What changed in this filing

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Item 1. Financial Statements

2022-11-14 compared with 2022-08-11 · 774 added, 315 removed, 799 unchanged (58% of the section changed)

3 unchanged sentences

(In thousands, except par value amounts)

September 30,

Current assets:

2 unchanged sentences

$ 7,504  

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)

Accounts receivable, net of allowance for doubtful accounts ($ 8 at September 30, 2022 and $ 0 at December 31, 2021)

Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($455 and $641 at September 30, 2022 and December 31, 2021, respectively)

Prepaid expenses and other current assets

1 unchanged sentence

10,613  

13,170  

Operating lease right-of-use assets

7 unchanged sentences

$ 1,097  

$ 1,045  

Accrued liabilities

11 unchanged sentences

5,000 shares authorized;

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

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

Common stock, $ 0.01 par value;

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

150,000 and 100,000 shares authorized, 64,988 and 47,766 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

12 unchanged sentences

(In thousands, except per share data)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

September 30,

Nine Months Ended

September 30,

Product revenue, net

5 unchanged sentences

Total sales, net

10,761  

Product cost of goods sold

4 unchanged sentences

Total operating expenses

11,017  

10,505  

Operating loss

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

Non-cash loss on modification of common stock warrants  

( 1,922 )  

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

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

1 unchanged sentence

Loss before provision for income taxes

Provision for income taxes  

( 136 )  

Provision for income taxes

Net loss and comprehensive loss

$ ( 136 )  

Increase to accumulated deficit due to adjustment to Series B Preferred Stock conversion price  

Net loss attributable to common stockholders

Net loss per share (basic and diluted)

7 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ 

EQUITY  

(in thousands)

Preferred Stock

Stockholders'

Stockholders’

Balance at December 31, 2021

47,766  

$ 150,900  

$ ( 141,887 )

$ 10,171  

Reclassification of Private Placement Warrants

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

Conversion of Series B Preferred Stock to common stock  

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

Balance at March 31, 2022

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

51,419  

$ 158,621  

$ ( 141,998 )

$ 17,746  

Conversion of Series B Preferred Stock to common stock  

Vesting of director restricted stock awards

1 unchanged sentence

Balance at June 30, 2022

53,513  

$ 158,793  

$ ( 144,153 )

$ 15,745  

( 136 )  

Modification of common stock warrants  

Exercise of warrants, net of offering costs  

11,475  

Reclassification of common stock warrants to liability  

Adjustment of Series B Preferred Stock conversion price  

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

Balance at September 30, 2022

64,988  

$ 162,510  

$ ( 149,946 )

$ 13,784  

Preferred Stock

Stockholders'

Stockholders’

Balance at December 31, 2020

41,782  

$ 147,963  

$ ( 136,063 )

$ 12,318  

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

1 unchanged sentence

Balance at March 31, 2021

41,782  

$ 148,146  

$ ( 137,581 )

$ 10,983  

Issuance of warrants

4 unchanged sentences

Balance at June 30, 2021

44,615  

$ 150,202  

$ ( 139,440 )

$ 11,209  

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 September 30, 2021

44,943  

$ 150,643  

$ ( 141,729 )

$ 9,364  

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

3 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Operating activities:

6 unchanged sentences

Issuance of warrants to non-employees for services

Unrealized gain on changes in fair value of warrant liability

Non-cash loss on modifications of common stock warrants  

Unrealized gain on changes in fair value of warrant liabilities

Unrealized gain on changes in fair value of contingent liability

5 unchanged sentences

Operating lease liabilities

Deferred revenue

Net cash used in operating activities

3 unchanged sentences

Financing activities:

Proceeds from exercise of warrants

Proceeds from common stock issuances, net

Payment on the line of credit

Net cash (used in) provided by financing activities

Net cash provided by financing activities

Net decrease in cash, cash equivalents, and restricted cash

Cash, cash equivalents and restricted cash, beginning of year

12,427  

Cash, cash equivalents and restricted cash, end of period

Six Months Ended June 30,

$ 4,020  

$ 9,503  

Nine Months Ended September 30,

Supplemental disclosure of cash flow information:

Interest paid

Six Months Ended June 30,

Nine Months Ended September 30,

Supplemental disclosure of non-cash information:

Warrant liability transferred to equity

$ 7,502  

Adjustment of Series B Preferred Stock conversion price  

$ 5,657  

Equity transferred to warrant liabilities

$ 3,825  

Addition of operating lease, right-of-use asset

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

$ 2,039  

Reassessment of operating lease, right-of-use asset  

Conversion of Series B Preferred Stock to common stock

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

6 unchanged sentences

Avenova Spray is available direct to consumers through online distribution channels and is also often prescribed and dispensed by eyecare professionals for blepharitis and dry-eye disease.

Other eyecare products offered under the Avenova eyecare brand include Novawipes by Avenova, Avenova Lubricant Eye Drops, Avenova Moist Heating Eye Compress, and the i-Chek.

Other eyecare products offered under the Avenova eyecare brand include Novawipes by Avenova, Avenova Lubricant Eye Drops, Avenova Moist Heating Eye Compress, and the i-Chek eyelid and eyelash mirror.

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

NeutroPhase and PhaseOne are used for the cleansing and irrigation of post-surgical wounds, minor burns, and superficial abrasions.

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 for professional use only, and NeutroPhase is distributed in China by Pioneer Pharma (Hong Kong) Company Ltd.

On November 5, 2021, ( the “Acquisition Closing”), we significantly expanded our business by acquiring DERMAdoctor, LLC (“DERMAdoctor”) as our wholly-owned subsidiary (the “DERMAdoctor Acquisition”).

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

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.

Based primarily on the funds available on September 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 second 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, 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 has determined that its 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:

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

To address the Company’s current liquidity and capital needs, the Company has and continues to evaluate different plans and strategic transactions to fund operations, including:

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

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

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

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.

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

6 unchanged sentences

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 June 30, 2022.

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

3 unchanged sentences

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 year-end condensed consolidated balance sheet date was derived from audited consolidated 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.

The financial statements and notes included herein should be read in conjunction with the annual consolidated 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.

Change in Accounting and Revision of Prior Period Financial Statements

During the three months ended September 30, 2022, the Company made an accounting policy change election related to fulfillment fees paid to third -party online retailers such as Amazon.

The Company began expensing these fees as incurred as product cost of goods sold in the Company’s condensed consolidated statements of operations and comprehensive loss.

The Company previously recorded revenue net of these fees.

The Company believes that making this change is appropriate and preferable as it is more consistent with the practices of comparable companies as we increasingly focus on commercial growth in our direct to consumer on-line channels.

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

See additional information under “Revenue Recognition”

The changes had no impact on operating loss, net loss and comprehensive loss or net loss per share in the Company’s condensed consolidated statements of operations and comprehensive loss in the periods presented in this report or in previously issued annual and quarterly Company’s condensed financial statements.

The changes also did not impact cash or ending cash balances in the Company’s condensed consolidated balance sheets in the periods presented in this report or in previously issued annual and quarterly Company’s condensed financial statements.

While reviewing its accounting policy for fulfillment fees, the Company identified an error in its previously issued financial statements whereby the Company has been incorrectly presenting revenue net of selling commissions paid to third -party online retailers.

For the three months ended September 30, 2022, the Company concluded that these commissions relate to a sales activity and began expensing them as incurred as sales and marketing expenses within the Company’s condensed consolidated statements of operations and comprehensive loss.

The identified error impacted the Company’s previously issued 2022, 2021 and 2020 quarterly and annual financial statements.

Management believes that the impact of this these adjustments error is immaterial to the previously issued condensed consolidated financial statements, based on an evaluation of both quantitative and qualitative factors.

However, revisions to prior period amounts presented in this report have been made to conform to the current period presentation.

See additional information under “Revenue Recognition”

The revisions had no impact on operating loss, net loss and comprehensive loss or net loss per share in the Company’s condensed consolidated statements of operations and comprehensive loss in the periods presented in this report or in previously issued annual and quarterly Company's condensed financial statements.

Cash, Cash Equivalents, and Restricted Cash

1 unchanged sentence

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

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.

As of September 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):

September 30,

Cash and cash equivalents

11 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 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,

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

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Avenova Spray

$ 1,939  

4 unchanged sentences

Total product revenue, net

10,743  

Other revenue, net

4 unchanged sentences

$ 7,031  

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:

During the three months ended September 30, 2022 and 2021, sales of Avenova Spray via Amazon comprised 70 % and 63 %, respectively, of total Avenova Spray net revenue.

During the nine months ended September 30, 2022 and 2021, sales of Avenova Spray via Amazon comprised 73 % and 65 %, respectively, of total Avenova Spray net revenue.

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

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

September 30,

Major distribution partner

1 unchanged sentence

Avenova Spray Pharmacy Distributor B

Retailer A  

Retailer B  

* Less than 10%

4 unchanged sentences

Fair Value of Financial Assets and Liabilities

The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, and contingent consideration.

