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Item 5. Market for Registrant’s Common Equity

2023-03-31 compared with 2022-03-29 · 165 added, 218 removed, 91 unchanged (81% of the section changed)

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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.

Except as required by law, we undertake no obligation to publicly revise or update 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 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, as further described in Item 1.

On November 5, 2021, we purchased DERMAdoctor, LLC (“DERMAdoctor”) (the “DERMAdoctor Acquisition”) 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 Consolidated Financial Statements in Part II, Item 8 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”

We are a company focused on the development and sale 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 Novawipes by Avenova, Avenova Lubricant Eye Drops, Avenova Moist Heating Eye Compress, and the i-Chek eyelid and eyelash mirror by Avenova.

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 in fiscal 2022, 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 through 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

To help address our need for liquidity and capital to fund our planned operations, we entered into two financing transactions on September 9, 2022, which resulted in our Company raising approximately $5.3 million of gross proceeds, as summarized below.

In connection with these transactions, effective November 15, 2022, we completed the Reverse Stock Split, a 1-for-35 reverse stock split of our common stock.

2022 Warrant Reprice Transaction

On September 9, 2022, we entered into certain letter agreements and completed the 2022 Warrant Reprice Transaction with each of the holders of the November 2021 Warrants and certain holders of the July 2020 Warrants.

The 2022 Warrant Reprice Transaction resulted in gross proceeds of approximately $2.1 million.

Pursuant to the letter agreements, the November 2021 Warrants and the July 2020 Warrants were amended to:

(1) reduce the exercise price;

(2) provide that such warrants would not be exercisable until a later date, March 9, 2023;

and (3) in the case of the November 2021 Warrants, extend the termination date to September 11, 2028.

Additionally, in connection with the 2022 Warrant Reprice Transaction, we issued to certain participants in the 2022 Warrant Reprice Transaction that exercised their November 2021 Warrants, as amended, or their Amended July 2020 Warrants, as applicable, the September 2022 Warrants to purchase up to a number of shares of common stock, equal to 100% of the number of shares of Common Stock that a participant exercised.

The September 2022 Warrants are exercisable for an aggregate of 327,860 shares of Common Stock.

For additional information regarding the 2022 Warrant Reprice Transaction, the November 2021 Warrants, as amended, the Amended July 2020 Warrants and the September 2022 Warrants, see Note 13, “Warrant Liability”

and Note 14, “Stockholders’

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in the Notes to Consolidated Financial Statements in Part II, Item 8 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.

2022 Private Placement

Concurrent with the 2022 Warrant Reprice Transaction on September 9, 2022, we entered into the 2022 Private Placement, a private placement transaction with certain accredited investors to sell, pursuant to the 2022 Securities Purchase Agreement, units consisting of:

(1) 3,250 shares of Series C Preferred Stock convertible into an aggregate of 516,750 shares of common stock , (2) the Short-Term Warrants exercisable for 515,876 shares of common stock, and (3) the Long-Term Warrants exercisable for 515,876 shares of common stock.

On November 18, 2022, we closed the 2022 Private Placement and received gross proceeds of $3.2 million from the sale of the Series C Preferred Stock and the 2022 Warrants.

For additional information regarding the 2022 Private Placements, see Note 14, “Stockholders’

Equity”

in Part II, Item 8 of this report.

On October 3, 2022, we received a notification from the NYSE American stating that the Company is not in compliance with Section 1003(f)(v) of the NYSE American Company Guide because the Company’s shares of common stock were determined by the NYSE American staff to have been selling for a low price per share for a substantial period of time.

We regained compliance with the NYSE American listing requirements by effecting our Reverse Stock Split effective November 15, 2022.

Financial Overview and Outlook

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Our net losses were $10.6 million and $5.8 million for the years ended December 31, 2022 and 2021, respectively.

As of December 31, 2021, we had an accumulated deficit of $141.9 million and current assets totaling $13.2 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

As of December 31, 2022, we had an accumulated deficit of $158.2 million, total current assets of $11.3 million and total assets of $16.4 million.

