As filed with the Securities and Exchange Commission on May 2, 2018

Registration No. 333 -                

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

DERMADOCTOR, LLC

(to be converted as described herein to a corporation named)

 

DERMADOCTOR, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   8071   [     ]

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

DERMAdoctor, Inc.

1901 McGee Street

Kansas City, Missouri 64108

(816) 472-5700

 (Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)

 

Jeff Kunin, M.D.

President and Chief Executive Officer

DERMAdoctor, Inc.

1901 McGee Street

Kansas City, Missouri 64108

(816) 472-5700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Leslie Marlow, Esq.

Hank Gracin, Esq.

Patrick J. Egan, Esq.

Gracin & Marlow, LLP

The Chrysler Building

405 Lexington Avenue, 26th Floor

New York, NY 10174

Telephone: (212) 907-6457

Facsimile: (212) 208-4657

 

Aron Izower, Esq.

Reed Smith, LLP

599 Lexington Avenue

New York, NY 10022

Telephone: (212) 521-5400

Facsimile: (212) 521-54504

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

 

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box: ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering: ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering: ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering: ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

  Large accelerated filer ☐ Accelerated filer ☐
  Non-accelerated filer ☐ Smaller reporting company ☒
    Emerging Growth Company ☒

 

If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒

 

 

 

  

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered  

Proposed maximum aggregate offering

price (1)

    Amount of registration fee  
Common Stock, $0.001 par value (2)(3)   $ 17,250,000     $ 2,147.63  
Representative’s Warrants (4)            
Shares of Common Stock underlying Representative’s Warrants (2)(5)   $ 937,500     $ 116.72  
Total   $ 18,187,500     $ 2,264.35  

 

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended (the “Securities Act”).
   
(2) Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional securities as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.
   
(3) Includes shares of common stock the underwriters have the option to purchase to cover over-allotments, if any.
   
(4) No fee pursuant to Rule 457(g) under the Securities Act.
   
(5) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The representative’s warrants are exercisable at a per share exercise price equal to 125% of the public offering price per share. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the representative’s warrants is $937,500, which is equal to 125% of $750,000 (5% of $15,000,000).

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED MAY 2, 2018

 

1,875,000 Shares

Common Stock

 

 

 

DERMAdoctor, Inc.

 

 

 

This is a firm commitment initial public offering of 1,875,000 shares of common stock of DERMAdoctor, Inc. No public market currently exists for our shares. We anticipate that the initial public offering price will be between $7.00 and $9.00 per share.

 

Prior to this offering, there has been no public market for our common stock. We have applied to list our shares of common stock for trading on the Nasdaq Capital Market (“Nasdaq”) under the symbol “DDOC.” No assurance can be given that our application will be approved.

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 12 of this prospectus for a discussion of information that you should consider before investing in our securities.

 

Neither the Securities and Exchange Commission, or the SEC, nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

We are an “emerging growth company” under applicable SEC rules and will be eligible for reduced public company disclosure requirements. See “Summary — Implications of Being an Emerging Growth Company.”

 

Following the completion of this offering, we will also qualify as a “controlled company” within the meaning of the rules of Nasdaq. Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements.

 

    Per Share     Total  
Public offering price   $              $           
Underwriting discounts and commissions (1)   $       $    
Proceeds, before expenses, to us   $       $    

   

(1) The underwriters will receive compensation in addition to the discounts and commissions. The registration statement, of which this prospectus is a part, also registers for sale warrants to purchase 93,750 shares of our common stock to be issued to the representative of the underwriters. We have agreed to issue the warrants to the representative of the underwriters as a portion of the underwriting compensation payable to the underwriters in connection with this offering. See “Underwriting” for a description of compensation payable to the underwriters.

 

We have granted the representative of the underwriters an option to purchase up to an additional 281,250 shares of common stock from us at the public offering price, less the underwriting discounts and commissions, within 45 days from the date of this prospectus to cover over-allotments, if any. If the representative of the underwriters exercises the option in full, the total underwriting discounts and commissions payable will be $          , and the total proceeds to us, before expenses, will be $          .

 

The underwriters expect to deliver our shares to purchasers in the offering on or about                 , 2018.

 

ThinkEquity

a division of Fordham Financial Management, Inc.

 

The date of this prospectus is                 , 2018

 

 

 

 

   

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
THE OFFERING 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION 9
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 11
RISK FACTORS 12
USE OF PROCEEDS 39
DIVIDEND POLICY 40
THE CORPORATE REORGANIZATION 41
CAPITALIZATION 42
DILUTION 43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 45
BUSINESS 58
MANAGEMENT 74
EXECUTIVE COMPENSATION 79
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 81
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 82
SHARES ELIGIBLE FOR FUTURE SALE 83
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK 84
DESCRIPTION OF SECURITIES 88
UNDERWRITING 93
LEGAL MATTERS 99
EXPERTS 99
WHERE YOU CAN FIND ADDITIONAL INFORMATION 99
INDEX TO FINANCIAL STATEMENTS F-1

 

You should rely only on the information contained in this prospectus or in any free writing prospectus that we may specifically authorize to be delivered or made available to you. We have not, and the underwriters have not, authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus may only be used where it is legal to offer and sell our securities. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our securities. Our business, financial condition, results of operations and prospects may have changed since that date. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where the offer is not permitted.

 

For investors outside the United States: We have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States must inform themselves about, and observe any restrictions relating to, the offering of securities and the distribution of this prospectus outside the United States.

 

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. We believe that the data obtained from these industry publications and third-party research, surveys and studies are reliable. We are ultimately responsible for all disclosure included in this prospectus.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our securities, you should carefully read this entire prospectus, including our financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in each case included elsewhere in this prospectus. In this prospectus, unless the context otherwise requires, the terms “we,” “us,” “our,” “DERMAdoctor” and the “Company” refer to DERMAdoctor, LLC for the periods prior to the consummation of the corporate reorganization (as described below), and such terms refer to DERMAdoctor, Inc. for the periods after the consummation of the corporate reorganization. Except as disclosed in the prospectus, the financial statements and selected historical financial data and other financial information included in this registration statement are (i) those of DERMAdoctor, LLC and an affiliated company, 1901 McGee, LLC, a variable interest entity for which DERMAdoctor, LLC is the primary beneficiary; and (ii) do not give effect to the corporate reorganization.

 

Prior to the effective date of the registration statement of which this prospectus is a part, we will complete a number of transactions pursuant to which DERMAdoctor, Inc. will succeed to the business of DERMAdoctor, LLC and the members of DERMAdoctor, LLC will become stockholders of DERMAdoctor, Inc. In this prospectus, we refer to such transactions as the “corporate reorganization.” 

 

Overview

 

We are an omni-channel, innovative, skincare company primarily focused on the creation of products that are designed to target common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris. We develop, market, distribute and sell skincare products under our DERMAdoctor ® brand worldwide. All of our DERMAdoctor ® products are conceived by our product design team headed by our Chief Creative Officer and founder, Dr. Audrey Kunin, who is a board-certified dermatologist. Dr. Kunin adds her unique perspective, which is incorporated in our packaging, that skincare can be both elegant and powerful. Our philosophy is to mix science and technology synergistically to provide non-irritating, effective and pleasing skincare products aimed at targeting overlooked or unfulfilled common skin concerns. All of our products are fragrance and dye free. Since 2003, we have been developing, marketing, distributing and selling an extensive array of our proprietary skincare products. Today, we produce and sell over 30 DERMAdoctor ® products that account for 39 stock keeping units, or skus, at prices ranging from $22 for an antiperspirant to $95 for a Kakadu vitamin C skin product. Our products are typically grouped into families of products and include those such as Wrinkle Revenge, Ain’t Misbehavin’, Calm Cool and Corrected and KP Duty designed to improve the skin’s appearance for aging, acne, redness and keratosis pilaris, respectively. Within each family, products are typically further broken down to face, eyes, and body. The ingredients are then uniquely formulated for the resulting product subcategory. Each family of products creates opportunities for the customer to expand into different product types aimed at addressing their particular skincare problems. For example, within our KP Duty family we offer both a lotion and a scrub. Often these products are purchased together. We recently launched a third KP Duty product, the KP Duty Body Peel, providing an innovative product delivery system which should expand this family of products to a large group of current customer users.

 

We initially began operations in 1998 as an e-commerce company selling third-party beauty products and skincare products on the internet and providing skincare advice and information on our website. Through our online sales we developed significant market knowledge of the industry, specifically what consumers desired and disliked, product packaging successes and failures, new technology and product opportunities and market voids, which led to our decision to create our own proprietary products to leverage our customer base and daily internet traffic and eventually to discontinue sales of third-party products to focus on sales of our own proprietary products. We named our proprietary skincare line DERMAdoctor ® .

 

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We utilize an omni-channel distribution model which includes traditional domestic retail distribution outlets, online shopping and international distributors. For the three months ended March 31, 2018, domestic, e-commerce and international sales were 42%, 32%, and 26% of our net sales, respectively, as compared to 46%, 35%, and 19%, respectively, for the three months ended March 31, 2017. For the year ended December 31, 2017, domestic, e-commerce and international sales were 44%, 26% and 30% of our net sales, respectively, as compared to 68%, 26% and 6%, respectively, for the year ended December 31, 2016. The traditional domestic retail distribution outlets consist mainly of specialty and department stores, including their company websites. To date, specialty retailers Ulta Beauty and Sephora have accounted for a majority of our U.S. sales. Other U.S. retailers include Belk, Macy’s online, Von Maur, Nordstrom online, Dermstore.com, and Skinstore.com. Other retail outlets include “flash” websites such as Gilt, HauteLook and Rue La La and in the past have included Home Shopping Network, or HSN, and QVC. In 2017, we began initial sales to Costco Wholesale Corporation (“Costco”) for select products, as well as Evine, a home shopping television channel. As of March 31, 2018, our products are distributed to over 700 Ulta Beauty stores located in 49 states and the District of Columbia as well as other department stores. Our direct to consumer distribution channel is comprised of internet sales through our website ( www.dermadoctor.com ) and through Amazon.com. Our primary source of revenue historically has been from the sale of our products in the United States. In 2017, however, we saw significant growth in our international distribution channel. The majority of the growth during 2017 was driven by the signing of our China distributor in October 2016, their significant advance purchase in 2017 of one of our products due to a price that reflected a one-time special manufacturing discount and growth in sales to our Kuwait distributor. We experienced continued growth in our international channel during the three months ended March 31, 2018 due to sales of our products by our China and Kuwait distributors as well as sales by our Hong Kong distributor who was signed in July 2017. The majority of our international sales have occurred through these distributors that sell our products via the internet in China, Hong Kong and Kuwait. In April 2017, we were granted the approval for European Union registration of some of our products and we expect to expand shipments of our approved products in Europe in 2018. In August 2017, we began shipping to our distributor in Guatemala who has the rights to begin shipping to other countries in Central America, namely, Belize, Costa Rica, El Salvador, Honduras, Nicaragua and Panama. In January 2018, we began shipping to our distributor in The United Arab Emirates (UAE) who has the rights to ship our products to Saudi Arabia, Qatar, Lebanon, Jordan, Oman and Bahrain.

 

We believe that a core element of our success is our distinctive marketing strategy. We focus on educating our target customers, women between the ages of 18 to 65 who have a college education with above average household income, about the unique attributes of our products, developing intimate relationships with these consumers and capitalizing on our omni-channel distribution strategy to effectively reach and engage these consumers. We believe educational media such as appearances on television shows, information on our website and physical presence at specialty retailers such as Ulta Beauty, as well as at certain department stores, has helped us to further strengthen our brand image and provide additional points of contact to educate consumers about our products. We have received multiple awards from respected publications such as Health and Fitness magazine and have been a finalist in the CEW Beauty Awards, the “Academy Awards” of the beauty industry. In addition, Dr. Audrey Kunin has been a guest on The Dr. Oz show several times. Dr. Kunin and her products have graced numerous publications including InStyle, W, More, Redbook, Bride Glamour, Family Circle, O The Oprah Magazine, Shape, Self, Fitness, Good Housekeeping, Cosmopolitan, Health, Allure, Elle, RealSimple, Lucky, Ladies Home Journal, People and People en Espanol, Prevention, Men’s Health, New York Daily News, The Wall Street Journal, The Washington Post, The Chicago Tribune, WebMD, Newsweek and U.S. News and World Report, The Today Show, E! and the Tyra Banks Show.

 

Strengths and Competitive Advantages

 

The skincare products market is large and attractive

 

We believe that the skincare products market is highly attractive given its scale, growth dynamics and consumer demand trends. The Cosmetic Skin Care Market: Global Industry Analysis, Trends, Market Size and Forecasts to 2023 reports that the global cosmetic skincare market was $130.7 billion in 2016. It predicts the global skincare market to grow with a compound annual growth rate of between 4.7% and 5.3% from 2017 to 2023. The report predicts that Asia Pacific, which includes China, will dominate the world market with the Middle East and Africa growing at the highest compounded annual growth rate over the forecasted period. Lucitel, a market research firm, in its December 12, 2016 report, forecasts the global skincare market to grow at a compound annual growth rate of 3.8% from 2016 to 2021, with opportunities in the areas of anti-aging, sun protection, body care lotion and multi-functional skin cream.

 

Our strategic differentiation: DERMAdoctor, a prestige, problem solving, skincare company

 

We are driven by what we believe today’s consumer wants—an assortment of high-quality, prestige-inspired skincare products at extraordinary value. Through our modern consumer engagement and responsiveness, we interact with our consumers instead of broadcasting at them. We focus a significant portion of our product development efforts on creating new and improving existing products that fulfill unmet skincare needs. We believe that our business model has multiple areas of competitive advantage, including the following:

 

Authentic brand that attracts a wide range of consumers in the category. Since 1998, we have prioritized getting to know our consumers, and they in turn have provided us with valuable feedback, enabling us to build DERMAdoctor ® into an authentic and trusted brand. Our differentiated marketing approach focuses on educating consumers as to the unique attributes of our products; communicating product efficacy through product demonstrations; featuring our consumers instead of celebrities on our website and developing direct connections with our consumers. By providing a comprehensive experience—from integrated engagement online, through social media and in retail stores to our differentiated product offerings—we target new users as well as sophisticated buyers of skincare products.

 

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Innovation and customer feedback model . We believe innovation is a major key to our success. We have built an innovation capability that has led to breakthrough new product introductions. We introduced five new products over the past three years and 28% of our 2017 net sales came from products launched in the last three years. With almost a half million visits per year and online reviews, dermadoctor.com has been a useful vehicle for aiding in refinement of products and determining customer preferences. We are able to analyze sales results, reviews and feedback through social media to provide a quick indication of a product’s performance, which allows us to quickly allocate appropriate marketing and other resources. 

 

True omni-channel brand. We are a true omni-channel brand with a presence across national retailers, e-commerce and international distributors, which allows us to leverage insights gained from each channel to drive performance across the business.

 

  National retailers . We currently sell our products to retailers, some of which sell our products in brick-and-mortar stores and through their websites and others who sell our products solely through their websites. Ulta Beauty, a leading national retail customer and key beauty destination for many consumers, currently sells our products in over 700 of their stores. We have also continued to expand our sales through other retailers, including Von Maur, Nordstrom, Gilt, Sephora, Costco and Macy’s. We believe that our presence across many touch points within the beauty industry further strengthens our brand image.

 

  e-commerce . Our e-commerce business, which includes sales on our website and on Amazon.com, serves as a strong source of sales and an important component of our engagement and innovation model. We have nurtured a loyal, highly active online community for almost two decades through our own website and more recently through Amazon’s Luxury Beauty page. In 2017, we had just over one-half million total visitors to our website and over two million page views. During 2017, we focused on driving more customers to our website through on-line marketing and social media. Sales through our website and Amazon.com contribute the highest gross margin of any of our sales channels.

 

  International Distributors . We currently sell our products to international distributors who sell into China, Hong Kong, Central America and Kuwait and the UAE. This is the fastest growing segment of our business with a growth rate of 539% between 2016 and 2017 and a growth rate of 66% between the first quarter of 2017 and the first quarter of 2018. Although we have experienced significant growth in this segment during the twelve months ended December 31, 2017 and the three months ended March 31, 2018 when compared to prior periods, we do not expect a similar percentage increase for the rest of 2018, as 2017 sales included the impact of the signing of our China distributor in October 2016, their significant advance purchase of one of our products due to a price that reflected a one-time special manufacturing discount, and growth in sales to our Kuwait distributor. We are actively pursuing additional distribution partners and other opportunities to sell our products internationally.

 

Experienced management team. Our Chief Creative Officer, Audrey Kunin, M.D., is a board-certified dermatologist, author, clinician, educator, and television personality. Dr. Kunin founded our company in 1998 with her husband, Jeff Kunin, M.D., who currently serves as our President and Chief Executive Officer. Jeff Kunin also holds a Masters of Business Administration from Washington University in St. Louis, Missouri. Under the leadership of Audrey and Jeff Kunin we have assembled an experienced management team that possesses complementary experiences managing prestige cosmetic brands within retail and wholesale distribution channels and overseeing operations in the branded consumer products industry. Our team has demonstrated skills in building brands, leading innovation, expanding distribution, and supply chain management. We operate with a high-performance team culture. The combination of an experienced team, strong culture and values and disciplined execution forms the foundation of our success.

 

Our Growth Strategy

 

DERMAdoctor ® is a prestige skincare brand. We are in the early stages of development, with significant room to grow by developing innovative new products, converting more consumers to the brand while increasing sales to existing consumers, and making DERMAdoctor ® products more widely available both domestically and internationally. We expect international markets to be the largest source of our growth over the next few years and also see an opportunity to expand in the United States. We also believe we have an opportunity to improve our profitability through greater operating leverage and efficiency.

 

We believe we are well positioned for continued growth driven by three main strategies.

 

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Develop new products

 

We have a track record of bringing prestige-inspired innovative and effective skincare products to markets. As stated above, from 2015 through 2017, we introduced five new products including our Kakadu C line of products and KP Duty Peel Pads and 28% of our net sales during the year ended December 31, 2017 came from products launched in the last three years. We focus a significant portion of our product development efforts on creating new products and improving existing products based on feedback from our consumer community. We seek to create packaging that is unique to our brand, while being approachable and effective. We believe there are significant additional opportunities within the skincare space. We expect to continue to leverage our product development expertise to introduce new products into related market segments.

 

Expand domestic market penetration

 

Draw new consumers to the brand . Increasing brand awareness is a major growth driver for our company. We believe we can significantly grow our following of passionate consumers to the brand from current levels with assistance from a public relations firm focused on beauty and through a greater focus on social media and other on-line marketing tools. While we introduced DERMAdoctor ® 14 years ago, we are still relatively unknown to many women.

 

Encourage current consumers to use more DERMAdoctor ® products . Our consumers’ loyalty to the DERMAdoctor® brand drives growth through increased usage of our products across categories and advocacy of our brand to other potential consumers. We have a loyalty program where customers receive reward points for each purchase that may be applied to payment for future purchases made through our website within 90 days. We also allow customers on our website to select up to three free samples of other products with each purchase to encourage future purchases of those additional products. In 2016, we started a subscription service for our products which allows customers to sign up for periodic delivery of our products. While still in its infancy, we are seeing increased participation by our consumers resulting in increased monthly subscription sales. We believe that through sustained innovation and efficient marketing, we will increase the number of DERMAdoctor ® items our consumers purchase.

 

Grow our retail relationships . We intend to continue to increase net sales through key premium retail accounts, such as Ulta Beauty, Costco, and Sephora. Within Ulta Beauty and other physical retail locations, we will seek to improve our in-store product positioning and collaborative marketing efforts. We believe we have significant potential upside in deepening distribution with our existing domestic retailers by continuing to leverage our productivity, innovation and growth to win more shelf space. In addition, we expect our domestic retail sales will grow as Ulta Beauty opens new stores and we are able to develop additional opportunities to sell our products in upscale department stores and on their websites.

 

Drive additional traffic to our website . We intend to grow our direct-to-consumer sales by driving additional traffic to our website and the Amazon website as well as improving customer conversion metrics. By focusing on affiliate marketing, paid search, search engine optimization (SEO) and other media spending, enhanced content and social media referrals including user generated content and paid influencers, through Facebook, Instagram, Youtube, and Pinterest, we expect to increase sales both in stores and online. The higher product margins and relatively fixed expenses of our website sales creates a leveraged business environment for higher profits.

 

Expand our global presence

 

We operate in a number of countries outside the United States, which accounted for 26% of our net sales during the three months ended March 31, 2018, up from 19% of our net sales during the three months ended March 31, 2017 and 30% of our net sales during the year ended December 31, 2017, up from 6% of our net sales during the year ended December 31, 2016. Given that the skin conditions we target are universal, we believe that the DERMAdoctor ® brand is highly portable, which will provide us with a significant opportunity in international markets over the long term. We believe our market penetration in the Middle East (Kuwait and UAE), China and Hong Kong represents the most significant opportunities for increasing our existing global sales. The United Kingdom, Canada, Western Europe, Asia, India and Australia are markets we plan to enter or expand in over the next three years, which would significantly expand our global presence.

 

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Recent Developments 

  

Costco Purchase Orders

 

In the first quarter of 2018, we received an order from Costco for the purchase of one of our products for a special promotion. This order was fulfilled in early April 2018. We expect this order to contribute approximately $1.5 million to net sales when recorded in the second quarter of 2018.

 

Risks

 

Our business and our ability to execute our business strategy are subject to a number of risks of which you should be aware before you decide to buy our common stock. In particular, you should carefully consider the following risks, which are discussed more fully in “Risk Factors” beginning on page 12 of this prospectus:

 

  historically we have incurred significant net losses and anticipate that we will continue to incur net losses in the future;
     
  our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern;

 

  we are currently dependent upon a small number of customers for a significant percentage of our revenue and a decrease or interruption in their business with us would reduce our sales and profitability;

 

  we do not have long-term contracts with any of our retailers, and the loss of orders of our products from our retailers or a retailer’s refusal to accept products may have a material adverse effect on our operating results;

 

  the skincare business is highly competitive, and if we are unable to compete effectively our results will suffer;

 

  our success depends, in part, on the quality, performance and safety of our products and our ability to introduce new products that appeal to consumers or offer new benefits or otherwise successfully compete with our competitors in the skincare industry;

 

  there can be no assurance that we will be able to execute on our business strategy, successfully market our products, drive customers to our distribution channels and increase sales;

 

  we rely on third-party suppliers, manufacturers, distributors and other vendors, and their ability to produce products or provide services that are consistent with our standards or applicable regulatory requirements could be disrupted, which could harm our brand, cause consumer dissatisfaction, and require us to find alternative suppliers of our products or services;

 

  we are increasingly dependent on information technology, and we may experience service interruptions, data corruption, cyber-based attacks or network security breaches which result in the disruption of our operating systems or the loss of confidential information of our customers;

 

  our success depends, in part, on our retention of key members of our senior management team and ability to attract and retain qualified personnel;

 

  our products may be the subject of regulatory actions, including but not limited to actions by the Food and Drug Administration, or the FDA, the Federal Trade Commission, or the FTC, and the Consumer Product Safety Commission, or the CPSC, in the United States;

 

  our business is subject to complex and evolving U.S. and foreign laws and regulations; and

 

  if we are unable to protect our intellectual property the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.

 

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Implications of Being an Emerging Growth Company

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal controls over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an “emerging growth company.” In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected not to use the extended transition period for complying with new or revised accounting standards under the JOBS Act, which election is irrevocable. We will remain an “emerging growth company” until the earlier of (i) the last day of the fiscal year in which the fifth anniversary of the closing of this offering occurs; (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion; (iii) the date on which we are deemed to be a large accelerated filer, which means we (1) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second quarter, (2) have been required to file annual and quarterly reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, for a period of at least 12 months and (3) have filed at least one annual report pursuant to the Exchange Act, and (iv) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. References herein to “emerging growth company” have the meaning associated with associated with that term in the JOBS Act.

 

Implications of Being a Controlled Company

 

Following the completion of this offering, we will qualify as a “Controlled Company” within the meaning of the rules of Nasdaq. Under these rules, a “Controlled Company” may elect not to comply with certain corporate governance requirements.

 

Corporate Information

 

DERMAdoctor, LLC was formed as a Missouri limited liability company in December 2015. Initially, our company was formed as a Missouri corporation in 1998 under the name DERMAdoctor, Inc. In December 2015, DERMAdoctor, Inc. contributed all of its assets to D. Doctor Acquisition, LLC, a Missouri limited liability company and received membership interests in D. Doctor Acquisition, LLC. On December 31, 2015, D. Doctor Acquisition, LLC filed an amendment to its articles of organization changing its name to DERMAdoctor, LLC and DERMAdoctor, Inc. filed an amendment to its articles of organization changing its name to Papillon Partners, Inc., or Papillon. Papillon is owned 51% by the Audrey G. Kunin Trust and 49% by the Jeffrey R. Kunin Trust.

 

Prior to the effective date of the registration statement of which this prospectus is a part, DERMAdoctor, LLC will merge directly with and into a Delaware corporation. We refer to this as the “corporate reorganization.” In connection with the corporate reorganization, all outstanding membership units, or Units, of DERMAdoctor, LLC will be converted into 3,000,000 shares of common stock of DERMAdoctor, Inc., the members of DERMAdoctor, LLC will become stockholders of DERMAdoctor, Inc. and DERMAdoctor, Inc. will succeed to the business of DERMAdoctor, LLC. See “The Corporate Reorganization” for further information regarding the transactions to be effected in the corporate reorganization.

 

Our principal executive offices are located at 1901 McGee St, Kansas City, Missouri 64108, and our telephone number is (816) 472-5700. Our website address is www.dermadoctor.com . Information contained in our website does not form part of the prospectus and is intended for informational purposes only.

 

This prospectus contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

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THE OFFERING

 

Issuer DERMAdoctor, Inc.
   
Common stock offered by us 1,875,000 shares (or 2,156,250 shares if the underwriters exercise their over-allotment option in full).
   
Over-allotment option The underwriters have an option for a period of 45 days to purchase up to 281,250 additional shares of our common stock to cover over-allotments, if any.
   
Common stock to be outstanding immediately after this offering 4,875,000 shares. If the underwriters’ over-allotment option is exercised in full, the total number of shares of common stock outstanding immediately after this offering would be 5,156,250.
   
Use of Proceeds We estimate the net proceeds from this offering will be $13,200,000 assuming an initial public offering price of $8.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
   
  We currently intend to use $190,000 of the net proceeds from this offering to repay the outstanding balance owed by us under two bridge notes that we issued to Papillon. The balance of the proceeds will be used to pay approximately $500,000 of our accounts payable, purchase approximately $1,000,000 in additional inventory, allocate approximately $1,500,000 to expand product development and increase marketing activities, invest approximately $300,000 to improve our infrastructure by upgrading our computer systems and information technology and acquiring additional equipment for our warehouse, and retaining the remaining proceeds for other working capital and general corporate purposes. Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities. See “Use of Proceeds.”
   
Representative’s Warrants The registration statement of which this prospectus is a part also registers for sale warrants to purchase 93,750 shares of our common stock to the representative of the underwriters as a portion of the underwriting compensation payable to the underwriters in connection with this offering. The warrants will be exercisable for a four-year period commencing one year following the closing of this offering at an exercise price equal to 125% of the initial public offering price of the common stock. Please see “Underwriting—Representative’s Warrants” for a description of these warrants.
   
Risk Factors See “Risk Factors” beginning on page 12 and the other information included in this prospectus for a discussion of factors you should carefully consider before investing in our securities.
   
Proposed symbol and listing We have applied to list our shares of common stock for trading on the Nasdaq Capital Market under the symbol “DDOC.”

 

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Unless we indicate otherwise, the number of shares of our common stock outstanding after this offering is based on the following:

 

 

the consummation of the corporate reorganization, pursuant to which all of the outstanding Units of DERMAdoctor, LLC (described in the “Description of Securities” section of this prospectus) will be automatically converted into an aggregate of 3,000,000 shares of our common stock; and

 

  excludes 731,250 shares of our common stock reserved for future issuance under the new equity incentive plan (the 2018 Equity Incentive Plan) that we intend to adopt prior to the closing of this initial public offering; however, we do not intend to issue any awards under the 2018 Equity Incentive Plan in connection with this offering.

