, the 2023 Warrants, the warrant amendments and the other related agreements and transactions, as well as the antidilution adjustment to the Series B Preferred Stock and Series C Preferred Stock, see Note 18, “Subsequent Events” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report and the Company’s Current Report on Form 8-K filed with the SEC on April 27, 2023.

### 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. Our net losses were $1.7 million and $111 thousand for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, we had an accumulated deficit of $159.9 million, total current assets of $9.9 million and total assets of $14.8 million.

We expect to grow commercial sales of Avenova branded products and expect to grow commercial sales of our 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 Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these unaudited 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 unaudited condensed consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. In preparing these unaudited 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. 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.

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While our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report, we believe that the following accounting estimates are most critical to fully understanding and evaluating our reported financial results as discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

### Impairment of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets

We review goodwill, indefinite-lived intangible assets and long-lived assets for impairment at least annually or whenever events or changes in business circumstances indicate that any such asset may be impaired, that the carrying amount of any such asset may not be fully recoverable or that the useful life of the asset, if applicable, is no longer appropriate. Management uses judgement in making critical assumptions and estimates in determining when an impairment assessment should be recorded, if more frequent than annually, or in the completion of any such assessment. This includes cash flow projections that look several years into the future and assumptions on variables such as future sales and operating margin growth rates, economic conditions, probability of success, market competition, inflation and discount rates. Changes in judgments with respect to these assumptions and estimates could impact any such impairments recorded such as those recorded in the fourth quarter of 2022 as further described in Note 2, “Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2022.

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

We revalue any outstanding contingent obligations to pay future consideration related to business combinations at the end of each quarter and record increases or decreases in their fair value within our consolidated statements of operations. 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. See additional information in Note 2, “Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

### Estimates of Future Product Returns

The Company records revenue in an amount that reflets the consideration which the Company expects to receive. Accordingly, revenue is reduced for estimated future product returns. The Company’s estimates for returns are updated quarterly based on historical data of actual returns. Actual future returns experience may differ significantly from historical data and could result in significant future adjustments, including a reduction of revenue recognized.

### Common Stock Warrant Liabilities

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. 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 when deemed appropriate. These values are subject to a significant degree of management’s judgment.

### Results of Operations

### Comparison of the Three Months Ended March 31, 2023 and 2022 (dollars in thousands)

| Statement of Operations Sales: | Three Months Ended March 31, 2023 | 2022 | Dollar Change | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Product revenue, net | $3,117 | $3,267 | $(150) | (5%) |
| Other revenue, net | 7 | 6 | 1 | 17% |
| Total sales, net | 3,124 | 3,273 | (149) | (5%) |
| Product cost of goods sold | 1,188 | 1,459 | (271) | (19%) |
| Gross profit | 1,936 | 1,814 | 122 | 7% |
| Research and development | 26 | 28 | (2) | (7%) |
| Sales and marketing | 1,653 | 1,985 | (332) | (17%) |
| General and administrative | 1,991 | 2,183 | (192) | (9%) |
| Total operating expenses | 3,670 | 4,196 | (526) | (13%) |
| Operating loss | (1,734) | (2,382) | 648 | (27%) |
| 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, net | (5) | (4) | (1) | 25% |
| Net loss | $(1,739) | $(111) | $(1,628) | 1467% |

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### Effect of Change in Accounting and Revision of Prior Period Financial Statements

As discussed further in Note 2, “Summary of Significant Accounting Policies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report, during the three months ended September 30, 2022, the Company made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon. While reviewing its accounting policy for fulfillment fees, the Company identified an immaterial error in its previously issued consolidated financial statements whereby the Company had been incorrectly presenting revenue net of selling commissions paid to third-party online retailers. Changes and revisions to prior period amounts presented in this report have been made to conform to the current period presentations. For the three months ended March 31, 2022, the result of these changes and revisions was an increase of $644 thousand in product revenue, net, which was offset by an increase of $346 thousand in product cost of goods sold and $298 thousand in sales and marketing expenses. These changes and revisions did not impact operating loss, net loss or net loss per share in the Company’s unaudited condensed consolidated statement of operations in the periods presented in this report or in previously issued annual and quarterly Company consolidated financial statements. The changes and revisions also did not impact cash or ending cash balances in the Company’s unaudited condensed consolidated balance sheets as of the dates presented in this report or in previously issued annual and quarterly Company consolidated financial statements.