Included in our net losses for the year ended December 31, 2022, was an impairment of our DERMAdoctor business of approximately $6.8 million.

Approximately $6.7 million of the total impairment was reflected in the goodwill, intangible and other asset impairment caption in our consolidated statements of operations, and approximately $0.1 million was reflected in the general and administrative caption in our consolidated statements of operations.

The impact of the DERMAdoctor impairment on our consolidated balance sheet as of December 31, 2022 was as follows;

goodwill was reduced by $4.2 million, other intangible assets, net was reduced by $2.6 million, and property and equipment, net was reduced by $0.1 million.

Refer to Note 2, “Summary of Significant Accounting Policies”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for further information on the impairment of our DERMAdoctor business.

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 consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States.

The preparation of these 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.

The preparation of these 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 consolidated financial statements, as well as the reported revenues and expenses during the reporting periods.

In preparing these 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.

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.

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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 Consolidated Financial Statements in Part II, Item 8 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 December 31, 2021 and December 31, 2020.

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 December 31, 2021 and 2020, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $641 thousand and $236 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

Customer relationships

Straight line

Trade secrets / product formulations

Straight line

N/A  

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report, we believe that the following accounting estimates are most critical to fully understanding and evaluating our reported financial results.

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”

in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

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 consolidated statements of operations until such time as the specified milestone achievement period is complete.

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.

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 statements of operations.

There were no impairment charges during the years ended December 31, 2021 and 2020, respectively.

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 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 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”

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):

Balance at December 31, 2020

Current provision related to sales made during current period

Balance at December 31, 2021

Cost of goods sold includes third-party manufacturing costs, shipping and handling costs, and other costs associated with products sold.

Cost of goods sold also includes any necessary allowance for excess and obsolete inventory along with lower of cost and estimated net realizable value.

Research and Development Costs

The Company charges research and development costs to expense as incurred.

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

Stock-Based Compensation

The Company’s stock-based compensation includes grants of stock options and restricted stock units (“RSUs”) to employees, 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 Consolidated Financial Statements in Part II, Item 8 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.

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.

Updates to assumptions could have a significant impact on our results of operations in any given period, including adjustments recorded during the year ended December 31, 2022 as further described in Note 2, “Summary of Significant Accounting Policies”

in the Notes to Consolidated Financial Statements, in Part II, Item 8 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

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 consolidated statements of operations and comprehensive loss.

The fair values of these warrants are determined using the Black-Scholes option pricing model, the Binomial Lattice (“Lattice”) valuation model, or the Monte Carlo simulation model where deemed appropriate.

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

Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies”, in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for information on recent accounting pronouncements.

Results of Operations

Comparison of Years Ended December 31, 2022 and 2021

For the Years Ended

(in thousands)

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General and administrative

Goodwill, intangible and other asset impairment

Total operating expenses

Operating loss

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

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

Other (expense) income, net

Loss before provision for income taxes

Provision for income taxes

Net loss and comprehensive loss

Non-cash loss on modification of common stock warrants

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

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

Other expense , net

Impact of DERMAdoctor Acquisition

The above results include the financial results of DERMAdoctor beginning at the time of the Acquisition Closing on November 5, 2021 (see Note 3, “Business Combination”

The 2021 results above include the financial results of DERMAdoctor beginning at the time of the closing of the DERMAdoctor Acquisition on November 5, 2021 (see Note 3, “Business Combination”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report) which includes product revenue, net, of $0.6 million, goods sold of $0.3 million, $0.2 million in sales and marketing costs and $0.3 million in general and administrative costs.

Accordingly, the 2021 results do not represent a full year of DERMAdoctor financial results while the 2022 results do reflect a full year of DERMAdoctor financial results.

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

As discussed in “Revenue Adjustment and Revenue Recognition”

above and in more detail in Note 2, “Summary of Significant Accounting Policies”

in the Notes to the Consolidated Financial Statement in Part II, Item 8 of this report, during the year ended December 31, 2022, we made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon.