 

Unless specifically stated otherwise, the information in this prospectus:

 

  assumes completion of the corporate reorganization;
     
  assumes no exercise by the underwriters of their option to purchase up to an additional 281,250 shares of common stock to cover over-allotments, if any;
     
  assumes no exercise of the representative’s warrants granted to the representative of the underwriters upon completion of this offering; and
     
  assumes an initial public offering price of $8.00 per share, which is the midpoint of the price range set forth on the front cover page of this prospectus.

 

Assuming an initial public offering price of $8.00 per share, the maximum number of shares of our common stock which will be issued pursuant to the corporate reorganization and which will be reserved for future issuance under the 2018 Equity Incentive Plan will in no event exceed 3,731,250 total shares. 

 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

 

The following table sets forth our summary consolidated statement of operations data for the fiscal years ended December 31, 2017 and 2016 which are derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus and the summary consolidated statements of operations data for the three months ended March 31, 2018 and 2017, and selected balance sheet data as of March 31, 2018 which are derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. In our opinion, such condensed consolidated financial statements include all adjustments consisting of only normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. Our financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States. The results indicated below are not necessarily indicative of our future performance. You should read this information together with the sections entitled “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. We do not own or have any claim to any of the assets of 1901 McGee, LLC, nor are we liable for the mortgage on the property owned by 1901 McGee, LLC.

 

    Three months ended     Years ended  
    March 31, (unaudited)     December 31,  
    2018     2017     2017     2016  
Statement of Operations Data:                        
Net sales   $ 1,711,291     $ 1,474,059     $ 8,808,674     $ 6,474,861  
Cost of sales (1)     707,376       787,849       4,062,563       2,902,349  
Gross profit     1,003,915       686,210       4,746,111       3,572,512  
Total expenses (1)     1,190,795       1,116,862       5,014,986       5,430,936  
Loss from operations     (186,880 )     (430,652 )     (268,875 )     (1,858,424 )
Net loss     (249,036 )     (476,950 )     (456,356 )     (2,023,233 )
Net loss attributable to DERMAdoctor, LLC     (233,395 )     (459,433 )     (345,083 )     (1,897,264 )
                                 
Per Shares Data:                                
Net loss per unit (2)                                
Basic and diluted   $ (0.23 )   $ (0.46 )   $ (0.35 )   $ (1.90 )
Weighted average units outstanding (2)                                
Basic and diluted     1,000,000       1,000,000       1,000,000       1,000,000  
Pro forma net loss per share of common stock (2)                                
Basic and diluted (unaudited)   $ (0.08 )   $ (0.15 )   $ (0.11 )   $ (0.63 )
Pro forma weighted average shares outstanding (2)                                
Basic and diluted (unaudited)     3,000,000       3,000,000       3,000,000       3,000,000  

 

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    As of March 31, 2018  
    Actual     Pro Forma (3)    

Pro Forma, As

Adjusted (4)(5)

 
Balance Sheet Data:                  
Cash and cash equivalents (1)   $ 105,785     $ 105,785     $ 12,615,785  
Total assets (1)     6,084,383       6,084,383       18,594,383  
Total liabilities (1)     6,764,641       6,764,641       6,074,641  
Redeemable membership interest     1,270,000              
Total equity (deficiency)     (1,950,258 )     ( 680,258 )       12,519,742  

 

 

 

(1) Includes cost of sales of $18,665, $18,170, $89,905, and $89,785 and operating expenses of $27,315, $27,818, $133,707, and $114,820 attributable to 1901 McGee, LLC for the three months ended March 31, 2018 and 2017, and the years ended December 31, 2017 and 2016, respectively. Total expenses including rent expense of $51,984, $50,470, $201,902, and $198,952 for the three months ended March 31, 2018 and 2017, and the years ended December 31, 2017 and 2016, respectively, paid from DERMAdoctor, LLC to 1901 McGee, LLC is eliminated upon consolidation. Includes cash and cash equivalents of $27,172, total assets of $2,980,106 and total liabilities of $2,668,469 attributable to 1901 McGee, LLC as of March 31, 2018.
   
(2) The unaudited pro forma basic and diluted loss per share attributable to common stockholders for the three months ended March 31, 2018 and 2017 and for the years ended December 31, 2017 and 2016 gives effect to the assumed conversion of all membership units upon an initial public offering by treating all membership units as if they had been converted to common stock in all periods in which such shares were outstanding. Shares to be sold in the offering are excluded from the unaudited pro forma basic and diluted loss per share attributable to common stock holders calculations. In addition, the $2,850 and $0 of interest expense incurred during the three months ended March 31, 2018 and 2017 and the $3,250 and $0 of interest expense incurred during the twelve month ended December 2017 and 2016 on the $190,000 related party notes to be repaid at the closing of the offering has been excluded from the unaudited pro forma basic and diluted loss per share; however, the net loss attributable to common stockholders has not been adjusted for this interest expense. Weighted average shares are calculated by multiplying the weighted average units by the ratio of units to shares in the corporate reorganization.
   
(3) The pro forma balance sheet data gives effect to the corporate reorganization. The pro forma balance sheet also gives effect to the elimination of the redeemable membership interest in the amount of $1,270,000 as well as the reclassification of the redeemable membership interest into permanent equity.
   
(4) The pro forma, as adjusted balance sheet data reflects the items described in footnote (2) above and gives effect to our receipt of estimated net proceeds of $12,510,000 from the sale of 1,875,000 shares of common stock that we are offering at an assumed initial public offering price of $8.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, a payment of $190,000 to Papillon, which is the outstanding balance owed by us to Papillon under two bridge notes that we issued to Papillon in the aggregate principal amount of $190,000, which accrues interest at the rate of 6% per annum, as well as payments of $500,000 to certain vendors to reduce our accounts payable balance.
   
(5) The pro forma, as adjusted data is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, total assets and total stockholders’ equity by $1,725,000 assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements. Those risks and uncertainties include, among others:

 

  our ability to implement our business plan;
     
  our ability to raise additional capital to meet our liquidity needs;
     
  our ability to generate product revenues;
     
  our ability to achieve profitability;
     
  our ability to obtain market acceptance;
     
  our ability to compete in the market;
     
  our ability to gain acceptance of customers for use of our products;
     
  our ability to rely on third-party researchers, manufacturers and payors;
     
  our ability to establish and maintain strategic partnerships, including for the distribution of products;
     
  our ability to attract and retain sufficient qualified personnel;
     
  our ability to obtain or maintain patents or other appropriate protection for our intellectual property; and
     
  our ability to adequately support future growth.

 

In some cases, you can identify forward-looking statements by terminology, such as “expects,” “anticipates,” “intends,” “estimates,” “plans,” “believes,” “seeks,” “may,” “should,” “could,” “would,” “will” or the negative of such terms or other similar expressions.

 

You should read this prospectus and the documents that we reference herein and therein and have filed as exhibits to the registration statement, of which this prospectus is part, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Because the risks and uncertainties describe in this prospectus could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New risks may emerge from time to time, and it is not possible for us to predict what new risks will arise. In addition, we cannot assess the impact of any particular risk on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this prospectus, and particularly our forward-looking statements, by these cautionary statements.

 

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RISK FACTORS

 

Investors should carefully consider the risks described below before deciding whether to invest in our securities. If any of the following risks actually occurs, our business, financial condition or results of operations could be adversely affected. In such case, the trading price of our common stock could decline and you could lose all or part of your investment. Our actual results could differ materially from those anticipated in the forward-looking statements made throughout this prospectus as a result of different factors, including the risks we face described below.

 

Risks Relating to our Company

 

We have a history of losses and there can be no assurance that we will be able to generate a profit in the future.

 

Historically, we have incurred net losses, including a net loss attributable to DERMAdoctor, LLC of $233,395 and $459,433 for the three months ended March 31, 2018 and March 31, 2017, respectively, and $345,083 and $1,897,264 for the years ended December 31, 2017 and December 31, 2016, respectively. We expect to continue to incur substantial expenditures to develop, manufacture and market our products and could continue to incur losses and negative operating cash flow. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Our ability to generate profits will depend, in part, on our expenses and our ability to generate revenue. Our prior losses and any future losses have had and will have an adverse effect on our stockholders’ equity and working capital.

 

Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.

 

As described in Note 2 of our accompanying consolidated financial statements as of December 31, 2017 and 2016 and the years then ended, our auditors have issued a going concern opinion on our financial statements, expressing substantial doubt that we can continue as a going concern for the next twelve months after the issuance of their report based upon our recurring losses and negative cash flows from operations. While the net loss was significantly reduced in 2017 compared to 2016, cash from operations will not be sufficient to fund our operations for the twelve-month period from the date the 2017 financial statements were issued. In addition, we incurred a net loss for the three months ended March 31, 2018 and management has determined that a substantial doubt about our ability to continue as a going concern continues to exist and that cash from operations will not be sufficient to fund operations for the twelve-month period from the date of the issuance of the condensed consolidated financial statements. We have entered into a receivables financing facility and we are actively pursuing additional sources of financing to fund our operations, including this offering. Our majority member, Papillon, has provided short-term loans to us and may continue to do so, but there is no assurance that additional financing from any source will be available on acceptable terms, if at all. These factors raise substantial doubt regarding our ability to continue as a going concern.

 

We are currently dependent upon a small number of customers for a significant percentage of our business and do not have long-term purchase commitments from these customers. A decrease or interruption in their business with us would reduce our sales and profitability.

 

We currently depend on four customers for a significant portion of our business. Sales to these customers each accounted for 10% or more of our revenues and combined accounted for an aggregate of approximately 66% (29%, 17%, 10%, and 10%, respectively) of our revenue from operations for the three months ended March 31, 2018. Sales to three customers each accounted for 10% or more of our revenues and combined accounted for an aggregate of approximately 58% (26%, 17% and 15%, respectively) of our revenue from operations for the fiscal year ended December 31, 2017. At March 31, 2018, two significant customers accounted for 100% (71% and 29%) of our accounts receivable. At December 31, 2017 two significant customers accounted for approximately 83% (45% and 38%) of our accounts receivable. Our arrangements with these retailers are by purchase order and are terminable at will at the option of either party. A substantial decrease or interruption in business from these three customers could result in inventory write-offs or in the loss of future business and would likely reduce our liquidity and profitability.

 

In the future, our significant customers may undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease their orders for our products. Any severe adverse impact on the business operations of our significant customers may have a corresponding negative effect on us. One or more of these customers could decide to exclusively feature a competitor’s skincare products, develop their own store-brand skincare products or reduce the number of brands of skincare products they sell, any of which could affect our ability to sell our products to them on favorable terms, if at all. Our loss of significant customers would impair our sales and profitability and harm our business, prospects, financial condition and results of operations.

 

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We do not have long-term contracts with any of our retailers, and the loss of orders of our products from our retailers or a retailer’s refusal to accept products may have a material adverse effect on our operating results.

 

We do not maintain long-term contracts with any of our retailers, and retailers generally purchase products from us on a purchase order basis. As a result, our retailers generally may, with little or no notice or penalty, decide to cease ordering and selling our products, could materially reduce their orders in any period or refuse to accept products that they have ordered. If certain significant retailers, individually or in the aggregate, refuse to accept our products, particularly if an order is of significant size, choose to return our products to us, or elect to no longer sell our products, we may be unable to change our distribution to other retailers in a timely manner, which could have a material adverse effect on our financial condition and results of operations.

 

The skincare business is highly competitive, and if we are unable to compete effectively our results will suffer.

 

We face vigorous competition from companies throughout the world, including large multinational consumer products companies that have many skincare brands under ownership and standalone skincare brands, including those that may target the latest trends or specific distribution channels. The skincare industry is highly competitive and subject to rapid changes due to consumer preferences and industry trends. Competition in the skincare industry is generally based on the introduction of new products, pricing of products, quality of products and packaging, brand awareness, perceived value and quality, innovation, in-store presence and visibility, promotional activities, advertising, editorials, e-commerce and mobile-commerce initiatives and other activities. We must compete with a high volume of new product introductions and existing products by diverse companies across several different distribution channels.

 

Our products face, and will continue to face, competition for consumer recognition and market share with products that have achieved significant national and international brand name recognition and consumer loyalty, such as those offered by global prestige beauty companies like Avon Products, Inc., Elizabeth Arden, Inc., The Estée Lauder Companies, Inc., Johnson & Johnson, Inc., L’Oréal Group, Shiseido, Coty, Mary Kay, Inc. and The Proctor & Gamble Company, each of which have launched skincare brands. In addition, we compete with brands including Dr. Dennis Gross, Kate Somerville, Murad, Perricone M.D., Dr. Brandt, Clarins, Clinique, Dermalogica, Exuviance, La Roche Posay and Vichey. We also compete with numerous other companies that market skincare products. These companies may have substantially greater financial, technical and marketing resources, longer operating histories, greater brand recognition and larger customer bases than we do and may be able to respond more effectively to changing business and economic conditions than we can. These competitors typically devote substantial resources to promoting their brands through traditional forms of advertising, such as print media and television commercials. Because of such mass marketing methods, these competitors’ products may achieve higher visibility and recognition than our products. We compete with prestige cosmetics companies primarily in online retailing, department stores and specialty beauty retail channels, but prestige cosmetics companies also recently have increased their sales through infomercial and home shopping television channels. Mass cosmetics brands are sold primarily though channels in which we do not sell our products, such as mass merchants, but mass cosmetics companies are increasingly making efforts to acquire market share in the higher-margin prestige cosmetics category by introducing brands and products that address this market. Many of these competitors’ products are sold in a wider selection or greater number of retail stores and possess a larger presence in these stores, typically having significantly more inline shelf space than we do. Given the finite space allocated to skincare products by retail stores, our ability to grow the number of retail stores in which our products are sold, and expand our space allocation once in these retail stores, may require the removal or reduction of the shelf space of these competitors. We may be unsuccessful in our growth strategy in the event retailers do not reallocate shelf space from our competitors to us. Our competitors may attempt to gain market share by offering products at prices at or below the prices at which our products are typically offered, including through the use of large percentage discounts and “buy one and get one free” offers. Competitive pricing may require us to reduce our prices, which would decrease our profitability or result in lost sales. Our competitors, many of whom have greater resources than we do, may be better able to withstand these price reductions and lost sales.

 

It is difficult for us to predict the timing and scale of our competitors’ activities in these areas or whether new competitors will emerge in the skincare business. In addition, further technological breakthroughs, including new and enhanced technologies which increase competition in the online retail market, new product offerings by competitors and the strength and success of our competitors’ marketing programs may impede our growth and the implementation of our business strategy.

 

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Our ability to compete depends on the continued strength of our brand and products, the success of our marketing, innovation and execution strategies, the continued diversity of our product offerings, the successful management of new product introductions and innovations, strong operational execution, including in order fulfillment, and our success in entering new markets and expanding our business in existing geographies. If we are unable to continue to compete effectively, it could have a material adverse effect on our business, results of operations and financial condition.

 

Our new product introductions may not be as successful as we anticipate.

 

The skincare industry is driven in part by beauty trends, which may shift quickly. Our continued success depends on our ability to anticipate, gauge and react in a timely and cost-effective manner to changes in consumer preferences for skincare products, consumer attitudes toward our industry and brand and where and how consumers shop for those products. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brand, maintain a favorable mix of products and develop our approach as to how and where we market and sell our products.

 

Despite our process for new product development, there can be no assurance that our new product launches will be successful or even if initially successful that we will be able to maintain customer demand. The acceptance of new product launches and sales to our retail customers may not be as high as we anticipate, due to a variety of reasons including lack of acceptance of the products themselves or their price, or limited effectiveness of our marketing strategies. In addition, our ability to launch new products may be limited by delays or difficulties affecting the ability of our suppliers or manufacturers to timely manufacture, distribute and ship new products or displays for new products. Sales of new products may be affected by inventory management by our retail customers, and we may experience product shortages or limitations in retail display space by our retail customers. We may also experience a decrease in sales of certain existing products as a result of newly-launched products, the impact of which could be exacerbated by shelf space limitations or any shelf space loss. Any of these occurrences could delay or impede our ability to achieve our sales objectives, which could have a material adverse effect on our business, financial condition and results of operations. If our new products fail to maintain our distinctive brand identity, our brand image may be diminished and our net sales may decrease. In addition, the development and launch of new products may place a strain on management, diverting resources from other areas of business, which could negatively affect profitability.

 

Our success depends, in part, on the quality, performance and safety of our products.

 

Any loss of confidence on the part of consumers in the ingredients used in our products, whether related to product contamination or product safety or quality failures, actual or perceived, or inclusion of prohibited ingredients, could tarnish the image of our brand and could cause consumers to choose other products. We believe that our customer appeal is based in large part upon the trust our customers place in our products to be effective. If our products are found to be, or perceived to be, defective or unsafe, or if they otherwise fail to meet our consumers’ expectations, our relationships with consumers could suffer, the appeal of our brand could be diminished, we may need to recall some of our products and/or become subject to regulatory action, and we could lose sales or market share or become subject to boycotts or liability claims. In addition, safety or other defects found in our competitors’ products could reduce consumer demand for our own products if consumers view them to be similar. Any of these outcomes could result in a material adverse effect on our business, financial condition and results of operations.

 

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Any damage to our reputation or brand may materially and adversely affect our business, financial condition and results of operations.

 

We believe that developing and maintaining our brand is critical and that our financial success is directly dependent on consumer perception of our brand. Furthermore, the importance of our brand recognition may become even greater as competitors offer more products similar to ours. We believe that our customers view our brand as one that is trusted, respected and effective. Many factors, some of which are beyond our control, are important to maintaining our reputation and brand. These factors include our ability to comply with ethical, social, product, labor and environmental standards. Any actual or perceived failure in compliance with such standards could damage our reputation and brand.

 

The growth of our brand depends largely on our ability to provide a high-quality consumer experience, which in turn depends on our ability to bring innovative products to the market at competitive prices that respond to consumer demands and preferences. Additional factors affecting our consumer experience include our ability to provide appealing store displays in retail stores, the maintenance and stocking of those displays by our retail customers, the overall shopping experience provided by our retail customers, a reliable and user-friendly website interface and mobile applications for our consumers to browse and purchase products over the Internet. If we are unable to preserve our reputation, enhance our brand recognition or increase positive awareness of our products and in-store and Internet platforms, it may be difficult for us to maintain and grow our consumer base, and our business, financial condition and results of operations may be materially and adversely affected.

 

The success of our brand may also suffer if our marketing strategy or product initiatives do not have the desired impact on our brand’s image or its ability to attract consumers. Further, our brand value could diminish significantly due to a number of factors, including consumer perception that we have acted in an irresponsible manner, adverse publicity about our products, our failure to maintain the quality of our products, product contamination, the failure of our products to deliver consistently positive consumer experiences, or the products becoming unavailable to consumers.

 

The success of our brand internationally relies on our international distribution partners and their business and marketing strategies. They maintain independence from our company and actions on their part could not have the desired impact on our brand’s image or its ability to attract customers. Further, our brand value could diminish significantly due to a number of factors, including consumer perception that we or our distribution partners have acted in an irresponsible manner, adverse publicity about our products, our failure to maintain the quality of our products, product contamination, the failure of our products to deliver consistently positive consumer experiences, or the products becoming unavailable to consumers.

 

Our future success depends upon our ability to successfully implement our growth strategy.

 

Our future revenues and profitability depend upon our ability to successfully implement our growth strategy. There can be no assurance given that we will be successful in executing our growth strategy, and even if we achieve our strategic plan, that we will realize, in full or in part, the anticipated benefits we expect our strategy will achieve. The failure to realize those benefits could have a material adverse effect on our business, financial condition and results of operations. Further, achieving our objectives will require investments in product development, marketing initiatives, distribution channels, information technology, operating infrastructure and the hiring and training of additional employees which may result in short-term costs without generating any current net sales and therefore may be dilutive to our earnings.

 

In future periods, our revenue could decline or grow more slowly than we expect. We also may incur significant losses in the future for a number of reasons, including the following risks and the other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors:

 

 

 

we may lose one or more significant retail customers, or sales of our products through these retail customers may decrease;

 

 

 

 

we may be unable to attract new customers, grow our space allocation with our existing national retail customers, grow our direct-to-consumer business, develop successful distribution partners in current international markets or encourage current customers to use more of our products;

 

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  ●  the ability of our third-party suppliers and manufacturers to produce our products and of our distributors to distribute our products could be disrupted;
     
  ●  because few of our product components are sourced and manufactured internationally, our operations are susceptible to risks inherent in doing business in foreign countries;
     
  ●  our products may be the subject of regulatory actions, including but not limited to actions by the Food and Drug Administration, or the FDA, the Federal Trade Commission, or the FTC, and the Consumer Product Safety Commission, or the CPSC, in the United States;
     
  ●  we may be unable to introduce new products that appeal to consumers or offer new benefits or otherwise successfully compete with our competitors in the skincare industry;
     
  we may be unsuccessful in maintaining or enhancing the recognition and reputation of our brand, and our brand may be damaged as a result of, among other reasons, our failure, or alleged failure, to comply with applicable ethical, social, product, labor or environmental standards;
     
  we may experience service interruptions, data corruption, cyber-based attacks or network security breaches which result in the disruption of our operating systems or the loss of confidential information of our consumers;
     
   ● we may be unable to successfully market our products, drive customers to our distribution channels and increase sales.
     
  we may be unable to retain key members of our senior management team or attract and retain other qualified personnel; and
     
  we may be affected by any adverse economic conditions in the United States or internationally.

 

Our growth has placed, and is expected to continue to place, a strain on our management team, financial and information systems, supply chain and distribution capacity and other resources. To manage growth effectively, we must continue to enhance our operational, financial and management systems, including our warehouse management, and inventory control; maintain and improve our internal controls and disclosure controls and procedures; maintain and improve our information technology systems and procedures; and expand, train and manage our employee base. We may not be able to effectively manage this expansion in any one or more of these areas, and any failure to do so could significantly harm our business, financial condition and results of operations.

 

We rely on a small number of third-party suppliers, manufacturers, distributors and other vendors, and our inability to obtain products from third-party suppliers or from our manufacturers, could have a material adverse effect on our business, financial condition, or results of operations.

 

The management and oversight of the engagement and activities of our third-party suppliers, manufacturers and distributors requires substantial time, effort and expense of our employees, and we may be unable to successfully manage and oversee the activities of our third-party manufacturers, suppliers and distributors. If we experience any supply chain disruptions caused by our manufacturing process or by our inability to locate suitable third-party manufacturers or suppliers, or if our manufacturers or suppliers experience problems with product quality or disruptions or delays in the manufacturing process or delivery of the finished products or the raw materials or components used to make such products, our business, financial condition and results of operations could be materially and adversely affected.

 

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We do not manufacture any of our products and instead rely primarily on third-party manufacturers, located in the United States, for the manufacture of most of our products with a few components manufactured in China and Spain. We also have two suppliers who accounted for approximately 64% (43% and 21%) of our purchases for the three months ended March 31, 2018 and one vendor who accounted for approximately 39% and 31% of our purchases for the years ended December 31, 2017 and December 31, 2016, respectively. We do not have long-term contracts with any of our suppliers or manufacturers and instead engage our third-party suppliers and manufacturers on a purchase order basis. These third-party suppliers and manufacturers produce and package our products according to formulations that have been developed by the manufacturer’s chemists, based on the concept, ingredient list, and application method proscribed by our in-house product development team. The fact that we do not have long-term contracts with any of our third-party suppliers or manufacturers means that they could cease supplying or manufacturing these products for us suddenly and unpredictably. Our third-party manufacturers are not restricted from manufacturing our competitors’ products. There can also be no assurance that suppliers will provide the raw materials or manufactured products that are needed by us in the quantities that we request or at the prices that we are willing to pay. Furthermore, because we do not control the actual production of certain raw materials and products, we are also subject to delays caused by any interruption in the production of these materials, based on conditions not within our control, including weather, crop conditions, transportation interruptions, strikes by supplier employees, and natural disasters or other catastrophic events. The ability of these third parties to supply and manufacture our products may be affected by competing orders placed by other customers and the demands of those customers. If we are unable to obtain adequate supplies of suitable products or ingredients because of the loss of one or more key vendors or manufacturers or our supplier agent or otherwise, our business and results of operations would suffer because we would be missing products from our merchandise mix unless and until we could make alternative supply arrangements. Any of our manufacturers may also increase the cost of the products we purchase from them. If our manufacturers increase our costs, our margins would suffer unless we were able to pass along these increased costs to our customers. If we experience significant increases in demand, or need to replace a significant number of existing suppliers or our primary manufacturer, there can be no assurance that additional supply and manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer will allocate sufficient capacity to us in order to meet our requirements. New suppliers and manufacturers might not allocate sufficient capacity to us to meet our requirements and products from alternative sources, if any, may be of a lesser quality or more expensive than those we currently purchase. To the extent we fail to obtain additional products from our manufacturers, we may not be able to meet customer demand, which could harm our net sales and profitability. Our inability to secure adequate and timely supplies of merchandise would harm inventory levels, net sales and gross profit, and ultimately our results of operations.

 

We also contract with third-party delivery service providers to deliver our products to a single distribution facility located in Kansas City, Missouri, and from there to our retail customers. Further, we rely on postal and parcel carriers for the delivery of products sold directly to consumers over the Internet. Interruptions to or failures in these delivery services could prevent the timely or successful delivery of our products. These interruptions or failures may be due to unforeseen events that are beyond our control or the control of our third-party delivery service providers, such as inclement weather, natural disasters, increased fuel expense, export or import controls, increased airport and shipping port congestion or labor unrest or shortages. Disruptions in our container shipments may result in increased costs, including the additional use of airfreight to meet demand. Congestion to ports can affect previously negotiated contracts with shipping companies, resulting in unexpected increases in shipping costs and reduction in our profitability. Although international distributors are responsible for shipping from our distribution facility, we record revenue when orders are shipped, so any delay in shipping to our international distributors could affect our results. Furthermore, the delivery personnel of contracted third-party delivery service providers act on our behalf and interact with our consumers personally. Any failure to provide high-quality delivery services to our consumers may negatively affect the shopping experience of our consumers, damage our reputation and cause us to lose consumers.

 

Our ability to meet the needs of our consumers and retail customers depends on the proper operation of our Kansas City, Missouri distribution facility, where most of our inventory that is not in transit is housed. Although we currently insure our inventory, our insurance coverage may not be sufficient to cover the full extent of any loss or damage to our inventory or distribution facility, and any loss, damage or disruption of this facility, or loss or damage of the inventory and contents stored there, could materially and adversely affect our business, financial condition and results of operations. A natural disaster or other catastrophic event, such as a fire, flood, severe storm, break-in, terrorist attack or other comparable event would cause interruptions or delays in our business and loss of inventory and could render us unable to accept or fulfill customer orders in a timely manner, or at all. Kansas City has been subject to severe storms and tornados increasing our susceptibility to the risk that severe weather conditions could harm the operations of our distribution facility. In the event that a storm, tornado, fire, natural disaster or other catastrophic event were to destroy a significant part of the facility or interrupt our operations for an extended period of time, our net sales would be reduced and our results of operations would be harmed.

 

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Changes in production costs, including raw material prices, could erode our profit margins and negatively impact operating results.

 

Pricing and availability of raw materials needed for our business, such as plastic, glass bottles, and cardboard, as well as pricing and availability of energy, shipping and other services needed for our business, can be volatile due to general economic conditions, labor costs, production levels, import duties and tariffs and other factors beyond our control. There is no certainty that we will be able to offset future cost increases. This volatility can significantly affect our production cost, and may, therefore, have a material adverse effect on our business, results of operations and financial condition

 

If we fail to properly estimate product demand and manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected.

 

Our business requires us to estimate demand for our products and therefore estimate the amount of inventory we require. We depend on our forecasts of demand for and popularity of various products to make purchase decisions and to manage our inventory of skus. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale, which can be as long as four months. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, promotions, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors, and our consumers may not purchase products in the quantities that we expect. It may be difficult to accurately forecast demand and determine appropriate levels of product or componentry. We do not have the right to return unsold products to our suppliers. If we fail to manage our inventory effectively or negotiate favorable credit terms with third-party suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our business, financial condition and results of operations.

 

We are increasingly dependent on information technology, and if we are unable to protect against service interruptions, data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.

