Stablecoin Development Corp 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   The financial statements required by this Item 8 are set forth below. Our quarterly financial information is set forth in Item 7 of this report and is hereby incorporated into this Item 8 by reference.   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   Page Reports of Independent Registered Public Accounting Firms 28 Consolidated Balance Sheets as of December 31, 2021 and 2020 32 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021,   2020 and 2019 33 Consolidated Statements of Stockholders' Equity   for the Years Ended December 31, 2021,   2020 and 2019 34 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021,   2020 and 2019 35 Notes to Consolidated Financial Statements 37   27 Table of Contents   Report of Independent Registered Public Accounting Firm   To the Stockholders and Board of Directors NovaBay Pharmaceuticals Inc. Emeryville, California   Opinion on the Financial Statements   We have audited the accompanying consolidated balance sheet of NovaBay Pharmaceuticals Inc. (the “Company”) as of December 31, 2021, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and the results of its operations and its cash flows for the year ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.   The consolidated financial statements of the Company as of December 31, 2020 and for each of the two years in the period ended December 31, 2020 were audited by OUM & Co. LLP, who joined WithumSmith+Brown PC on July 15, 2021, and rendered their opinion on such statements on March 25, 2021.   Basis for Opinion     These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.   Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements whether due to error or fraud and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.   Critical Audit Matters   The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.   Acquisition of DERMAdoctor, LLC – Valuation of Certain Intangible Assets   Description of the Matter     As described in Note 3 to the consolidated financial statements, the Company completed the acquisition of DERMAdoctor, LLC. (“DERMAdoctor”) on November 5, 2021. The acquisition was accounted for under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including $2.1 million for the DERMAdoctor trade names and $2.9 million for proprietary product formulations.   28 Table of Contents   Auditing the Company’s accounting for the acquisition was complex due to the significant estimates and assumptions management made to determine the fair value of the DERMAdoctor trade names and proprietary product formulations. Trade names were valued using the relief-from-royalty method and proprietary product formulations were valued using the multi-period excess earnings model.  The determination of the fair value of these intangible assets required management to make significant estimates and assumptions related to forecasted sales growth rates, cash flows, market-based royalty rates, and estimated discount rates. These significant assumptions are forward looking and could be affected by future economic and market conditions.   How We Addressed the Matter in Our Audit   We obtained an understanding of the Company’s accounting for the acquisition, including reviewing the purchase agreement, evaluating the significant assumptions and methods used in developing the fair value estimates, and testing the recognition of (1) the tangible assets acquired and liabilities assumed at fair value; (2) the identifiable intangible assets acquired at fair value; (3) the fair value of contingent consideration (as discussed below) and (4) goodwill measured as a residual.   To test the estimated fair value of the trade names and proprietary product formulations intangible assets, we performed audit procedures that included, among others, assessing the appropriateness of the valuation methodologies used and testing the significant assumptions used in the model, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market and economic trends, and to the historical results of the acquired business and other guideline companies. We involved our valuation specialists to assist in our evaluation of the significant assumptions and models used in the fair value estimates.   Valuation of Contingent Consideration   Description of the Matter     As described in Note 2 to the consolidated financial statements, in accounting for the acquisition of DERMAdoctor, the Company recognized contingent consideration liabilities at the estimated fair value on the acquisition date. As mentioned above, the Company applied the acquisition method of accounting for business combinations. Subsequent changes to the fair value of the contingent consideration liabilities would be recorded within the consolidated statements of operations and comprehensive loss in the period of change. The contingent consideration liability is based on the achievement of certain predetermined financial targets for the 2022 and 2023 fiscal years.  At December 31, 2021, the Company recorded $0.6 million in contingent earnout liability that was associated with DERMAdoctor business combination. This amount represented a ‘Level 3’ fair value measurement in the fair value hierarchy due to the significant unobservable inputs used in determining the fair value and the use of management judgment about the assumptions market participants would use in pricing the liabilities.   Auditing the valuation of the contingent consideration liability was complex and required significant auditor judgment due to the complexity of the valuation method and the high degree of subjectivity in evaluating certain assumptions required to estimate the fair value of the contingent consideration liability. Management determined the estimated fair value of the contingent consideration liability using a Monte Carlo simulation model.  The significant assumptions and estimates include the probability the Company will achieve a specified range of revenue, profitability levels, volatility and discount rate. These significant assumptions are forward looking and consider anticipated market conditions, which in turn, requires subjective auditor judgement.   How We Addressed the Matter in Our Audit   To test the estimated fair value of the contingent consideration liability, our audit procedures included, among others, inspecting the terms of the executed acquisition agreement, assessing the scenario analysis valuation method used, and testing the key inputs and significant assumptions discussed above. We involved our valuation specialists who assisted in evaluating the appropriateness of the selected valuation methodology and evaluating the reasonableness of certain significant assumptions used to estimate the fair value of the contingent consideration. We evaluated whether the assumptions and estimates used, including the probability the Company will achieve a specified range of revenue and profitability levels, by considering the past performance of the acquired business and current market forecasts, and whether such assumptions were consistent with evidence obtained in other areas of the audit.   Product Revenue Allowances for Product Returns   Description of the Matter     As described in Note 2 to the consolidated financial statements, when recognizing revenue from product sales of Avenova Spray to the Company’s major distribution partners, the Company makes an estimate of the amount of consideration the Company expects to be entitled to receive. Upon recognition of these product sales, the Company records estimates for variable consideration consisting of service fees, discounts, rebates, and product returns, resulting in a reduction in product revenue. The variable consideration provisions are recorded within accrued liabilities and in the same period that the related revenue is recognized. Liabilities related to allowance for product returns involve the use of significant assumptions and judgments in their calculation. These significant assumptions and judgments include historical sales and return rates and inventory levels in the distribution channel and utilizing existing return policies with customers.   29 Table of Contents   Management’s estimated allowance for product returns requires a high degree of judgment and is subject to change based on various quantitative and qualitative factors. Accordingly, extensive audit effort and a high degree of auditor judgment were needed to evaluate management’s estimates and assumptions used in the determination of rebates and product returns.    How We Addressed the Matter in Our Audit   We obtained an understanding of and evaluated the design of controls relating to the Company’s processes for estimating product returns. We evaluated the significant accounting policies relating to product returns, as well as management’s application of the policies, for appropriateness and reasonableness.   To test management’s estimate of product returns, we obtained management’s calculations for the estimates and performed one or more of the following procedures: clerically tested the calculation, agreed relevant inputs to the terms of relevant policies, assessed subsequent events related to these estimates, evaluated the methodologies and assumptions used and the underlying data used by the Company, evaluated the assumptions used by management against historical trends, evaluated the change in estimated accruals from the prior periods, and assessed the historical accuracy of the Company’s estimates against actual results.   /s WithumSmith+Brown, PC   We have served as the Company's auditor since 2010.   San Francisco California March 29, 2022   PCAOB ID Number 100   30 Table of Contents   Report of Independent Registered Public Accounting Firm   Stockholders and Board of Directors NovaBay Pharmaceuticals, Inc. Emeryville, California   Opinion on the Consolidated Financial Statements   We have audited the accompanying consolidated balance sheet of NovaBay Pharmaceuticals, Inc. (the “Company”) as of December 31, 2020, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America.   Basis for Opinion   These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.   Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.   /s/ OUM & CO. LLP   We served as the Company's auditor since 2010.   San Francisco, California March 25, 2021   PCAOB ID Number 252   31 Table of Contents     NOVABAY PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value amounts)       December 31,     December 31,       2021     2020                     ASSETS                 Current assets:                 Cash and cash equivalents   $ 7,504     $ 11,952   Accounts receivable, net of allowance for doubtful accounts ( $0 at December 31, 2021 and December 31, 2020)     1,668       1,106   Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ( $641 and $236 at December 31, 2021 and December 31, 2020, respectively)     3,220       608   Prepaid expenses and other current assets     778       576   Total current assets     13,170       14,242   Operating lease right-of-use assets     411       436   Property and equipment, net     193       84   Goodwill     4,528       —   Other intangible assets, net     5,200       —   Other assets     476       476   TOTAL ASSETS   $ 23,978     $ 15,238                     LIABILITIES AND STOCKHOLDERS' EQUITY                 Liabilities:                 Current liabilities:                 Accounts payable   $ 1,045     $ 302   Accrued liabilities     2,092       2,115   Line of credit     105       —   Operating lease liabilities     200       416   Total current liabilities     3,442       2,833   Operating lease liabilities-non-current     246       87   Warrant liability     9,558       —   Contingent earnout liability     561       —   Total liabilities     13,807       2,920   Commitments & contingencies (Note 10)                     Stockholders' equity:                 Preferred stock, $0.01 par value; 5,000 shares authorized; 14 and 0 issued and outstanding at December 31, 2021 and December 31, 2020, respectively     680       —   Common stock, $0.01 par value; 100,000 and 75,000 shares authorized, 47,766 and 41,782 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively     478       418   Additional paid-in capital     150,900       147,963   Accumulated deficit     ( 141,887 )     ( 136,063 ) Total stockholders' equity     10,171       12,318   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 23,978     $ 15,238     The accompanying notes are an integral part of these consolidated financial statements.   32 Table of Contents     NOVABAY PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands except per share data)       Year Ended December 31,       2021     2020     2019   Sales:                         Product revenue, net   $ 8,397     $ 9,916     $ 6,556   Other revenue, net     24       18       43   Total sales, net     8,421       9,934       6,599                             Cost of goods sold     2,776       3,970       1,738   Gross profit     5,645       5,964       4,861                             Research and development     44       285       184   Sales and marketing     7,223       6,173       8,767   General and administrative     7,240       5,932       5,310   Total operating expenses     14,507       12,390       14,261   Operating loss     ( 8,862 )     ( 6,426 )     ( 9,400 )                           Non-cash gain (loss) on changes in fair value of warrant liability     4,615       ( 5,216 )     749   Non-cash gain on changes in fair value of embedded derivative liability     —       3       424   Other (expense) income, net     ( 1,577 )     605       ( 1,425 )                           Loss before provision for income taxes     ( 5,824 )     ( 11,034 )     ( 9,652 ) Provision for income taxes     —       ( 5 )     ( 6 ) Net loss and comprehensive loss   $ ( 5,824 )   $ ( 11,039 )   $ ( 9,658 )                           Less: Preferred deemed dividend     735       —       800   Less: Retained earnings reduction related to warrants down round feature triggered     —       —       29   Net loss attributable to common stockholders   $ ( 6,559 )   $ ( 11,039 )   $ ( 10,487 )                                                                               Net loss per share attributable to common stockholders (basic and diluted)   $ ( 0.15 )   $ ( 0.31 )   $ ( 0.48 ) Weighted-average shares of common stock outstanding used in computing net loss per share of common stock (basic and diluted)     43,657       35,076       21,641     The accompanying notes are an integral part of these consolidated financial statements.   