What changed in this filing

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Item 1. Financial Statements

2022-08-11 compared with 2022-05-12 · 378 added, 361 removed, 736 unchanged (50% of the section changed)

7 unchanged sentences

$ 7,504  

Accounts receivable, net of allowance for doubtful accounts ($ 0 at March 31, 2022 and December 31, 2021)

Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($ 522 and $ 641 at March 31, 2022 and December 31, 2021, respectively)

Accounts receivable, net of allowance for doubtful accounts ($ 0 at June 30, 2022 and December 31, 2021)

Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($ 522 and $ 641 at June 30, 2022 and December 31, 2021, respectively)

Prepaid expenses and other current assets

1 unchanged sentence

13,170  

Operating lease right-of-use assets

7 unchanged sentences

$ 1,045  

Accrued liabilities

11 unchanged sentences

5,000 shares authorized;

13 and 14 issued and outstanding at March 31, 2022 and December 31, 2021, respectively

12 and 14 issued and outstanding at June 30, 2022 and December 31, 2021, respectively

Common stock, $ 0.01 par value;

150,000 and 100,000 shares authorized, 51,419 and 47,766 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

150,000 and 100,000 shares authorized, 53,513 and 47,766 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

2 unchanged sentences

Accumulated deficit

( 141,998 )  

Total stockholders' equity

8 unchanged sentences

(In thousands, except per share data)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Product revenue, net

$ 3,043  

$ 2,126  

$ 5,666  

$ 3,927  

Other revenue, net

7 unchanged sentences

Operating loss

Unrealized gain on changes in fair value of warrant liability

Unrealized gain on changes in fair value of contingent liability

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

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

Other (expense) income, net

Loss before provision for income taxes

Provision for income taxes

Net loss and comprehensive loss

Net loss per share attributable to common stockholders (basic and diluted)

Weighted-average shares of common stock used in computing net loss per share attributable to common stockholders (basic and diluted)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Net loss per share (basic and diluted)

Weighted-average shares of common stock used in computing net loss per share (basic and diluted)

52,735  

42,561  

51,419  

42,174  

The accompanying notes are an integral part of these condensed consolidated financial statements. 

NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ 

(in thousands)

Preferred Stock

Stockholders’

Stockholders'

Balance at December 31, 2021

3 unchanged sentences

Balance at March 31, 2022

Conversion of Series B Non-Voting Preferred Stock to common stock

Vesting of director restricted stock awards

Stock-based compensation expense related to employee and director stock options

Balance at June 30, 2022

Preferred Stock

Stockholders’

Stockholders'

Balance at December 31, 2020

2 unchanged sentences

Balance at March 31, 2021

Issuance of warrants

Issuance of common stock, net of offering costs

Vesting of employee restricted stock awards

Stock-based compensation expense related to employee and director stock options

Stock-based compensation expense related to non-employee stock options

Balance at June 30, 2021

The accompanying notes are an integral part of these condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Operating activities:

4 unchanged sentences

Stock-based compensation expense for options and stock issued to non-employees

Vesting of employee restricted stock awards

Issuance of warrants to non-employees for services

Unrealized gain on changes in fair value of warrant liability

6 unchanged sentences

Operating lease liabilities

Deferred revenue

Net cash used in operating activities

3 unchanged sentences

Financing activities:

Proceeds from common stock issuances, net

Payment on the line of credit

Net cash used in financing activities

Net cash (used in) provided by financing activities

Net decrease in cash, cash equivalents, and restricted cash

1 unchanged sentence

Cash, cash equivalents and restricted cash, end of period

Three Months Ended March 31,

Six Months Ended June 30,

Supplemental disclosure of cash flow information:

Interest paid

Three Months Ended March 31,

Six Months Ended June 30,

Supplemental disclosure of non-cash information:

26 unchanged sentences

( 1 ) Optical & Wound Care and ( 2 ) Skin Care.

Based primarily on the funds available at March 31, 2022, 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 May 12, 2023.

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.

Based primarily on the funds available on June 30, 2022, the Company believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund its existing operations and meet its planned operating expenses into at least the first quarter of 2023.

The Company has sustained operating losses for the majority of its corporate history and expects that its 2022 expenses will exceed its 2022 revenues, as the Company continues to invest in both its Avenova and DERMAdoctor commercialization efforts.

The Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations.

Accordingly, the Company’s planned operations raise substantial doubt about its ability to continue as a going concern.

Additionally, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control that impact the broader economy such as periods of inflation, supply chain issues, the continuation of the COVID- 19 pandemic and international conflicts (e.g., the conflict between Russia and Ukraine).

The Company’s liquidity needs will be largely determined by the success of commercialization efforts.

The Company also may consider other plans to fund operations including:

( 1 ) raising additional capital through debt and equity financings or from other sources;

( 2 ) reducing spending on operations, including reducing spend on one or more of its sales and marketing programs or restructuring operations to change its overhead structure;

( 3 ) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee;

and/or ( 4 ) entering into license agreements to sell new products.

The Company may issue securities, including common stock and warrants through private placement transactions or registered public offerings, which may require the filing of a Form S- 1 or Form S- 3 registration statement with the Securities and Exchange Commission (“SEC”).

In the absence of the Company’s completion of one or more of such transactions or substantial revenue growth from its commercialization efforts, there will be substantial doubt about the Company's ability to continue as a going concern within one year after the date these unaudited financial statements are issued, and the Company will be required to scale back or terminate operations and/or seek protection under applicable bankruptcy laws.

The accompanying unaudited financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.

The unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to its ability to continue as a going concern.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

2 unchanged sentences

GAAP”) and are expressed in U.S.

In management’s opinion, the condensed consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results.

In management’s opinion, the unaudited condensed consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results.

Use of Estimates

1 unchanged sentence

GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated 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, goodwill, stock-based compensation, income taxes and other contingencies as of March 31, 2022.

These estimates are based on management’s best estimates and judgment.

2 unchanged sentences

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.

Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements and related disclosures have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only recurring adjustments, necessary for a fair statement of the results of operations for the periods presented.

The year-end condensed consolidated balance sheet date was derived from audited financial statement but does not include all disclosures required by U.S.

The condensed consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.

The financial statements and notes included herein should be read in conjunction with the annual financial statements and notes for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2021, which was filed with the SEC on March 29, 2022.

Cash, Cash Equivalents, and Restricted Cash

1 unchanged sentence

Cash and cash equivalents are stated at cost, which approximates fair value.

As of March 31, 2022 and December 31, 2021, the Company’s cash and cash equivalents were held in a highly-rated, major financial institution in the United States.

The following table provides a reconciliation of the cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheets that sum to the total of the same reported in the condensed consolidated statements of cash flows (in thousands):

As of June 30, 2022 and December 31, 2021, the Company’s cash and cash equivalents were held in a highly-rated, major financial institution in the United States.

The following table provides a reconciliation of the cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheets (in thousands):

Cash and cash equivalents

2 unchanged sentences

Restricted cash included in other assets

Total cash, cash equivalents, and restricted cash in the condensed consolidated statements of cash flows

Total cash, cash equivalents, and restricted cash in the condensed consolidated balance sheets

$ 4,086  

6 unchanged sentences

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 three months ended March 31, 2022 and 2021, revenues were derived primarily from sales of Avenova-branded products, directly to consumers through Amazon.com, and Avenova.com.