 

The global nature of our business requires the development and implementation of robust and efficiently functioning information technology systems. We rely on information technology networks and systems to market and sell our products, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities and to comply with regulatory, legal and tax requirements. We are increasingly dependent on a variety of information systems to effectively process retail customer orders and fulfill consumer orders from our e-commerce business. Our ability to receive and fulfill orders successfully is critical to our success and largely depends upon the efficient and uninterrupted operation of our computer and communications hardware and software systems. Our primary computer systems and operations are located at our facility in Kansas City, Missouri.

 

In addition, we depend on our information technology infrastructure for digital marketing activities, personnel, retail customers, consumers, manufacturers and suppliers around the world. Our e-commerce operations are important to our business. Our website serves as an effective extension of our marketing strategies by exposing potential new consumers to our brand, product offerings and enhanced content. Due to the importance of our website and e-commerce operations, we are vulnerable to website downtime and other technical failures. Our failure to successfully respond to these risks could reduce e-commerce sales and damage our brand’s reputation.

 

We provide emails and “push” communications to inform consumers of new products, shipping specials and other promotions. We believe these messages are an important part of our consumer experience. If we are unable to successfully deliver emails or other messages to our subscribers, or if subscribers decline to open or read our messages, our net revenue and profitability would be materially adversely affected. Changes in how web and mail services block, organize and prioritize email may reduce the number of subscribers who receive or open our emails. For example, Google’s Gmail service has a feature that organizes incoming emails into categories (for example, primary, social and promotions). Such categorization or similar inbox organizational features may result in our emails being delivered in a less prominent location in a subscriber’s inbox or viewed as “spam” by our subscribers and may reduce the likelihood of that subscriber reading our emails.

 

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These information technology systems, some of which are managed by third parties, are vulnerable to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events and errors in usage by our employees and customers. Actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages could also adversely impact our business. From time to time, Internet service providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to consumers. Any material disruption of our systems, or the systems of our third-party service providers, could disrupt our ability to track, record and analyze the products that we sell and could negatively impact our operations, shipment of goods, ability to process financial information and transactions, and our ability to receive and process retail customers and e-commerce orders or engage in normal business activities. If our information technology systems suffer damage, disruption or shutdown and we do not effectively resolve the issues in a timely manner, our business, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results.

 

Changes in the laws or regulations that limit our ability to send communications to consumers or impose additional requirements upon us in connection with sending such communications would also materially adversely impact our business. Our use of email and other messaging services to send communications to consumers may also result in legal claims against us, which may cause us increased expenses, and if successful might result in fines and orders with costly reporting and compliance obligations or might limit or prohibit our ability to send emails or other messages. We also rely on social networking messaging services to send communications and to encourage consumers to send communications. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our ability or our consumers’ ability to send communications through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement with social networking services by consumers could materially adversely affect our business, financial condition and operating results.

 

If we fail to adopt new technologies or adapt our website and systems to changing consumer requirements or emerging industry standards, our business may be materially and adversely affected.

 

To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our Internet platform, including our e-commerce website and mobile applications. Our competitors are continually developing innovations and introducing new products to increase their consumer base and enhance user experience. As a result, in order to attract and retain consumers and compete against our competitors, we must continue to invest resources to enhance our information technology and improve our existing products and services for our consumers. The Internet and the online retail industry are characterized by rapid technological evolution, changes in consumer requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, and respond to technological advances and emerging industry standards and practices in a cost-effective and timely way. The development of our website and other proprietary technology entails significant technical and business risks. There can be no assurance that we will be able to properly implement or use new technologies effectively or adapt our website and systems to meet consumer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or consumer requirements, whether for technical, legal, financial or other reasons, our business, financial condition and results of operations may be materially and adversely affected.

 

Failure to protect sensitive information of our consumers and information technology systems against security breaches could damage our reputation and brand and substantially harm our business, financial condition and results of operations.

 

We collect, maintain, transmit and store data about our consumers, suppliers and others, including personally identifiable and financial information, as well as other confidential and proprietary information. We also employ third-party service providers that collect, store, process and transmit proprietary, personal and confidential information, including credit card information, on our behalf.

 

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Advances in technology, the expertise of criminals, new discoveries in the field of cryptography, acts or omissions by our employees, contractors or service providers or other events or developments could result in a compromise or breach in the security of confidential or sensitive information. We and our service providers may not be able to prevent third parties, including criminals, competitors or others, from breaking into or altering our systems, conducting denial-of-service attacks, attempting to gain access to our systems, information or monetary funds through phishing or social engineering campaigns, installing viruses or malicious software on our website or devices used by our employees or contractors, or carrying out other activity intended to disrupt our systems or gain access to confidential or sensitive information in our or our service providers’ systems. Furthermore, such third parties may further engage in various other illegal activities using such information, including credit card fraud, which may cause additional harm to us, our consumers and our brand. We also may be vulnerable to error or malfeasance by our own employees or other insiders. Third parties may attempt to fraudulently induce our or our service providers’ employees to misdirect funds or to disclose information in order to gain access to personal data we maintain about our consumers or website users. In addition, we have limited control or influence over the security policies or measures adopted by third-party providers of online payment services through which some of our consumers may elect to make payment for purchases at our website. Contracted third-party delivery service providers may also violate their confidentiality obligations and disclose or use information about our consumers inadvertently or illegally.

 

If any breach of information security were to occur, our reputation and brand could be damaged, our business may suffer, we could be required to expend significant capital and other resources to alleviate problems caused by such breaches, and we could be exposed to a risk of loss, litigation or regulatory action and possible liability. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. In addition, any party who is able to illicitly obtain a subscriber’s password could access the subscriber’s financial, transaction or personal information. Any compromise or breach of our security measures, or those of our third-party service providers, may violate applicable privacy, data security and other laws, and cause significant legal and financial exposure, adverse publicity and a loss of confidence in our security measures, which could have a material adverse effect on our business, financial condition and results of operations. Although we maintain privacy, data breach and network security liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. We may need to devote significant resources to protect against security breaches or to address problems caused by breaches, diverting resources from the growth and expansion of our business.

 

Payment methods used on our Internet platform subject us to third-party payment processing-related risks.

 

We accept payments from our consumers using a variety of methods, including online payments with credit cards, and debit cards issued by major banks in the United States, and payment through third-party online payment platforms such as PayPal. We also rely on third parties to provide payment processing services. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins. We may also be subject to fraud and other illegal activities in connection with the various payment methods we offer, including online payment options. For online consumers, these are card-not-present transactions, so they present a greater risk of fraud. Criminals are using increasingly sophisticated methods to engage in illegal activities such as unauthorized use of credit or debit cards and bank account information. To the extent we are an online seller, requirements relating to consumer authentication and fraud detection are more complex. If we fail to follow payment card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of using payment cards to fund their payments or pay their fees. If we were unable to accept payment cards, our business would be seriously damaged. In addition, we may be subject to additional fraud risk if third-party service providers or our employees fraudulently use consumer information for their own gain or facilitate the fraudulent use of such information. Overall, we may have little recourse if we process a criminally fraudulent transaction.

 

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If our cash from operations is not sufficient to meet our current or future operating needs, expenditures and debt service obligations, our business, financial condition and results of operations may be materially and adversely affected.

 

We may require additional cash resources due to changed business conditions or other future developments, including any marketing initiatives, investments or acquisitions we may decide to pursue. To the extent we are unable to generate sufficient cash flow, we may be forced to cancel, reduce or delay these activities. Alternatively, if our sources of funding are insufficient to satisfy our cash requirements, we may seek to obtain a credit facility or sell additional equity or debt securities. The sale of additional equity securities would result in dilution of our existing stockholders. The incurrence of additional indebtedness would result in increased debt service obligations and operating and financing covenants that could restrict our operations.

 

Our ability to generate cash to meet our operating needs, expenditures and debt service obligations will depend on our future performance and financial condition, which will be affected by financial, business, economic, legislative, regulatory and other factors, including potential changes in costs, pricing, the success of product innovation and marketing, competitive pressure and consumer preferences. If our cash flows and capital resources are insufficient to fund our debt service obligations and other cash needs, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. Any future credit facilities may restrict our ability to take these actions, and we may not be able to affect any such alternative measures on commercially reasonable terms, or at all.

 

Our ability to raise capital through the sale of equity may be limited by the various rules of SEC, and the national securities exchange on which we intend to apply to list our shares of common stock, which place limits on the number of shares of stock that may be sold. If we should require additional capital and we do not succeed in raising additional funds on acceptable terms, we could be forced to delay, discontinue or curtail product development, forego sales and marketing efforts, and forego attractive business opportunities. Furthermore, it is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all, which could have a material adverse effect on our business, financial condition and results of operations. For further discussion of our liquidity requirements as they relate to our long-term plans, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

The failure to comply with the terms of our accounts receivable financing facility with CircleUp Credit Advisors, LLC, or CircleUp, could potentially result in action against our pledged assets, which would likely have a disruptive effect on our business operations.

 

On October 19, 2017, we entered into an accounts receivable financing facility with CircleUp. CircleUp funds us based on a percentage of our outstanding accounts receivable from customers. Our customers pay CircleUp directly up to the amount funded to us by CircleUp in addition to any incurred interest. The accounts receivable financing facility requires us, among other things, to provide a security interest in all of our assets and meet various negative and affirmative covenants. If we fail to comply with the terms of the accounts receivable financing facility, CircleUp could declare a default and if the default were to remain uncured, CircleUp would have the right to proceed against any or all of the collateral securing the facility. Any action by our secured or unsecured creditors to proceed against our assets would likely have a disruptive effect on our business operations. During the three months ended March 31, 2018, CircleUp agreed to lend amounts to us, in addition to the outstanding accounts receivable facility, to fund payments owed to vendors for large inventory purchases made in conjunction with a substantial customer sale completed in the second of quarter of 2018.

 

Our success depends, in part, on our retention of key members of our senior management team and ability to attract and retain qualified personnel.

 

Our success depends, in part, on our ability to retain our key employees, including our executive officers (in particular, our Chief Creative Officer, Audrey Kunin, M.D., and our President and Chief Executive Officer, Jeff Kunin, M.D.), our senior management team and development, supply chain, operations, finance, sales and marketing personnel. We are a small company that relies on a few key employees, any one of whom would be difficult to replace, and because we are a small company, we believe that the loss of key employees may be more disruptive to us than it would be to a large, international company. Our success also depends, in part, on our continuing ability to identify, hire, train and retain other highly qualified personnel. In addition, we may be unable to effectively plan for the succession of senior management, including our chief executive officer. The loss of key personnel or the failure to attract and retain qualified personnel may have a material adverse effect on our business, financial condition and results of operations.

 

Adverse U.S. or international economic conditions could negatively affect our business, financial condition and results of operations.

 

Consumer spending on skincare products is influenced by general economic conditions and the availability of discretionary income. Adverse U.S. or international economic conditions or periods of inflation or high energy prices may contribute to higher unemployment levels, decreased consumer spending, reduced credit availability and declining consumer confidence and demand, each of which poses a risk to our business. A decrease in consumer spending or in retailer and consumer confidence and demand for our products could have a significant negative impact on our net sales and profitability, including our operating margins and return on invested capital. These economic conditions could cause some of our retail customers or suppliers to experience cash flow or credit problems and impair their financial condition, which could disrupt our business and adversely affect product orders, payment patterns and default rates and increase our bad debt expense. In addition, deterioration in global financial markets could make future financing difficult or more expensive, which could have a material adverse effect on our ability to finance the acquisition of inventory for sale to our customers.

 

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Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.

 

Net sales from outside the United States comprised 26% and 19% of our net sales for the three months ended March 31, 2018 and 2017, respectively. Net sales from outside the United States comprised 30% and 6% of our net sales for the fiscal years ended December 31, 2017 and 2016, respectively. Further, certain of our third-party suppliers and manufacturers are located in China and European countries. Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is exposed to the risks associated with international operations, including:

 

  ●  burdens of complying with a wide variety of laws and regulations, including more stringent regulations relating to data privacy and security, particularly in the European Union;
     
  political and economic instability;

 

  natural disasters;

 

  trade restrictions;
     
  the imposition of government controls;
     
  an inability to use or to obtain adequate intellectual property protection for our key brands and products;

 

  tariffs and customs duties and the classifications of our goods by applicable governmental bodies;

 

  the lack of well-established or reliable legal systems in certain areas or a legal system subject to undue influence or corruption;

 

  a business culture in which illegal sales practices may be prevalent;

 

 

logistics and sourcing;

 

 

the presence of high inflation in the economies of international markets;

 

  military conflicts; and

 

  acts of terrorism.

 

The occurrence of any of these risks could negatively affect our international business and consequently our overall business, financial condition and results of operations.

 

Currency exchange rate fluctuations could reduce our overall profits.

 

Currently all of our international sales are denominated in U.S. dollars, so we don’t currently have foreign exchange risk from our sales transactions, but could in the future. Any translation from foreign currencies to the U.S. dollar resulting from materials purchased from foreign suppliers is done using the spot exchange rate and is recorded as an expense in the period in which payment is made. If the U.S. dollar changes relative to applicable local currencies, there is a risk our reported operating expenses, and net income could fluctuate. We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations. To date, we have not entered into any hedging contracts or participated in any hedging or derivative activities as our foreign currency transactions are not currently material.

 

New laws, regulations, enforcement trends or changes in existing regulations governing the introduction, marketing and sale of our products to consumers could harm our business.

 

Our business is subject to strict government regulations. The processing, formulation, manufacturing, packaging, labeling, advertising, and distribution of our products are subject to federal laws and regulation by one or more federal agencies, including the FDA, the FTC, the Consumer Product Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. These activities are also regulated by various state, local, and international laws and agencies of the states and localities in which our products are sold. If we or our manufacturers fail to comply with those regulations, we could become subject to significant penalties or claims, which could harm our results of operations or our ability to conduct our business. In addition, the adoption of new regulations or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may impair the marketing of our products, resulting in significant loss of net sales. Government regulations may prevent or delay the introduction, or require the reformulation, of our products, which could result in lost revenues and increased costs to us.

 

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Our failure to comply with federal or state regulations, or with regulations in foreign markets that cover our product claims and advertising, including direct claims and advertising by us, may result in enforcement actions and imposition of penalties or otherwise harm the distribution and sale of our products. Further, our business is subject to laws governing our accounting, tax, and import and export activities. Failure to comply with these requirements could result in legal and/or financial consequences that might adversely affect our sales and profitability. In addition, changes in the laws, regulations and policies that affect our business, or the interpretations thereof, and actions we may take in response to such changes, could have an adverse effect on our financial results. Any of these actions could prevent us from marketing particular products or making certain claims or statements of support for them. The FDA could also require us to remove a particular product from the market. Any future recall or removal would result in additional costs to us, including lost revenues from any additional products that we are required to remove from the market, any of which could be material. Any product recalls or removals could also lead to liability, substantial costs, and reduced growth prospects.

 

We face lengthy timelines with respect to product registrations in certain countries such as the United Arab Emirates, European Union member countries, and Latin American countries. The process for obtaining product permits and licenses may require extended periods of time that may prevent us from launching new product initiatives in the aforementioned countries on the same timelines as other markets around the world.

 

Additional or more stringent regulations of our products have been considered from time to time. These developments could require reformulation of some products to meet new standards, recalls or discontinuance of some products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of some products, additional or different labeling, additional scientific substantiation, adverse event reporting, or other new requirements. Any of these developments could result in, among other things, increased costs, delays in product launches, product returns or recalls and lower net sales, and therefore could have a material adverse effect on our business, financial condition and results of operations. Additionally, our third-party suppliers or vendors may not be able to comply with these rules without incurring substantial expenses. If our third-party suppliers or vendors are not able to timely comply with these new rules, we may experience increased cost or delays in obtaining certain raw materials and third-party products.

 

In the United States, the FDA does not currently require pre-market approval for products intended to be sold as non-prescription skincare products so long as they are not marketed for the treatment or prevention of a disease, or as affecting the structure or function of the human body. However, the FDA may in the future require pre-market approval, clearance or registration/notification of skincare products, establishments or manufacturing facilities. Moreover, such products could also be regulated as both drugs and skincare simultaneously, as the categories are not mutually exclusive. The statutory and regulatory requirements applicable to drugs are extensive and require significant resources and time to ensure compliance. For example, if any of our products intended to be sold as skincare were to be regulated as drugs, we might be required to conduct, among other things, clinical trials to demonstrate the safety and efficacy of these products. We may not have sufficient resources to conduct any required clinical trials or to ensure compliance with the manufacturing requirements applicable to drugs. If the FDA determines that any of our products intended to be sold as skincare should be classified and regulated as drug products and we are unable to comply with applicable drug requirements, we may be unable to continue to market those products. Any inquiry into the regulatory status of our skincare and any related interruption in the marketing and sale of these products could damage our reputation and image in the marketplace.

 

The facilities of our third-party manufacturers are subject to regulation under the FDCA, and FDA implementing regulations.

 

The facilities of our third-party manufacturers are subject to regulation under the FDCA and FDA implementing regulations. In accordance with the FDCA and FDA regulations, our products may not be sold if they are deemed to be adulterated or misbranded. Our third-party manufacturers may deviate from good manufacturing practices or, through their action or inaction, otherwise render our products misbranded. Labeling and claims made for products must follow specific requirements to avoid being deemed misbranded. The FDA may inspect our third-party manufacturers periodically to determine if they are complying with the FDCA. Certain claims may subject our products to being deemed an illegal new drug. A history of past compliance is not a guarantee that future FDA regulatory manufacturing requirements will not mandate other compliance steps with associated expense. Our operations could be harmed if regulatory authorities make determinations that our vendors, are not in compliance with these regulations. If the FDA finds a violation of Good Manufacturing Practices, or GMPs, it may enjoin our manufacturer’s operations, seize product, and impose administrative, civil or criminal penalties. If our third-party manufacturers fail to comply with applicable regulatory requirements, we could be required to take costly corrective actions, including suspending manufacturing operations, changing product formulations, suspending sales of nonconforming products, or initiating product recalls, change product labelling, packaging or advertising or take other corrective action. In addition, sanctions under the FDCA may include seizure of products, injunctions against future shipment of products, restitution and disgorgement of profits, operating restrictions and criminal prosecution. If any of the above events occurs, we would be required to expend significant resources on compliance, fines and/or legal fees and we might need to seek the services of alternative third-party manufacturers. A prolonged interruption in the manufacturing of one or more of our products as a result of non-compliance could decrease our supply of products available for sale, which could reduce our net sales, gross profits and market share, as well as harm our overall business, prospects, financial condition and results of operations.

 

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Government regulations and private party actions relating to the marketing and advertising of our products and services may restrict, inhibit or delay our ability to sell our products and harm our business, financial condition and results of operations.

 

Government authorities regulate advertising and product claims regarding the performance and benefits of our products. These regulatory authorities typically require a reasonable basis to support any marketing claims. What constitutes a reasonable basis for substantiation can vary widely from market to market, and there is no assurance that the efforts that we undertake to support our claims will be deemed adequate for any particular product or claim. The most significant area of risk for such activities relates to improper or unsubstantiated claims about our products and their use or safety. If we are unable to show adequate substantiation for our product claims, or our promotional materials make claims that exceed the scope of allowed claims for the classification of the specific product, whether skincare, OTC drug products or other consumer products that we offer, the FDA, the FTC, other regulatory authorities a private plaintiff, or a class of private plaintiffs, could initiate an investigation, initiate enforcement action, initiate litigation, and/or seek to impose penalties, such as monetary consumer redress, requiring us to revise our marketing materials, amend our claims or stop selling certain products, all of which could harm our business, financial condition and results of operations. Any regulatory action or penalty could lead to private party actions, which could further harm our business, financial condition and results of operations.

 

In 2012, the FDA issued warning letters to several cosmetic companies alleging improper structure/function claims regarding their cosmetic products, including, for example, product claims regarding gene activity, cellular rejuvenation, and rebuilding collagen. There is a degree of subjectivity in determining whether a claim is an improper structure/function claim. Given this subjectivity, there is a risk that we could receive a warning letter, be required to modify our product claims or take other actions to satisfy the FDA if the FDA determines any of our marketing materials include improper structure/function claims for our cosmetic products. In addition, plaintiffs’ lawyers have filed class action lawsuits against some of our competitors after our competitors received these FDA warning letters. There can be no assurance that we will not be subject to government actions or class action lawsuits, which could harm our business.

 

In 2009 in the United States, the FTC approved revisions to its Guides Concerning the Use of Endorsements and Testimonials in Advertising, or Guides, that require disclosure of material connections between an endorser and the company they are endorsing and generally do not allow marketing using atypical results. Our sales force has used testimonials and “before and after” photos to market and sell some of our popular products. We intend to continue to use testimonials for our popular products, including our anti-aging products. In highly regulated and scrutinized product categories if we or our sales force fails to comply with the Guides or makes improper product claims, the FTC could bring an enforcement action against us and we could be fined and/or forced to alter our marketing materials.

 

In December 2014, a complaint was filed by the FTC against us and Audrey Kunin alleging unsubstantiated product claims made by us with respect to the effects of photodynamic therapy used in certain of our antiaging products and with respect to claims made in our Shrinking Beauty product. A consent order with the FTC was approved later in December 2014 and a judgment in the amount of $843,996 was entered against us, of which we were required to pay $12,675. Payment of the balance of the judgment was indefinitely suspended.

 

If the FTC has reason to believe the law or a consent order is being violated (e.g. failure to possess adequate substantiation for product claims), it can initiate an enforcement action. The FTC has a variety of processes and remedies available to it for enforcement, both administratively and judicially, including compulsory process authority, cease and desist orders, and injunctions. FTC enforcement could result in civil penalties or orders requiring, among other things, limits on advertising, consumer redress, and divestiture of assets, rescission of contracts, or such other relief as may be deemed necessary. Violation of these orders could result in substantial financial or other penalties. Any action against us by the FTC could materially and adversely affect our ability to successfully market our products.

 

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Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased costs of operations or otherwise harm our business, financial condition and results of operations.

 

We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including privacy and data protection, intellectual property, advertising, marketing, distribution, consumer protection and online payment services. The sale of products outside the U.S., the introduction of new products or expansion of our activities in certain jurisdictions may subject us to additional laws and regulations. These U.S. federal and state and foreign laws and regulations, which can be enforced by private parties or government entities, are constantly evolving and can be subject to significant change. For example, the European Union significantly amended its data protection laws in May of 2016 through the enactment of the General Data Protection Regulation, or GDPR, which goes into full force in May of 2018. The GDPR may limit our ability to collect or use information about consumers that are located in the European Union or increase our potential liability for misuse, loss or a breach of security in data of European Union residents. The application, interpretation and enforcement of the GDPR may be uncertain, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction and inconsistently with our current policies and practices. Moreover, consumer data privacy remains a matter of interest to lawmakers and regulators, and a number of other proposals are pending before federal, state and foreign legislative and regulatory bodies that could significantly affect our business. These existing and proposed laws and regulations can be costly to comply with and can delay or impede our ability to market and sell our products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices.

 

Furthermore, foreign data protection, privacy and other laws and regulations are often more restrictive than those in the United States. The GDPR, for example, imposes stricter obligations under its laws and regulations relating to privacy than the United States. European Union member countries have discretion with respect to their interpretation and implementation of the GDPR and have their own regulators with differing attitudes towards enforcement, which results in varying privacy standards and enforcement risks from jurisdiction to jurisdiction. Legislation and regulation in the European Union and some European Union member states require companies to give specific types of notice and in some cases seek consent from consumers before using their data for certain purposes, including some marketing activities. In the majority of European Union member countries, consent must be obtained prior to setting cookies or other tracking technologies. Outside of the European Union, there are many countries with data protections laws, and new countries are adopting data protection legislation with increasing frequency. Many of these laws also require consent from consumers for the collection and use of data for various purposes, including marketing, which may reduce the ability to market our products. In particular, these laws may have an impact on our ability to conduct business through websites we and our partners may operate outside the U.S. There is no harmonized approach to these laws and regulations globally although several frameworks exist. Consequently, the potential risk of non-compliance with applicable foreign data protection laws and regulations will increase as we continue our international expansion. We may need to change and limit the way we use consumer information in operating our business and may have difficulty maintaining a single operating model that is compliant. Compliance with such laws and regulations will result in additional costs and may necessitate changes to our business practices and divergent operating models, which may adversely affect our business, financial condition and results of operations.

 

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We may, from time to time, become party to litigation, regulatory proceedings or other disputes that, if adversely decided or settled, could materially and adversely affect our business, financial condition and results of operations.

 

We may, from time to time, become party to litigation, regulatory proceedings or other disputes. In general, claims made by or against us in disputes and other legal or regulatory proceedings can be expensive and time consuming to bring or defend against, requiring us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. These potential claims include but are not limited to personal injury and investigations relating to the advertising and promotional claims about our products. Plaintiffs in the past have received substantial damage awards from other cosmetics companies based upon claims for injuries allegedly caused by the use of their products. Any adverse determination against us in these proceedings, or even the allegations contained in the claims, regardless of whether they are ultimately found to be without merit, may also result in settlements, injunctions or damages that could have a material adverse effect on our business, financial condition and results of operations. We currently maintain general liability insurance with an annual aggregate coverage limit of two million dollars. Some allegations of regulatory non-compliance are also exempt from coverage under general liability insurance.

 

We may be required to recall products and may face product liability claims, either of which could result in unexpected costs and damage our reputation.

 

We may need to recall some of our products if they become contaminated, are tampered with or are mislabeled. A widespread product recall could result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our products, which could have a material adverse effect on our business results and the value of our brands. We also may incur significant liability if our products or operations violate applicable laws or regulations, or in the event our products cause injury, illness or death. In addition, we could be the target of claims that our advertising is false or deceptive under U.S. federal and state laws as well as foreign laws, including consumer protection statutes of some states. Even if a product liability or consumer fraud claim is unsuccessful or without merit, the negative publicity surrounding such assertions regarding our products could adversely affect our reputation and brand image.

 

We sell products for human use. Our products intended for use as skincare are not generally subject to pre-market approval or registration processes, so we cannot rely upon a government safety panel to qualify or approve our products for use. A product may be safe for the general population when used as directed but could cause an adverse reaction for a person who has a health condition or allergies, or who is taking a prescription medication. While we include what we believe are adequate instructions and warnings and we have historically had low numbers of reported adverse reactions, previously unknown adverse reactions could occur. If we discover that any of our products are causing adverse reactions, we could suffer further adverse publicity or regulatory/government sanctions.

 

Potential product liability risks may arise from the testing, manufacture and sale of our products, including that the products fail to meet quality or manufacturing specifications, contain contaminants, include inadequate instructions as to their proper use, include inadequate warnings concerning side effects and interactions with other substances or for persons with health conditions or allergies, or cause adverse reactions or side effects. Product liability claims could increase our costs, and adversely affect our business, financial condition and results of operations. As we continue to offer an increasing number of new products, our product liability risk may increase. It may be necessary for us to recall products that do not meet approved specifications or because of the side effects resulting from the use of our products, which would result in adverse publicity, potentially significant costs in connection with the recall and could have a material adverse effect on our business, financial condition and results of operations.

 

In addition, plaintiffs in the past have received substantial damage awards from other skincare and drug companies based upon claims for injuries allegedly caused by the use of their products. Although we currently maintain general liability insurance, any claims brought against us may exceed our existing or future insurance policy coverage or limits. Any judgment against us that is in excess of our policy coverage or limits would have to be paid from our cash reserves, which would reduce our capital resources. In addition, we may be required to pay higher premiums and accept higher deductibles in order to secure adequate insurance coverage in the future. Further, we may not have sufficient capital resources to pay a judgment, in which case our creditors could levy against our assets. Any product liability claim or series of claims brought against us could harm our business significantly, particularly if a claim were to result in adverse publicity or damage awards outside or in excess of our insurance policy limits.

 

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If we are unable to protect our intellectual property the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.

 

We regard our trademarks, trade dress, copyrights, trade secrets, know-how and similar intellectual property as critical to our success. Our principal intellectual property rights include registered trademarks, “DERMAdoctor”, “KP Duty”, “AIN’T MISBEHAVIN’” and “POETRY IN LOTION” among others, copyrights, as well as trade secrets, know-how, and patents relating to our product formulations, sales and marketing and other business practices. We also rely in part on confidentiality agreements to protect our proprietary rights, including know-how, such as but not limited to processes and technologies. Our trademarks are valuable assets that support our brand, consumers’ perception of our products and the resultant goodwill. Although we have registered trademarks and pending trademark applications for our brands in the United States and in many foreign countries in which we operate, we may not be successful in asserting an action for trademark infringement in all jurisdictions. We also have not applied for trademark protection in all relevant foreign jurisdictions in which we operate, and cannot ensure that our pending trademark applications will be approved. Third parties may also oppose our trademark applications domestically or abroad, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products in some parts of the world, which could result in the loss of brand recognition and could require us to devote resources to advertising and marketing new brands.

