What changed in this filing

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Item 1. Financial Statements

2023-05-11 compared with 2022-11-14 · 577 added, 985 removed, 588 unchanged (73% of the section changed)

3 unchanged sentences

(in thousands, except par value amounts)

September 30,

Current assets:

2 unchanged sentences

$ 5,362  

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

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

Accounts receivable, net of allowance for credit losses ($ 3 and $ 19 at March 31, 2023 and December 31, 2022, respectively)

Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($ 488 and $ 499 at March 31, 2023 and December 31, 2022, respectively)

Prepaid expenses and other current assets

1 unchanged sentence

11,332  

13,170  

Operating lease right-of-use assets

3 unchanged sentences

$ 16,399  

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES AND STOCKHOLDERS ’

Current liabilities:

3 unchanged sentences

Accrued liabilities

Line of credit

Operating lease liabilities

1 unchanged sentence

Operating lease liabilities-non-current

Warrant liability

Contingent earnout liability

Total liabilities

13,807  

Commitments & contingencies (Note 10)

Stockholders' equity:

Stockholders’

Preferred stock, $ 0.01 par value;

5,000 shares authorized;

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

Series B Preferred Stock;

12 shares issued and outstanding at March 31, 2023 and December 31, 2022  

Series C Preferred Stock;

2 shares issued and outstanding at March 31, 2023 and December 31, 2022  

Common stock, $ 0.01 par value;

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

150,000 shares authorized, 2,035 shares issued and outstanding at March 31, 2023 and December 31, 2022

Additional paid-in capital

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Accumulated deficit

Total stockholders' equity

13,784  

Total stockholders’

10,554  

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

TOTAL LIABILITIES AND STOCKHOLDERS’

$ 14,825  

$ 16,399  

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

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

NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended March 31,

Product revenue, net

$ 3,816  

$ 2,259  

$ 10,743  

$ 7,012  

Other revenue, net

Total sales, net

10,761  

Product cost of goods sold

4 unchanged sentences

Total operating expenses

11,017  

10,505  

Operating loss

Non-cash loss on modification of common stock warrants  

( 1,922 )  

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

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

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

Other (expense) income, net

Loss before provision for income taxes

( 136 )  

Provision for income taxes

Net loss and comprehensive loss

$ ( 136 )  

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

Net loss attributable to common stockholders

Net loss per share (basic and diluted)

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

56,133  

44,921  

53,007  

43,100  

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

Other expense, net

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

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

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

NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ 

EQUITY  

(in thousands)

1 unchanged sentence

Stockholders ’

Equity   

Balance at December 31, 2022

47,766  

$ 150,900  

$ ( 141,887 )

$ 10,171  

Reclassification of Private Placement Warrants

Conversion of Series B Preferred Stock to common stock  

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

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

Balance at March 31, 2023

51,419  

$ 158,621  

$ ( 141,998 )

$ 17,746  

Conversion of Series B Preferred Stock to common stock  

Vesting of director restricted stock awards

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

Balance at June 30, 2022

53,513  

$ 158,793  

$ ( 144,153 )

$ 15,745  

( 136 )  

Modification of common stock warrants  

Exercise of warrants, net of offering costs  

11,475  

Reclassification of common stock warrants to liability  

Adjustment of Series B Preferred Stock conversion price  

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

Balance at September 30, 2022

64,988  

$ 162,510  

$ ( 149,946 )

$ 13,784  

Preferred Stock

Stockholders ’

Equity   

Balance at December 31, 2021

41,782  

$ 147,963  

$ ( 136,063 )

$ 12,318  

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

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

Reclassification of Series B Private Placement Warrants

Conversion of Series B Preferred Stock to common stock

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

Balance at March 31, 2022

41,782  

$ 148,146  

$ ( 137,581 )

$ 10,983  

Issuance of warrants

Issuance of common stock, net of offering costs

Vesting of employee restricted stock awards

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

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

Balance at June 30, 2021

44,615  

$ 150,202  

$ ( 139,440 )

$ 11,209  

Vesting of employee restricted stock awards

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

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

Balance at September 30, 2021

44,943  

$ 150,643  

$ ( 141,729 )

$ 9,364  

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

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

NOVABAY PHARMACEUTICALS, INC.

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(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Operating activities:

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

Depreciation and amortization

Depreciation of property and equipment

Amortization of intangible 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

Vesting of employee restricted stock awards

Issuance of warrants to non-employees for services

Non-cash loss on modifications of common stock warrants  

Unrealized gain on changes in fair value of warrant liabilities

Unrealized gain on changes in fair value of contingent liability

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

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

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

Changes in operating assets and liabilities:

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Financing activities:

Proceeds from exercise of warrants

Proceeds from common stock issuances, net

Payment on the line of credit

Net cash provided by financing activities

Net decrease in cash, cash equivalents, and restricted cash

Net cash used in financing activities

Net change in cash, cash equivalents, and restricted cash

Cash, cash equivalents and restricted cash, beginning of year

12,427  

Cash, cash equivalents and restricted cash, end of period

1 unchanged sentence

$ 5,793  

Nine Months Ended September 30,

Three Months Ended March 31,

Supplemental disclosure of cash flow information:

Interest paid

Nine Months Ended September 30,

Three Months Ended March 31,

Supplemental disclosure of non-cash information:

Warrant liability transferred to equity

$ 7,502  

Adjustment of Series B Preferred Stock conversion price  

$ 5,657  

Equity transferred to warrant liabilities

$ 3,825  

Addition of operating lease, right-of-use asset

$ 2,039  

Reassessment of operating lease, right-of-use asset  

Conversion of Series B Preferred Stock to common stock

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

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

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 eyelid and eyelash mirror.

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

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

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

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

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

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 (“DERMAdoctor”), 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.

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

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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The Company is managed as two reportable segments:

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

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

( 1 ) Eyecare and Wound Care and ( 2 ) Skincare.

Effective November 15, 2022, the Company effected a 1 -for- 35 reverse split of our outstanding common stock (“Reverse Stock Split”) (See Note 12, “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.

Liquidity and Going Concern

Based primarily on the funds available on March 31, 2023 and the 2023 Private Placement (as defined elsewhere in this Quarterly Report) completed subsequent to March 31, 2023 as further described in Note 18, “Subsequent Events”, the Company believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund its existing operations and meet its planned operating expenses into at least the second quarter of 2024.

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.

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

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

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

The 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 Securities and Exchange Commission (“SEC”).

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

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

These estimates include contract liabilities related to product sales, useful lives for property and equipment and related depreciation calculations, assumptions for valuing options and warrants, the fair value of contingent consideration, intangible assets, goodwill, stock-based compensation, income taxes and other contingencies as of September 30, 2022.

These estimates include contract liabilities related to product sales such as product returns, assumptions for valuing 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.

Unaudited Interim Financial Information

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

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

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

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

Unaudited Condensed Consolidated Interim Financial Information

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

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

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

The condensed consolidated financial statements and notes included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2022, which was filed with the SEC on March 31, 2023.

Change in Accounting and Revision of Prior Period Financial Statements

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

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

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 condensed 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 we increasingly focus on commercial growth in our direct to consumer on-line channels.

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 focuses on commercial growth in our direct to consumer on-line channels.

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

See additional information under “Revenue Recognition”

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

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

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

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

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

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

The changes had no impact on operating loss, net loss or net loss per share in the Company’s unaudited condensed 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 unaudited condensed 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.

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

The identified error impacted the Company’s previously issued 2022 first and second quarter condensed consolidated financial statements, as well as the 2021 annual consolidated 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 and comprehensive loss or net loss per share in the Company’s condensed consolidated statements of operations and comprehensive loss in the periods presented in this report or in previously issued annual and quarterly Company's condensed financial statements.

The revisions had no impact on operating loss, net loss or net loss per share in the Company’s unaudited condensed consolidated statements of operations 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 September 30, 2022 and December 31, 2021, the Company’s cash and cash equivalents were held in a highly-rated, major financial institution in the United States.

As of March 31, 2023 and December 31, 2022, 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 condensed consolidated balance sheets (in thousands):

September 30,

Cash and cash equivalents

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Restricted cash included in other assets

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

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

$ 4,222  

$ 5,846  

The restricted cash amount included in other assets on the condensed 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 condensed 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 three and nine months ended September 30, 2022 and 2021, revenues were derived primarily from sales of Avenova branded products, directly to consumers through Amazon.com, and Avenova.com.

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

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

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

The Company has a significant amount of its 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 three months ended March 31, 2023 and 2022, revenues were derived primarily from sales of Avenova and DERMAdoctor branded products, directly to consumers through Amazon.com, Avenova.com and DERMAdoctor.com.

During the three months ended March 31, 2023 and 2022, revenues from significant product categories were as follows (in thousands):

For the three Months Ended March 31,

Avenova Spray

1 unchanged sentence

$ 1,839  

$ 5,778  

$ 6,358  

Other products

Total product revenue, net

10,743  

Other revenue, net

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$ 3,273  

$ 10,761  

$ 7,031  

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

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

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

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

September 30,

During the three months ended March 31, 2023 and 2022, sales of Avenova Spray via Amazon comprised 75 % and 82 % of total Avenova Spray net revenue, respectively.