While reviewing our accounting policy for fulfillment fees, we identified an immaterial error on our previously issued consolidated financial statements whereby we had been incorrectly presenting revenue net of selling commissions paid to third-party online retailers.

Beginning in the third quarter of 2022 and for the year ended December 31, 2022, we began expensing them as incurred as sales and marketing expenses within our consolidated statements of operations.

Changes and revisions to prior period amounts presented in this report have been made to conform to the current period presentations.

For year ended December 31, 2021, the result of these changes and revisions was an increase of $1.8 million in product revenue, net, which was offset by an increase of $0.9 million in product cost of goods sold and $0.9 million in sales and marketing expenses.

These changes and revisions that were applied for the year ended December 31, 2021 and did not impact operating loss, net loss or loss per share in our consolidated statement of operations.

The changes and revisions also did not impact cash or ending cash balances in our consolidated balance sheets as of December 31, 2021, or in previously issued annual Company financial statements.

Total Net Sales, Cost of Goods Sold and Gross Profit

Product revenue, net, decreased by $1.5 million, or 15%, to $8.4 million for the year ended December 31, 2021, from $9.9 million for the year ended December 31, 2020.

During the year ended December 31, 2020, we generated $3.1 million from the sale of KN95 Masks with no comparable revenue during the year ended December 31, 2021.

We do not anticipate dedicating future Company resources toward the sale of KN95 Masks or other personal protective equipment and we do not expect any related future revenue.

Offsetting this decrease, revenue from Avenova Spray increased $0.8 million in 2021 from $6.0 million for the year ended December 31, 2020 to $6.8 million for the year ended December 31, 2021.

The increase was the result of an overall increase in the number of Avenova Spray units sold.

The increase in units sold reflects continued higher number of over-the-counter and physician dispensed units sold, partially offset by continued decrease in the number of units sold through pharmacy channels.

The increase in over-the-counter units includes the impact of our ongoing focus and increasing spend on digital marketing and social media initiatives to promote Avenova Spray directly to end consumers.

The overall increase in revenue due to unit sales was also partially offset by the lower average net selling price associated with over-the-counter and physician dispensed units as compared to units sold through our pharmacy channels.

We also recognized product revenue, net, of $0.6 million from the sale of DERMAdoctor products during the period after completion of the DERMAdoctor Acquisition on November 5, 2021, with no comparable revenue during the year ended December 31, 2020.

Cost of goods sold decreased by $1.2 million, or 30%, to $2.8 million for the year ended December 31, 2021, from $4.0 million for the year ended December 31, 2020.

The decrease was primarily the result of cost of goods sold from the sale of KN95 Masks during the 2020 period, with no comparable cost in the 2021 period.

This decrease was partially offset by the overall increase in the number of Avenova Spray units sold during the year ended December 31, 2021, as compared to the 2020 period.

We also recognized cost of goods sold of $0.3 million from the sale of DERMAdoctor products during the period after completion of the DERMAdoctor Acquisition, with no comparable cost of goods sold during the year ended December 31, 2020.

Gross profit decreased by $0.3 million, or 5%, to $5.6 million for the year ended December 31, 2021, from $6.0 million for the year ended December 31, 2020.

The decrease reflects the lack of KN95 Mask sales during 2021, offset by an increase in sales of higher margin Avenova Spray during the 2021 period as well as the sale of DERMAdoctor products after the completion of the DERMAdoctor Acquisition.

Product revenue, net, increased by $4.2 million, or 41%, to $14.4 million for the year ended December 31, 2022, from $10.2 million for the year ended December 31, 2021.

The increase in product revenue, net, was primarily the result of $4.2 million from the sale of DERMAdoctor products recognized during the year ended December 31, 2022, compared to revenue recognized from DERMAdoctor products of $0.6 million for the year ended December 31, 2021.