 

Our products have limited patent protection. We have issued patents relating to four of our products. We may pursue additional patent protection in the future. Limited patent protection for our products limits our ability to protect our products from competition. As such, we primarily rely on know-how to protect our products and it is possible that others may independently develop the same or similar know-how, allowing them to become direct competitors by marketing the same or similar products. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. For example, our confidentiality agreements may not effectively prevent disclosure of our proprietary information, technologies and processes, and may not provide an adequate remedy in the event of unauthorized use of such information, technologies and processes, which could harm our competitive position.

 

In addition, effective trademark, copyright, patent and trade secret protection may be unavailable or limited for certain of our intellectual property. Other parties may infringe our intellectual property rights and may dilute our brands in the marketplace. We may need to engage in litigation or other activities to enforce our intellectual property rights, protect our trade secrets, and defend against third-party challenges to the validity and scope of our intellectual property and other proprietary rights, which could be expensive, time-consuming and unsuccessful. In addition, initiating a patent infringement litigation will place our patents at risk for invalidation through competitors counter claims of invalidity in court and/or initiation of a challenge to our patents in inter partes review or other opposition proceedings before the patent office. Such challenge, if successful, may render our patents invalid or unenforceable. An adverse result with respect to infringement could put one or more of our patents at risk for being interpreted narrowly, thereby limiting the scope of protection afforded by said patents. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. Further, we may not be able to prevent, alone or with our licensors, misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the United States. If we fail to protect our intellectual property or other proprietary rights, our business, financial condition and results of operations may be materially and adversely affected.

 

Interference proceedings provoked by third parties may be necessary to determine the priority of inventions with respect to some of our patents or patent applications subject to pre-AIA or those of our licensors (i.e., those filed before March 16, 2013). An unfavorable outcome could result in a loss of our current patent rights and could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Litigation or interference proceedings may result in a decision adverse to our interests and, even if we are successful, may result in substantial costs and distract our management and other employees.

 

Derivation proceedings may be provoked by third parties for our patents or patent applications subject to AIA or those of our licensors filed after March 16, 2013. Derivation proceedings provide a means to establish that a patent applicant (or patentee) was not an inventor, but rather that he derived the invention from someone else. An unfavorable result of any such derivation proceeding could require us to cease using the related technology or license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms or does not agree to license the technology. Thus, the derivation proceedings may result in a decision adverse to our interests and, even if we are successful, may result in substantial costs and distract our management and other employees.

 

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Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation despite the existence of protective orders in this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments during the course of litigation. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our shares of common stock.

 

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market, which would have a material adverse effect on our business.

 

Our success depends on our ability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and other proprietary rights of third parties.

 

Our commercial success depends in part on our ability to operate without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights, trade secrets and other proprietary rights of others. We cannot be certain that the conduct of our business, and in particular, the marketing of our products do not and will not infringe, misappropriate or otherwise violate such third-party rights. In addition, third parties may involve us in intellectual property disputes as part of a business model or strategy to gain competitive advantage. While we are not involved in any currently active intellectual property litigation, from time to time we receive allegations of trademark or patent infringement and in the past, third parties have filed claims against us with allegations of intellectual property infringement.

 

To the extent we gain greater visibility and market exposure as a public company or otherwise, we may also face a greater risk of being the subject of such claims and litigation. Third-parties in the industry in which we operate are presently developing pipeline product candidates and own large patent portfolios. These third-party patent portfolios include numerous U.S. and Foreign issued patents and pending patent applications. As our industry expands, the large patent portfolios owned by third-parties increases the risk that our product candidates may launch with a higher risk of infringement. Our use of our trademarks may also be the subject of allegations of infringement and such use may be limited. For these and other reasons, third parties may allege that our products or activities infringe, misappropriate, dilute or otherwise violate their trademark, patent, copyright or other proprietary rights. Defending against such allegations and litigation could be expensive, occupy significant amounts of time, divert management’s attention from other business concerns and have an adverse impact on our ability to bring products to market. In addition, if we are found to infringe, misappropriate, dilute or otherwise violate third-party trademark, patent, copyright or other proprietary rights, our ability to use brands to the fullest extent we plan may be limited and our marketing of products may be enjoined. We may need to obtain a license to use our brand or sell our products, which may not be available on commercially reasonable terms, or at all. Additionally, or alternatively, we may need to redesign or rebrand our marketing strategies or products, which may not be possible. We may also be required to pay substantial damages or be subject to an order prohibiting us and our retail customers from importing or selling certain products or engaging in certain activities. Our inability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and proprietary rights of others could have a material adverse effect on our business, financial condition and results of operations.

 

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In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize product candidates, which could harm our business significantly.

 

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

 

We possess confidential and proprietary information of third parties. In addition, we employ individuals who were previously employed at other beauty, cosmetic or skincare companies, and therefore, may be privy to the confidential and proprietary information of their former employers. As such, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed third party confidential or proprietary information without authorization. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

 

Use of social media may materially and adversely affect our reputation or subject us to fines or other penalties.

 

We rely to a large extent on our online presence to reach consumers. Negative commentary regarding us or our products may be posted on our website or social media platforms and may be adverse to our reputation or business. Our target consumers often value readily available information and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without affording us an opportunity for redress or correction. In addition, we may face claims relating to information that is published or made available through the interactive features of our website. For example, we may receive third-party complaints that the comments or other content posted by users on our platforms infringe third-party intellectual property rights or otherwise infringe the legal rights of others. While the Communications Decency Act, or the CDA, and Digital Millennium Copyright Act, or the DMCA, generally protect online service providers from claims of copyright infringement or other legal liability for the self-directed activities of its users, if it were determined that we did not meet the relevant safe harbor requirements under either law, we could be exposed to claims related to advertising practices, defamation, intellectual property rights, rights of publicity and privacy, and personal injury torts. We could incur significant costs investigating and defending such claims and, if we are found liable, significant damages. If any of these events occur, our business, financial condition and results of operations could be materially and adversely affected.

 

We also use third-party social media platforms as marketing tools. For example, we maintain Facebook, Twitter, Pinterest, Instagram, YouTube, Snapchat and Google+ accounts. As e-commerce and social media platforms continue to rapidly evolve, we must continue to maintain a presence on these platforms and establish presences on new or emerging popular social media platforms. If we are unable to cost-effectively use social media platforms as marketing tools, our ability to acquire new consumers and our financial condition may suffer. Furthermore, as laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and result of operations.

 

In addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us to monitor compliance of such materials, and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations.

 

Failure to comply with the U.S. Foreign Corrupt Practices Act, other applicable anti-corruption and anti-bribery laws, and applicable trade control laws could subject us to penalties and other adverse consequences.

 

We currently sell our products in several countries outside of the United States through distributors. Our operations are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, as well as the anti-corruption and anti-bribery laws in the countries where we do business. The FCPA prohibits covered parties from offering, promising, authorizing or giving anything of value, directly or indirectly, to a “foreign government official” with the intent of improperly influencing the official’s act or decision, inducing the official to act or refrain from acting in violation of lawful duty, or obtaining or retaining an improper business advantage. The FCPA also requires publicly traded companies to maintain records that accurately and fairly represent their transactions, and to have an adequate system of internal accounting controls. In addition, other applicable anti-corruption laws prohibit bribery of domestic government officials, and some laws that may apply to our operations prohibit commercial bribery, including giving or receiving improper payments to or from non-government parties, as well as so-called “facilitation” payments. In addition, we are subject to U.S. and other applicable trade control regulations that restrict with whom we may transact business, including the trade sanctions enforced by the U.S. Treasury, Office of Foreign Assets Control, or OFAC.

 

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While we have implemented certain safeguards designed to ensure compliance with U.S. trade control laws, our employees, agents, or distributors may engage in improper conduct for which we might be held responsible. Any violations of these anti-corruption or trade controls laws, or even allegations of such violations, can lead to an investigation and/or enforcement action, which could disrupt our operations, involve significant management distraction, and lead to significant costs and expenses, including legal fees. If we, or our employees, distributors or agents acting on our behalf, are found to have engaged in practices that violate these laws and regulations, we could suffer severe fines and penalties, profit disgorgement, injunctions on future conduct, securities litigation, bans on transacting government business, delisting from securities exchanges and other consequences that may have a material adverse effect on our business, financial condition and results of operations. In addition, our brand and reputation, our sales activities or our stock price could be adversely affected if we become the subject of any negative publicity related to actual or potential violations of anti-corruption, anti-bribery or trade control laws and regulations.

 

Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business, financial condition and results of operations.

 

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future regulations and laws could impede the growth of the Internet, e-commerce or mobile commerce. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications, consumer protection, social media marketing and gift cards. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. It is possible that general business regulations and laws, or those specifically governing the Internet or e-commerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot be sure that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business and decrease the use of our sites by consumers and suppliers and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations. In addition, it is possible that governments of one or more countries may seek to censor content available on our sites or may even attempt to completely block access to our sites. Adverse legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole or in part, from operating in one or more countries, our ability to retain or increase our consumer base may be adversely affected, and we may not be able to maintain or grow our net sales and expand our business as anticipated.

 

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Risks Related to this Offering

 

Following this offering, Papillon will have sufficient voting power to make corporate governance decisions that could have a significant effect on us and our other stockholders.

 

As of the date of this prospectus, Papillon owns 82.23% of our outstanding Units. Following the consummation of this offering, Papillon, will control approximately 50.6% of our outstanding voting power on a fully diluted basis, assuming the issuance of all 1,875,000 shares of common stock being offered in this offering. As a result, Papillon will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in our control and might affect the market price of our common stock, even when a change in control may be in the best interest of all stockholders. Furthermore, the interests of Papillon may not always coincide with our interests or the interests of our other stockholders.

 

Following the completion of this offering, we will qualify as a “controlled company” within the meaning of the rules and will qualify for exemptions from certain corporate governance requirements. We do not currently intend to rely on these exemptions; however, if we do elect to rely on these exemptions in the future, holders of our common stock will not have the same protections afforded to stockholders of companies that are subject to such requirements.

 

Following the completion of this offering, we will qualify as a “controlled company” within the meaning of the Nasdaq corporate governance standards, because in excess of 50% of our voting power will be held by Papillon, an entity that Audrey and Jeff Kunin indirectly control. Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements, including:

 

  the requirement that a majority of our board of directors consists of independent directors;
     
  the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
     
  the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
     
  the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

 

Although we will qualify as a “controlled company” following the completion of this offering, we will nevertheless have a majority of independent directors, our nominating and corporate governance committee, and our compensation committee will both consist entirely of independent directors, and such committees will be subject to annual performance evaluations. However, there can be no assurance that in the future we will not elect to rely on the exemptions available to controlled companies, in which case holders of our common stock will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of              .

 

Stockholders purchasing shares of common stock in this offering will experience immediate and substantial dilution, causing their investment to immediately be worth less than their purchase price.

 

If you purchase shares of common stock in this offering, you will experience an immediate and substantial dilution in the projected book value of the common stock from the price you pay in this offering.

 

After consummation of this offering and assuming the consummation of this offering exclusive of the underwriters’ over-allotment option, you will have an immediate dilution of $ 5.53 per common share and an immediate increase in net tangible book value from $(0.39) to $2.47 per share will occur.

 

Future sales and issuances of our common stock or rights to purchase our common stock, including pursuant to the 2018 Equity Incentive Plan we plan to adopt prior to the closing of this offering, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

 

As part of the corporate reorganization, which we will effect prior to the effective date of this registration statement, we will file a certificate of incorporation with the State of Delaware that will authorize the issuance of 50,000,000 shares of common stock and 5,000,000 shares of preferred stock. The common stock and preferred stock, as well as the awards available for issuance under the 2018 Equity Incentive Plan, may be issued by our board of directors, without stockholder approval. Any future issuances of such stock would further dilute the percentage ownership in us held by holders of our common stock. In addition, the issuance of preferred stock may be used as an “anti-takeover” device without further action on the part of our stockholders, and may adversely affect the holders of the common stock.

 

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We expect that significant additional capital may be needed in the future to continue our planned operations, including inventory, marketing and costs associated with operating as a public company. To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to the holders of our common stock, including shares of common stock sold in this offering.

 

In addition, our management will be authorized to grant equity incentive awards to our employees, directors and consultants under the 2018 Equity Incentive Plan, which will become effective on the business day prior to the public trading date of our common stock; however, we do not intend to issue any awards under the 2018 Equity Incentive Plan in connection with this offering, but do intend to grant equity awards after this offering is consummated. “See Executive Compensation - Employment Agreements”. Initially, the aggregate number of shares of our common stock that may be issued pursuant to stock awards under our 2018 Equity Incentive Plan is 731,250 shares. Increases in the number of shares available for future grant or purchase may result in additional dilution, which could cause our stock price to decline.

 

If we issue preferred stock with superior rights than the common stock offered in this offering, it could result in a decrease in the value of our common stock and delay or prevent a change in control of us.

 

Our board of directors will be authorized to issue 5,000,000 shares of preferred stock pursuant to the certificate of incorporation we intend to adopt as part of the corporate reorganization. The issuance of any preferred stock having rights superior to those of the common stock may result in a decrease in the value or market price of the common stock. Holders of preferred stock may have the right to receive dividends, certain preferences in liquidation and conversion rights. The issuance of preferred stock could, under certain circumstances, have the effect of delaying, deferring or preventing a change in control of us without further vote or action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.

 

We have no plans to pay dividends in the future.

 

Holders of our common stock will be entitled to receive such dividends as may be declared by our board of directors. We do not expect to pay cash dividends in the foreseeable future. We intend to retain all of our future earnings, if any, to finance the growth and development of our business. Therefore, any returns investors in common stock may have will be in the form of appreciation, if any, in the market value of their common stock. See “Dividend Policy.”

 

Nasdaq may not list our securities for quotation on its exchange which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

 

We anticipate that our securities will be listed on the Nasdaq, a national securities exchange, upon consummation of this offering. Although, after giving effect to this offering, we expect to meet, on a pro forma basis, the Nasdaq’s minimum initial listing standards, which generally mandate that we meet certain requirements relating to stockholders’ equity, market capitalization, aggregate market value of publicly held shares and distribution requirements, we cannot assure you that we will be able to meet those initial listing requirements. If the does not list our securities for trading on its exchange, we could face significant material adverse consequences, including:

 

  a limited availability of market quotations for our securities;

 

  reduced liquidity with respect to our securities;

 

  a determination that our shares of common stock are “penny stock” which will require brokers trading in our shares of common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares of common stock;

 

  a limited amount of news and analyst coverage for our company; and

 

  a decreased ability to issue additional securities or obtain additional financing in the future.

 

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The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because we expect that our common stock will be listed on the Nasdaq, our common stock will be covered securities. Although the states are preempted from regulating the sale of covered securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were to be delisted from the, our common stock would cease to be recognized as covered securities and we would be subject to regulation in each state in which we offer our securities.

 

Our failure to meet the continued listing requirements of the Nasdaq could result in a de-listing of our common stock.

 

If after listing we fail to satisfy the continued listing requirements of the Nasdaq such as the corporate governance requirements, the stockholder’s equity requirement or the minimum closing bid price requirement, the may take steps to de-list our common stock. Such a de-listing or even notification of failure to comply with such requirements would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with the Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with the Nasdaq’s listing requirements.

 

We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

We are an “emerging growth company” as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, not being required to comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, not being required to comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could remain an emerging growth company until the earlier of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year in which the fifth anniversary of this offering occurs; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile. Further, as a result of these scaled regulatory requirements, our disclosure may be more limited than that of other public companies and you may not have the same protections afforded to shareholders of such companies.

 

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Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected not to avail ourselves of this exemption from new or revised accounting standards, which election is irrevocable, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

As a result of our becoming a public company, we will become subject to additional reporting and corporate governance requirements that will require additional management time, resources and expense.

 

As a public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the national securities exchange on which we intend to apply to list our shares of common stock and other applicable securities rules and regulations impose various requirements on public companies, including the obligation to file with the SEC annual and quarterly information and other reports that are specified in the Exchange Act, and to establish and maintain effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

 

We are evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

 

We have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Had we performed such an evaluation or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, material weaknesses may have been identified.

 

As a public company, we will be subject to the reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.

 

We have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Had we performed such an evaluation or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, material weaknesses may have been identified. For so long as we qualify as an “emerging growth company” under the JOBS Act, which may be up to five years following this offering, we will not have to provide an auditor’s attestation report on our internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. During the course of the evaluation, documentation or attestation, we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not otherwise identify in a timely manner or at all as a result of the deferred implementation of this additional level of review.

 

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business, including increased complexity resulting from our international expansion. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of management reports and independent registered public accounting firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures, and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our common stock.

 

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We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K. Our independent registered public accounting firm is not required to audit the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating.

 

Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results, and cause a decline in the market price of our common stock.

 

Future sales of a substantial number of our common stock by our existing stockholders could cause our stock price to decline.

 

We will have a significant number of shares of restricted common stock that will become eligible for sale shortly after this registration statement is declared effective. We currently have shares of our common stock outstanding. All of the shares sold in this offering will be eligible for sale immediately upon effectiveness of this registration statement. All of the remaining shares will be eligible for sale in the public market upon expiration of lock-up agreements, which will expire 180 days after the date of this prospectus, subject, in some cases to the volume, manner of sale and other limitations of Rule 144 or 701 promulgated under the Securities Act of 1933, as amended, or the Securities Act. It is conceivable that following the holding period, many stockholders may wish to sell some or all of their shares. If our stockholders sell substantial amounts of our common stock in the public market at the same time, the market price of our common stock could decrease significantly due to an imbalance in the supply and demand of our common stock. Even if they do not actually sell the common stock, the perception in the public market that our stockholders might sell significant common stock could also depress the market price of our common stock.

 

A decline in the price of our common stock might impede our ability to raise capital through the issuance of additional common stock or other equity securities, and may cause you to lose part or all of your investment in our common stock.

 

Our common stock may be thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

 

Prior to this offering, you could not buy or sell our common stock publicly. We cannot predict the extent to which investors’ interests will lead to an active trading market for our common stock or whether the market price of our common stock will be volatile following this offering. If an active trading market does not develop, investors may have difficulty selling any of our common stock that they buy. There may be limited market activity in our stock and we are likely to be too small to attract the interest of many brokerage firms and analysts. We cannot give you any assurance that a public trading market for our common stock will develop or be sustained. The market price of our common stock could be subject to wide fluctuations in response to quarterly variations in our revenues and operating expenses, announcements of new products or services by us, significant sales of our common stock, including “short” sales, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.

 

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The price of our common stock may be volatile, and you could lose all or part of your investment.

 

The trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

 

  our decision to initiate or not initiate a product launch to delay a product launch, or to terminate a product;
     
  changes in laws or regulations applicable to our products;
     
  adverse developments concerning our manufacturers;
     
  our inability to obtain adequate product supply for any product or inability to do so at acceptable prices;
     
  additions or departures of key management personnel;
     
  unanticipated safety concerns related to the use of our products;
     
  introduction of new products offered by our competitors;
     
  announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
     
  our ability to effectively manage our growth;
     
  the size and growth of our target markets;
     
  actual or anticipated variations in quarterly operating results;
     
  our cash position;

 

  our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;
     
  publication of research reports about us or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;
     
  changes in the market valuations of similar companies;
     
  overall performance of the equity markets;
     
  sales of our common stock by us or our stockholders in the future;
     
  trading volume of our common stock;
     
  changes in accounting practices;
     
  ineffectiveness of our internal controls;
     
  disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our products;
     
  significant lawsuits, including patent or stockholder litigation;
     
  general political and economic conditions; and
     
  other events or factors, many of which are beyond our control.

 

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In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating results or financial condition.

 

The offering price of the common stock may not be indicative of the value of our assets or the price at which shares can be resold.

 

The offering price of the common stock may not be an indication of our actual value. Prior to this offering, there has been no public market for our securities. The offering price of $8.00 per share (the midpoint of the range on the cover page of this prospectus) was determined based upon negotiations between the underwriters and us. Factors considered in determining such price in addition to prevailing market conditions include an assessment of our future prospects, an increase in value of our stock due to becoming a public company and prior valuations of our shares prepared for us. Such price does not have any relationship to any established criteria of value, such as book value or earnings per share. Such price may not be indicative of the current market value of our assets. No assurance can be given that the shares can be resold at the public offering price.

 

Our management will have broad discretion over the use of the proceeds we receive in this offering, and may not apply the proceeds in ways that increase the value of your investment.

 

If the representative of the underwriter exercises their option to purchase additional shares in this offering in full, we estimate that net proceeds of the sale of the common stock that we are offering will be $15,292,500. Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Although we intend to use a portion of the net proceeds from this offering for payment of accounts payable, product development, improvement of our infrastructure, marketing and advertising and the purchase of additional inventory, because of the number and variability of factors that will determine our use of the net proceeds from this offering, we cannot specify with certainty the particular use of the net proceeds that we will receive from this offering, and we cannot assure you that we will use the proceeds in a manner that will increase the value of your investment or of which you would approve. Moreover, you will not have the opportunity to influence our decision on how to use the proceeds from this offering. We may use the proceeds for corporate purposes that do not immediately enhance our prospects for the future or increase the value of your investment. See the section entitled “Use of Proceeds.”

 

The application of the “penny stock” rules to our common stock could limit the trading and liquidity of the common stock, adversely affect the market price of our common stock and increase your transaction costs to sell those shares.

 

If our common stock becomes traded on a securities market or exchange, as long as the trading price of our common stock is below $5.00 per share, the open-market trading of our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1.0 million or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include: (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the volatility of our share price.

 

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Provisions in our corporate charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our corporate charter and our bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:

 

  the authorized number of directors can be changed only by resolution of our board of directors;

 

  our bylaws may be amended or repealed by our board of directors or our stockholders;

 

  stockholders may not call special meetings of the stockholders or fill vacancies on the board of directors;
     
  our board of directors will be authorized to issue, without stockholder approval, preferred stock, the rights of which will be determined at the discretion of the board of directors and that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that our board of directors does not approve;

 

  our stockholders do not have cumulative voting rights, and therefore our stockholders holding a majority of the shares of common stock outstanding will be able to elect all of our directors; and

 

  our stockholders must comply with advance notice provisions to bring business before or nominate directors for election at a stockholder meeting.

 

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

Our Bylaws have an exclusive forum for adjudication of disputes provision that limits the forum to the Court of Chancery of the State of Delaware for certain actions against us.

 

Article XIV, Section 48 of our bylaws dictates that the Court of Chancery of the State of Delaware is the sole and exclusive forum for certain actions including any derivative action or proceeding brought on behalf of us, an action asserting a breach of fiduciary duty owed by any of our officers, directors, employees or to our stockholders; any claim arising under Delaware corporate law, including under the Delaware General Corporation Law; and any action asserting a claim against us or any of our officers, directors or employees governed by the internal affairs doctrine. While management believes limiting the forum for resolution of disputes to the Court of Chancery of the State of Delaware is in the best interests of our company and our stockholders in that it will provide the most appropriate outcomes by avoiding the risk of another forum misapplying Delaware law and Delaware courts have a well-developed body of case law, our stockholders could be inconvenienced by not being able to bring an action in another forum they find more convenient. In addition, this exclusive forum provision may discourage stockholder lawsuits, or limit stockholders’ ability to obtain a more favorable judicial forum for disputes with us, our officers and/or directors.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of us, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price may decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from our issuance and sale of 1,875,000 shares of our common stock in this offering will be $13,200,000 (or $15,292,500 if the underwriters exercise their over-allotment option in full), assuming an initial public offering price of $8.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share, would increase (decrease) the net proceeds from this offering by $1,725,000, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We currently intend to use $190,000 of the net proceeds to repay the outstanding balance owed by us under two bridge notes that we issued to Papillon in the aggregate principal amount of $190,000, which accrue interest at the rate of 6% per annum. One bridge note is in the principal amount of $100,000 and matures on July 29, 2018 and the other bridge note is in the principal amount of $90,000 and matures on July 29, 2018. The proceeds from the bridge notes were used for working capital purposes.

 

The balance of the proceeds will be used to pay approximately $500,000 of our accounts payable, purchase approximately $1,000,000 in additional inventory, allocate approximately $1,500,000 to expand product development and increase marketing activities, invest approximately $300,000 to improve our infrastructure by upgrading our computer systems and information technology and acquiring additional equipment for our warehouse, and retaining the remaining proceeds for other working capital and general corporate purposes. This expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received from this offering. The amounts and timing of our actual expenditures will depend on numerous factors including the progress in, and costs of, our product development activities. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of management regarding the application of the net proceeds from the offering.

 

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities.

 

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DIVIDEND POLICY

 

We do not anticipate paying dividends on our common stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. We are not subject to any legal restrictions respecting the payment of dividends, except that we may not pay dividends if the payment would render us insolvent. Any future determination as to the payment of cash dividends on our common stock will be at our board of directors’ discretion and will depend on our financial condition, operating results, capital requirements and other factors that our board of directors considers to be relevant.

 

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THE CORPORATE REORGANIZATION

 

Prior to the effective date of the registration statement of which this prospectus is a part, DERMAdoctor, LLC will merge directly with and into a Delaware corporation. We refer to this as the “corporate reorganization.” In order to consummate the corporate reorganization, a certificate of merger will be filed with the Secretary of State of the State of Delaware prior to the effective date of the registration statement of which this prospectus is a part and articles of merger will be filed with the Secretary of State of the State of Missouri prior to the effective date of the registration statement of which this prospectus is a part. In connection with the corporate reorganization, all outstanding Units of DERMAdoctor, LLC will be converted into 3,000,000 shares of common stock of DERMAdoctor, Inc., the members of DERMAdoctor, LLC will become stockholders of DERMAdoctor, Inc. and DERMAdoctor, Inc. will succeed to the business of DERMAdoctor, LLC. In addition, the redeemable membership interest of $1,270,000 will be reclassified to permanent equity because the put option will be eliminated.

 

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CAPITALIZATION

 

The following table sets forth the capitalization of DERMAdoctor, LLC, excluding the amounts attributable to 1901 McGee, LLC, as of March 31, 2018.

 

  on an actual basis;
     
  on a pro forma basis to give effect to the corporate reorganization and the conversion of all of the units immediately outstanding prior to this offering into 3,000,000 shares of common stock, which includes the redeemable membership interest of $1,270,000 which will be reclassified to permanent equity due to the elimination of the put option.
     
  on a pro forma, as adjusted basis after giving effect to the corporate reorganization, as adjusted for the sale of 1,875,000 shares of our common stock in this offering at the assumed public offering price of $8.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us the cash repayment of the outstanding principal amount of $190,000 under two of our loans, and payments totaling $500,000 to reduce our accounts payable balance.

 

You should consider this table in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and related notes thereto included elsewhere in this prospectus.

    As of March 31, 2018  
    (unaudited)  
    DERMAdoctor, LLC Actual     DERMAdoctor, Inc. Pro Forma    

DERMAdoctor, Inc.

Pro Forma,

As Adjusted (1)

 
Cash   $ 78,613       78,613       12,588,613  
Total Indebtedness   $ 2,424,748       2,424,748     $ 2,234,748  
Redeemable membership interest     1,270,000              
Members’ / stockholders’ equity                        
Common Stock, $0.001 par value, 50,000,000 shares authorized, pro forma and pro forma, as adjusted; 3,000,000 shares issued and outstanding, pro forma; 4,875,000 shares issued and outstanding, pro forma, as adjusted             3,000       4,875  
Additional paid in capital             (994,895 )     12,203,230  
Accumulated deficit                   — 
Total members’ deficiency/stockholders’ equity     (2,261,895 )     (991,895 )     12,208,105  
Total capitalization   $ 1,432,853       1,432,853       14,442,853  

 

 

 

(1) A $1.00 increase or decrease in the assumed initial public offering price of $8.00 per share would increase or decrease total stockholders’ equity and total capitalization on a pro forma as adjusted basis by approximately $1,725,000, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

 

The number of shares of common stock that will be outstanding immediately after this offering is based on shares of common stock outstanding immediately prior to this offering after giving effect to the corporate reorganization, which will be effected prior to the effective date of this registration statement of which this prospectus is a part, and excludes:

 

  731,250 shares of our common stock reserved for future issuance under the 2018 Equity Incentive Plan we intend to adopt immediately prior to this offering; and
     
  93,750 shares of our common stock issuable upon exercise of the representative’s warrants to be granted to the representative of the underwriters upon completion of this offering.