33 Table of Contents     NOVABAY PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)                                         Additional             Total       Preferred Stock     Common Stock     Paid-In     Accumulated     Stockholders'       Shares     Amount     Shares     Amount     Capital     Deficit     Equity   Balance at December 31, 2018     —     $ —       17,089     $ 171     $ 119,764     $ ( 114,981 )   $ 4,954   Net loss     —       —       —       —       —       ( 9,658 )     ( 9,658 ) Reclassification of warrant liability to equity related to adoption of ASU 2017-11     —       —       —       —       412       ( 356 )     56   Down round feature adjustment related to warrants     —       —       —       —       29       ( 29 )     —   Issuance of Series A Preferred Stock and common stock warrants, net of offering costs     2,700       584       —       —       —       —       —   Conversion of Series A Preferred Stock to common stock     ( 2,700 )     ( 584 )     2,700       27       557       —       584   Beneficial conversion feature upon issuance of Series A Preferred Stock     —       —       —       —       800       —       800   Deemed dividend from beneficial conversion feature of Series A Preferred Stock     —       —       —       —       ( 800 )     —       ( 800 ) Issuance of common stock in connection with offering, net of offering costs     —       —       7,467       75       3,427       —       3,502   Issuance of common stock in connection with exercise of warrants     —       —       389       4       616       —       620   Issuance of RSUs related to employee separation agreement     —       —       168       2       218       —       220   Issuance of common stock for option exercises     —       —       83       —       189       —       189   Issuance of RSUs to non-employees for services     —       —       36       —       20       —       20   Vesting of employee restricted stock awards     —       —       6       —       10       —       10   Stock-based compensation expense related to employee and director stock options     —       —       —       —       334       —       334   Stock-based compensation expense related to non-employee stock options     —       —       —       —       37       —       37   Stock option modification     —       —       —       —       105       —       105   Balance at December 31, 2019     —     $ —       27,938     $ 279     $ 125,718     $ ( 125,024 )   $ 973   Net loss     —       —       —       —       —       ( 11,039 )     ( 11,039 ) Reclassification of warrant liability to equity related to warrant modification     —       —       —       —       197       —       197   Issuance of common stock, net of offering costs     —       —       5,838       58       5,162       —       5,220   Issuance of common stock in connection with exercise of warrants, net     —       —       7,791       78       16,128       —       16,206   Issuance of RSUs to non-employees for services     —       —       193       2       218       —       220   Issuance of stock for option exercises     —       —       20       1       6       —       7   Vesting of employee restricted stock awards     —       —       2       —       2       —       2   Stock-based compensation expense related to employee and director stock options     —       —       —       —       415       —       415   Stock-based compensation expense related to non-employee stock options     —       —       —       —       64       —       64   Stock option modification     —       —       —       —       53       —       53   Balance at December 31, 2020     —     $ —       41,782     $ 418     $ 147,963     $ ( 136,063 )   $ 12,318   Net loss     —       —       —       —       —       ( 5,824 )     ( 5,824 ) Issuance of warrants in connection with TLF warrants     —       —       —       —       13       —       13   Issuance of common stock, net of offering costs     —       —       2,673       27       1,749       —       1,776   Vesting of employee restricted stock awards     —       —       160       2       ( 2 )     —       —   Issuance of RSUs to non-employees for services     —       —       328       3       217       —       220   Issuance of Series B Preferred Stock and common stock warrants, net of offering costs     15       735       —       —       —       —       735   Conversion of Series B Preferred Stock to common stock     ( 1 )     ( 55 )     2,823       28       27       —       —                                                             Beneficial conversion feature upon Issuance of Series B Preferred Stock     —       —       —       —       735       —       735   Deemed dividend from beneficial Conversion feature of Series B Preferred Stock     —       —       —       —       ( 735 )     —       ( 735 )                                                           Stock-based compensation expense related to employee and director stock options     —       —       —       —       693       —       693   Stock-based compensation expense related to non-employee stock options     —       —       —       —       240       —       240                                                             Balance at December 31, 2021     14     $ 680       47,766     $ 478     $ 150,900     $ ( 141,887 )   $ 10,171     The accompanying notes are an integral part of these consolidated financial statements.   34 Table of Contents     NOVABAY PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)       Year ended December 31,       2021     2020     2019                             Operating activities:                         Net loss   $ ( 5,824 )   $ ( 11,039 )   $ ( 9,658 ) Adjustments to reconcile net loss to net cash used in operating activities:                         Depreciation and amortization     119       51       65   Gain from early operating lease termination     —       ( 54 )     —   Impairment of property and equipment     —       —       32   Loss on disposal of property and equipment     —       1       3   Impairment of operating lease right-of-use assets     —       —       125   Stock-based compensation expense for options and stock issued to employees and directors     693       415       334   Stock-based compensation expense for options and stock issued to non-employees     240       64       37   Stock option modification expense     —       53       105   Issuance of RSUs to employees     —       2       10   Issuance of RSUs related to employee separation agreement     —       —       220   Issuance of RSUs to non-employees for services     233       220       20   Non-cash (gain) loss on changes in fair value of warrant liability     ( 4,615 )     5,216       ( 749 ) Non-cash (gain) on changes in fair value of embedded derivative liability     —       ( 3 )     ( 424 ) Interest expense related to amortization of debt issuance and debt discount     —       141       670   Interest expense related to amortization of debt issuance related to related party note payable     —       2       18   Issuance of warrants for services     —       —       59   Changes in operating assets and liabilities:                         Accounts receivable     452       ( 317 )     2,319   Inventory     ( 243 )     ( 116 )     ( 212 ) Prepaid expenses and other current assets     ( 52 )     310       888   Operating lease right-of-use assets     25       816       861   Other assets     —       1       9   Accounts payable and accrued liabilities     ( 163 )     ( 321 )     ( 1,841 ) Operating lease liabilities     ( 57 )     ( 878 )     ( 1,066 ) Deferred rent     —       —       —   Related party note payable     —       73       204   Long-term obligations     —       —       42   Net cash used in operating activities     ( 9,192 )     ( 4,721 )     ( 7,929 )                           Investing activities:                         Acquisition, net of cash     ( 11,993 )     —       —   Purchases of property and equipment     ( 52 )     ( 26 )     ( 19 ) Net cash used in investing activities     ( 12,045 )     ( 26 )     ( 19 )                           Financing activities:                         Proceeds from preferred stock issuances, net     14,908       —       2,598   Proceeds from common stock issuances, net     1,776       5,220       6,698   Proceeds from exercise of warrants     —       7,098       67   Proceeds from exercise of options, net     —       7       189   Proceeds from issuance of related party note payable     —       —       1,000   Proceeds from stock options & RSUs sold to cover taxes     —       —       4   Proceeds from convertible notes, net of discount     —       —       2,000   Proceeds from line of credit     105       —       —   Payment on the convertible note (Note 12)     —       ( 1,563 )     ( 652 ) Payment on the related party loan (Note 11)     —       ( 1,000 )     —   Debt issuance cost     —       —       ( 202 ) Net cash provided by financing activities     16,789       9,762       11,702   Net (decrease) increase in cash, cash equivalents, and restricted cash     ( 4,448 )     5,015       3,754   Cash, cash equivalents and restricted cash, beginning of year     12,427       7,412       3,658   Cash, cash equivalents and restricted cash, end of year   $ 7,979     $ 12,427     $ 7,412     35 Table of Contents       Year ended December 31,       2021     2020     2019   Supplemental disclosure of cash flow information:                         Interest paid   $ —     $ 49     $ 148   Income taxes paid   $ 21     $ 14     $ 14         Year ended December 31,       2021     2020     2019   Supplemental disclosure of non-cash information:                         Warrant liability transferred to equity in connection with exercise of warrants   $ —     $ 9,108     $ 553   Warrant liability transferred to equity related to warrant modification   $ —     $ 197     $ —   Non-cash payment of related party loan accrued interest by offsetting related party accounts receivables - see Note 11   $ —     $ 277     $ —   Cumulative effect of adoption of ASU 2017-11   $ —     $ —     $ 56   Addition of operating lease, right-of-use asset   $ 376     $ —     $ 2,473   Fixed asset purchases, included in accounts payable and accrued liabilities   $ —     $ —     $ 10   Fair value of warrants issued in connection with financings   $ 14,172     $ —     $ 5,269   Conversion of preferred stock to common stock   $ 55     $ —     $ 584   Reclassification of EmeryStation lease security deposit from long term to short term   $ —     $ —     $ 65   Reclassification of EmeryStation sublease security deposit from long term to short term   $ —     $ —     $ 198     The accompanying notes are an integral part of these consolidated financial statements.   36 Table of Contents   NOVABAY PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS         NOTE 1. ORGANIZATION   NovaBay Pharmaceuticals, Inc. develops and sells scientifically-created and clinically-proven eyecare and skincare products. Our leading product, Avenova® Antimicrobial Lid and Lash Solution (“Avenova Spray”), is proven in laboratory testing to have broad antimicrobial properties as it removes foreign material including microorganisms and debris from the skin around the eye, including the eyelid. Avenova Spray is formulated with our proprietary, stable and pure form of hypochlorous acid and is cleared by the U.S. Food and Drug Administration (“FDA”) for sale in the United States. Avenova Spray is available direct to consumers through online distribution channels and is also often prescribed and dispensed by eyecare professionals for blepharitis and dry-eye disease. Other eyecare products offered under the Avenova eyecare brand include Novawipes by Avenova, Avenova Lubricant Eye Drops, Avenova Moist Heating Eye Compress, and the i-Chek.   On November 5, 2021, we significantly expanded our business by acquiring DERMAdoctor, LLC (“DERMAdoctor”) (the “DERMAdoctor Acquisition”). DERMAdoctor offers over 30 dermatologist-developed products targeting common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris. DERMAdoctor branded products are marketed and sold through the DERMAdoctor website, well-known traditional and digital beauty retailers, and a network of international distributors. See Note 3, “Business Combination” below.   The Company was incorporated under the laws of the State of California on January  19, 2000, as NovaCal Pharmaceuticals, Inc. It had no operations until July  1, 2002, on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company. In February 2007, it changed its name from NovaCal Pharmaceuticals, Inc. to NovaBay Pharmaceuticals, Inc. In June 2010, the Company changed the state in which it was incorporated (the “Reincorporation”) and is now incorporated under the laws of the State of Delaware. All references to “the Company” herein refer to the California corporation prior to the date of the Reincorporation and to the Delaware corporation on and after the date of the Reincorporation. The Company is managed as a single segment focused on commercializing Avenova Spray in the United States.   Liquidity   Based primarily on the funds available at December 31, 2021, management believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to enable the Company to meet its planned operating expenses at least through March 29, 2023. However, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control. Additionally, our future results, cash expenditures and ability to obtain additional external financing could be adversely affected by the COVID- 19 pandemic and general adverse economic conditions.       NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES    Basis of Presentation   The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and are expressed in U.S. dollars.   Use of Estimates   The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates include contract liabilities related to product sales, useful lives for property and equipment and related depreciation calculations, assumptions for valuing options and warrants, the fair value of contingent consideration, intangible assets, and goodwill, stock-based compensation, income taxes and other contingencies   These estimates are based on management’s best estimates and judgment. Actual results may differ from these estimates. Estimates, judgments, and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions, judgments and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.   Cash, Cash Equivalents, and Restricted Cash   The Company considers all highly-liquid instruments with a stated maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. As of December 31, 2021 and 2020, the Company’s cash and cash equivalents were held in a highly-rated, major financial institution in the United States.   37 Table of Contents   The following table provides a reconciliation of the cash, cash equivalents, and restricted cash reported in the consolidated balance sheets that sum to the total of the same reported in the consolidated statements of cash flows (in thousands):       December 31,     December 31,       2021     2020   Cash and cash equivalents   $ 7,504     $ 11,952   Restricted cash included in other assets     475       475   Total cash, cash equivalents, and restricted cash in the consolidated statements of cash flows   $ 7,979     $ 12,427     The restricted cash amount included in other assets on the consolidated balance sheets represents amounts held as certificates of deposit for long-term financing and lease arrangements as contractually required by our financial institution and landlord.   Concentrations of Credit Risk and Major Partners   Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains deposits of cash, cash equivalents and restricted cash with a highly-rated, major financial institution in the United States.    Deposits in this bank may exceed the amount of federal insurance provided on such deposits. The Company does not believe it is exposed to significant credit risk due to the financial position of the financial institution in which the deposits are held.    During the year ended December 31, 2021, revenues were derived primarily from sales of Avenova Spray directly to doctors through the Company’s webstore, directly to consumers through Amazon.com, national retailers and to pharmacies via three major distribution partners and specialty pharmacies. During the year ended December 31, 2020, revenues were derived primarily from sales of Avenova Spray directly to three major distribution partners, to doctors through the Company's internal sales team, and also generated revenue from the sale of KN95 Masks in response to the national need for personal protective equipment.   