No other individual distributor comprised greater than 10% of total Avenova Spray net revenue during the three months ended March 31, 2023 or 2022.

As of March 31, 2023 and December 31, 2022, accounts receivable from our major distribution partners and major retailers greater than 10% were as follows:

Major distribution partner

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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 delays in light of the global supply chain issues.

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

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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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Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Allowance for Doubtful Accounts

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

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

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

There was no reserve for accounts receivable at December 31, 2021.

Allowance for Credit Losses

The Company maintains an allowance for estimated losses resulting from the inability of its customers to meet their financial obligations to the Company.

The Company recognizes an allowance for credit losses based on factors such as historical experience, contract terms and general and market business conditions.

The Company’s future collection experience can differ significantly from historical collection trends due to such factors as changing customer circumstances and uncertain economic and industry trends.

Management recorded a reserve for allowance for credit losses of $ 3 thousand and $ 19 thousand as of March 31, 2023 and December 31, 2022, respectively.

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 September 30, 2022 and December 31, 2021, management had recorded an allowance for excess and obsolete inventory at the lower of cost or estimated net realizable value adjustments of $ 455 thousand and $ 641 thousand, respectively. 

At March 31, 2023 and December 31, 2022, management had recorded an allowance for excess and obsolete inventory at the lower of cost or estimated net realizable value of $ 488 thousand and $ 499 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.

Leasehold improvements are amortized over the lease term.

The costs of normal maintenance, repairs, and minor replacements are expensed as incurred. 

Business Combinations  

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

The acquisition method requires 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.

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

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

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

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

Goodwill and Intangible Assets

The costs of normal maintenance, repairs, and minor replacements are expensed as incurred.

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 as of September 30, 2022 and December 31, 2021.

The Company did not record any goodwill or indefinite-lived asset impairment charges during the three months ended March 31, 2023 or 2022.

Valuation of Contingent Consideration Resulting from a Business Combination

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

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

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

In connection with certain acquisitions, including the DERMAdoctor Acquisition, 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.

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.

DERMAdoctor Acquisition milestone events consist of financial targets for calendar years 2022 and 2023.

The financial target was not met for the calendar year 2022.

Additionally, we do not expect the financial target to be met for the calendar year 2023.

As a result, the liability recorded for potential earn out payments in the Company’s condensed consolidated balance sheets was zero as of March 31, 2023 and December 31, 2022.

This amount is subject to change in the event that there are changes to our expectations and related valuation assumptions.

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, 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 are present.

The Company reviews long-lived 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 as of September 30, 2022 and December 31, 2021.

The Company did not record any long-lived asset impairments during the three months ended March 31, 2023 or 2022.

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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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 condensed consolidated statements of operations and comprehensive loss.

We present revenue net of sales taxes and refunds.

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 condensed consolidated statements of operations and comprehensive loss.

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

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

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.

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

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

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

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

These changes did not impact operating loss, net loss or loss per share in the Company’s condensed 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 condensed consolidated statements of operations and comprehensive loss.

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

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

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

The identified error impacted the Company's previously issued 2022 and 2021 quarterly, and 2021 and 2020 annual consolidated 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 condensed consolidated statements of operations and comprehensive loss for the three and nine month periods ended September 30, 2022 and 2021 were adjusted for the above changes as follows (in thousands):

Three Months Ended September 30, 2022

Nine Months Ended September 30, 2022

As Previously

Product revenue, net

$ 3,268  

$ 3,816  

$ 8,934  

$ 10,743  

Product cost of goods sold

Operating expenses

Sales and marketing

Net loss and comprehensive loss

( 136 )  

( 2,402 )  

Net loss per share (basic and diluted)

( 0.10 )  

( 0.15 )  

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

As Previously

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

Financial statement line items included in the condensed consolidated statements of operations for the three months ended March 31, 2022 were adjusted for the above changes as follows (in thousands, except per share amounts):

For the Three Months Ended March 31, 2022

As Previously

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$ 3,267  

$ 5,761  

$ 7,012  

Product cost of goods sold

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Sales and marketing

Net loss and comprehensive loss

( 2,289 )  

( 5,666 )  

Net loss per share (basic and diluted)

( 0.05 )  

( 0.13 )  

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 to the amount of consideration that the Company expects to be entitled to, generally upon delivery to Costco.

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

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.

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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 may be required to defer recognition of revenue for upfront payments until it performs its obligations under these arrangements, and such amounts are recorded as deferred revenue upon receipt. Deferred revenue was $ 307 thousand and $ 4 thousand as of March 31, 2023 and December 31, 2022, respectively.

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

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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 condensed consolidated statements of operations and comprehensive loss.

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

Advertising Costs

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

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

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

Advertising expenses were $ 1.6 million and $ 2.3 million for the nine months ended September 30, 2022 and 2021, respectively.

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

Advertising expenses were $ 326 thousand and $ 617 thousand for the three months ended March 31, 2023 and 2022, respectively.

Stock-Based Compensation

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

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

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

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 unaudited condensed consolidated statements of operations based on their fair values as they are earned under the applicable vesting terms.

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

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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,  

Derivatives and Hedging .

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

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

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

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

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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.

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

$ ( 136 )  

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

Net loss attributable to common stockholders, basic and diluted

Weighted average shares outstanding, basic and diluted

56,133  

44,921  

53,007  

43,100  

Net loss per share, basic and diluted

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

As of September 30,

Series B Preferred Stock common stock equivalents

64,561  

Three Months Ended March 31,

Weighted average shares of common stock outstanding (basic and diluted)

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

For the three months ended March 31, 2023 and 2022, Series B Non-Voting Convertible Preferred Stock (the “Series B Preferred Stock”) and the Series C Non-Voting Convertible Preferred Stock (the “Series C Preferred Stock”) were excluded from the computation of diluted net loss per share as their inclusion on an “if converted”

basis would have been anti-dilutive.

The Series B Preferred Stock and Series C Preferred Stock were considered anti-dilutive because such securities did not have a contractual obligation to participate in losses of the Company.

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

Three Months Ended March 31,

Stock options

Stock warrants

71,586  

11,029  

Recent Accounting Pronouncements

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The Company continues to evaluate the potential impact of adopting the new accounting guidance on its consolidated financial position, results of operations and cash flows.

BUSINESS COMBINATION

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

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

Equity”).

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

The following table sets forth the final allocation of the purchase price for the DERMAdoctor Acquisition to the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed from DERMAdoctor (in thousands):

Tangible net assets and liabilities:

Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts

Inventory, net of allowance

Prepaid expenses and other current assets

Property and equipment, net

Other intangible assets

Accounts payable

Accrued liabilities

Total net assets

Intangible Assets:

Customer relationships

Trade secrets / product formulations

Total intangible assets

Net assets acquired

Purchased consideration

12,561  

$ 4,528  

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

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

Intangible Asset

Customer relationships

Straight line

Trade secrets / product formulations

Straight line

$ 9,788  

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

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

These costs are recorded as general and administrative expense in the consolidated statements of operations and comprehensive loss.

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

Therefore, financial results are reported in two operating segments:

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

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 adopted the new standard effective January 1, 2023, and the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

FAIR VALUE MEASUREMENTS  

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

As of December 31, 2021, the November 2021 Warrants (as defined in Note 14 ) are classified within Level 3 of the fair value hierarchy as liabilities (see Note 13, “Warrant Liability”

and Note 14, “Stockholders’

Equity”).

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

The following table presents the Company’s cash equivalent assets measured at fair value on a recurring basis as of March 31, 2023 ( in thousands):

Fair Value Measurements Using

Quoted Prices

September 30,

for Identical

Restricted cash held as a certificate of deposit

Deposit held as a certificate of deposit

Warrant liability

$ 2,827  

Contingent earnout liability

Total liabilities

$ 3,169  

The following is a reconciliation of the beginning and ending balances for the liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) as of September 30, 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 (as defined in Note 14)

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

Fair value of warrant liability at September 30, 2022

$ 2,827  

Fair value of contingent liability at December 31, 2021

Decrease in fair value of contingent liability

Fair value of contingent liability at September 30, 2022

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

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

for Identical

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Deposit held as a certificate of deposit

Warrant liability

$ 9,558  

Contingent earnout liability

Total liabilities

$ 10,119  

Fair value of warrant liability at December 31, 2020

Fair value of November 2021 Warrants issued

14,172  

Decrease in fair value of November 2021 Warrants

Fair value of warrant liability at December 31, 2021

$ 9,558  

PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

September 30,

Prepaid insurance

Tenant allowance  

Prepaid inventory

Prepaid insurance

Prepaid dues and subscriptions

Prepaid patents

Prepaid sales rebates

Prepaid consultants

Prepaid marketing costs

Prepaid patents

Tenant allowance

Total prepaid expenses and other current assets

Inventory consisted of the following (in thousands):

September 30,

Raw materials and supplies

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

September 30,

Office and laboratory equipment

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Computer equipment and software

Production equipment

Leasehold improvements

Total property and equipment, at cost

accumulated depreciation and amortization

accumulated depreciation

Total property and equipment, net

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

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

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

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

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

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

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

Depreciation expense was $ 13 thousand and $ 30 thousand for the three months ended March 31, 2023 and 2022, respectively.