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

Product revenue, net, decreased by $150 thousand, or 5%, to $3.1 million for the three months ended March 31, 2023, from $3.3 million for the three months ended March 31, 2022.

Revenue from Avenova Spray increased $0.1 million from $1.8 million for the three months ended March 31, 2022 to $1.9 million for the three months ended March 31, 2023. The 2022 result 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.

Revenue from DERMAdoctor branded skincare products decreased $0.2 million from $1.0 million for the three months ended March 31, 2022 to $0.8 million for the three months ended March 31, 2023, primarily from wholesale customers.

Revenue from the Company’s wound care products was $0.1 million during both quarters.

Cost of goods sold decreased by $271 thousand, or 19%, to $1.2 million for the three months ended March 31, 2023 from $1.5 million for the three months ended March 31, 2022 primarily due to the overall decrease in product revenue.

Gross profit increased by $122 thousand in spite of the decrease in product revenue. This is primarily the impact of the increase in expired Avenova Spray units returned from retail pharmacies in the 2022 period as well as product and channel mix.

### Sales and marketing

Sales and marketing expenses decreased by $0.3 million, or 17%, to $1.7 million for the three months ended March 31, 2023, from $2.0 million for the three months ended March 31, 2022. The decrease was due primarily to continued lower digital advertising costs incurred for the Company’s Avenova Spray and other Avenova branded optical products in the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

### General and administrative

General and administrative expenses decreased $0.2 million to $2.0 million for the three months ended March 31, 2023, from $2.2 million for the comparable period in 2022. The change is primarily the result of a decrease in variable compensation costs, including non-cash stock-based compensation expense, recorded in the comparable periods.

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### 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 three months ended March 31, 2022 with no comparable adjustment for the current year period. For additional information regarding the warrant liability and their valuation, please see Note 11, “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 three months ended March 31, 2022 with no comparable adjustment for the current year period. This contingent liability related to potential future contingent consideration of earn out payments that could have become payable as part of the DERMAdoctor Acquisition if specified milestone events were achieved. As of March 31, 2023, the Company does not anticipate that any such earn out payments will be made.

### Financial Condition, Liquidity and Capital Resources

As of March 31, 2023, our cash and cash equivalents were $3.7 million, compared to $5.4 million as of December 31, 2022. Based primarily on the funds available on March 31, 2023 and the 2023 Private Placement completed subsequent to March 31, 2023 as further described in Note 18, “Subsequent Events”, 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 second quarter of 2024. We have sustained operating losses for the majority of our corporate history and expect that our 2023 expenses will exceed our 2023 revenues, as we continue to invest in both Avenova and DERMAdoctor commercialization efforts. Additionally, we expect to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Accordingly, we have determined that our planned operations raise substantial doubt about our ability to continue as a going concern. Additionally, changing circumstances may cause us to expend cash significantly faster than currently anticipated, and we may need to spend more cash than currently expected because of circumstances beyond our control that impact the broader economy such as periods of inflation, supply chain issues, the continuation of the COVID-19 pandemic and international conflicts.

Our long-term liquidity needs will be largely determined by the success of commercialization efforts. To address our current liquidity and capital needs, we have and continue to evaluate different plans and strategic transactions to fund operations, including: (1) raising additional capital through debt and equity financings or from other sources; (2) reducing spending on operations, including reducing spending on one or more of our sales and marketing programs or restructuring operations to change our overhead structure; (3) out-licensing rights to certain of our products or product candidates, pursuant to which we would receive cash milestones or an upfront fee; and/or (4) entering into license agreements to sell new products. We may issue securities, including common stock, preferred stock, convertible debt securities and warrants through additional 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 one or more additional transactions and/or substantial revenue growth from our commercialization efforts, there will be substantial doubt about our ability to continue as a going concern within one year after the date these unaudited condensed consolidated financial statements are issued, and we will be required to scale back or terminate operations and/or seek protection under applicable bankruptcy laws. The accompanying unaudited condensed consolidated financial statements have been prepared assuming we 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. These 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 our ability to continue as a going concern.