During the three months ended March 31, 2022, revenues also included sales of DERMAdoctor-branded products.

During the three months ended March 31, 2022 and 2021, revenues from significant product categories were as follows (in thousands):

Three Months Ended March 31,

Avenova Spray

During the three and six months ended June 30, 2022 and 2021, revenues were derived primarily from sales of Avenova branded products, directly to consumers through Amazon.com, and Avenova.com.

During the three and six months ended June 30, 2022, revenues also included sales of DERMAdoctor branded products.

During the three and six months ended June 30, 2022 and 2021, revenues from significant product categories were as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

$ 1,626  

$ 1,883  

$ 3,052  

$ 3,458  

Other products

4 unchanged sentences

$ 2,133  

During the three months ended March 31, 2022 and 2021, sales of Avenova Spray via Amazon comprised 77 % and 65 % of total Avenova Spray net revenue, respectively.

No other individual distributor comprised greater than 10% of total Avenova Spray net revenue during the three months ended March 31, 2022 or 2021.

retailer comprised 25 % of DERMAdoctor net revenue for the three months ended March 31, 2022 with no comparable revenue for the three months ended March 31, 2021.

As of March 31, 2022 and December 31, 2021, accounts receivable from our major distribution partners and major retailers greater than 10% were as follows:

$ 5,674  

$ 3,940  

During the three months ended June 30, 2022 and 2021, sales of Avenova Spray via Amazon comprised 62 % and 52 % of total Avenova Spray net revenue, respectively.

During the six months ended June 30, 2022 and 2021, sales of Avenova Spray via Amazon comprised 69 % and 58 % of total Avenova Spray net revenue, respectively.

No other individual distributor comprised greater than 10% of total Avenova Spray net revenue during the three and six months ended June 30, 2022 or 2021.

As of June 30, 2022 and December 31, 2021, accounts receivable from our major distribution partners and major retailers greater than 10% were as follows:

Major distribution partner

Retailer  

Avenova Spray Pharmacy Distributor B

Avenova Spray Pharmacy Distributor A

Avenova Spray Pharmacy Distributor B

Retailer A  

Retailer B  

* Less than 10%

The Company relies on seven contract manufacturers to produce its products.

1 unchanged sentence

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.

In particular, it is possible that we may suffer from unexpected delays in light of the global supply chain issues.

Fair Value of Financial Assets and Liabilities

17 unchanged sentences

Management identifies amounts due that are in dispute and believes are unlikely to be collected.

Management recorded no reserve for accounts receivable at March 31, 2022 and December 31, 2021.

Management recorded no reserve for accounts receivable at June 30, 2022 or December 31, 2021.

Inventory is comprised of ( 1 ) raw materials and supplies, such as bottles, packaging materials, labels, boxes and pumps;

3 unchanged sentences

Inventory is stated at the lower of cost or estimated net realizable value determined by the first -in, first -out method.

At both March 31, 2022 and December 31, 2021, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $ 522 thousand and $ 641 thousand, respectively. 

At both June 30, 2022 and December 31, 2021, management had recorded an allowance for excess and obsolete inventory at the lower of cost or estimated net realizable value adjustments of $ 522 thousand and $ 641 thousand, respectively. 

Property and Equipment, net

5 unchanged sentences

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 acquisition method requires that identifiable assets acquired and liabilities assumed are 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.

7 unchanged sentences

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 as of March 31, 2022 and December 31, 2021.

Intangible Asset

Fair Value (in

Customer relationships

Straight line

Trade secrets / product formulations

Straight line

$ 9,788  

There were no impairment charges as of June 30, 2022 and December 31, 2021.

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.

In connection with certain acquisitions, including the acquisition of DERMAdoctor, 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.

9 unchanged sentences

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 as of March 31, 2022 and December 31, 2021.

There were no impairment charges as of June 30, 2022 and December 31, 2021.

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.

17 unchanged sentences

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.

Revenue is generated through the Company’s webstores, Avenova.com and DERMAdoctor.com, for Avenova and DERMAdoctor products.

Such direct to consumer sales 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 products to a third -party carrier.

Revenue generated through third -party online retailers is recognized upon fulfillment, which generally occurs upon delivery of the products to a third -party carrier.

We present revenue net of commissions and any related fulfillment and shipping fees charged by these partners.

16 unchanged sentences

Advertising costs are expensed in the period in which the costs are incurred.

Advertising expenses were $ 0.6 million and $ 0.7 million for the three months ended March 31, 2022 and 2021, respectively.

Advertising costs are included in sales and marketing expenses in the consolidated statements of operations and comprehensive loss.

Advertising expenses were $ 0.4 million and $ 0.7 million for the three months ended June 30, 2022 and 2021, respectively.

Advertising expenses were $ 1.0 million and $ 1.5 million for the six months ended June 30, 2022 and 2021, respectively.

Stock-Based Compensation

5 unchanged sentences

for further information regarding stock-based compensation expense and the assumptions used in estimating that expense.

The Company accounts for RSUs issued to employees and non-employees (consultants and advisory board members) based on the fair market value of the Company’s common stock as of the date of issuance.

The Company accounts for RSUs issued to employees and non-employees (directors, consultants and advisory board members) based on the fair market value of the Company’s common stock as of the date of issuance.

The Company accounts for income taxes under the asset and liability method.

8 unchanged sentences

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.

8 unchanged sentences

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 Series B Non-Voting Preferred Stock (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 as a result of such securities not having a contractual obligation to participate in losses of the Company. 

The following table sets forth the calculation of basic EPS and diluted EPS (in thousands, except per share amounts):

Three Months Ended March 31,

$ ( 111 )  

Three Months Ended June 30,

Six Months Ended June 30,

Weighted average shares of common stock outstanding, basic and diluted

1 unchanged sentence

42,561  

Net loss per share attributable to common stockholders, basic and diluted

51,419  

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):

Three Months Ended March 31,

42,174  

Net loss per share, basic and diluted

The following outstanding preferred stock, stock options and stock warrants were excluded from the diluted EPS computation as their effect would have been anti-dilutive (in thousands):

As of June 30,

Series B Preferred  

29,050  

Stock options

11 unchanged sentences

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.

The DERMAdoctor 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.

25 unchanged sentences

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.

These costs are recorded as 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, Segment Reporting .

Therefore, financial results are reported in two operating segments:

( 1 ) Optical & Wound Care and ( 2 ) Skincare (see Note 20, “Segment Reporting”

( 1 ) Optical & Wound Care and ( 2 ) Skin Care (see Note 19, “Segment Reporting”

FAIR VALUE MEASUREMENTS  

1 unchanged sentence

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”

As of December 31, 2021, the November 2021 Warrants are classified within Level 3 of the fair value hierarchy as liabilities (see Note 13, “Warrant Liability”

and Note 14, “Stockholders’

Equity”).

