What changed in this filing

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Item 1. Business

2023-03-31 compared with 2022-03-29 · 63 added, 55 removed, 173 unchanged (41% of the section changed)

NovaBay Pharmaceuticals, Inc.

develops and sells scientifically-created and clinically-proven eyecare and skincare products.

develops and sells scientifically-created and clinically-proven eyecare, skincare and wound care products.

Our leading product, Avenova®

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Food and Drug Administration (“FDA”) for sale in the United States.

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

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

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

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

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

Through our subsidiary DERMAdoctor, LLC (“DERMAdoctor”), we offer over 30 dermatologist-developed products targeting common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris.

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

We 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.

Avenova Branded Optical Products

Avenova Spray is a proprietary solution of hypochlorous acid that acts as an antimicrobial preservative in solution and has been shown to neutralize bacterial toxins in laboratory tests.

We acquired DERMAdoctor in November 2021 (the “DERMAdoctor Acquisition”), and since completing this transaction we have been working to integrate and expand the DERMAdoctor business in order to achieve strategic objectives contemplated by the acquisition, including revenue growth, cost reductions and overall profitability.

We were not able to achieve these objectives in fiscal 2022, as DERMAdoctor’s product revenue declined in 2022 compared tour expectations, while operating costs relating to these products increased.

We continue to work to achieve these objectives, as well as continuing to evaluate additional strategies for our Company and its business to address our capital and liquidity needs as discussed in this Item 1 below under “Our Capital Requirements and Strategic Initiatives”.

We also manufacture and sell our proprietary form of hypochlorous acid for the wound care market through our NeutroPhase and PhaseOne branded products.

NeutroPhase and PhaseOne are used for cleansing and irrigation as part of surgical procedures, as well as treating certain wounds, burns, ulcers and other injuries.

We currently sell these products through distributors.

Our Products and Marketing Approach

Avenova Branded Eyecare Products

Avenova Spray is a proprietary form of hypochlorous acid that acts as an antimicrobial solution and has been shown to neutralize bacterial toxins in laboratory tests.

Because it is a gentle isotonic solution, it is well suited for daily use on the lids and lashes.

Avenova Spray offers distinct advantages when compared to alternative lid and lash regimens that contain soaps, bleach, and other impurities, as Avenova Spray removes unwanted microorganisms from the skin without the use of those harmful ingredients.

Avenova Spray’s target market is the millions of Americans who suffer from minor irritation of the skin around the eye (commonly referred to as blepharitis) as well as anyone who suffers from dry eye (commonly described as a gritty sandy sensation while blinking).

Avenova Spray is available both over-the-counter and as a prescription.

We promote Avenova Spray direct to consumers and make it available through Avenova.com, other online channels and at select brick-and-mortar stores.

We primarily promote Avenova Spray directly to consumers on Amazon.com and Avenova.com.

In total, this was our leading sales channel by unit sales and net revenue in 2022.

Avenova Spray is also available (1) at optometrists’

Prescription Avenova Spray is available at optometrists’

and ophthalmologists’

offices, through our physician dispensed channel;

(2) at national pharmacy chains across all 50 states;

and (3) through our Partner Pharmacy Program, providing a consistent patient experience at contracted pricing.

offices, through our physician dispensed channel, and at most retail pharmacies across all 50 states.

Because Avenova Spray can be purchased as both an over-the-counter and prescription product, it is available to a wide range of potential customers and addressable markets.

Making it available over-the-counter capitalizes on a trend to sell pharmaceutical products directly to consumers in response to increased cost shifting to consumers through high-deductible health plans.

Our ongoing focus on promoting Avenova Spray online is reflected in increasing our spend on digital marketing and public relations initiatives.

Avenova Spray is available on Avenova.com, Amazon.com, Walmart.com, and select other online channels.

Avenova Spray also became available at CVS store locations throughout the U.S.

and on CVS.com beginning in the first quarter of 2021.

Support from ophthalmologists and optometrists for Avenova Spray remains strong.

The continual endorsement of medical professionals has created a “doctor recommended”

Continuous endorsement of medical professionals for Avenova has created a “doctor recommended”

halo effect around our brand.

This is a key differentiating factor in a crowded consumer space and is a result of our high quality and reliable efficacy.

Our Buy-and-Sell physician dispensed channel is particularly important in this regard as it gives patients the opportunity to purchase Avenova Spray conveniently and immediately upon recommendation in the doctor’s office.

We believe this also creates repeat Avenova Spray customers who subsequently purchase Avenova Spray and often other Avenova branded products through other channels.

We also make Avenova Spray accessible nationwide in nearly all retail pharmacies across the United States through agreements with McKesson Corporation, Cardinal Health, and AmerisourceBergen Corporation.

Our physician dispensed channel is particularly important in this regard as it gives patients the opportunity to purchase Avenova Spray conveniently and immediately upon recommendation in the doctor’s office.

We believe this also creates repeat Avenova Spray customers who subsequently purchase Avenova Spray and other Avenova branded products through other channels.

We also make prescription Avenova Spray accessible nationwide in nearly all retail pharmacies across the United States through agreements with McKesson Corporation, Cardinal Health, and AmerisourceBergen Corporation.

We continue to build our prescription business under a value pricing model.

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The rebate cards are intended to be used by patients who either do not have insurance coverage or whose insurance coverage does not cover Avenova Spray, thereby lowering the price for the patient at the pharmacy.

We also have agreements directly with some preferred pharmacy networks through our Partner Pharmacy Program.

We also have agreements with select preferred pharmacy networks through our Partner Pharmacy Program.

These agreements provide greater control over the patient experience at consistent contract pricing.

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In 2021, we added ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical businesses, to our Partner Pharmacy Program.

There are many companies that sell lid and lash solutions, most of which, to the best of our knowledge, are surfactant (soap) based.

Unlike these detergent-based products that contain a mix of numerous chemicals, Avenova Spray consists solely of saline and 0.01% pure hypochlorous acid, a molecule naturally produced by the human body.

Elegant in its simplicity, Avenova Spray works without the toxic impurities included in competitive offerings.

While cheaper antibacterial soaps are commonly used to reduce or prevent bacterial contamination on the skin, we do not view them as true competitors of Avenova Spray.

DERMAdoctor Branded Dermatology Products

Through the DERMAdoctor Acquisition, we added a comprehensive portfolio of dermatological solutions to address common skincare concerns including:

keratosis pilaris, rosacea and eczema, anti-aging, SPF, hyperhidrosis, excessive hair, and acne.

keratosis pilaris, rosacea and eczema, anti-aging, hyperhidrosis, excessive hair, and acne.

These products are organized into several product families, including:

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Our marketing strategy for the DERMAdoctor brand is to focus on educating our target consumers about the unique attributes of such products, developing intimate relationships with these consumers and capitalizing on our omni-channel distribution strategy to effectively reach and engage these consumers.

Our target demographic for both the Avenova and DERMAdoctor brands encompasses women between the ages of 25 to 65 who have a college education and an above average household income.

We plan to continue DERMAdoctor’s efforts to engage in educational media such as appearances on television shows, information and research provided on our websites and physical presence at specialty retailers and department stores, primarily by Dr.

Audrey Kunin, to further strengthen the DERMAdoctor brand image and provide additional points of contact to educate consumers about such products.

In addition, we also plan to leverage our consumer focused messaging and the products’

pharmaceutical pedigree to create brand awareness through digital marketing, influencers and third-party advertising companies.

Our target demographic for the DERMAdoctor brand encompasses women between the ages of 25 to 65 who have a college education and an above average household income.

The skincare industry is highly competitive and subject to rapid changes due to consumer preferences and industry trends.

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NeutroPhase and PhaseOne Branded Wound Care Products

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

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

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

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

DERMAdoctor Acquisition and Financing Transaction

On September 27, 2021, we entered into a Membership Unit Purchase Agreement (the “Acquisition Purchase Agreement”) by and among (i) us, (ii) DERMAdoctor, (iii) Dr.

Jeffrey Kunin and Dr.

Audrey Kunin (the “Founders”);

(iv) Papillon Partners, Inc., a Missouri corporation that is owned by the Founders (“Papillon”);

and (v) Midwest Growth Partners, L.L.L.P., an Iowa limited liability limited partnership (“MGP”

and together with Papillon, the “Sellers”).

Pursuant to the Acquisition Purchase Agreement, we acquired 100% of the membership units of DERMAdoctor for an agreed upon purchase price of approximately $15.0 million (the “Purchase Price”).

The Purchase Price was comprised of a payment of approximately $12.0 million in cash to the Sellers at closing, which amount was (i) reduced to account for payments we made to satisfy DERMAdoctor’s indebtedness and its transaction expenses as of closing, and (ii) increased by the DERMAdoctor cash and cash equivalents that remained as of closing.

The remaining amount of the Purchase Price is comprised of up to an aggregate of $3.0 million in earn out payments after the Acquisition Closing, which are contingent upon the legacy DERMAdoctor business achieving predetermined contribution margin financial targets for the 2022 and the 2023 calendar fiscal years (the “Earn Out Payments”).

DERMAdoctor is now a wholly-owned subsidiary of NovaBay.

On October 29, 2021, we entered into a Securities Purchase Agreement with various institutional investors (the “Purchasers”).

Pursuant to the Securities Purchase Agreement, we agreed 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 Convertible Preferred Stock (the “Preferred Stock”) convertible into an aggregate of 37,500,000 shares of common stock, par value $0.01 (“Common Stock”), and (ii) warrants (the “2021 Warrants”) exercisable for 37,500,000 shares of Common Stock for an aggregate purchase price of $15.0 million.

The 2021 Private Placement closed on November 2, 2021.

We used a portion of the net proceeds from the 2021 Private Placement to partially fund the Purchase Price of the DERMAdoctor Acquisition, with the remaining amount to be used for working capital purposes.

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

Customers, Manufacturing and Suppliers

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Such products are distributed online, through wholesale distribution, in physical store locations and, particularly as relates to international sales, through marketing and distribution agreements with local partners.

For the Avenova Spray, we currently outsource manufacturing to two contract manufacturers with facilities located in the United States.

For the Avenova Spray, we currently outsource manufacturing to a contract manufacturer with facilities located in the United States.

For our DERMAdoctor products, we also use third-party contract manufacturers and suppliers to obtain substantially all raw materials, components, and packaging products and to manufacture finished products relating to the DERMAdoctor brand.

We utilize a total of seven different product fillers and numerous ingredient and packaging suppliers from which we source and contract the manufactures of our DERMAdoctor products.

We utilize several different product fillers and numerous ingredient and packaging suppliers from which we source and contract the manufactures of our DERMAdoctor products.

We believe that we have good relationships with our manufacturers and that our manufacturers have adequate manufacturing capacity to satisfy our demands for all products.

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We rely on patents, trademarks, trade secrets and know-how to maintain our competitive position.

We own over 40 live trademark registrations in the U.S., as well as trademark registrations and pending applications in many other countries internationally, with our primary trademarks including “Avenova®”, “CelleRx®”, “DERMAdoctor®”, “Kakadu C®”, “AIN’T Misbehavin’®”, “KP Duty®”

We own over 40 live trademark registrations in the U.S., as well as trademark registrations and pending applications in many other countries internationally, with our primary trademarks including “Avenova®”, “CelleRx®”, “PhaseOne®”, “NeutroPhase®”, “DERMAdoctor®”, “Kakadu C®”, “AIN’T Misbehavin’®”, “KP Duty®”

and depictions of Dr.

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Research and Development

For the years ended December 31, 2021 and 2020, we incurred total research and development expenses of approximately $44 thousand and $285 thousand, respectively.

DERMAdoctor focuses a significant portion of its product development efforts on creating new products and improving existing products based on feedback and suggestions from its consumers.

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The finished products DERMAdoctor develops, including packaging, must meet adequate quality control, and performance tests before they are marketed.

Pursuant to our current business strategy, we plan to continue DERMAdoctor’s practice of creating new products and improving existing products in our core product lines by incorporating consumer feedback into our product development efforts.

For the years ended December 31, 2022 and 2021, we incurred total research and development expenses of approximately $174 thousand and $44 thousand, respectively.

Avenova Branded Products

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This annual phenomenon is due to consumers facing the need to satisfy health insurance deductibles and changes to copays as each new insurance year begins.

Sales of Avenova Spray through non-prescription channels, along with the other Avenova branded products, experience less seasonality with demands, consistent throughout the year.

Sales of Avenova Spray through non-prescription channels, along with the other Avenova branded products, experience less seasonality with demands, with more consistent sales throughout the year.

Dermatology/Skincare Products

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Historically, sales of DERMAdoctor products that contain sunscreen and antiperspirants are higher in the summer seasons and sales of DERMAdoctor products that contain moisturizers are higher in the fall and winter months.

In addition, DERMAdoctor products will typically experience an uptick in sales during the fourth quarter around the holidays of each country in which its products are sold, particularly in the United States and China.

Our Capital Requirements and Strategic Initiatives

In our Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission (“SEC”) on August 11, 2022 and November 14, 2022, and this annual report on Form 10-K, we reported that based primarily on the funds available as of June 30, 2022, September 30, 2022 and December 31, 2022, respectively, that we expected our expenses will continue to exceed our revenues, as the Company continues to invest in both its Avenova and DERMAdoctor commercialization efforts.

Further, based on the amount of capital and liquidity that we had available at such time, we determined that our planned operations raised substantial doubt about our ability to continue as a going concern.

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

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

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

2022 Financing Transactions

On September 9, 2022, we entered into certain letter agreements and completed a warrant reprice transaction (the “2022 Warrant Reprice Transaction”) with each holder of the common stock purchase warrants (the “November 2021 Warrants”) that we issued in our November 2021 private placement (the “2021 Private Placement”) and with certain holders of the common stock purchase warrants that we issued in a private placement that was part of a warrant reprice transaction in July 2020 (the “July 2020 Warrants”) (the “Warrant Reprice Transaction”).

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

Pursuant to the terms of the letter agreements, the November 2021 Warrants (“Amended November 2021 Warrants”) and the July 2020 Warrants (“Amended July 2020 Warrants”) were amended to:

(i) reduce the exercise price;

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

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

Additionally, in connection with the 2022 Warrant Reprice Transaction, we issued to certain participants in the 2022 Warrant Reprice Transaction that exercised their Amended November 2021 Warrants and their Amended July 2020 Warrants, new common stock purchase warrants (the “September 2022 Warrants”) to purchase a number of shares of common stock equal to 100% of the number of shares that a participant exercised under its November 2021 Warrant or Amended July 2020 Warrant.

The September 2022 Warrants are exercisable for an aggregate of 327,860 shares of common stock at an exercise price of $6.30 per share and expire on September 11, 2028. 

Concurrent with the 2022 Warrant Reprice Transaction, we entered into a private placement transaction with accredited investors (the “2022 Private Placement”) to sell, pursuant to the Securities Purchase Agreement, dated September 9, 2022 (the “2022 Securities Purchase Agreement”), units consisting of (i) 3,250 shares of Series C Non-Voting Convertible Preferred Stock, par value $0.01 per share (“Series C Preferred Stock”), convertible into an aggregate of 516,750 shares of common stock, (ii) a short-term Series A-1 warrant to purchase common stock (“Short-Term Warrants”), which are exercisable for 515,876 shares of common stock at an exercise price of $6.30 per share for a period of eighteen (18) months after the date of issuance and (iii) a long-term Series A-2 warrant to purchase common stock (“Long-Term Warrants”

and, together with the Short-Term Warrants, the “2022 Warrants”), which are exercisable for 515,876 shares of common stock at an exercise price of $6.30 per share for a period of six (6) years after the date of issuance.

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

Ongoing Strategic Initiatives

While the 2022 Warrant Reprice Transaction and the 2022 Private Placement provided needed capital for the continuing operation of our business, additional funding or substantial revenue growth will be needed in both the short- and long-term in order to continue the operation of our business according to our existing business plan.

In addition to strategies to grow our revenue in fiscal year 2023 and improve liquidity, we are taking steps to reduce our operating expenses, including through streamlining operations and reducing or eliminating excess costs.

Further, we are continuing to evaluate our current business plan and potential changes to our business and strategic direction.

If we do not raise additional capital or our revenues do not reach sufficient levels in the near term, then we may need to implement additional cost reduction measures and make changes to our current business plan and strategic direction.

Such changes may include altering our existing operations and/or pursing a strategic transaction, such as a divestiture of certain of a business or product line and related assets.

We are continuing to work diligently to improve the capital, liquidity and overall financial condition of our Company.

For additional information regarding the Company’s going concern determination, plans to fund operations and ongoing strategic initiatives, see the sections captioned “Recent Developments”

and “Financial Condition, Liquidity and Capital Resources”

contained in Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations and within Note 1, “Organization”

in the Notes to Consolidated Financial Statements contained in Item 8.

Financial Statements and Supplementary Data.

Government Regulation

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Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our corporate website, located at www.novabay.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”).

Our website is not part of this annual report on Form 10-K.

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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-K

Item 1. Business