### Cash Used in Operating Activities

Net cash used in operating activities was $1.6 million for the three months ended March 31, 2023, which consisted primarily of a net loss of $1.7 million, adjusted by depreciation and amortization expenses of $51 thousand, stock-based compensation expenses of $75 thousand, and a net change of $2 thousand in our net operating assets and liabilities.

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.

### Cash Used in Investing Activities

Net cash used in investing activities for the purchase of property and equipment was $13 thousand and $24 thousand, for the three months ended March 31, 2023 and 2022, respectively.

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### Cash Used in Financing Activities

There was no cash used in, or provided by, financing activities during the three months ended March 31, 2023.

For the three months ended March 31, 2022, net cash used in financing activities consisted of a repayment of the DERMAdoctor line of credit, which was subsequently terminated.

### Net Operating Losses and Tax Credit Carryforwards

As of December 31, 2022, we had net operating loss carryforwards for federal and state income tax purposes of $133.0 million and $111.0 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 $38.1 million that will carry forward 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, 2022, we also had tax credit carryforwards for federal income tax purposes of $0.5 million and $0.1 million for state tax purposes. If not utilized, the federal tax credits will begin expiring in 2031. 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 changes 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, 2023 and December 31, 2022 as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

### Seasonality

#### Avenova Branded Products

In recent years, as our focus and revenue mix have shifted in favor of Avenova products sold directly to the consumer without insurance reimbursement, we have not noted any material seasonal impacts on our overall eyecare business, with demands consistent throughout the year.

Prior to this shift, while focused on prescription Avenova Spray, prescriptions for Avenova Spray experienced seasonality with the first quarter of each year typically being the lowest revenue quarter. This annual phenomenon was due to consumers facing the need to satisfy health insurance deductibles and changes to copays as each new insurance year began.

#### Dermatology/Skincare Products

Our DERMAdoctor products are sold through wholesale distribution relationships with third parties such as Costco 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, 2023 were as follows (in thousands):

| Contractual Obligations | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Facility leases | $538 | $952 | $656 | $— | $2,146 |
| Equipment lease | 8 | 13 | — | — | 21 |
| Total | $546 | $965 | $656 | $— | $2,167 |

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Our commitments as of March 31, 2023 consisted primarily of facility operating leases and an operating lease for one copier.

The total commitment for the facility leases were $2.1 million due over the leases’ terms as of March 31, 2023.

The total commitment for the copier lease was $22 thousand due over the leases’ terms as of March 31, 2023.

See Note 10, “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, 2023 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, 2023 and December 31, 2022, 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, 2,173 characters.

### Evaluation of Disclosure Controls and Procedures

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 at March 31, 2023, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure, at the reasonable assurance level, 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 were no changes in our internal control over financial reporting during the quarter ended March 31, 2023, which has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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## Risk factors

As filed, 2,135 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 additional material risks we face.

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, 2022, which was filed with the SEC on March 31, 2023.

### Risk Relating to the Debentures

***We have debt, which is secured by all of our assets, and defaulting on such debt may have a material adverse effect on the Company.***

The Debentures represent outstanding secured convertible notes of the Company. Pursuant to the Security Agreement and Subsidiary Guarantee, all of our assets, including our accounts receivable and general intangibles, including all inventory, machinery, equipment, furniture and fixtures and the products and proceeds of all the foregoing, have been pledged as collateral to secure the repayment of the Debentures. If we are unable to repay these Debentures or if another type of event of default occurs, a decision by the holders of the Debentures to foreclose on their security interest would materially and adversely affect our future.

***The issuance of our Common Stock in connection with the conversion of the Debentures would cause substantial dilution, and could materially affect the trading price of our common shares.***

There is an aggregate principal amount of $3.3 million outstanding under the Debentures. To the extent we or the holders of the Debentures converts the Debentures into our Common Stock, including for more shares of Common Stock than we currently anticipate due to the monthly redemption provision in the Debentures and the trading price of our Common Stock potentially declining, substantial amounts of our Common Stock will be issued. Such issuances could result in substantial decreases to our stock price and dilution to our existing shareholders.

Filed May 11, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-013945. Last ingested by Listed: Oct 29, 2026, 17:47 ET. No prices; not investment advice.