The following table presents the Company's assets measured at fair value on a recurring basis as of March 31, 2022 ( in thousands):

The following table presents the Company's assets measured at fair value on a recurring basis as of June 30, 2022 ( in thousands):

Fair Value Measurements Using

Quoted Prices in

Active Markets

Quoted Prices

for Identical

3 unchanged sentences

Total liabilities

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 ) as of March 31, 2022 ( in thousands):

Fair value of warrant liability at December 31, 2021

Decrease in fair value of 2021 Warrants

$ 9,558  

Decrease in fair value of November 2021 Warrants

Reclassification of warrant liability to equity

Fair value of warrant liability at March 31, 2022

Fair value of warrant liability at June 30, 2022

Fair value of contingent liability at December 31, 2021

Decrease in fair value of contingent liability

Fair value of contingent liability at March 31, 2022

Fair value of contingent liability at June 30, 2022

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

Quoted Prices in

Active Markets

Quoted Prices

for Identical

6 unchanged sentences

Fair value of warrant liability at December 31, 2020

Fair value of 2021 Warrants issued

Decrease in fair value of 2021 Warrants

Fair value of November 2021 Warrants issued

14,172  

Decrease in fair value of November 2021 Warrants

Fair value of warrant liability at December 31, 2021

$ 9,558  

PREPAID EXPENSES AND OTHER CURRENT ASSETS

1 unchanged sentence

Prepaid inventory

Prepaid dues and subscription

Prepaid insurance

Prepaid consultant

Prepaid dues and subscriptions

Prepaid marketing costs

Prepaid patents

Prepaid consultants

Prepaid sales rebates

15 unchanged sentences

Total property and equipment, net

Depreciation and amortization expense was $ 30 thousand and $ 9 thousand for the three months ended March 31, 2022 and 2021, respectively.

Depreciation and amortization expense was $ 29 thousand and $ 11 thousand for the three months ended June 30, 2022 and 2021, respectively, and $ 59 thousand and $ 20 thousand for the six months ended June 30, 2022 and 2021, respectively.

Goodwill is accounted for in accordance to ASC 350, Intangibles-Goodwill and Other.

We do not amortize goodwill, but rather test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired.

There were no indications of impairment during the three months ended March 31, 2022.

There were no indications of impairment during the three and six months ended June 30, 2022.

For the DERMAdoctor Acquisition, there were no material measurement period adjustments recorded to the fair values of assets acquired and liabilities assumed during the period. 

No goodwill impairment was recognized as of March 31, 2022.

Goodwill was $ 4.5 million as of both March 31, 2022 and December 31, 2021.

No goodwill impairment was recognized as of June 30, 2022.

Goodwill was $ 4.5 million as of both June 30, 2022 and December 31, 2021.

OTHER INTANGIBLE ASSETS

Other intangible assets consisted of the following (in thousands):

Balance at December 31, 2021

Balance at June 30, 2022

Indefinite-lived intangible assets

$ 2,080  

Amortizable intangible assets

2 unchanged sentences

Total other intangible assets

Balance at March 31, 2022

$ 5,260  

$ 5,018  

Balance at December 31, 2021

Indefinite-lived intangible assets

3 unchanged sentences

Customer relationships

$ ( 17 )  

Trade secrets / product formulations

( 134 )  

Total other intangible assets

1 unchanged sentence

$ 5,200  

Amortization expense was $ 91 thousand for the three months ended June 30, 2022 and $ 182 thousand for the six months ended June 30, 2022.

There was no comparable amortization expense for the three or six months ended June 30, 2021.

Based on the amortizable intangible assets as of June 30, 2022, future amortization expenses were as follows (in thousands):

$ 2,938  

Amortization expense was $ 91 thousand and $ 0 for the three months ended March 31, 2022 and 2021, respectively.

Based on the amortizable intangible assets as of March 31, 2022, future amortization expenses were as follows (in thousands):

ACCRUED LIABILITIES  

Accrued liabilities consisted of the following (in thousands):

Contract liabilities (see Note 16)

Contract liabilities (see Note 16, “License, Collaboration and Distribution Agreements”)

Employee payroll and benefits

Audit services

Inventory purchases

Total accrued liabilities

1 unchanged sentence

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 line of credit was terminated and repaid in full on January 6, 2022.

1 unchanged sentence

All borrowings were collateralized by substantially all assets of DERMAdoctor.

As of March 31, 2022, there was no outstanding balance on the line of credit.

As of June 30, 2022, there was no outstanding balance on the line of credit as such line of credit was terminated in the first quarter of 2022.

COMMITMENTS AND CONTINGENCIES  

5 unchanged sentences

The Company believes the fair value of these indemnification agreements is minimal.

Accordingly, it has not recorded any liabilities for these agreements as of March 31, 2022. 

Accordingly, it has not recorded any liabilities for these agreements as of June 30, 2022. 

In the normal course of business, the Company provides indemnification of varying scope under its agreements with other entities, typically its clinical research organizations, investigators, clinical sites, suppliers, and others.

6 unchanged sentences

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 March 31, 2022. 

Accordingly, the Company has not recorded any liabilities for these agreements as of June 30, 2022. 

Legal Matters

As of March 31, 2022, there were no legal 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.

As of June 30, 2022, there were no legal 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.

The Company leases office space for its corporate headquarters located in Emeryville, California.

The initial lease term was scheduled to expire on February 28, 2022, but on January 19, 2022, the Company exercised its option to extend the term and amended the lease to extend the term through July 31, 2027.

The Company also leases two copiers for its corporate headquarters located in Emeryville, California.

The initial lease term is through October 31, 2022.

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.

5 unchanged sentences

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 lease expense for the three months ended March 31, 2022 and 2021 were as follows (in thousands):

Three Months Ended March 31,

The components of lease expense for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):

Three Months Ended

Six Months Ended

Operating lease cost

Net lease cost

Other information

2 unchanged sentences

The weighted average remaining lease term and the weighted average discount rate are summarized as follows:

Three Months Ended March 31,

June 30, 2022

June 30, 2021

Weighted-average remaining lease term (in years)

Weighted-average discount rate

Future lease payments under non-cancelable leases as of March 31, 2022 were as follows (in thousands):

Future lease payments under non-cancelable leases as of June 30, 2022 were as follows (in thousands):

Total future minimum lease payments

4 unchanged sentences

$ 2,270  

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 TLF Agreement, the Company paid TLF Bio Innovation a monthly cash fee and issued 15,000 warrants to TLF Bio Innovation on January 22, 2021( see Note 14, “Stockholders’

Equity”).

WARRANT LIABILITY

2019 Domestic, Foreign & Ladenburg Warrants

2019 Domestic Warrants, 2019 Foreign Warrants and 2019 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.

Equity”, the Company issued the 2019 Domestic Warrants, 2019 Foreign Warrants and 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.

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Weighted-average fair value of warrant

There were no 2019 Domestic Warrants or 2019 Foreign Warrants outstanding as of March 31, 2022.

$ 1.18  

$ 1.54  

There were no 2019 Domestic Warrants or 2019 Foreign Warrants outstanding as of June 30, 2022.

In the third quarter of 2020, as further described in Note 14, “Stockholders’

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Weighted-average fair value of warrants

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 March 31, 2022.

$ 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 June 30, 2022.

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 stockholder 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.

On January 31, 2022, our stockholders met and approved the necessary increase in authorized share capital available to meet the assumed exercise or conversion of its issued warrants and convertible preferred stock.  On January 31, 2022, as a result of the stockholder approval of the increase in authorized share capital, the warrants issued in November 2021 became exercisable and were reclassified from a liability to equity because the warrants require physical settlement or net share settlement. Accordingly, there is no fair value of warrant liabilities recorded in the Company’s balance sheet as of March 31, 2022.