The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant liabilities, and contingent consideration.

The Company’s cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.

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

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

At September 30, 2022, management reserved $ 8 thousand for accounts receivable.

There was no reserve for accounts receivable at 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 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. 

At September 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 $ 455 thousand and $ 641 thousand, respectively. 

Property and Equipment, net

15 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 June 30, 2022 and December 31, 2021.

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

Valuation of Contingent Consideration Resulting from a Business Combination

1 unchanged sentence

We record contingent consideration resulting from a business combination at its fair value on the acquisition date.

Each quarter thereafter, we revalue these obligations and record increases or decreases in their fair value within our Statement of Operations and Comprehensive Loss until such time as the specified milestone achievement period is complete.

Each quarter thereafter, we revalue these obligations and record increases or decreases in their fair value within our condensed consolidated statement 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.

7 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 June 30, 2022 and December 31, 2021.

There were no impairment charges as of September 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.

7 unchanged sentences

Comprehensive Income (Loss)

ASC 220, Comprehensive Income, requires that an entity's change in equity or net assets during a period from transactions and other events from non-owner sources be reported.

ASC 220, Comprehensive Income, requires that an entity’s change in equity or net assets during a period from transactions and other events from non-owner sources be reported.

Revenue Recognition

9 unchanged sentences

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.

Shipping and handling costs are expensed as incurred and included in product 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 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.

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

Revenue generated through third -party online retailers, including Amazon, is recognized when control of the goods is transferred to the customer, which generally occurs upon delivery of the products to a third -party carrier.

The Company pays third -party online retailers advertising & promotion fees, selling commissions and fulfillment fees.

Advertising & promotion fees are expensed as incurred as sales and marketing expenses within operating expenses in the condensed consolidated statements of operations and comprehensive loss.

Prior to the third quarter of 2022, the Company recorded revenue net of selling commissions and fulfillment fees. 

Beginning in the third quarter of 2022, as further described below, the Company began expensing selling commissions as sales and marketing expenses in the condensed consolidated statements of operations and comprehensive loss and fulfillment fees as product cost of goods sold in the condensed consolidated statements of operations and comprehensive loss.

Prior to the third quarter of 2022, to determine its accounting for fulfillment fees, the Company evaluated principal versus agent considerations with respect to the obligation to ship its product to the customer.

The Company assessed whether the nature of the Company’s obligation is as a principal in providing the fulfillment service or as an agent in promising to arrange for a third party to provide the fulfillment service.

The Company concluded that it is an agent with respect to the shipping service as the Company does not control the service itself and, therefore, its obligation is that of a promise to arrange for the service. This determination involved significant judgement.

In accordance with this conclusion, prior to the third quarter of 2022, the Company recorded revenue net of fulfillment fees.

Beginning in the third quarter of 2022, the Company made an accounting policy change election, as a practical expedient, to account for the shipping fees as a fulfillment activity and began expensing them as incurred within product cost of goods sold in the Company’s condensed consolidated statements of operations and comprehensive loss.

We believe the resulting accounting changes are preferable as they conform our practice to a majority of comparable filers and our other similar sales channels.

Changes to amounts presented for prior periods have been made to conform to these changes.

These changes did not impact operating loss, net loss and comprehensive loss or loss per share in the Company’s condensed consolidated statement of operations and comprehensive loss in the periods presented in this report or in previously issued annual and quarterly Company’s condensed financial statements.

Prior to the third quarter of 2022, the Company also recorded revenue net of selling commissions.

During the third quarter of 2022, the Company concluded that these commissions relate to a sales activity and began expensing them as incurred as sales and marketing expenses within the Company’s condensed consolidated statements of operations and comprehensive loss.

The Company determined that its treatment prior to the third quarter of 2022 was an error.

The identified error impacted the Company's previously issued 2022, 2021 and 2020 quarterly and annual financial statements.

Management believes that the impact of this error is immaterial to the previously issued condensed consolidated financial statements, based on an evaluation of both quantitative and qualitative factors.

However, revisions to prior period amounts presented in this report have been made to conform to the current period presentation as outlined below.

Financial statement line items included in the condensed consolidated statements of operations and comprehensive loss for the three and nine month periods ended September 30, 2022 and 2021 were adjusted for the above changes as follows (in thousands):

Three Months Ended September 30, 2022

Nine Months Ended September 30, 2022

As Previously

Product revenue, net

$ 3,268  

$ 3,816  

$ 8,934  

$ 10,743  

Product cost of goods sold

Operating expenses

Sales and marketing

Net loss and comprehensive loss

( 136 )  

( 2,402 )  

Net loss per share (basic and diluted)

( 0.10 )  

( 0.15 )  

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

As Previously

Product revenue, net

$ 1,834  

$ 2,259  

$ 5,761  

$ 7,012  

Product cost of goods sold

Operating expenses

Sales and marketing

Net loss and comprehensive loss

( 2,289 )  

( 5,666 )  

Net loss per share (basic and diluted)

( 0.05 )  

( 0.13 )  

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

3 unchanged sentences

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

Revenue for products sales to Costco is recognized upon transfer of control to the amount of consideration that the Company expects to be entitled to, generally upon delivery to Costco.

Upon recognition of product sales, contract liabilities are recorded for invoiced amounts that are subject to significant reversal, including discounts 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 Costco.

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

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

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

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

Cost of goods sold includes third -party manufacturing costs, shipping and handling costs, third -party fulfillment fees, 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.

3 unchanged sentences

Patent costs, including legal expenses, are expensed in the period in which they are incurred.

Patent expenses are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.

Patent expenses are included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss.

Advertising Costs

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

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.

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

Advertising expenses were $ 0.5 million and $ 0.8 million for the three months ended September 30, 2022 and 2021, respectively.

Advertising expenses were $ 1.6 million and $ 2.3 million for the nine months ended September 30, 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’

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

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

15 unchanged sentences

Additionally, for common stock purchase warrants accounted for in accordance with ASC 718, Stock Compensation, the Company classifies as liabilities any contracts where it believes the warrants are deemed to be probable of issuance.

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

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.

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

Three Months Ended June 30,

Six Months Ended June 30,

Weighted average shares of common stock outstanding, basic and diluted

Three Months Ended September 30,

Nine Months Ended September 30,

$ ( 136 )  

Increase in accumulated deficit due to Series B Preferred Stock conversion price  

Net loss attributable to common stockholders, basic and diluted

Weighted average shares outstanding, basic and diluted

56,133  

1 unchanged sentence

53,007  

43,100  

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  

As of September 30,

Series B Preferred Stock common stock equivalents

64,561  

3 unchanged sentences

11,029  

10,955  

Recent Accounting Pronouncements

3 unchanged sentences

BUSINESS COMBINATION

On November 5, 2021, the Company completed the DERMAdoctor Acquisition in which NovaBay acquired 100% of the membership units of DERMAdoctor from the sellers for a closing purchase price of $ 12.0 million and potential future earn out payments of up to an aggregate of $ 3.0 million over a period of two calendar years post-closing.

On November 5, 2021, the Company completed the DERMAdoctor Acquisition in which NovaBay acquired 100% of the membership units of DERMAdoctor from the sellers for a closing purchase price of $ 12.0 million and potential future earnout payments of up to an aggregate of $ 3.0 million over a period of two calendar years post-closing.

The Company funded the closing purchase price in part through the 2021 Private Placement (see Note 14, “Stockholders’

Equity”).

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.

The DERMAdoctor Acquisition is accounted for as a business combination in accordance with 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.

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Purchased consideration

12,561  

$ 4,528  

Goodwill is primarily attributable to assembled workforce, expected synergies and other factors.

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Trade secrets / product formulations

Straight line

Straight line

$ 9,788  

The valuations of intangible assets incorporate significant unobservable inputs and require significant judgment and estimates, including the amount and timing of future cash flows.

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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 November 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 (as defined in Note 14 ) 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 June 30, 2022 ( in thousands):

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

Fair Value Measurements Using

Quoted Prices

September 30,

for Identical

Deposit held as a certificate of deposit

Warrant liability

Warrant liability

$ 2,827  

Contingent earnout liability

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 June 30, 2022 ( in thousands):

$ 3,169  

Fair value of warrant liability at December 31, 2021

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Decrease in fair value of November 2021 Warrants

Reclassification of warrant liability to equity

Fair value of warrant liability at June 30, 2022

Reclassification of November 2021 Warrants liability to equity

Fair value of warrants issued in connection with the 2022 Warrant Reprice Transaction (as defined in Note 14)

Decrease in fair value of warrants issued in connection with the 2022 Warrant Reprice Transaction (as defined in Note 14)

Fair value of warrant liability at September 30, 2022

$ 2,827  

Fair value of contingent liability at December 31, 2021

Decrease in fair value of contingent liability

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 of contingent liability at September 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

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Warrant liability

$ 9,558  

Contingent earnout liability

Total liabilities

$ 10,119  

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Prepaid expenses and other current assets consisted of the following (in thousands):

Prepaid inventory

September 30,

Prepaid insurance

Tenant allowance  

Prepaid inventory

Prepaid dues and subscriptions

Prepaid marketing costs

Prepaid patents

Prepaid consultants

Prepaid sales rebates

Prepaid consultants

Prepaid marketing costs

Total prepaid expenses and other current assets

Inventory consisted of the following (in thousands):

September 30,

Raw materials and supplies

$ 1,195  

$ 1,179  

Finished goods

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Total inventory, net

$ 4,068  

$ 3,220  

PROPERTY AND EQUIPMENT  

Property and equipment consisted of the following (in thousands):

September 30,

Office and laboratory equipment

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Total property and equipment, net

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.