OTHER INTANGIBLE ASSETS

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

Balance at September 30, 2022

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

Balance at March 31, 2023

Indefinite-lived intangible assets

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$ 2,280  

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

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

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

2022 (remaining 3 months)  

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 recorded an intangible asset impairment charge of $ 2.6 million in the fourth quarter of 2022, which was reflected in the “Goodwill, Intangible and Other Asset Impairment”

caption in the Company’s consolidated statements of operations.

The Company did not record any intangible asset impairment charges for the three months ended March 31, 2023 or 2022.

Amortization expense was $ 38 thousand and $ 91 thousand for the three months ended March 31, 2023 and 2022, respectively.

Based on the amortizable intangible assets as of March 31, 2023, future amortization expenses are expected to be as follows (in thousands):

$ 1,132  

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Accrued liabilities consisted of the following (in thousands):

September 30,

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

Contract liabilities (see Note 14)

$ 1,864  

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Employee payroll and benefits

Marketing costs

Inventory purchases

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

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

COMMITMENTS AND CONTINGENCIES  

As of March 31, 2023 and December 31, 2022, there was no outstanding balance on the line of credit as such line of credit was terminated and repaid in full during the quarter ended March 31, 2022.

COMMITMENTS AND CONTINGENCIES

Indemnification  

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

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

Accordingly, it has not recorded any liabilities for these agreements as of March 31, 2023 or December 31, 2022. 

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

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As a result, it believes the fair value of these indemnification agreements is minimal.

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

Accordingly, the Company has not recorded any liabilities for these agreements as of March 31, 2023 or December 31, 2022. 

Legal Matters

As of September 30, 2022, there were no legal matters that, in the opinion of management, would ultimately result in liability that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.

As of March 31, 2023 and 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 was scheduled to expire on February 28, 2022, but on January 19, 2022, the Company exercised its option to extend the term and amended the lease to extend the term through July 31, 2027.

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

The lease term is scheduled to expire in November 2022.

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

The 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.

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This will potentially result in the initial and subsequent measurement of the balances of the right-of-use assets and lease liability for leases being greater than if the policy election was not applied.

The leases include variable components (e.g.

common area maintenance) that are paid separately from the monthly base payment based on actual costs incurred and therefore were not included in the right-of-use assets and lease liability, but are reflected as an expense in the period incurred.

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

The leases include variable components (e.g., common area maintenance) that are paid separately from the monthly base payment based on actual costs incurred and therefore were not included in the right-of-use assets and lease liability, but are reflected as an expense in the period incurred.

The components of lease expense for the three months ended March 31, 2023 and 2022 were as follows (in thousands):

Three Months Ended March 31,

Operating lease cost

Net lease cost

Other information

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

September 30,

Three Months Ended March 31,

Weighted-average remaining lease term (in years)

Weighted-average discount rate

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

2022 (remaining 3 months)

Future lease payments under non-cancelable leases as of March 31, 2023 were as follows (in thousands):

Total future minimum lease payments

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$ 1,978  

Operating lease liability

Operating lease liability- non-current

Operating lease liabilities

Operating lease liabilities- non-current

$ 1,978  

WARRANT LIABILITY

2019 Domestic Warrants, 2019 Foreign Warrants and 2019 Ladenburg Warrants

As further described in Note 14, “Stockholders’

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

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

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

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

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

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

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

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

The fair values were then transferred to equity.

As of the date of exercise, the fair value of the 2019 Domestic Warrants and 2019 Foreign Warrants was determined to be $ 4.9 million and $ 4.2 million, respectively, in accordance with the following key assumptions:

2019 Domestic

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrant

$ 1.18  

$ 1.54  

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

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

Equity”, the Company amended the 2019 Ladenburg Warrants.

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

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

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

The fair value was then transferred to equity.

The fair value of the 2019 Ladenburg Warrants was determined to be $ 0.2 million on the date of amendment in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 1.17  

The 2019 Ladenburg Warrants will no longer be adjusted to fair value in reporting periods after the amendment. All 2019 Ladenburg Warrants remained outstanding as of September 30, 2022.

Amended July 2020 Warrants

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

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

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

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

See additional discussion of the terms of the Company’s various warrants and related transactions in Note 12, “Stockholders’

Equity”.

and Note 20 “Subsequent Events”).

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

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

Further, many of the defined terms used below are defined in Note 12, “Stockholders’

Equity”.

September 2022 Warrants

The September 2022 Warrants were issued by the Company on September 9, 2022, in connection with the 2022 Warrant Reprice Transaction.

The September 2022 Warrants were not exercisable prior to the effective date of the Reverse Stock Split, which was approved by Company stockholders on November 10, 2022.

Under ASC 480, Distinguishing Liabilities from Equity , the September 2022 Warrants were classified as liabilities from the date of issuance through the date of approval of the Reverse Stock Split at which time they were reclassified to equity.

The fair value of the September 2022 Warrants was determined to be $ 1.4 million as of the date of issuance on September 9, 2022 in accordance with the following key assumptions, which was recorded as a liability:

Expected price volatility

4 unchanged sentences

$ 4.55  

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

The fair value of the September 2022 Warrants was determined to be $ 0.5 million as of the date of approval by Company stockholders on November 10, 2022 in accordance with the following key assumptions, at which time the liability was adjusted and reclassified to equity:

Expected price volatility

5 unchanged sentences

November 2021 Warrants

As further described in Note 14, “Stockholders’

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

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

Equity”

and Note 20 “Subsequent Events”).

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

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

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

The November 2021 Warrants were issued by the Company on November 2, 2021, in connection with the 2021 Private Placement.

The November 2021 Warrants were subsequently amended in September 2022 pursuant to the 2022 Warrant Reprice Transaction.

The November 2021 Warrants were not initially exercisable prior to shareholder approval for an increase in authorized share capital which the Company received on January 31, 2022. 

Under ASC 480, Distinguishing Liabilities from Equity , the November 2021 Warrants were classified as liabilities from the date of issuance through the date of approval at which time they were reclassified to equity.

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, which was recorded as a liability:

Expected price volatility

4 unchanged sentences

$ 8.75  

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:

As of January 31, 2022, the fair value of the November 2021 Warrants was determined to be $ 7.5 million in accordance with the following key assumptions, at which time the liability was adjusted and reclassified to equity:

Expected price volatility

4 unchanged sentences

$ 7.00  

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

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

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

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

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

Unexercised November 2021 Warrants exercisable for 803,574 shares of common stock were amended on September 9, 2022, in connection with the 2022 Warrant Reprice Transaction.

As a result of the amendment, these November 2021 Warrants were no longer exercisable prior to the effective date of the Reverse Stock Split, which was approved by Company stockholders on November 10, 2022.

Under ASC 480, Distinguishing Liabilities from Equity , the November 2021 Warrants were reclassified as liabilities on the date of amendment and remained recorded as liabilities through the date of approval of the Reverse Stock Split at which time they were reclassified to equity.

The fair value of these November 2021 Warrants was determined to be $ 3.5  million as of the date of amendment on September 9, 2022 in accordance with the following key assumptions, at which time they were reclassified as liabilities:

Expected price volatility

4 unchanged sentences

$ 4.55  

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

As of November 10, 2022, the fair value of these November 2021 Warrants, as amended, was determined to be $ 1.3 million in accordance with the following key assumptions, at which time they were reclassified to equity:

Expected price volatility

4 unchanged sentences

$ 1.40  

September 2022 Warrants

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

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

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

Equity and Note 20 “Subsequent Events”).

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

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

Amended July 2020 Warrants

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, the Company amended certain July 2020 Warrants.

Amended July 2020 Warrants exercisable for 77,145 shares of common stock were no longer exercisable prior to the effective date of the Reverse Stock Split, which was approved by Company stockholders on November 10, 2022.

Under ASC 480, Distinguishing Liabilities from Equity , these Amended July 2020 Warrants were reclassified as liabilities on the date of amendment and remained recorded as liabilities through the date of approval of the Reverse Stock Split at which time they were reclassified to equity.

The fair value of these Amended July 2020 Warrants was determined to be $ 0.3 million as of the date of amendment on September 9, 2022 in accordance with the following key assumptions, at which time they were reclassified as liabilities:

Expected price volatility

4 unchanged sentences

$ 3.50  

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

As of November 10, 2022, the fair value of these Amended July 2020 Warrants was determined to be $ 0.1 million in accordance with the following key assumptions, at which time they were reclassified to equity:

Expected price volatility

4 unchanged sentences

$ 1.05  

STOCKHOLDERS’

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).