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:

Equity”, the Company issued the November 2021 Warrants in the fourth quarter of 2021.

The terms of the November 2021 Warrants required that the Company obtain stockholder approval for an increase in authorized shares before they became exercisable.

Under ASC 480, Distinguishing Liabilities from Equity , the November 2021 Warrants were classified as liabilities as of December 31, 2021 and until the November 2021 Warrants became exercisable.

The November 2021 Warrants became exercisable subsequent to December 31, 2021, on January 31, 2022.

On January 31, 2022, our stockholders met and approved the necessary increase in authorized share capital available to meet the assumed exercise or conversion of the November 2021 Warrants and Preferred Stock.  On January 31, 2022, as a result of the stockholder approval of the increase in authorized share capital, the warrants issued in November 2021 became exercisable and were reclassified from a liability to equity because the warrants require physical settlement or net share settlement. Accordingly, there is no fair value of warrant liabilities recorded in the Company’s condensed consolidated balance sheet as of June 30, 2022.

Upon issuance, the fair value of the November 2021 Warrants was determined to be $ 14.2 million in accordance with the following key assumptions as of November 2, 2021:

Expected price volatility

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Weighted-average fair value of warrants

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:

$ 0.38  

As of December 31, 2021, the fair value of the November 2021 Warrants was determined to be $ 9.6 million in accordance with the following key assumptions:

Expected price volatility

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Weighted-average fair value of warrants

$ 0.25  

STOCKHOLDERS' EQUITY

Preferred Stock and 2021 Warrants

Common Stock and the May 2021 At the Market Offering

The Company is authorized to issue up to 150,000,000 shares of common stock under its Amended and Restated Certificate of Incorporation.

In the second quarter of 2021, the Company established the 2021 ATM Program with Ladenburg Thalmann & Co.

(“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.

Preferred Stock and November 2021 Warrants

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.

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 “November 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 stockholder approvals, the Warrants became exercisable subsequent to December 31, 2021 and will continue to be exercisable for a period of six ( 6 ) years thereafter.

The November 2021 Warrants are exercisable at an exercise price of $ 0.53 per share, subject to adjustment.

The November 2021 Warrants became exercisable on January 31, 2022, when the Company obtained 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 warrants have an expiration date of January 31, 2028.

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.

The conversion by the holders of the Preferred Stock was initially subject to approval of the Company’s stockholders (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.

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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.

The Company allocated the net proceeds between the Preferred Stock and the November 2021 Warrants by applying the residual fair value methodology.

The Company first allocated $ 14.2 million to the November 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.

for further discussion of the key assumptions used to value the November 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 the 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.

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The remaining $ 0.1 million was recorded as a reduction of Preferred Stock in the Company’s consolidated balance sheets.

During the first quarter of 2022, 1,461 shares of the Preferred Stock were converted into 3,652,500 shares of common stock.

As of June 30, 2022, 3,380 shares of the Preferred Stock had been converted into 8,450,000 shares of common stock.

Each share of the Preferred Stock is currently convertible into 2,500 shares of common stock.

There were 13 thousand shares of the Preferred Stock outstanding as of March 31, 2022.

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.

There were 12 thousand shares of the Preferred Stock outstanding as of June 30, 2022.

Common Stock Warrants

2019 Domestic 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 Company simultaneously entered into a purchase agreement for the sale of (i) 2,700,000 shares of Series A Non-Voting Convertible Preferred Stock and (ii) 2,700,000 common stock purchase warrants exercisable for 2,700,000 shares of common stock (the “2019 Foreign Warrants”) for gross proceeds of $ 2.7 million.

The 2019 Domestic Warrants were issued with an exercise price of $ 1.15 per share and an expiration date of February 13, 2025.

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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.

In addition, the Company reimbursed Ladenburg $ 60 thousand for certain expenses.

The Company also incurred and paid other offering costs of $ 0.3 million.

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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.

All July 2020 Warrants remained outstanding as of March 31, 2022.

All July 2020 Warrants remained outstanding as of June 30, 2022.

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.

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The TLF Warrants are classified as equity.

The details of all outstanding warrants as of March 31, 2022 were as follows:

All TLF Warrants remained outstanding as of June 30, 2022.

The details of all outstanding warrants as of June 30, 2022 were as follows:

(in thousands)

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Warrants granted

Outstanding at March 31, 2022

Outstanding at June 30, 2022

EQUITY-BASED COMPENSATION

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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 March 31, 2022.

All stock options outstanding under the 2007 Plan were fully vested as of June 30, 2022.

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. 

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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.

March 31, 2022, 

On March 6, 2022, the number of shares available for future awards under the 2017 Plan was increased by 1,910,634 shares.

June 30, 2022, 

there were 

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Stock Option Summary  

The following table summarizes information about the Company’s stock options outstanding at March 31, 2022 and activity during the period ended March 31, 2022:

(in thousands, except years and per share data)

The following table summarizes information about the Company’s stock options outstanding at June 30, 2022 and activity during the period ended June 30, 2022:

(in thousands, except years 

and per share data)

Outstanding at December 31, 2021

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$ 0.30  

Restricted stock units granted

Restricted stock units vested

( 120 )  

Options forfeited/cancelled

( 37 )  

Outstanding at March 31, 2022

$ 8.05  

Vested and expected to vest at March 31, 2022

Restricted stock units cancelled

( 30 )  

Vested at March 31, 2022

Outstanding at June 30, 2022

$ 1.25  

Exercisable at March 31, 2022

Vested and expected to vest at June 30, 2022

$ 1.31  

The aggregate intrinsic value 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 March 31, 2022 for options that have a quoted market price in excess of the exercise price.

There were no stock option awards exercised during the three months ended March 31, 2022.

The Company received no cash payments for the exercise of stock options during the three months ended March 31, 2022.

As of March 31, 2022, total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately $ 1.1 million.

Vested at June 30, 2022

$ 2.24  

Exercisable at June 30, 2022

$ 2.24  

The aggregate intrinsic value 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 June 30, 2022 for options that have a quoted market price in excess of the exercise price.

There were no stock option awards exercised during the three and six months ended June 30, 2022.

The Company received no cash payments for the exercise of stock options during the three and six months ended June 30, 2022.

As of June 30, 2022, total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately $ 1.0 million.

This amount is expected to be recognized as stock-based compensation expense in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss over the remaining weighted average vesting period of 2.05 years.

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for a description of the accounting policies that the Company applied to value its stock-based awards. 

During the three months ended March 31, 2022 and 2021, the Company granted options to employees and directors to purchase an aggregate of 332,000 and 55,000 shares of common stock, respectively.

During the six months ended June 30, 2022 and 2021, the Company granted options to employees and directors to purchase an aggregate of 336,000 and 92,000 shares of common stock, respectively.

The weighted-average assumptions used in determining the value of options are as follows: 

Three Months Ended March 31,

Six Months Ended June 30,

Expected price volatility

160.47 %  

Expected term (in years)

Risk-free interest rate

1.63 %  

Dividend yield

0.00 %  

Weighted-average fair value of options granted during the period

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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 three months ended March 31, 2022 and 2021, the Company did not grant restricted stock to employees.

For the three months ended March 31, 2022 and 2021, the Company recognized stock-based compensation expense of $ 184 thousand and $ 130 thousand, respectively, for stock-based awards to employees and directors.  