 

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DILUTION

 

If you invest in our common stock in this offering, your interest will be immediately and substantially diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after giving effect to this offering. 

 

Our historical net tangible book value, excluding the amounts attributable to 1901 McGee, LLC, as of March 31, 2018 was $(2,436,533). Historical net tangible book value excludes the redeemable membership interest. Historical net tangible book value per share as of March 31, 2018 has not been provided due to the fact that at March 31, 2018 we were a limited liability company and did not have shares of common stock outstanding.

 

Our pro forma net tangible book value, excluding the amounts attributable to 1901 McGee, LLC, as of March 31, 2018 was $ (1,166,533), or $(0.39) per share of our common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the pro forma number of shares of our common stock outstanding as of March 31, 2018, which includes shares after giving effect to the corporate reorganization. The pro forma net tangible book value also accounts for the reclassification of the redeemable membership interest in the amount of $1,270,000 to permanent equity due to the elimination of the put option.

 

After giving effect to the sale of 1,875,000 shares in this offering at the assumed initial public offering price of $8.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us as well as the repayment of $190,000 related party notes and $500,000 of accounts payable, our pro forma, as adjusted net tangible book value, excluding the amounts attributable to 1901 McGee, LLC, at March 31, 2018 would have been $12,033,467, or $2.47 per share. This represents an immediate increase in pro forma net tangible book value of approximately $2.86 per share to our existing stockholders, and an immediate dilution of $ 5.53 per share to investors purchasing shares of common stock in this offering. 

 

Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering. 

 

The following table illustrates the per share dilution to investors purchasing shares in the offering:

 

Assumed initial public offering price per share   $ 8.00  
Pro forma net tangible book value per share as of March 31, 2018     (0.39 )
Increase in pro forma net tangible book value per share attributable to new investors     2.86  
Pro forma, as adjusted net tangible book value per share after this offering     2.47  
Dilution per share to new investors   $ 5.53  

 

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value will increase to $2.74  per share, representing an immediate dilution of $5.26 per share to new investors, assuming that the initial public offering price will be $8.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus. 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the pro forma as adjusted net tangible book value by approximately $1,725,000, the pro forma as adjusted net tangible book value per share by $0.36  per share, and the dilution in pro forma as adjusted net tangible book value per share to investors in this offering by $0.64 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. 

 

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The following table summarizes, on a pro forma as adjusted basis as of March 31, 2018 the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid by existing stockholders and by investors participating in this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses, at an assumed public offering price of $8.00 per share, the midpoint of the price range set forth on the cover page of this prospectus.

 

    Shares Purchased     Total Consideration     Average Price Per  
    Number     %     Amount     %     Share  
Existing stockholders     3,000,000       61.5       7,015,431       31.9 %     2.34  
New investors     1,875,000       38.5       15,000,000       68.1 %     8.00  
Total     4,875,000       100.0 %     22,015,431       100.0 %     4.52  

 

The number of shares of common stock that will be outstanding immediately after this offering is based on 3,000,000 shares of common stock outstanding immediately prior to this offering after giving effect to the corporate reorganization, which will be effected prior to the effective date of this registration statement of which this prospectus forms a part, and excludes:

 

  731,250 shares of our common stock reserved for future issuance under the 2018 Equity Incentive Plan we intend to adopt immediately prior to this offering; and
     
   93,750 shares of our common stock issuable upon exercise of the representative’s warrants to be granted to the representative of the underwriters upon completion of this offering.

 

If the underwriters exercise their over-allotment option in full, the number of shares held by new investors will increase to 2,156,250, or 41.8 % of the total number of shares of common stock outstanding after this offering and the shares held by existing stockholders will be 3,000,000, but the percentage of shares held by existing stockholders will decrease to 58.2% of the total shares outstanding. 

 

To the extent that the underwriters’ over-allotment option is exercised or any warrants or options are exercised, there will be further dilution to new investors.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read together with our audited financial statements and the related notes appearing elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We are an omni-channel, innovative, skincare company primarily focused on the creation of products that are designed to target common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris. We develop, market, distribute and sell skincare products under our DERMAdoctor ® brand worldwide. All of our DERMAdoctor ® products are conceived by our product design team headed by our Chief Creative Officer and founder, Dr. Audrey Kunin, who is a board-certified dermatologist. Dr. Kunin adds her unique perspective, which is incorporated in our packaging, that skincare can be both elegant and powerful. Our philosophy is to mix science and technology synergistically to provide non-irritating, effective and pleasing skincare products aimed at targeting overlooked or unfulfilled common skin concerns. All of our products are fragrance and dye free. Since 2003, we have been developing, marketing, distributing and selling an extensive array of our proprietary skincare products. Today, we produce and sell over 30 DERMAdoctor ® products that account for 39 skus at prices ranging from $22 for an antiperspirant to $95 for a Kakadu vitamin C skin product. Our products are typically grouped into families of products and include those such as Wrinkle Revenge, Ain’t Misbehavin’, Calm Cool and Corrected and KP Duty designed to improve the skin’s appearance for aging, acne, redness and keratosis pilaris, respectively. Within each family, products are typically further broken down to face, eyes, and body. The ingredients are then uniquely formulated for the resulting product subcategory. Each family of products creates opportunities for the customer to expand into different product types aimed at addressing their particular skincare problems. For example, within our KP Duty family we offer both a lotion and a scrub. Often these products are purchased together. We recently launched a third KP Duty product, the KP Duty Body Peel, providing an innovative product delivery system which should expand this family of products to a large group of current customer users.

 

Historically, we have incurred net losses, including a net loss attributable to DERMAdoctor, LLC of $233,395 and $459,433 for the three months ended March 31, 2018 and 2017, respectively, and net losses attributable to DERMAdoctor, LLC of $345,083 and $1,897,264 for the years ended December 31, 2017 and 2016, respectively. Cash from operations is not expected to be sufficient to fund our operations over the next twelve months.

 

Our financial statements described in the prospectus include the results of 1901 McGee, LLC, an entity owned by Dr. Audrey Kunin and Dr. Jeff Kunin. Its sole asset is a building which is the leased corporate headquarters of DERMAdoctor, LLC. Since a related party owns 100% of 1901 McGee, LLC and we have the power to direct the activities of 1901 McGee, LLC, we have determined that 1901 McGee, LLC qualifies as a variable interest entity and we consolidate the 1901 McGee, LLC financial statements with our financial statements. We do not own or have any claim to any of the assets of 1901 McGee, LLC, nor are we liable for the mortgage or other liabilities related to the property owned by 1901 McGee, LLC. In the following discussion, 2017 refers to the twelve months ended December 31, 2017, and 2016 refers to the twelve months ended December 31, 2016.

 

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Critical Accounting Policies and Estimates

 

The consolidated financial statements have been prepared in accordance with principles generally accepted in the United States, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

While our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this filing, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements and understanding and evaluating our reported financial results. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this prospectus, we believe that the following accounting policies and estimates are critical to our business operations and understanding of our financial results.

 

Accounts receivable, net

 

Accounts receivables consist of customer obligations from transactions with domestic retail customers, reduced by an allowance for doubtful accounts for estimated losses based on the aging of accounts receivable and historical collection experience. We write off accounts receivable against the allowance when a balance is determined to be uncollectible. Recoveries of receivables previously written off are recorded when received. Based on historical trends and review of the account balances, we did not record an allowance for doubtful accounts in either 2018 or 2017. As of March 31, 2018 and December 31, 2017, $62,362 and $181,778, respectively, of the sales allowances (as discussed further under “Revenue Recognition” below) were netted against accounts receivable. We grant credit terms in the normal course of business to our domestic retail customers. The risk with respect to trade receivables is mitigated by the thirty to sixty-day duration of customer payment terms and the good credit quality type of customer we sell to. Credit is not currently extended to e-commerce customers or international distributors who pay for goods prior to them being shipped.

 

Inventory, net

 

Inventories consist of components and finished goods and are stated at the lower of cost or net realizable value. Cost is determined using the first in, first out method. Cost components include direct materials, assembly, and freight. We review our inventory for excess, obsolescence, or expiration and write down inventory that has no alternative uses to its net realizable value. We recorded a $128,000, $142,000, and $95,841 reserve for obsolete inventory as of March 31, 2018, December 31, 2017, and December 31, 2016, respectively.

 

Cost of sales includes all the costs to manufacture our products by third-party contractors, which are recognized in the consolidated statement of operations when the product is sold. Cost of sales also includes the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These costs are reflected in our consolidated statements of operations and when the product is sold, and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their recoverable value. Cost of sales also includes warehouse costs including depreciation, wages, utilities, real estate taxes, and property insurance.

  

Property and equipment, net

 

Repairs and maintenance expenditures are expensed as incurred. The Property and Equipment, net balance as of March 31, 2018 was $2,958,884 with $2,952,934 of the balance attributable to the property of 1901 McGee, LLC. The Property and Equipment, net balance as of December 31, 2017 and 2016 was $2,982,227 and $3,077,671, respectively, with $2,974,830 and $3,062,415, respectively, of the balance attributable to the property of 1901 McGee, LLC. Fixed assets include items of property and equipment such as buildings, leasehold improvements, office furniture, fixtures, computers and other related technology equipment. All capitalized assets are depreciated using the straight-line depreciation method. We evaluate events and changes in circumstances that could indicate carrying amounts of long-lived assets, including property and equipment, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted future cash flows derived from their use and eventual disposition. If the sum of the undiscounted future cash flows is less than the carrying amount of an asset, we record an impairment loss for the amount by which the carrying amount of the assets exceeds its fair value. There was no impairment charge recorded during the three months ended March 31, 2018 or the years ended December 31, 2017 or 2016.

 

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Revenue recognition

 

Revenue consists of sales of our products through domestic retail customers, international distributors and retail customers, and e-commerce channels and shipping fees charged to our e-commerce customers. Through December 31, 2017, sales were recognized when persuasive evidence of an arrangement exists, services have been rendered (the product has shipped or when delivered, based on the shipping terms), the price is fixed and determinable and collectability is reasonably assured. Revenue recognized through e-commerce sales is recognized net of any taxes that are collected from consumers and subsequently remitted to governmental authorities.

 

In May 2014 the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606), which replaced existing revenue recognition standards and expand the disclosure requirements for revenue arrangements. It may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts with remaining performance obligations as of the effective date. We adopted ASU 2015-14 effective January 1, 2018 on a modified retrospective basis. We reviewed all terms and conditions with customers to determine any potential effects of ASU 2014-09 and determined that the adoption of this standard did not have a material impact on our results of operations, financial condition and/or financial statement disclosures.

 

Sales through all channels are recognized when the related goods have been transferred to customers for an amount that reflects the consideration for which we expect to be entitled in exchange for said goods. Revenue recognized through e-commerce sales is recognized net of any taxes that are collected from consumers and subsequently remitted to governmental authorities.

 

E-commerce customers can return unused product within 30 days for any reason for full credit. Our domestic retail customers can return product or take credits for damaged product and returns from their customers. In certain circumstances they are also allowed to return product that they decide to no longer carry in their stores or sell on their websites. Some agreements with domestic retail customers allow them to use a portion of the products they purchase as testers.

 

Provision for sales discounts, product returns, markdowns, shortages, damages and testers are recorded as reductions to revenue when the related revenue from customers is recognized. The estimated reserves for these items are established by us based upon management’s best estimates at the time of sale based upon historical trends.

 

We regularly review and revise, when deemed necessary, our estimates of sales returns and other required reserves based primarily upon the historical rate of actual product returns, the duration of time between the original sale and return, new product launches and any communicated changes in sales plans by our retail customers. Customers will take credits for discounts, returns, markdowns, damages, shortages, and testers which will reduce future amounts owed to us. These revenue reductions are reflected in the consolidated statements of operations as an allowance against revenue. We recorded an estimated reserve of $198,000 and $390,000 at March 31, 2018 and December 31, 2017, respectively. At March 31, 2018, $62,362 of the reserve was netted against accounts receivable, while $135,638 was included in accrued expenses and other current liabilities. At December 31, 2017, $181,778 of the reserve was netted against accounts receivable, while $208,222 was included in accrued expenses and other current liabilities. We recorded $243,917 and $328,098 of revenue reductions during the three months ended March 31, 2018 and 2017, respectively.

 

Certain international customers pay for products in advance. In these instances, when cash is received in advance of a shipment of goods to customers, deferred revenue is recorded. We recorded deferred revenue of $0 and $45,077 as of March 31, 2018 and December 31, 2017, respectively

 

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Concentrations of risk

 

Four significant customers (defined as contributing at least 10%) accounted for an aggregate of 66% (29%, 17%, 10% and 10%, respectively) of our revenue from operations for the three months ended March 31, 2018. At March 31, 2018, two significant customers accounted for 100% (71% and 29%, respectively) of accounts receivable. We had two vendors that accounted for approximately 64% (43% and 21%, respectively) of purchases for the three months ended March 31, 2018.

 

Two significant customers (defined as contributing at least 10%) accounted for an aggregate of 55% (35% and 20%, respectively) of revenue from operations for the three months ended March 31, 2017. We had two vendors that accounted for approximately 50% (39% and 11%) of purchases for the three months ended March 31, 2017.

 

Three significant customers (defined as contributing at least 10%) accounted for an aggregate of 58% (26%, 17% and 15%, respectively) of our revenue from operations for the year ended December 31 , 2017. At December 31, 2017, two significant customers accounted for approximately 83% (45% and 38%) of our accounts receivable. We had one vendor that accounted for approximately 39% of purchases for the year ended December 31, 2017.

 

Three significant customers (defined as contributing at least 10%) accounted for an aggregate of 71% (40%, 21% and 10%, respectively) of revenue from operations for the year ended December 31, 2016. At December 31, 2016, three significant customers accounted for an aggregate of approximately of 85% (48%, 22% and 15%, respectively) of accounts receivable. We had one vendor that accounted for approximately 31% of purchases for the year ended December 31, 2016.

 

Fair value of financial instruments

 

We adopted the provisions of the accounting pronouncement which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under the provisions of the pronouncement, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

U.S. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

 

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, we use quoted market prices to measure fair value. If market prices are not available, the fair value measurement is based on models that use primarily market-based parameters including interest rate yield curves, option volatilities and currency rates. In certain cases where market rate assumptions are not available, we are required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows could significantly affect the results of current or future values. The results may not be realized in an actual sale or immediate settlement of an asset or liability.

 

Income taxes  

 

We are a limited liability company which is not a tax paying entity at the corporate level. Each member is instead individually responsible for their share of our income or loss for income tax reporting purposes.

 

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Recent accounting pronouncements

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606), which will replace existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. It may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts with remaining performance obligations as of the effective date. We adopted ASU 2015-14 effective January 1, 2018 on a modified retrospective basis. Adoption of this standard did not have a material impact on our results of operations, financial condition and/or financial statement disclosures (see “Revenue recognition” note above for further information regarding revenue recognition).

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidations (Topic 810): Amendments to the consolidation analysis”. The amendment places more emphasis in the consolidation evaluation on variable interests other than fee arrangements such as principal investment risk. Additionally, the amendments in this update reduce the extent to which related party arrangements cause an entity to be considered a primary beneficiary. The Company adopted ASU No. 2015-02 beginning as of January 1, 2016, and notes that this adoption did not have a material impact on the Company’s results of operations, financial condition and/or financial statement disclosures.

 

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be presented in the financial statements as a deduction from the corresponding debt liability, consistent with the presentation of debt discounts.

 

This guidance became effective for annual periods beginning after December 15, 2015, with early adoption permitted, and is applied retrospectively. We adopted ASU No. 2015-03 beginning as of January 1, 2015 and the adoption did not have a material impact on our results of operations, financial condition and/or our financial statement disclosures.

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which simplifies the subsequent measurement of inventories by requiring inventory to be measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for annual periods beginning after December 15, 2016, with early adoption permitted. We adopted ASU No. 2015-11 beginning as of January 1, 2015 and did not have a material impact on our results of operations, financial condition and/or our financial statement disclosures

 

In 2016, the FASB issued ASU2016-02 “Leases” (Topic 842), which will require lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard. This guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. We expect to adopt ASU No. 2016-02 beginning as of January 1, 2019. Due to the fact that 1901 McGee, LLC is consolidated, we do not expect this adoption to have an impact.

 

In October 2016, the FASB issued ASU No. 2016-17, “Consolidations (Topic 810): Interests held through related parties under common control”, which amends the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control, with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is a reporting entity that has a controlling financial interest in a VIE, and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The Company adopted ASU No. 2016-17 beginning as of January 1, 2017, and notes that the adoption did not have a material impact on the Company’s results of operations, financial condition and/or financial statement disclosures.

 

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JOBS Act

 

We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, reduced disclosure obligations relating to the presentation of financial statements in management’s discussion and analysis of financial condition and results of operations and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. We have availed ourselves of the reduced reporting obligations and executive compensation disclosure in this prospectus, and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings.

 

In addition, an emerging growth company can delay its adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing not to take advantage of such extended transition period, and as a result, we will comply with any new or revised accounting standards on the relevant dates on which non-emerging growth companies must adopt such standards. This election is irrevocable.

 

We will continue to qualify as an emerging growth company until the earliest of:

 

  the last day of our fiscal year in which the fifth anniversary of this offering occurs;

 

  ●  the last day of our fiscal year in which have annual gross revenues of $1.07 billion or more;

 

  the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt;

 

  the date on which we are deemed to be a “large accelerated filer.”

 

Results of Operations for the three months ended March 31, 2018 and 2017

 

The following information summarizes our results of operations included in our consolidated financial statements as of and for the three months ended March 31, 2018 and 2017.

 

Net Sales

 

For the three months ended March 31, 2018 and 2017, net sales by sales channel as a percentage of total sales were as follows:

 

    Three months ended     Three months ended  
    March 31, 2018     March 31, 2017  
Domestic     42 %     46 %
E-Commerce     32 %     35 %
International     26 %     19 %

 

Our net sales are derived from sales of products, net of provisions for sales discounts and allowances, product returns, markdowns and price adjustments. Net sales increased 16%, from $1,474,059 for the three months ended March 31, 2017 to $1,711,291 for the three months ended March 31, 2018. This increase was driven by an increase in international sales of $174,943, an increase in online sales of $24,339, and an increase in domestic sales of $37,950. Our international sales comprised 26% of net sales for the three months ended March 31, 2018, up from 19% for the three months ended March 31, 2017 due to sales of our products by our China and Kuwait distributors and the signing of our Hong Kong distributor in July 2017. Sales to domestic retail customers increased 6% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, positively impacted by an approximately $90,000 reduction in the reserve for testers and returns for the three months ended March 31, 2018. We fulfilled a large purchase order from Costco in the second quarter of 2018. As such, we expect sales to domestic retail customers to increase and to continue to be the largest component of our sales in fiscal year 2018.

 

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Cost of sales and gross margin

 

Cost of sales reflects the aggregate costs to procure our products, including the amounts invoiced by our third-party contractors for components and finished goods as well as costs related to transportation to and from our manufacturers and distribution centers. Cost of sales also includes the effect of changes in the balance of reserves for excess and obsolete inventory and write-off of inventory not previously reserved. In addition, cost of sales includes warehouse costs including depreciation, wages, utilities, real estate taxes, and property insurance. Cost of sales were $707,376 (of which $18,665 are attributable to 1901 McGee, LLC) and $787,849 (of which $18,170 are attributable to 1901 McGee, LLC) for the three months ended March 31, 2018 and 2017, respectively, representing a decrease of 10%, despite a 16% increase in revenue. This decrease was the result of a difference in the mix of products sold during the period, and the impact of an approximately $46,000 inventory reserve for the three months ended March 31, 2017 for obsolete products. All of our products are manufactured by third-parties, so we must schedule the production of our products when there is availability. While we have good relations with our manufacturers, the current size of our orders does not give us scheduling priority or the lowest possible cost. We continue to work with our manufacturers to look for ways to reduce overall costs as a percentage of sales. If we can increase sales and order sizes in the future, we believe we will be able to reduce our cost of sales as a percentage of sales.

 

Gross profit is our net sales less cost of sales. Gross profit increased $317,705, or 46%, to $1,003,915 for the three months ended March 31, 2018 as compared to the gross profit of $686,210 for the three months ended March 31, 2017. Our gross profit as a percentage of net sales was 58.7% and 46.5% for the three months ended March 31, 2018 and 2017, respectively. Gross profit was impacted by the changes in Net Sales and Cost of sales described above.

 

Total expenses

 

Total expenses for the three months ended March 31, 2018 were $1,190,795, an increase of $73,933, or 6.6%, from $1,116,862 for the three months ended March 31, 2017. For the three months ended March 31, 2018, approximately 62% of our total expenses were selling expenses and 38% were general and administrative expenses. For the three months ended March 31, 2017, approximately 72% were selling expenses and 28% were general and administrative expenses. General and administrative expenses include $27,315 and $27,818 attributable to 1901 McGee, LLC for the three months ended March 31, 2018 and 2017, respectively. Rent expense of $51,984 and $50,470 paid from DERMAdoctor, LLC to 1901 McGee, LLC for the three months ended March 31, 2018 and 2017, respectively, is eliminated upon consolidation.

 

Selling expenses

 

Selling expenses totaled $735,680 and $802,944 for the three months ended March 31, 2018 and 2017, respectively. Selling expenses primarily consisted of advertising and marketing expenses of $392,294 and $394,407 for the three months ended March 31, 2018 and 2017, respectively, and sales and marketing team payroll of $241,328 and $295,337 for the three months ended March 31, 2018 and 2017, respectively. The decrease in selling expenses in 2018 when compared to 2017 is mainly related to the reduction of our sales payroll. To the extent sales to our retail channel grows at a smaller or larger rate than our online website or international distributor channels, this expense may become a smaller or larger part of total expenses.

 

General and administrative expenses

 

General and administrative expenses were $455,115 for the three months ended 2018, an increase of $141,197, or 45.0%, over the $313,918 expense for the three months ended March 31, 2017. The increase is primarily due to higher payroll costs associated with additional accounting personnel and higher professional fees related to the financial statement audit. Research and development expenses were $21,660 and $7,855 for the three months ended March 31, 2018 and 2017, respectively.

 

As we expand our product sales we expect that both selling expenses and general and administrative expenses will increase.

 

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Losses from operations

 

We had operating losses of $186,880 and $430,652 for the three months ended March 31, 2018 and 2017, respectively. The main reasons for the significant reduction in losses from operations is related to the increased sales for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, and the reduction of cost of sales for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. A significant portion of the loss for the three months ended March 31, 2017 is attributable to a material reduction in sales to one of our larger domestic specialty retailers who stopped selling our products in their stores and began selling our products only on their website. It took us time to adjust inventory and expenses to be more in line with lower sales and to diversify our business to international distributors.

 

Interest expense

 

Interest expense was $61,483 and $45,670 for the three months ended March 31, 2018 and 2017, respectively. Interest expense on our related party notes was $26,503 for the three months ended March 31, 2018 ($1,790,000 balance at March 31, 2018) and $23,671 for the three months ended in March 31, 2017 ($1,600,000 balance at March 31, 2017). The remaining increase in interest expense for the three months ended March 31, 2018 is primarily attributable to the accounts receivable financing facility put in place in October 2017 of $12,688.

 

Cash flows 

 

Cash used in operating activities

 

Net cash used in operating activities for the three months ended March 31, 2018 was $368,886 (of which cash provided of $5,256 is attributable to 1901 McGee, LLC). Net loss before deducting depreciation, and other non-cash items used $229,193 of cash.

 

Cash from operations was negatively impacted by a $139,693 increase in working capital primarily attributed to an increase in inventory of $776,709 due to inventory acquired for the large Costco order that was placed in the first quarter of 2018 and a decrease in accrued expenses of $157,206, partially offset by a decrease in accounts receivable of $208,661 and an increase in accounts payable of $643,648. The increase in accounts payable is primarily related to inventory purchased to satisfy the Costco orders, which sales occurred at the beginning of the second quarter.

 

Net cash used in operating activities for the three months ended March 31, 2017 was $178,798 (of which cash provided of $10,554 is attributable to 1901 McGee, LLC). Net loss before deducting depreciation, and other non-cash items used $397,452 of cash. Cash from operations was positively impacted by a $218,654 decrease in working capital primarily attributed to an increase in accounts payable of $258,259 and an increase in accrued expenses of $264,352, partially offset by an increase in inventory of $280,506.

 

Cash used in investing activities

 

No equipment was purchased during the three months ended March 31, 2018 or 2017.

 

Cash provided by financing activities .

 

Net Cash provided by financing activities for the three months ended March 31, 2018 was $394,042 (of which $1,920 was attributable to 1901 McGee, LLC). In 2018, we continued an accounts receivable financing facility with CircleUp. The accounts receivable financing facility balance increased $454,432 during the three months ended March 31, 2018. Finally, in 2018, we also incurred $62,310 in deferred offering costs related to the potential initial public offering.

 

Net Cash used by financing activities for the three months ended March 31, 2017 was $4,387 (of which $4,387 was attributable to 1901 McGee, LLC).

 

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Results of Operations for the years ended December 31, 2017 and 2016

 

The following information summarizes our results of operations included in our consolidated financial statements as of and for the years ended December 31, 2017 and 2016. References to 2017 are references to the twelve months ended December 31, 2017 and references to 2016 are references to the twelve months ended December 31, 2016.

 

Net Sales

 

During 2017 and 2016, net sales by sales channel were as follows:

 

    Twelve months ended     Twelve months ended  
    December 31, 2017     December 31, 2016  
Domestic     44 %     68 %
E-Commerce     26 %     26 %
International     30 %     6 %

 

Our net sales are derived from sales of products, net of provisions for sales discounts and allowances, product returns, markdowns and price adjustments. Net sales increased 36%, from $6,474,861 in 2016 to $8,808,674 in 2017. This increase was mainly driven by an increase in international sales of $2,190,017, an increase in online sales of $733,131, partially offset by a decrease in domestic sales of $589,335. Our international sales comprised 30% of net sales and was the fastest growing segment of our business with a growth rate of 539% between 2016 and 2017. This growth was driven by the signing of our China distributor in October 2016, their advance purchase in 2017 of approximately $816,000 of one of our products due to a price that reflected a one-time special manufacturing discount, and growth in sales to our Kuwait distributor. We expect this growth to continue in 2018, albeit at a slower a rate, due in part to our recent receipt of approval to sell certain products in the European Union, our recent entry into the Central American, Hong Kong and UAE markets, and as we continue to increase our international sales territory. Sales to domestic retail customer declined from 2016 to 2017 mainly due to the fact that two of our larger specialty retailers reduced the number of locations at which they sell our products, and one of these retailers is now only selling our products on their website. We received a large order from Costco we delivered at the beginning of the second quarter of 2018. As such we expect sales to domestic retail customers to increase and to continue to be the largest component of our sales in 2018.

 

Cost of sales and gross margin

 

Cost of sales reflects the aggregate costs to procure our products, including the amounts invoiced by our third-party contractors for components and finished goods as well as costs related to transportation to and from our manufacturers and distribution centers. Cost of sales also includes the effect of changes in the balance of reserves for excess and obsolete inventory and write-off of inventory not previously reserved. In addition, cost of sales includes warehouse costs including depreciation, wages, utilities, real estate taxes, and property insurance. Cost of sales were $4,062,563 and $2,902,349 in 2017 and 2016, respectively, representing an increase of 40%. All of our products are manufactured by third-parties, so we must schedule the production of our products when there is availability. While we have good relations with our manufacturers, the current size of our orders does not give us scheduling priority or the lowest possible cost. We continue to work with our manufacturers to look for ways to reduce overall costs as a percentage of sales. If we can increase sales and order sizes in the future, we believe we will be able to reduce our cost of sales as a percentage of sales.