2022 Warrant Reprice Transaction and September 2022 Warrants

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

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

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

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, Amended November 2021 Warrants, Amended July 2020 Warrants 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 amended, the “Amended November 2021 Warrants”

and the “Amended July 2020 Warrants”, respectively).

The Amended November 2021 Warrants are exercisable for an aggregate of 803,574 shares of common stock at an exercise price of $ 6.30 per share and expire on September 11, 2028.

The Amended July 2020 Warrants are exercisable for an aggregate of 77,145 shares of common stock at an exercise price of $ 6.30 per share and expire on January 22, 2026.

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 Amended November 2021 Warrants and the Amended July 2020 Warrants as a result of the modification.

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

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

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

6 unchanged sentences

$ 0.70  

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

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

6 unchanged sentences

$ 3.50  

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

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

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

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

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, new common stock purchase warrants (the “September 2022 Warrants”) to purchase a number of shares of common stock equal to 100% of the number of shares that a participant exercised under its November 2021 Warrant or Amended July 2020 Warrant, 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 November 2021 Warrants, as amended, and the Amended July 2020 Warrants exercised, and September 2022 Warrants issued to participants by applying the relative fair value allocation methodology.

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

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 were classified as a liability.

For additional information regarding the warrant liability and valuation, please see Note 11 , “Warrant Liability”.

2 unchanged sentences

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

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

The Company allocated $ 166 thousand of the issuance costs to the warrant liability which was expensed in the Company’s condensed consolidated statements of operations during the third quarter of 2022 .

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

Unissued Series C Preferred Stock and Warrants

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

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

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

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

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

Series C Preferred Stock, Short-Term Warrants and Long-Term Warrants

Concurrent with the 2022 Warrant Reprice Transaction on September 9, 2022, the Company entered into a private placement transaction with accredited investors (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 ) series A- 2 warrants to purchase common stock, which are exercisable for 515,876 shares of common stock at an exercise price of $ 6.30 per share through May 20, 2024 ( the “Short-Term Warrants”), and ( 3 ) series A- 1 warrants to purchase common stock, which are exercisable for 515,876 shares of common stock at an exercise price of $ 6.30 per share through November 20, 2028 ( the “Long-Term Warrants”

and, together with the Short-Term Warrants, the “2022 Warrants”).

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.

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

The Series C 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 C Preferred Stock.

Series B Preferred Stock and November 2021 Warrants

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

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 Preferred Stock convertible into an aggregate of 1,071,429 shares of common stock, and (ii) the November 2021 Warrants exercisable for 1,071,429 shares of common stock for net proceeds of $ 14.9 million.

The 2021 Private Placement closed on November 2, 2021.

Each share of the Series B Preferred Stock that we issued in the Private Placement has a purchase price of $ 1,000 per share and was initially convertible at a conversion price of $ 0.40 into 2,500 shares of common stock, or an aggregate of 37,500,000 shares of common stock.

The conversion price was subsequently adjusted to $ 0.18 as a result of the 2022 Warrant Reprice Transaction as described further below.

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

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

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

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

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

See Note 13, “Warrant Liability”

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

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

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

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

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

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

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

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

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.

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).

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.

The deemed dividend was recorded as a reduction to income available to common shareholders in the basic earnings per share (EPS) calculation in the third quarter of 2022.

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:

The fair value of the Series B Preferred Stock was determined to be $ 6.8  million immediately prior the conversion price adjustment in accordance with the following key assumptions:

Expected price volatility

4 unchanged sentences

$ 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:

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

4 unchanged sentences

$ 2.10  

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

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

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

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 share of Series B Preferred Stock became convertible into 159 shares of common stock.

As of March 31, 2023, 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 March 31, 2023, was currently convertible into 159 shares of common stock at a conversion price of $ 6.30 at such time.

Each share of Series B Preferred Stock is now convertible into 770 shares of common stock at a conversion price of $ 1.30 , as further described in Note 18.

“Subsequent Events”.

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, the November 2021 Warrants were amended to reduce the exercise price to $ 6.30 and extend the expiration date to September 11, 2028.

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

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

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

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

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

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

The Company allocated the proceeds between the common stock and 2019 Domestic Warrants by applying the relative fair value allocation methodology.

The Company first allocated $ 3.1 million to the 2019 Domestic Warrants, with the residual amount allocated to the common stock.

See Note 13, “Warrant Liability”

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

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

In addition, the Company reimbursed Ladenburg $ 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 condensed consolidated statements of operations and comprehensive loss during the period.

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

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 condensed consolidated balance sheets.

See Note 13, “Warrant Liability”

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

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

The Company received aggregate gross proceeds of approximately $ 6.8 million from the exercises.

The Company incurred and paid other offering costs of $ 0.2 million.

The Company also incurred and paid a $ 0.2 million fee to China Kington for brokering the transaction, which equaled six percent ( 6 %) of the gross proceeds from the 2019 Foreign Warrants.

During the third quarter of 2020, the Company and all holders of the 2019 Domestic Warrants and 2019 Foreign Warrants entered into warrant repricing letter agreements.

Pursuant to the letter agreements, in consideration for the exercise in full of the 2019 Domestic Warrants and 2019 Foreign Warrants, the Company agreed to:

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

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

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

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

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.

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

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

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

May 2021 At-the-Market Offering

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

For additional information regarding the offering and equity program, see the Company’s Current Report on Form 8 -K filed with the SEC on May 14, 2021.

During the second quarter of 2021, 2,672,000 shares of common stock were issued under the 

2021 ATM Program for total net proceeds of $ 1.8 million, net of offering costs of $ 0.1 million.

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 March 31, 2023, November 2021 Warrants exercisable for 803,574 shares of common stock remain outstanding.

Common Stock Warrants

In addition to the Amended July 2020 Warrants, the Amended November 2021 Warrants, the September 2022 Warrants and the 2022 Warrants, the Company also has the following outstanding warrants:

2019 Ladenburg Warrants

In 2019, Ladenburg was granted warrants exercisable for 4,799 shares of common stock (the “2019 Ladenburg Warrants”).

The 2019 Ladenburg Warrants bear an exercise price of $ 34.65 and an expiration date of August 8, 2024.

July 2020 Warrants

In 2020, certain of the Company’s accredited investors were granted warrants with an exercise price of $ 57.75 (the “July 2020 Warrants”).

A portion of these warrants were subsequently amended as described above to become the Amended July 2020 Warrants.

As of March 31, 2023, outstanding July 2020 Warrants which were not amended are exercisable for 59,960 shares of common stock.

The July 2020 Warrants expire on January 22, 2026.

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 per share (the “TLF Warrants”).

The TLF Warrants will expire five years after their issuance.

The TLF Warrants are classified as equity.

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

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

In 2021, TLF Bio Innovation was granted warrants exercisable for 429 shares of common stock with an exercise price of $ 23.513 (the “TLF Warrants”).

The TLF Warrants expire on January 15, 2026.

Summary of Warrants Outstanding

The details of all outstanding warrants as of March 31, 2023 and December 31, 2022 are as follows:

(in thousands)

2 unchanged sentences

Warrants granted

37,500  

$ 0.53  

Warrants exercised

$ 0.18  

Warrants modified and not exercised

$ 0.18  

Outstanding at September 30, 2022

Warrants expired

Outstanding at March 31, 2023

$ 7.70  

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

EQUITY-BASED COMPENSATION

Equity Compensation Plans  

In October 2007, the Company adopted the 2007 Omnibus Incentive Plan (the “2007 Plan”) to provide for the granting of equity awards, such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights, and stock appreciation rights to employees, directors and outside consultants, as determined by the Board. 

The 2007 Plan expired on March 15, 2017.

Upon expiration, new awards cannot be issued pursuant to the 2007 Plan, but outstanding awards continue to be governed by its terms.

Stock options granted under the 2007 Plan expire no later than ten years from the date of grant.

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

In March 2017, the Company adopted the 2017 Omnibus Incentive Plan (the “2017 Plan”), which was approved by stockholders on June 2, 2017, to provide for the granting of equity awards, such as nonqualified stock options (“NQSOs”), incentive stock options (“ISOs”), restricted stock, performance shares, stock appreciation rights (“SARs”), RSUs and other share-based awards to employees, directors, and consultants, as determined by the Board. 

The 2017 Plan does not affect awards previously granted under the 2007 Plan.

Upon adoption, the 2017 Plan allowed for awards of up to 2,318,486 shares of the Company’s common stock, plus an automatic annual increase in the number of shares authorized for awards on the first day of each of the Company’s fiscal years beginning January 1, 2018 through January 1, 2027 equal to (i) 4 % of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of common stock than provided for in Section 4 (a)(i) of the 2017 Plan as determined by the Board.

October 2007, 

the Company adopted the 

2007  Omnibus Incentive Plan (the 

“2007  Plan”) to provide for the granting of equity awards, such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights, and stock appreciation rights to employees, directors and outside consultants, as determined by the Board.

2007  Plan expired on 

March 15, 2017. 