During the six months ended June 30, 2022, the Company granted 180,000 shares of restricted stock to employees and directors.

During the six months ended June 30, 2021, the Company granted 900,000 shares of restricted stock to employees and directors.

For the three months ended June 30, 2022 and 2021, the Company recognized stock-based compensation expense of $ 154 thousand and $ 242 thousand, respectively, for stock-based awards to employees and directors.

For the six months ended June 30, 2022 and 2021, the Company recognized stock-based compensation expense of $ 338 thousand and $ 372 thousand, respectively, for stock-based awards to employees and directors.     

Stock-Based Awards to Non-Employees

During the three months ended March 31, 2022 and 2021, the Company did not grant options exercisable for shares of common stock to non-employees in exchange for advisory and consulting services.

During the six months ended June 30, 2022 and 2021, the Company did not grant options exercisable for shares of common stock to non-employees in exchange for advisory and consulting services.

When the Company grants stock options, the stock options are recorded at their fair value on the grant date and recognized over the respective service or vesting period.

The fair value of the stock options that are granted is calculated using the Black-Scholes-Merton option pricing model.

In addition, during the three months ended March 31, 2022 and 2021, the Company did not grant restricted stock to non-employees.

For the three months ended March 31, 2022, the Company recognized a nominal stock-based compensation expense as compared to stock-based compensation expense of $ 53 thousand for the three months ended March 21, 2021, related to non-employee stock option grants. 

In addition, during the six months ended June 30, 2022 and 2021, the Company did not grant restricted stock to non-employees.

For the three months ended June 30, 2022, the Company recognized a nominal stock-based compensation expense as compared to stock-based compensation expense of $ 54 thousand for the three months ended June 30, 2021, related to non-employee stock option grants.

For the six months ended June 30, 2022, the Company recognized a nominal stock-based compensation expense as compared to stock-based compensation expense of $ 107 thousand for the six months ended June 30, 2021, related to non-employee stock option 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): 

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Research and development

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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 three months ended March 31, 2022 ( in thousands): 

The following table presents changes in the Company's contract assets and liabilities for the six months ended June 30, 2022 ( in thousands): 

Contract liabilities:

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accrued liabilities (includes contract assets)

For the three months ended March 31, 2022 and 2021, the Company recognized the following revenue (in thousands):

Three Months Ended March 31,

For the six months ended June 30, 2022 and 2021, the Company recognized the following revenue (in thousands):

Six Months Ended June 30,

Revenue recognized in the period from:

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We have also entered into direct agreements with preferred pharmacy networks as part of our Partner Pharmacy Program.

The Company incurred net sales loss of $ 199 thousand during the three months ended March 31, 2022, and net sales revenue of $ 122 thousand during the three months ended March 31, 2021 for its Avenova Spray product from these distribution and partner pharmacy agreements.

The net loss during the three months ended March 31, 2022, was the result of an increase in returns for expired product from a major pharmacy retail chain.

Under the prescription Avenova Spray product distribution arrangements, the Company had a contract liability balance of $ 1.3 million and $ 0.9  million as of 

March 31, 2022 and December 31, 2021, respectively.

During the three months ended June 30, 2022 and 2021, the Company earned $ 0.1  million and $ 0.3 million, respectively, in sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements.

The Company incurred net sales loss of $ 57 thousand during the six months ended June 30, 2022, and net sales revenue of $ 385 thousand during the six months ended June 30, 2021 for its Avenova Spray product from these distribution and partner pharmacy agreements.

The net loss during the six months ended June 30, 2022, was the result of an increase in returns for expired product from a major pharmacy retail chain.

Under the prescription Avenova Spray product distribution arrangements, the Company had a contract liability balance of $ 1.4 million and $ 0.9  million at 

June 30, 2022 and December 31, 2021, respectively.

The contract liability is included in accrued liabilities in the condensed consolidated balance sheets.

The Company also recorded a prepayment of $ 3 thousand and $ 19 thousand for rebates related to these distribution agreements as of March 31, 2022 and December 31, 2021, respectively, that is recorded in the prepaid expenses and other current assets in the condensed consolidated balance sheets (see Note 5, “Prepaid Expenses and Other Current Assets”).

The Company also recorded a prepayment of $ 6 thousand and $ 19 thousand for rebates related to these distribution agreements as of June 30, 2022 and December 31, 2021, respectively, that is recorded in the prepaid expenses and other current assets in the condensed consolidated balance sheets.

See Note 5, “Prepaid Expenses and Other Current Assets”. 

Over-the-Counter Sales of Avenova Spray

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These channels provide the Company with more stable pricing and provide customers with easy access to our product.

During the three months ended March 31, 2022 and 2021, the revenue generated from over-the-counter Avenova Spray was $ 1.4  million and $ 1.2 million, respectively. 

During the three and six months ended June 30, 2022, the revenue generated from over-the-counter Avenova Spray was $ 1.3 million and $ 2.7 million, respectively.

During the three and six months ended June 30, 2021, the revenue generated from over-the-counter Avenova Spray was $ 1.3 million and $ 2.6 million, respectively. 

DERMAdoctor products are available through wholesale distribution relationships with third parties such as Costco, Amazon and others.

The Company had a contract liability balance of $ 0.1 million and $ 0.4  million as of 

March 31, 2022, and December 31, 2021, respectively.

June 30, 2022, and December 31, 2021, respectively.

The contract liability is included in accrued liabilities in the condensed consolidated balance sheets.

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Related Party Revenue  

The following table summarizes information about the Company’s related party revenue and cost of goods sold during the three months ended March 31, 2022 and 2021, respectively (in thousands): 

Three Months Ended March 31,

The following table summarizes information about the Company’s related party revenue and cost of goods sold during the three and six months ended June 30, 2022 and 2021, respectively (in thousands): 

Three Months Ended June 30,

Six Months Ended June 30,

Related party revenue:

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Total related party expenses

Related party accounts receivable was $ 0.1 million as of both March 31, 2022 and December 31, 2021.

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 period ended March 31, 2022.

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.

There was no related party accounts receivable as of June 30, 2022 compared to $ 0.1 million as of December 31, 2021.

SEGMENT REPORTING

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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.

Prior to the DERMAdoctor Acquisition in November 2021 ( see Note 3, “Business Combination”), the Company was managed as a single segment primarily focused on commercializing Avenova 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:

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Select financial information for each segment is as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Optical & Wound Care

$ 2,453  

$ 2,133  

$ 4,191  

$ 3,940  

$ 3,045  

$ 2,133  

$ 5,674  

$ 3,940  

Operating loss

Optical & Wound Care

$ ( 1,308 )  

$ ( 1,859 )  

$ ( 3,347 )  

( 844 )  

( 1,187 )  

$ ( 2,152 )  

$ ( 1,859 )  

$ ( 4,534 )  

The Company’s reportable segments are strategic business units that offer different products.

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Overview  

We are a company focused on the development and sale of scientifically-created and clinically-proven eyecare and skincare products.

Our portfolio of products includes a number of eyecare products under our Avenova brand, led by Avenova Spray which contains our proprietary, stable and pure form of hypochlorous acid, and over 30 dermatologist-developed skincare products under our DERMAdoctor brand.