 

Gross profit is our net sales less cost of sales. Gross profit increased $1,173,599, or 33%, to $4,746,111 for 2017 as compared to the gross profit of $3,572,512 in 2016. Our gross profit as a percentage of net sales was 53.9% and 55.2% for 2017 and 2016, respectively. This number was impacted by the mix of products sold during the period as well as the mix of sales between distribution channels. Our e-commerce sales are the highest margin contributors followed by our domestic retail sales. Sales to our international distributors have the lowest gross margin. Since sales to our international distributors increased in 2017, our gross margin declined in 2017 when compared to 2016.

 

Total expenses

 

Total expenses in 2017 were $5,014,986, a decrease of $415,950, or 7.7%, from $5,430,936 in 2016. In 2017, approximately 67% of our total expenses were selling expenses and 33% were general and administrative expenses. In 2016, approximately 73% were selling expenses and 27% were general and administrative expenses. General and administrative expenses include $133,707 and $114,820 attributable to 1901 McGee, LLC in 2017 and 2016, respectively. Rent expense of $201,902 and $198,952 paid from DERMAdoctor, LLC to 1901 McGee, LLC for the years ended December 31, 2017 and 2016, respectively, is eliminated upon consolidation.

 

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Selling expenses

 

Selling expenses totaled $3,371,570 and $3,955,468 in 2017 and 2016, respectively. Selling expenses primarily consisted of advertising and marketing expenses of $1,793,846 and $2,114,847 in 2017 and 2016, respectively, and sales and marketing team payroll of $1,148,376 and $1,425,012 in 2017 and 2016, respectively. A significant portion of our current selling expense is related to sales in retail outlets. The decrease in advertising and marketing expenses in 2017 when compared to 2016 is mainly because we were no longer selling products in certain physical locations of some specialty retailers in 2017. This allowed us to lower our costs related to product testers, payroll, and travel expenses. To the extent sales to our retail channel grows at a smaller or larger rate than our online website or international distributor channels, this expense may become a smaller or larger part of total expenses.

 

General and administrative expenses

 

General and administrative expenses were $1,643,416 in 2017, an increase of $167,948, or 11.4%, over the $1,475,468 expense in 2016. The increase is primarily due to higher payroll costs associated with additional accounting personnel and higher professional fees related to the financial statement audit. Research and development expenses were $83,845 and $79,385 in 2017 and 2016, respectively.

 

As we expand our product sales we expect that both selling expenses and general and administrative expenses will increase.

 

Losses from operations

 

We had operating losses of $268,875 and $1,858,424 in 2017 and 2016, respectively. The main reasons for the significant reduction in losses from operations is related to the increased sales in 2017 compared to 2016, and the reduction of marketing and advertising expenses in 2017 compared to 2016. A significant portion of the loss in 2016 is attributable to a material reduction in sales to one of our larger specialty retailers who stopped selling our products in their store and began selling our products only on their website. It took us time to adjust inventory and expenses to be more in line with lower sales and to diversify our business to international distributors.

 

Interest expense

 

Interest expense was $199,321 and $175,545 in 2017 and 2016, respectively. Interest expense on our related party notes was $99,250 in 2017 ($1,790,000 balance at year-end) and $14,203 in 2016 ($1,600,000 balance at year-end) in 2016. The remaining interest expense for 2017 is attributable to the accounts receivable financing facility put in place in 2017 of $10,508 and the mortgage payables of 1901 McGee, LLC of $89,563. The remaining interest expense for 2016 was attributable to a bank line of credit of $30,290 and the mortgage payables of 1901 McGee, LLC of $131,052.

 

Net income (loss)

 

For the years ended December 31, 2017 and 2016, we reported a net loss of $345,083 and $1,897,264, respectively, attributable to DERMAdoctor, LLC.

 

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Cash flows 

 

Cash used in operating activities

 

Net cash used in operating activities for the year ended December 31, 2017 was $469,283 (of which $14,006 is attributable to 1901 McGee, LLC). Net loss before deducting depreciation, and other non-cash items used $303,751 of cash. Cash from operations was negatively impacted by a $165,532 increase in working capital primarily attributed to an increase in accounts receivable of $178,364, an increase in inventory of $368,762 to support higher sales, partially offset by an increase in accrued expenses of $228,566. The increase in accrued expenses is primarily related to inventory in transit and an increase in our outstanding credit card balance.

 

Net cash used in operating activities for the year ended December 31, 2016 was $2,803,362 (of which $37,951 is attributable to 1901 McGee, LLC). Net cash used in operating activities consisted of a net loss of $2,023,233 (of which $125,969 is related to 1901 McGee, LLC), $1,061,217 in changes in operating assets and liabilities, offset in part by $281,088 of non-cash operating activity (of which $87,585 is depreciation attributable to 1901 McGee, LLC). Net non-cash operating expenses included $95,841 to record an obsolete inventory reserve. Changes in operating assets and liabilities were attributable to decreases in working capital, primarily related to a decrease in accounts receivable of $349,377, an increase in inventory of $492,797, a decrease in prepaid expenses of $27,644, a decrease in accounts payable of $1,085,777 (of which $18,705 is attributable to 1901 McGee, LLC), and an increase in accrued expenses of $88,460. The decrease in accounts payable of $1,085,777 and the increase in inventory of $492,797 was attributable to using the proceeds of the cash infusion from the issuance of equity as described below. Inventory was increased as a result of an effort to lower the cost of goods sold by increasing order sizes.

 

Cash used in investing activities

 

No equipment was purchased during 2017. The Company purchased $6,492 of equipment during 2016.

 

Cash provided by financing activities .

 

Net Cash provided by financing activities for the year ended December 31, 2017 was $297,905 (of which $22,589 was attributable to 1901 McGee, LLC). In 2017, we entered into two additional notes payable with Papillon for a total principal amount of $190,000. Also in 2017, we entered into an accounts receivable financing facility with CircleUp. An outstanding balance of $180,316 still remains as of December 31, 2017. Finally, in 2017, we also incurred $95,000 in deferred operating costs related to the potential initial public offering.

 

Net Cash provided by financing activities for the year ended December 31, 2016 was $2,942,422 (of which $32,472 was attributable to 1901 McGee, LLC). In 2016, we sold Units representing 47.5% of our outstanding equity to two investors for aggregate proceeds of $3,500,000. A portion of those proceeds were used to repay $353,000 of related party long-term debt. We also entered into a bank line of credit with Banker’s Trust in 2016. The proceeds of that line of credit were used to pay off a bank line of credit with ANB Bank and to provide working capital during 2016. In November 2016, the Banker’s Trust bank line of credit was paid off by Papillon in exchange for a note payable from by us in the amount of $1,600,000. Proceeds related to the re-financing of 1901 McGee, LLC mortgage payables totaled $1,624,211. Total payments made related to the outstanding mortgage payables of 1901 McGee, LLC totaled $1,720,160. In addition, 1901 McGee, LLC received capital contributions of $128,421 during 2016.

 

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Liquidity and Capital Resources

 

We have a history of recurring losses from operations and negative cash flows from operations. We have funded our operations from revenue derived from sales of our products as well as from the sale of equity, account receivable financings, and short-term loans from related parties. We used $368,886 and $178,798 of cash in our operating activities during the three months ended March 31, 2018 (of which cash provided of $5,256 is attributable to 1901 McGee, LLC) and 2017 (of which cash provided of $10,554 is attributable to 1901 McGee, LLC), respectively. We used $469,283 and $2,803,302 of cash in our operating activities during the years ended December 31, 2017 (of which $14,006 is attributable to 1901 McGee, LLC) and 2016 (of which $37,951 is attributable to 1901 McGee, LLC), respectively. We have a lengthy manufacturing process that requires us to pay for product ingredients and components up to four months before we get paid for the product from our customers. Therefore, as long as sales and related required inventory are growing we will likely require external working capital to finance the timing difference between when we must pay for inventory and when we get paid by our customers.

 

As a result, management concluded that there was a substantial doubt about our ability to continue as a going concern as current cash balances and projected cash flows from operations will not be sufficient to fund operations for the next twelve months from the date that the condensed consolidated financial statements are issued. We anticipate completing an initial public offering for gross proceeds of approximately $15,000,000; however there can be no certainty that the financing will be consummated. If we continue to experience losses and do not achieve breakeven cash flow, we may need to raise additional funds in the future, in addition to those anticipated in contemplation of this initial public offering, to meet our working capital requirements and pursue our business strategy.

 

As of March 31, 2018 and December 31, 2017, we had cash and cash equivalents totaling $105,785 and $80,629, respectively, total current assets of $3,125,499 and $2,442,975, respectively, and total assets of $6,084,383 and $5,425,202, respectively. We had total current liabilities of $2,635,739 and $1,739,062, respectively, and a net working capital of $489,760 and $703,913, respectively. Our primary working capital requirements are for product and product-related costs, the payment of payroll, and advertising and marketing costs. Fluctuations in working capital are primarily driven by the time lag between when we must pay for inventory and when our customers pay us for the product we sell them.

 

The total numbers in the paragraph above include the following attributable to 1901 McGee, LLC: cash and cash equivalents of $27,172 and $19,996, respectively, total current assets of $27,172 and $19,996, respectively, and total assets of $2,980,106 and $2,994,826, respectively. 1901 McGee, LLC had total current liabilities of $122,239 and $123,358, respectively, and a net working capital deficit of ($95,067) and ($103,362), respectively.

 

Description of Indebtedness

 

As of March 31, 2018 and December 31, 2017, our total indebtedness was $5,089,222 and $4,663,440, respectively, which includes: (i) a promissory note issued by 1901 McGee, LLC to EDC Loan Corporation in the outstanding principal amount of $1,132,376 as of March 31, 2018; and (ii) a promissory note issued by 1901 McGee, LLC to Alterra Bank in the outstanding principal amount of $1,532,098 as of March 31, 2018, which promissory notes is secured by the real property of 1901 McGee, LLC (which includes the office and warehouse we lease from 1901 McGee, LLC) and are guaranteed by Audrey Kunin, Jeff Kunin and other entities affiliated with each of them; (iii) outstanding promissory notes issued by us to Papillon in the principal amount of $1,790,000; and (iv) an outstanding financing facility in the amount of $634,748 to CircleUp as of March 31, 2018.

 

On November 6, 2016, we issued a promissory note in the aggregate principal amount of $1,600,000 to Papillon, which accrues interest at a rate of 6% per annum. The note matures of November 8, 2019, unless earlier repaid. All or any portion of the note may be prepaid without premium or penalty of any kind.

 

On July 17, 2017, we issued a promissory note in the principal amount of $90,000 to Papillon. Interest is paid at a rate of 6% per annum, payable monthly. On October 9, 2017, the maturity of the note was extended for a three (3) month period to January 13, 2018. On January 13, 2018, the note was amended to extend the maturity date to March 15, 2018. On March 15, 2018, the note was amended to extend the maturity date to May 14, 2018. On April 30, 2018, the note was amended to extend the maturity date to July 29, 2018. All or any portion of the note may be prepaid without premium or penalty of any kind.

 

On November 9, 2017, we issued an additional promissory note in the principal amount of $100,000 to Papillon, which accrues interest at a rate of 6% per annum, payable monthly. The note was originally scheduled to mature on February 7, 2018. On February 6, 2018 the note was amended to extend the maturity date to May 8, 2018. On April 30, 2018, the note was amended to extend the maturity date to July 29, 2018. All or any portion of this note may be prepaid without premium or penalty of any kind.

 

On October 19, 2017, we entered into an accounts receivable financing facility with CircleUp. CircleUp lends to us based on a percentage of outstanding accounts receivable from customers. Our customers pay CircleUp directly up to the amount funded to us by CircleUp in addition to any incurred interest. During the three months ended March 31, 2018, CircleUp agreed to lend amounts to the Company, above the outstanding accounts receivable balance, to fund payments owed to vendors for large inventory purchases made in conjunction with a material sale to Costco in the second of quarter of 2018. Interest is paid at a rate of 17% per annum. To the extent payments from our customers are not sufficient to repay any funds advanced to us by CircleUp, we are obligated to repay any outstanding loan amounts. We may prepay any amounts outstanding at any time without penalty. In addition, to secure payment of all funds to CircleUp, we have granted it a security interest in all of our assets.

 

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Sale of Membership Interests

 

In 2016, we sold Units representing 47.5% of our outstanding equity to two investors for aggregate proceeds of $3,500,000. In November 2016, the investors sold 50% of the Units they had acquired to Papillon in consideration for Papillon loaning us $1,600,000 that was used to repay our bank debt. In December 2017, Papillon purchased 25% of the remaining Units owned by the PE firm in consideration for Papillon paying the PE firm $480,000.

 

Contractual obligations and commitments

 

The following table summarizes our contractual obligations as of March 31, 2018:

 

    Payments due by period  
    Total     Less than
one year
    1-3 Years     3-5 Years     More than
5 years
 
Notes (1)   $ 2,664,474     $ 117,239     $ 245,281     $ 1,507,618     $ 794,336  
Indebtedness to related parties (2)     1,790,000       190,000       1,600,000                  
Accounts receivable financing (3)     634,748       634,748                          
                                         
Total contractual obligations (4)   $ 5,089,222     $ 941,987     $ 1,845,281     $ 1,507,618     $ 794,336  

 

 

 

(1) 1901 McGee, LLC promissory notes (mortgage payables) to EDC Loan Corporation and Alterra Bank, excluding financing fees.

 

(2) Promissory notes issued to Papillon.
   
(3) Accounts receivable financing facility with CircleUp.
   
(4) Lease payments on our headquarters are not reflected in the table since they are eliminated in consolidation with 1901 McGee, LLC.

 

Off-balance sheet arrangements

 

We did not have during the period presented, and we do not currently have, any off-balance sheet arrangements as defined under SEC rules.

 

Commitments and contingencies

 

Except as otherwise disclosed elsewhere in this prospectus, we have no material commitments or contingent liabilities. We have an employment agreement with each of our President/Chief Executive Officer and Chief Creative Officer that would require a one-year severance payment in the event that we terminate his or her services under certain circumstances. We have an employment agreement with our Chief Financial Officer that would require a three-month severance payment in the event that we terminate her services under certain circumstances.

 

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BUSINESS

 

Overview

 

We are an omni-channel, innovative, skincare company primarily focused on the creation of products that are designed to target common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris. We develop, market, distribute and sell skincare products under our DERMAdoctor ® brand worldwide. All of our DERMAdoctor ® products are conceived by our product design team headed by our Chief Creative Officer and founder, Dr. Audrey Kunin, who is a board-certified dermatologist. Dr. Kunin adds her unique perspective, which is incorporated in our packaging, that skincare can be both elegant and powerful. Our philosophy is to mix science and technology synergistically to provide non-irritating, effective and pleasing skincare products aimed at targeting overlooked or unfulfilled common skin concerns. All of our products are fragrance and dye free. Since 2003, we have been developing, marketing, distributing and selling an extensive array of our proprietary skincare products. Today, we produce and sell over 30 DERMAdoctor ® products that account for 39 stock keeping units, or skus, at prices ranging from $22 for an antiperspirant to $95 for a Kakadu vitamin C skin product. Our products are typically grouped into families of products and include those such as Wrinkle Revenge, Ain’t Misbehavin’, Calm Cool and Corrected and KP Duty designed to improve the skin’s appearance for aging, acne, redness and keratosis pilaris, respectively. Within each family, products are typically further broken down to face, eyes, and body. The ingredients are then uniquely formulated for the resulting product subcategory. Each family of products creates opportunities for the customer to expand into different product types aimed at addressing their particular skincare problems. For example, within our KP Duty family we offer both a lotion and a scrub. Often these products are purchased together. We recently launched a third KP Duty product, the KP Duty Body Peel, providing an innovative product delivery system which should expand this family of products to a large group of current customer users.

 

We initially began operations in 1998 as an e-commerce company selling third-party beauty products and skincare products on the internet and providing skincare advice and information on our website. Through our online sales we developed significant market knowledge of the industry, specifically what consumers desired and disliked, product packaging successes and failures, new technology and product opportunities and market voids, which led to our decision to create our own proprietary products to leverage our customer base and daily internet traffic and eventually to discontinue sales of third-party products to focus on sales of our own proprietary products. We named our proprietary skincare line DERMAdoctor ® .

 

We utilize an omni-channel distribution model which includes traditional domestic retail distribution outlets, online shopping and international distributors. For the three months ended March 31, 2018, domestic, e-commerce and international sales were 42%, 32% and 26% of our net sales, respectively, as compared to 46%, 35% and 19%, respectively, for the three months ended March 31, 2017. For the year ended December 31, 2017, domestic, e-commerce and international sales were 44%, 26% and 30% of our net sales, respectively, as compared to 68%, 26% and 6%, respectively, for the year ended December 31, 2016. The traditional domestic retail distribution outlets consist mainly of specialty and department stores, including their company websites. To date, specialty retailers Ulta Beauty and Sephora have accounted for a majority of our U.S. sales. Other U.S. retailers include Belk, Macy’s online, Von Maur, Nordstrom online, Dermstore.com, and Skinstore.com. Other retail outlets include “flash” websites such as Gilt, HauteLook and Rue La La and in the past have included HSN and QVC. In 2017, we began initial sales to Costco for select products, as well as Evine, a home shopping television channel. As of March 1, 2018, our products are distributed to over 700 Ulta Beauty stores located in 49 states and the District of Columbia as well as other department stores. Our direct to consumer distribution channel is comprised of internet sales through our website ( www.dermadoctor.com ) and through Amazon.com. Our primary source of revenue historically has been from the sale of our products in the United States. In 2017 and the first quarter of 2018, however, we saw significant growth in our international distribution channel. The majority of the growth during 2017 was driven by the signing of our China distributor in October 2016, their significant advance purchase in 2017 of one of our products due to a price that reflected a one-time special manufacturing discount, and growth in sales to our Kuwait distributor. We experienced continued growth in our international channel during the three months ended March 31, 2018 due to sales of our products by our China and Kuwait distributors as well as sales by our Hong Kong distributor signed in July 2017. The majority of our international sales have occurred through these distributors that sell our products via the internet in China, Hong Kong, and Kuwait. In April 2017, we were granted the approval for European Union registration of some of our products and we expect to expand shipments of our approved products in Europe in 2018. In August 2017, we began shipping to our distributor in Guatemala who has the rights to begin shipping to other countries in Central America, namely, Belize, Costa Rica, El Salvador, Honduras, Nicaragua and Panama. In January 2018, we began shipping to our distributor in the UAE who has the rights to begin shipping to Saudi Arabia, Qatar, Lebanon, Jordan, Oman and Bahrain.

 

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We believe that a core element of our success is our distinctive marketing strategy. We focus on educating our target customers, women between the ages of 18 to 65 who have a college education with above average household income, about the unique attributes of our products, developing intimate relationships with these consumers and capitalizing on our omni-channel distribution strategy to effectively reach and engage these consumers. We believe educational media such as appearances on television shows, information on our website and physical presence at specialty retailers such as Ulta Beauty, as well as at certain department stores, has helped us to further strengthen our brand image and provide additional points of contact to educate consumers about our products. We have received multiple awards from respected publications such as Health and Fitness magazine and have been a finalist in the CEW Beauty Awards, the “Academy Awards” of the beauty industry. In addition, Dr. Audrey Kunin has been a guest on The Dr. Oz show several times. Dr. Kunin and her products have graced numerous publications including InStyle, W, More, Redbook, Glamour, Bride, Family Circle, O The Oprah Magazine, Shape, Self, Fitness, Good Housekeeping, Cosmopolitan, Health, Allure, Elle, RealSimple, Lucky, Ladies Home Journal, People and People en Espanol, Prevention, Men’s Health, New York Daily News, The Wall Street Journal, The Washington Post, The Chicago Tribune, WebMD, Newsweek and U.S. News and World Report, The Today Show, E! and the Tyra Banks Show.

 

Our Market

 

We operate within the large and steadily growing skincare category of the beauty industry. According to Forbes, the skincare market is the biggest segment of the beauty industry. The skincare market is divided into facial care, hand and body care and sun care. Skincare products can also be subdivided into prestige and mass segments. Prestige products are characterized by higher price points and are typically sold in high-end specialty stores, such as Ulta Beauty stores and department stores. Within the skincare market, we sell and compete across all major product categories with our prestige products.

 

Strengths and Competitive Advantages

 

The skincare products market is large and attractive

 

We believe that the skincare products market is highly attractive given its scale, growth dynamics and consumer demand trends. The Cosmetic Skin Care Market: Global Industry Analysis, Trends, Market Size and Forecasts to 2023 reports that the global cosmetic skincare market was $130.7 billion in 2016. It predicts the global skincare market to grow with a compound annual growth rate of between 4.7% and 5.3% from 2017 to 2023. The report predicts that Asia Pacific, which includes China, will dominate the world market with the Middle East and Africa growing at the highest compounded annual growth rate over the forecasted period. Lucitel, a market research firm, in its December 12, 2016 report, forecasts the global skincare market to grow at a compound annual growth rate of 3.8% from 2016 to 2021, with opportunities in the areas of anti-aging, sun protection, body care lotion and multi-functional skin cream.

 

Our strategic differentiation: DERMAdoctor, a prestige, problem solving, skincare company

 

We are driven by what we believe today’s consumer wants—an assortment of high-quality, prestige-inspired skincare products at extraordinary value. Through our modern consumer engagement and responsiveness, we interact with our consumers instead of broadcasting at them. We focus a significant portion of our product development efforts on creating new and improving existing products that fulfill unmet skincare needs. We believe that our business model has multiple areas of competitive advantage, including the following:

 

Authentic brand that attracts a wide range of consumers in the category. Since 1998, we have prioritized getting to know our consumers, and they in turn have provided us with valuable feedback, enabling us to build DERMAdoctor ® into an authentic and trusted brand. Our differentiated marketing approach focuses on educating consumers as to the unique attributes of our products; communicating product efficacy through product demonstrations; featuring our consumers instead of celebrities on our website and developing direct connections with our consumers. By providing a comprehensive experience—from integrated engagement online, through social media and in retail stores to our differentiated product offerings—we target new users as well as sophisticated buyers of skincare products.

 

Innovation and customer feedback model. We believe innovation is a major key to our success. We have built an innovation capability that has led to breakthrough new product introductions. We introduced five new products over the past three years and 28% of our 2017 net sales came from products launched in the last three years. With almost one million visits per year and online reviews, dermadoctor.com has been a useful vehicle for aiding in refinement of products and determining customer preferences. We are able to analyze sales results, reviews and feedback through social media to provide a quick indication of a product’s performance, which allows us to quickly allocate appropriate marketing and other resources.

 

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True omni-channel brand. We are a true omni-channel brand with a presence across national retailers, e-commerce and international distributors, which allows us to leverage insights gained from each channel to drive performance across the business.

 

  National retailers . We currently sell our products to retailers, some of which sell our products in brick-and-mortar stores and through their websites and others who sell our products solely through their websites. Ulta Beauty, a leading national retail customer and key beauty destination for many consumers, currently sells our products in over 700 of their stores. We have also continued to expand our sales through other retailers, including Von Maur, Nordstrom, Gilt, Sephora, Costco and Macy’s. We believe that our presence across many touch points within the beauty industry further strengthens our brand image.

 

  e-commerce. Our e-commerce business, which includes sales on our website and on Amazon.com, serves as a strong source of sales and an important component of our engagement and innovation model. We have nurtured a loyal, highly active online community for almost two decades through our own website and more recently through Amazon’s Luxury Beauty page. In 2017, we had just over a half a million total visitors to our website and over two- million page views. During 2017, we focused on driving more customers to our website through on-line marketing and social media. Sales through our website and Amazon.com contribute the highest gross margin of any of our sales channels.

 

  International Distributors . We currently sell our products to international distributors who sell into China, Hong Kong, Central America, Kuwait and the UAE. This is the fastest growing segment of our business with a growth rate of 539% between 2016 and 2017 and a growth rate of 66% between the first quarter of 2018 and the first quarter of 2017.  Although we have experienced significant growth in this segment during the twelve months ended December 31, 2017 and the three months ended March 31, 2018 when compared to the prior periods, we do not expect a similar percentage increase for the rest of 2018, as 2017 sales included the impact of the signing of our China distributor in October 2016, their significant advance purchase of one of our products to take advantage of a one-time special manufacturing discount, and the signing of our Hong Kong distributor in July 2017. We are actively pursuing additional distribution partners and other opportunities to sell our products internationally.

 

Experienced management team. Our Chief Creative Officer and President, Audrey Kunin, M.D., is a board-certified dermatologist, author, clinician, educator, and television personality. Dr. Kunin founded our company in 1998 with her husband, Jeff Kunin, M.D., who currently serves as our President and Chief Executive Officer. Jeff Kunin also holds a Masters of Business Administration from Washington University in St. Louis, Missouri. Under the leadership of Audrey and Jeff Kunin we have assembled an experienced management team that possesses complementary experiences managing prestige cosmetic brands within retail and wholesale distribution channels and overseeing operations in the branded consumer products industry. Our team has demonstrated skills in building brands, leading innovation, expanding distribution, and supply chain management. We operate with a high-performance team culture. The combination of an experienced team, strong culture and values and disciplined execution forms the foundation of our success.

 

Our Growth Strategy

 

DERMAdoctor ® is a prestige skincare brand. We are in the early stages of development, with significant room to grow by developing innovative new products, converting more consumers to the brand while increasing sales to existing consumers, and making DERMAdoctor ® products more widely available both domestically and internationally. We expect international markets to be the largest source of our growth over the next few years and also see an opportunity to expand in the United States. We also believe we have an opportunity to improve our profitability through greater operating leverage and efficiency.

 

We believe we are well positioned for continued growth driven by three main strategies.

 

Develop new products

 

We have a track record of bringing prestige-inspired innovative and effective skincare products to markets. As stated above, from 2015 through 2017, we introduced five new products including our Kakadu C line of products and KP Duty Peel Pads and 28% of our net sales during the year ended December 31, 2017 came from products launched in the last three years. We focus a significant portion of our product development efforts on creating new products and improving existing products based on feedback from our consumer community. We seek to create packaging that is unique to our brand, while being approachable and effective. We believe there are significant additional opportunities within the skincare space. We expect to continue to leverage our product development expertise to introduce new products into related market segments.

 

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Expand domestic market penetration

 

Draw new consumers to the brand . Increasing brand awareness is a major growth driver for our company. We believe we can significantly grow our following of passionate consumers to the brand from current levels through a greater focus on social media and other on-line marketing tools. While we introduced DERMAdoctor ® 14 years ago, we are still relatively unknown to many women.

 

Encourage current consumers to use more DERMAdoctor ® products . Our consumers’ loyalty to the DERMAdoctor® brand drives growth through increased usage of our products across categories and advocacy of our brand to other potential consumers. We have a loyalty program where customers receive reward points for each purchase that may be applied to payment for future purchases made through our website within 90 days. We also allow customers on our website to select up to three free samples of other products with each purchase to encourage future purchases of those additional products. In 2016, we started a subscription service for our products which allows customers to sign up for periodic delivery of our products. While still in its infancy, we are seeing increased participation by our consumers resulting in increased monthly subscription sales. We believe that through sustained innovation and efficient marketing, we will increase the number of DERMAdoctor ® items our consumers purchase.

 

Grow our retail relationships . We intend to continue to increase net sales through key premium retail accounts, such as Ulta Beauty, Costco, and Sephora. Within Ulta Beauty and other physical retail locations, we will seek to improve our in-store product positioning and collaborative marketing efforts. We believe we have significant potential upside in deepening distribution with our existing domestic retailers by continuing to leverage our productivity, innovation and growth to win more shelf space. In addition, we expect our domestic retail sales will grow as Ulta Beauty opens new stores and we are able to develop additional opportunities to sell our products in upscale department stores and on their websites.

 

Drive additional traffic to our website . We intend to grow our direct-to-consumer sales by driving additional traffic to our website and the Amazon website as well as improving customer conversion metrics. By focusing on affiliate marketing, paid search, SEO and other media spending, enhanced content and social media referrals, including user generated content and paid influencers through Facebook, Instagram, Youtube and Pinterest, we expect to increase sales both in stores and online. The higher product margins and relatively fixed expenses of our website sales creates a leveraged business environment for higher profits.