The 2022 results include sales from DERMAdoctor products for the entire fiscal year while the 2021 results include sales recognized only after the DERMAdoctor Acquisition on November 5, 2021 through December 31, 2021.

Revenue from Avenova Spray decreased by $0.8 million in 2022 from $8.4 million for the year ended December 31, 2021 to $7.6 million for the year ended December 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 also due to an overall decrease in physician dispensed units sold and units sold through the pharmacy channels.

These decreases were partially offset by a continued increase in the number of over-the-counter Avenova Spray units sold through online channels.

Additionally, the Company recorded an increase of $0.6 million in revenue from other Avenova branded optical products, including the Company’s NovaWipes by Avenova and Avenova Moist Heating Eye Compress Mask.

Additionally, product revenue, net, from the Company’s NeutroPhase and PhaseOne branded wound care products was $0.9 million higher during the year ended December 31, 2022, compared to the year ended December 31, 2021.

Cost of goods sold increased by $2.9 million, or 80%, to $6.6 million for the year ended December 31, 2022, from $3.7 million for year ended December 31, 2021.

This increase was primarily due to $2.7 million in cost of goods sold recognized from the sales of DERMAdoctor products for the year ended December 31, 2022, compared to the cost of goods sold from sales of DERMAdoctor products of $0.3 million for the year ended December 31, 2021.

In addition, cost of goods sold increased in relation to the increase in Avenova branded optical products other than Avenova Spray and wound care products sold in the year ended December 31, 2022 compared to the year ended December 31, 2021.

Gross profit increased by $1.3 million, to $7.8 million for the year ended December 31, 2022, from $6.5 million for the comparable period in 2021, which is a result of the increase in total sales, net, offset by the increase in the cost of goods sold for the same period.

Research and development  

Research and development expenses decreased by $241 thousand, or 85%, to $44 thousand for the year ended December 31, 2021, from $285 thousand for the year ended December 31, 2020.

The decrease was primarily the result of one-time regulatory expenses incurred in the 2020 period with no comparable expenditures in the 2021 period.

Research and development expenses increased by $130 thousand to $174 thousand for the year ended December 31, 2022, from $44 thousand for the year ended December 31, 2021.

The 2022 results include costs incurred for DERMAdoctor research and development activities incurred for the entire fiscal year while the 2021 results include costs recognized only after the DERMAdoctor Acquisition was completed on November 5, 2021 through December 31, 2021.

Sales and marketing

Sales and marketing expenses increased by $1.0 million, or 17%, to $7.2 million for the year ended December 31, 2021, from $6.2 million for the year ended December 31, 2020.

This is reflective of an increase in marketing costs for Avenova branded products, primarily digital advertising, and costs associated with the Company’s relaunch of CelleRx Clinical Reset.

Going forward, the Company anticipates focusing resources on the DERMAdoctor brand instead of driving growth of CelleRx Clinical Reset.

The 2021 period also includes $0.2 million in sales and marketing costs incurred in connection with DERMAdoctor products during the period after the DERMAdoctor Acquisition on November 5, 2021 with no comparable expense during the year ended December 31, 2020.

These increases were partially offset by a decrease in sales representative headcount and associated costs in the first quarter of 2021.

Sales and marketing expenses decreased by $0.3 million, or 4%, to $7.8 million for the year ended December 31, 2022, from $8.1 million for the year ended December 31, 2021.

The decrease was due primarily to lower digital advertising and related consulting costs incurred for the Company’s Avenova Spray and other eye care products in the year ended December 31, 2022 compared to the year ended December 31, 2021.

Additionally, results for the year ended December 31, 2021, include marketing costs incurred in conjunction with the Company’s CelleRx Clinical Reset product with no comparable expenditures during the same period in 2022.

These decreases in sales and marketing expenses for the year ended December 31, 2022 were partially offset by an increase of $2.2 million in sales and marketing costs incurred for DERMAdoctor products compared to $0.2 million recognized in the same period of 2021.