On November 5, 2021, we purchased DERMAdoctor, LLC (“DERMAdoctor”) for approximately $12.0 million as well as $3.0 million of contingent consideration payable in cash or our common stock over the next two years upon the achievement of certain contribution margin targets.

We create science-based, problem-solving, accessible solutions for improved well-being through our two brands, Avenova and DERMAdoctor.

Avenova products are scientifically created and clinically proven to help consumers with common eye irritations.

DERMAdoctor products are premium dermatologist-developed skincare solutions sold through traditional domestic retailers, digital beauty channels and international distributors.

The acquisition of DERMAdoctor, LLC (“DERMAdoctor”) occurred on November 5, 2021, and it now operates as our wholly-owned subsidiary.

For additional information regarding the DERMAdoctor Acquisition, see Note 3 “Business Combination”

in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

The DERMAdoctor Acquisition was funded, in part, through the sale of an aggregate of 15,000 shares of Preferred Stock (convertible into an aggregate of 37,500,000 shares of Common Stock) and the 2021 Warrants (exercisable for 37,500,000 shares of Common Stock) for an aggregate purchase price of $15.0 million.

For additional information regarding the Preferred Stock and the 2021 Warrants, see Note 13, “Warrant Liability”

The DERMAdoctor Acquisition was funded, in part, through the sale of an aggregate of 15,000 shares of Preferred Stock (convertible into an aggregate of 37,500,000 shares of common stock) and the November 2021 Warrants (exercisable for 37,500,000 shares of common stock) for an aggregate purchase price of $15.0 million.

For additional information regarding the Preferred Stock and the November 2021 Warrants, see Note 13, “Warrant Liability”

and Note 14, “Stockholders’

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in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

In 2021, we also continued to expand our Avenova product offerings, including adding the following products under the Avenova eyecare brand:

(1) Avenova Moist Heating Eye Compress and (2) the i-Chek.

We expanded our distribution efforts through our partnership with ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical businesses to promote Avenova Spray.

We expect to grow commercial sales of both Avenova and DERMAdoctor branded products through an expansion of domestic and international market penetration, with a particular focus on online channels, and the development of new product offerings under both brand names.

We also manufacture and sell our proprietary form of hypochlorous acid for the wound care market.

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

Although NeutroPhase and PhaseOne compete in a crowded wound cleanser market, we believe our NeutroPhase and PhaseOne solutions have distinct competitive advantages because they are made without the toxic chemicals found in other products.

NeutroPhase and PhaseOne are gentle, non-irritating, and non-sensitizing to skin and new tissue.

PhaseOne is distributed through commercial partners in the United States, and NeutroPhase is distributed in China by Pioneer Pharma (Hong Kong) Company Ltd.

Financial Overview and Outlook

We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue to commercialize our eyecare and skincare products and integrate the DERMAdoctor business.

Our net loss was $111 thousand for the three months ended March 31, 2022 and a net loss of $1.5 million for the three months ended March 31, 2021.

As of March 31, 2022, we had an accumulated deficit of $142 million and current assets totaling $12.5 million.

Our net loss was $2.2 million for the three months ended June 30, 2022 as compared to a net loss of $1.9 million for the three months ended June 30, 2021.

As of June 30, 2022, we had an accumulated deficit of $144 million and current assets totaling $9.5 million.

We expect to grow commercial sales of Avenova and DERMAdoctor branded products through an expansion of domestic and international market penetration, with a particular focus on online channels, and the development of new product offerings under both brand names.

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Actual results may differ from these estimates. 

While our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies”

in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report, we believe that the following accounting policies are most critical to fully understanding and evaluating our reported financial results.

Allowance for Doubtful Accounts

The Company charges bad debt expense and records an allowance for doubtful accounts when management believes it to be unlikely that specific invoices will be collected.

Management identifies amounts due that are in dispute, and it believes are unlikely to be collected.

Management recorded no reserve for accounts receivable at March 31, 2022 and December 31, 2021.

Inventory is comprised of (1) raw materials and supplies, such as bottles, packaging materials, labels, boxes, and pumps;

(2) goods in progress;

and (3) finished goods.

We utilize contract manufacturers to produce our products and the price paid to these manufacturers is included in inventory.

Inventory is stated at the lower of cost or estimated net realizable value determined by the first-in, first-out method.

Business Combinations  

We account for business combinations using the acquisition method of accounting, in accordance with ASC 805, Business Combinations .

The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill.

The determination of estimated fair value requires us to make significant estimates and assumptions.

These fair value determinations require judgment and involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, and asset lives, among other items. 

As a result, we may record adjustments to the fair values of assets acquired and liabilities assumed within the measurement period (up to one year from the acquisition date) with the corresponding offset to goodwill.

Transaction costs associated with business combinations are expensed as they are incurred.

Goodwill and Intangible Assets

Goodwill represents the excess of the consideration transferred over the estimated fair value of assets acquired and liabilities assumed in a business combination.

Intangible assets are measured at their respective fair values as of the acquisition date and may be subject to adjustment within the measurement period, which may be up to one year from the acquisition date.

We do not amortize goodwill and intangible assets with indefinite useful lives.

Intangible Asset

Fair Value (in

Customer relationships

Straight line

Trade secrets / product formulations

Straight line

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 condensed consolidated statements of operations and comprehensive loss 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.

There were no impairment charges during the periods ended March 31, 2022 and December 31, 2021, respectively.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present.

Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term.

The interest rate implicit in lease contracts is typically not readily determinable.

As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.

Certain adjustments to the right-of-use assets may be required for items such as initial direct costs paid or incentives received.

The Company has elected to combine lease and non-lease components as a single component for all leases in which it is a lessee or a lessor.

The lease expense is recognized over the expected term on a straight-line basis.

Operating leases are recognized on the balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current.

Revenue Recognition

Revenue generated through the Company’s webstores, primarily Avenova.com and DERMAdoctor.com, is recognized upon fulfillment, which generally occurs upon delivery of the related products to multiple third-party carriers.

Shipping and handling costs are expensed as incurred and included in cost of goods sold in the condensed consolidated statements of operations and comprehensive loss.

We present revenue net of sales taxes and refunds.

Revenue generated through third-party online retailers is also recognized upon fulfillment, which generally occurs upon delivery of the related products to a third-party carrier.

We present revenue net of commissions and any related fulfillment and shipping fees charged by these partners.

Fees paid to partners for promoting our product are expensed as incurred and are included in sales and marketing expenses within the operating expenses in the condensed consolidated statements of operations and comprehensive loss.

The Company also generates Avenova Spray revenue through major pharmacy distribution partners.

Product supply of Avenova Spray is the only performance obligation contained in these arrangements, and the Company recognizes product revenue upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to, generally upon delivery to the distributor on a “sell-in”

Upon recognition of product sales, contract liabilities are recorded for invoiced amounts that are subject to significant reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, and product returns.

The Company derives its rate of return from historical data and updates its return rate assumption quarterly.

Payment for product supply is typically due 30 days after control transfers to the distributor.

Revenue generated through the Company’s partner pharmacies is recognized when control of the product transfers to the end customer.

Revenue for product sales to other retailers is generally recognized upon transfer of control to the retailer, which generally occurs upon delivery of the related products to a third-party carrier, net of estimated future product returns.