 

Expand our global presence

 

We operate in a number of countries outside the United States, which accounted for 26% of our net sales during the three months ended March 31, 2018, up from 19% of our net sales during the three months ended March 31, 2017 and 30% of our net sales in 2017, up from 6% of our net sales in 2016. Given that the skin conditions we target are universal, we believe that the DERMAdoctor ® brand is highly portable, which will provide us with a significant opportunity in international markets over the long term. We believe our market penetration in the Middle East and Asia represents the most significant opportunities for increasing our existing global sales. The United Kingdom, Canada, Western Europe, Asia, India and Australia are markets we plan to enter or expand in over the next three years, which would significantly expand our global presence.

 

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Brands and Products

 

We market and sell our products under the DERMAdoctor ® brand. Our products are grouped into 13 families of products based upon their formulations and the skincare problems they address. A detailed table of our products is set forth below:

 

Family   Skincare Use   Products
         
Ain’t Misbehavin’   Acne and Blemishes   Acne Cleanser 
Healthy Toner 
Acne Mask & Spot Treatment 
Acne Control Serum
         
Calm Cool & Corrected   Redness 
Sensitive Skin
  Tranquility Cleanser 
Tranquility Cream
         
DD Cream   Sunscreen 
Dry Skin 
Concealer
  DD Cream
         
Kakadu C   Wrinkles 
Anti-Aging
  Brightening Daily Cleanser 
Vitamin C Serum 
Face Crème 
Eye Soufflé 
Detox Mask 
Intensive Vitamin C Peel Pad 
Evening Oil
         
KP Duty   Keratosis Pliaris 
Dry Skin
  Moisturizing Therapy 
Body Scrub 
Body Peel Pads
         
MED e Tate   Sweating 
Hyperhidrosis
  Antiperspirant Wipes
         
Photodynamic Therapy   Sun Protection 
Wrinkles
  3 in 1 Facial Lotion 
Energizing Eye Renewal Cream
         
Physical Chemistry   Wrinkles 
Discoloration 
Enlarged Pores
  Facial Microdermabrasion + Multiacid Peel
         
Picture Porefect   Enlarged Pores 
Oily Skin
  Pore Minimizer
         
Poetry in Lotion   Discoloration 
Wrinkles
  Intensive 1% Retinol
         
Shrinking Beauty   Dry Skin   Shrinking Beauty Lotion
         
Total NonScents   Sweating   Ultra-Gentle Antiperspirant 
Ultra-Gentle Brightening Antiperspirant
         
Wrinkle Revenge   Wrinkles 
Sensitive Skin
  Antioxidant Enhanced Glycolic Acid Facial Cleanser 
Rescue & Protect Eye Balm 
Rescue & Protect Facial Crème 
Ultimate Hyaluronic Serum

 

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Merchandising and Product Packaging

 

Our product formulations and branding are consistent across our distribution channels. However, we tailor product offerings to our distribution channels by creating unique sizes and differentiated “kits” or assortments of products which help us to:

 

  introduce new consumers to our brand;

 

  create specialized offerings for our channel partners;

 

  merchandise products according to channel demographics;

 

  increase the average consumer purchase;

 

  generate and renew excitement among our consumers; and

 

  reinforce our brand.

 

For example, our DERMAdoctor ® Wrinkle Revenge Anti-Aging Essentials Intro Kit, which we market across our various distribution channels, includes an assortment of our Wrinkle Revenge products, including a facial cleanser, facial serum and eye balm. The products are uniquely packaged and priced to offer the consumer a trial of multiple products that they otherwise may not have purchased at a special value. We also offer promotional kits which are typically “themed” to address specific end uses, targeted consumer segments or seasonal offerings.

 

Distribution Channels

 

We believe that a core element of our success is our distinctive omni-channel distribution model including a strong internet presence, traditional retail channel and an international distributor channel. The internet portion of our business consists of online shopping through our website ( www.dermadoctor.com ) as well as through Amazon.com . Our retail channel consists of select department stores, select specialty boutiques, primarily Ulta Beauty, physician offices, spas and salons, Macys.com, Nordstrom.com, Sephora.com, and Ulta.com. Special pricing and offerings are also promoted on Costco.com, Ipsy.com, HauteLook.com, Gilt.com and other flash sale websites as well as periodically through home shopping and other television appearances. We believe that this distribution model, through which each channel reinforces the others, provides:

 

  greater brand awareness across channels;

 

  cost-effective consumer acquisition and education;

 

  premium brand positioning without the large expenditures on print-based advertising and marketing common in our industry; and

 

  improved convenience for consumers.

 

We use the Internet to increase brand awareness and educate consumers on product differentiation, proper application and resulting benefits. We believe this increased brand awareness drives consumers to shop across all retail distribution points. In turn, we believe that our physical presence at specialty retailers such as Ulta Beauty further enhances our brand image and validates the premium positioning of our products.

 

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Our distribution channels are summarized as follows:

 

 

National Retailers

 

The domestic retail channel accounted for approximately 42% and 46% of our net sales for the three months ended March 31, 2018 and 2017, respectively. The domestic retail channel accounted for approximately 44% and 68% of our net sales for the years ended December 31, 2017 and 2016, respectively. Our retail channel enables us to provide additional points of contact to educate consumers about our products, expand our traditional retail location penetration with limited capital investment, and further strengthen our brand image. The brick-and-mortar portion of this channel allows us to target a consumer who may be less inclined to shop at home and provides an inviting venue to experience the products personally and discuss product features with experienced sales personnel. As of March 31, 2018, our products were distributed in over 700 locations of these specialty beauty retailers with Ulta Beauty being the largest retail presence. The retailers’ websites offer an additional point of contact with our customer and facilitates subsequent purchases. Television appearances on such shows as Good Morning America, HSN and The View and flash sale sites such as Ipsy and Rue La La allow us to reach a wide audience, many of whom may not yet be familiar with our brand. In 2017, we began doing business with Costco for select products, as well as Evine, a home shopping television channel. In the first quarter of 2018, we received an order from Costco for the purchase of one of our products for a special promotion. This order was fulfilled in April 2018. We expect this order to contribute approximately $1.5 million to net sales when recorded in the second quarter of 2018.

 

Online Shopping

 

We sell our products via our existing website, www.dermadoctor.com and on Amazon.com . On-line sales through these websites accounted for 32% and 35% of our net sales for the three months ended March 31, 2018 and 2017, respectively and 26% for both the years ended December 31, 2017 and 2016. In addition to allowing consumers to purchase the core items in our product assortment, our website also educates consumers as to the attributes as well as proper usage and application techniques for each of the products offered. We fulfill and ship all Amazon.com orders and this allows us to control the distribution of our product while allowing our customers the convenience of purchasing our products through their Amazon account.

 

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International Distributors

 

We market our DERMAdoctor ® products internationally through a network of distributors. We sell to a limited number of distributors who distribute product through websites, retail channels and spas and salons in certain international markets. Our international distributor channel accounted for 26% and 19% of our net sales for the three months ended March 31, 2018 and 2017, respectively. Our international distributor channel accounted for 30% and 6% of our net sales for the years ended December 31, 2017 and 2016, respectively, and was our fastest growing channel. The majority of our international sales have occurred through distributors in China and Kuwait.

 

In April 2017, we received approval for European Union registration of some our products and we expect to expand shipments of our approved products in Europe in 2018. In August 2017, we began shipping to our distributor in Guatemala who has the rights to begin shipping to other countries in Central America, namely, Belize, Costa Rica, El Salvador, Honduras, Nicaragua and Panama. We also commenced shipments to our Hong Kong distributor in the fourth quarter of 2017. In January 2018, we began shipping to our distributor in The United Arab Emirates (UAE) who has the rights to ship to Saudi Arabia, Qatar, Lebanon, Jordan, Oman and Bahrain.

 

Marketing and Promotion

 

We have an innovative, media-driven marketing strategy which focuses on educating consumers about the attributes of our products, developing intimate relationships with those consumers, and leveraging our omni-channel distribution approach to effectively reach and engage those consumers.

 

We employ the following marketing techniques:

 

Social Media . A primary method of building brand awareness is through social media such as Facebook, Pinterest, and Instagram. These channels provide a unique opportunity for us to communicate the attributes of our products to a broad audience as well as build brand awareness. We also contract with various internet marketing services that allow us to target customers who research various skincare issues or shop for or purchase other brands’ skincare products. During the past year we have put greater human and financial resources into this initiative and anticipate continued future growth in our audience which should translate to increasing sales.

 

Consumer Testimonials . We believe that one of the keys to the success of the DERMAdoctor ® brands has been testimonials from our consumers regarding the attributes of our products. Unlike other skincare companies that rely on image-based marketing, we have used consumer testimonials in our marketing which allow us to demonstrate both the efficacy of our products and the increased self-confidence that our products have given many women. We believe that consumer testimonials both through user generated content and paid influencers on social media and our website are a particularly powerful component of our educational media marketing. These actual consumer comments are often unsolicited and may be available across all marketing channels.

 

Public Relations . We have benefited from a broad range of media coverage that has highlighted our innovative products and success. Our products have been profiled in:

 

  magazines such as InStyle, W, More, Redbook, Bride, Glamour, Family Circle, O The Oprah Magazine, Shape, Self, Fitness, Good Housekeeping, Cosmopolitan, Health, Allure, Elle, RealSimple, Lucky, Ladies Home Journal, People and People en Espanol, Prevention, Men’s Health;

 

  newspapers and publications such as The New York Daily News, The Wall Street Journal, The Washington Post, The Chicago Tribune, WebMD, Newsweek and U.S. News and World Report; and

 

  television shows such as Dr. Oz, The Today Show, E!, The Tyra Banks Show and Good Morning America.

 

Word of Mouth . We believe that our company benefits from strong consumer loyalty as well as the emotional connection formed between our consumers and our brand. In turn, we believe that our consumers are strong advocates for our brand and have displayed a willingness to convert others to our brand. Our nearly 20 year business history has provided us a competitive advantage of long term customer acquisition, with the resulting customer loyalty, brand awareness and trustworthiness which is difficult for others to replicate

 

Our Website . We utilize our website as a method for us to communicate the attributes of our products to a broad audience as well as build brand awareness. Since our founding in 1998, our website has become a trusted source of skincare information besides a destination for consumers to purchase our unique problem-solving prestige line of skincare products.

 

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Sales Force . We have a robust sales team throughout the United States. Territories are managed by seven Account Executives who are our employees. In addition, we use a third-party for outside additional marketing people or freelancers who we do not employ but who work independently to assist in marketing our products within retail stores. Currently, our total freelancers amount to approximately 80 to 100 individuals throughout the United States who work in any one week’s time. We have proprietary data analytics developed by us to analyze individual, and team performance in order to rapidly deploy marketing individuals and to simultaneously maximize sales and profit potential in the store.

 

Retail Partner Marketing . We participate in our retail partners’ periodic promotions, catalogues and various other marketing campaigns. These partner promotions allow us to introduce our products to a broad, focused audience.

 

Product Development

 

We focus a significant portion of our product development efforts on creating new products and improving existing products based on feedback and suggestions from our consumers. Many of these suggestions are the catalyst for new product development as well as product extensions. For example, in August 2017, we launched KP Duty Body Peels, which was developed based on feedback from our consumers who were searching for additional products related to their purchases of our top selling KP Duty product franchise. We believe that a novel application system will expand our KP Duty products, allowing us to increase sales and profits related to the consumer’s needs.

 

Our product development department continually meets in creative sessions to develop ideas for new products. Once we have a concept of what type of skin concern we want to address or product we want to develop, we work with third-party laboratory teams to develop unique formulations with different purposes for our prospective products, and to determine the ideal delivery systems, opacity, texture and viscosity of such products. Formulas go through many rounds of lab samples and changes prior to us approving them for testing. Extensive clinical and safety testing by outside labs is done on the formula samples we approve including sensitivity, allergy, stability and compatibility testing. If a formulation doesn’t pass a particular test, we work with our labs to reformulate the formulation until it does. All of our products are fragrance and dye free and we do not test on animals. Finally, the finished product including packaging must meet adequate quality control, and performance tests before it can be marketed. We continue to create new products and improve existing products in our core product lines by incorporating consumer feedback into our product development efforts.

 

Sourcing

 

We use third-party contract manufacturers and suppliers to obtain substantially all raw materials, components and packaging products and to manufacture finished products relating to our DERMAdoctor ® brand. We utilize a total of approximately six different product fillers and numerous ingredient and packaging suppliers from which we source and contract manufacture our products. Currently, each product we sell is manufactured by a single filler. Manufacturers directly purchase some and we supply a portion of the raw materials needed to manufacture our products. While we source these raw materials, such as plastic, glass bottles, and cardboard through a limited number of suppliers in order to take advantage of volume discounts, we do not believe we are materially dependent upon any one supplier of our raw materials as we have sufficient other suppliers across our broad range of products that we are able to mitigate most of our supply chain risk within a reasonable time frame. Each supplier manufactures products that meet our established guidelines.

 

With respect to our other third-party manufacturers, we make purchases through purchase orders. We believe that we have good relationships with our manufacturers and that there are alternative sources available to us in the event that one or more of these manufacturers is not available; however, the products manufactured by alternative manufacturers may not be identical to the current products because product formulations are often owned by the manufacturer. We continually review our manufacturing needs against the capacity of our contract manufacturers to ensure that we are able to meet our production goals, reduce costs, and operate more efficiently.

 

The majority of our raw materials are purchased from U.S.-based suppliers, although the materials may have originated in other countries. We directly purchase some raw materials such as jars, pumps, caps and droppers from suppliers in China and Spain.

 

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We work closely with our suppliers on new product innovation and quality. Our team members source our component and design secondary packaging specifications based on the supplier’ ability to provide competitive pricing, meet our design and packaging specifications and maintain a high quality.

 

Quality Control

 

We have a comprehensive quality assurance program that gives us visibility into the quality of our products during the sourcing and production cycle. Our quality team approves product samples prior to any initial production runs, analyzing formula ingredients and testing for compliance with Good Manufacturing Practices (GMP) and/or International Standard for Organization (ISO) quality team provides oversight of our third-party manufacturers as well as component and packaging suppliers. We also validate our manufacturers’ finished product with both internal and external stability and microbiological testing to monitor compliance with industry and country-specific regulations and standards.

 

Management Information Systems

 

We use our information systems to manage our national retailers, e-commerce and corporate operations. These management information systems provide business process support and intelligence across our omni-channel operations.

 

Our order management process is automated via electronic data interchange with the vast majority of our retail customers. We have an integrated inventory system, which allows us to manage our inventory and interfaces with our accounting systems.

 

Trademarks and other Intellectual Property

 

We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. Our primary trademarks include “DERMAdoctor ® ,” and KP Duty,” both of which are registered with the U.S. Patent and Trademark Office for our goods and services of primary interest. “DERMAdoctor ® and depictions of Dr. Audrey are also registered or have registrations pending in Australia, Canada, China, the European Union, Hong Kong, Japan, Kuwait, Malaysia, and Philippines. We also have numerous other trademark registrations and pending applications for product trade names and tag lines. Our trademarks are valuable assets that reinforce the distinctiveness of our brand and our consumers’ favorable perception of our products, and goodwill. The current registered trademarks in the United States and foreign countries are in use, and registration renewals are due at various times between 2017 and 2028, provided that we comply with all applicable renewal requirements including, where necessary, the continued use of the trademarks in connection with similar goods the trademarks will continue to be in force. In addition to trademark protection, we own numerous URL designations, including www.dermadoctor.com . We also rely on and use reasonable business activities to protect our trade secrets, such as proprietary expertise and product formulations, continuing innovation efforts and techniques, and other know-how to develop and maintain our competitive position.

 

We currently own the following four patents:

  

Patent Title   Related Product   Country   Patent No.   Issue Date   Expiration Date
Composition For Treatment of Hyperhidrosis   Med e Tate antiperspirant
wipes
  U.S.   8,337,821 B2   December 25, 2012   March 24, 2031
                     
Moisturizing Retinol Composition   Poetry in Lotion   U.S.   9,155,915 B2   October 13, 2015   August 31, 2031
                     
Topical Skin Care Composition   Topical skincare formulation (product is discontinued)   U.S.   8,784,852 B2   July 22, 2014   May 10, 2030
                     
Composition and Method for Treating Keratosis Pilaris   KP Duty lotion   U.S.   8,647,682 B2   February 11, 2014   April 5, 2028

 

While KP Duty lotion is a top selling product and we believe the patent is valuable for this product, we have determined that the benefits of seeking patents for many of our other products may not exceed the time and expense in doing so. For example, the Kakadu C family of products are material to our business and we do not hold a patent on those compositions. We intend to review any future decision on whether to obtain a patent on a particular new product or method on a case by case basis. To the extent we believe in seeking, obtaining, and protecting a patent on a particular composition or method would be beneficial and make a material difference in our ability to sell the product, we plan to pursue a patent.

 

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Competition

 

The skincare industry is highly competitive and subject to rapid changes due to consumer preferences and industry trends. Competition in the skincare industry is generally based on the introduction of new products, pricing of products, quality of products and packaging, brand awareness, perceived value and quality, innovation, in-store presence and visibility, promotional activities, advertising, editorials, e-commerce and mobile-commerce initiatives and other activities. We must compete with a high volume of new product introductions and existing products by diverse companies across several different distribution channels.

 

We face vigorous competition from companies throughout the world, including large multinational consumer products companies that have many skincare brands under ownership and standalone skincare brands, including those that may target the latest trends or specific distribution channels. Our products face, and will continue to face, competition for consumer recognition and market share with products that have achieved significant national and international brand name recognition and consumer loyalty, such as those offered by global prestige beauty companies like Avon Products, Inc., Elizabeth Arden, Inc., The Estée Lauder Companies, Inc., Johnson & Johnson, Inc., L’Oréal Group, Shiseido, Coty, Mary Kay, Inc. and The Proctor & Gamble Company, each of which have launched skincare brands. In addition, we compete with brands including Dr. Dennis Gross, Kate Somerville, Murad, Perricone M.D., Dr. Brandt, Clarins, Clinique, Dermalogica, Exuviance, La Roche Posay and Vichey. We also compete with numerous other companies that market skincare products.

 

These companies may have substantially greater financial, technical and marketing resources, longer operating histories, greater brand recognition and larger customer bases than we do and may be able to respond more effectively to changing business and economic conditions than we can. These competitors typically devote substantial resources to promoting their brands through traditional forms of advertising, such as print media and television commercials. Because of such mass marketing methods, these competitors’ products may achieve higher visibility and recognition than our products. We compete with prestige cosmetics companies primarily in online retailing, department stores and specialty beauty retail channels, but prestige cosmetics companies also recently have increased their sales through infomercial and home shopping television channels. Mass cosmetics brands are sold primarily though channels in which we do not sell our products, such as mass merchants, but mass cosmetics companies are increasingly making efforts to acquire market share in the higher-margin prestige cosmetics category by introducing brands and products that address this market. Many of these competitors’ products are sold in a wider selection or greater number of retail stores and possess a larger presence in these stores, typically having significantly more inline shelf space than we do. Given the finite space allocated to skincare products by retail stores, our ability to grow the number of retail stores in which our products are sold, and expand our space allocation once in these retail stores, may require the removal or reduction of the shelf space of these competitors. We may be unsuccessful in our growth strategy in the event retailers do not reallocate shelf space from our competitors to us. Our competitors may attempt to gain market share by offering products at prices at or below the prices at which our products are typically offered, including through the use of large percentage discounts and “buy one and get one free” offers. Competitive pricing may require us to reduce our prices, which would decrease our profitability or result in lost sales. Our competitors, many of whom have greater resources than we do, may be better able to withstand these price reductions and lost sales.

 

We believe that we compete primarily on the basis of product differentiation, sales and marketing strategy and distribution model. In addition to the significant resources we have devoted over time to developing our innovative product formulation and differentiated product concepts, we believe that our expertise within the skincare category, brand authenticity and loyal consumer base, and omni-channel marketing and distribution expertise provide us with competitive advantages in the market for prestige skincare products.

  

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Seasonality

 

Sales of our products that contain sunscreen and our antiperspirants are higher in the summer than the winter and sales of our products that contain moisturizers are higher in the fall and winter months. The overall effects of the seasonality of our various products that have higher sales in the warm weather months is offset by the seasonality of the sale of products that have higher sales in the colder weather months, with the net effect of seasonality being minimal on overall net revenue.

 

Government Regulation

 

We and our products are subject to regulation by the FDA, the CPSC and the FTC as well as various other federal, state, local and foreign regulatory authorities. These laws and regulations principally relate to the ingredients, proper labeling, advertising, packaging, marketing, manufacture, safety, shipment and disposal of our products.

 

Under the FDCA cosmetic skincare products are defined as articles or components of articles that are applied to the human body and intended to cleanse, beautify or alter its appearance, with the exception of soap. The labeling of cosmetic products is also subject to the requirements of the FDCA, the Fair Packaging and Labeling Act, the Poison Prevention Packaging Act and other FDA regulations. Cosmetics are not subject to pre-market approval by the FDA, however certain ingredients, such as color additives, must be pre-authorized. If safety of the products or ingredients has not been adequately substantiated, a specific warning label is required. Other warnings may also be mandated pursuant to FDA regulations. The FDA monitors compliance of cosmetic products through market surveillance and inspection of cosmetic manufacturers and distributors to ensure that the products neither contain false nor misleading labeling and that they are not manufactured under unsanitary conditions. Inspections also may arise from consumer or competitor complaints filed with the FDA. In the event the FDA identifies false or misleading labeling or unsanitary conditions or otherwise a failure to comply with FDA requirements, we may be required by a regulatory authority or we may independently decide to conduct a recall or market withdrawal of our product or to make changes to our manufacturing processes or product formulations or labels which could result in an insufficient amount of our products in the market and harm our reputation.

 

The FDA evaluates the “intended use” of a product to determine whether it is a drug, cosmetic product, or both. If a product is intended for use in the diagnosis, cure, mitigation, treatment or prevention of a disease condition or to affect the structure or function of the human body, the FDA will regulate the product as a drug. Drug products will then be subject to applicable requirements under the FDCA. The FDA may also consider labeling claims in determining the intended use of a product. If the FDA considers label claims for our cosmetic products to be claims affecting the structure or function of the human body, or intended for a disease condition, those products may be regulated as “new” drugs. If such products were regulated as “new” drugs by the FDA, it would be necessary to obtain pre-market approval, which includes, among other things, conducting clinical trials to demonstrate safety and efficacy of our products in order to continue marketing those products. However, we may not have sufficient resources to conduct any required clinical studies and because clinical trial outcomes are uncertain we may not be able to demonstrate sufficient efficacy or safety data to resume future marketing of those products.

 

Our current products that are intended to treat acne and used as sunscreen are considered OTC drug products by the FDA. Our OTC products are subject to regulation through the FDA’s “monograph” system which specifies, among other things, permitted active drug ingredients and their concentrations. The FDA’s monograph system also provides the permissible product claims and certain product labeling requirements, based on the intended use of the product. Our OTC drug products must be manufactured consistent with the FDA’s current GMP requirements, and the failure to maintain compliance with these requirements could require us to conduct recalls, market withdrawals, or make changes to our manufacturing practices. Any of these actions could result in harm to our reputation or affect our ability to provide sufficient product to the market.

 

The FDA may change the regulations as to any product category, requiring a change in labeling, product formulation or analytical testing. However, we may not have sufficient resources to conduct any required analytical testing, reformulate the product or make required label changes, possibly resulting in an inability to continue or resume marketing these products. Any inquiries or investigations from the FDA, FTC or other foreign regulatory authorities into the regulatory status of our cosmetic products and any subsequent interruption in the marketing and sale of those products could severely damage our brand and company reputation in the marketplace.

 

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We may be subject to regulation by the CPSC under the Consumer Product Safety Act, as amended by the Consumer Product Safety Improvement Act of 2008. These statutes and the related regulations ban from the market consumer products and packaging that fail to comply with applicable product safety laws, regulations, and standards. The CPSC has the authority to require the recall, repair, replacement or refund of any such banned products or products that otherwise create a substantial risk of injury and may seek penalties for regulatory noncompliance under certain circumstances. CPSC regulations also require manufacturers of consumer products to report to the CPSC certain types of information regarding products that fail to comply with applicable regulations. Certain state laws also address the safety of consumer products, and mandate reporting requirements, and noncompliance may result in penalties or other regulatory action.

 

The FTC, FDA and other government authorities also regulate advertising and product claims regarding the safety, performance and attributes of our products. These regulatory authorities typically require a safety assessment of the product and reasonable basis to support any marketing claims. What constitutes a reasonable basis for substantiation can vary widely from market to market, and there is no assurance that our efforts to support our claims will be considered sufficient. The most significant area of risk for such activities relates to improper or unsubstantiated claims about the use and safety of our products. If we cannot adequately support safety or substantiate our product claims, or if our promotional materials make claims that exceed the scope of allowed claims for the classification of the specific product, the FDA, FTC or other regulatory authority could take enforcement action or impose penalties, such as monetary consumer redress, requiring us to revise our marketing materials, amend our claims or stop selling certain products, all of which could harm our business, financial condition and results of operations.

 

In December of 2014 the FTC filed a complaint against us and Audrey Kunin alleging unsubstantiated product claims made by us with respect to the effects of photodynamic therapy used in certain of our antiaging products and with respect to claims made in our Shrinking Beauty product. Although we had conducted several consumer perception studies with respect to such products, the FTC did not agree that the studies provided enough support for the claims that were made with respect to the products. In December 2014, a judgment in the amount of $843,996 was entered into of which we were required to pay $12,675 and payment of the balance of the judgment was indefinitely suspended based truthfulness, accuracy, and completeness of the information that we provided at that time to the FTC, which included information about our financial condition. If the court finds that we provided inaccurate information to the FTC, including, for example, an inaccurate representation of our material assets at the time, the suspension will be lifted.

 

The Foreign Corrupt Practices Act

 

The Foreign Corrupt Practices Act, or the FCPA, prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of such foreign official in her or her official capacity or to secure any other improper advantage in order to obtain or retain business. In addition to the antibribery provisions, the FCPA also obligates “issuers,” companies whose securities are registered pursuant to Section 12 of the Exchange Act or is required to file periodic and other reports with SEC under Section 15(d) of the Exchange Act to comply with the FCPA’s record keeping and internal controls provisions; the accounting provisions require a listed company to maintain books and records that, in reasonable detail, accurately and fairly reflect all transactions of the corporation, including international affiliates, and to devise and maintain an adequate system of internal accounting controls to assure management’s control authority, and responsibility over our assets.

 

Export Controls and Economic Sanctions

 

Several U.S. statutes and regulations regulate the export from the United States of pharmaceutical products. Pursuant to the Export Administration Regulations, or the EAR, the export (including re-exports and “deemed exports”) of commercial and “dual-use” products may require a license or be prohibited. A listing of the types of goods and services controlled for export by the EAR is on the Commerce Control List, or the CCL, which includes essentially all civilian science, technology, and engineering dual use items. For products listed on the CCL, a license will be required as a condition to export, unless an exclusion or license exception applies. The DERMAdoctor ® products do not fall under EAR but are included in a broad category known as “EAR99.” Although a license may not generally be required for EAR99 designated items, a license will be required if the item will be shipped or otherwise transferred to a comprehensively embargoed country or for a potentially prohibited purpose.

 

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The Commerce Department’s Office of Antiboycott Compliance and the Treasury Department’s Internal Revenue Service enforce anti-boycott compliance regulations that prohibit U.S. persons such as us from participating directly or indirectly with an economic boycott that is not recognized by the United States. The regulations include reporting requirements, prohibitions, and tax liabilities that may be incurred if we support, even inadvertently, an economic boycott in which the U.S. does not participate.

 

Pursuant to the Trading With the Enemy Act, the International Emergency Economic Powers Act, and other related statutes, regulations, and Executive Orders, the Treasury Department’s Office of Foreign Assets Control, or OFAC, administers and enforces economic and trade sanctions that prohibit or restrict certain activities with embargoed countries, sanctioned entities, and sanctioned individuals for particular foreign policy and national security reasons. The scope of the sanctions varies significantly, but may include comprehensive restrictions on imports, exports, investment, and facilitation of foreign transactions involving a sanctioned jurisdiction, entity or person, as well as non-sanctioned persons and entities acting on behalf of sanctioned jurisdictions, entities or people. OFAC’s programs also prohibit U.S. persons, such as us, from transacting with any person or entity that is deemed to be a Foreign Sanctions Evader (foreign individuals and entities determined to have violated, attempted to violate, conspired to violate, or caused a violation of U.S. sanctions).