Depreciation and amortization expense was $ 29 thousand and $ 13 thousand for the three months ended September 30, 2022 and 2021, respectively, and $ 88 thousand and $ 32 thousand for the nine months ended September 30, 2022 and 2021, respectively.

Goodwill is accounted for in accordance with 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 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 June 30, 2022.

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

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

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

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

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.

OTHER INTANGIBLE ASSETS

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

Balance at June 30, 2022

Balance at September 30, 2022

Indefinite-lived intangible assets

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$ 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):

Amortization expense was $ 90 thousand for the three months ended September 30, 2022 and $ 272 thousand for the nine months ended September 30, 2022.

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

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

2022 (remaining 3 months)  

$ 2,848  

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Accrued liabilities consisted of the following (in thousands):

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

September 30,

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

$ 1,703  

$ 1,289  

Employee payroll and benefits

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Total accrued liabilities

$ 2,168  

$ 2,092  

LINE OF CREDIT

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All borrowings were collateralized by substantially all assets of DERMAdoctor.

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.

As of September 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  

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

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

Accordingly, it has not recorded any liabilities for these agreements as of September 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.

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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 June 30, 2022. 

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

Legal Matters

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.

As of September 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.

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

The initial lease term is through October 31, 2022.

The lease term is scheduled to expire in November 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.

The lease commenced on October 1, 2019 and expires on December 31, 2024.

In calculating the present value of the lease payments, the Company utilized its incremental borrowing rate.

In calculating the present value of the minimum lease payments, the Company utilized its incremental borrowing rate.

The Company has elected to account for each lease component and its associated non-lease components as a single lease component and has allocated all of the contract consideration across lease components only.

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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 and six months ended June 30, 2022 and 2021 were as follows (in thousands):

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

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Operating lease cost

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

June 30, 2022

June 30, 2021

September 30,

Weighted-average remaining lease term (in years)

Weighted-average discount rate

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

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

2022 (remaining 3 months)

Total future minimum lease payments

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As further described in Note 14, “Stockholders’

Equity”, the Company issued the 2019 Domestic Warrants, 2019 Foreign Warrants and 2019 Ladenburg Warrants in the third quarter of 2019.

Equity”, the Company issued the 2019 Domestic Warrants, 2019 Foreign Warrants and 2019 Ladenburg Warrants (each as defined in Note 14 ) in the third quarter of 2019.

The terms of the 2019 Domestic Warrants, 2019 Foreign Warrants and 2019 Ladenburg Warrants all required potential cash-settlement in the event of a specified fundamental transaction.

Under ASC 480, Distinguishing Liabilities from Equity , the warrants were classified as liabilities because the Company’s potential obligation to cash-settle the warrants was deemed to be beyond the Company’s control.

The fair value of outstanding warrants was determined at each reporting date using a Black-Scholes option pricing model with the changes in fair value recorded in the consolidated statements of operations and comprehensive loss.

The fair value of outstanding warrants was determined at each reporting date using a Black-Scholes option pricing model with the changes in fair value recorded in the condensed consolidated statements of operations and comprehensive loss.

Upon issuance in the third quarter of 2019, the fair value of the 2019 Domestic Warrants, 2019 Foreign Warrants and 2019 Ladenburg Warrants was determined to be $ 3.1 million, $ 2.0 million and $ 0.1 million, respectively.

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Equity”, the 2019 Domestic Warrants and 2019 Foreign Warrants were exercised at reduced exercise prices.

The warrant liabilities associated with these warrants was adjusted to their fair values as of the date of exercise, with the change in fair values recorded in the consolidated statements of operations and comprehensive loss.

The warrant liabilities associated with these warrants were adjusted to their fair values as of the date of exercise, with the change in fair values recorded in the condensed consolidated statements of operations and comprehensive loss.

The fair values were then transferred to equity.

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$ 1.54  

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

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

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

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Pursuant to this change, the 2019 Ladenburg Warrants were no longer classified as liabilities.

The warrant liability associated with the 2019 Ladenburg Warrants was adjusted to fair value as of the date of the amendment, with the change in fair value recorded in the consolidated statements of operations and comprehensive loss.

The warrant liability associated with the 2019 Ladenburg Warrants was adjusted to fair value as of the date of the amendment, with the change in fair value recorded in the condensed consolidated statements of operations and comprehensive loss.

The fair value was then transferred to equity.

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$ 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.

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 September 30, 2022.

Amended July 2020 Warrants

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction (See Note 14, “Stockholders’

Equity”), the Company reduced the exercise price of certain July 2020 Warrants exercisable for 4,800,000 shares of common stock to $ 0.18 per share and amended certain other of their terms.

In connection with the 2022 Warrant Reprice Transaction, a total of 2,100,000 shares of common stock underlying the Amended July 2020 Warrants (as defined in Note 14 ) were exercised immediately after amendment.

The remaining Amended July 2020 Warrants exercisable for 2,700,000 shares of common stock are subject to a restriction upon their exercise until the later of (i) March 9, 2023 or (ii) the date that the Reverse Stock Split (as defined in Note 20 ), which was approved by Company’s stockholders on November 10, 2022, becomes effective (See Note 14, “Stockholder’

Equity”

and Note 20 “Subsequent Events”).

As a result, under ASC 480, Distinguishing Liabilities from Equity , the unexercised Amended July 2020 Warrants were classified as liabilities on the date of amendment and September 30, 2022.

The fair value of the Amended July 2020 Warrants was determined to be $ 0.3 million on the date of amendment in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.10  

As of September 30, 2022, the fair value of the Amended July 2020 Warrants was determined to be $ 0.1 million in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.05  

November 2021 Warrants

As further described in Note 14, “Stockholders’

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.

Equity”, the Company issued the November 2021 Warrants in the fourth quarter of 2021 which were all subsequently amended pursuant to the 2022 Warrant Reprice Transaction (as defined and further described below in Note 14 ).

The amended terms of the November 2021 Warrants included a restriction upon the exercise of the November 2021 Warrants until the later of (i) March 9, 2023 or (ii) the date that the Reverse Stock Split, which was approved by the Company’s stockholders on November 10, 2022, becomes effective (See Note 14, “Stockholder’

Equity”

and Note 20 “Subsequent Events”).

Under ASC 480, Distinguishing Liabilities from Equity , the November 2021 Warrants prior to being amended were classified as liabilities as of December 31, 2021, which classification continued until the November 2021 Warrants became exercisable.

The November 2021 Warrants became exercisable subsequent to December 31, 2021, on January 31, 2022 when 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 the Series B Preferred Stock.  On January 31, 2022, as a result of the stockholder approval of the increase in authorized share capital, the November 2021 Warrants became exercisable and were reclassified from a liability to equity because the warrants require physical settlement or net share settlement. 

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:

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$ 0.25  

STOCKHOLDERS' EQUITY

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 “November 2021 Warrants”) exercisable for 37,500,000 shares of common stock for net proceeds of $ 14.9 million.

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction (See Note 14, “Stockholders’

Equity”), the Company reduced the exercise price of all of the November 2021 Warrants to $ 0.18 per share and amended certain other of their terms.

In connection with the 2022 Warrant Reprice Transaction, a total of 9,375,000 shares of common stock underlying the November 2021 Warrants were exercised immediately after amendment.

As a result, under ASC 480, Distinguishing Liabilities from Equity , the unexercised November 2021 Warrants, as amended, were classified as liabilities on the date of amendment and September 30, 2022.

The fair value of the November 2021 Warrants, as amended, was determined to be $ 3.5 million on the date of amendment in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.13  

As of September 30, 2022, the fair value of the November 2021 Warrants, as amended, was determined to be $ 1.9 million in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.07  

September 2022 Warrants

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction (See Note 14, “Stockholders’

Equity”), the Company issued the September 2022 Warrants.

The September 2022 Warrants are subject to an exercise restriction until the later of (i) March 9, 2023 or (ii) the date that the Reverse Stock Split, which was approved by Company stockholders on November 10, 2022, becomes effective (See Note 14, “Stockholders’

Equity and Note 20 “Subsequent Events”).

As a result, under ASC 480, Distinguishing Liabilities from Equity , the September 2022 Warrants were classified as liabilities on the date of issuance and September 30, 2022.

The fair value of the September 2022 Warrants was determined to be $ 1.4 million as of the date of issuance in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.13  

As of September 30, 2022, the fair value of the September 2022 Warrants was determined to be $ 0.8 million in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.07  

STOCKHOLDERS’

Common Stock and Preferred Stock

Under the Company’s Amended and Restated Certificate of Incorporation, as amended, the Company is authorized to issue up to 150,000,000 shares of common stock and up to 5,000,000 shares of preferred stock (with rights and preferences as may be approved by the Company’s Board of Directors).

2022 Warrant Reprice Transaction and September 2022 Warrants

On September 9, 2022, the Company entered into warrant reprice letter agreements with each of the holders of the November 2021 Warrants (as defined below) and certain holders of the July 2020 Warrants (as defined below) (the “2022 Warrant Reprice Transaction”). 

As a result of these amendments to the November 2021 Warrants and the Amended July 2020 Warrants, the Company recorded a non-cash loss on modification of common stock warrants in the amount of $ 1.9 million.

The loss represents the increase in fair value of the November 2021 Warrants, as amended, and the Amended July 2020 Warrants as a result of the modification.

The increase in fair value was calculated as the difference in value immediately before and after modification using the Black-Scholes option pricing model.

The fair value of the warrants was determined to be $ 3.3 million immediately prior to the modification in accordance with the following key assumptions:

November 2021

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.09  

$ 0.02  

The fair value of the warrants was determined to be $ 5.2 million immediately after the modification in accordance with the following key assumptions:

November 2021

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.13  

$ 0.10  

Further, in connection with the 2022 Warrant Reprice Transaction, the Company, in a private placement, issued to certain participants in the 2022 Warrant Reprice Transaction that exercised a portion of their November 2021 Warrants, as amended, or their Amended July 2020 Warrants, as applicable, new common stock purchase warrants (the “September 2022 Warrants”) to purchase up to a number of shares of common stock, equal to 100% of the number of shares of common stock underlying the portion of the November 2021 Warrants, as amended, or Amended July 2020 Warrants, as applicable, that were exercised by the participant.

Pursuant to the 2022 Warrant Reprice Transaction, the holders of the November 2021 Warrants, as amended, exercised their warrants for 9,375,000 shares of common stock and the participating holder of the Amended July 2020 Warrants exercised its warrants for 2,100,000 shares of common stock and each such holder received September 2022 Warrants.

The September 2022 Warrants will become exercisable on March 9, 2023 ( or such later date on which the Reverse Stock Split becomes effective as the applicable stockholder approvals were obtained on November 10, 2022), for an aggregate of 11,475,000 shares of common stock.

The September 2022 Warrants have an exercise price of $ 0.18 per share and will expire on September 11, 2028.

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

The Company allocated the gross proceeds between the common stock issued for the November 2021 Warrants, as amended, and the Amended July 2020 Warrants exercised, and September 2022 Warrants issued to participants by applying the relative fair value allocation methodology.

The Company allocated $ 0.7 million in gross proceeds to the common stock issued for the November 2021 Warrants, as amended, and the Amended July 2020 Warrants exercised, and $ 1.4 million to the September 2022 Warrants which are classified as a liability.

For additional information regarding the warrant liability and valuation, please see Note 13, “Warrant Liability”.

Ladenburg Thalmann & Co.

(“Ladenburg”) served as the Company’s warrant solicitation agent for the 2022 Warrant Reprice Transaction in exchange for a fee equal to 8 % of the total gross proceeds.

The Company incurred total issuance costs of $ 529 thousand in conjunction with the 2022 Warrant Reprice Transaction.

The Company allocated $ 166 thousand of the issuance costs to the warrant liability which was expensed in the Company’s condensed consolidated statements of operations and comprehensive loss during the quarter ended September 30, 2022.

The remaining $ 363 thousand was recorded as a reduction of common stock and additional paid in capital in the Company’s condensed consolidated balance sheets.

Unissued Series C Preferred Stock and Warrants

Concurrent with the 2022 Warrant Reprice Transaction on September 9, 2022, the Company entered into a private placement transaction with certain accredited investors to sell units that will consist of:

( 1 ) a newly designated Series C Non-Voting Convertible Preferred Stock, par value $ 0.01 per share (“Series C Preferred Stock”), ( 2 ) a new short-term Series A- 1 warrant to purchase common stock that will be exercisable for a period of eighteen ( 18 ) months after the date of issuance, and ( 3 ) a new long-term Series A- 2 warrant to purchase common stock that will be exercisable for a period of six ( 6 ) years after the date of issuance (collectively, the “2022 Private Placement”).

The closing of the 2022 Private Placement is subject to receiving certain stockholder approvals (as obtained on November 10, 2022), effecting the Reverse Stock Split, as well as the satisfaction of other customary closing conditions.

Upon the satisfaction of the conditions and the closing of the 2022 Private Placement, we expect to receive gross proceeds of $ 3.3 million from the sale of the units.

For additional information regarding the 2022 Private Placements, see the Company’s Current Report on Form 8 -K filed with the SEC on September 13, 2022.

Series B Preferred Stock and November 2021 Warrants

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 “Series B Preferred Stock”) initially 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 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 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.

As a result of the Company’s stockholders approving the Share Issuance Proposal at the Special Meeting, this limitation upon conversion of Preferred Stock was no longer applicable to the holders as of December 31, 2021.

The Preferred Stock does not have any preemptive rights or a preference upon any liquidation, dissolution or winding-up of NovaBay.

The Preferred Stock does, however, have anti-dilution protection in the event that we sell or grant any common stock or any other securities of our Company, subject to certain limited exceptions, that would entitle the holder thereof to acquire common stock at an effective price per share that is lower than the then applicable conversion price of the Preferred Stock.

The Company allocated the net proceeds between the Preferred Stock and the 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.

Each share of the Series B Preferred Stock that we issued in the Private Placement has a purchase price of $ 1,000 per share and was 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 price was subsequently adjusted to $ 0.18 as a result of the 2022 Warrant Reprice Transaction as described further below.

The Series B Preferred Stock does not have any preemptive rights or a preference upon any liquidation, dissolution or winding-up of NovaBay.

The Certificate of Designation of Preferences, Rights and Limitations for the Series B 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 Series B Preferred Stock.

This anti-dilution protection was triggered in the third quarter of 2022 as a result of the 2022 Warrant Reprice Transaction as described further below.

The Company allocated the net proceeds from the 2021 Private Placement between the Series B 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 Series B Preferred Stock.

See Note 13, “Warrant Liability”

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.

At the time of issuance, the Company recorded a beneficial conversion feature of $ 0.7 million as a discount to the Series B Preferred Stock and an increase to additional paid in capital.

The Company fully amortized the discount related to the beneficial conversion feature as a deemed dividend in the condensed consolidated statements of operations and comprehensive loss upon approval of certain stockholder proposals in the fourth quarter of 2021.

The Company incurred total issuance costs of $ 1.7 million in conjunction with the 2021 Private Placement.

The Company allocated $ 1.6 million of the issuance costs to the warrant liability which was expensed in the Company’s consolidated statements of operations and comprehensive loss during the year ended December 31, 2021.

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

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

Common Stock Warrants

The Company allocated $ 1.6 million of the issuance costs to the warrant liability which was expensed in the Company’s condensed consolidated statements of operations and comprehensive loss during the year ended December 31, 2021.

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

On September 9, 2022, the 2022 Warrant Reprice Transaction provided for amendments to certain common stock purchase warrants to lower their exercise price to $ 0.18 per share as well as the issuance of the September 2022 Warrants also with an exercise price of $ 0.18 per share, which exercise price was lower than the then effective $ 0.40 conversion price of the Series B Preferred Stock.

This triggered the Series B Preferred Stock anti-dilution feature, resulting in the automatic adjustment to the conversion price for each outstanding share of the Series B Preferred Stock to $ 0.18 , and each outstanding share of Series B Preferred Stock became convertible into 5,556 shares of common stock.

As a result of the change, the Company recorded a $ 5.7 million deemed Series B Preferred Stock dividend.

The deemed dividend is recorded as a reduction to income available to common shareholders in the basic earnings per shares (EPS) calculation.

In accordance with ASC 820, the deemed dividend was measured as the difference between ( 1 ) the fair value of the Series B Preferred Stock immediately prior to the conversion price adjustment (but without the anti-dilution protection feature) and ( 2 ) the fair value of the Series B Preferred Stock immediately after the conversion price adjustment (but without the anti-dilution protection feature).

The fair value of the Series B Preferred Stock was determined to be $ 6.9 million immediately prior the conversion price adjustment in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.23  

The fair value of the Series B Preferred Stock was determined to be $ 12.5 million immediately after the conversion price protection adjustment in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.06  

As of September 30, 2022, 3,380 shares of the Series B Preferred Stock had been converted into 8,450,000 shares of common stock, which occurred at a conversion price of $ 0.40 into 2,500 shares of common stock.

Each of the remaining 11,620 shares of the Series B Preferred Stock as of September 30, 2022, is currently convertible into 5,556 shares of common stock at a conversion price of $ 0.18 .

The November 2021 Warrants were initially issued with an exercise price of $ 0.53 .

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, the November 2021 Warrants were amended to reduce the exercise price to $ 0.18 and extend the expiration date to September 11, 2028.

Additionally, in conjunction with the 2022 Warrant Reprice Transaction, holders of the November 2021 Warrants, as amended, exercised a portion of their warrants at the reduced exercise price for an aggregate of 9,375,000 shares of common stock.

As of September 30, 2022, the 28,125,000 shares of common stock underlying the November 2021 Warrants, as amended, will become exercisable on March 9, 2023 ( or such later date on which the Reverse Stock Split becomes effective as the applicable stockholder approvals were obtained on November 10, 2022).

2019 Domestic Warrants, 2019 Foreign Warrants, 2019 Ladenburg Warrants and July 2020 Warrants  

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The Company incurred total issuance costs of $ 0.5 million in conjunction with the 2019 Purchase Agreement.

The Company allocated $ 0.2 million of the issuance costs to the warrant liability which was expensed in the Company’s consolidated statements of operations and comprehensive loss during the period.

The remaining $ 0.3 million was recorded as a reduction of additional paid-in capital in the Company’s consolidated balance sheets.

As the 2019 Ladenburg Warrants were accounted for as a stock issuance cost, $ 59 thousand was allocated to the warrant liability and expensed during the period and $ 65 thousand was recorded as a reduction to additional paid-in capital in the Company’s consolidated balance sheets.

The Company allocated $ 0.2 million of the issuance costs to the warrant liability which was expensed in the Company’s condensed consolidated statements of operations and comprehensive loss during the period.

The remaining $ 0.3 million was recorded as a reduction of additional paid-in capital in the Company’s condensed consolidated balance sheets.

See Note 13, “Warrant Liability”

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( 1 ) reduce the exercise price of the 2019 Domestic Warrants and the 2019 Foreign Warrants to $ 0.99  per share prior to exercise, and ( 2 ) in a private placement, issue new common stock purchase warrants (the “July 2020 Warrants”) to purchase up to a number of shares of common stock, equal to 100% of the number of 2019 Domestic Warrants and 2019 Foreign Warrants currently held by such holders upon the holders exercising their warrants.

The July 2020 Warrants became exercisable nine months after their issuance, for an aggregate of 6,898,566 shares of common stock.

The July 2020 Warrants have an exercise price of $ 1.65 per share and will expire five and a half years after their issuance. The Company determined that the common stock issued from the exercise of the 2019 Domestic and 2019 Foreign Warrants, and the July 2020 Warrants to be one unit of account, and therefore did not allocate the proceeds between the common stock and the July 2020 Warrants as, the proceeds, even if allocated, would be both recognized in additional paid-in capital.

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

The July 2020 Warrants became initially exercisable nine months after their issuance, for an aggregate of 6,898,566 shares of common stock.

The July 2020 Warrants had an initial exercise price of $ 1.65 per share and expiration five and a half years after their issuance. The Company determined that the common stock issued from the exercise of the 2019 Domestic and 2019 Foreign Warrants, and the July 2020 Warrants to be one unit of account, and therefore did not allocate the proceeds between the common stock and the July 2020 Warrants as, the proceeds, even if allocated, would be both recognized in additional paid-in capital.

During the third quarter of 2020, the Company also entered into a reprice agreement with Ladenburg which reduced the exercise price to $ 0.99 per share and amended certain terms of the 2019 Ladenburg Warrants.

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As further described in Note 13 “Warrant Liability”, the 2019 Ladenburg Warrants were no longer classified as a liability as a result of this amendment.

As described above, during the third quarter of 2022, pursuant to the 2022 Warrant Reprice Transaction, certain of the July 2020 Warrants held by holders who participated in the 2022 Warrant Reprice Transaction, which are exercisable for 4,800,000 shares of common stock were amended (collectively, the “Amended July 2020 Warrants”).

The Amended July 2020 Warrants currently have an exercise price of $ 0.18 and will become exercisable on March 9, 2023 ( or such later date on which the Reverse Stock Split becomes effective as the applicable stockholder approvals were obtained on November 10, 2022).

The July 2020 Warrants held by investors that did not participate in the 2022 Warrant Reprice Transaction, which are exercisable for 2,098,566 shares of common stock, were not amended and maintain the original exercise price and other original terms (collectively, the “Unamended July 2020 Warrants”).

May 2021 At-the-Market Offering

In the second quarter of 2021, the Company established an at-the-market offering (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.

TLF Bio Innovation Warrants

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The TLF Warrants are classified as equity.

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

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

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

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

(in thousands)

Outstanding at December 31, 2021

$ 1.63  

Warrants granted

Outstanding at June 30, 2022

37,500  

$ 0.53  

Warrants exercised

$ 0.18  

Warrants modified and not exercised

$ 0.18  

Outstanding at September 30, 2022

$ 1.59  

The September 2022 Warrants exercisable for 11,475,000 shares of common stock, the unexercised November 2021 Warrants, as amended, for 28,125,000 shares of common stock, and the unexercised Amended July 2020 Warrants for 2,700,000 shares of common stock are excluded from the balance of warrants outstanding as of September 30, 2022 because they were subject to shareholder approval and were not yet exercisable on that date.

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 June 30, 2022.

All stock options outstanding under the 2007 Plan were fully vested as of September 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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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, 

September 30, 2022, 

there were 

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Stock Option Summary  

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)

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

(in thousands, except years and per share data)

Outstanding at December 31, 2021

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Restricted stock units vested

( 120 )  

Options forfeited/cancelled

$ 3.50  

$ 8.05  

Restricted stock units cancelled

( 30 )  

Outstanding at June 30, 2022

Outstanding at September 30, 2022

$ 1.07  

Vested and expected to vest at June 30, 2022

Vested and expected to vest at September 30, 2022

$ 1.42  

Vested at June 30, 2022

Vested at September 30, 2022

$ 2.06  

Exercisable at June 30, 2022

Exercisable at September 30, 2022

$ 2.06  

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.

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 September 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 nine months ended September 30, 2022.

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

As of September 30, 2022, total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately $ 0.6 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 2.30 years.

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

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.

During the nine months ended September 30, 2022 and 2021, the Company granted options to employees and directors to purchase an aggregate of 626,000 and 291,000 shares of common stock, respectively.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Expected price volatility

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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 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.     

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

During the nine months ended September 30, 2021, the Company granted 1,228,359 shares of restricted stock to employees and directors.

For the three months ended September 30, 2022, the Company recognized a reversal of stock-based compensation expense of $ 208 thousand for stock-based awards to employees and directors.

For the three months ended September 30, 2021, the Company recognized stock-based compensation expense $ 151 thousand for stock-based awards to employees and directors.

For the nine months ended September 30, 2022 and 2021, the Company recognized stock-based compensation expense of $ 130 thousand and $ 523 thousand, respectively, for stock-based awards to employees and directors.     

Stock-Based Awards to Non-Employees

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.

During the nine months ended September 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 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.

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

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

For the three months ended September 30, 2022, the Company recognized no stock-based compensation expense as compared to a stock-based compensation expense of $ 73 thousand for the three months ended September 30, 2021, related to non-employee stock option grants.

For the nine months ended September 30, 2022, the Company recognized a nominal stock-based compensation expense as compared to stock-based compensation expense of $ 180 thousand for the nine months ended September 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 June 30,

Six Months Ended June 30,

Three Months Ended

September 30,

Nine Months Ended

September 30,

Research and development

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General and administrative

( 225 )  

Total stock-based compensation expense

LICENSE, COLLABORATION AND DISTRIBUTION AGREEMENTS

$ ( 208 )  

DISTRIBUTION AGREEMENTS

Transactions under the Company’s major distribution agreements are recognized upon transfer of control of product sold to its major distribution partners at the amount of consideration that the Company expects to be entitled to.

The Company records contract liabilities for the amounts that are estimated to be subject to significant reversal, including allowances for services, discounts, rebate programs, and product returns.

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

Contract liabilities:

deferred revenue

Contract liabilities:

accrued liabilities (includes contract assets)

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:

Amounts included in contract liabilities at the beginning of the period:

Performance obligations satisfied

New activities in the period:

Performance obligations satisfied

Product Sales Discounts and Allowances  

The following table presents activities and ending reserve balances for each significant category of discounts and allowance, which constitute variable consideration for the nine months ended September 30, 2022 ( in thousands): 

Chargebacks, Discounts for Prompt Payment

Other Custome r Fees

Balance at December 31, 2021

$ 1,150  

$ 1,289  

Provision related to sales made in:

Current period

Payments and customer credits issued

$ ( 189 )  

$ ( 55 )  

$ ( 341 )  

Balance at September 30, 2022

$ 1,574  

$ 1,703  

Contract Assets and Liabilities

We receive payments from our distribution partners established in each contract.

Amounts are recorded as accounts receivable when our right to consideration is unconditional.

We may be required to defer recognition of revenue for upfront payments until we perform our obligations under these arrangements, and such amounts are recorded as deferred revenue upon receipt.

The following table presents contract assets and liabilities reported in the condensed consolidated balance sheets (in thousands):

September 30,

Contract assets

Contract liabilities - current

Total contract liabilities

Avenova Spray Pharmacy Distribution Agreements and Specialty Pharmacies

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

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 $ 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.

During the three months ended September 30, 2022 and 2021, the Company earned $ 0.2  million and $ 0.3 million, respectively, in sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements.

The Company earned net sales revenue of $ 0.1 million and $ 0.7 million during the nine months ended September 30, 2022 and 2021, respectively, for its Avenova Spray product from these distribution and partner pharmacy agreements.

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

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

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

The Company also recorded a prepayment of $ 11 thousand and $ 19 thousand for rebates related to these distribution agreements as of September 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”. 

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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 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. 

During the three and nine months ended September 30, 2022, the revenue generated from over-the-counter Avenova Spray was $ 1.6 million and $ 5.1 million, respectively.

During the three and nine months ended September 30, 2021, the revenue generated from over-the-counter Avenova Spray was $ 1.6 million and $ 5.0 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 

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

The Company had a reserve balance of $ 0.3 million and $ 0.4  million as of 

September 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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The Company made an election to change the terms of the 401 (k) plan such that, beginning on January 1, 2022, the Company made matching contributions equal to 100 % of the first 3 % of compensation deferred, plus 50 % of the next 2 % of compensation deferred.

During the three and nine months ended September 30, 2022, the Company matching contribution was $ 15 thousand and $ 101 thousand, respectively, with no comparable expenditures in the 2021 period.

RELATED PARTY TRANSACTIONS       

Related Party Revenue  

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

Three Months Ended June 30,

Six Months Ended June 30,

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Related party revenue:

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Total related party expenses

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

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

SEGMENT REPORTING

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

September 30,

Nine Months Ended

September 30,

Optical & Wound Care

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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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Operating costs included in one segment may benefit other segments, and therefore these segments are not designed to measure operating income or loss directly related to the products included in each segment.

Management will continually evaluate the alignment of product development organizations, sales organizations, and inter-segment commissions for segment reporting purposes, which may result in changes to segment allocations in future periods.

SUBSEQUENT EVENTS

The Company has evaluated all subsequent events through the filing date of this Form 10 -Q with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the financial statements as of September 30, 2022, and events which occurred subsequently but were not recognized in the financial statements.

Except as described below there were no other subsequent events which required recognition, adjustment to or disclosure in the condensed consolidated financial statements.

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

On November 10, 2022, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to effect a reverse stock split of all common stock issued and outstanding or held in treasury at a ratio of not less than 1 -for- 10 and not more than 1 -for- 35 (the “Reverse Stock Split”).

In addition to the approval related to the Reverse Stock Split, the Company’s stockholders also approved a proposal that may be required to comply with the continued listing rules of the NYSE American Company Guide, including pursuant to Section 713 of the NYSE American Company Guide (collectively, the “Stockholder Approvals”).

As further discussed in Note 14, “Stockholders’

Equity”

above, such Stockholder Approvals, as well as effecting the Reverse Stock Split, are necessary in order for the September 2022 Warrants, the November 2021 Warrants, as amended, and the Amended July 2020 Warrants to be exercisable, as well as to satisfy a closing condition of the 2022 Private Placement.

On November 14, 2022, the Company announced that its Board of Directors has approved the filing of an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to effect a 1 -for- 35  reverse stock split of all outstanding common stock shares of the Company.

The Company also announced that it anticipated that the 1 -for- 35 reverse stock split will be effective as of 4:15 p.m.

New York City Time on Tuesday, November 15, 2022 and the Company’s common stock will begin trading on a split-adjusted basis on Wednesday, November 16, 2022.

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

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Overview  

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.

At NovaBay Pharmaceuticals, we are passionate about scientifically created and clinically proven eyecare and skincare products.

Our company is focused on three major markets:

Eyecare, Skincare, and Wound Care.

Our leading product, Avenova Antimicrobial Lid and Lash Solution, is proven in laboratory testing to have broad antimicrobial properties as it removes foreign material including microorganisms and debris from the skin around the eye, including the eyelid.

Avenova Spray is formulated with our proprietary, stable and pure form of hypochlorous acid and is cleared by the U.S.

Food and Drug Administration for sale in the United States.

Avenova Spray is available direct to consumers through online distribution channels and is also often prescribed and dispensed by eyecare professionals for blepharitis and dry-eye disease.

Other eyecare products offered under the Avenova eyecare brand include Novawipes by Avenova, Avenova Lubricant Eye Drops, Avenova Moist Heating Eye Compress, and the i-Chek eyelid and eyelash mirror.

DERMAdoctor offers over 30 dermatologist-developed products targeting common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris.

DERMAdoctor branded products are marketed and sold through the DERMAdoctor website, well-known traditional and digital beauty retailers, and a network of international distributors.

We expect to grow commercial sales of 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.

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

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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 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”

The DERMAdoctor Acquisition was funded, in part, through the sale of an aggregate of 15,000 shares of Series B Preferred Stock and the November 2021 Warrants (each as defined in Note 14, “Stockholders’

Equity”

in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report) for an aggregate purchase price of $15.0 million.

For additional information regarding the Series B 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.

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.

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

Recent Developments

2022 Warrant Reprice Transaction

On September 9, 2022, the Company entered into certain letter agreements and completed warrant reprice transactions with each of the holders of the November 2021 Warrants and certain holders of the July 2020 Warrants (as defined in Note 14, “Stockholders’

Equity”

in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report)(the “Warrant Reprice Transaction”).

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

Pursuant to the letter agreements, the Company agreed to:

(1) reduce the exercise price of all of the November 2021 Warrants and the July 2020 Warrants held by participants in the 2022 Warrant Reprice Transaction to $0.18 per share;

(2) amend all of the November 2021 Warrants and the July 2020 Warrants held by participants in the 2022 Warrant Reprice Transaction to provide that such warrants would not be exercisable until the later of (i) March 9, 2023 and (ii) the date on which certain stockholder approvals, including for the Company to complete the Reverse Stock Split (as defined in Note 20, “Subsequent Events”

in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report), are obtained and become effective;

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

Equity”

in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report), as applicable, new common stock purchase warrants (the “September 2022 Warrants”) to purchase up to a number of shares of common stock, equal to 100% of the number of shares of common stock underlying the portion of the November 2021 Warrants, as amended, or the Amended July 2020 Warrants, as applicable, exercised.

The September 2022 Warrants will become exercisable on March 9, 2023 (or such later date on which the Reverse Stock Split becomes effective as the applicable stockholder approvals were obtained on November 10, 2022), for an aggregate of 11,475,000 shares of common stock.

The September 2022 Warrants have an exercise price of $0.18 per share and will expire on September 11, 2028. 

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

and Note 14, “Stockholders’

Equity”

in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report and the Company’s Current Report on Form 8-K filed with the SEC on September 13, 2022.

2022 Private Placement

Concurrent with the 2022 Warrant Reprice Transaction on September 9, 2022, the Company entered into a private placement transaction with certain accredited investors to sell, pursuant to the securities purchase agreement, units that will consist of:

(1) a newly designated Series C Non-Voting Convertible Preferred Stock, par value $0.01 per share (“Series C Preferred Stock”), (2) a new short-term Series A-1 warrant to purchase common stock that will be exercisable for a period of eighteen (18) months after the date of issuance (“Series A-1 Warrants”), and (3) a new long-term Series A-2 warrant to purchase common stock that will be exercisable for a period of six (6) years after the date of issuance (“Series A-2 Warrants”) (collectively, the “2022 Private Placement”).

In the 2022 Private Placement we intend to sell 3,250 shares of Series C Preferred Stock initially convertible into 18,057,000 shares of common stock at a conversion price of $0.18, Series A-1 Warrants exercisable to purchase up to an aggregate of 18,055,557 shares of Company common stock at an exercise price of $0.18 per share and Series A-2 Warrants exercisable to purchase up to an aggregate of 18,055,557 shares of Company common stock at an exercise price of $0.18 per share.

Upon the satisfaction of the conditions and the closing of the 2022 Private Placement, we expect to receive gross proceeds of $3.3 million.

For additional information regarding the 2022 Private Placements, see the Company’s Current Report on Form 8-K filed with the SEC on September 13, 2022.

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

As set forth in the written notice, the Company’s continued listing is predicated on it effecting a reverse stock split of its common stock or otherwise demonstrating sustained price improvement within a reasonable period of time, which the NYSE American staff determined to be no later than April 3, 2023.

On November 10, 2022, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to effect the Reverse Stock Split.

The Company anticipates that after the Reverse Stock Split is effective that it will result in an increase to its per share market price of its common stock, which the Company believes will satisfy the condition to effect a reverse stock split set forth in the NYSE American’s notification.

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 $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.

Our net loss attributable to common stockholders was $8.1 million for the nine months ended September 30, 2022, or $0.15 per share, as compared to a net loss attributable to common stockholders of $5.7 million for the nine months ended September 30, 2021, or $0.13 per share.

As of September 30, 2022, we had an accumulated deficit of $150 million and net cash used in operating activities of $5.4 million for the nine months ended September 30, 2022.

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

Based primarily on our cash and cash equivalents at September 30, 2022, we believe that our existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund our existing operations and meet our planned operating expenses into at least the second quarter of 2023.

Accordingly, the Company has determined that its planned operations raise substantial doubt about its ability to continue as a going concern.

To address this, the Company has and continues to evaluate different plans and strategic transactions to fund its operations, which recently included completing the 2022 Warrant Reprice Transaction and entering into the 2022 Private Placement to raise up to approximately $5.3 million in aggregate gross proceeds.

For additional information regarding the Company’s going concern determination and plans to fund operations, see “Financial Condition, Liquidity and Capital Resources”

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

Critical Accounting Policies and Estimates

Critical Accounting Policies and Estimates and Change in Accounting  

and Revision of Prior Period Financial Statements

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

1 unchanged sentence

In preparing these condensed consolidated financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality.

On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, research and development costs, patent costs, stock-based compensation, income taxes, earnout contingency, and warrant liability.

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances.

Actual results may differ from these estimates. 

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

Actual results may differ from these estimates.

During the three months ended September 30, 2022, the Company made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon.

The Company began expensing these fees as incurred as product cost of goods sold in the Company’s condensed consolidated statements of operations and comprehensive loss.

The Company previously recorded revenue net of these fees.

While reviewing its accounting policy for fulfillment fees, the Company identified an immaterial error in its previously issued condensed consolidated financial statements whereby the Company has been incorrectly presenting revenue net of selling commissions paid to third-party online retailers.

For the three months ended September 30, 2022, the Company began expensing them as incurred as sales and marketing expenses within the Company’s condensed consolidated statements of operations and comprehensive loss.

The Company evaluated the error and believes that the impact of this error is immaterial to the previously issued condensed consolidated financial statements.

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

The changes and revisions had no impact on operating loss, net loss and comprehensive loss or net loss per share in the Company’s condensed consolidated statements of operations and comprehensive loss in the periods presented in this report or in previously issued annual and quarterly Company condensed consolidated financial statements.

The changes and revisions also did not impact cash or ending cash balances in the Company’s condensed consolidated balance sheets in the periods presented in this report or in previously issued annual and quarterly Company condensed consolidated financial statements.

Additional information regarding the change in accounting, revision of prior period condensed consolidated financial statements and our other 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.

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Comparison of the Three Months  

Ended June 30, 2022 and 2021

Ended September 30, 2022 and 2021

Three Months Ended

September 30,

(in thousands)

4 unchanged sentences

Product cost of goods sold

Operating expenses:

Research and development

3 unchanged sentences

Operating loss

Other (expense) income, net

Non-cash loss on modification of common stock warrants

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

Other expense

Loss before provision for income taxes

1 unchanged sentence

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.

Impact of DERMAdoctor Acquisition

The closing of the DERMAdoctor Acquisition 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 and those discussed below for the three months ended September 30, 2022 include the financial results of DERMAdoctor, with no comparable results for the three months ended September 30, 2021.

For the three months ended September 30, 2022, this includes product revenue, net, of $1.3 million, product cost of goods sold of $0.7 million, $0.6 million in sales and marketing costs and $0.2 million in general and administrative costs.

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

As discussed further in Note 2, “Summary of Significant Accounting Policies”

 in the Notes to the Unaudited Condensed Consolidated Financial Statement in Part I, Item 1 of this report, during the three months ended September 30, 2022, the Company made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon.

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

For the three months ended September 30, 2022, the result of these changes was an increase of $548 thousand in product revenue, net, which was offset by an increase of $283 thousand in product cost of goods sold and $265 thousand in sales and marketing expenses.

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

For the three months ended September 30, 2021, the result of these changes and revisions was an increase of $425 thousand in product revenue, net, which was offset by an increase of $219 thousand in product cost of goods sold and $206 thousand in sales and marketing expenses.

These changes and revisions that were applied during the three month periods ended September 30, 2022 and 2021 did not impact operating loss, net loss and comprehensive loss or loss per share in the Company’s condensed consolidated statement of operations and comprehensive loss during either of those periods.

The changes and revisions also did not impact cash or ending cash balances in the Company’s condensed consolidated balance sheets as of September 30, 2022, September 30, 2021 or in previously issued annual and quarterly Company financial statements.

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

Product revenue, net, increased by $1.6 million, or 69%, to $3.8 million for the three months ended September 30, 2022, from $2.3 million for the three months ended September 30, 2021.

The increase in product revenue, net, was primarily the result of $1.3 million from the sale of DERMAdoctor products during the three months ended September 30, 2022 with no comparable revenue from DERMAdoctor products during the three months ended September 30, 2021 as DERMAdoctor was not acquired until November 2021.

Revenue from Avenova Spray decreased by $0.2 million for the three months ended September 30, 2022 from $2.1 million for the three months ended September 30, 2021 to $1.9 million for the three months ended September 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.

Additionally, the Company recorded an increase of $0.1 million in revenue from other Avenova branded optical products, including the Company’s NovaWipes by Avenova and Avenova Moist Heating Eye Compress Mask.

Additionally, the Company recorded $0.3 million in product revenue, net, from the sale of PhaseOne branded wound care products during the three months ended September 30, 2022 with no comparable result for the three months ended September 30, 2021.

Product cost of goods sold increased by 104%, to $1.5 million for the three months ended September 30, 2022, from $0.7 million for the three months ended September 30, 2021.

This increase was primarily due to $0.7 million in product cost of goods sold recognized from the sale of DERMAdoctor products for the three months ended September 30, 2022 with no comparable product cost of goods sold of DERMAdoctor products for the three months ended September 30, 2021 as DERMAdoctor was not acquired until November 2021 and product cost of goods sold associated with the increase in wound care products sold during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Gross profit increased by 53%, to $2.4 million for the three months ended September 30, 2022, from $1.6 million for the three months ended September 30, 2021, which is a result of the increase in total sales, net, offset by the increase in the product cost of goods sold.

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.

Research and development expenses increased by $31 thousand to $41 thousand for the three months ended September 30, 2022, from $10 thousand for the three months ended September 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.

Sales and marketing expenses decreased by $0.2 million, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

The decrease was primarily due to lower digital advertising and related consulting costs incurred in the three month period ended September 30, 2022.

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

As previously disclosed, 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, consulting and CelleRx costs were partially offset by $0.6 million in sales and marketing costs incurred for DERMAdoctor products during the three months ended September 30, 2022, with no comparable expenditures in the 2021 period as DERMAdoctor was not acquired until November 2021.

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

General and administrative expenses decreased by $0.8 million, or 46%, to $1.0 million for the three months ended September 30, 2022, from $1.8 million for the three months ended September 30, 2021.

This decrease was primarily a result of a lower variable compensation and non-cash stock-based compensation expenses recorded in the 2022 period.

Additionally, during the three months ended September 30, 2021, we incurred legal costs in anticipation of the Company’s acquisition of DERMAdoctor with no comparable cost incurred in the 2022 period.

Offsetting the decrease in the 2022 period was $0.2 million in DERMAdoctor general and administrative costs and $0.1 million from the amortization of intangibles related to the DERMAdoctor Acquisition recorded in the three months ended September 30, 2022, with no comparable expenses in the 2021 period as DERMAdoctor was not acquired until November 2021.

Non-cash loss on modification of common stock warrants

During the three months ended September 30, 2022, the Company recorded a $1.9 million non-cash loss on modification of common stock warrants, which occurred due to amendments to the Amended July 2020 Warrants and the November 2021 Warrants, as amended, in connection with the 2022 Warrant Reprice Transaction with no comparable result in the prior year period.

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

and Note 14, “Stockholder’s Equity”, 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 warrant liabilities  

The Company recorded a non-cash gain on changes in fair value of warrant liabilities of $2.4 million for the three months ended September 30, 2022 with no comparable result in the prior year period.

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.

Other expense, net

Other expense, net, was $171 thousand for the three months ended September 30, 2022, with no comparable expense in the 2021 period.

The expense in 2022 was primarily due to $166 thousand related to the issuance of the September 2022 Warrants.

For additional information, please see Note 14, “Stockholder’s Equity”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

Comparison of the Nine Months  

Ended September 30, 2022 and 2021

Nine Months Ended

September 30,

(in thousands)

4 unchanged sentences

Product cost of goods sold

Operating Expenses:

Research and development

3 unchanged sentences

Operating loss

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

Non-cash loss on modification of common stock warrants

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

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

Other (expense) income, net

Other (expense) income

Loss before provision for income taxes

1 unchanged sentence

Net loss and comprehensive loss

Total Net Sales, Cost of Goods Sold and Gross Profit

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.

Impact of DERMAdoctor Acquisition

The closing of the DERMAdoctor Acquisition 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 and those discussed below for the nine months ended September 30, 2022 include the financial results of DERMAdoctor, with no comparable results for the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, this includes product revenue, net, of $3.1 million, product cost of goods sold of $1.9 million, $1.8 million in sales and marketing costs and $0.9 million in general and administrative costs, with no comparable operating results for the nine months ended September 30, 2021.

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

As discussed further in Note 2, “Summary of Significant Accounting Policies”

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

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

For the nine months ended September 30, 2022, the result of these changes and revisions was an increase of $1.8 million in product revenue, net, which was offset by an increase of $1.0 million in product cost of goods sold and $0.9 million in sales and marketing expenses.

For the nine months ended September 30, 2021, the result of these changes and revisions was an increase of $1.3 million in product revenue, net, which was offset by an increase of $0.6 million in product cost of goods sold and $0.6 million in sales and marketing expenses.

These changes and revisions that were applied during the nine month periods ended September 30, 2022 and 2021 did not impact operating loss, net loss and comprehensive loss or net loss per share in the Company’s condensed consolidated statement of operations and comprehensive loss during either of those periods.

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

Product revenue, net, increased by $3.7 million, or 53%, to $10.7 million for the nine months ended September 30, 2022, from $7.0 million for the nine months ended September 30, 2021.

The increase in product revenue, net, was primarily the result of $3.1 million from the sale of DERMAdoctor products during the nine months ended September 30, 2022 with no comparable revenue from DERMAdoctor products during the nine months ended September 30, 2021.

Revenue from Avenova Spray decreased by $0.6 million for the nine months ended September 30, 2022, from $6.4 million for the nine months ended September 30, 2021 to $5.8 million for the nine months ended September 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 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.

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

Additionally, the Company recorded an increase of $0.5 million in revenue from other Avenova branded optical products, including the Company’s NovaWipes by Avenova and Avenova Moist Heating Eye Compress Mask.

Additionally, product revenue, net, from the Company’s NeutroPhase and PhaseOne branded wound care products was $0.8 million higher during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Product cost of goods sold increased by $2.5 million, or 116%, to $4.7 million for the nine months ended September 30, 2022, from $2.2 million for the nine months ended September 30, 2021.

This increase was primarily due to $1.9 million in product cost of goods sold recognized from the sales of DERMAdoctor products for the nine months ended September 30, 2022, with no comparable product cost of goods sold for the nine months ended September 30, 2021 and product cost of goods sold associated with the increase in wound care products sold during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Gross profit increased by $1.2 million, to $6.0 million for the nine months ended September 30, 2022, from $4.8 million for the nine months ended September 30, 2021, which is a result of the increase in total sales, net, offset by the increase in the product 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.

Research and development expenses increased by $72 thousand to $108 thousand for the nine months ended September 30, 2022, from $36 thousand for the nine months ended September 30, 2021.

Sales and Marketing

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.

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. 

Sales and marketing expenses decreased by $0.1 million, or 1%, to $5.8 million for the nine months ended September 30, 2022, from $5.9 million for the nine months ended September 30, 2021.

The decrease was due to lower digital advertising and related consulting costs incurred in the nine month period ended September 30, 2022.

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

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

These decreases were partially offset by $1.8 million in sales and marketing costs incurred for DERMAdoctor products during the nine months ended September 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.

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.

General and administrative expenses increased by $0.5 million, or 12%, to $5.0 million for the nine months ended September 30, 2022, from $4.5 million for the nine months ended September 30, 2021.

Results for the nine months ended September 30, 2022 include $0.9 million in DERMAdoctor general and administrative costs and $0.3 million from the amortization of intangibles related to the DERMAdoctor Acquisition with no comparable expenses in the 2021 period.

Additionally, during the nine months ended September 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.

Partially offsetting these increases was a decrease in variable compensation and non-cash stock-based compensation expenses recorded in the 2022 period as compared to the 2021 period.

Non-cash loss on modification of common stock warrants 

During the nine months ended September 30, 2022, the Company recorded a $1.9 million non-cash loss on modification of common stock warrants, which occurred due to amendments to the Amended July 2020 Warrants and the November 2021 Warrants, as amended, in connection with the 2022 Warrant Reprice Transaction with no comparable result in the prior year period.

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

and Note 14, “Stockholder’s Equity”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report. 

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

Adjustments to the fair value of warrant liabilities resulted in a gain of $4.5 million for the nine months ended September 30, 2022.

For additional information regarding the warrant liabilities 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.

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

This contingent liability relates to potential future contingent consideration that may become payable as part of the DERMAdoctor Acquisition if specified milestone events are achieved.

Other (expense)  

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. 

The other expense, net, was $178 thousand for the nine months ended September 30, 2022 and other income, net, of $2 thousand for the nine months ended September 30, 2021, respectively. The expense in 2022 was primarily due to $166 thousand related to the issuance of the September 2022 Warrants.

For additional information, please see Note 14, “Stockholder’s Equity”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

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.

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

Our cash and cash equivalents include approximately $2.1 million in aggregate gross proceeds received from the 2022 Warrant Reprice Transaction (see Note 14, “Stockholders’

Equity”

in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further information regarding the 2022 Warrant Reprice Transaction) that was completed in September 2022.

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:

Additionally, 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 has determined that its 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 long-term liquidity needs will be largely determined by the success of commercialization efforts.

To address the Company’s current liquidity and capital needs, the Company has and continues to evaluate different plans and strategic transactions to fund operations, including:

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

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

(2) reducing spending on operations, including reducing spending 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.

In the absence of the Company’s completion of the 2022 Private Placement and one or more additional transactions and/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.

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Cash Used in Operating Activities

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.

Net cash used in operating activities was $5.4 million for the nine months ended September 30, 2022, which consisted primarily of a net loss of $2.4 million, non-cash loss of $1.9 million on modification of common stock warrants, non-cash gain of $4.5 million on the change in fair value of warrant liability, non-cash gain of $0.2 million on the change in fair value of contingent liability, stock-based compensation expenses of $0.1 million, and a net decrease of $0.8 million in our net operating assets and liabilities.

Net cash used in operating activities was $4.9 million for the nine months ended September 30, 2021, which consisted primarily of a net loss of $5.7 million, stock-based compensation expenses of $0.7 million, and a net change of $42 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 $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 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.

Net cash used in investing activities for the purchase of property and equipment was $112 thousand and $44 thousand, for the nine months ended September 30, 2022 and 2021, respectively.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2022 of $1.6 million was primarily related to the proceeds received in the 2022 Warrant Reprice Transaction partially offset by the repayment of the DERMAdoctor line of credit, which was terminated in the first quarter of 2022.

Net cash provided by financing activities was $2.0 million for the nine months ended September 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.

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The state tax credits have an indefinite carryover period.

Current federal and California tax laws include substantial restrictions on the utilization of net operating loss carryforwards in the event of an ownership change of a corporation.

Current federal and California tax laws include substantial restrictions on the utilization of net operating loss carryforwards in the event of an ownership change of a corporation.

Accordingly, our ability to utilize net operating loss carryforwards may be limited as a result of such ownership changes.

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

Our costs are subject to fluctuations, particularly due to change in the price of raw and packing materials and the cost of labor, transportation and operating supplies.  Therefore, our business results depend, in part, on our continued ability to manage these fluctuations through pricing actions, costs savings projects and sourcing decisions, while maintaining and improving margins and market share.  Failure to manage these fluctuations could adversely impact our results of operations or cash flows.

Our costs are subject to fluctuations, particularly due to changes in the price of raw and packing materials and the cost of labor, transportation and operating supplies.  Therefore, our business results depend, in part, on our continued ability to manage these fluctuations through pricing actions, costs savings projects and sourcing decisions, while maintaining and improving margins and market share.  Failure to manage these fluctuations could adversely impact our results of operations or cash flows.

Off-Balance Sheet Arrangements

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

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

Avenova Branded Products

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Dermatology/Skincare Products

Our DERMAdoctor products are sold through third parties such as Costco, Amazon and others;

Our DERMAdoctor products are sold through third parties such as Costco and others;

therefore, we may receive periodic large orders that result in large chunks of revenue that are received in irregular intervals during the year.

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Contractual Obligations

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

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

Contractual Obligations

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Equipment 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 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.

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

The total commitment for the facility leases as of September 30, 2022 was $2.3 million due over the leases’

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

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

The total commitment for the lease as of September 30, 2022 was $1 thousand due over the lease terms, compared to $13 thousand as of December 31, 2021.

The copier lease term is scheduled to expire in November 2022.

See Note 12, “Commitments and Contingencies”

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

What changed 10-Q

Item 1. Financial Statements