The following table summarizes the activity in the accounts related to product revenue allowances (in thousands) during the three months ended March 31, 2022:

Balance at December 31, 2021

Current provision related to sales made during current period

Balance at March 31, 2022

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”).

Advertising Costs

Advertising costs are expensed in the period in which the costs are incurred.

Advertising expenses were $0.6 million and $0.7 million for the three months ended March 31, 2022 and 2021, respectively.

Stock-Based Compensation

The Company’s stock-based compensation includes grants of stock options and restricted stock units (“RSUs”) to employees, consultants and non-employee directors.

The expense associated with these grants is recognized in the Company’s consolidated statements of stockholders’

equity based on their fair values as they are earned under the applicable vesting terms.

For stock options granted, the fair value of the stock options is estimated using a Black-Scholes option pricing model.

See Note 15, “Equity-Based Compensation”

in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further information regarding stock-based compensation expense and the assumptions used in estimating that expense.

The Company accounts for RSUs issued to employees and non-employees (consultants and advisory board members) based on the fair market value of the Company’s common stock as of the date of issuance.

The Company accounts for income taxes under the asset and liability method.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.

Common Stock Warrant Liabilities

The Company accounts for common stock warrants issued in connection with its equity offerings in accordance with the provisions of Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity , and ASC 815, 

Derivatives and Hedging .

The Company accounts for common stock warrants issued in connection with share-based compensation arrangements in accordance with the provisions of ASC 718, Stock Compensation, which encompasses the provisions of ASC 480, Distinguishing Liabilities from Equity .

The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).

For warrants that are classified as liabilities, the Company records the fair value of the warrants at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the condensed 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.

Segment Reporting

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (the “CODM”) in deciding how to allocate resources to an individual segment and in assessing performance.

The Company’s Chief Executive Officer is the Company’s CODM.

The CODM reviews financial information presented on a business line basis in making operating decisions, allocating resources, and evaluating financial performance.

The Company has determined that it operates as two operating segments.

Recent Accounting Pronouncements

Our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies”

in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report, which is incorporated herein by reference.

For information regarding recent accounting pronouncements that could affect our business, results of operations, financial condition, and liquidity, see Note 2, “Summary of Significant Accounting Policies”

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Comparison of the Three Months  

Ended March 31, 2022 and 2021

Ended June 30, 2022 and 2021

Three Months Ended

(in thousands)

Statement of Operations

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Operating loss

Other (expense) income, net

Loss before provision for income taxes

Provision for income taxes

Net loss and comprehensive loss

Total Net Sales, Cost of Goods Sold and Gross Profit

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

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

Revenue from Avenova Spray decreased by $0.3 million for the three months ended June 30, 2022 from $1.9 million for the three months ended June 30, 2021 to $1.6 million for the three months ended June 30, 2022.

The decrease was due to a decrease in physician dispensed Avenova Spray units sold and a decrease in Avenova Spray units sold through the pharmacy channels.

This decrease in prescription Avenova Spray units was partially offset by a continued increase in the number of over-the-counter Avenova Spray units sold through online channels.

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

Cost of goods sold increased by 143%, to $1.5 million for the three months ended June 30, 2022, from $0.6 million for the three months ended June 30, 2021.

This increase was primarily due to $0.5 million in cost of goods sold recognized from the sales of DERMAdoctor products for the three months ended June 30, 2022 with no comparable cost of goods sold for the three months ended June 30, 2021 and cost of goods sold associated with the increase in wound care products sold during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

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

Research and Development

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

Sales and marketing

Sales and marketing expenses decreased by $36 thousand, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

The decrease was primarily due to lower digital advertising and related consulting costs incurred in the 2022 period.

Additionally, results for the 2021 period include marketing costs incurred in conjunction with the Company’s CelleRx Clinical Reset product with no comparable expenditures during the three months ended June 30, 2022.

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

The decreases in digital marketing and CelleRx costs were offset by $0.7 million in sales and marketing costs incurred for DERMAdoctor products during the three months ended June 30, 2022, with no comparable expenditures in the 2021 period.

General and administrative  

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

Results for the three months ended June 30, 2022 include $0.5 million in DERMAdoctor general and administrative costs and $0.1 million from the amortization of intangibles related to the DERMAdoctor Acquisition with no comparable expenses in the 2021 period.

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

Other (expense)  

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

Comparison of the Six Months  

Ended June 30, 2022 and 2021

Six Months Ended

(in thousands)

Statement of Operations

Product revenue, net

Other revenue, net

Total sales, net

Product cost of goods sold

Research and development

Sales and marketing

General and administrative

Total operating expenses

Operating loss

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

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Net loss and comprehensive loss

Impact of DERMAdoctor Acquisition

The Acquisition Closing for DERMAdoctor took place on November 5, 2021 (see Note 3, “Business Combination”

in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report) Accordingly, the above results for the three months ended March 31, 2022 include the financial results of DERMAdoctor, which includes product revenue, net, of $0.9 million, goods sold of $0.5 million, $0.4 million in sales and marketing costs and $0.2 million in general and administrative costs, with no comparable operating results for the three months ended March 31, 2021.

Total Net Sales, Cost of Goods Sold and Gross Profit

Product revenue, net, increased by $0.8 million, or 46%, to $2.6 million for the three months ended March 31, 2022, from $1.8 million for the three months ended March 31, 2021.

Revenue from Avenova Spray decreased by $0.2 million in 2022 from $1.6 million for the three months ended March 31, 2021 to $1.4 million for the three months ended March 31, 2022.

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

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

Revenue from Avenova Spray decreased by $0.4 million for the six months ended June 30, 2022, from $3.5 million for the six months ended June 30, 2021 to $3.1 million for the six months ended June 30, 2022.

The decrease reflects an unanticipated increase in expired Avenova Spray units returned from retail pharmacies for product purchased prior to the launch of our over-the-counter Avenova Spray product in 2019 and the beginning of the COVID-19 pandemic in 2020.

The decrease was partially offset by an overall increase in the number of Avenova Spray units sold during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

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

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

We also recognized product revenue, net, of $0.9 million from the sale of DERMAdoctor products during the three months ended March 31, 2022 with no comparable revenue during the three months ended March 31, 2021.

Cost of goods sold increased by 145%, to $1.1 million for the three months ended March 31, 2022, from $0.5 million for the three months ended March 31, 2021.

This increase was primarily due to $0.5 million in cost of goods sold recognized from the sales of DERMAdoctor products for the three months ended March 31, 2022 with no comparable cost of goods sold for the three months ended March 31, 2021.

Gross profit increased by 12%, to $1.5 million for the three months ended March 31, 2022, from $1.4 million for the three months ended March 31, 2021.

The decrease was also due to an overall decrease in physician dispensed units sold and units sold through the pharmacy channels.

This decrease was partially offset by a continued increase in the number of over-the-counter Avenova Spray units sold through online channels.

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

Cost of goods sold increased by $1.5 million, or 144%, to $2.6 million for the six months ended June 30, 2022, from $1.1 million for the six months ended June 30, 2021.

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

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

Research and Development

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

Sales and Marketing

Sales and marketing expenses increased by $7 thousand, for the three months ended March 31, 2022.

The increase was due to $0.4 million in sales and marketing costs incurred for DERMAdoctor products for the three months ended March 31, 2022, with no comparable expenditures in the 2021 period.