The 2022 results include costs of the DERMAdoctor business that we incurred for the entire fiscal year while the 2021 results include costs recognized only after the DERMAdoctor Acquisition was completed on November 5, 2021 through December 31, 2021.

General and administrative  

General and administrative expenses increased by $1.3 million, or 22%, to $7.2 million for the year ended December 31, 2021, from $5.9 million for the year ended December 31, 2020.

The increase was primarily a result of one-time costs incurred in conjunction with the DERMAdoctor Acquisition and the related financing during the year ended December 31, 2021 with no comparable expense in the 2020 period.

Employee-related costs, consisting primarily of non-cash stock-based compensation costs, also increased in the 2021 period as compared to 2020.

The 2021 period also includes $0.3 million in general and administrative costs incurred by DERMAdoctor during the period after the DERMAdoctor Acquisition on November 5, 2021 with no comparable costs during the year ended December 31, 2020.

These increases were partially offset overall by a decrease in 2021 in costs incurred in conjunction with a dispute with the Company’s former Interim President and Chief Executive Officer and Chief Financial Officer as further described in Note 10, “Commitments and Contingencies”, in the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report.

The Company also received an insurance reimbursement for these costs which further reduced general and administrative costs in the 2021 period.

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

The adjustments to the fair value of warrant liability resulted in a gain of $4.6 million for the year ended December 31, 2021 and a loss of $5.2 million for the year ended December 31, 2020.

For additional information regarding the warrants and their valuation, please see Note 13, “Warrant Liability”, in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

(expense) income, net

Other (expense) income, net, was a net expense of $1.6 million for the year ended December 31, 2021 as compared to a net income of $0.6 million for the year ended December 31, 2020.

The expense of $1.6 million for the year ended December 31, 2021 represented issuance costs related to the 2021 Warrants.

For additional information regarding the issuance of the 2021 Warrants, please see Note 14 “Stockholders’

Equity”.

During the year ended December 31, 2020, the Company recorded income of $0.9 million as the result of income recognized as qualifying expenses incurred under the PPP Loan.

Please see Note 20, “Paycheck Protection Program”, to the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report.

Comparison of Years Ended December 31, 2020 and 2019

For this discussion, see the “Comparison of Years Ended December 31, 2020 and 2019 in Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Liquidity and Capital Resources  

General and administrative expenses increased $0.3 million to $7.5 million for the year ended December 31, 2022, from $7.2 million for the comparable period in 2021.

Results for the year ended December 31, 2022 include ongoing DERMAdoctor general and administrative operating costs and amortization of intangibles related to the DERMAdoctor Acquisition, and the DERMAdoctor impairment of property plant and equipment recorded for the year ended December 31, 2022.

The 2022 results include these expenses for the entire fiscal year while the 2021 results include costs recognized only after the DERMAdoctor Acquisition was completed on November 5, 2021 through December 31, 2021.

Additionally, during year ended December 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.

Offsetting these increases were lower legal and professional fees and variable compensation and non-cash stock-based compensation expenses recorded in the 2022 period.

During the year ended December 31, 2021, we incurred legal and other professional fees related to the DERMAdoctor Acquisition with no comparable DERMAdoctor Acquisition legal and professional fees incurred in the 2022 period.

Goodwill, intangible and other asset impairment

In connection with the impairment of our DERMAdoctor business, we recorded a goodwill, intangible and other asset impairment charge of $6.7 million in the year ended December 31, 2022.

Goodwill related to our DERMAdoctor business was impaired by $4.2 million as of December 31, 2022, and our indefinite-lived intangible assets and long-lived assets related to our DERMAdoctor business was reduced by $2.6 million.

We did not record any goodwill impairment charges for the year ended December 31, 2021, for further details refer to Note 2, “Summary of Significant Accounting Policies”

in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

Non-cash loss on modification of common stock warrants  

During the year ended December 31, 2022, the Company recorded a $1.9 million non-cash loss on the modification of common stock warrants, which occurred due to amendments to the Amended July 2020 Warrants and the November 2021 Warrants, as amended, in connection with the 2022 Warrant Reprice Transaction with no comparable result in the prior year period.