 

Other U.S. government agencies, including the U.S. Department of State, may maintain regulations that impact our ability to export pharmaceutical products from the United States. These broad range of U.S. export control laws and regulations obligate U.S. businesses to develop, maintain, and enforce an adequate system of internal controls to ensure compliance with such laws and regulations.

 

Business Over the Internet

 

In addition, there are an increasing number of laws and regulations being promulgated by the U.S. government, governments of individual states and governments overseas that pertain to the Internet and doing business online. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments and agencies. Laws or regulations have been or may be adopted with respect to the Internet relating to:

 

  liability for information retrieved from or transmitted over the Internet;
     
  online content regulation;
     
  commercial e-mail;
     
  visitor privacy; and
     
  taxation and quality of products and services.

 

Moreover, the applicability to the Internet of existing laws governing issues such as:

 

  intellectual property ownership and infringement;
     
  consumer protection;
     
  obscenity;
     
  defamation;
     
  employment and labor;
     
  the protection of minors;
     
  health information; and
     
  personal privacy and the use of personally identifiable information.

 

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This area is uncertain and developing. Any new legislation or regulation or the application or interpretation of existing laws may have an adverse effect on our business. Even if our activities are not restricted by any new legislation, the cost of compliance may become burdensome, especially as different jurisdictions adopt different approaches to regulation. For example, we are subject to federal, state and foreign laws regarding privacy and protection of people’s data. Foreign data protection, privacy and other laws and regulations can be more restrictive than those in the United States. U.S. federal and state and foreign laws and regulations are constantly evolving and can be subject to significant change. In addition, the application, interpretation and enforcement of these laws and regulations are often uncertain, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. There are also a number of legislative proposals pending before the U.S. Congress, various state legislative bodies and foreign governments concerning privacy and data protection which could affect us. For example, in 2016 the European Commission recently enacted a new data protection regulation that includes operational requirements for companies that offer goods or services to people that are located in the European Union. The new regulation is significantly different than the one previously in place in the European Union, and also includes significant penalties for non-compliance.

 

Environmental, Health and Safety

 

We are subject to numerous foreign, federal, provincial, state, municipal and local environmental, health and safety laws and regulations relating to, among other matters, safe working conditions, product stewardship and environmental protection, including those relating to, handling, storage, transportation, treatment and disposal of hazardous substances and waste materials, and the registration and evaluation of chemicals. We maintain policies and procedures to monitor and control environmental, health and safety risks, and to monitor compliance with applicable environmental, health and safety requirements. Compliance with such laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon our capital expenditures, earnings or competitive position. However, environmental laws and regulations have tended to become increasingly stringent and, to the extent regulatory changes occur in the future, they could result in, among other things, increased costs to our company. For example, certain states such as California and the U.S. Congress have proposed legislation relating to chemical disclosure and other requirements related to the content of our products.

 

Description of Facilities

 

We lease approximately 3,000 square feet of office space for our principal executive office and 11,000 square feet of warehouse space in Kansas City, Missouri from 1901 McGee, LLC. From this warehouse we distribute wholesale and bulk orders of product to our domestic retail customers, international distributors and direct-to-consumer orders, including distribution of product to our website and Amazon.com customers. Our lease commenced on January 1, 2016 and is for a term of one year, which we have the right to extend for ten additional one year terms. We did not extend the lease at the end of its initial one-year term and are therefore renting the facility on a month to month basis. For the three months ended March 31, 2018 and March 31, 2017, monthly base rent was $17,328 and $16,823, respectively. For the years ended December 31, 2017 and 2016, monthly base rent was $16,823 and $16,333, respectively. Rental income and rent expense is eliminated upon consolidation. Base rent is subject to an annual increase of 3% per year. We consider our properties to be generally in good condition and believe that our existing facilities are currently adequate to support our existing operations. However, we do expect to outgrow our current warehouse space due to increasing sales and anticipate relocation to a new facility will be necessary. There is no assurance that new space may not increase our overall monthly rent which is currently at market rates.

 

Employees

 

As of March 31, 2018, we had approximately 21 full-time employees and one part-time employee. None of our employees are currently covered by a collective bargaining agreement, and we have experienced no work stoppages. We consider our relationship with our employees to be good.

 

Legal Proceedings

 

We are from time to time subject to, and are presently involved in, litigation and other proceedings. We believe that there are no pending lawsuits or claims that may, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations.

 

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Implications of Being an Emerging Growth Company

 

We are an “emerging growth company,” as defined in the JOBS Act, and for as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal controls over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an “emerging growth company.” In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected not to use the extended transition period for complying with new or revised accounting standards under the JOBS Act, which election is irrevocable. We will remain an “emerging growth company” until the earlier of (i) the last day of the fiscal year in which the fifth anniversary of the closing of this offering occurs; (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion; (iii) the date on which we are deemed to be a large accelerated filer, which means we (1) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second quarter, (2) have been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (3) have filed at least one annual report pursuant to the Exchange Act, and (iv) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. References herein to “emerging growth company” have the meaning associated with associated with that term in the JOBS Act.

 

Corporate Information

 

DERMAdoctor, LLC was formed as a Missouri limited liability company in December 2015. Initially, our company was formed as a Missouri corporation in 1998 under the name DERMAdoctor, Inc. In December 2015, DERMAdoctor, Inc. contributed all of its assets to D. Doctor Acquisition, LLC, a Missouri limited liability company and received membership interests in D. Doctor Acquisition, LLC. On December 31, 2015, D. Doctor Acquisition, LLC filed an amendment to its articles of organization changing its name to DERMAdoctor, LLC and DERMAdoctor, Inc. filed an amendment to its articles of organization changing its name to Papillon Partners, Inc. Papillon is owned 51% by the Audrey G. Kunin Trust and 49% by the Jeffrey R. Kunin Trust.

 

Prior to the effective date of the registration statement of which this prospectus is a part, DERMAdoctor, LLC will merge directly with and into a Delaware corporation. We refer to this as the “corporate reorganization.” In connection with the corporate reorganization, all outstanding membership units of DERMAdoctor, LLC will be converted into 3,000,000 shares of common stock of DERMAdoctor, Inc., the members of DERMAdoctor, LLC will become stockholders of DERMAdoctor, Inc., and DERMAdoctor, Inc. will succeed to the business of DERMAdoctor, LLC. See “The Corporate Reorganization” for further information regarding the transactions effected in the corporate reorganization.

 

Our principal executive offices are located at 1901 McGee St, Kansas City, Missouri 64108, and our telephone number is (816) 472-5700. Our website address is www.dermadoctor.com . Information contained in our website does not form part of the prospectus and is intended for informational purposes only.

 

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MANAGEMENT

 

Board of Directors and Executive Officers

 

Our business and affairs are organized under the direction of our board of directors, which currently consists of three members. Set forth below are our directors and executive officers and their respective ages and positions as of the date of this prospectus:

  

Executive Officers and Directors   Age   Position(s) Held
         
Jeff Kunin, M.D.   56   President and Chief Executive Officer and Director
         
Audrey Kunin, M.D.   59   Chief Creative Officer and Director
         
Andrea Bielsker   59   Chief Financial Officer
         
William Kunin   46   Director

 

Jeff Kunin, M.D. President and Chief Executive Officer, Co-founder and Member of the Board of Directors

 

Jeff Kunin, M.D. co-founded our company in 1998. He currently serves as the President and Chief Executive Officer of our company and has served as our Chief Operating Officer since November 2016 until his appointment as our President and Chief Executive Officer and from November 2016 until May 2017 served as our Chief Financial Officer.

 

Dr. Kunin served as the Chairman of the Department of Radiology at Saint Luke’s Hospital in Kansas City from 2007 to 2017. He graduated college with a B.S. degree in Biochemistry and Cell Biology from the University of California, San Diego. Jeff then graduated medical school and earned his M.D. degree from the University of Texas Medical Branch in Galveston, Texas. Then he completed a residency in diagnostic radiology at the Medical College of Virginia and Henry Ford Hospital. Subsequently, he completed a fellowship in body imaging at the University of Michigan Hospitals. Jeff received his MBA degree from Washington University in St. Louis Olin School of Business. Dr. Kunin is also a co-owner of 1901 McGee, LLC, our landlord.

 

We selected Dr. Kunin to serve on our board of directors because he brings to the board extensive knowledge of the medical industry as well as his business background. Dr. Kunin has a vast knowledge of the industry and brings to the board significant executive leadership and operational experience. His business experience provides him with a broad understanding of the operational, financial and strategic issues facing similar companies.

 

Audrey Kunin, M.D. – Chief Creative Officer Co-founder and Member of the Board of Directors

 

Audrey Kunin, M.D. is one of our founders, currently serves as the Chief Creative Officer of our company since March 1, 2018 and the Chief Executive Officer of our company and its predecessor since 1998. Dr. Kunin graduated from Ohio State University in December 1980 and received her M.D. at the Medical College of Ohio in July 1985. She became a clinical researcher at Tulane Medical School and received her postgraduate training in Dermatology at the Medical College of Virginia after serving as Chief Resident in July 1989. She is a fellow of the American Academy of Dermatology and serves as an Assistant Clinical Instructor of Dermatology at the University of Kansas School of Medicine. Dr. Kunin is also a co-owner of 1901 McGee, LLC, our landlord.

 

We selected Dr. Kunin to serve on our board of directors because she brings to the board extensive knowledge of the dermatology industry and vast knowledge about our company. As a leader in the field of dermatology and her product development experience, she is invaluable to our company.

 

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Dr. Audrey Kunin is the wife of Dr. Jeff Kunin, our President and Chief Executive Officer and a member of our board of directors, and the sister-in-law of William Kunin, a member of our board of directors.

 

Dr. Jeff Kunin, our President and Chief Executive Officer, is the husband of Dr. Audrey Kunin, our Chief Creative Officer and a member of our board of directors, and the brother of William Kunin, a member of our board of directors.

 

Andrea Bielsker - Chief Financial Officer

 

Andrea Bielsker joined DERMAdoctor in May 2017. She spent the majority of her career at Kansas City Power & Light Company, or KCPL, and its parent company, Great Plains Energy (NYSE: GXP), or GXP. Ms. Bielsker joined KCPL/GXP in 1984 as a financial analyst, was named Supervisor Financial Planning in 1989 and promoted to Assistant Treasurer in 1995, Treasurer in 1996, and Vice President-Finance in January 2000. She was promoted to Senior Vice President Finance and Chief Financial Officer in January 2001, the position she held until leaving KCPL and GXP in 2005. While at KCPL and GXP she was responsible for Corporate Finance and Analysis, Accounting and Tax, Cash Management, Risk Management, and Budgeting and Financial Forecasting and Investor Relations. Ms. Bielsker has a master of business administration from the University of Kansas where she also earned an undergraduate degree in business administration. She has had several officer positions in the Kansas City Treasury Management Association and was a member of the Board of Directors of the Kansas City Fountains Foundation, the Kansas City Tomorrow Alumni Association, and Marillac. Ms. Bielsker was elected a Director of UMB Scout mutual funds in 2006 and was named Chairperson of the Board in 2014. From 2005 to May 2017, Ms. Bielsker worked as a consultant advising on primarily finance-related matters. She also held senior financial positions at Liberty Power and Aleritas Capital during 2007 and 2008.

 

William Kunin, Director

 

William Kunin is a visual effects (VFX) supervisor for Hydraulx, a VFX company based in Santa Monica, California. He has worked on numerous films and productions in all aspects of visual effects including inferno artist and digital compositor. He currently supervises a team of artists based in Los Angeles, Vancouver, and New Orleans. Mr. Kunin graduated from the University of California, Los Angeles (UCLA) with B.A. in Political Science. Mr. Kunin was elected as a member of our board of directors because of his technological expertise.

 

William Kunin is the brother of Dr. Jeff Kunin, our President and Chief Executive Officer and a member of our board of directors, and the brother-in-law of Dr. Audrey Kunin, our Chief Creative Officer and a member of our board of directors.

 

Board of Directors as of the Effective Date 

 

Effective immediately upon the effective date of this offering, it is intended that William Kunin will resign from the Board and that the following three independent directors will join the Board.

 

Name   Age   Positions
Victoria Barnard   61   Director, Nominee
Brad Hampton   51   Director, Nominee
James Hyde   53   Director, Nominee

  

Victoria Barnard, Director Nominee

 

Victoria Barnard is the President of Foot Traffic USA, LLC, a privately held brand leader in fashion legwear and novelty socks with national distribution in 1,300 boutiques, specialty retailers and online retailers, and has held such position since 2012. From 1984 to 2012, she held various leadership positions at Hallmark Cards, Inc., a family held, industry leader in global greetings, specialty retail and the parent company of Crayola and the Hallmark Cable Television Channel. In 1995, she was named General Manager, Hallmark Season Greeting Cards, and served in that capacity until 1999 when she was promoted to Vice President, Acquisitions Strategy and Integration and served in that capacity until 2002. From 2002 to 2012, she served as Vice President, Strategic Planning responsible for strategic decisions within and across all divisions. Since March 2017, she has served as an independent director and the Compensation Committee Chair of Just Born Quality Confections (“Just Born”). A family held company, Just Born is the 9 th largest candy company in the United States and is known for several iconic brands, including Peeps Marshmallow candies, Mike and Ike fruity, chewy candies and Hot Tamales, the number one selling cinnamon candy. Ms. Barnard holds an MBA from the University of Virginia, Darden School of Business, and a Bachelor degree in Business Administration from Marquette University. Ms. Barnard serves as a Commissioner on the Kansas City Crime Commission, is co-founder and former Board Chair of the Women’s Capital Connection, an all women angel-investing group, former Board Chair of the Kansas Women’s Business Center and former Board Member of the Kansas City Ballet.

 

Ms. Barnard was elected as a member of our board of directors because of her over thirty years of consumer goods experience in senior executive positions.

 

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Brad Hampton, Director Nominee

 

Brad Hampton is the Chief Financial Officer of Helzberg Diamonds, a nationwide and online fine jewelry retailer, and subsidiary of Berkshire Hathaway Company. Prior to joining Helzberg Diamonds in June 2017, he held numerous senior financial executive positions with Sprint Corporation. Mr. Hampton joined Sprint Corporation in October 1996 as a financial analyst, was named a Director, Product Finance in January 2004, a Director, Marketing Finance in January 2005, and a Director, Financial Planning and Analysis in January 2006. In 2009, he was promoted to Vice President-Finance; in 2012, he was promoted to Vice President and Investor Relations Officer; and in 2014, he was promoted to Vice President and Business Unit Chief Financial Officer. Mr. Hampton holds an Executive Leadership Certificate from Duke University, an Executive Education Certificate from Georgetown University’s McDonough School of Business and an MBA from LeTourneau University. He also holds Bachelor degrees in Economics and Latin American studies from the University of New Mexico. Brad serves as a director on the board of Junior Achievement of Greater Kansas City, and is a long-time volunteer leader for the Boy Scouts of America and his local church.

 

Mr. Hampton was elected as a member of our board of directors because of his over twenty years of finance experience in senior executive positions. 

 

James Hyde, Director Nominee

 

James A Hyde has served in various senior capacities in the telecommunication industry. From April 2016 to December 2017, he was the President - Wholesale, Affiliates and Strategic Partnerships at Sprint Corporation. From October 2015 through December 2016, he served as a board member and Executive Chairman of Fastback Networks, a wireless telecommunications company. From April 2009 to August 2014, he was the Chief Executive Officer and a director of nTelos Holdings, a Nasdaq-listed telecommunications company. From October 2011 to September 2014, he served as a director of Lumos Networks, a Nasdaq-listed telecommunications company, and served as its Chief Executive Officer from October 2011 to April 2012. From January 2006 to March 2009, he served as Chief Executive Officer and Managing Director of T-Mobile, United Kingdom. From July 1997 to January 2006, he was Vice President, Sales and Operations at T-Mobile. Mr. Hyde holds a Bachelor degree in Business/Finance from Arizona State University.

 

Mr. Hyde was elected as a member of our board of directors because of his significant experience in serving as a board member and senior executive of Nasdaq-listed public companies.

 

Board Composition and Election of Directors

 

Our board of directors currently consists of three members: Audrey Kunin, Jeff Kunin and William Kunin. Our board of directors has undertaken a review of its composition and its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that none of our current directors are “independent” under the applicable rules of the SEC and Nasdaq. Audrey and Jeff Kunin are not independent directors under these rules because Jeff is our President and Chief Executive Officer and Audrey is our Chief Creative Officer. William is not an independent director under these rules because of his family relationship to Audrey and Jeff. Upon the effective date of this offering, we intend for Victoria Barnard, James Hyde and Brad Hampton to be elected to serve as directors on our board of directors. We have determined that each of Ms. Barnard and Messrs. Hyde and Hampton will be independent directors under the applicable Nasdaq rules.

 

Corporate Governance

 

Our Status as a Controlled Company

 

After completion of this offering, we will qualify as a “controlled company” within the meaning of the applicable Nasdaq corporate governance standards because in excess of 50% of our voting power will be held by Papillon, an entity that Audrey and Jeff Kunin indirectly control. As such, we will qualify for certain exemptions to the Nasdaq listing requirements, including the requirement that a majority of our directors be independent, and the requirements to have a compensation committee and a nominating and corporate governance committee, each composed of entirely independent directors.

 

Board Committees

 

Prior to the effective date of the registration statement of which this prospectus is a part, our board of directors will establish an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee.

 

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Audit Committee

 

The members of our Audit Committee will be Victoria Barnard, James A. Hyde, and Brad Hampton, each of whom has been determined by our board of directors to be independent under applicable Nasdaq and SEC rules and regulations. Mr. Hampton  will be the chair of the Audit Committee. Our Audit Committee’s responsibilities will include, among others:

 

  appointing, approving the compensation of, and assessing the independence of our registered public accounting firm;
     
  overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from that firm;
     
  reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly financial statements and related disclosures;
     
  monitoring our internal control over financial reporting, disclosure controls and procedures;
     
  overseeing our internal audit function;
     
  discussing our risk management policies;

 

  establishing policies regarding hiring employees from our independent registered public accounting firm and procedures for the receipt and retention of accounting related complaints and concerns;
     
  meeting independently with our internal auditing staff, if any, our independent registered public accounting firm and management;
     
  reviewing and approving or ratifying any related person transactions; and
     
  preparing the Audit Committee report required by SEC rules.

 

All audit and non-audit services, other than de minimis non-audit services, to be provided to us by our independent registered public accounting firm must be approved in advance by our Audit Committee.

 

Our board of directors has determined that Mr. Hampton is an “audit committee financial expert” as defined in applicable SEC rules.

 

Compensation Committee

 

The members of our Compensation Committee will be Victoria Barnard, James A. Hyde and Brad Hampton, each of whom has been determined by our board of directors to be independent under applicable Nasdaq and SEC rules and regulations. Ms. Barnard will be the chair of the Compensation Committee. Our Compensation Committee’s responsibilities will include, among others:

 

  reviewing and approving annually the corporate goals and objectives applicable to the compensation of the Chief Executive Officer, evaluating at least annually the Chief Executive Officer’s performance in light of those goals and objectives, and determining and approving the Chief Executive Officer’s compensation level based on this evaluation;

 

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  reviewing and approving the compensation of all other executive officers;
     
  reviewing and approving and, when appropriate, recommending to the board of directors for approval, incentive compensation plans and equity-based plans, and where appropriate or required, recommending for approval by our stockholders, the adoption, amendment or termination of such plans; and administering such plans;
     
  reviewing and approving the executive compensation information included in our annual report on Form 10-K and proxy statement;
     
  reviewing and approving or providing recommendations with respect to any employment agreements or severance arrangements or plans; and
     
  reviewing director compensation and recommending any changes to the board of directors.

 

Nominating and Corporate Governance Committee

 

The members of our Nominating and Corporate Governance Committee will be Victoria Barnard, James A. Hyde, and Brad Hampton, each of whom has been determined by our board of directors to be independent under current Nasdaq rules.  Mr. Hyde will be the chair of the Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance Committee’s responsibilities include, among others:

 

  identifying and recommending candidates to fill vacancies on the board of directors and for election by the stockholders;
     
  recommending committee and chairperson assignments for directors to the board of directors;
     
  developing, subject to the board of directors’ approval, a process for an annual evaluation of the board of directors and its committees and to oversee the conduct of this annual evaluation;
     
  overseeing our corporate governance practices, including reviewing and recommending to the board of directors for approval any changes to the documents and policies in our corporate governance framework, including its certificate of incorporation and bylaws; and
     
  monitoring compliance with our Code of Business Conduct and Ethics, investigating alleged breaches or violations thereof and enforcing its provisions.

 

Board of Directors Leadership Structure

 

Our board of directors does not have a lead independent director. Our board of directors has determined its leadership structure is appropriate and effective for us, given our stage of development.

  

Risk Oversight

 

Our board of directors will monitor our exposure to a variety of risks through our Audit Committee. Our Audit Committee charter will give the Audit Committee responsibilities and duties that include discussing with management, the internal audit department and the independent auditors our major financial risk exposures and the steps management has taken to monitor and control such exposures, including our risk assessment and risk management policies.

 

Code of Business Conduct and Ethics

 

We will adopt a code of business conduct and ethics that applies to all of our employees, officers, and directors, including those officers responsible for financial reporting. These standards are designed to deter wrongdoing and to promote honest and ethical conduct. We will disclose any amendment or waiver of our code of business conduct and ethics via a Form 8-K or our website.

 

The code of business conduct and ethics and the written charter for each of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee will be available on our website. The information that appears on our website is not part of, and is not incorporated into, this prospectus.

 

None of our directors, director nominees or executive officers, nor any associate of such individual, is involved in a legal proceeding adverse to us.

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table (2017 and 2016)

 

The following table sets forth the information as to compensation paid to or earned by, our principal executive officer for such year and our two other executive officers whose total compensation exceeded $100,000 for each of the fiscal years presented below. The persons listed in the following table are referred to herein as the “named executive officers.”

   

Name and Principal Position   Fiscal
Year
  Salary     All Other
Compensation (4)
    Total  
Jeff Kunin (1)                            
President and Chief Executive Officer and   2017                  
Former Chief Financial Officer   2016                  
                             
Audrey Kunin (1)(2)   2017   $ 150,000     $ 6,000     $ 156,000  
Chief Creative Officer and former Chief Executive Officer   2016   $ 150,000     $ 5,917     $ 155,917  
                             
Andrea Bielsker (3)   2017   $ 76,000           $ 76,000  
Chief Financial Officer   2016                        

 

 

 

(1) Does not include any distribution that Drs. Kunin has received from 1901 McGee, LLC, the lessor of our corporate headquarters and warehouse.
   
(2) Dr. Audrey Kunin served as our Chief Executive Officer until March 1, 2018 when Dr. Jeff Kunin was appointed to serve as our Chief Executive Officer.
   
(3) Ms. Bielsker joined our company as our Chief Financial Officer in May 2017.
   
(4) Represents 401(k) benefits.

 

Employment Agreements

 

On March 10, 2018, we entered into an employment agreement with Dr. Jeff Kunin to act as our President and Chief Executive Officer, or the Jeff Kunin Employment Agreement. The initial term of the Jeff Kunin Employment Agreement is from March 10, 2018 through March 10, 2022; however, this agreement will be automatically renewed for successive one year periods, each a renewal term, unless, at least ninety (90) days prior to the expiration of the initial term or any renewal term, either party gives written notice to the other party specifically electing to terminate the Jeff Kunin Employment Agreement at the end of the applicable term. The Jeff Kunin Employment Agreement provides for Dr. Kunin to receive an annual base salary of $150,000 per year, which will increase to $200,000 per year upon consummation of this offering. Pursuant to the Jeff Kunin Employment Agreement, Dr. Kunin may receive a cash bonus equal to 150% of his base salary and an equity bonus as determined by our board of directors in its sole discretion. In addition, at the first meeting of the board of directors held after the consummation of this offering, Dr. Kunin will be issued options to purchase a number of shares of our common stock, to be determined by the board of directors in its sole discretion, at an exercise price equal to the closing price of our common stock on the grant date, vesting monthly on a pro rata basis over four years with accelerated vesting upon a Change of Control (as defined in the 2018 Equity Incentive Plan). If Dr. Kunin’s employment is terminated by us for Just Cause (as defined in the agreement), death or disability, he (or his estate in the event of death) will receive the accrued base salary, vacation pay, expense reimbursement and any other entitlements accrued by him through the date of termination to the extent not previously paid. If Dr. Kunin’s employment is terminated by us Without Just Cause (as defined in the agreement) or by Dr. Kunin for Good Reason (as defined in the agreement), he will also receive an amount equal to one year’s base salary as severance; provided that he executes and does not revoke a release and settlement agreement releasing us from all claims arising from his employment. The Jeff Kunin Employment Agreement includes customary non-competition provisions.

 

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On March 10, 2018, we entered into an employment agreement with Dr. Audrey Kunin to act as our Chief Creative Officer, or the Audrey Kunin Employment Agreement. The initial term of the Audrey Kunin Employment Agreement from March 10, 2018 through March 10, 2022; however, this agreement will be automatically renewed for successive one year periods, each a renewal term, unless, at least ninety (90) days prior to the expiration of the initial term or any renewal term, either party gives written notice to the other party specifically electing to terminate the Audrey Kunin Employment Agreement at the end of the applicable term. The Audrey Kunin Employment Agreement provides for Dr. Kunin to receive an annual base salary of $150,000 per year, which will increase to $200,000 per year upon consummation of this offering. Pursuant to the Audrey Kunin Employment Agreement, Dr. Kunin may receive a cash bonus equal to 150% of her base salary and an equity bonus as determined by our board of directors in its sole discretion. In addition, at the first meeting of the board of directors held after the consummation of this offering, Dr. Kunin will be issued options to purchase a number of shares of our common stock, to be determined by the board of directors in its sole discretion, at an exercise price equal to the closing price of our common stock on the grant date, vesting monthly on a pro rata basis over four years with accelerated vesting upon a Change of Control (as defined in the 2018 Equity Incentive Plan). If Dr. Kunin’s employment is terminated by us for Just Cause (as defined in the agreement), death or disability, she (or her estate in the event of death) will receive the accrued base salary, vacation pay, expense reimbursement and any other entitlements accrued by her through the date of termination to the extent not previously paid. If Dr. Kunin’s employment is terminated by us Without Just Cause (as defined in the agreement) or by Dr. Kunin for Good Reason (as defined in the agreement), she will also receive an amount equal to one year’s base salary as severance; provided that she executes and does not revoke a release and settlement agreement releasing us from all claims arising from her employment. The Audrey Kunin Employment Agreement includes customary non-competition provisions.

 

The Audrey Kunin Employment Agreement will replace the employment agreement that we entered into on January 1, 2016, with Dr. Audrey Kunin to act as our Chief Executive Officer, or the AK Employment Agreement. Effective January 1, 2017, the AK Employment Agreement was automatically renewed for a successive one year period. Pursuant to the AK Employment Agreement, Dr. Kunin received an annual base salary of $150,000 per year and was entitled to a bonus equal to two percent (2%) of actual measurable sales that were the direct result of her personal media appearances on our behalf, as determined by us.

 

On May 22, 2017, we entered into an employment agreement with Andrea Bielsker to act as our Chief Financial Officer, or the Bielsker Employment Agreement. The initial term of the Bielsker Employment Agreement is May 22, 2017 through December 31, 2018; however, this agreement will be automatically renewed for successive one year periods, each a renewal term, unless, at least ninety (90) days prior to the expiration of the initial term or any renewal term, either party gives written notice to the other party specifically electing to terminate the Bielsker Employment Agreement at the end of the applicable term. Ms. Bielsker receives an annual base salary of $130,000 per year and has agreed to devote at least sixty percent (60%) of her professional time attending to our business. Pursuant to the Bielsker Employment Agreement, Ms. Bielsker may receive a bonus equal to a percentage of her base salary as determined by our board of directors in its sole discretion. If Ms. Bielsker’s employment is terminated by us for Just Cause (as defined in the agreement), death or disability, she (or her estate in the event of death) will receive the accrued base salary, vacation pay, expense reimbursement and any other entitlements accrued by her through the date of termination to the extent not previously paid. If Ms. Bielsker’s employment is terminated by us Without Just Cause (as