During the years ended December 31, 2021, 2020 and 2019, revenues from each product were as follows (in thousands):       Year Ended December 31,       2021     2020     2019   Avenova Spray   $ 6,844     $ 5,974     $ 6,347   DERMAdoctor     587       —       —   KN95 Masks     —       3,124       —   NeutroPhase     368       524       209   Other products     598       294       —   Total product revenue, net     8,397       9,916       6,556   Other revenue, net     24       18       43   Total sales, net   $ 8,421     $ 9,934     $ 6,599     38 Table of Contents   During the years ended December 31, 2021, 2020 and 2019, Avenova Spray revenues from our major distribution partners greater than 10% were as follows:       Year Ended December 31,   Major distribution   2021     2020     2019   Avenova Direct via Amazon     59 %     50 %     15 % Avenova distributor A     * %     * %     17 % Avenova distributor B     * %     * %     16 % Avenova distributor C     * %     * %     15 %   *Not greater than 10%   As of December 31, 2021 and 2020, accounts receivable from our major distribution partners and major retailers greater than 10% were as follows:       Year Ended December 31,   Major distribution partner   2021     2020   Major U.S. Retailer     33 %     * % Avenova Spray Pharmacy Distributor A     13 %     18 % Avenova Spray Pharmacy Distributor C     11 %     14 % Chongqing Pioneer Pharma Holdings Limited     * %     16 % Avenova Spray Pharmacy Distributor B     * %     14 % Amazon     * %     11 %   *Not greater than 10%   The Company relies on seven contract manufacturers to produce its products. The Company does not own any manufacturing facilities and intends to continue to rely on third parties for the supply of finished goods. Contract manufacturers may or may not be able to meet the Company’s needs with respect to timing, quantity or quality. In particular, it is possible that we may suffer from unexpected supply chain delays in light of the worldwide COVID- 19 pandemic.   Fair Value of Financial Assets and Liabilities   The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, and contingent consideration. The Company’s cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.   The Company follows Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures , with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under this standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. There are three levels of inputs that may be used to measure fair value:   Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable; and Level 3 – inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).   Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.   Allowance for Doubtful Accounts   The Company charges bad debt expense and records an allowance for doubtful accounts when management believes it to be unlikely that specific invoices will be collected. Management identifies amounts due that are in dispute and believes are unlikely to be collected. Management recorded no reserve for accounts receivable at December 31, 2021 and December 31, 2020.   39 Table of Contents   Inventory   Inventory is comprised of ( 1 ) raw materials and supplies, such as bottles, packaging materials, labels, boxes and pumps; ( 2 ) goods in progress, which are normally filled but unlabeled bottles; and ( 3 ) finished goods. We utilize contract manufacturers to produce our products and the price paid to these manufacturers is included in inventory. Inventory is stated at the lower of cost or estimated net realizable value determined by the first -in, first -out method. At December 31, 2021 and 2020, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $ 641 thousand and $ 236 thousand, respectively.    Property and Equipment, net   Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets of five to seven years for office and laboratory equipment, three to five years for computer equipment and software, and five to seven years for furniture and fixtures. Leasehold improvements are amortized over the lease term.   The costs of normal maintenance, repairs, and minor replacements are expensed as incurred.    Business Combinations     We account for business combinations using the acquisition method of accounting, in accordance with ASC 805, Business Combinations . The acquisition method requires identifiable assets acquired and liabilities assumed be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill.   The determination of estimated fair value requires us to make significant estimates and assumptions. These fair value determinations require judgment and involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, and asset lives, among other items. As a result, we may record adjustments to the fair values of assets acquired and liabilities assumed within the measurement period (up to one year from the acquisition date) with the corresponding offset to goodwill.   Transaction costs associated with business combinations are expensed as they are incurred.   Goodwill and Intangible Assets   Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination. Intangible assets are measured at their respective fair values as of the acquisition date and may be subject to adjustment within the measurement period, which may be up to one year from the acquisition date. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the assets are impaired. There were no impairment charges during the years ended December 31, 2021 and 2020, respectively.   Intangible Asset   Fair Value (in thousands)     Useful Life (in years)     Amortization Method   Customer relationships   $ 290       7     Straight line   Trade secrets / product formulations     2,890       9     Straight line   Trade names     2,080     Indefinite       N/A   Goodwill     4,528     Indefinite       N/A       $ 9,788                     Valuation of Contingent Consideration Resulting from a Business Combination   In connection with certain acquisitions, we may be required to pay future consideration that is contingent upon the achievement of specified milestone events. We record contingent consideration resulting from a business combination at its fair value on the acquisition date. Each quarter thereafter, we revalue these obligations and record increases or decreases in their fair value within our Statement of Income until such time as the specified milestone achievement period is complete.   Increases or decreases in fair value of the contingent consideration liabilities can result from updates to assumptions such as the expected timing or probability of achieving the specified milestones. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Updates to assumptions could have a significant impact on our results of operations in any given period. Actual results may differ from estimates.   Impairment of Long-Lived Assets    The Company accounts for long-lived assets, other than goodwill and intangible assets, and operating lease right-of-use assets in accordance with ASC 360, Property, Plant and Equipment , which requires that companies consider whether events or changes in facts and circumstances, both internally and externally, may indicate that an impairment of long-lived assets held for use or right-of-use assets are present. The Company reviews long-lived assets and right-of-use assets for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values and the loss is recognized in the statements of operations. There were no impairment charges during the years ended December 31, 2021 and 2020, respectively.   40 Table of Contents   Leases   At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use assets may be required for items such as initial direct costs paid or incentives received.   The Company has elected to combine lease and non-lease components as a single component for all leases in which it is a lessee or a lessor. The lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current.   Comprehensive Income (Loss)   ASC 220, Comprehensive Income, requires that an entity's change in equity or net assets during a period from transactions and other events from non-owner sources be reported.   Revenue Recognition   Revenue is recognized from sale of goods in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606” ). Under ASC 606, the Company recognizes revenue when or as the Company’s performance obligations are satisfied by transferring control of the promised goods to customers in an amount that reflects the consideration to which the Company expects to receive. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps as prescribed by ASC 606:     i. identify the contract(s) with a customer;     ii. identify the performance obligations in the contract;     iii. determine the transaction price;     iv. allocate the transaction price to the performance obligations in the contract; and     v. recognize revenue when (or as) the entity satisfies performance obligations.   Revenue is generated through the Company’s webstores, Avenova.com and DERMAdoctor.com, for Avenova Spray and DERMAdoctor direct to consumer sales which are recognized upon fulfillment, which generally occurs upon delivery of the related products to a third -party carrier. Shipping and handling costs are expensed as incurred and included in cost of goods sold in the consolidated statements of operations and comprehensive loss. We present revenue net of sales taxes and refunds.   Revenue generated through Amazon.com and Walmart.com is recognized upon fulfillment, which generally occurs upon delivery of the related products to a third -party carrier. We present revenue net of commissions and any related fulfillment and shipping fees charged by these partners. Fees paid to partners for promoting our products are expensed as incurred and are included in sales and marketing expenses within the operating expenses in the consolidated statements of operations and comprehensive loss.   The Company also generates Avenova Spray revenue through major pharmacy distribution partners. Product supply of Avenova Spray is the only performance obligation contained in these arrangements, and the Company recognizes product revenue upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to, generally upon delivery to the distributor on a “sell-in” basis. Upon recognition of product sales, contract liabilities are recorded for invoiced amounts that are subject to significant reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, and product returns. The Company derives its rate of return from historical data and updates its return rate assumption quarterly. Payment for product supply is typically due 30 days after control transfers to the distributor.   Revenue generated through the Company’s partner pharmacies is recognized when control of the product transfers to the end customer.   Revenue for product sales to other retailers, such as Costco and CVS, is generally recognized upon transfer of control to the retailer, which generally occurs upon delivery of the related products to a third -party carrier, net of estimated future product returns.   41 Table of Contents   Cost   of   Goods   Sold   Cost of goods sold includes third -party manufacturing costs, shipping and handling costs, and other costs associated with products sold. Cost of goods sold also includes any necessary allowance for excess and obsolete inventory along with lower of cost and estimated net realizable value.   Research and Development Costs   The Company charges research and development costs to expense as incurred. These costs include all costs associated with research, development and regulatory activities, including submissions to the Food and Drug Administration (“FDA”).   Patent Costs   Patent costs, including legal expenses, are expensed in the period in which they are incurred. Patent expenses are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.   Advertising Costs   Advertising costs are expensed in the period in which the costs are incurred. Advertising expenses were $ 3.2 million, $ 1.7  million, and $ 0.5 million, respectively, for the years ended December  31, 2021, 2020, and 2019.   Stock-Based Compensation   The Company’s stock-based compensation includes grants of stock options and restricted stock units (“RSUs”) to employees, consultants and non-employee directors. The expense associated with these grants is recognized in the Company’s consolidated statements of stockholders’ equity based on their fair values as they are earned under the applicable vesting terms. For stock options granted, the fair value of the stock options is estimated using a Black-Scholes option pricing model. See Note 15, “Equity-Based Compensation” for further information regarding stock-based compensation expense and the assumptions used in estimating that expense. The Company accounts for RSUs issued to employees and non-employees (consultants and advisory board members) based on the fair market value of the Company’s common stock as of the date of issuance.   Income Taxes   The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.   42 Table of Contents   Common Stock Warrant Liabilities   The Company accounts for common stock purchase warrants issued in connection with its equity offerings in accordance with the provisions of ASC 480, Distinguishing Liabilities from Equity , and ASC 815,   Derivatives and Hedging .   The Company accounts for common stock purchase warrants issued in connection with share-based compensation arrangements in accordance with the provisions of ASC 718, Stock Compensation, which encompasses the provisions of ASC 480, Distinguishing Liabilities from Equity .   The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement) or (iii) do not become exercisable until the occurrence of contingent event. Additionally, for common stock purchase warrants accounted for in accordance with ASC 718, Stock Compensation, the Company classifies as liabilities any contracts where it believes the warrants are deemed to be probable of issuance.   For warrants that are classified as liabilities, the Company records the fair value of the warrants at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss. The fair values of these warrants are determined using the Black-Scholes option pricing model, the Binomial Lattice (“Lattice”) valuation model, or the Monte Carlo simulation model where deemed appropriate. These values are subject to a significant degree of management’s judgment.   Net Loss per Share   The Company computes net loss per share by presenting both basic and diluted earnings (loss) per share (“EPS”).   Basic EPS is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods because their effect would be anti-dilutive.   For the year ended December 31, 2021, the Preferred Stock was excluded from the computation of diluted net income per share as their inclusion on an “if converted” basis would have been anti-dilutive.  For the year ended December 31, 2021, the Preferred Stock was considered anti-dilutive as a result of such securities not having a contractual obligation to participate in losses of the Company.    43 Table of Contents   The following table sets forth the calculation of basic EPS and diluted EPS (in thousands, except per share amounts):       Year Ended December 31,       2021     2020     2019   Numerator                         Net loss   $ ( 5,824 )   $ ( 11,039 )   $ ( 9,658 ) Less: Preferred deemed dividend     735       —       800   Less: Retained earnings reduction related to warrants down round feature triggered     —       —       29   Net loss attributable to common stockholders, basic and diluted   $ ( 6,559 )   $ ( 11,039 )   $ ( 10,487 )                           Denominator                         Weighted average shares outstanding, basic and diluted     43,657       35,076       21,641   Net loss per share, basic and diluted   $ ( 0.15 )   $ ( 0.31 )   $ ( 0.48 )   The following outstanding stock options and stock warrants were excluded from the diluted EPS computation as their effect would have been anti-dilutive (in thousands):       Year Ended December 31,       2021     2020     2019   Stock options   4,449       3,165       2,183   Stock warrants     7,082       7,067       8,588         11,531       10,232       10,771     Recent Accounting Pronouncements   In August 2018, the FASB issued ASU 2018 - 13,   Fair Value Measurement (Topic 820 ): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018 - 13” ). ASU 2018 - 13 improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements. The Company adopted the new standard effective January 1, 2020, and the adoption of this guidance did not have a material impact on our consolidated financial statements.   In June 2016, the FASB issued ASU 2016 - 13, Financial Instruments — Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments (“ASU 2016 - 13” ). The amendments in ASU 2016 - 13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. ASU 2016 - 13 is effective for the Company for annual and interim reporting periods beginning  January 1, 2023. The Company will adopt the new standard effective January 1, 2023.  We are currently evaluating the impact of the new guidance on our consolidated financial statements.   In December 2019, the FASB issued ASU 2019 - 12,   Income Taxes   (Topic 740 ):   Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes. The Company adopted the new standard effective January 1, 2021, and the adoption of this guidance did not have a material impact on our consolidated financial statements.   In August 2020, FASB issued ASU 2020 - 06,   Debt — Debt with Conversion and Other Options (Subtopic 470 - 20 ) and Derivatives and Hedging — Contracts in Entity ’ s Own Equity (Subtopic 815 - 40 ): Accounting for Convertible Instruments and Contracts in an Entity ’ s Own Equity (“ASU 2020 - 06” ) . ASU 2020 - 06 simplifies the accounting for convertible instruments by removing the separation models for ( 1 ) convertible debt with a cash conversion feature and ( 2 ) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. ASU 2020 - 06 also requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. ASU 2020 - 06 is effective for the Company in our first quarter of fiscal 2022. The Company adopted the new standard effective January 1, 2022, and the adoption of this guidance is not expected to have a material impact on our consolidated financial statements.   44 Table of Contents     NOTE 3. BUSINESS COMBINATION   On November 5, 2021, the Company completed the DERMAdoctor Acquisition. Pursuant to the Acquisition Purchase Agreement, NovaBay acquired 100% of the membership units of DERMAdoctor from the Sellers for a closing purchase price of $ 12.0 million and potential future earn out payments of up to an aggregate of $ 3.0 million over a period of two calendar years post-closing. The following pro forma financial information is based on the historical financial statements of the Company and presents the Company’s results as if the business combination had occurred as of January 1, 2020 ( in thousands):       Unaudited Pro Forma       Year Ended December 31,       2021     2020   Revenue   $ 12,767     $ 18,170   Net Profit (Loss)   $ ( 4,918 )   $ ( 11,647 )   The pro forma financial information is not indicative of the results of operations that the Company would have attained had the business combination occurred as of January 1, 2020, nor is the pro forma financial information indicative of the results of operations that may occur in the future. The unaudited pro forma information includes adjustments to reflect the $ 1.2 million of transaction costs as if they were incurred in the year ended December 31, 2020.   The Company funded the closing purchase price in part through the 2021 Private Placement (See Note 14, “Stockholders’ Equity”).   The Acquisition is accounted for as a business combination in accordance to ASC 805, Business Combinations , which requires that the assets acquired and liabilities assumed be recognized at their estimated fair values as of the Acquisition Closing. Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination.   The following table sets forth the final allocation of the purchase price for the DERMAdoctor Acquisition to the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed from DERMAdoctor (in thousands):       Fair Value   Tangible net assets and liabilities:         Cash and cash equivalents   $ 12   Accounts receivable, net of allowance for doubtful accounts     1,015   Inventory, net of allowance     2,369   Prepaid expenses and other current assets     150   Property and equipment, net     62   Other intangible assets     54   Accounts payable     ( 200 ) Accrued liabilities     ( 683 ) Total net assets     2,779   Intangible Assets:         Customer relationships     290   Trade secrets / product formulations     2,890   Trade names     2,080   Total intangible assets     5,260   Net assets acquired     8,039   Purchased consideration     12,561   Goodwill   $ 4,528     Goodwill is primarily attributable to assembled workforce, expected synergies and other factors.   The fair values of the identifiable intangible assets acquired at the date of the DERMAdoctor Acquisition are as follows (in thousands):   Intangible Asset   Fair Value     Useful Life (in years)     Amortization Method   Customer relationships   $ 290       7     Straight line   Trade secrets / product formulations     2,890       9     Straight line   Trade names     2,080     Indefinite       N/A   Goodwill     4,528     Indefinite       N/A       $ 9,788                     45 Table of Contents   The valuations of intangible assets incorporate significant unobservable inputs and require significant judgment and estimates, including the amount and timing of future cash flows.   The Company recognized approximately $ 1.2 million of transaction costs in the year ended December 31, 2021. These costs are recorded in “General and administrative expense” in the consolidated statements of operations and comprehensive loss.   The Company’s management reviews financial results and manages the business on an aggregate basis in accordance with ASC 280. Therefore, financial results are reported in two operating segments: ( 1 ) Optical & Wound Care and ( 2 ) Skincare (See Note 21, “Segment Reporting” below).     NOTE 4. FAIR VALUE MEASUREMENTS     The Company follows ASC 820, Fair Value Measurements and Disclosures , with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under this standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.    The Company’s cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of investments that are generally classified within Level 1 of the fair value hierarchy include money market securities and certificates of deposit.   As of December 31, 2021, the 2021 Warrants are classified within Level 3 of the fair value hierarchy as liabilities (see Note 13, “Warrant Liability” and Note 14, “Stockholders’ Equity”).   As of December 31, 2020, there were no warrants outstanding that were classified as liabilities. The Company’s outstanding warrants on December 31, 2020 consisted of the 2019 Domestic Warrants, 2019 Foreign Warrants and the 2019 Ladenburg Warrants, all of which were classified as equity. The 2019 Domestic Warrants and the 2019 Foreign Warrants were amended and exercised in July 2020 ( see Note 14, “Stockholders’ Equity”), resulting in a decrease of $ 9.1 million in warrant liability. The 2019 Ladenburg Warrants were also amended in July 2020 ( see Note 14, “Stockholders’ Equity”), resulting in a decrease of $ 0.2 million in warrant liability.   The embedded derivative liability related to the Convertible Note (as defined below) was fully settled in September 2020. See Note 12, “Convertible Note” for further discussion of the settlement of the Convertible Note and embedded derivative liability during the third quarter of 2020.   The following table presents the Company's assets measured at fair value on a recurring basis as of December 31, 2021 ( in thousands):               Fair Value Measurements Using       Balance at     Quoted Prices in     Significant     Significant       December 31,     Active Markets     Other     Unobservable       2021     for Identical     Observable     Inputs               Items     Inputs     (Level 3)               (Level 1)     (Level 2)           Assets                                 Restricted cash held as a certificate of deposit   $ 324     $ 324     $ —     $ —   Deposit held as a certificate of deposit     151       151       —       —   Total assets   $ 475     $ 475     $ —     $ —                                     Liabilities                                 Warrant liability   $ 9,558       —       —     $ 9,558   Contingent earnout liability     561       —       —       561   Total liabilities   $ 10,119     $ —     $ —     $ 10,119     46 Table of Contents   The following table presents the Company's assets measured at fair value on a recurring basis as of December 31, 2020 ( in thousands):               Fair Value Measurements Using       Balance at     Quoted Prices in     Significant     Significant       December 31,     Active Markets     Other     Unobservable       2020     for Identical     Observable     Inputs               Items     Inputs     (Level 3)               (Level 1)     (Level 2)           Assets                                 Restricted cash held as a certificate of deposit   $ 324     $ 324     $ —     $ —   Deposit held as a certificate of deposit     151       151       —       —   Total assets   $ 475     $ 475     $ —     $ —     There were no liabilities measured at fair value on a recurring basis as of December 31, 2020.   The following is a reconciliation of the beginning and ending balances for the liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) during the year ended December 31, 2021 ( in thousands):   Fair value of warrant liability at December 31, 2020   $ —   Fair value of 2021 Warrants issued     14,172   Decrease in fair value of 2021 Warrants     ( 4,614 ) Fair value of warrant liability at December 31, 2021   $ 9,558     The following is a reconciliation of the beginning and ending balances for the liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) during the year ended December 31, 2020 ( in thousands):   Fair value of warrant liability and embedded derivative liability at December 31, 2019   $ 4,092   Increase in fair value of warrant liability     5,238   Decrease in fair value of embedded derivative liability     ( 2 ) Decrease in fair value related to warrants expired     ( 22 ) Fair value of warrant liability transferred to equity upon exercise     ( 9,108 ) Fair value of 2019 Ladenburg Warrant liability transferred to equity upon warrant modification     ( 197 ) Elimination of embedded derivative liability upon settlement of convertible note     ( 1 ) Fair value of warrant liability and embedded derivative liability at December 31, 2020   $ —         NOTE 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS   Prepaid expenses and other current assets consisted of the following (in thousands):       December 31,     December 31,       2021     2020   Prepaid inventory   $ 368     $ —   Prepaid insurance     138       165   Prepaid consulting services     68       —   Prepaid sales rebates     19       144   Prepaid security deposit for lease     —       65   Prepaid dues and subscription     18       53   Prepaid rent     14       —   Prepaid patents     9       47   Other     144       102   Total prepaid expenses and other current assets   $ 778     $ 576     47 Table of Contents     NOTE 6. INVENTORY   Inventory consisted of the following (in thousands):       December 31,     December 31,       2021     2020   Raw materials and supplies   $ 1,179     $ 159   Finished goods     2,682       685   Less: Reserve for excess and obsolete inventory     ( 641 )     ( 236 ) Total inventory, net   $ 3,220     $ 608         NOTE 7. PROPERTY AND EQUIPMENT     Property and equipment consisted of the following (in thousands):       December 31,     December 31,       2021     2020   Office and laboratory equipment   $ 20     $ 20   Furniture and fixtures     157       157   Computer equipment and software     464       365   Production equipment     114       65   Leasehold improvements     79       79   Total property and equipment, at cost     834       686   Less: accumulated depreciation and amortization     ( 641 )     ( 602 ) Total property and equipment, net   $ 193     $ 84     Depreciation and amortization expense was $ 59 thousand, $ 51 thousand, and $ 65 thousand for the years ended December 31, 2021, 2020 and 2019, respectively.   During the years ended December 31, 2021 and 2020, the Company disposed of damaged, unusable and fully depreciated property and equipment with cost of approximately $ 12 thousand and $ 10 thousand, respectively. As a result, the Company recognized an immaterial loss on the disposal of these assets in the consolidated statements of operation and comprehensive loss for such periods.   48 Table of Contents     NOTE 8. ACCRUED LIABILITIES     Accrued liabilities consisted of the following (in thousands):       December 31,     December 31,       2021     2020   Contract liabilities (see Note 16)   $ 1,289     $ 730   Employee payroll and benefits     443       632   Sublease security deposit     —       198   Inventory purchases     —       181   Consulting service     —       98   Other     360       276   Total accrued liabilities   $ 2,092     $ 2,115         NOTE 9. LINE OF CREDIT   At the time of the DERMAdoctor Acquisition, DERMAdoctor had a line of credit agreement with Bank Midwest for $ 500 thousand. There was no balance outstanding on the line of credit at the time of Acquisition Closing. The agreement was terminated and repaid in full subsequent to December 31, 2021 on January 6, 2022. The line had an interest rate equal to the Wall Street Journal Prime Rate plus 1.50 % with a floor of 5.00 % on December 31, 2021. All borrowings were collateralized by substantially all assets of DERMAdoctor. As of December 31, 2021, the Company had $ 105 thousand outstanding on the line of credit.     NOTE 10. COMMITMENTS AND CONTINGENCIES     Indemnification   Agreements   As permitted under Delaware law and in accordance with its bylaws, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and may enable it to recover a portion of any future payments. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, it has not recorded any liabilities for these agreements as of December 31, 2021.    In the normal course of business, the Company provides indemnification of varying scope under its agreements with other companies, typically its clinical research organizations, investigators, clinical sites, suppliers, and others. Pursuant to these agreements, it generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with the use or testing of its products or product candidates or with any U.S. patent or any copyright or other intellectual property infringement claims by any third party with respect to its products. The term of these indemnification agreements is generally perpetual. The potential future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, costs related to these indemnification provisions have been immaterial. The Company also maintains various liability insurance policies that limit its exposure. As a result, it believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of December 31, 2021.    Legal Matters   As of December 31, 2021, there were no other matters that, in the opinion of management, would ultimately result in liability that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.   Leases   The Company leases office space for its corporate headquarters located in Emeryville, California. The initial lease term is through February 28, 2022. The Company has the option to extend the term of the lease for one five ( 5 )-year period upon written notice to the landlord. Subsequent to December 31, 2021, on January 19, 2022, the Company amended the lease to extend the term through July 31, 2027 ( see Note 22, “Subsequent Events”).   We are also party to a lease for 19,136 square feet of space located in Riverside, Missouri, which we utilize for light manufacturing, storage, distribution of products and administrative functions. The lease commenced on October 1, 2019 and expires on December 31, 2024.   The Company also had a lease commitment for laboratory facilities and office space at EmeryStation North in Emeryville, California (“EmeryStation”) under an operating lease. In July 2016, the Company subleased the EmeryStation space (the “Sublease Agreement”). The Sublease Agreement commenced September 8, 2016. The EmeryStation lease and Sublease Agreement were terminated as of August 31, 2020 pursuant to a sublease termination agreement executed on July 31, 2020. In conjunction with the termination, the Company recognized a gain of $ 54 thousand which is recorded within the operating expenses in the Company’s consolidated statements of operations and comprehensive loss for the year ended December 31, 2020.   49 Table of Contents   In calculating the present value of the lease payments, the Company has elected to utilize its incremental borrowing rate based on the original lease term and not the remaining lease term. The Company has elected to account for each lease component and its associated non-lease components as a single lease component and has allocated all of the contract consideration across lease components only. This will potentially result in the initial and subsequent measurement of the balances of the right-of-use assets and lease liability for leases being greater than if the policy election was not applied. The leases include variable components (e.g. common area maintenance) that are paid separately from the monthly base payment based on actual costs incurred and therefore were not included in the right-of-use assets and lease liability, but are reflected as an expense in the period incurred.   The components of net lease costs for the years ended  December 31, 2021 and 2020  are as follows (in thousands):   Lease Costs   Year Ended December 31,       2021     2020   Operating lease cost   $ 418     $ 826   Sublease income     —       ( 421 ) Net lease cost   $ 418     $ 405                     Other information                 Operational cash flow used for operating leases   $ 475     $ 927     The Company has measured its operating lease liabilities at its incremental borrowing rate over the remaining term for each operating lease. The weighted average remaining lease term and the weighted average discount rate are summarized as follows:       Year Ended December 31,       2021     2020   Weighted-average remaining lease term (in years)     2.5       1.2   Weighted-average discount rate     6 %     12 %   Future lease payments under non-cancelable leases as of December 31, 2021 were as follows (in thousands):   2022   $ 216   2023     129   2024     130   Thereafter     —   Total future minimum lease payments     475   Less imputed interest     ( 29 ) Total   $ 446             Reported as:         Operating lease liability   $ 200   Operating lease liability- non-current     246   Total   $ 446     50 Table of Contents   Contracts   On May 13, 2020, the Company entered into an agreement with TLF Bio Innovation Lab LLC (“TLF Bio Innovation”) to manage the relaunch of the Company’s CelleRx product (the “TLF Agreement”) which was further amended on September 4, 2020 and subsequently terminated on February 4, 2021. Under the agreement, the Company paid TLF Bio Innovation a monthly cash fee. Additionally, upon the successful completion of certain milestones, TLF Bio Innovation was eligible to receive warrants exercisable for up to 2 million shares of the Company’s common stock with an exercise price equal to the average closing price of the Company’s common stock for the last calendar month immediately prior to the date on which an individual milestone was achieved. TLF Bio Innovation was issued 15,000 warrants under the agreement on January 22, 2021.   On April 16, 2020, the Company entered into an international distribution agreement with Shenzhen Microprofit Biotech Co., LTD (“Microprofit”) (the “Microprofit Agreement”). In accordance with the Microprofit Agreement, the Company assisted Microprofit in applying for approval of Microprofit’s SARS-CoV- 2 IgG and IgM Antibody Combined Test Kit (“Test Kits”) by the FDA. Under the terms of the Microprofit Agreement, if such approvals were granted, the Company would issue warrants to certain Microprofit officers exercisable for an aggregate number of shares of the Company’s common stock equivalent to 12 % of the Company’s outstanding common stock on the date of approval. If FDA approval was received, the Microprofit Agreement granted the Company exclusive rights to distribute the Test Kits in the United States through December 31, 2021. On December 31, 2020, the Microprofit Agreement expired with no warrants being issued.   In connection with the Microprofit Agreement, on April 16, 2020, the Company entered into an intermediary distribution agreement with Chongqing Pioneer Pharma Holdings Limited (“Chongqing Pioneer”), a related party, which was subsequently amended on June 29, 2020. The amended agreement provided that the Company would purchase all Test Kits from Chongqing Pioneer as an intermediary. This agreement also expired on December 31, 2021.        NOTE 11. RELATED PARTY NOTE   PAYABLE   On February 27, 2019, the Company issued a $ 1.0 million promissory note payable to Pioneer Pharma (Hong Kong) Company Ltd. (“Pioneer Pharma”), which was amended on June 25, 2019 and May 14, 2020 ( the “Promissory Note”). The Promissory Note provided for an interest payment of $ 0.2 million which was initially amended to a payment of $ 0.3 million and subsequently amended to the delivery of 65,178 units of NeutroPhase ( 40ml ) to Pioneer Pharma. The second amendment to the Promissory Note also provided the Company with the right to repay the note at any time. On May 14, 2020, the Company repaid the $ 1.0 million principal balance of the Promissory Note using proceeds raised through the at-the-market offering and equity program (“ATM Program”) (see Note 14, “Stockholders’ Equity”). The Company settled the accrued interest through two separate shipments of NeutroPhase in 2020. Upon full repayment of principal and interest during the year ended December 31, 2020, the Company was released from the Promissory Note with Pioneer Pharma.   In connection with the Promissory Note, the Company paid China Kington a 2 % fee for brokering the transaction and entered into a consulting agreement with China Kington for a term of one year, which expired on March 1, 2020. Bob Wu, acting in a dual role as a member of the Company’s Board of Directors and as principal of China Kington, was paid $ 0.1 million pursuant to such consulting agreement. Upon the expiration of the original consulting agreement, the parties entered into a new consulting agreement, in which no cash compensation will be paid. Debt issuance costs associated with the issuance of the Promissory Note of $ 20 thousand was recognized and recorded as an offset to the related party note payable in the consolidated balance sheets.   The interest expense recognized, including amortization of the issuance costs, was $ 75 thousand during the year ended December 31, 2020. There was no comparable expense for the year ended December 31, 2021.        NOTE 12. CONVERTIBLE NOTE   On March 26, 2019, the Company entered into a Securities Purchase Agreement with Iliad Research and Trading, L.P. (the “Lender”), pursuant to which the Company issued a Secured Convertible Promissory Note (the “Convertible Note”) to the Lender dated as of March 26, 2019. The Convertible Note had an original principal amount of $ 2.2 million, beared interest at a rate of 10 % per annum and matured on September 26, 2020, unless earlier paid, redeemed or converted in accordance with its terms. The Company received net proceeds of $ 2.0 million after deducting an original issue discount of $ 0.2 million and debt issuance cost of Lender’s transaction fees of $ 15 thousand. The Company recognized an additional $ 0.2 million of debt issuance costs associated with the issuance of the Convertible Note. The Convertible Note was repaid in full during the third quarter of 2020. Upon full repayment, the Company was released from the Convertible Note.   51 Table of Contents   During the year ended December 31, 2020, the effective interest rate on the Convertible Note was 20 %. Interest expense recognized, including amortization of the issuance costs and debt discount, was $ 0.2 million during the year ended December 31, 2020.        NOTE 13. WARRANT LIABILITY   July 2011 Warrants   The Company issued the July 2011 Warrants (as defined in Note 14, “Stockholders’ Equity”) in the third quarter of 2011. The terms of the July 2011 Warrants required registered shares to be delivered upon warrant exercise and potential cash-settlement in the event of a specified fundamental transaction. Under ASC 480, Distinguishing Liabilities from Equity , the warrants were classified as liabilities because the Company’s potential obligation to deliver registered shares and cash-settle the warrants were deemed to be beyond the Company’s control. The fair value of outstanding July 2011 Warrants was determined at each reporting date using a Lattice model with changes in fair value recorded in the consolidated statements of operations and comprehensive loss.   On March 6, 2020, the remaining 35,107 July 2011 Warrants expired unexercised. There were no July 2011 Warrants outstanding as of December 31, 2020 or December 31, 2021.   October 2015 Warrants   The Company issued the October 2015 Warrants (as defined in Note 14, “Stockholders’ Equity”) in the third quarter of 2015. The terms of the October 2015 Warrants required potential cash-settlement in the event of a specified fundamental transaction. Under ASC 480, Distinguishing Liabilities from Equity , the warrants were classified as liabilities because the Company’s potential obligation to cash-settle the warrants was deemed to be beyond the Company’s control. The fair value of outstanding October 2015 Warrants was determined at each reporting date using a Lattice model with changes in fair value recorded in the consolidated statements of operations and comprehensive loss.   During the fourth quarter of 2020, a total of 22,680 October 2015 Warrants were exercised, resulting in gross proceeds of $ 5 thousand. The liability associated with these warrants was adjusted to fair value of $ 12 thousand as of the date of exercise, with the change in fair value recorded in the consolidated statements of operations and comprehensive loss. The fair value was then transferred to equity.   On October 27, 2020, 15,320 October 2015 Warrants expired unexercised. There were no October 2015 Warrants outstanding as of December 31, 2020 or December 31, 2021.   2019 Domestic, Foreign & Ladenburg Warrants   As further described in Note 14, “Stockholders’ Equity”, the Company issued the 2019 Domestic Warrants, the 2019 Foreign Warrants and the 2019 Ladenburg Warrants in the third quarter of 2019. The terms of the 2019 Domestic Warrants, 2019 Foreign Warrants and 2019 Ladenburg Warrants all required potential cash-settlement in the event of a specified fundamental transaction. Under ASC 480, Distinguishing Liabilities from Equity , the warrants were classified as liabilities because the Company’s potential obligation to cash-settle the warrants was deemed to be beyond the Company’s control. The fair value of outstanding warrants was determined at each reporting date using a Black-Scholes option pricing model with the changes in fair value recorded in the consolidated statements of operations and comprehensive loss.   Upon issuance in the third quarter of 2019, the fair value of the 2019 Domestic Warrants, 2019 Foreign Warrants and 2019 Ladenburg Warrants was determined to be $ 3.1 million, $ 2.0 million and $ 0.1 million, respectively.   52 Table of Contents   In the third quarter of 2020, as further described in Note 14, “Stockholders’ Equity”, the 2019 Domestic Warrants and 2019 Foreign Warrants were exercised at reduced exercise prices. The warrant liabilities associated with these warrants was adjusted to their fair values as of the date of exercise, with the change in fair values recorded in the consolidated statements of operations and comprehensive loss. The fair values were then transferred to equity. As of the date of exercise, the fair value of the 2019 Domestic Warrants and 2019 Foreign Warrants was determined to be $ 4.9 million and $ 4.2 million, respectively, in accordance with the following key assumptions:   Assumptions   2019 Domestic Warrants     2019 Foreign Warrants   Expected price volatility     178 %     178 % Expected term (in years)     4.57       4.57   Risk-free interest rate     0.25 %     0.27 % Dividend yield     0.00 %     0.00 % Weighted-average fair value of warrant   $ 1.18     $ 1.54     There were no 2019 Domestic Warrants or 2019 Foreign Warrants outstanding as of December 31, 2020 or December 31, 2021.   In the third quarter of 2020, as further described in Note 14, “Stockholders’ Equity”, the Company amended the 2019 Ladenburg Warrants. The Company’s potential obligation to cash-settle the warrants if a specified fundamental transaction occurred was amended to apply only in situations within the Company’s control. Pursuant to this change, the 2019 Ladenburg Warrants were no longer classified as liabilities. The warrant liability associated with these warrants was adjusted to fair value as of the date of the amendment, with the change in fair value recorded in the consolidated statements of operations and comprehensive loss. The fair value was then transferred to equity. The fair value of the 2019 Ladenburg Warrants was determined to be $ 0.2 million on the date of amendment in accordance with the following key assumptions:   Expected price volatility     186 % Expected term (in years)     4.05   Risk-free interest rate     0.22 % Dividend yield     0.00 % Weighted-average fair value of warrants   $ 1.17     The 2019 Ladenburg Warrants will no longer be adjusted to fair value in reporting periods after the amendment. All 2019 Ladenburg Warrants remained outstanding as of December 31, 2021.   November 2021 Warrants   As further described in Note 14, “Stockholders’ Equity”, the Company issued the 2021 Warrants in the fourth quarter of 2021. The terms of the 2021 Warrants required that the Company obtain shareholder approval for an increase in authorized shares before they became exercisable. Under ASC 480, Distinguishing Liabilities from Equity , the 2021 Warrants were classified as liabilities as of December 31, 2021 and until the 2021 Warrants became exercisable. The 2021 Warrants became exercisable subsequent to December 31, 2021, on January 31, 2022. The fair value was then transferred to equity.   Upon issuance, the fair value of the 2021 Warrants was determined to be $ 14.2 million in accordance with the following key assumptions as of November 2, 2021:   Expected price volatility     84.9 % Expected term (in years)     6.2   Risk-free interest rate     1.29 % Dividend yield     0.00 % Weighted-average fair value of warrants   $ 0.38     As of December 31, 2021, the fair value of the 2021 Warrants was determined to be $ 9.6 million in accordance with the following key assumptions:   Expected price volatility     87 % Expected term (in years)     6.0   Risk-free interest rate     1.31 % Dividend yield     0.00 % Weighted-average fair value of warrants   $ 0.25     53 Table of Contents     NOTE 14. STOCKHOLDERS' EQUITY   Preferred Stock   The Company is authorized to issue up to 5,000,000 shares of preferred stock with rights and preferences as may be approved by its Board of Directors under its Amended and Restated Certificate of Incorporation.   On October 29, 2021, the Company entered into a securities purchase agreement with various institutional investors to sell in a private placement offering (the “2021 Private Placement”) (i) an aggregate of 15,000 shares of our newly-created Series B Non-Voting Preferred Stock (the “Preferred Stock”) convertible into an aggregate of 37,500,000 shares of Common Stock, and (ii) warrants (the “2021 Warrants”) exercisable for 37,500,000 shares of Common Stock for net proceeds of $ 14.9 million. The 2021 Private Placement closed on November 2, 2021.   The 2021 Warrants are exercisable into 37,500,000 Warrant Shares at an exercise price of $ 0.53 per share, subject to adjustment. The Warrants were not immediately exercisable upon issuance. In order for the Warrants to become exercisable, the Company was required to hold a stockholder meeting to (i) obtain stockholder approval, in accordance with the NYSE American LLC Company Guide (the “Company Guide”) Section 713 (a) and (b), for the issuance of the 37,500,000 shares of Common Stock upon the exercise of all of the Warrants, as well as the issuance of the 37,500,000 Conversion Shares upon conversion of the Preferred Stock (the “Share Issuance Proposal”) and (ii) obtain stockholder approval of an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from 100,000,000 shares to 150,000,000 shares (the “Authorized Share Increase Proposal”). The Company held a special meeting of stockholders on December 17, 2021 ( the “Special Meeting”) at which the Share Issuance Approval was approved by stockholders and, at a subsequent adjournment of the Special Meeting on January 31, 2022, the stockholders approved the Authorized Share Increase Proposal. As a result of these approvals having been given by the stockholders at the Special Meeting, the Warrants became exercisable subsequent to December 31, 2021 and will continue to be exercisable for a period of six ( 6 ) years thereafter.   Each share of the Preferred Stock that we issued in the Private Placement had a purchase price of $ 1,000 per share and is initially convertible at a conversion price of $ 0.40 into 2,500 shares of Common Stock, or an aggregate of 37,500,000 shares of Common Stock. The conversion by the holders of the Preferred Stock was initially subject to approval of the Share Issuance Proposal. Until the Share Issuance Proposal was approved by stockholders at the Special Meeting, the holders of the Preferred Stock were limited in converting their shares to an aggregate of 19.99 % of the outstanding shares of Common Stock immediately prior to the closing of the 2021 Private Placement, or 8,984,178 shares of Common Stock. As a result of the Company’s stockholders approving the Share Issuance Proposal at the Special Meeting, this limitation upon conversion of Preferred Stock was no longer applicable to the holders as of December 31, 2021. The Preferred Stock does not have any preemptive rights or a preference upon any liquidation, dissolution or winding-up of NovaBay. The Preferred Stock does, however, have anti-dilution protection in the event that we sell or grant any Common Stock or any other securities of our Company, subject to certain limited exceptions, that would entitle the holder thereof to acquire Common Stock at an effective price per share that is lower than the then applicable conversion price of the Preferred Stock.   The Company allocated the net proceeds between the Preferred Stock and the 2021 Warrants by applying the residual fair value methodology. The Company first allocated $ 14.2 million to the 2021 Warrants, with the residual amount allocated to the Preferred Stock. See Note 13, “Warrant Liability” for further discussion of the key assumptions used to value the 2021 Warrants.   In connection with the issuance of the Preferred Stock, the Company recorded a beneficial conversion feature of $ 0.7 million as a discount to Preferred Stock and an increase to additional paid in capital. The Company fully amortized the discount related to the beneficial conversion feature on the deemed dividend in the consolidated statements of operations and comprehensive loss upon approval of the Share Issuance Proposal in the fourth quarter of 2021.   The Company incurred total issuance costs of $ 1.7 million in conjunction with the 2021 Private placement. The Company allocated $ 1.6 million of the issuance costs to the warrant liability which was expensed in the Company’s consolidated statements of operations and comprehensive loss during the year ended December 31, 2021. The remaining $ 0.1 million was recorded as a reduction of Preferred Stock in the Company’s consolidated balance sheets.   There were 14 thousand shares of the Preferred Stock outstanding as of December 31, 2021.   Common Stock   April 2020 At the Market Offering   In the second quarter of 2020, the Company established the 2020 ATM Program with Ladenburg Thalmann & Co. Inc. (“Ladenburg”). For additional information regarding the offering and equity program, see the Company’s Current Reports on Form 8 -K filed with the SEC on April 27, 2020 and September 15, 2020. During the second quarter of 2020, 5,836,792 shares of common stock were issued under the  2020 ATM Program for total net proceeds of $ 5.6 million, net of offering costs of $ 0.4 million.   May 2021 At the Market Offering   In the second quarter of 2021, the Company established the 2021 ATM Program with Ladenburg. For additional information regarding the offering and equity program, see the Company’s Current Report on Form 8 -K filed with the SEC on May 14, 2021. During the second quarter of 2021, 2,672,000 shares of common stock were issued under the  2021 ATM Program for total net proceeds of $ 1.8 million, net of offering costs of $ 0.1 million.   Common Stock Warrants   July 2011 Warrants   In the third quarter of 2011, the Company issued 139,520 common stock purchase warrants exercisable for 139,520 shares of common stock in connection with a registered direct financing (the “July 2011 Warrants”). The July 2011 Warrants were issued with an exercise price of $ 33.25 and an expiration date of July 5, 2016. In October 2015, in connection with a separate financing event, the exercise price of outstanding July 2011 Warrants was reduced to $ 5.00 per share and the expiration date extended to March 6, 2020. In February 2016 and May 2019, the exercise price of outstanding July 2011 Warrants was reduced to $ 1.81 and $ 0.2061 per share, respectively, pursuant to price protection provisions of the warrants.   54 Table of Contents   In March 2020, a total of 35,107 July 2011 Warrants expired unexercised. As of December 31, 2021, there were no July 2011 Warrants outstanding.   March 2015 Warrants   In the first quarter of 2015, the Company issued 649,133 common stock purchase warrants exercisable for 649,133 shares of common stock in connection with a private placement offering (the “March 2015 Warrants”). The exercise price of individual March 2015 Warrants varied between $ 15.00 and $ 16.25 per share at the time of issuance. The Company issued 278,200 of the March 2015 Warrants with an expiration date of March 6, 2020 and the remaining 370,933 March 2015 Warrants with an expiration date of September 6, 2015. In October 2015, in connection with a separate financing event, the exercise price of all outstanding March 2015 Warrants was reduced to $ 5.00 per share and the expiration date of all outstanding warrants expiring on September 6, 2015 was extended to March 6, 2020. In February 2016 and May 2019, the exercise price of all outstanding July 2011 Warrants was reduced to $ 1.81 and $ 0.2061 per share, respectively, pursuant to price protection provisions of the warrants.   During the first quarter of 2020, a total of 70,000 March 2015 Warrants were exercised, resulting in gross proceeds of $ 14 thousand. Also in the first quarter of 2020, all remaining 7,419 March 2015 Warrants expired unexercised. As of December 31, 2021, there were no March 2015 Warrants outstanding.   October 2015 Warrants   In the fourth quarter of 2015, the Company issued 442,802 common stock purchase warrants exercisable for 442,802 shares of common stock in connection with a public offering (the “October 2015 Warrants”). The warrants were issued with an exercise price of $ 5.00 and an expiration date of October 27, 2020. In February 2016 and May 2019, the exercise price of outstanding October 2015 Warrants was reduced to $ 1.81 and $ 0.2061 per share, respectively, pursuant to price protection provisions of the warrants. Also during the fourth  quarter of 2020, a total of 22,680 October 2015 Warrants were exercised, resulting in gross proceeds of $ 5 thousand.   During the fourth  quarter of 2020, all remaining 15,320 October 2015 Warrants expired unexercised. As of December 31, 2021, there were no October 2015 Warrants outstanding.   June 2019 Private Placement and June 2019 Warrants   During the second quarter of 2019, the Company entered into a private placement agreement to sell 1,371,427 shares of common stock and 1,371,427 common stock purchase warrants exercisable for 1,371,427 shares of common stock (the “June 2019 Warrants”) for an aggregate subscription price of $ 2.4 million. Three accredited investors, Messrs. Xiao Rui Liu, Hai Dong Pang and Ping Huang, subscribed to the private placement for $ 1.0 million, $ 0.4 million and $ 1.0 million, respectively. China Kington served as placement agent in exchange for a commission equal to six percent ( 6 %) of the gross proceeds, totaling $ 0.1 million. The Company also paid other offering costs of $ 27 thousand.   The June 2019 Warrants were issued with an exercise price of $ 0.87 and an expiration date of June 17, 2020. The June 2019 Warrants were callable by the Company if the closing price of the Company’s common stock, as reported on the NYSE American, was $ 1.00 or greater.   During the first quarter of 2020, a total of 228,571 June 2019 Warrants were exercised, resulting in gross proceeds of $ 199 thousand. The Company paid China Kington a fee of $ 12 thousand, or six percent ( 6 %) of the gross proceeds, for brokering the exercise transaction.   During the second quarter of 2020, a total of 571,428 June 2019 Warrants were exercised, resulting in gross proceeds of $ 497 thousand. The Company paid China Kington a fee of $ 29 thousand, or six percent ( 6 %) of the gross proceeds, for brokering the exercise transaction. Also during the second quarter of 2020, all remaining 571,428 June 2019 Warrants expired unexercised. As of December 31, 2021, there were no June 2019 Warrants outstanding.   55 Table of Contents   2019 Domestic Warrants, 2019 Ladenburg Warrants, 2019 Foreign Warrants, 2019 Ladenburg Warrants and July 2020 Warrants   In the third quarter of 2019, the Company entered into a purchase agreement (the “2019 Purchase Agreement”) for the sale of (i) 4,198,566 shares of common stock and (ii) 4,198,566 common stock purchase warrants exercisable for 4,198,566 shares of common stock (the “2019 Domestic Warrants”) for gross proceeds of $ 4.2 million. The 2019 Domestic Warrants were issued with an exercise price of $ 1.15 and an expiration date of February 13, 2025.   The Company allocated the proceeds between the common stock and 2019 Domestic Warrants by applying the relative fair value allocation methodology. The Company first allocated $ 3.1 million to the 2019 Domestic Warrants, with the residual amount allocated to the common stock. See Note 13, “Warrant Liability” for further discussion of the key assumptions used to value the 2019 Domestic Warrants.   Ladenburg served as the placement agent for the transaction in exchange for a commission representing six percent ( 6 %) of the gross proceeds, totaling $ 0.3 million, and 167,942 common stock purchase warrants exercisable for 167,942 shares of common stock with an exercise price of $ 1.25 per share and an expiration date of August 8, 2024 ( the “2019 Ladenburg Warrants”). In addition, the Company reimbursed the Placement Agent $ 60 thousand for certain expenses. The Company also incurred and paid other offering costs of $ 0.3 million.   The Company incurred total issuance costs of $ 0.5 million in conjunction with the 2019 Purchase Agreement. The Company allocated $ 0.2 million of the issuance costs to the warrant liability which was expensed in the Company’s consolidated statements of operations and comprehensive loss during the period. The remaining $ 0.3 million was recorded as a reduction of additional paid-in capital in the Company’s consolidated balance sheets. As the 2019 Ladenburg Warrants were accounted for as a stock issuance cost, $ 59 thousand was allocated to the warrant liability and expensed during the period and $ 65 thousand was recorded as a reduction to additional paid-in capital in the Company’s consolidated balance sheets. See Note 12, “Warrant Liability” for a discussion of the key assumptions used to value the 2019 Ladenburg Warrants.   During the third quarter of 2020, the Company and the holders of the 2019 Domestic Warrants and the 2019 Foreign Warrants entered into exercise agreements which resulted in the cash exercise of the warrants at a reduced exercise price of $ 0.99 . The Company received aggregate gross proceeds of approximately $ 6.8 million from the exercises. The Company incurred and paid other offering costs of $ 0.2 million. The Company also incurred and paid a $ 0.2 million fee to China Kington for brokering the transaction, which equaled six percent ( 6 %) of the gross proceeds from the 2019 Foreign Warrants.   During the third quarter of 2020, the Company and all holders of the 2019 Domestic Warrants and 2019 Foreign Warrants entered into warrant repricing letter agreements. Pursuant to the agreement, in consideration for the exercise in full of the 2019 Domestic Warrants and 2019 Foreign Warrants, the Company agreed to: ( 1 ) reduce the exercise price of the 2019 Domestic Warrants and the 2019 Foreign Warrants to $ 0.99  per share prior to exercise, and ( 2 ) in a private placement, issue new common stock purchase warrants (the “July 2020 Warrants”) to purchase up to a number of shares of common stock, equal to 100% of the number of 2019 Domestic Warrants and 2019 Foreign Warrants currently held by such holders upon the holders exercising their warrants.   The July 2020 Warrants became exercisable nine months after their issuance, for an aggregate of 6,898,566 shares of common stock. The July 2020 Warrants have an exercise price of $ 1.65 per share and will expire five and a half years after their issuance. The Company determined that the common stock issued from the exercise of the 2019 Domestic and 2019 Foreign Warrants, and the July 2020 Warrants to be one unit of account, and therefore did not allocate the proceeds between the common stock and the July 2020 Warrants as, the proceeds, even if allocated, would be both recognized in additional paid-in capital.   During the third quarter of 2020, the Company also entered into a reprice agreement with Ladenburg which reduced the exercise price to $ 0.99 per share and amended certain terms of the 2019 Ladenburg Warrants. The Company’s potential obligation to cash-settle the warrants if a specified fundamental transaction occurred was amended to apply only in situations within the Company’s control. As further described in Note 13 “Warrant Liability”, the 2019 Ladenburg Warrants were no longer classified as a liability as a result of this amendment.   TLF Bio Innovation 2021 Warrants   On January 15, 2021, TLF Bio Innovation was granted warrants exercisable for 15,000 shares of the Company’s common stock with an exercise price of $ 0.6718 (the “TLF Warrants”). The TLF Warrants will expire five years after their issuance. The TLF Warrants are classified as equity.   56 Table of Contents   The details of all outstanding warrants as of December 31, 2021 were as follows:       Warrants (in thousands)     Weighted- Average Exercise Price   Outstanding at December 31, 2020     7,067     $ 1.63   Warrants granted     15     $ 0.67   Warrants expired     —     $ —   Outstanding at December 31, 2021     7,082     $ 1.63         NOTE 15. EQUITY-BASED COMPENSATION   Equity Compensation Plans     In October 2007, the Company adopted the 2007 Omnibus Incentive Plan (the “2007 Plan”) to provide for the granting of equity awards, such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights, and stock appreciation rights to employees, directors and outside consultants, as determined by the Board.  The 2007 Plan expired on March 15, 2017. Upon expiration, new awards cannot be issued pursuant to the 2007 Plan, but outstanding awards continue to be governed by its terms. Stock options granted under the 2007 Plan expire no later than ten years from the date of grant. All stock options outstanding under the 2007 Plan were fully vested as of December 31, 2020.   In March 2017, the Company adopted the 2017 Omnibus Incentive Plan (the “2017 Plan”), which was approved by stockholders on June 2, 2017, to provide for the granting of equity awards, such as nonqualified stock options (“NQSOs”), incentive stock options (“ISOs”), restricted stock, performance shares, stock appreciation rights (“SARs”), RSUs and other share-based awards to employees, directors, and consultants, as determined by the Board.  The 2017 Plan does not affect awards previously granted under the 2007 Plan. Upon adoption, the 2017 Plan allowed for awards of up to 2,318,486 shares of the Company’s common stock, plus an automatic annual increase in the number of shares authorized for awards on the first day of each of the Company’s fiscal years beginning January 1, 2018 through January 1, 2027 equal to (i) 4 % of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of common stock than provided for in Section 4 (a)(i) of the 2017 Plan as determined by the Board. On January 15, 2021, the number of shares available for future awards under the 2017 Plan was increased by 1,671,303 shares. As of December 31, 2021, there were 1,842,993 shares available for future awards under the 2017 Plan.   Under the terms of the 2017 Plan, the exercise price of NQSOs, ISOs and SARs may not be less than 100 % of the fair market value of the common stock on the date of grant and, if ISOs are granted to an owner of more than 10 % of the Company’s stock, then not less than 110 % of the fair market value of the common stock on the date of grant. The term of awards will not be longer than ten years, or in the case of ISOs, not longer than five years with respect to holders of more than 10% of the Company’s stock. Stock options granted to employees generally vest over four years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service. The Company issues new shares to satisfy option exercises under the 2007 Plan and the 2017 Plan.   57 Table of Contents   Stock Option Summary     The following table summarizes information about the Company’s stock options and restricted stock outstanding at December 31, 2021, 2020, and activity during the year ended December 31, 2021:   (in thousands, except years and per share data)   Options     Weighted- Average Exercise Price     Weighted- Average Remaining Contractual Life (years)     Aggregate Intrinsic Value   Outstanding at December 31, 2020     3,165     $ 2.05       7.6     $ 189                                     Options granted     516     $ 0.66                   Restricted stock units granted     1,528     $ —                   Restricted stock units vested     ( 488 )   $ —                   Options forfeited/cancelled     ( 272 )   $ 2.35                   Outstanding at December 31, 2021     4,449     $ 1.39       7.6     $ 460   Vested and expected to vest at December 31, 2021     4,125     $ 1.46       7.5     $ 406                                     Vested at December 31, 2021     2,150     $ 2.42       5.4     $ 8                                     Exercisable at December 31, 2021     2,150     $ 2.42       5.9     $ 8     The aggregate intrinsic value in the table above is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE American as of December 31, 2021  for options that have a quoted market price in excess of the exercise price. There were no stock option awards exercised during the year ended December 31, 2021. There were 20 thousand stock option awards exercised during the year ended December 31, 2020 for which the Company received cash payments of $ 7 thousand. There was no intrinsic value for stock option awards exercised for the year ended December 31, 2020. There were 83 thousand stock option awards exercised for the year ended December 31, 2019 for which the Company received cash payments of $ 0.2 million. There was no intrinsic value for stock option awards exercised for the year ended December 31, 2019.   As of December 31, 2021, total unrecognized compensation cost related to unvested stock options and restricted stock was approximately $ 1.2 million. This amount is expected to be recognized as stock-based compensation expense in the Company’s consolidated statements of operations and comprehensive loss over the remaining weighted average vesting period of 2.29 years.   Stock Option Awards to Employees and Directors     The Company grants options to purchase common stock to its employees and directors at prices equal to or greater than the market value of the stock on the dates the options are granted. The Company has estimated the value of stock option awards as of the date of grant by applying the Black-Scholes option pricing model using the single-option valuation approach. The application of this valuation model involves assumptions that are judgmental and subjective in nature. See Note 2, “Summary of Significant Account Policies,” for a description of the accounting policies that the Company applied to value its stock-based awards.    During the years ended December 31, 2021, 2020, and 2019, the Company granted options to employees and directors to purchase an aggregate of 516,000 , 1,158,000 , and 145,000 shares of common stock, respectively.   58 Table of Contents   The weighted-average assumptions used in determining the value of options are as follows:        Year Ended December 31,   Assumptions   2021     2020     2019   Expected price volatility     164 %     161 %     112 % Expected term (in years)     6.19       6.45       6.14   Risk-free interest rate     1.05 %     0.45 %     1.99 % Dividend yield     0.00 %     0.00 %     0.00 % Weighted-average fair value of options granted during the period   $ 0.64     $ 0.94     $ 0.31     Expected Price Volatility —This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The computation of expected volatility was based on the historical volatility of our own stock.   Expected Term —This is the period of time over which the options granted are expected to remain outstanding. The expected life assumption is based on the Company’s historical data.   Risk-Free Interest Rate —This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option.   Dividend Yield —We have not made any dividend payments nor do we have plans to pay dividends in the foreseeable future.   Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.   During the year ended December 31, 2021, the Company granted 1,200,000 RSUs to employees and directors. During the year December 31, 2020, the Company granted 160,000 RSU to one employee.  No employees were granted RSUs during the year ended December 31, 2019.   For the years ended December 31, 2021, 2020, and 2019, the Company recognized stock-based compensation expense of $ 0.7  million, $ 0.5 million, and $ 0.4 million, respectively, for option awards to employees and directors.   The Company modified stock options held by Mr. Yonghao (Carl) Ma in April 2019, Mr. Yanbin (Lawrence) Liu in May 2019, Mr. Mark Sieczkarek in July 2019, Mr. Todd Zavodnick in September 2019, Ms. Gail Maderis in April 2020 and Mr. Xiaopei Wang in August 2020, who each resigned as a director of the Company. The option exercise period for each of the former directors listed was extended from three months to three years, calculated from each director’s date of resignation. Each director’s stock option awards became fully vested at the date of his or her resignation. In connection with the stock option modification for each of Messrs. Ma, Liu, Sieczkarek, Zavodnick, Ms. Maderis and Mr. Wang, the Company recognized stock-based compensation expense of $ 14 thousand, $ 7 thousand, $ 60 thousand, $ 24 thousand, $ 36 thousand and $ 17 thousand, respectively, which are included in the figure above.   Stock-Based Awards to Non-Employees   During the year December 31, 2021, the Company did not grant options to purchase shares of common stock to non-employees. During the year ended December 31, 2020, the Company granted options to purchase an aggregate of 400,000 shares of common stock to non-employees in exchange for advisory and consulting services. Out of the 400,000 shares, 300,000 shares were granted to a related party, Eric Wu, Partner and Senior Vice President of China Kington and the brother of Bob Wu, who serves on the Company’s Board of Directors. Please refer to Note 19, “Related Party Transactions”, for more details related to the consulting service agreement. During the year ended December 31, 2019, the Company did not grant options to purchase shares of common stock to non-employees.   Stock options granted to non-employees recorded at their fair value on the measurement date and recognized over the respective service or vesting period. The fair value of the stock options granted was calculated using the Black-Scholes-Merton option pricing model based upon the following assumptions:       Year Ended December 31,   Assumptions   2021     2020   Expected price volatility     —       162 % Expected term (in years)     —       6.34   Risk-free interest rate     —       0.50 % Dividend yield     —       0.00 % Weighted-average fair value of options granted during the period   $ —     $ 0.73     59 Table of Contents   The Company did not grant restricted stock to non-employees during the year ended December 31, 2021.   In connection with Mr. Sieczkarek’s resignation, the Company granted 168 thousand shares of fully vested registered stock to Mr. Sieczkarek during the year ended December 31, 2019. The expense related to these shares was recorded in the Company’s consolidated statements of operations and comprehensive loss. At the time of his resignation, the Company also entered into a two -year consulting agreement with Mr. Sieczkarek under which he is entitled to receive additional shares of fully vested registered stock in exchange for consulting services. According to the terms of the agreement, the stock units are to be issued in two tranches of $ 0.2 million each for a total aggregate fair market value equal to $ 0.4 million. The number of shares issued for each tranche is calculated using the closing price on each respective grant date. In July 2020, the Company issued 192,983 shares to Mr. Sieczkarek to fulfill the first tranche. In July 2021, the Company issued 328,359 shares to Mr. Sieczkarek to fulfill the second tranche. The expense related to the shares issued under the consulting agreement is being recorded over the term of the Consulting Agreement.   During the fourth quarter of the year ended December 31, 2019, the Company paid two consultants, Ms. Moon and Ms. Xiao, via a combination of 36 thousand registered shares and cash for services rendered, based on the terms of their consulting agreements.    For the years ended December 31, 2021, 2020, and 2019, the Company recognized stock-based compensation expense of $ 240 thousand, $ 64 thousand, and $ 37 thousand, respectively, related to non-employee options and restricted stock grants.   Summary of Stock-Based Compensation Expense     A summary of the stock-based compensation expense included in results of operations for the options and restricted stock awards discussed above is as follows (in thousands):        Year Ended December 31,       2021     2020     2019   Research and development   $ 10     $ 23     $ 42   Sales and marketing     129       85       93   General and administrative     794       424       351   Total stock-based compensation expense   $ 933     $ 532     $ 486         NOTE 16. LICENSE, COLLABORATION AND DISTRIBUTION AGREEMENTS   Transactions under the Company’s major distribution agreements are recognized upon transfer of control of product sold to its major distribution partners at the amount of consideration that the Company expects to be entitled to. The Company records contract liabilities for the amounts that are estimated to be subject to significant reversal, including allowances for services, discounts, rebate programs, and product returns.   The following table presents changes in the Company's contract assets and liabilities for the year ended December 31, 2021 ( in thousands):          Balance at Beginning of the Period     Additions     Deductions     Balance at the end of the Period   Contract liabilities: deferred revenue   $ 2     $ 176     $ ( 124 )   $ 54   Contract liabilities: accrued liabilities (includes contract assets)     573       1,851       ( 1,154 )     1,270   Total   $ 575     $ 2,027     $ ( 1,278 )   $ 1,324     The following table presents changes in the Company's contract assets and liabilities for the year ended December 31, 2020 ( in thousands):          Balance at Beginning of the Period     Additions     Deductions     Balance at the end of the Period   Contract liabilities: deferred revenue   $ —     $ 2     $ —     $ 2   Contract liabilities: accrued liabilities (includes contract assets)     434       2,338       ( 2,199 )     573   Total   $ 434     $ 2,340     $ ( 2,199 )   $ 575     60 Table of Contents   For the years ended December 31, 2021, 2020 and 2019, the Company recognized the following revenue (in thousands):       Year Ended December 31,       2021     2020     2019   Revenue recognized in the period from:                         Amounts included in contract liabilities at the beginning of the period:                         Performance obligations satisfied   $ 573     $ 434     $ 1,473   New activities in the period:                         Performance obligations satisfied     7,848       9,500       5,126                                 $ 8,421     $ 9,934     $ 6,599     Avenova Spray Pharmacy Distribution Agreements and Specialty Pharmacies   Avenova Spray is made available in local pharmacies and major pharmacy retail chains under nationwide distribution agreements with McKesson Corporation, Cardinal Health and AmerisourceBergen. We have also entered into direct agreements with preferred pharmacy networks as part of our Partner Pharmacy Program. During the years ended December 31, 2021, 2020 and 2019, the Company earned $ 0.6 million, $ 1.7 million and $ 4.6 million, respectively, in sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements.   Under these product distribution arrangements, the Company had a contract liability balance of $ 0.9 million as of December 31, 2021 and $ 0.7 million as of December 31, 2020. The contract liability is included in accrued liabilities in the consolidated balance sheets. The Company also recorded a prepayment of $ 19 thousand and $ 144 thousand for rebates related to these distribution agreements as of December 31, 2021 and December 31, 2020, respectively, that is recorded in the prepaid expenses and other current assets in the consolidated balance sheets (see Note 5, “Prepaid Expenses and Other Current Assets”).   Over-the-Counter Sales of Avenova Spray   Avenova Spray was launched online on June 1, 2019 direct to U.S. customers. Avenova Spray is offered primarily for sale on Amazon.com, the Company’s website (Avenova.com) and Walmart.com. Avenova Spray was launched at select CVS stores and online on CVS.com in February 2021. These channels provide the Company with more stable pricing and provide customers with easy access to our product. During the years ended December 31, 2021, 2020, and 2019 the revenue generated from Avenova Spray in these channels was $ 5.1 million, $ 3.3 million, and $ 1.0 million, respectively.       NOTE 17. EMPLOYEE BENEFIT PLAN   The Company has a 401 (k) plan covering all eligible employees. The Company was not required to contribute to the plan and made no contributions during the year ended December 31, 2021 or 2020. The Company made an election to change the terms of the 401 (k) plan such that, beginning on January 1, 2022, the Company will be required to make a matching contribution equal to 100 % of the first 3 % of compensation deferred, plus 50 % of the next 2 % of compensation deferred.   61 Table of Contents     NOTE 18. INCOME TAXES   For the years ended December 31, 2021, 2020 and 2019, loss before provision for income taxes consisted of the following (in thousands):       Year Ended December 31,       2021     2020     2019   United States   $ ( 5,824 )   $ ( 11,034 )   $ ( 9,652 ) International     —       —       —       $ ( 5,824 )   $ ( 11,034 )   $ ( 9,652 )   For the years ended December 31, 2021, 2020 and 2019, the federal and state income tax provision is summarized as follows (in thousands):       Year Ended December 31,       2021     2020     2019   Current                         Federal   $ —     $ —     $ —   State     —       5       6   Other     —       —       —   Total current tax expense     —       5       6                                                       Deferred                         Federal     —       —       —   State     —       —       —   Other     —       —       —   Total deferred tax expense     —       —       —                             Income tax provision   $ —     $ 5     $ 6     Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.   62 Table of Contents   The tax effects of significant items comprising the Company's deferred taxes as of December 31, 2021 and 2020 are as follows (in thousands):       Year Ended December 31,       2021     2020   Deferred tax assets:                 Net operating losses   $ 33,455     $ 31,115   Stock options     884       790   Research and development credits     641       641   Accruals     306       267   Operating lease liabilities     19       109   Property and equipment     10       2   Other deferred tax assets     376       81   Total deferred tax assets     35,691       33,005                                       Deferred tax liabilities:                 Operating lease right-of-use assets     ( 19 )     ( 108 ) Total deferred tax liabilities     ( 19 )     ( 108 )                   Valuation allowance     ( 35,672 )     ( 32,897 ) Net deferred taxes   $ —     $ —     ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a valuation allowance.   On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act was enacted. The CARES Act changed net loss carryforward and back provisions and the business interest expenses limitation. The Company has evaluated the impact of the CARES Act and determined that none of the changes would result in a material cash benefit to the Company.   The valuation allowance increased by $ 2.8  million, $ 1.3 million and $ 2.2 million during the years ended December 31, 2021, 2020 and 2019, respectively.   Net operating loss and tax credit carryforwards as of December 31, 2021, are as follows (in thousands):               Expiration       Amount     Years   Net operating losses, federal (Post December 31, 2017)   $ 30,989     Does Not Expire   Net operating losses, federal (Pre January 1, 2018)   $ 94,886     Beginning in 2024   Net operating losses, state   $ 106,784     Beginning in 2028   Tax credits, federal   $ 1,321     Beginning in 2026   Tax credits, state   $ 325     Indefinite     A reconciliation of the beginning and ending balance of unrecognized income tax benefits follows (in thousands):        Year Ended December 31,       2021     2020   Unrecognized benefit - beginning of period   $ 974     $ 974   Change during the period     —       —   Unrecognized benefit - end of period   $ 974     $ 974     The entire amount of the unrecognized tax benefits would not impact our effective tax rate if recognized. The balance of unrecognized tax benefits increased as a result of a comprehensive analysis to substantiate the company's research credits. Accrued interest and penalties related to unrecognized tax benefits are classified as income tax expense and were immaterial. We do not anticipate that total unrecognized tax benefits will significantly change in the next 12 months. The Company files income tax returns in the United States and in California. Other jurisdictions are not significant. The tax years 2004 - 2021 remain open in the federal jurisdiction and 2006 - 2021 for California. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions.   63 Table of Contents   The effective tax rate of the Company's provision (benefit) for income taxes differs from the federal statutory rate as follows:       Year Ended December 31,       2021     2020     2019   Statutory rate     21.0 %     21.0 %     21.0 % State tax     11.2 %     3.2 %     3.1 % Change in valuation allowance     ( 47.7 %)     ( 11.7 %)     ( 23.0 %) Warrant/equity expenses     16.7 %     ( 10.3 %)     1.7 % Stock-based compensation expense     ( 1.1 %)     ( 4.0 %)     ( 3.7 %) Other     ( 0.1 %)     1.7 %     ( 0.3 %) Impact of 162m     — %     — %     1.1 % Total     0.0 %     ( 0.1 %)     ( 0.1 %)       NOTE 19. RELATED PARTY TRANSACTIONS          Related Party Revenue     The following table summarizes information about the Company’s related party revenue and cost of goods sold during the years ended December 31, 2021, 2020 and 2019, respectively (in thousands):        Year Ended December 31,       2021     2020     2019   Related party revenue:                         NeutroPhase   $ 368     $ 524     $ 209   Licensing     —       —       41   Total related party revenue   $ 368     $ 524     $ 250                             Cost of goods sold                         NeutroPhase   $ 325     $ 384     $ 176   Licensing     —       —       —   Total related party expenses   $ 325     $ 384     $ 176     Related party accounts receivable was $ 0.1 million and $ 0.2 million as of December 31, 2021 and December 31, 2020, respectively.   Other Related Party Expenses     During the year ended December 31, 2021, the Company purchased KN95 Masks through an affiliate of China Pioneer. As of December 31, 2021, there was no related party account payable as compared to related party accounts payable of $ 8 thousand as of December 31, 2020.   64 Table of Contents   The following table summarizes information about the Company’s other related party expenses excluding stock-based compensation during the years ended December 31, 2021, 2020 and 2019, respectively (in thousands):       Year Ended December 31,       2021     2020     2019   Commissions to China Kington related to:                         OP Private Placement   $ —     $ —     $ —   June 2019 Private Placement     —       —       144   August 2019 Private Placement     —       —       162   Exercise of June 2019 Warrants     —       41       —   Exercise of 2019 Foreign Warrants     —       160       —   Promissory Note to Pioneer Pharma (Hong Kong) Company Ltd.     —       —       20   Total commissions to China Kington     —       201       326   Board Director Bob Wu consulting fee     —       50       83   Total related party expenses   $ —     $ 251     $ 409     On November 17, 2020, the Company entered into a consulting agreement with Eric Wu. Eric Wu is Partner and Senior Vice President of China Kington and the brother of Bob Wu, who serves on the Company’s Board of Directors. Pursuant to the Agreement, Eric Wu acted as a consultant to the Company in support of product expansion efforts as well as in potential financings and other transaction opportunities. The term of the Agreement was for twelve months. As consideration for his services, the Company granted Eric Wu options exercisable for 300,000 shares of the Company’s common stock under the Company’s 2017 Omnibus Incentive Plan with an exercise price equal to the Company’s closing stock price on the date of the grant and vesting on the one year anniversary of the grant date. Stock-based compensation expense of $ 152 thousand and $ 15 thousand was recorded for the year ended December 31, 2021 and 2020, respectively, related to Eric Wu’s options.       NOTE 20. PAYCHECK PROTECTION PROGRAM   On May 6, 2020, the Company received loan proceeds in the amount of $ 0.9 million from Wells Fargo Bank, N.A. (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The terms of the PPP Loan were subsequently revised in accordance with the provisions of the Paycheck Protection Flexibility Act of 2020, or the PPP Flexibility Act, which was enacted on September 5, 2020. The PPP loan provided for an interest rate of  1.00% per year and maturity  two years after the date of initial disbursement, with initial principal and interest payments coming due late in fiscal 2021.  The PPP Loan could be prepaid by the Company at any time prior to the maturity with no prepayment penalties. Funds from the PPP Loan could only be used for payroll costs, costs used to continue group health care benefits, rent and utilities incurred during the 24 -week period after receiving the PPP Loan (collectively, “Qualifying Expenses”) in order for the PPP Loan to be forgiven in whole or in part. The Company used the entire PPP Loan amount for Qualifying Expenses.   Since the Company determined that there was reasonable assurance that it would meet the conditions for forgiveness of the full loan amount, the Company accounted for the forgivable PPP Loan as a government income grant that we earned through the Company’s compliance with the loan forgiveness criteria. A deferred income liability was recognized upon receipt of the forgivable loan proceeds. The deferred income liability was recognized as other income as Qualifying Expenses were incurred. For the year ended December 31, 2020, $ 0.9 million, was recognized as other income and recorded in the consolidated statements of operations and comprehensive loss. No amount was recognized for the year ended December 31, 2021.   The Company received notice, dated May 24, 2021, from Wells Fargo Bank, N.A. confirming the full loan amount of $ 0.9 million was forgiven.       NOTE 21. SEGMENT REPORTING   The Company’s chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company. The CODM reviews financial information presented for each reportable segment for purposes of making operating decisions and assessing financial performance.   Prior to the DERMAdoctor Acquisition in November 2021 ( see Note 3, Business Combination), the Company was managed as a single segment focused on commercializing Avenova Spray in the United States. After the DERMAdoctor Acquisition, the Company began managing and aggregating its operational and financial information in accordance with two reportable segments: ( 1 ) Optical &Wound Care and ( 2 ) Skin Care. The Optical & Wound Care segment consists of products historically sold by NovaBay prior to the DERMAdoctor Acquisition. The Skin Care segment consists of products acquired in the DERMAdoctor Acquisition and skincare products subsequently sold under the DERMAdoctor brand.   Select financial information for each segment is as follows:       Year Ended     Percentage       December 31, 2021     of Total Revenue   Optical & Wound Care   $ 7,834       93 % Skincare     587       7 %                   Total revenue   $ 8,421       100 %   65 Table of Contents       Year Ended     Percentage       December 31, 2021     of Total Gross Margin   Optical &Wound Care   $ 5,336       95 % Skincare     309       5 %                   Total gross margin   $ 5,645       100 %       NOTE 22. SUBSEQUENT EVENTS   On January 19, 2022, the Company amended the lease for its corporate headquarters located in Emeryville, California to extend the term through July 31, 2027.   On January 31, 2022, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of the Company’s common stock from 100,000,000 to 150,000,000 (the “Amendment”). The Amendment became effective upon the Company’s filing of the Amendment with the Secretary of State of Delaware on January 31, 2022.   In February 2022, the Russian Federation and Belarus commenced a military action with the country of Ukraine. As a result of this action, various nations, including the United States, have instituted economic sanctions against the Russian Federation and Belarus. Further, the impact of this action and related sanctions on the world economy are not determinable as of the date of these financial statements. Although the Company does not have significant customers, suppliers or operations within the affected geographies, the specific impact on the Company's financial condition, results of operations, and cash flows is also not determinable as of the date of these financial statements.   66 Table of Contents     ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   As previously reported on the Company’s Current Report on Form 8-K filed with the SEC on July 21, 2021, WithumSmith+Brown, PC, an independent registered public accounting firm (“Withum”), acquired certain assets of OUM & Co. LLP (“OUM”), the independent registered public accounting firm for NovaBay Pharmaceuticals, Inc. (the “Company”) (the “Transaction”). As a result of this Transaction, on July 15, 2021, OUM resigned as the Company’s independent registered public accounting firm. Concurrent with such resignation, the Company, with the approval of its Audit Committee, consented to the engagement of Withum as the Company’s new independent registered public accounting firm, effective July 15, 2021.   Prior to the Transaction, the Company did not consult with Withum regarding the application of accounting principles to any specific completed or contemplated transaction or regarding the type of audit opinion that might be rendered by Withum on the Company’s financial statements, and Withum did not provide any written or oral advice that was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue.   OUM’s Report of Independent Registered Public Accounting Firm (the “Audit Report”) on the Company’s financial statements for the fiscal years ended December 31, 2020 and 2019 did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.   During the years ended December 31, 2020 and 2019, and during the interim period from the end of the most recently completed fiscal year through July 15, 2021, the date of resignation, there were no “disagreements” (as such term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304) with OUM on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of OUM would have caused it to make reference to such disagreement in its reports. During the fiscal years ended December 31, 2020 and 2019, and the subsequent interim period through July 15, 2021, there have been no “reportable events” (as such term is defined in Item 304 (a)(1)(v) of Regulation S-K).