For additional information regarding the 2022 Warrant Reprice Transaction, please see Note 13, “Warrant Liability”

and Note 14, “Stockholder’s Equity”, in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report. 

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

Adjustments to the fair value of warrant liabilities resulted in a gain of $5.4 million for the year ended December 31, 2022 as compared to a gain of $4.6 million for the year ended December 31, 2021.

For additional information regarding the warrant liabilities and their valuation, please see Note 13, “Warrant Liability”, in the Notes to Consolidated Financial Statements, in Part II, Item 8 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 $0.6 million for the year ended December 31, 2022 with no comparable adjustment for the prior 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 December 31, 2022, we determined that the above-mentioned milestones were not met for the first calendar year of the post-closing earn out and are not expected to be met in the second calendar year of the post-closing earn out, based on projections;

therefore, the liability for the potential earn out payments was determined to be zero.

expense , net

Other expense, net, was $276 thousand and $1.6 million for the years ended December 31, 2022 and 2021, respectively. The other expense, net in 2022 was primarily due to an expense of $166 thousand related to the issuance of the September 2022 Warrants.

The other expense, net for the year ended December 31, 2021, represented issuance costs related to the November 2021 Warrants.

For additional information on our September 2022 Warrants and November 2021 Warrants, please see Note 14, “Stockholder’s Equity”, in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

Financial Condition, Liquidity and Capital Resources  

As of December 31, 2022, our cash and cash equivalents were $5.4 million, compared to $7.5 million as of December 31, 2021.

Based primarily on the funds available at December 31, 2021, management believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to enable the Company to meet its planned operating expenses at least through March 29, 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.

Our cash and cash equivalents include approximately $2.1 million in aggregate gross proceeds received from the 2022 Warrant Reprice Transaction, and $3.2 million in aggregate gross proceeds from the 2022 Private Placement.

Based primarily on the funds available on December 31, 2022, we believe that our existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund our existing operations and meet our planned operating expenses into at least the third quarter of 2023.

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 audited 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 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.

The 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 $6.7 million for the year ended December 31, 2022, which consisted primarily of a net loss of $10.6 million, a non-cash loss of $1.9 million on the modification of common stock warrants, a non-cash gain of $5.4 million on the change in fair value of our warrant liability, a non-cash gain of $0.6 million on the change in fair value of our contingent liability, impairment of our DERMAdoctor business including goodwill, intangible assets and property and equipment totaling $6.8 million, the amortization of intangible assets and depreciation of property and equipment of $0.5 million, stock-based compensation expenses of $0.2 million, and a net increase of $0.5 million in our net operating assets and liabilities.

Net cash used in operating activities was $9.2 million for the year ended December 31, 2021, which consisted primarily of a net loss of $5.8 million, adjusted primarily by non-cash gain of $4.6 million on the change in fair value of warrant liability, stock-based compensation expenses of $0.9 million, and a net decrease of $38 thousand in our net operating assets and liabilities.

Net cash used in operating activities was $4.7 million for the year ended December 31, 2020, which consisted primarily of a net loss of $11.0 million, adjusted primarily by non-cash loss of $5.2 million on the change in fair value of warrant liability, stock-based compensation expenses of $0.5 million, issuance of RSUs for services of $0.2 million, non-cash interest expense related to amortization of debt issuance cost and debt discount of $0.2 million, and a net increase of $0.2 million in our net operating assets and liabilities.

Cash Used in Investing Activities

For the years ended December 31, 2021, cash used in investing activities was $12.0 million which was primarily the result of $12.0 million, net of cash, paid at closing of the DERMAdoctor Acquisition (see Note 3, “Business Combination”

For the year ended December 31, 2022, cash used in investing activities was $0.1 million, which was primarily the result of capital expenditures for the purchase of property and equipment. 