The increase was offset by fewer sales representative headcount employed during the three months ended March 31, 2022 period as compared to the 2021 period.

Additionally, results for the 2021 period include costs incurred in conjunction with the relaunch of the Company’s CelleRx Clinical Reset product with no comparable expenditures during the three months ended March 31, 2022.

Sales and marketing expenses decreased by $29 thousand, or 1%, to $3.4 million for the six months ended June 30, 2022, from $3.5 million for the six months ended June 30, 2021.

The decrease was due to lower digital advertising and related consulting costs incurred in the 2022 period.

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

General and administrative  

General and administrative expenses increased by $1.0 million, or 84%, to $2.2 million for the three months ended March 31, 2022, from $1.2 million for the three months ended March 31, 2021.

Results for the three months ended March 31, 2022 include $0.2 million in DERMAdoctor general and administrative costs and $0.1 million from the amortization of intangibles related to the DERMAdoctor Acquisition with no comparable expenses in the 2021 period.

The decrease also reflects fewer sales representative headcount employed during the six months ended June 30, 2022 as compared to the 2021 period.

These decreases were offset by $1.1 million in sales and marketing costs incurred for DERMAdoctor products during the six months ended June 30, 2022, with no comparable expenditures in the 2021 period. 

General and Administrative

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

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

Additionally, during the six months ended June 30, 2021, the Company received an insurance reimbursement for costs incurred in conjunction with a dispute with the Company’s former Interim President and Chief Executive Officer and Chief Financial Officer which reduced general and administrative costs in the 2021 period.

The Company also incurred one-time costs related to a special meeting of stockholders held in January 2022 with no comparable expenditures in the 2021 period.

Employee-related costs, including non-cash stock-based compensation costs, were also higher for the three months ended March 31, 2022 as compared to the 2021 period.

Additionally, during the three months ended March 31, 2021, the Company received an insurance reimbursement for costs incurred in conjunction with a dispute with the Company’s former Interim President and Chief Executive Officer and Chief Financial Officer which reduced general and administrative costs in the 2021 period.

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

Adjustments to the fair value of warrant liability resulted in a gain of $2.1 million for the three months ended March 31, 2022.

The warrant liability was reclassified to equity during the three months ended March 31, 2022 and will no longer require fair value adjustments which will impact our results of operations.

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

Adjustments to the fair value of warrant liability resulted in a gain of $2.1 million for the six months ended June 30, 2022.

The warrant liability was reclassified to equity during the six months ended June 30, 2022 and will no longer require fair value adjustments which will impact our results of operations.

For additional information regarding the warrant liability and their valuation, please see Note 13, “Warrant Liability”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

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

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

Other (expense)  

Other (expense) income, net, was $215 thousand for the three months ended March 31, 2022 as compared to $2 thousand for the three months ended March 31, 2021.

During the three months ended March 31, 2022, the Company recorded $219 thousand in income for an adjustment to the fair value of a contingent earnout liability.

For additional information regarding the contingent earnout liability, please see Note 4, “Fair Value Measurements”, in the Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report.

Liquidity and Capital Resources  

As of March 31, 2022, our cash and cash equivalents were $5.6 million, compared to $7.5 million as of December 31, 2021.

However, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control that impact the broader economy such as the COVID-19 pandemic and the conflict between Russia and Ukraine.

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

Financial Condition, Liquidity and Capital Resources

As of June 30, 2022, our cash and cash equivalents were $3.9 million, compared to $7.5 million as of December 31, 2021.

The Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations.

Accordingly, the Company’s planned operations raise substantial doubt about its ability to continue as a going concern.

Additionally, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control that impact the broader economy such as periods of inflation, supply chain issues, the continuation of the COVID-19 pandemic international conflicts (e.g., the conflict between Russia and Ukraine).

The Company’s liquidity needs will be largely determined by the success of commercialization efforts.

The Company also may consider other plans to fund operations including:

(1) raising additional capital through debt and equity financings or from other sources;

(2) reducing spending on operations, including reducing spend on one or more of its sales and marketing programs or restructuring operations to change its overhead structure;

(3) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee;

and/or (4) entering into license agreements to sell new products.

Cash Used in Operating Activities

Net cash used in operating activities was $2.1 million for the three months ended March 31, 2022, which consisted primarily of a net loss of $111 thousand, adjusted primarily by non-cash gain of $2.1 million on the change in fair value of warrant liability, non-cash gain of $219 thousand on the change in fair value of contingent liability, stock-based compensation expenses of $184 thousand, and a net increase of $24 thousand in our net operating assets and liabilities.

Net cash used in operating activities was $1.4 million for the three months ended March 31, 2021, which consisted primarily of a net loss of $1.5 million, adjusted by stock-based compensation expenses of $0.2 million, and a net change of $0.1 million in our net operating assets and liabilities.

Net cash used in operating activities was $3.8 million for the six months ended June 30, 2022, which consisted primarily of a net loss of $2.3 million, non-cash gain of $2.1 million on the change in fair value of warrant liability, non-cash gain of $219 thousand on the change in fair value of contingent liability, stock-based compensation expenses of $338 thousand, and a net increase of $156 thousand in our net operating assets and liabilities.

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

Cash Used in Investing Activities

Net cash used in investing activities for the purchase of property and equipment was $24 and $25 thousand, for the three months ended March 31, 2022 and 2021, respectively.

Net cash used in investing activities for the purchase of property and equipment was $32 thousand and $27 thousand, for the six months ended June 30, 2022 and 2021, respectively.

Net Cash Used in Financing Activities

Net cash used in financing activities for the repayment of the DERMAdoctor line of credit, which was subsequently terminated in the first quarter of 2022, was $0.1 million for the three months ended March 31, 2022.

There was no cash used in, or provided by, financing activities during the three months ended March 31, 2021.

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

Net cash provided by financing activities was $1.8 million for the six months ended June 30, 2021.

The Company received net proceeds of $1.8 million raised from the Company’s 2021 ATM program pursuant to an ATM Agreement, dated May 14, 2021, with Ladenburg.

Net Operating Losses and Tax Credit Carryforwards

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Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements at March 31, 2022.

We did not have any off-balance sheet arrangements as of June 30, 2022.

Avenova Branded Products

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Contractual Obligations

Our contractual cash commitments as of March 31, 2022 were as follows (in thousands):

Our contractual cash commitments as of June 30, 2022 were as follows (in thousands):

Contractual Obligations

1 unchanged sentence

Equipment leases

Our commitments as of March 31, 2022 consisted primarily of facility operating leases and an operating lease for two copiers.

The total commitment for the facility leases as of March 31, 2022 was $2.7 million due over the leases’

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

The total commitment for the facility leases as of June 30, 2022 was $2.5 million due over the leases’

terms, compared to $0.5 as of December 31, 2021.

We had an operating lease for two copiers as of March 31, 2022.

The total commitment for the lease as of March 31, 2022 was $9 thousand due over the lease terms, compared to $13 thousand as of December 31, 2021.

We had an operating lease for two copiers as of June 30, 2022.

The total commitment for the lease as of June 30, 2022 was $5 thousand due over the lease terms, compared to $13 thousand as of December 31, 2021.

See Note 12, “Commitments and Contingencies”

1 unchanged sentence

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What changed 10-Q

Item 1. Financial Statements