Upon expiration, new awards cannot be issued pursuant to the 

2007  Plan, but outstanding awards continue to be governed by its terms.

Stock options granted under the 

2007  Plan expire 

no  later than 

ten  years from the date of grant.

All stock options outstanding under the 

2007  Plan were fully vested as of 

December 31, 2020.

March 2017, 

the Company adopted the 

2017  Omnibus Incentive Plan (the 

“2017  Plan”), which was approved by stockholders on 

June 2, 2017, 

to provide for the granting of equity awards, such as nonqualified stock options (“NQSOs”), incentive stock options (“ISOs”), restricted stock, performance shares, stock appreciation rights (“SARs”), RSUs and other share-based awards to employees, directors, and consultants, as determined by the Board. 

2017  Plan does 

not  affect awards previously granted under the 

2007  Plan.

Upon adoption, the 

2017  Plan allowed for awards of up to 

66,243  shares of the Company’s common stock, plus an automatic annual increase in the number of shares authorized for awards on the 

first  day of each of the Company’s fiscal years beginning 

January 1, 2018 

through 

January 1, 2027 

equal to (i) 

4 % of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of common stock than provided for in Section 

4 (a)(i) of the 

2017  Plan as determined by the Board.

On March 31, 2023, the number of shares available for future awards under the 2017 Plan was increased by 81,417 shares.

September 30, 2022, 

March 31, 2023, 

there were 

1 unchanged sentence

2017  Plan.

Under the terms of the 2017 Plan, the exercise price of NQSOs, ISOs and SARs may not be less than 100 % of the fair market value of the common stock on the date of grant and, if ISOs are granted to an owner of more than 10 % of the Company’s stock, then not less than 110 % of the fair market value of the common stock on the date of grant.

The term of awards will not be longer than ten years, or in the case of ISOs, not longer than five years with respect to holders of more than 10% of the Company’s stock.

Stock options granted to employees generally vest over four years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service.

The Company issues new shares to satisfy option exercises for awards issued under the 2007 Plan and the 2017 Plan.

Stock Option Summary  

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

(in thousands, except years and per share data)

Under the terms of the 

2017  Plan, the exercise price of NQSOs, ISOs and SARs 

not  be less than 

100 % of the fair market value of the common stock on the date of grant and, if ISOs are granted to an owner of more than 

10 % of the Company’s stock, then 

not  less than 

110 % of the fair market value of the common stock on the date of grant.

The term of awards will 

not  be longer than 

ten  years, or in the case of ISOs, 

not  longer than 

five  years with respect to holders of more than 

10%  of the Company’s stock.

Stock options granted to employees generally vest over 

four  years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service.

The Company issues new shares to satisfy option exercises under the 

2007  Plan and the 

2017  Plan.

Summary  

of Outstanding Equity Awards

The following table summarizes information about the Company’s equity awards outstanding at March 31, 2023 and activity during the period ended March 31, 2023: 

(in thousands, except years

and per share data)

Outstanding at December 31, 2022

2 unchanged sentences

$ 1.80  

Restricted stock units granted

Restricted stock units vested

Options forfeited/cancelled

1 unchanged sentence

Restricted stock units cancelled

Outstanding at September 30, 2022

Outstanding at March 31, 2023

$ 38.34  

Vested and expected to vest at September 30, 2022

Vested and expected to vest at March 31, 2023

$ 49.23  

Vested at September 30, 2022

Vested at March 31, 2023

$ 65.02  

Exercisable at September 30, 2022

Exercisable at March 31, 2023

$ 65.02  

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE American as of September 30, 2022 for options that have a quoted market price in excess of the exercise price.

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

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

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

This amount is expected to be recognized as stock-based compensation expense in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss over the remaining weighted average vesting period of 2.30 years.

Stock Option Awards to Employees and Directors  

The aggregate intrinsic value in the table above is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE American as of March 31, 2023 for options that have a quoted market price in excess of the exercise price.

There were no stock option awards exercised during the three months ended March 31, 2023 and 2022.

The Company received no cash payments for the exercise of stock options during the three months ended March 31, 2023 and 2022.

As of March 31, 2023, total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately $ 0.3 million.

This amount is expected to be recognized as stock-based compensation expense in the Company’s unaudited condensed consolidated statements of operations over the remaining weighted average vesting period of 2.06 years.

Equity Awards to Employees and Directors

The Company grants options to purchase common stock to its employees and directors at prices equal to or greater than the market value of the stock on the dates the options are granted.

1 unchanged sentence

The application of this valuation model involves assumptions that are judgmental and subjective in nature.

See Note 2, “Summary of Significant Accounting Policies,”

See Note 

2,  “Summary of Significant Accounting Policies,”

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

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

During the three months ended March 31, 2023 and 2022, the Company granted options to employees and directors to purchase an aggregate of 3,650 and 9,486 shares of common stock, respectively.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Expected price volatility

11 unchanged sentences

Treasury rate for the week of the grant having a term approximating the expected life of the option.

Dividend Yield —We have not made any dividend payments nor do we have plans to pay dividends in the foreseeable future.

Dividend Yield —The Company has not made any dividend payments nor does the Company have plans to pay dividends in the foreseeable future.

Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period.

This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

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

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

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

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

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

Stock-Based Awards to Non-Employees

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

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

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

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

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

For the nine months ended September 30, 2022, the Company recognized a nominal stock-based compensation expense as compared to stock-based compensation expense of $ 180 thousand for the nine months ended September 30, 2021, related to non-employee stock option grants.

Summary of Stock-Based Compensation Expense  

A summary of the stock-based compensation expense included in results of operations for the options and restricted stock awards discussed above is as follows (in thousands): 

Three Months Ended

September 30,

Nine Months Ended

September 30,

During the three months ended March 31, 2023 and 2022, the Company did not grant restricted stock to employees.

For the three months ended March 31, 2023 and 2022, the Company recognized stock-based compensation expense of $ 75 thousand and $ 184 thousand, respectively, for stock-based awards to employees and directors.

Summary of Stock-Based Compensation Expense

A summary of the stock-based compensation expense included in results of operations for the options and restricted stock awards discussed above is as follows (in thousands):  

Three Months Ended March 31,

Research and development

1 unchanged sentence

General and administrative

( 225 )  

Total stock-based compensation expense

$ ( 208 )  

DISTRIBUTION AGREEMENTS

2 unchanged sentences

Product Sales Discounts and Allowances  

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

Chargebacks, Discounts for Prompt Payment

Other Custome r Fees

Product Returns,

Discounts for

Prompt Payment

Balance at December 31, 2022

1 unchanged sentence

$ 1,807  

Provision related to sales made in:

Current period

Provision related to sales made in current period

Payments and customer credits issued

$ ( 189 )  

$ ( 55 )  

$ ( 341 )  

Balance at September 30, 2022

Balance at March 31, 2023

$ 1,739  

$ 1,864  

Contract Assets and Liabilities

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

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

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

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

September 30,

Contract assets

Contract liabilities - current

Total contract liabilities

Avenova Spray Pharmacy Distribution Agreements and Specialty Pharmacies

Avenova Spray is made available in local pharmacies and major pharmacy retail chains under nationwide distribution agreements with McKesson Corporation, Cardinal Health and AmerisourceBergen.

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

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

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

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

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

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

The Company also recorded a prepayment of $ 11 thousand and $ 19 thousand for rebates related to these distribution agreements as of September 30, 2022 and December 31, 2021, respectively, that is recorded in the prepaid expenses and other current assets in the condensed consolidated balance sheets.

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

The Company has also entered into direct agreements with preferred pharmacy networks as part of our Partner Pharmacy Program.

During the three months ended March 31, 2023, the Company earned $ 92 thousand in net sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements.

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

Under these product distribution arrangements, the Company had a contract liability balance of $ 1.5 million as of March 31, 2023 and $ 1.6 million as of December 31, 2022.

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

The Company also recorded a prepayment of $ 8 thousand for rebates related to these distribution agreements as of March 31, 2023, with no such prepayment recorded as of December 31, 2022, that is recorded in the prepaid expenses and other current assets in the condensed consolidated balance sheets (see Note 4, “Prepaid Expenses and Other Current Assets”).

Over-the-Counter Sales of Avenova Spray

Avenova Spray was launched online on June 1, 2019 direct to U.S.

Avenova Spray is offered primarily for sale on Amazon.com, the Company’s website (Avenova.com) and Walmart.com.

Avenova Spray was launched at select CVS stores and online on CVS.com in February 2021.

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

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

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

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

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

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

Avenova Spray is offered for sale direct to U.S.

customers primarily on Amazon.com, the Company’s website (Avenova.com), Walmart.com, select CVS stores and online on CVS.com.

During the three months ended March 31, 2023 and 2022, the revenue generated from over-the-counter Avenova Spray was $ 1.6 million and $ 1.8 million, respectively. 

DERMAdoctor Products Distribution Agreements

DERMAdoctor products are sold through distribution arrangements with third parties such as Costco and others.

During the three months ended March 31, 2023 and 2022, the Company earned $ 0.1 million and $ 0.2 million, respectively, in sales revenue for its DERMAdoctor products from these distribution agreements.

Under these distribution arrangements, the Company had a contract liability balance of $ 0.3 million as of March 31, 2023, and $ 0.2 million as of December 31, 2022.

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

1 unchanged sentence

The Company has a 401 (k) plan covering all eligible employees.

The Company was not required to contribute to the plan and made no contributions during the period ended December 31, 2021.

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

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

The Company provides matching contributions equal to 100 % of the first 3 % of compensation deferred, plus 50 % of the next 2 % of compensation deferred.

The Company contributed $ 32 thousand and $ 46 thousand to the plan during the three months ended March 31, 2023 and 2022, respectively.

RELATED PARTY TRANSACTIONS       

Related Party Revenue  

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

The following table summarizes information about the Company’s related party revenue and cost of goods sold (in thousands): 

Three Months Ended March 31,

Related party revenue:

2 unchanged sentences

Total related party expenses

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

Related party accounts receivable was zero and $ 0.2 million as of March 31, 2023 and December 31, 2022, respectively.

SEGMENT REPORTING

1 unchanged sentence

The CODM reviews financial information presented for each reportable segment for purposes of making operating decisions and assessing financial performance.

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

Prior to the DERMAdoctor Acquisition in November 2021, the Company was managed as a single segment focused on commercializing Avenova Spray in the United States.

After the DERMAdoctor Acquisition, the Company began managing and aggregating its operational and financial information in accordance with two reportable segments:

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

The Optical & Wound Care segment consists of products historically sold by NovaBay prior to the DERMAdoctor Acquisition.

The Skin Care segment consists of products acquired in the DERMAdoctor Acquisition and skincare products subsequently sold under the DERMAdoctor brand.

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Optical & Wound Care

( 1 ) Eyecare & Wound Care and ( 2 ) Skincare.

The Eyecare & Wound Care segment consists of products historically sold by NovaBay prior to the DERMAdoctor Acquisition.

The Skincare segment consists of products acquired in the DERMAdoctor Acquisition and skincare products subsequently sold under the DERMAdoctor brand.

Select financial information for each segment is as follows:

of Total Sales,

Eyecare & Wound Care

$ 2,339  

$ 2,230  

Total sales, net

$ 3,124  

$ 3,273  

Operating Loss

Eyecare & Wound Care

$ ( 1,335 )  

2 unchanged sentences

( 343 )  

Operating loss

Optical & Wound Care

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

Each segment is managed independently because they require different operations and markets to distinct classes of customers.

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

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

Total operating loss

$ ( 1,734 )  

$ ( 2,382 )  

SUBSEQUENT EVENTS

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

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

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

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

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

As further discussed in Note 14, “Stockholders’

Equity”

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

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

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

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

The Company has evaluated all subsequent events through the filing date of this Form 

10 -Q with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the financial statements as of 

March 31, 2023 ,  and events which occurred subsequently but were 

not  recognized in the financial statements.

Except as described below there were 

no  other subsequent events which required recognition, adjustment to or disclosure in the unaudited condensed consolidated financial statements.

2023 Private Placement

On April 27, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”)  with existing accredited institutional investors (the “Purchasers”) of the Company that provided for the issuance and sale in a private placement (the “2023 Private Placement”) of (i) $ 3.3 million aggregate principal amount  (the “Aggregate Principal Amount”) of  Original Issue Discount Senior Secured Convertible Debentures Due November 1, 2024 ( the “Debentures”) that may be converted or redeemed into up to an aggregate of 2,538,464 shares of Common Stock (the “Conversion Shares”), 

(ii) a new long-term Series B- 1 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a five year period (“Long-Term Warrants”), and (iii) a new short-term Series B- 2 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a two year period (“Short-Term Warrants” and, together with the Long-Term Warrants, the “2023 Warrants”).

The 2023 Private Placement closed on May 1, 2023 ( the “Private Placement Closing”) and the Company received gross proceeds of $ 3.0 million, before deducting placement agent fees and other offering expenses.

Ladenburg served as the Company’s exclusive placement agent in the 2023 Private Placement and received a fee equal to 8 % of the total gross proceeds and were reimbursed for certain related expenses in an aggregate amount of $ 55 thousand.

Due to the number of shares of common stock that may be issued upon conversion or redemption of the Debentures and the exercise of the 2023 Warrants, the Company is required to obtain stockholder approval for the issuance of these shares of common stock in accordance with Section 713 (a) and 713 (b) of the NYSE American Company Guide (the “Stockholder Approval”).

The Company is required to promptly hold a meeting of stockholders within sixty ( 60 ) days following the Private Placement Closing to seek the Stockholder Approval and the Company intends to submit a proposal for consideration of stockholders at the 2023 Annual Meeting of Stockholders.

Until the Stockholder Approval is obtained, the conversion of the Debentures by the holders into shares of common stock is currently limited a holder’s pro rata share of 19.99 % of the Company’s outstanding shares of Common Stock, or into an aggregate of 438,669 shares (the “Issuable Maximum”) and the 2023 Warrants are not exercisable.

At any time after issuance, the Debentures are convertible by the holder, in whole or in part, into shares of common stock at a conversion price equal to $ 1.30 per share (“Conversion Price”), subject to limitations upon conversion including the Issuable Maximum.

Under the terms of the  Debentures, the Company is required to make a monthly redemption of the Debentures (“Monthly Redemption”) beginning on June 1, 2023 equal to 1/18th  of the Aggregate Principal Amount multiplied by 1.10 in cash;

or, as provided in the Debenture, in shares of common stock at the election of the Company with a conversion rate equal to the lower of (i) the Conversion Price or (ii) 90 % of the Company’s average volume-weighted average price over 10 trading days.

If any event of default occurs, the outstanding principal amount of the Debentures, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the holder’s election, immediately due and payable in cash.

Commencing five days after the occurrence of any event of default that results in the eventual acceleration of the Debentures, the interest rate on the Debentures shall accrue at an interest rate equal to the lesser of 18 % per annum and the maximum rate permitted under applicable law.

The Debentures are secured obligations of the Company and DERMAdoctor pursuant to the terms of the Security Agreement, dated April 27, 2023 ( the “Security Agreement”).

Under the terms of the Security Agreement the holders of the Debentures were granted a security interest, a lien upon and a right of set-off against all of the Company’s and DERMAdoctor’s assets as collateral security for the complete, timely payment, performance and discharge of the obligations under the Debentures.

To further secure the Company’s obligations under the Debenture, DERMAdoctor also executed a Subsidiary Guarantee (the “Subsidiary Guarantee”), pursuant to which DERMAdoctor is a guarantor of the Company’s obligations owed to the Debenture holders.

Warrant Amendments

In connection with the closing of the 2023 Private Placement, common stock purchase warrants that the Company previously issued to the Purchasers and to other existing investors in prior private placements and warrant reprice transactions were amended to lower the exercise price of the previously issued warrants exercisable for an aggregate of 1,724,455 shares of Common Stock from $ 6.30 to $ 1.30 per share pursuant to Warrant Amendment Agreements entered into by the Company.

Anti-Dilution Adjustment to Series B Preferred Stock and the Series C Preferred Stock

The Certificate of Designation of Preferences, Rights and Limitations for the Company’s outstanding Series B Preferred Stock (the “Series B Certificate of Designation”) and the Certificate of Designation of Preferences, Rights and Limitations for the Company’s outstanding Series C Preferred Stock (the “Series C Certificate of Designation”) provides for anti-dilution protections in the event that the Company grants any right to reprice any Company security or issue a new Company security that would entitle the holder to acquire Common Stock at an effective price per share that is lower than the conversion price of the Series B Preferred Stock and the Series C Preferred Stock, which is referred to as “full-ratchet”

anti-dilution protection.

As a result of the consummation of the 2023 Private Placement, the Conversion Price of the Debentures and the exercise price of the 2023 Warrants at $ 1.30 per share triggered this anti-dilution protection in the Series B Certificate of Designation and the Series C Certificate of Designation.

The conversion price of each share of Series B Preferred Stock and each share of Series C Preferred Stock, which were each $ 6.30 convertible into 159 shares of Common Stock, were both automatically adjusted downward to $ 1.30 convertible into 770 shares of Common Stock, resulting in an additional 7,863,570 shares of common stock issuable upon conversion of the outstanding Series B Preferred Stock and Series C Preferred Stock.

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

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1  

of this report.

This discussion contains forward-looking statements that involve risks and uncertainties, and with our consolidated financial statements and related notes, and Management ’

This discussion contains forward-looking statements that involve risks and uncertainties.

The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1  

of this report, and with our consolidated financial statements and related notes, and Management ’

s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission (the “

) on March 31, 2023.

Words such as "expects," "anticipated," "will," " may ," "goals," "plans," "believes," "estimates," "concludes," determines," variations of these  

Words such as “

expects, ”

anticipated, ”

will, ”

may ,”

goals, ”

plans, ”

believes, ”

estimates, ”

concludes, ”

determines, ”

variations of these  

words, and similar expressions are intended to identify these forward-looking statements.

As a result of many factors, including those set forth in our SEC filings, our actual results may differ materially from those anticipated in these forward-looking statements.

As a result of many factors, including those set forth under the section entitled “

Risk Factors ”

and other sections in our SEC filings, our actual results may differ materially from those anticipated in these forward-looking statements.

Readers are cautioned that these forward-looking statements are only predictions based upon assumptions made that we believed to be reasonable at the time and are subject to risks and uncertainties.

Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.

Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements.

Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements after the date of this report, even if new information becomes available in the future.

Overview  

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

Our company is focused on three major markets:

Eyecare, Skincare, and Wound Care.

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

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

Food and Drug Administration for sale in the United States.

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

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

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

We are a company focused on the development and commercialization of scientifically-created and clinically-proven eyecare, skincare and wound care products.

Our leading product, 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.

Other eyecare products offered under the Avenova eyecare brand include our Novawipes, Lubricant Eye Drops, Moist Heating Eye Compress, i-Chek lash mirror, and the Eye Health Support Oral Supplement with MaquiBright.

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

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

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

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

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

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

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

Equity”

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

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

and Note 14, “Stockholders’

Equity”

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

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

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

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

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

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

We acquired DERMAdoctor in November 2021, and since completing the DERMAdoctor Acquisition we have been working to integrate and expand the DERMAdoctor business in order to achieve strategic objectives that we expected by completing this acquisition, including revenue growth, cost reductions and achieving overall profitability.

We have not been able to achieve these objectives to date, as DERMAdoctor’s product revenue declined in 2022 compared to 2021, while operating costs relating to these products remained substantially the same.

We are working to achieve our overall objectives, as well as continuing to evaluate additional strategies for our Company and its business to address our capital and liquidity needs.

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

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

We currently sell these products through distributors.

Recent Developments

2022 Warrant Reprice Transaction

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

Equity”

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

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

Pursuant to the letter agreements, the Company agreed to:

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

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

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

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

Equity”

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

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

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

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

and Note 14, “Stockholders’

Equity”

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

2023 Private Placement

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

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

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

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

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

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

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

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

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

On April 27, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”)  with existing accredited institutional investors of the Company that provided for the issuance and sale in a private placement (the “2023 Private Placement”) of (i) $3.3 million aggregate principal amount of  Original Issue Discount Senior Secured Convertible Debentures Due November 1, 2024 (the “Debentures”), which may be converted or redeemed into up to an aggregate of 2,538,464 shares of Common Stock (the “Conversion Shares”), 

(ii) a new long-term Series B-1 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a five year period (“Long-Term Warrants”), and (iii) a new short-term Series B-2 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a two year period (“Short-Term Warrants” and, together with the Long-Term Warrants, the “2023 Warrants”).

The 2023 Private Placement closed on May 1, 2023 (the “Private Placement Closing”) and the Company received gross proceeds of $3.0 million, before deducting placement agent fees and other offering expenses.

In connection with the closing of the 2023 Private Placement, common stock purchase warrants that the Company previously issued to the Purchasers and to other existing investors in prior private placements and warrant reprice transactions were amended to lower the exercise price of the previously issued warrants exercisable for an aggregate of 1,724,455 shares of Common Stock from $6.30 to $1.30 per share pursuant to Warrant Amendment Agreements entered into by the Company.

Due to the number of shares of common stock that may be issued upon conversion or redemption of the Debentures and the exercise of the 2023 Warrants, the Company is required to obtain stockholder approval for the issuance of these shares of common stock in accordance with Section 713(a) and 713(b) of the NYSE American Company Guide (the “Stockholder Approval”) and the Company expects to seek the Stockholder Approval at its 2023 Annual Meeting of Stockholders.

Until the Stockholder Approval is obtained, the conversion of the Debentures by the holders into shares of common stock is currently limited a holder’s pro rata share of 19.99% of the Company’s outstanding shares of Common Stock, or into an aggregate of 438,669 shares (the “Issuable Maximum”), and none of the 2023 Warrants will be exercisable until the Stockholder Approval is obtained.

Anti-Dilution Adjustment to Series B Preferred Stock and the Series C Preferred Stock

anti-dilution protection.

As a result of the consummation of the 2023 Private Placement the Conversion Price of the Debentures and the exercise price of the 2023 Warrants at $1.30 per share triggered this anti-dilution protection in the Series B Certificate of Designation and the Series C Certificate of Designation.

As a result, the conversion price of each share of Series B Preferred Stock and each share of Series C Preferred Stock, which were each $6.30 convertible into 159 shares of Common Stock, were both automatically adjusted downward to now be $1.30 convertible into 770 shares of Common Stock resulting in an additional 7,863,570 shares of common stock issuable upon conversion of the outstanding Series B Preferred Stock and Series C Preferred Stock.

For additional information regarding the 2023 Private Placement, the Debentures, the 2023 Warrants, the warrant amendments and the other related agreements and transactions, as well as the antidilution adjustment to the Series B Preferred Stock and Series C Preferred Stock, see Note 18, “Subsequent Events”

in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report and the Company’s Current Report on Form 8-K filed with the SEC on April 27, 2023.

Financial Overview and Outlook

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

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

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

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

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

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

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

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

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

Critical Accounting Policies and Estimates and Change in Accounting  

and Revision of Prior Period Financial Statements

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

The preparation of these condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods.

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

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

Our net losses were $1.7 million and $111 thousand for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, we had an accumulated deficit of $159.9 million, total current assets of $9.9 million and total assets of $14.8 million.

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

Critical Accounting Estimates

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

The preparation of these unaudited condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, as well as the reported revenues and expenses during the reporting periods.

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

On an ongoing basis, we evaluate our estimates and judgments.

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

Actual results may differ from these estimates.

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

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

The Company previously recorded revenue net of these fees.

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

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

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

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

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

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

Additional information regarding the change in accounting, revision of prior period condensed consolidated financial statements and our other significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies”

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

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

included in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 29, 2022.

The Company continues to evaluate the potential impact of adopting the new accounting guidance on its consolidated financial position, results of operations and cash flows.

Actual results may differ from these estimates. 

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

in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report, we believe that the following accounting estimates are most critical to fully understanding and evaluating our reported financial results as discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Impairment of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets

We review goodwill, indefinite-lived intangible assets and long-lived assets for impairment at least annually or whenever events or changes in business circumstances indicate that any such asset may be impaired, that the carrying amount of any such asset may not be fully recoverable or that the useful life of the asset, if applicable, is no longer appropriate.

Management uses judgement in making critical assumptions and estimates in determining when an impairment assessment should be recorded, if more frequent than annually, or in the completion of any such assessment.

This includes cash flow projections that look several years into the future and assumptions on variables such as future sales and operating margin growth rates, economic conditions, probability of success, market competition, inflation and discount rates.

Changes in judgments with respect to these assumptions and estimates could impact any such impairments recorded such as those recorded in the fourth quarter of 2022 as further described in Note 2, “Summary of Significant Accounting Policies”

included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Valuation of Contingent Consideration Resulting from a Business Combination

We revalue any outstanding contingent obligations to pay future consideration related to business combinations at the end of each quarter and record increases or decreases in their fair value within our consolidated statements of operations.

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.

See additional information in Note 2, “Summary of Significant Accounting Policies”

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

Estimates of Future Product Returns

The Company records revenue in an amount that reflets the consideration which the Company expects to receive.

Accordingly, revenue is reduced for estimated future product returns.

The Company’s estimates for returns are updated quarterly based on historical data of actual returns.

Actual future returns experience may differ significantly from historical data and could result in significant future adjustments, including a reduction of revenue recognized.

Common Stock Warrant Liabilities

These values are subject to a significant degree of management’s judgment.

Results of Operations

Comparison of the Three Months  

Ended September 30, 2022 and 2021

Ended March 31, 2023 and 2022 (dollars in thousands)

Three Months Ended

September 30,

(in thousands)

Statement of Operations

3 unchanged sentences

Product cost of goods sold

Operating expenses:

Research and development

3 unchanged sentences

Operating loss

Non-cash loss on modification of common stock warrants

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

Other expense

Loss before provision for income taxes

Provision for income taxes

Net loss and comprehensive loss

Impact of DERMAdoctor Acquisition

The closing of the DERMAdoctor Acquisition took place on November 5, 2021 (see Note 3, “Business Combination”

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

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

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

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

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

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

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

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

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

As discussed further in Note 2, “Summary of Significant Accounting Policies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report, during the three months ended September 30, 2022, the Company made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Research and Development

Research and development expenses increased by $31 thousand to $41 thousand for the three months ended September 30, 2022, from $10 thousand for the three months ended September 30, 2021.

For the three months ended March 31, 2022, the result of these changes and revisions was an increase of $644 thousand in product revenue, net, which was offset by an increase of $346 thousand in product cost of goods sold and $298 thousand in sales and marketing expenses.

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

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

Total Net Sales, Cost of Goods Sold and Gross Profit

Product revenue, net, decreased by $150 thousand, or 5%, to $3.1 million for the three months ended March 31, 2023, from $3.3 million for the three months ended March 31, 2022.

Revenue from Avenova Spray increased $0.1 million from $1.8 million for the three months ended March 31, 2022 to $1.9 million for the three months ended March 31, 2023.

The 2022 result reflects an unanticipated increase in expired Avenova Spray units returned from retail pharmacies for product purchased prior to the launch of our over-the-counter Avenova Spray product in 2019 and the beginning of the COVID-19 pandemic in 2020.

Revenue from DERMAdoctor branded skincare products decreased $0.2 million from $1.0 million for the three months ended March 31, 2022 to $0.8 million for the three months ended March 31, 2023, primarily from wholesale customers.

Revenue from the Company’s wound care products was $0.1 million during both quarters. 

Cost of goods sold decreased by $271 thousand, or 19%, to $1.2 million for the three months ended March 31, 2023 from $1.5 million for the three months ended March 31, 2022 primarily due to the overall decrease in product revenue.

Gross profit increased by $122 thousand in spite of the decrease in product revenue.

This is primarily the impact of the increase in expired Avenova Spray units returned from retail pharmacies in the 2022 period as well as product and channel mix.

Sales and marketing

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

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

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

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

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

Sales and marketing expenses decreased by $0.3 million, or 17%, to $1.7 million for the three months ended March 31, 2023, from $2.0 million for the three months ended March 31, 2022.

The decrease was due primarily to continued lower digital advertising costs incurred for the Company’s Avenova Spray and other Avenova branded optical products in the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

General and administrative  

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

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

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

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

Non-cash loss on modification of common stock warrants

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

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

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

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

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

General and administrative expenses decreased $0.2 million to $2.0 million for the three months ended March 31, 2023, from $2.2 million for the comparable period in 2022.

The change is primarily the result of a decrease in variable compensation costs, including non-cash stock-based compensation expense, recorded in the comparable periods.

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

Adjustments to the fair value of warrant liability resulted in a gain of $2.1 million for the three months ended March 31, 2022 with no comparable adjustment for the current year period.

For additional information regarding the warrant liability and their valuation, please see Note 11, “Warrant Liability”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

Other expense, net

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

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

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

Comparison of the Nine Months  

Ended September 30, 2022 and 2021

Nine Months Ended

September 30,

(in thousands)

Statement of Operations

Product revenue, net

Other revenue, net

Total sales, net

Product cost of goods sold

Operating Expenses:

Research and development

Sales and marketing

General and administrative

Total operating expenses

Operating loss

Non-cash loss on modification of common stock warrants

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

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

Other (expense) income

Loss before provision for income taxes

Provision for income taxes

Net loss and comprehensive loss

Impact of DERMAdoctor Acquisition

The closing of the DERMAdoctor Acquisition took place on November 5, 2021 (see Note 3, “Business Combination”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Research and Development

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

Sales and Marketing

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

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

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

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

These decreases were partially offset by $1.8 million in sales and marketing costs incurred for DERMAdoctor products during the nine months ended September 30, 2022, with no comparable expenditures in the 2021 period.

General and Administrative

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

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

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

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

Non-cash loss on modification of common stock warrants 

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

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

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

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

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

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

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

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

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

Other (expense)  

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

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

Financial Condition, Liquidity and Capital Resources

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

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

Equity”

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

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

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:

Adjustments to the fair value of contingent liability resulted in a gain of $0.2 million for the three months ended March 31, 2022 with no comparable adjustment for the current year period.

This contingent liability related to potential future contingent consideration of earn out payments that could have become payable as part of the DERMAdoctor Acquisition if specified milestone events were achieved.

As of March 31, 2023, the Company does not anticipate that any such earn out payments will be made.

Financial Condition, Liquidity and Capital Resources  

As of March 31, 2023, our cash and cash equivalents were $3.7 million, compared to $5.4 million as of December 31, 2022.

Based primarily on the funds available on March 31, 2023 and the 2023 Private Placement completed subsequent to March 31, 2023 as further described in Note 18, “Subsequent Events”, the Company believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund its existing operations and meet its planned operating expenses into at least the second quarter of 2024.

We have sustained operating losses for the majority of our corporate history and expect that our 2023 expenses will exceed our 2023 revenues, as we continue to invest in both Avenova and DERMAdoctor commercialization efforts.

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

Accordingly, we have determined that our planned operations raise substantial doubt about our ability to continue as a going concern.

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

Our long-term liquidity needs will be largely determined by the success of commercialization efforts.

To address our current liquidity and capital needs, we have and continue 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;

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

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

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

In the absence of the Company’s completion of the 2022 Private Placement and one or more additional transactions and/or substantial revenue growth from its commercialization efforts, there will be substantial doubt about the Company's ability to continue as a going concern within one year after the date these unaudited financial statements are issued, and the Company will be required to scale back or terminate operations and/or seek protection under applicable bankruptcy laws.

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

We 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.

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

The accompanying unaudited condensed consolidated financial statements have been prepared assuming we 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.

Cash Used in Operating Activities

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

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

Net cash used in operating activities was $1.6 million for the three months ended March 31, 2023, which consisted primarily of a net loss of $1.7 million, adjusted by depreciation and amortization expenses of $51 thousand, stock-based compensation expenses of $75 thousand, and a net change of $2 thousand in our net operating assets and liabilities.

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

Cash Used in Investing Activities

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

Net Cash Provided by Financing Activities

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

Net cash provided by financing activities was $2.0 million for the nine months ended September 30, 2021.

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

Net cash used in investing activities for the purchase of property and equipment was $13 thousand and $24 thousand, for the three months ended March 31, 2023 and 2022, respectively.

Cash Used in Financing Activities

There was no cash used in, or provided by, financing activities during the three months ended March 31, 2023.

For the three months ended March 31, 2022, net cash used in financing activities consisted of a repayment of the DERMAdoctor line of credit, which was subsequently terminated.

Net Operating Losses and Tax Credit Carryforwards

As of December 31, 2021, we had net operating loss carryforwards for federal and state income tax purposes of $125.9 million and $106.8 million, respectively.

The federal net operating loss carryforwards consist of $94.9 million generated before January 1, 2018, which will begin to expire in 2024 and $31.0 million that will carryforward indefinitely but are subject to an 80% limitation for years following December 31, 2021.

As of December 31, 2022, we had net operating loss carryforwards for federal and state income tax purposes of $133.0 million and $111.0 million, respectively.

The federal net operating loss carryforwards consist of $94.9 million generated before January 1, 2018, which will begin to expire in 2024 and $38.1 million that will carry forward indefinitely but are subject to an 80% limitation for years following December 31, 2021.

The state net operating loss carryforwards will begin to expire in 2028.

As of December 31, 2021, we also had tax credit carryforwards for federal income tax purposes of $1.3 million and $0.3 million for state tax purposes.

As of December 31, 2022, we also had tax credit carryforwards for federal income tax purposes of $0.5 million and $0.1 million for state tax purposes.

If not utilized, the federal tax credits will begin expiring in 2031.

The state tax credits have an indefinite carryover period.

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

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

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

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

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

Our costs are subject to fluctuations, particularly due to changes in the price of raw and packing materials and the cost of labor, transportation and operating supplies.

Therefore, our business results depend, in part, on our continued ability to manage these fluctuations through pricing actions, costs savings projects and sourcing decisions, while maintaining and improving margins and market share.

Failure to manage these fluctuations could adversely impact our results of operations or cash flows.

Off-Balance Sheet Arrangements

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

We did not have any off-balance sheet arrangements at March 31, 2023 and December 31, 2022 as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Avenova Branded Products

Consistent with our peers in the United States pharmaceutical industry, prescriptions for Avenova Spray experience seasonality with the first quarter of each year typically being the lowest revenue quarter.

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

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

In recent years, as our focus and revenue mix have shifted in favor of Avenova products sold directly to the consumer without insurance reimbursement, we have not noted any material seasonal impacts on our overall eyecare business, with demands consistent throughout the year.

Prior to this shift, while focused on prescription Avenova Spray, prescriptions for Avenova Spray experienced seasonality with the first quarter of each year typically being the lowest revenue quarter.

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

Dermatology/Skincare Products

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

Our DERMAdoctor products are sold through wholesale distribution relationships with third parties such as Costco and others;

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

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Contractual Obligations

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

Our contractual cash commitments as of March 31, 2023 were as follows (in thousands):

Contractual Obligations

Facility leases

Equipment leases

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

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

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

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

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

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

Equipment lease

Our commitments as of March 31, 2023 consisted primarily of facility operating leases and an operating lease for one copier.

The total commitment for the facility leases were $2.1 million due over the leases’

terms as of March 31, 2023.

The total commitment for the copier lease was $22 thousand due over the leases’

terms as of March 31, 2023.

See Note 10, “Commitments and Contingencies”

1 unchanged sentence

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

What changed 10-Q

Item 1. Financial Statements