For the year ended December 31, 2021, cash used in investing activities was $12.0 million which was primarily the result of $12.0 million, net of cash, paid at closing of the DERMAdoctor Acquisition (see Note 3, “Business Combination”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report).

Capital expenditures were $52 thousand and $26 thousand for the years ended December 31, 2021 and 2020, respectively, for the purchase of property and equipment. 

Capital expenditures were $52 thousand for the year ended December 31, 2021, for the purchase of property and equipment. 

Cash Provided by Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022 of $4.6 million was primarily related to the net proceeds received in the 2022 Warrant Reprice Transaction of $1.7 million, and the net proceeds received in the 2022 Private Placement of $3.0 million (including the issuance of Series C Preferred Stock and the issuance of the 2022 Warrants), partially offset by $0.1 million for the repayment of our DERMAdoctor line of credit, which was terminated in the first quarter of 2022.

See Note 13, “Warrant Liability”

and Note 14, “Stockholders’

Equity”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for further information regarding the 2022 Warrant Reprice Transaction and the 2022 Private Placement.

Net cash provided by financing activities was $16.8 million for the year ended December 31, 2021.

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in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for further information regarding the 2021 Private Placement and the ATM Program.

Net cash provided by financing activities was $9.8 million for the year ended December 31, 2020.

The Company received net proceeds of $5.2 million from an ATM Program, and an additional $7.1 million from the exercise of warrants.

These amounts were offset by repayments of $1.5 million on the Convertible Note (as later defined) issued to Iliad Research and Trading L.P.

and repayment of $1.0 million on the Promissory Note (as later defined), both paid using proceeds raised through an ATM Program with Ladenburg.

See Note 14, “Stockholders’

Equity,”

Note 12, “Convertible Note”

and Note 11, “Related Party Note Payable”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for further information regarding the ATM Program, Convertible Note and Promissory Note.

Quarterly Results of Operations (unaudited)

The following table presents unaudited quarterly results of operations for the eight most recent quarters ending with the quarter ended December 31, 2021.

This information has been derived from our unaudited consolidated financial statements and has been prepared by us on a basis consistent with our audited annual consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the information for the periods presented.

Quarter Ended

(in thousands, except per share data)

Statements of Operations Data:

Product revenue, net

Other revenue, net

Total sales, net

Cost of goods sold

Operating expenses:

Research and development

Sales and marketing

General and administrative

Total operating expenses

Operating loss

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

Non-cash gain (loss) on changes in fair value of embedded derivative liability

Other (expense) income, net

Loss before provision for income taxes

Provision for income taxes

Preferred deemed dividend

Net loss attributable to common stockholders

Net loss per share attributable to common stockholders:

Basic and diluted

Shares used in computing net loss per share:

Basic and diluted

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 Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) changed net loss carryforward provisions, allowing a full utilization of NOL carryforwards through December 31, 2020.

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, 2021, we also had tax credit carryforwards for federal income tax purposes of $1.3 million and $0.3 million for state tax purposes.

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.

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Such a limitation could result in the expiration of carryforwards before they are utilized.

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

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 December 31, 2022 and December 31, 2021 as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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 wholesale distribution relationships with third parties such as Costco, Amazon and others;

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.

5 unchanged sentences

Facility leases

Equipment leases

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

Our commitments as of December 31, 2022 consisted primarily of facility operating leases.

The total commitment for the facility leases were $2.2 million due over the leases’

terms as of December 31, 2021 and December 31, 2020, respectively.

Our corporate headquarters lease was subsequently amended on January 19, 2022, which included extending the lease term until 2027.

We had an operating lease for two copiers as of December 31, 2021.

The total commitment for the lease as of December 31, 2021 was $13 thousand due over the lease terms, compared to $29 thousand as of December 31, 2020.

terms as of December 31, 2022.

Our corporate headquarters lease was amended in 2022, which included extending the lease term until 2027.

See Note 12, “Commitments and Contingencies”

and Note 22, “Subsequent Events”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for further information regarding these leases.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity