What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-31 compared with 2022-03-29 · 759 added, 750 removed, 659 unchanged (70% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2022 and 2021

Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021,  

2020 and 2019

Consolidated Statements of Stockholders' Equity  

for the Years Ended December 31, 2021,  

2020 and 2019

Consolidated Statements of Cash Flows for the Years Ended December 31, 2021,  

2020 and 2019

Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2022 and 2021

Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

To the Stockholders and Board of Directors of

NovaBay Pharmaceuticals Inc.

Emeryville, California

Opinion on the Financial Statements

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of NovaBay Pharmaceuticals Inc.

(the “Company”) as of December 31, 2021, the related consolidated statements of operations and comprehensive loss, stockholders’

equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and the results of its operations and its cash flows for the year ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

The consolidated financial statements of the Company as of December 31, 2020 and for each of the two years in the period ended December 31, 2020 were audited by OUM & Co.

LLP, who joined WithumSmith+Brown PC on July 15, 2021, and rendered their opinion on such statements on March 25, 2021.

and subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, stockholders’

equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt Regarding Going Concern

The accompanying financial statements have been prepared assuming that the entity will continue as a going concern.

As discussed in Note 1 to the financial statements, the entity has a history of recurring losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern.

Management's plans in regard to these matters are also described in Note 1.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our opinion is not modified with respect to this matter.

Basis for Opinion  

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements whether due to error or fraud and performing procedures that respond to those risks.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Acquisition of DERMAdoctor, LLC –

Valuation of Certain Intangible Assets

Description of the Matter  

As described in Note 3 to the consolidated financial statements, the Company completed the acquisition of DERMAdoctor, LLC.

(“DERMAdoctor”) on November 5, 2021.

The acquisition was accounted for under the acquisition method of accounting for business combinations.

Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including $2.1 million for the DERMAdoctor trade names and $2.9 million for proprietary product formulations.

Auditing the Company’s accounting for the acquisition was complex due to the significant estimates and assumptions management made to determine the fair value of the DERMAdoctor trade names and proprietary product formulations.

Trade names were valued using the relief-from-royalty method and proprietary product formulations were valued using the multi-period excess earnings model. 

The determination of the fair value of these intangible assets required management to make significant estimates and assumptions related to forecasted sales growth rates, cash flows, market-based royalty rates, and estimated discount rates.

These significant assumptions are forward looking and could be affected by future economic and market conditions.

How We Addressed the Matter in Our Audit

We obtained an understanding of the Company’s accounting for the acquisition, including reviewing the purchase agreement, evaluating the significant assumptions and methods used in developing the fair value estimates, and testing the recognition of (1) the tangible assets acquired and liabilities assumed at fair value;

(2) the identifiable intangible assets acquired at fair value;

(3) the fair value of contingent consideration (as discussed below) and (4) goodwill measured as a residual.

To test the estimated fair value of the trade names and proprietary product formulations intangible assets, we performed audit procedures that included, among others, assessing the appropriateness of the valuation methodologies used and testing the significant assumptions used in the model, including the completeness and accuracy of the underlying data.

For example, we compared the significant assumptions to current industry, market and economic trends, and to the historical results of the acquired business and other guideline companies.

We involved our valuation specialists to assist in our evaluation of the significant assumptions and models used in the fair value estimates.

Valuation of Contingent Consideration

Description of the Matter  

As described in Note 2 to the consolidated financial statements, in accounting for the acquisition of DERMAdoctor, the Company recognized contingent consideration liabilities at the estimated fair value on the acquisition date.

As mentioned above, the Company applied the acquisition method of accounting for business combinations.

Subsequent changes to the fair value of the contingent consideration liabilities would be recorded within the consolidated statements of operations and comprehensive loss in the period of change.

The contingent consideration liability is based on the achievement of certain predetermined financial targets for the 2022 and 2023 fiscal years. 

At December 31, 2021, the Company recorded $0.6 million in contingent earnout liability that was associated with DERMAdoctor business combination.

This amount represented a ‘Level 3’

fair value measurement in the fair value hierarchy due to the significant unobservable inputs used in determining the fair value and the use of management judgment about the assumptions market participants would use in pricing the liabilities.

Auditing the valuation of the contingent consideration liability was complex and required significant auditor judgment due to the complexity of the valuation method and the high degree of subjectivity in evaluating certain assumptions required to estimate the fair value of the contingent consideration liability.

Management determined the estimated fair value of the contingent consideration liability using a Monte Carlo simulation model. 

The significant assumptions and estimates include the probability the Company will achieve a specified range of revenue, profitability levels, volatility and discount rate.

These significant assumptions are forward looking and consider anticipated market conditions, which in turn, requires subjective auditor judgement.

How We Addressed the Matter in Our Audit

To test the estimated fair value of the contingent consideration liability, our audit procedures included, among others, inspecting the terms of the executed acquisition agreement, assessing the scenario analysis valuation method used, and testing the key inputs and significant assumptions discussed above.

We involved our valuation specialists who assisted in evaluating the appropriateness of the selected valuation methodology and evaluating the reasonableness of certain significant assumptions used to estimate the fair value of the contingent consideration.

We evaluated whether the assumptions and estimates used, including the probability the Company will achieve a specified range of revenue and profitability levels, by considering the past performance of the acquired business and current market forecasts, and whether such assumptions were consistent with evidence obtained in other areas of the audit.

Product Revenue Allowances for Product Returns

Description of the Matter  

As described in Note 2 to the consolidated financial statements, when recognizing revenue from product sales of Avenova Spray to the Company’s major distribution partners, the Company makes an estimate of the amount of consideration the Company expects to be entitled to receive.

As described in Note 2 of the consolidated financial statements, when recognizing revenue from product sales of Avenova Spray to the Company’s major distribution partners, the Company makes an estimate of the amount of consideration the Company expects to be entitled to receive.

Upon recognition of these product sales, the Company records estimates for variable consideration consisting of service fees, discounts, rebates, and product returns, resulting in a reduction in product revenue.

The variable consideration provisions are recorded within accrued liabilities and in the same period that the related revenue is recognized.

Liabilities related to allowance for product returns involve the use of significant assumptions and judgments in their calculation.

These significant assumptions and judgments include historical sales and return rates and inventory levels in the distribution channel and utilizing existing return policies with customers.

Liabilities related to the allowance for product returns involve the use of significant assumptions and judgments in their calculation.

These significant assumptions and judgments include historical sales and return rates and inventory levels in the distribution channel, as well as existing return policies with customers.

Management’s estimated allowance for product returns requires a high degree of judgment and is subject to change based on various quantitative and qualitative factors.

Accordingly, extensive audit effort and a high degree of auditor judgment were needed to evaluate management’s estimates and assumptions used in the determination of rebates and product returns. 

Accordingly, extensive audit effort and a high degree of auditor judgment were needed to evaluate management’s estimates and assumptions used in the determination of product returns. 

How We Addressed the Matter in Our Audit

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We evaluated the significant accounting policies relating to product returns, as well as management’s application of the policies, for appropriateness and reasonableness.

To test management’s estimate of product returns, we obtained management’s calculations for the estimates and performed one or more of the following procedures:

To test management’s estimate of product returns, we obtained management’s calculations for the estimates and performed the following procedures:

clerically tested the calculation, agreed relevant inputs to the terms of relevant policies, assessed subsequent events related to these estimates, evaluated the methodologies and assumptions used and the underlying data used by the Company, evaluated the assumptions used by management against historical trends, evaluated the change in estimated accruals from the prior periods, and assessed the historical accuracy of the Company’s estimates against actual results.

Impairment of Goodwill and Intangible Assets

Description of the Matter

At December 31, 2021, the Company had $4.5 million of goodwill and $5.2 million of other intangible assets, which primarily consisted of indefinite-lived trade names and definite lived trade secrets / product formulations and customer relationships.

As described in Notes 2, 3, 8 and 9 of the consolidated financial statements, these assets are evaluated for impairment at least annually using valuation techniques to estimate fair value, which involves the comparison of the fair value of each reporting unit or asset to its carrying value.

The Company estimates fair value using the income method, which is based on the present value of estimated future cash flows attributable to the respective assets.

These fair value estimates are sensitive to certain significant assumptions, including future sales and operating margin growth rates, economic conditions, probability of success, market competition, inflation, discount rates, and royalty rates.

We identified the Company’s impairment evaluations as a critical audit matter because of the significant judgments made by management to estimate the fair values of the reporting unit and the assets.

A high degree of auditor judgment and an increased extent of effort was required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of future sales and earnings as well as the selection of royalty rates and discount rates, including the need to involve our fair value specialists.

How We Addressed the Matter in Our Audit

We obtained an understanding of and evaluated the design of controls relating to the Company’s impairment review process.

We evaluated the significant accounting policies relating to the Company’s impairment analyses, as well as management’s application of the policies, for appropriateness and reasonableness. 

To test the estimated fair values of the assets, we performed audit procedures that included, among other things, assessing methodologies used to determine the fair values, testing the significant assumptions discussed above and testing the completeness and accuracy of the underlying data used by the Company.

For example, we evaluated management’s forecasted revenue growth rates used in the fair value estimates by comparing those assumptions to the historical results of the Company and current industry, market and economic forecasts.

We involved a valuation specialist to assist in evaluating the valuation methodologies and the significant assumptions such as discount rates and royalty rates as well as testing the mathematical accuracy of the calculation.

Additionally, we performed sensitivity analyses of significant assumptions to evaluate the effect on the fair value estimates of the assets.

/s WithumSmith+Brown, PC

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PCAOB ID Number 100

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors

NOVABAY PHARMACEUTICALS, INC.

Emeryville, California

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of NovaBay Pharmaceuticals, Inc.

(the “Company”) as of December 31, 2020, and the related consolidated statements of operations and comprehensive loss, stockholders’

equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ OUM & CO.

We served as the Company's auditor since 2010.

San Francisco, California

March 25, 2021

PCAOB ID Number 252

NOVABAY PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

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$ 7,504  

Accounts receivable, net of allowance for doubtful accounts ( $0 at December 31, 2021 and December 31, 2020)

Accounts receivable, net of allowance for doubtful accounts ($ 19 and $ 0 at December 31, 2022 and December 31, 2021, respectively)

Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($ 499 and $ 641 at December 31, 2022 and December 31, 2021, respectively)

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$ 1,080  

$ 1,045  

Accrued liabilities

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Operating lease liabilities-non-current

Warrant liability  

Contingent earnout liability  

Warrant liability

Contingent earnout liability

Total liabilities

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5,000 shares authorized;

14 and 0 issued and outstanding at December 31, 2021 and December 31, 2020, respectively

Series B Preferred Stock;

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

Series C Preferred Stock;

2 and 0 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively

Common stock, $ 0.01 par value;

100,000 and 75,000 shares authorized, 47,766 and 41,782 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively  

150,000 and 100,000 shares authorized, 2,035 and 1,365 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively

Additional paid-in capital

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NOVABAY PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Year Ended December 31,

For the Years Ended December 31,

Product revenue, net

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$ 10,180  

$ 6,556  

Other revenue, net

Total sales, net

14,404  

10,204  

Cost of goods sold

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General and administrative

Goodwill, intangible and other asset impairment

Total operating expenses

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15,377  

14,261  

Operating loss

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

Non-cash gain on changes in fair value of embedded derivative liability

Other (expense) income, net

Loss before provision for income taxes

Provision for income taxes

Net loss and comprehensive loss

Non-cash loss on modification of common stock warrants

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

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

Other expense, net

Preferred deemed dividend

Retained earnings reduction related to warrants down round feature triggered

Retained earnings reduction related to preferred stock down round feature triggered

Net loss attributable to common stockholders

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

43,657  

35,076  

21,641  

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

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Balance at December 31, 2020

17,089  

$ 119,764  

$ ( 114,981 )

$ 4,954  

Reclassification of warrant liability to equity related to adoption of ASU 2017-11

Down round feature adjustment related to warrants

Issuance of Series A Preferred Stock and common stock warrants, net of offering costs

Conversion of Series A Preferred Stock to common stock

Beneficial conversion feature upon issuance of Series A Preferred Stock

Deemed dividend from beneficial conversion feature of Series A Preferred Stock

Issuance of common stock in connection with offering, net of offering costs

Issuance of common stock in connection with exercise of warrants

Issuance of RSUs related to employee separation agreement

Issuance of common stock for option exercises

Issuance of RSUs to non-employees for services

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

Stock option modification

Balance at December 31, 2019

27,938  

$ 125,718  

$ ( 125,024 )

Reclassification of warrant liability to equity related to warrant modification

Issuance of warrants in connection with the TLF Warrants

Issuance of common stock, net of offering costs

Issuance of common stock in connection with exercise of warrants, net

16,128  

16,206  

Issuance of RSUs to non-employees for services

Issuance of stock for option exercises

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

Stock option modification

Balance at December 31, 2020

41,782  

$ 147,963  

$ ( 136,063 )

$ 12,318  

( 5,824 )  

Issuance of warrants in connection with TLF warrants

Issuance of common stock, net of offering costs  

Vesting of employee restricted stock awards

Issuance of RSUs to non-employees for services

Issuance of Series B Preferred Stock and common stock warrants, net of offering costs  

Conversion of Series B Preferred Stock to common stock

( 55 )  

Beneficial conversion feature upon Issuance of Series B Preferred Stock

Deemed dividend from beneficial Conversion feature of Series B Preferred Stock

( 735 )  

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

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Balance at December 31, 2021

47,766  

$ 150,900  

$ ( 141,887 )  

$ 10,171  

Reclassification of Series B Private Placement Warrants

Conversion of Series B Preferred Stock to common stock

Vesting of director restricted stock awards

Issuance of common stock in connection with exercise of warrants, net of offering costs

Shares issued for reverse stock split due to rounding feature

Reclassification of equity to liability related to 2022 Warrant Reprice Transaction (see Note 14)

Modification of common stock warrants

Down round feature adjustment related to Series B Preferred Stock

Reclassification of Private Placement Warrants

Issuance of Series C Preferred Stock, net of offering costs

Issuance of common stock A-1 warrants, net of offering costs

Issuance of common stock A-2 warrants, net of offering costs

Conversion of Series C Preferred Stock to common stock

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

Balance at December 31, 2022

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

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Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

Gain from early operating lease termination

Impairment of property and equipment

Loss on disposal of property and equipment

Impairment of operating lease right-of-use assets

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

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

Stock option modification expense

Issuance of RSUs to employees

Issuance of RSUs related to employee separation agreement

Depreciation of property and equipment

Amortization of intangible assets

Impairment of goodwill, intangible and other assets

Impairment of property, plant and equipment

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

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

Issuance of RSUs to non-employees for services

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

Non-cash (gain) on changes in fair value of embedded derivative liability

Interest expense related to amortization of debt issuance and debt discount

Interest expense related to amortization of debt issuance related to related party note payable

Issuance of warrants for services

Issuance of warrants in connection with the TLF Warrants

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

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

Non-cash loss on modification of common stock warrants

Changes in operating assets and liabilities:

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Operating lease liabilities

Deferred rent

Related party note payable

Long-term obligations

Net cash used in operating activities

( 9,192 )  

Investing activities:

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Financing activities:

Proceeds from preferred stock issuances, net

14,908  

Proceeds from Series B Preferred Stock issuances, net

Proceeds from Series C Preferred Stock and warrant issuances, net

Proceeds from common stock issuances, net

Proceeds from exercise of warrants

Proceeds from exercise of options, net

Proceeds from issuance of related party note payable

Proceeds from stock options & RSUs sold to cover taxes

Proceeds from convertible notes, net of discount

Proceeds from line of credit

Payment on the convertible note (Note 12)

Payment on the related party loan (Note 11)

Debt issuance cost

Draws (payments) on the line of credit

Net cash provided by financing activities

16,789  

11,702  

Net (decrease) increase 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 year

$ 7,979  

$ 12,427  

$ 7,412  

Year ended December 31,

For the Years ended December 31,

Supplemental disclosure of cash flow information:

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Income taxes paid

Year ended December 31,

For the Years ended December 31,

Supplemental disclosure of non-cash information:

Warrant liability transferred to equity in connection with exercise of warrants

Warrant liability transferred to equity related to warrant modification

Non-cash payment of related party loan accrued interest by offsetting related party accounts receivables - see Note 11

Cumulative effect of adoption of ASU 2017-11

Equity transferred to warrant liability related to warrant modification

Addition of operating lease, right-of-use asset

Fixed asset purchases, included in accounts payable and accrued liabilities

Fair value of warrants issued in connection with financings

Conversion of preferred stock to common stock

Reclassification of EmeryStation lease security deposit from long term to short term

Reclassification of EmeryStation sublease security deposit from long term to short term

Conversion of Series B Preferred Stock to common stock

Conversion of Series C Preferred Stock to common stock

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

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NovaBay Pharmaceuticals, Inc.

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

(the “Company”) develops and sells scientifically-created and clinically-proven eyecare, skincare and wound care products.

Our leading product, Avenova®

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

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

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

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

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

On November 5, 2021, we significantly expanded our business by acquiring DERMAdoctor, LLC (“DERMAdoctor”) (the “DERMAdoctor Acquisition”).

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

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

Avenova Spray is formulated with our proprietary, stable and pure form of hypochlorous acid and is cleared by the FDA for sale in the United States.

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

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

See Note 3, “Business Combination”

The Company was incorporated under the laws of the State of California on January 

19, 2000, as NovaCal Pharmaceuticals, Inc.

It had no operations until July 

1, 2002, on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company.

The Company also manufactures and sells its proprietary form of hypochlorous acid for the wound care market through our NeutroPhase and PhaseOne branded products.

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

The Company currently sells these products through distributors.

The Company was incorporated under the laws of the State of California on January 19, 2000, as NovaCal Pharmaceuticals, Inc.

It had no operations until July 1, 2002, on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company.

In February 2007, it changed its name from NovaCal Pharmaceuticals, Inc.

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herein refer to the California corporation prior to the date of the Reincorporation and to the Delaware corporation on and after the date of the Reincorporation.

The Company is managed as a single segment focused on commercializing Avenova Spray in the United States.

Based primarily on the funds available at December 31, 2021, management believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to enable the Company to meet its planned operating expenses at least through March 29, 2023.

However, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control.

Additionally, our future results, cash expenditures and ability to obtain additional external financing could be adversely affected by the COVID- 19 pandemic and general adverse economic conditions.

The Company is managed as two reportable segments:

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

Effective November 15, 2022, the Company effected a 1 -for- 35 reverse split of our outstanding common stock (“Reverse Stock Split”) (See Note 14, “Stockholders’

Equity”

for further details). Except as otherwise specifically noted, all share numbers, share prices, exercise/conversion prices and per share amounts have been adjusted, on a retroactive basis, to reflect this 1 -for- 35 reverse stock split.

Going Concern

The Company has sustained operating losses for the majority of its corporate history and expects that its 2023 expenses will exceed its 2023 revenues, as the Company continues to invest in both its Avenova and DERMAdoctor commercialization efforts.

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 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, preferred stock, convertible debt securities 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 SEC.

The accompanying consolidated 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.

These 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  

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S.

GAAP") and are expressed in U.S.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.

GAAP”) and are expressed in U.S.

Use of Estimates

The preparation of financial statements in accordance with U.S.

GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

These estimates include contract liabilities related to product sales, useful lives for property and equipment and related depreciation calculations, assumptions for valuing options and warrants, the fair value of contingent consideration, intangible assets, and goodwill, stock-based compensation, income taxes and other contingencies

GAAP requires management to make estimates and assumptions that affect the amounts reported in the 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.

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

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Uncertainty about these assumptions, judgments and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

Change in Accounting and Revision of Prior Period Financial Statements

During the third quarter of 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 consolidated statements of operations.

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 the Company 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 or net loss per share in the Company’s consolidated statements of operations in the periods presented in this report or in previously issued annual and quarterly financial statements.

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

While reviewing its accounting policy for fulfillment fees during the third quarter of 2022, the Company identified an error in its previously issued financial statements whereby the Company had been incorrectly presenting revenue net of selling commissions paid to third -party online retailers.

For the year ended December 31, 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 consolidated statements of operations.

The identified error impacted the Company’s previously issued 2022 first and second quarter financial statements, as well as the 2021 annual financial statements.

Management believes that the impact of these adjustments to correct such error is immaterial to the previously issued 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 or net loss per share in the Company’s consolidated statements of operations in the periods presented in this report or in previously issued annual consolidated financial statements.

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

Cash, Cash Equivalents, and Restricted Cash

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

As of December 31, 2021 and 2020, the Company’s cash and cash equivalents were held in a highly-rated, major financial institution in the United States.

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

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

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

Cash and cash equivalents

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$ 7,979  

The restricted cash amount included in other assets on the consolidated balance sheets represents amounts held as certificates of deposit for long-term financing and lease arrangements as contractually required by our financial institution and landlord.

The restricted cash amount included in other assets on the consolidated balance sheets represents amounts held as certificates of deposit for long-term financing and lease arrangements as contractually required by our financial institution and landlord.

Concentrations of Credit Risk and Major Partners

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash.

The Company maintains deposits of cash, cash equivalents and restricted cash with a highly-rated, major financial institution in the United States. 

Deposits in this bank may exceed the amount of federal insurance provided on such deposits.

The Company does not believe it is exposed to significant credit risk due to the financial position of the financial institution in which the deposits are held. 

During the year ended December 31, 2021, revenues were derived primarily from sales of Avenova Spray directly to doctors through the Company’s webstore, directly to consumers through Amazon.com, national retailers and to pharmacies via three major distribution partners and specialty pharmacies.

During the year ended December 31, 2020, revenues were derived primarily from sales of Avenova Spray directly to three major distribution partners, to doctors through the Company's internal sales team, and also generated revenue from the sale of KN95 Masks in response to the national need for personal protective equipment.

During the years ended December 31, 2021, 2020 and 2019, revenues from each product were as follows (in thousands):

Year Ended December 31,

The Company maintains deposits of cash, cash equivalents and restricted cash with a major financial institution in the United States. 

The Company has significant cash balances at financial institutions which throughout the year regularly exceed the federally insured limit of $250,000.

Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company's financial condition, results of operations, and cash flows.

During the years ended December 31, 2022 and 2021, revenues were derived primarily from sales of Avenova branded products, directly to consumers through Amazon.com, and Avenova.com.

Revenues in the 2022 and 2021 fiscal years also included sales of DERMAdoctor branded products (with 2021 revenue only including revenue from DERMAdoctor branded products beginning at the closing of the DERMAdoctor Acquisition).

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

For the Years Ended December 31,

Avenova Spray

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$ 8,565  

$ 6,347  

DERMAdoctor  

Other products

Total product revenue, net

14,374  

10,180  

Other revenue, net

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$ 10,204  

$ 6,599  

During the years ended December 31, 2021, 2020 and 2019, Avenova Spray revenues from our major distribution partners greater than 10% were as follows:

Year Ended December 31,

Major distribution

Avenova Direct via Amazon

Avenova distributor A

Avenova distributor B

Avenova distributor C

*Not greater than 10%

During the years ended December 31, 2022 and 2021, sales of Avenova Spray via Amazon comprised 73 % and 67 %, respectively, of total Avenova Spray net revenue.

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

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

Year Ended December 31,

Major distribution partner

Avenova Spray Pharmacy Distributor A

Avenova Spray Pharmacy Distributor C

Chongqing Pioneer Pharma Holdings Limited

Avenova Spray Pharmacy Distributor B

Amazon  

*Not greater than 10%

Avenova Spray Pharmacy Distributor C

* Less than 10%

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

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Contract manufacturers may or may not be able to meet the Company’s needs with respect to timing, quantity or quality.

In particular, it is possible that we may suffer from unexpected supply chain delays in light of the worldwide COVID- 19 pandemic.

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

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.

The Company follows Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures , with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis.

The Company follows ASC 820, Fair Value Measurements and Disclosures , with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis.

Under this standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.

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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 December 31, 2021 and December 31, 2020.

As of December 31, 2022, management recorded a $ 19 thousand reserve for allowance for doubtful accounts, and no reserve for allowance for doubtful accounts as of December 31, 2021.

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

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and ( 3 ) finished goods.

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

The Company utilizes contract manufacturers to produce our products and the price paid to these manufacturers is included in inventory.

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

At December 31, 2021 and 2020, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $ 641 thousand and $ 236 thousand, respectively. 

At December 31, 2022 and 2021, management had recorded an allowance for excess and obsolete inventory at the lower of cost or estimated net realizable value of $ 499 thousand and $ 641 thousand, respectively. 

Property and Equipment, net

Property and equipment are stated at cost, less accumulated depreciation and amortization.

Property and equipment are stated at cost, less accumulated depreciation.

Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets of five to seven years for office and laboratory equipment, three to five years for computer equipment and software, and five to seven years for furniture and fixtures.

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

The acquisition method requires identifiable assets acquired and liabilities assumed be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business.

The acquisition method requires that identifiable assets acquired and liabilities assumed are recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business.

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

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

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

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

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

Goodwill and Intangible Assets

Goodwill and Indefinite-Lived Intangible Assets

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

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Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the assets are impaired.

There were no impairment charges during the years ended December 31, 2021 and 2020, respectively.

Intangible Asset

Fair Value (in

Amortization Method

Customer relationships

Straight line

Trade secrets / product formulations

Straight line

$ 9,788  

Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary.

If it is determined, based on qualitative factors, that the fair value of the reporting unit may more likely than not be less than carrying amount, or if significant adverse changes in the Company's future financial performance occur that could materially impact fair value, a quantitative goodwill impairment test would be required.

Additionally, management can elect to forgo the qualitative assessment and perform the quantitative test.

If the qualitative assessment indicates that the quantitative analysis should be performed, or if management elects to bypass a qualitative assessment, the Company then evaluates goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill.

The quantitative assessment for goodwill requires management to estimate the fair value of the Company's reporting units using either an income or market approach or a combination thereof.

Management makes critical assumptions and estimates in completing impairment assessments of goodwill and indefinite-lived intangible assets.

The Company's cash flow projections look several years into the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions, probability of success, market competition, inflation and discount rates.

The Company acquired DERMAdoctor in November 2021, and since completing this transaction it has been working to integrate and expand the DERMAdoctor business in order to achieve strategic objectives that the Company expected by completing this acquisition, including revenue growth, cost reductions and achieving overall profitability.

The Company has not been able to achieve these objectives in fiscal 2022, as DERMAdoctor’s product revenue declined in 2022 compared to 2021, while operating costs relating to these products increased.

In addition, as a result of the performance of the DERMAdoctor business in fiscal 2022, management revised its forecast for the future performance of DERMAdoctor products.

During the fourth quarter of 2022, the Company performed its annual goodwill impairment analysis following the steps laid out in ASC 350 - 20 - 35 - 3C.

The Company’s annual impairment analysis included a qualitative assessment to determine if it is necessary to perform the quantitative impairment test.

In performing the qualitative assessment, the Company reviewed events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of goodwill.

The Company performed a Step 0 goodwill impairment analysis and determined that the fair value of the reporting unit may more likely than not be less than carrying amount, which necessitated the Company performing the quantitative impairment test.

After performing the quantitative impairment test in accordance with ASC 350 - 20 - 35 - 3C, the Company determined that goodwill related to its DERMAdoctor reporting unit was impaired by $4.2 million, as of December 31, 2022, which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations.

The impairment impact on the consolidated balance sheet as of December 31, 2022 was a $ 4.2 million reduction to the goodwill caption.

The Company did not record any goodwill impairment charges for the year ended December 31, 2021.

The Company completed its indefinite-lived intangible asset impairment assessment during the fourth quarter of 2022.

The Company evaluated, on the basis of the weight of the evidence, the significance of all identified events and circumstances that could affect the significant inputs used to determine the fair value of the Company’s indefinite-lived intangible assets for determining whether it is more likely than not that the Company’s indefinite-lived intangible assets are impaired.

After assessing the totality of events and circumstances, and their potential effect on significant inputs to the fair value calculation, the Company determined that it is more likely than not that its indefinite-lived intangible assets related to its DERMAdoctor reporting unit were impaired.

As such, the Company performed a quantitative impairment test on its indefinite-lived intangible assets.

Based on the quantitative impairment test, the Company determined that its indefinite-lived trade name intangible asset should be impaired by $ 1.0 million as of December 31, 2022, which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations.

The Company did not record any indefinite-lived intangible asset impairments during the year ended December 31, 2021.

Valuation of Contingent Consideration Resulting from a Business Combination

In connection with certain acquisitions, we may be required to pay future consideration that is contingent upon the achievement of specified milestone events.

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

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

In connection with certain acquisitions, including the acquisition of DERMAdoctor, the Company may be required to pay future consideration that is contingent upon the achievement of specified milestone events.

The Company records contingent consideration resulting from a business combination at its fair value on the acquisition date.

Each quarter thereafter, the Company revalues these obligations and records increases or decreases in the fair value within the consolidated statement of operations until such time as the specified milestone achievement period is complete.

Increases or decreases in fair value of the contingent consideration liabilities can result from updates to assumptions such as the expected timing or probability of achieving the specified milestones.

Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period.

Updates to assumptions could have a significant impact on our results of operations in any given period.

Updates to assumptions could have a significant impact on the Company’s results of operations in any given period.

Actual results may differ from estimates.

Impairment of Long-Lived Assets 

The Company accounts for long-lived assets, other than goodwill and intangible assets, and operating lease right-of-use assets in accordance with ASC 360, Property, Plant and Equipment , which requires that companies consider whether events or changes in facts and circumstances, both internally and externally, may indicate that an impairment of long-lived assets held for use or right-of-use assets are present.

As of December 31, 2022, the Company determined that the above-mentioned milestones related to the DERMAdoctor acquisition were not met for the first calendar year of the post-closing earn out and are not expected to be met in the second calendar year of the post-closing earn out, based on projections;

therefore, the liability for the potential earn out payments was determined to be zero.

As a result, the Company recognized a $ 0.6 million non-cash gain related to the change in fair value of the contingent consideration for the year then ended December 31, 2022, which is reflected in the Company’s consolidated statements of operations.

Long-Lived Assets  

The Company’s intangible assets that do not have indefinite lives (primarily trade secrets / product formulations) are amortized over their estimated useful lives.

All of the Company’s intangible assets subject to amortization and other long-lived assets, including operating lease right-of-use assets, are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment , which requires that companies consider whether events or changes in facts and circumstances, both internally and externally, may indicate that an impairment of long-lived assets held for use or right-of-use assets are present.

The Company reviews long-lived assets and right-of-use assets for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.

Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition.

In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values and the loss is recognized in the statements of operations.

There were no impairment charges during the years ended December 31, 2021 and 2020, respectively.

In connection with the above-mentioned DERMAdoctor reporting unit impairment, discussed in the goodwill and indefinite-lived intangible assets caption above, the Company determined that certain of its DERMAdoctor business definite long-lived intangible assets and property and equipment were also impaired.

As such, the Company has recorded an impairment charge in the year ended December 31, 2022 of $ 1.6 million for the impairment of long-lived intangible assets which is reflected in the caption goodwill, intangible and other asset impairment in the Company’s consolidated statements of operations, and of $ 66 thousand, net for property, plant and equipment which is reflected in the general and administrative caption in the Company’s consolidated statements of operations.

There were no impairment charges during the year ended 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.

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

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

Comprehensive Income (Loss)

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

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

Revenue Recognition

Revenue is recognized from sale of goods in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”

Revenue is recognized from the sale of goods in accordance with ASC 606, Revenue from Contracts with Customers .

Under ASC 606, the Company recognizes revenue when or as the Company’s performance obligations are satisfied by transferring control of the promised goods to customers in an amount that reflects the consideration to which the Company expects to receive.

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recognize revenue when (or as) the entity satisfies performance obligations.

Revenue is generated through the Company’s webstores, Avenova.com and DERMAdoctor.com, for Avenova Spray and DERMAdoctor direct to consumer sales which are recognized upon fulfillment, which generally occurs upon delivery of the related products to a third -party carrier.

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

We present revenue net of sales taxes and refunds.

Revenue generated through Amazon.com and Walmart.com is recognized upon fulfillment, which generally occurs upon delivery of the related products to a third -party carrier.

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

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

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

Such direct to consumer sales are recognized upon fulfillment, which generally occurs upon delivery of the related products to a third -party carrier.

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

The Company presents revenue net of sales taxes and refunds. 

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 consolidated statements of operations.

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 consolidated statements of operations and fulfillment fees as product cost of goods sold in the consolidated statements of operations.

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 consolidated statements of operations.

Management believes the resulting accounting changes are preferable as they conform the Company’s practice to a majority of comparable filers and 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 or loss per share in the Company’s consolidated statements of operations in the periods presented in this report or in previously issued annual consolidated 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 consolidated statements of operations.

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 and 2021 quarterly, and 2021 and 2020 annual financial statements.

Management believes that the impact of this error is immaterial to the previously issued 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 consolidated statements of operations for the year ended December 31, 2021 were adjusted for the above changes as follows (in thousands):

For the Year Ended December 31, 2021

As Previously

Product revenue, net

$ 8,397  

$ 10,180  

Cost of goods sold

Operating expenses

Sales and marketing

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

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

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

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

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

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

The Company derives its rate of return and other contract liabilities from historical data and updates its assumptions quarterly.

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 at 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 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 related 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.

The Company’s accounts receivable, net of allowance for doubtful accounts, on December 31, 2020 was $ 1.1 million.

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.

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The Company charges research and development costs to expense as incurred.

These costs include all costs associated with research, development and regulatory activities, including submissions to the Food and Drug Administration (“FDA”).

These costs include all costs associated with research, development and regulatory activities, including submissions to the Food and Drug Administration (the “FDA”).

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 consolidated statements of operations.

Advertising Costs

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

Advertising expenses were $ 3.2 million, $ 1.7  million, and $ 0.5 million, respectively, for the years ended December 

31, 2021, 2020, and 2019.

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

Advertising expenses were $ 2.0 million and $ 3.2 million, respectively, for the years ended December 31, 2022 and 2021.

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 Company’s stock-based compensation includes grants of stock options and RSUs to employees, consultants and non-employee directors.

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

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

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

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

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

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

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

Common Stock Warrant Liabilities

Common Stock Warrants

The Company accounts for common stock purchase warrants issued in connection with its equity offerings in accordance with the provisions of ASC 480, Distinguishing Liabilities from Equity , and ASC 815,  

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The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement).

The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement) or (iii) do not become exercisable until the occurrence of contingent event.

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

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

The fair values of these warrants are determined using the Black-Scholes option pricing model, the Binomial Lattice (“Lattice”) valuation model, or the Monte Carlo simulation model where deemed appropriate.

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The Company computes net loss per share by presenting both basic and diluted earnings (loss) per share (“EPS”).

Basic EPS is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period.

Basic EPS is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period.

Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method.

In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options or warrants.

Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods because their effect would be anti-dilutive.

For the year ended December 31, 2021, the Preferred Stock was excluded from the computation of diluted net income per share as their inclusion on an “if converted”

Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods if their effect would be anti-dilutive.

For the years ended December 31, 2022 and 2021, the Preferred Stock was excluded from the computation of diluted net loss per share as their inclusion on an “if converted”

basis would have been anti-dilutive. 

For the year ended December 31, 2021, the Preferred Stock was considered anti-dilutive as a result of such securities not having a contractual obligation to participate in losses of the Company. 

For the years ended December 31, 2022 and 2021, the Preferred Stock was considered anti-dilutive as a result of such securities not having a contractual obligation to participate in losses of the Company.

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

Year Ended December 31,

Numerator  

For the Years Ended December 31,

Preferred deemed dividend

Retained earnings reduction related to warrants down round feature triggered

Retained earnings reduction related to preferred stock down round feature triggered

Net loss attributable to common stockholders, basic and diluted

Weighted average shares outstanding, basic and diluted

43,657  

35,076  

21,641  

Net loss per share, basic and diluted

Weighted average shares of common stock outstanding, basic and diluted

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

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

Year Ended December 31,

For the Years Ended December 31,

Stock options

Stock warrants

11,531  

10,232  

10,771  

Recent Accounting Pronouncements

In August 2020, the FASB issued ASU 2020 - 06,  

Fair Value Measurement (Topic 820 ):

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018 - 13”

ASU 2018 - 13 improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements.

The standard removes, modifies, and adds certain disclosure requirements.

The Company adopted the new standard effective January 1, 2020, and the adoption of this guidance did not have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016 - 13, Financial Instruments —

Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments (“ASU 2016 - 13”

The amendments in ASU 2016 - 13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

ASU 2016 - 13 is effective for the Company for annual and interim reporting periods beginning 

January 1, 2023.

The Company will adopt the new standard effective January 1, 2023. 

We are currently evaluating the impact of the new guidance on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019 - 12,  

Income Taxes  

(Topic 740 ):

Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes.

The Company adopted the new standard effective January 1, 2021, and the adoption of this guidance did not have a material impact on our consolidated financial statements.

In August 2020, FASB issued ASU 2020 - 06,  

Debt —

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The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020.

ASU 2020 - 06 is effective for the Company in our first quarter of fiscal 2022.

The Company adopted the new standard effective January 1, 2022, and the adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

The Company adopted the new standard effective January 1, 2022, and the adoption of this guidance did not have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016 - 13, Financial Instruments —

Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments (“ASU 2016 - 13”

The amendments in ASU 2016 - 13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

ASU 2016 - 13 is effective for the Company for annual and interim reporting periods beginning 

January 1, 2023.

The Company will adopt the new standard effective January 1, 2023. 

The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

BUSINESS COMBINATION

On November 5, 2021, the Company completed the DERMAdoctor Acquisition.

Pursuant to the Acquisition Purchase Agreement, NovaBay acquired 100% of the membership units of DERMAdoctor from the Sellers for a closing purchase price of $ 12.0 million and potential future earn out payments of up to an aggregate of $ 3.0 million over a period of two calendar years post-closing.

The following pro forma financial information is based on the historical financial statements of the Company and presents the Company’s results as if the business combination had occurred as of January 1, 2020 ( in thousands):

Unaudited Pro Forma

Year Ended December 31,

$ 12,767  

$ 18,170  

Net Profit (Loss)

The pro forma financial information is not indicative of the results of operations that the Company would have attained had the business combination occurred as of January 1, 2020, nor is the pro forma financial information indicative of the results of operations that may occur in the future.

The unaudited pro forma information includes adjustments to reflect the $ 1.2 million of transaction costs as if they were incurred in the year ended December 31, 2020.

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 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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$ 4,528  

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

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

The fair values of the identifiable intangible assets acquired at the date of the DERMAdoctor Acquisition are as follows (in thousands):

Intangible Asset

Amortization Method

Customer relationships

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The Company recognized approximately $ 1.2 million of transaction costs in the year ended December 31, 2021.

These costs are recorded in “General and administrative expense”

in the consolidated statements of operations and comprehensive loss.

The Company’s management reviews financial results and manages the business on an aggregate basis in accordance with ASC 280.

These costs were recorded as general and administrative expense in the consolidated statements of operations.

The Company’s management reviews financial results and manages the business on an aggregate basis in accordance with ASC 280, Segment Reporting .

Therefore, financial results are reported in two operating segments:

( 1 ) Optical & Wound Care and ( 2 ) Skincare (See Note 21, “Segment Reporting”

( 1 ) Optical & Wound Care and ( 2 ) Skin Care (see Note 20, Segment Reporting , for further details).

FAIR VALUE MEASUREMENTS  

The Company follows ASC 820, Fair Value Measurements and Disclosures , with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis.

Under this standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. 

The Company’s cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The types of investments that are generally classified within Level 1 of the fair value hierarchy include money market securities and certificates of deposit.

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

As of December 31, 2021, the November 2021 Warrants (as described in Note 14, Stockholders ’

Equity ) were classified within Level 3 of the fair value hierarchy as liabilities (see Note 13, “Warrant Liability”

and Note 14, “Stockholders’

Equity”).

As of December 31, 2020, there were no warrants outstanding that were classified as liabilities.

The Company’s outstanding warrants on December 31, 2020 consisted of the 2019 Domestic Warrants, 2019 Foreign Warrants and the 2019 Ladenburg Warrants, all of which were classified as equity.

The 2019 Domestic Warrants and the 2019 Foreign Warrants were amended and exercised in July 2020 ( see Note 14, “Stockholders’

Equity”), resulting in a decrease of $ 9.1 million in warrant liability.

The 2019 Ladenburg Warrants were also amended in July 2020 ( see Note 14, “Stockholders’

Equity”), resulting in a decrease of $ 0.2 million in warrant liability.

The embedded derivative liability related to the Convertible Note (as defined below) was fully settled in September 2020.

See Note 12, “Convertible Note”

for further discussion of the settlement of the Convertible Note and embedded derivative liability during the third quarter of 2020.

The following table presents the Company's assets measured at fair value on a recurring basis as of December 31, 2021 ( in thousands):

Fair Value Measurements Using

Quoted Prices in

Active Markets

As of December 31, 2022, the Company no longer had a warrant liability as the amount was reclassed to equity.

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

Fair Value Measurements Using  

Quoted  

Prices in  

Active  

Significant  

Markets  

Significant  

Balance at  

for Identical

Unobservable  

 December 31,  

 2022  

Restricted cash held as a certificate of deposit

Deposit held as a certificate of deposit

Liabilities  

Warrant liability  

The following is a reconciliation of the beginning and ending balances for the liabilities and assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) as of December 31, 2022 ( in thousands):

Fair value of warrant liability at December 31, 2021

$ 9,558  

Decrease in fair value of November 2021 Warrants

Reclassification of November 2021 Warrants liability to equity

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

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

Reclassification of September 2022 Warrants liability to equity

Fair value of warrant liability at December 31, 2022

Fair value of contingent liability at December 31, 2021

Decrease in fair value of contingent liability

Fair value of contingent liability at December 31, 2022

The following table presents the Company’s cash equivalent assets measured at fair value on a recurring basis as of December 31, 2021 ( in thousands):

Fair Value Measurements Using  

Balance at  

Quoted  

Significant  

December 31,  

Prices in  

Unobservable  

Active  

Observable  

Inputs  

Markets  

Inputs  

(Level 3)  

for Identical  

(Level 2)  

Restricted cash held as a certificate of deposit

Deposit held as a certificate of deposit

Warrant liability

$ 9,558  

Contingent earnout liability  

Total liabilities  

$ 9,558  

Contingent earnout liability

Total liabilities

$ 10,119  

The following table presents the Company's assets measured at fair value on a recurring basis as of December 31, 2020 ( in thousands):

Fair Value Measurements Using

Quoted Prices in

Active Markets

for Identical

Restricted cash held as a certificate of deposit

Deposit held as a certificate of deposit

There were no liabilities measured at fair value on a recurring basis as of December 31, 2020.

The following is a reconciliation of the beginning and ending balances for the liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) during the year ended December 31, 2021 ( in thousands):

Fair value of warrant liability at December 31, 2020

Fair value of 2021 Warrants issued

$ 10,119  

Decrease in fair value of 2021 Warrants

Fair value of warrant liability at December 31, 2020

Fair value of November 2021 Warrants issued

14,172  

Fair value of warrant liability and embedded derivative liability at December 31, 2019

Decrease in fair value of November 2021 Warrants

Fair value of warrant liability at December 31, 2021

$ 9,558  

Increase in fair value of warrant liability

Decrease in fair value of embedded derivative liability

Decrease in fair value related to warrants expired

Fair value of warrant liability transferred to equity upon exercise

Fair value of 2019 Ladenburg Warrant liability transferred to equity upon warrant modification

Elimination of embedded derivative liability upon settlement of convertible note

Fair value of warrant liability and embedded derivative liability at December 31, 2020

PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

Prepaid inventory  

(in thousands)  

Prepaid inventory

Prepaid insurance

Prepaid consulting services  

Prepaid sales rebates

Prepaid security deposit for lease

Prepaid dues and subscription

Prepaid rent  

Prepaid dues and subscriptions

Prepaid marketing costs

Prepaid patents

Tenant Allowance

Prepaid consultants

Prepaid sales rebates

Total prepaid expenses and other current assets

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$ 1,273  

$ 1,179  

Finished goods

2 unchanged sentences

$ 3,437  

$ 3,220  

PROPERTY AND EQUIPMENT  

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Total property and equipment, at cost

accumulated depreciation and amortization

accumulated depreciation

Total property and equipment, net

Depreciation and amortization expense was $ 59 thousand, $ 51 thousand, and $ 65 thousand for the years ended December 31, 2021, 2020 and 2019, respectively.

Depreciation expense was $ 120 thousand and $ 59 thousand for the years ended December 31, 2022 and 2021, respectively.

During the years ended December 31, 2022, and 2021, the Company disposed of damaged, unusable and fully depreciated property and equipment with cost of approximately $ 68 thousand and $ 12 thousand, respectively.

As a result, the Company recognized an immaterial loss on the disposal of these assets in the consolidated statements of operation and comprehensive loss for such periods.

As a result, the Company recognized an immaterial loss on the disposal of these assets in the consolidated statements of operation for such periods.

During the year ended December 31, 2022, the Company recognized a long-lived asset impairment loss in connection with the DERMAdoctor business impairment.

As such, the Company has recorded an impairment charge in the year ended December 31, 2022, of $ 66 thousand, net for property, plant and equipment which is reflected in the general and administrative caption in the Company’s consolidated statements of operations.

The impairment information is discussed in Note 2, “Summary of Significant Account Policies”.

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

The Company does 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 indications of impairment during the year ended December 31, 2022. 

During the fourth quarter of 2022, the Company performed its annual goodwill impairment analysis following the steps laid out in ASC 350 - 20 - 35 - 3C.

The Company’s annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test.

In performing a qualitative assessment, the Company reviewed events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of goodwill.

The Company performed a Step 0 goodwill impairment analysis and determined that the fair value of the reporting unit may more likely than not be less than the carrying amount, which necessitated the Company performing the quantitative impairment test.

As such, the Company has recorded a goodwill impairment charge in the year ended December 31, 2022, which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations.

The impairment information is discussed in Note 2, “Summary of Significant Account Policies,”.

The Company did not record any goodwill impairment charges for the year ended December 31, 2021.

The following table presents details of our goodwill during the year ended December 31, 2022:

Balance as of December 31, 2021

$ 4,528  

Goodwill impairment  

Balance as of December 31, 2022  

OTHER INTANGIBLE ASSETS

For the years ended December 31, 2022 and 2021, other intangible assets consisted of the following (in thousands):

Balance at December 31, 2022

Impairment  

Indefinite-lived intangible assets

$ 2,080  

$ ( 970 )  

$ 1,110  

Amortizable intangible assets

Customer relationships

$ ( 48 )  

$ ( 172 )  

Trade secrets / product formulations

( 375 )  

$ ( 1,415 )  

Total other intangible assets

$ 5,260  

$ ( 423 )  

$ ( 2,557 )  

$ 2,280  

Balance at December 31, 2021

Impairment  

Indefinite-lived intangible assets

$ 2,080  

Amortizable intangible assets

Customer relationships

$ ( 7 )  

Trade secrets / product formulations

( 53 )  

Total other intangible assets

$ 5,260  

$ ( 60 )  

$ 5,200  

In the fourth quarter of 2022, the Company determined that certain of its indefinite-lived and long-lived amortizable intangible assets related to its DERMAdoctor business were impaired.

As such, the Company has recorded an intangible asset impairment charge of $ 2.6 million in the year ended December 31, 2022, which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations.

The impairment information is discussed in Note 2, “Summary of Significant Account Policies,”.

The Company did not record any intangible asset impairment charges for the year ended December 31, 2021.

Amortization expense was $ 363 thousand and $ 60 thousand for the years ended December 31, 2022 and 2021, respectively.

Based on the amortizable intangible assets as of December 31, 2022, future amortization expenses is expected to be as follows (in thousands):

$ 1,170  

ACCRUED LIABILITIES  

Accrued liabilities consisted of the following (in thousands):

(in thousands)  

Contract liabilities (see Note 14)

$ 1,807  

$ 1,289  

Employee payroll and benefits

Sublease security deposit

Marketing costs

Inventory purchases

Consulting service

Total accrued liabilities

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At the time of the DERMAdoctor Acquisition, DERMAdoctor had a line of credit agreement with Bank Midwest for $ 500 thousand.

There was no balance outstanding on the line of credit at the time of Acquisition Closing.

The agreement was terminated and repaid in full subsequent to December 31, 2021 on January 6, 2022.

The line had an interest rate equal to the Wall Street Journal Prime Rate plus 1.50 % with a floor of 5.00 % on December 31, 2021.

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

The line of credit had an interest rate equal to the Wall Street Journal Prime Rate plus 1.50 % with a floor of 5.00 %.

All borrowings were collateralized by substantially all assets of DERMAdoctor.

As of December 31, 2021, the Company had $ 105 thousand outstanding on the line of credit.

As of December 31, 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  

6 unchanged sentences

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

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

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.

Pursuant to these agreements, it generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with the use or testing of its products or product candidates or with any U.S.

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Legal Matters

As of December 31, 2021, there were no other matters that, in the opinion of management, would ultimately result in liability that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.

As of December 31, 2022, there were no legal matters that, in the opinion of management, would ultimately result in liability that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.

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

The initial lease term is through February 28, 2022.

The Company has the option to extend the term of the lease for one five ( 5 )-year period upon written notice to the landlord.

Subsequent to December 31, 2021, on January 19, 2022, the Company amended the lease to extend the term through July 31, 2027 ( see Note 22, “Subsequent Events”).

We are also party to a lease for 19,136 square feet of space located in Riverside, Missouri, which we utilize for light manufacturing, storage, distribution of products and administrative functions.

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

The Company is also party to a lease for 19,136 square feet of space located in Riverside, Missouri, which it utilizes for light manufacturing, storage, distribution of products and administrative functions.

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

The Company also had a lease commitment for laboratory facilities and office space at EmeryStation North in Emeryville, California (“EmeryStation”) under an operating lease.

In July 2016, the Company subleased the EmeryStation space (the “Sublease Agreement”).

The Sublease Agreement commenced September 8, 2016.

The EmeryStation lease and Sublease Agreement were terminated as of August 31, 2020 pursuant to a sublease termination agreement executed on July 31, 2020.

In conjunction with the termination, the Company recognized a gain of $ 54 thousand which is recorded within the operating expenses in the Company’s consolidated statements of operations and comprehensive loss for the year ended December 31, 2020.

In calculating the present value of the lease payments, the Company has elected to utilize its incremental borrowing rate based on the original lease term and not the remaining lease term.

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 net lease costs for the years ended 

December 31, 2021 and 2020  are as follows (in thousands):

Year Ended December 31,

The components of lease expense for the years ended December 31, 2022 and 2021 were as follows (in thousands):

For the Years 

Operating lease cost

Sublease income

Net lease cost

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

Year Ended December 31,

For the Years 

Weighted-average remaining lease term (in years)

3 unchanged sentences

Less imputed interest

$ 2,041  

Operating lease liability

Operating lease liability- non-current

On May 13, 2020, the Company entered into an agreement with TLF Bio Innovation Lab LLC (“TLF Bio Innovation”) to manage the relaunch of the Company’s CelleRx product (the “TLF Agreement”) which was further amended on September 4, 2020 and subsequently terminated on February 4, 2021.

Under the agreement, the Company paid TLF Bio Innovation a monthly cash fee.

Additionally, upon the successful completion of certain milestones, TLF Bio Innovation was eligible to receive warrants exercisable for up to 2 million shares of the Company’s common stock with an exercise price equal to the average closing price of the Company’s common stock for the last calendar month immediately prior to the date on which an individual milestone was achieved.

TLF Bio Innovation was issued 15,000 warrants under the agreement on January 22, 2021.

On April 16, 2020, the Company entered into an international distribution agreement with Shenzhen Microprofit Biotech Co., LTD (“Microprofit”) (the “Microprofit Agreement”).

In accordance with the Microprofit Agreement, the Company assisted Microprofit in applying for approval of Microprofit’s SARS-CoV- 2 IgG and IgM Antibody Combined Test Kit (“Test Kits”) by the FDA.

Under the terms of the Microprofit Agreement, if such approvals were granted, the Company would issue warrants to certain Microprofit officers exercisable for an aggregate number of shares of the Company’s common stock equivalent to 12 % of the Company’s outstanding common stock on the date of approval.

If FDA approval was received, the Microprofit Agreement granted the Company exclusive rights to distribute the Test Kits in the United States through December 31, 2021.

On December 31, 2020, the Microprofit Agreement expired with no warrants being issued.

In connection with the Microprofit Agreement, on April 16, 2020, the Company entered into an intermediary distribution agreement with Chongqing Pioneer Pharma Holdings Limited (“Chongqing Pioneer”), a related party, which was subsequently amended on June 29, 2020.

The amended agreement provided that the Company would purchase all Test Kits from Chongqing Pioneer as an intermediary.

This agreement also expired on December 31, 2021. 

RELATED PARTY NOTE  

On February 27, 2019, the Company issued a $ 1.0 million promissory note payable to Pioneer Pharma (Hong Kong) Company Ltd.

(“Pioneer Pharma”), which was amended on June 25, 2019 and May 14, 2020 ( the “Promissory Note”).

The Promissory Note provided for an interest payment of $ 0.2 million which was initially amended to a payment of $ 0.3 million and subsequently amended to the delivery of 65,178 units of NeutroPhase ( 40ml ) to Pioneer Pharma.

The second amendment to the Promissory Note also provided the Company with the right to repay the note at any time.

On May 14, 2020, the Company repaid the $ 1.0 million principal balance of the Promissory Note using proceeds raised through the at-the-market offering and equity program (“ATM Program”) (see Note 14, “Stockholders’

Equity”).

The Company settled the accrued interest through two separate shipments of NeutroPhase in 2020.

Upon full repayment of principal and interest during the year ended December 31, 2020, the Company was released from the Promissory Note with Pioneer Pharma.

In connection with the Promissory Note, the Company paid China Kington a 2 % fee for brokering the transaction and entered into a consulting agreement with China Kington for a term of one year, which expired on March 1, 2020.

Bob Wu, acting in a dual role as a member of the Company’s Board of Directors and as principal of China Kington, was paid $ 0.1 million pursuant to such consulting agreement.

Upon the expiration of the original consulting agreement, the parties entered into a new consulting agreement, in which no cash compensation will be paid.

Debt issuance costs associated with the issuance of the Promissory Note of $ 20 thousand was recognized and recorded as an offset to the related party note payable in the consolidated balance sheets.

The interest expense recognized, including amortization of the issuance costs, was $ 75 thousand during the year ended December 31, 2020.

There was no comparable expense for the year ended December 31, 2021. 

CONVERTIBLE NOTE

On March 26, 2019, the Company entered into a Securities Purchase Agreement with Iliad Research and Trading, L.P.

(the “Lender”), pursuant to which the Company issued a Secured Convertible Promissory Note (the “Convertible Note”) to the Lender dated as of March 26, 2019.

The Convertible Note had an original principal amount of $ 2.2 million, beared interest at a rate of 10 % per annum and matured on September 26, 2020, unless earlier paid, redeemed or converted in accordance with its terms.

The Company received net proceeds of $ 2.0 million after deducting an original issue discount of $ 0.2 million and debt issuance cost of Lender’s transaction fees of $ 15 thousand.

The Company recognized an additional $ 0.2 million of debt issuance costs associated with the issuance of the Convertible Note.

The Convertible Note was repaid in full during the third quarter of 2020.

Upon full repayment, the Company was released from the Convertible Note.

During the year ended December 31, 2020, the effective interest rate on the Convertible Note was 20 %.

Interest expense recognized, including amortization of the issuance costs and debt discount, was $ 0.2 million during the year ended December 31, 2020. 

$ 2,041  

WARRANT LIABILITY

July 2011 Warrants

The Company issued the July 2011 Warrants (as defined in Note 14, “Stockholders’

Equity”) in the third quarter of 2011.

The terms of the July 2011 Warrants required registered shares to be delivered upon warrant exercise and potential cash-settlement in the event of a specified fundamental transaction.

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

The fair value of outstanding July 2011 Warrants was determined at each reporting date using a Lattice model with changes in fair value recorded in the consolidated statements of operations and comprehensive loss.

On March 6, 2020, the remaining 35,107 July 2011 Warrants expired unexercised.

There were no July 2011 Warrants outstanding as of December 31, 2020 or December 31, 2021.

October 2015 Warrants

The Company issued the October 2015 Warrants (as defined in Note 14, “Stockholders’

September 2022 Warrants

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, the Company issued the September 2022 Warrants.

The September 2022 Warrants became exercisable on March 9, 2023 after being 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.

As a result, under ASC 480, Distinguishing Liabilities from Equity , the September 2022 Warrants were classified as equity as of December 31, 2022.

See Note 14, “

Stockholders ’

Equity ”.

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

$ 4.55  

As of November 10, 2022, the fair value of the September 2022 Warrants was determined to be $ 0.5 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

$ 1.40  

November 2021 Warrants

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.

The November 2021 Warrants, as amended, became exercisable on March 9, 2023 after being subject to 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, “Stockholders’

Equity”.

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:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 13.30  

As of December 31, 2021 

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 8.75  

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, 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 (or 267,857 shares of common stock if accounting for the subsequent Reverse Stock Split) 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 as of the date of amendment.

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 4.55  

As of November 10, 2022, the fair value of the November 2021 Warrants, as amended, was determined to be $ 1.3 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

$ 1.40  

Amended July 2020 Warrants

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, the Company reduced the exercise price of certain July 2020 Warrants exercisable for 4,800,000 shares of common stock (or 137,145 shares of common stock if accounting for the subsequent Reverse Stock Split) 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 (or 60,000 shares of common stock if accounting for the subsequent Reverse Stock Split) underlying the Amended July 2020 Warrants were exercised immediately after amendment.

The remaining Amended July 2020 Warrants exercisable for 2,700,000 shares of common stock (or 77,145 shares of common stock if accounting for the subsequent Reverse Stock Split) became exercisable on March 9, 2023 after being subject to a restriction upon their exercise until the later of (i) March 9, 2023 or (ii) the date that the Reverse Stock Split, which was approved by Company’s stockholders on November 10, 2022, becomes effective.

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.

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

$ 3.50  

As of November 10, 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

$ 1.05  

2019 Domestic Warrants, 2019 Foreign Warrants and 2019 Ladenburg Warrants

The Company issued the 2019 Domestic Warrants, 2019 Foreign Warrants and 2019 Ladenburg Warrants (each as defined in Note 14, “Stockholders’

Equity”) in the third quarter of 2019.

The terms of the October 2015 Warrants required potential cash-settlement in the event of a specified fundamental transaction.

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

The fair value of outstanding October 2015 Warrants was determined at each reporting date using a Lattice model with changes in fair value recorded in the consolidated statements of operations and comprehensive loss.

During the fourth quarter of 2020, a total of 22,680 October 2015 Warrants were exercised, resulting in gross proceeds of $ 5 thousand.

The liability associated with these warrants was adjusted to fair value of $ 12 thousand as of the date of exercise, with the change in fair value recorded in the consolidated statements of operations and comprehensive loss.

The fair value was then transferred to equity.

On October 27, 2020, 15,320 October 2015 Warrants expired unexercised.

There were no October 2015 Warrants outstanding as of December 31, 2020 or December 31, 2021.

2019 Domestic, Foreign & Ladenburg Warrants

As further described in Note 14, “Stockholders’

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

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

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

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

1 unchanged sentence

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 consolidated statements of operations.

The fair values were then transferred to equity.

8 unchanged sentences

$ 53.90  

There were no 2019 Domestic Warrants or 2019 Foreign Warrants outstanding as of December 31, 2020 or December 31, 2021.

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

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

2 unchanged sentences

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

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

The 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.

The fair value was then transferred to equity.

7 unchanged sentences

The 2019 Ladenburg Warrants will no longer be adjusted to fair value in reporting periods after the amendment. All 2019 Ladenburg Warrants remained outstanding as of December 31, 2022.

November 2021 Warrants

As further described in Note 14, “Stockholders’

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

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

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

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

The fair value was then transferred to equity.

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

STOCKHOLDERS' EQUITY

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).

Reverse Stock Split

Effective November 15, 2022, the Company amended its Certificate of Incorporation to effect a 1 -for- 35 reverse split of its outstanding common stock.

The Reverse Stock Split was approved by the Company’s stockholders on November 10, 2022.

As a result of the Reverse Stock Split, every 35 shares of the Company’s pre-reverse split outstanding common stock were combined and reclassified into 1 share of common stock.

Proportionate voting rights and other rights of common stockholders were not affected by the reverse stock split.

Any fractional shares of common stock resulting from the Reverse Stock Split were rounded up to the nearest whole share.

All stock options outstanding, common stock reserved for issuance under the Company’s equity incentive plans, common stock reserved for issuance under the Series B Preferred Stock and outstanding warrants were adjusted by dividing the number of affected shares of common stock by 35 and, as applicable, multiplying the exercise/conversion price by 35.

Except as otherwise specifically noted, all share numbers, share prices, exercise prices and per share amounts have been adjusted, on a retroactive basis, to reflect this 1 -for- 35 reverse stock split.

2022 Warrant Reprice Transaction and September 2022 Warrants

On September 9, 2022, the Company entered into the 2022 Warrant Reprice Transaction, which included warrant reprice letter agreements with each of the holders of the November 2021 Warrants and certain holders of the July 2020 Warrants. Pursuant to the terms of the letter agreements, the November 2021 Warrants and certain July 2020 Warrants were amended to:

(i) reduce the exercise price;

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

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

As a result of these amendments to the Amended 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 Amended November 2021 Warrants and the Amended July 2020 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

4 unchanged sentences

$ 3.15  

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

$ 0.70  

The fair value of the Amended November 2021 Warrants and the Amended July 2020 Warrants was determined to be $ 5.2 million immediately after the modification in accordance with the following key assumptions:

November 2021

Expected price volatility

4 unchanged sentences

$ 4.55  

STOCKHOLDERS' EQUITY

Preferred Stock

The Company is authorized to issue up to 5,000,000 shares of preferred stock with rights and preferences as may be approved by its Board of Directors under its Amended and Restated Certificate of Incorporation.

On October 29, 2021, the Company entered into a securities purchase agreement with various institutional investors to sell in a private placement offering (the “2021 Private Placement”) (i) an aggregate of 15,000 shares of our newly-created Series B Non-Voting Preferred Stock (the “Preferred Stock”) convertible into an aggregate of 37,500,000 shares of Common Stock, and (ii) warrants (the “2021 Warrants”) exercisable for 37,500,000 shares of Common Stock for net proceeds of $ 14.9 million.

$ 3.50  

Additionally, in connection with the 2022 Warrant Reprice Transaction, the Company issued to certain participants in the 2022 Warrant Reprice Transaction that exercised their Amended November 2021 Warrants and their Amended July 2020 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, as applicable.

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.

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 Amended November 2021 Warrants and the Amended July 2020 Warrants exercised, and the 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 Amended November 2021 Warrants 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 consolidated statements of operations during the year ended December 31, 2022 .

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

Series C Preferred Stock and Warrants

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

( 1 ) 3,250 shares of 

Series C Preferred Stock convertible into an aggregate of 516,750 shares of common stock, ( 2 ) the Short-Term Warrants exercisable for 515,876 shares of common stock at an exercise price of $ 6.30 per share, and ( 3 ) the Long-Term Warrants exercisable for 515,876 shares of common stock at an exercise price of $ 6.30 per share.

The closing of the 2022 Private Placement was 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.

On November 18, 2022, the Company 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.

As of December 31, 2022, the 1,031,752 shares of common stock underlying the 2022 Warrants (with 515,876 underlying each of the Short-Term Warrants and the Long-Term Warrants) became exercisable on March 9, 2023 at an exercise price of $ 6.30 with the Short-Term Warrants expiring on May 20, 2024 and the Long-Term Warrants expiring on November 20, 2024.

Series B Preferred Stock and November 2021 Warrants

On October 29, 2021, the Company entered into the 2021 Private Placement, including a securities purchase agreement with various institutional investors to sell in a private placement offering (i) an aggregate of 15,000 shares of our newly-created Series B Non-Voting Preferred Stock (the “Series B Preferred Stock”) convertible into an aggregate of 37,500,000 shares of common stock (or 1,071,429 shares of common stock if accounting for the subsequent Reverse Stock Split), and (ii) the November 2021 Warrants exercisable for 37,500,000 shares of common stock (or 1,071,429 shares of common stock if accounting for the subsequent Reverse Stock Split) for net proceeds of $ 14.9 million.

The 2021 Private Placement closed on November 2, 2021.

The 2021 Warrants are exercisable into 37,500,000 Warrant Shares at an exercise price of $ 0.53 per share, subject to adjustment.

The Warrants were not immediately exercisable upon issuance.

In order for the Warrants to become exercisable, the Company was required to hold a stockholder meeting to (i) obtain stockholder approval, in accordance with the NYSE American LLC Company Guide (the “Company Guide”) Section 713 (a) and (b), for the issuance of the 37,500,000 shares of Common Stock upon the exercise of all of the Warrants, as well as the issuance of the 37,500,000 Conversion Shares upon conversion of the Preferred Stock (the “Share Issuance Proposal”) and (ii) obtain stockholder approval of an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from 100,000,000 shares to 150,000,000 shares (the “Authorized Share Increase Proposal”).

The November 2021 Warrants were not immediately exercisable upon issuance.

In order for the November 2021 Warrants to become exercisable, the Company was required to hold a stockholder meeting to (i) obtain stockholder approval, in accordance with Section 713 (a) and (b) of the NYSE American Company Guide, for the issuance of the shares underlying the Series B Preferred Stock and the November 2021 Warrants (the “Share Issuance Proposal”) and (ii) obtain stockholder approval of an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 100,000,000 shares to 150,000,000 shares (the “Authorized Share Increase Proposal”).

The Company held a special meeting of stockholders on December 17, 2021 ( the “Special Meeting”) at which the Share Issuance Approval was approved by stockholders and, at a subsequent adjournment of the Special Meeting on January 31, 2022, the stockholders approved the Authorized Share Increase Proposal.

As a result of these approvals having been given by the stockholders at the Special Meeting, the Warrants became exercisable subsequent to December 31, 2021 and will continue to be exercisable for a period of six ( 6 ) years thereafter.

Each share of the Preferred Stock that we issued in the Private Placement had a purchase price of $ 1,000 per share and is initially convertible at a conversion price of $ 0.40 into 2,500 shares of Common Stock, or an aggregate of 37,500,000 shares of Common Stock.

The conversion by the holders of the Preferred Stock was initially subject to approval of the Share Issuance Proposal.

Until the Share Issuance Proposal was approved by stockholders at the Special Meeting, the holders of the Preferred Stock were limited in converting their shares to an aggregate of 19.99 % of the outstanding shares of Common Stock immediately prior to the closing of the 2021 Private Placement, or 8,984,178 shares of Common Stock.

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

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

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

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

The Company first allocated $ 14.2 million to the 2021 Warrants, with the residual amount allocated to the Preferred Stock.

As a result of these approvals having been given by the stockholders at the Special Meeting, the November 2021 Warrants became exercisable as of January 31, 2022, and will continue to be exercisable for a period of six ( 6 ) years from such date.

The conversion by the holders of the Series B Preferred Stock was initially subject to approval of the Share Issuance Proposal.

Until the Share Issuance Proposal was approved by stockholders at the Special Meeting, the holders of the Series B 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.

As a result of the Company’s stockholders approving the Share Issuance Proposal at the Special Meeting, this limitation upon conversion of Series B Preferred Stock was no longer applicable to the holders as of December 17, 2021.

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

The Series B Preferred Stock does, however, have anti-dilution protection in the event that the Company sells or grants any of its common stock or any other securities, 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.

The Company allocated the net proceeds 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 2021 Warrants.

In connection with the issuance of the Preferred Stock, the Company recorded a beneficial conversion feature of $ 0.7 million as a discount to Preferred Stock and an increase to additional paid in capital.

The Company fully amortized the discount related to the beneficial conversion feature on the deemed dividend in the consolidated statements of operations and comprehensive loss upon approval of the Share Issuance Proposal in the fourth quarter of 2021.

for further discussion of the key assumptions used to value the November 2021 Warrants.

In connection with the issuance of the Series B Preferred Stock, the Company recorded a beneficial conversion feature of $ 0.7 million as a discount to Series B 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 upon approval of the Share Issuance Proposal in the fourth quarter of 2022.

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

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

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

There were 14 thousand shares of the Preferred Stock outstanding as of December 31, 2021.

April 2020 At the Market Offering

In the second quarter of 2020, the Company established the 2020 ATM Program with Ladenburg Thalmann & Co.

(“Ladenburg”).

For additional information regarding the offering and equity program, see the Company’s Current Reports on Form 8 -K filed with the SEC on April 27, 2020 and September 15, 2020.

During the second quarter of 2020, 5,836,792 shares of common stock were issued under the 

2020 ATM Program for total net proceeds of $ 5.6 million, net of offering costs of $ 0.4 million.

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 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 consolidated balance sheets.

Each share of the Series B Preferred Stock that the Company issued in the 2021 Private Placement had 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 (which does not account for the Reverse Stock Split).

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 (which does not account for the Reverse Stock Split).

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 (which does not account for the Reverse Stock Split).

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

$ 8.05  

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

$ 2.10  

Thereafter, the Company effected the Reverse Stock Split, which resulted in an automatic adjustment to the conversion price for each outstanding share of the Series B Preferred Stock to $6.30, and each outstanding shares of Series B Preferred Stock became convertible into 159 shares of common stock.

As of December 31, 2022, 3,380 shares of the Series B Preferred Stock had been converted into common stock.

Each of the remaining 11,620 shares of the Series B Preferred Stock as of December 31, 2022, is currently convertible into 159 shares of common stock at a conversion price of $ 6.30 .

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 (or $ 6.30 to adjust for the subsequent Reverse Stock Split) 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.

As of December 31, 2022, the 803,574 shares of common stock underlying the November 2021 Warrants, as amended, became exercisable on March 9, 2023.

May 2021 At the Market Offering

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

In the second quarter of 2021, the Company established an at-the-market offering and equity program with Ladenburg (the “2021 ATM Program”).

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.

2 unchanged sentences

Common Stock Warrants

July 2011 Warrants

In the third quarter of 2011, the Company issued 139,520 common stock purchase warrants exercisable for 139,520 shares of common stock in connection with a registered direct financing (the “July 2011 Warrants”).

The July 2011 Warrants were issued with an exercise price of $ 33.25 and an expiration date of July 5, 2016.

In October 2015, in connection with a separate financing event, the exercise price of outstanding July 2011 Warrants was reduced to $ 5.00 per share and the expiration date extended to March 6, 2020.

In February 2016 and May 2019, the exercise price of outstanding July 2011 Warrants was reduced to $ 1.81 and $ 0.2061 per share, respectively, pursuant to price protection provisions of the warrants.

In March 2020, a total of 35,107 July 2011 Warrants expired unexercised.

As of December 31, 2021, there were no July 2011 Warrants outstanding.

March 2015 Warrants

In the first quarter of 2015, the Company issued 649,133 common stock purchase warrants exercisable for 649,133 shares of common stock in connection with a private placement offering (the “March 2015 Warrants”).

The exercise price of individual March 2015 Warrants varied between $ 15.00 and $ 16.25 per share at the time of issuance.

The Company issued 278,200 of the March 2015 Warrants with an expiration date of March 6, 2020 and the remaining 370,933 March 2015 Warrants with an expiration date of September 6, 2015.

In October 2015, in connection with a separate financing event, the exercise price of all outstanding March 2015 Warrants was reduced to $ 5.00 per share and the expiration date of all outstanding warrants expiring on September 6, 2015 was extended to March 6, 2020.

In February 2016 and May 2019, the exercise price of all outstanding July 2011 Warrants was reduced to $ 1.81 and $ 0.2061 per share, respectively, pursuant to price protection provisions of the warrants.

During the first quarter of 2020, a total of 70,000 March 2015 Warrants were exercised, resulting in gross proceeds of $ 14 thousand.

Also in the first quarter of 2020, all remaining 7,419 March 2015 Warrants expired unexercised.

As of December 31, 2021, there were no March 2015 Warrants outstanding.

October 2015 Warrants

In the fourth quarter of 2015, the Company issued 442,802 common stock purchase warrants exercisable for 442,802 shares of common stock in connection with a public offering (the “October 2015 Warrants”).

The warrants were issued with an exercise price of $ 5.00 and an expiration date of October 27, 2020.

In February 2016 and May 2019, the exercise price of outstanding October 2015 Warrants was reduced to $ 1.81 and $ 0.2061 per share, respectively, pursuant to price protection provisions of the warrants.

Also during the fourth  quarter of 2020, a total of 22,680 October 2015 Warrants were exercised, resulting in gross proceeds of $ 5 thousand.

During the fourth  quarter of 2020, all remaining 15,320 October 2015 Warrants expired unexercised.

As of December 31, 2021, there were no October 2015 Warrants outstanding.

June 2019 Private Placement and June 2019 Warrants

During the second quarter of 2019, the Company entered into a private placement agreement to sell 1,371,427 shares of common stock and 1,371,427 common stock purchase warrants exercisable for 1,371,427 shares of common stock (the “June 2019 Warrants”) for an aggregate subscription price of $ 2.4 million.

Three accredited investors, Messrs.

Xiao Rui Liu, Hai Dong Pang and Ping Huang, subscribed to the private placement for $ 1.0 million, $ 0.4 million and $ 1.0 million, respectively.

China Kington served as placement agent in exchange for a commission equal to six percent ( 6 %) of the gross proceeds, totaling $ 0.1 million.

The Company also paid other offering costs of $ 27 thousand.

The June 2019 Warrants were issued with an exercise price of $ 0.87 and an expiration date of June 17, 2020.

The June 2019 Warrants were callable by the Company if the closing price of the Company’s common stock, as reported on the NYSE American, was $ 1.00 or greater.

During the first quarter of 2020, a total of 228,571 June 2019 Warrants were exercised, resulting in gross proceeds of $ 199 thousand.

The Company paid China Kington a fee of $ 12 thousand, or six percent ( 6 %) of the gross proceeds, for brokering the exercise transaction.

During the second quarter of 2020, a total of 571,428 June 2019 Warrants were exercised, resulting in gross proceeds of $ 497 thousand.

The Company paid China Kington a fee of $ 29 thousand, or six percent ( 6 %) of the gross proceeds, for brokering the exercise transaction.

Also during the second quarter of 2020, all remaining 571,428 June 2019 Warrants expired unexercised.

As of December 31, 2021, there were no June 2019 Warrants outstanding.

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

TLF Bio Innovation 2021 Warrants

On January 15, 2021, TLF Bio Innovation was granted warrants exercisable for 15,000 shares of common stock (or 429 shares of common stock if accounting for the subsequent Reverse Stock Split) with an exercise price of $ 0.6718 (or $ 23.5130 if accounting for the subsequent Reverse Stock Split) (the “TLF Warrants”).

The TLF Warrants will expire five years after their issuance.

The TLF Warrants are classified as equity.

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

As of December 31, 2022, there were no 2019 Domestic Warrants, 2019 Foreign Warrants, 2019 Ladenburg Warrants or July 2020 Warrants (each as defined below) outstanding.

Therefore, the share amounts and related exercise prices below have not been adjusted to account for the Reverse Stock Split. 

In the third quarter of 2019, the Company entered into a purchase agreement (the “2019 Purchase Agreement”) for the sale of (i) 4,198,566 shares of common stock and (ii) 4,198,566 common stock purchase warrants exercisable for 4,198,566 shares of common stock (the “2019 Domestic Warrants”) for gross proceeds of $ 4.2 million.

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for further discussion of the key assumptions used to value the 2019 Domestic Warrants.

Ladenburg served as the placement agent for the transaction in exchange for a commission representing six percent ( 6 %) of the gross proceeds, totaling $ 0.3 million, and 167,942 common stock purchase warrants exercisable for 167,942 shares of common stock with an exercise price of $ 1.25 per share and an expiration date of August 8, 2024 ( the “2019 Ladenburg Warrants”).

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

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

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

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

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

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

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

See Note 12, “Warrant Liability”

for a discussion of the key assumptions used to value the 2019 Ladenburg Warrants.

During the third quarter of 2020, the Company and the holders of the 2019 Domestic Warrants and the 2019 Foreign Warrants entered into exercise agreements which resulted in the cash exercise of the warrants at a reduced exercise price of $ 0.99 .

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

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.

2019 Ladenburg Warrants

Ladenburg served as the placement agent for the transaction related to the 2019 Purchase Agreement in exchange for a commission representing six percent ( 6 %) of the gross proceeds, totaling $ 0.3 million, and common stock purchase warrants exercisable for 167,942 shares of common stock (or 4,799 shares of common stock as adjusted for the subsequent Reverse Stock Split) with an expiration date of August 8, 2024 ( the “2019 Ladenburg Warrants”).

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

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

See Note 13, “Warrant Liability”

for a discussion of the key assumptions used to value the 2019 Ladenburg Warrants.

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 (or $ 34.65 to adjust for the subsequent Reverse Stock Split) and amended certain terms of the 2019 Ladenburg Warrants.

The Company’s potential obligation to cash-settle the warrants if a specified fundamental transaction occurred was amended to apply only in situations within the Company’s control.

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

TLF Bio Innovation 2021 Warrants

On January 15, 2021, TLF Bio Innovation was granted warrants exercisable for 15,000 shares of the Company’s common stock with an exercise price of $ 0.6718 (the “TLF Warrants”).

The TLF Warrants will expire five years after their issuance.

The TLF Warrants are classified as equity.

June 2019 Private Placement and June 2019 Warrants

As of December 31, 2022, there were no June 2019 Warrants (as defined below) outstanding.

Therefore, the share amounts and related exercise prices below have not been adjusted to account for the Reverse Stock Split.