What changed in this filing

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Item 1. Financial Statements

2023-08-10 compared with 2023-05-11 · 538 added, 200 removed, 965 unchanged (43% of the section changed)

3 unchanged sentences

(in thousands, except par value amounts)

December 31,  

Current assets:

2 unchanged sentences

$ 5,362  

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)

Accounts receivable, net of allowance for credit losses ($ 3 and $ 19 at June 30, 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 ($ 446 and $ 499 at June 30, 2023 and December 31, 2022, respectively)

Prepaid expenses and other current assets

1 unchanged sentence

11,216  

11,332  

Operating lease right-of-use assets

9 unchanged sentences

Accrued liabilities

Convertible Notes, net

Embedded derivative liabilities

Operating lease liabilities

7 unchanged sentences

Series B Preferred Stock;

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

9 and 12 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

Series C Preferred Stock;

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

1 and 2 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

Common stock, $ 0.01 par value;

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

150,000 shares authorized, 4,214 and 2,035 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital

11 unchanged sentences

(in thousands, except per share data)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Product revenue, net

9 unchanged sentences

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

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

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

Other expense, net

Retained earnings reduction related to preferred stock down round feature triggered

Net loss attributable to common stockholders

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

6 unchanged sentences

Stockholders ’

Equity   

Balance at December 31, 2022

1 unchanged sentence

Balance at March 31, 2023

Conversion of Series B Preferred Stock to common stock

Conversion of Series C Preferred Stock to common stock

Modification of common stock warrants

Down round feature adjustment related to Series B & C Preferred Stock

Reclassification of May 2023 Warrants

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

Vesting of director restricted stock awards

Balance at June 30, 2023

Preferred Stock

Stockholders ’

Equity   

Balance at December 31, 2021

Reclassification of Series B Private Placement Warrants

Reclassification of November 2021 Warrants

Conversion of Series B Preferred Stock to common stock

1 unchanged sentence

Balance at March 31, 2022

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 awards

Balance at June 30, 2022

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

3 unchanged sentences

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30

Operating activities:

2 unchanged sentences

Amortization of intangible assets

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

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

Modification of common stock warrants, included in Other expense

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

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

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

Accretion of interest and amortization of debt discounts on convertible notes

Changes in operating assets and liabilities:

9 unchanged sentences

Financing activities:

Proceeds from convertible notes and warrant issuances, net of discount

Payment on the convertible notes

Debt issuance cost

Payment on the line of credit

Net cash used in financing activities

Net cash provided by (used in) financing activities

Net change in cash, cash equivalents, and restricted cash

1 unchanged sentence

Cash, cash equivalents and restricted cash, end of period

$ 4,222  

$ 5,793  

Three Months Ended March 31,

Six Months Ended June 30,

Supplemental disclosure of cash flow information:

Interest paid

Three Months Ended March 31,

Six Months Ended June 30,

Supplemental disclosure of non-cash information:

2 unchanged sentences

Conversion of Series B Preferred Stock to common stock

Conversion of Series C Preferred Stock to common stock

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

3 unchanged sentences

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 formulated with our proprietary, stable and pure form of hypochlorous acid and is cleared by the Food and Drug Administration (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.

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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.

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

to NovaBay Pharmaceuticals, Inc.

8 unchanged sentences

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.

Based primarily on the funds available on June 30, 2023 and the 2023 Private Placement, 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, meet its planned operating expenses and to meet the Monthly Redemptions of the Convertible Notes (both as defined below) 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.

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).

Accordingly, the Company has determined that its planned operations raise substantial doubt about its ability to continue as a going concern for at least one year from the date this Quarterly Report on Form 10 -Q is filed with the Securities and Exchange Commission (“SEC”).

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

5 unchanged sentences

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”).

While the Company believes that the proceeds from the 2023 Private Placement (as defined below) improved the Company’s liquidity in the near term, there is no assurance that the Company will be successful in executing additional capital raising strategies at levels necessary to address the Company’s ongoing and future cash flow and liquidity needs.

Accordingly, the Company continues to evaluate different plans and strategies to address the Company’s capital and liquidity needs, as well as evaluating potential other strategic alternatives and transactions.

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.

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

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of NovaBay Pharmaceuticals, Inc.

and its wholly-owned subsidiary, DERMAdoctor, LLC.

All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

1 unchanged sentence

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

These estimates include contract liabilities related to product sales 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.

Actual results may differ significantly from those estimates.

Significant estimates made by management include, but are not limited to, contract liabilities related to product sales such as product returns, assumptions for valuing warrants, assumptions for valuing derivative liabilities, 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.

11 unchanged sentences

The Company previously recorded revenue net of these fees.

The Company believes that making this change is appropriate and preferable as it is more consistent with the practices of comparable companies as the Company increasingly 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.

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

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.

As of June 30, 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):

12 unchanged sentences

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,

During the three and six months ended June 30, 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 and six months ended June 30, 2023 and 2022, revenues from significant product categories were as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Avenova Spray

1 unchanged sentence

$ 2,001  

$ 3,695  

$ 3,840  

Other products

4 unchanged sentences

$ 3,662  

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:

$ 7,734  

$ 6,935  

During the three months ended June 30, 2023 and 2022, sales of Avenova Spray via Amazon comprised 61 % and 69 % of total Avenova Spray net revenue, respectively.

During the six months ended June 30, 2023 and 2022, sales of Avenova Spray via Amazon comprised 68 % and 75 % of total Avenova Spray net revenue, respectively.

No other individual distributor comprised greater than 10% of total Avenova Spray net revenue during the three and six months ended June 30, 2023 or 2022.

As of June 30, 2023 and December 31, 2022, accounts receivable from our major distribution partners and major retailers greater than 10% were as follows:

Major distribution partner

7 unchanged sentences

Fair Value of Financial Assets and Liabilities

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

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

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

The Convertible Notes (as defined below) entered into on April 27, 2023 are carried at cost, which management believes approximates fair value.

Additionally, the derivative liability related to certain embedded features contained within the Convertible Notes, restricted cash, warrant liabilities, and contingent consideration are carried at fair value.

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.

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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.

Management recorded a reserve for allowance for credit losses of $ 3 thousand and $ 19 thousand as of June 30, 2023 and December 31, 2022, respectively.

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

3 unchanged sentences

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

At 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.

At June 30, 2023 and December 31, 2022, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $ 446 thousand and $ 499 thousand, respectively.

Property and Equipment, net

7 unchanged sentences

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

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

The Company did not record any goodwill or indefinite-lived asset impairment charges during the 

three and six months ended June 30, 2023 or 2022.

Valuation of Contingent Consideration Resulting from a Business Combination

9 unchanged sentences

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.

As a result, the liability recorded for potential earn out payments in the Company’s condensed consolidated balance sheets was zero as of June 30, 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, which are valued using Level 3 fair value inputs.

Long-Lived Assets  

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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 consolidated statements of operations.

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

The Company did not record any long-lived asset impairments during the 

three and six months ended June 30, 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.

5 unchanged sentences

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

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

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

Revenue Recognition

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.

To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps as prescribed by ASC 606:

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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 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

Financial statement line items included in the condensed consolidated statements of operations for the three and six months ended June 30, 2022 were adjusted for the above changes as follows (in thousands, except per share amounts):

Three Months Ended June 30, 2022

Six Months Ended June 30, 2022

As Previously

Product revenue, net

1 unchanged sentence

$ 3,660  

$ 5,666  

$ 6,927  

Product cost of goods sold

13 unchanged sentences

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

Revenue for product sales to other retailers, such as 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.

Revenue for product sales to other retailers 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 $ 4 thousand as of June 30, 2023 and December 31, 2022, which is recorded within Accrued liabilities on the Company’s unaudited condensed consolidated balance sheets.

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

2 unchanged sentences

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

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

These costs include all costs associated with research, development and regulatory activities, including submissions to the FDA.

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

3 unchanged sentences

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.

Advertising expenses were $ 0.3 million and $ 0.4 million for the three months ended June 30, 2023 and 2022, respectively.

Advertising expenses were $ 0.6 million and $ 1.0 million for the six months ended June 30, 2023 and 2022, respectively.

Stock-Based Compensation

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Derivatives and Hedging .

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 a contingent event.

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

The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement, (ii) give the counterparty a choice of net-cash physical settlement or net-share settlement or (iii) do not become exercisable until the occurrence of a contingent event.

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.

8 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Net loss  

$ 2,036  

$ ( 2,155 )  

$ ( 3,775 )  

Retained earnings reduction due to preferred stock down round feature triggered  

( 1,996 )  

Net loss attributable to common stockholders (basic and diluted)

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”

Net loss per share (basic and diluted)

For the three and six months ended June 30, 2023 and 2022, Series B Convertible Preferred Stock (the “Series B Preferred Stock”) and the Series C 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,

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

As of June 30,

Series B Preferred Stock

Series C Preferred Stock

Stock options

Stock warrants

15,392  

Recent Accounting Pronouncements

11 unchanged sentences

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

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):

As a result of certain call and put options within the Convertible Notes entered into in April 2023, the Company recorded a combined embedded derivative liability on its consolidated balance sheet with a corresponding debt discount which is netted against the face value of the Convertible Notes.

The fair value of the embedded derivative liability is classified within Level 2 of the fair value hierarchy because the stock price used in the related Black Sholes valuation model is adjusted for the dilutive effect of the 2023 Private Placement.

This price was also used in the fair value models used by the Company to value the 2023 Warrants issued in conjunction with the 2023 Private Placement as well as in accounting for the warrant amendment and preferred stock conversion price adjustments that resulted from the 2023 Private Placement.

This price is based on observable inputs but is not a quoted price in an active market and involves uncertainties.

If factors or assumptions utilized in determining this price change, the estimated fair values for which it was used could be materially different.

See Notes 9, “Convertible Note”;

11, “Warrant Liability”;

and Note 12, “Stockholder’s Equity”

for further discussion of related fair value calculations.

The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of June 30, 2023 ( in thousands):

Fair Value Measurements Using

2 unchanged sentences

Deposit held as a certificate of deposit

Combined embedded derivative liability

Total liabilities

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):

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Total property and equipment, net

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

Depreciation expenses were $ 13 thousand and $ 29 thousand for the three months ended June 30, 2023 and 2022, respectively, and $ 26 thousand and $ 59 thousand for the six months ended June 30, 2023 and 2022, respectively.

OTHER INTANGIBLE ASSETS

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

Balance at March 31, 2023

Balance at June 30, 2023

Indefinite-lived intangible assets

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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):

The Company did not record any intangible asset impairment charges for the three and six months ended June 30, 2023 or 2022.

Amortization expenses were $ 38 thousand and $ 91 thousand for the three months ended June 30, 2023 and 2022, respectively, and $ 76 thousand and $ 182 thousand for the six months ended June 30, 2023 and 2022, respectively.

Based on the amortizable intangible assets as of June 30, 2023, future amortization expenses are expected to be as follows (in thousands):

$ 1,094  

6 unchanged sentences

Marketing costs

Accrued interest on Convertible Notes  

Inventory purchases

2 unchanged sentences

$ 2,724  

LINE OF CREDIT

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

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.

CONVERTIBLE NOTE

On April 27, 2023, the Company entered into a Securities 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 “Convertible Notes”) 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 through June 9, 2028 ( “Series B- 1 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 through June 9, 2025 ( “Series B- 2 Warrants” and, together with the Series B- 1 Warrants, the “May 2023 Warrants”).

The May 2023 Warrants have an exercise price of $ 1.30 per share.

The 2023 Private Placement closed on May 1, 2023 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.

Due to the number of shares of common stock that may be issued upon conversion or redemption of the Convertible Notes and the exercise of the May 2023 Warrants, the Company was 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 received Stockholder Approval at its 2023 Annual Meeting of Stockholders on June 9, 2023, and, as a result, the Convertible Notes and the May 2023 Warrants are currently convertible or exercisable, as applicable, in accordance with their respective terms.

The Convertible Notes 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”) at any time, subject to certain limitations upon conversion.

The Convertible Notes are subject to a limitation upon conversion into shares of Common Stock to the extent that, after giving effect to such conversion, the holder of a Convertible Note (together with the holder’s affiliates, and any other persons acting as a group together with the holder or any of the holder’s affiliates), would beneficially own in excess of 4.99% or 9.99% of the outstanding Common Stock.

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

or, as provided in the Convertible Notes, in shares of common stock at the election of the Company under certain conditions as defined in the agreement 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.

At the election of the holders, the Convertible Notes also provide for a mandatory redemption by the Company of a portion of the principal amount of the Convertible Notes after completing a subsequent financing.

The redemption amount of the Convertible Notes shall be equal to at least 20 % of the gross proceeds received by the Company in such subsequent financing.

If any event of default occurs, the outstanding principal amount of the Convertible Notes, 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 Convertible Notes, the interest rate on the Convertible Notes shall accrue at an interest rate equal to the lesser of 18 % per annum and the maximum rate permitted under applicable law.

The Convertible Notes 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 Convertible Notes 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 Convertible Notes.

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

The lender’s conversion and subsequent financing redemption option and certain events of default represent embedded call options.

The Company’s monthly share redemption option represents an embedded put option.

Each of the options requires bifurcation.

The Company allocated the proceeds from the 2023 Private Placement between the May 2023 Warrants, combined embedded derivative liabilities, and the Convertible Notes by applying the residual fair value methodology.

The Company first allocated $ 1.6 million to the May 2023 Warrants and $ 0.2 million to the derivative liabilities with the residual $ 1.2 million to the Convertible Notes.

A single derivative comprising all bifurcatable features was measured at fair value using the Black Scholes valuation model.

The weighted average key assumptions based on probability of occurrence used to value the combined embedded derivative upon issuance were as follows:

$ 0.72  

Equity volatility

Risk-free interest rate

Dividend yield

Remaining term

The fair value of the combined embedded derivative was $ 209 thousand as of April 27, 2023.

The key assumptions used to value the combined embedded derivative as of June 30, 2023 were as follows:

June 30, 2023

$ 0.75  

Equity volatility

Risk-free interest rate

Remaining term

The fair value of the combined embedded derivative was $ 169 thousand as of June 30, 2023.

The change of $ 40 thousand in fair value between the date of issuance and June 30, 2023 was recorded as a non-cash gain in the consolidated statements of operations and comprehensive loss.

The aggregate $ 300 thousand original issue discount, and the $ 294 thousand of debt issuance costs that were allocated to the Convertible Notes based on the relative fair value method, were recorded at issuance as an offset to the Convertible Notes on the Company’s unaudited condensed consolidated balance sheet. The Convertible Notes are presented as follows as of June 30, 2023:

(in thousands)

Principal amount

$ 3,117  

Unamortized discount

Unamortized debt issuance costs

Total Convertible Note, net

The Convertible Notes, net is classified as short term in the Company’s unaudited condensed consolidated balance sheet.

The discount and debt issuance costs are being amortized to interest expense using the effective interest rate method over the term of the Convertible Notes, assuming that the Convertible Notes will be redeemed for cash of $ 193 thousand per month beginning in June 2023.

During both the three and six months ended June 30, 2023, the effective interest rate on the Convertible Notes was 173 %.

Interest expense recognized, including amortization of the issuance costs and debt discount, was $ 501 thousand during the three and six months ended June 30, 2023.

As of June 30, 2023, the Company's contractual maturity of the principal balance of the Convertible Notes was as follows:

(in thousands)

Remainder of 2023

$ 1,100  

$ 3,117  

COMMITMENTS AND CONTINGENCIES

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

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

Accordingly, it has not recorded any liabilities for these agreements as of June 30, 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 March 31, 2023 or December 31, 2022. 

Accordingly, the Company has not recorded any liabilities for these agreements as of June 30, 2023 or December 31, 2022. 

Legal Matters

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.

From time to time, the Company is subject to various legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business.

The ultimate outcome of any litigation or other legal dispute is uncertain.

When a loss related to a legal proceeding or claim is probable and reasonably estimable, the Company accrues its best estimate for the ultimate resolution of the matter.

If one or more legal matters are resolved against the Company in a reporting period for an amount above expectations, the Company’s financial condition and operating results for that period may be adversely affected.

As of June 30, 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.

Any outcome, whether favorable or unfavorable, may materially and adversely affect the Company due to legal costs and expenses, diversion of management attention and other factors.

The Company expenses legal costs in the period incurred.

The Company cannot provide assurance that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against it in the future, and these matters could relate to prior, current, or future transactions or events.

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 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 Company also leases 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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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,

The components of lease expense for the three and six months ended June 30, 2023 and 2022 were as follows (in thousands):

Three Months Ended

Six Months Ended

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:

Three Months Ended March 31,

June 30, 2023

June 30, 2022

Weighted-average remaining lease term (in years)

Weighted-average discount rate

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

Future lease payments under non-cancelable leases as of June 30, 2023 were as follows (in thousands):

Total future minimum lease payments

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Equity”.

May 2023 Warrants

The May 2023 Warrants were issued by the Company on May 1, 2023, in connection with the 2023 Private Placement.

The May 2023 Warrants were not initially exercisable prior to the Stockholder Approval on June 9, 2023.

Under ASC 480, Distinguishing Liabilities from Equity , the May 2023 Warrants were initially classified as liabilities from the date of issuance through the date of approval at which time they were reclassified to equity.

The fair value of the May 2023 Warrants was determined to be $ 1.6  million as of the date of issuance on May 1, 2023 in accordance with the following key assumptions (see additional discussion in Note 3, “Fair Value Measurements), at which time they were classified as liabilities:

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.40  

$ 0.22  

As of June 9, 2022, the date of shareholder approval, the fair value of these May 2023 Warrants, was determined to be $ 1.4 million in accordance with the following key assumptions, at which time they were reclassified to equity:

$ 0.68  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.36  

$ 0.18  

As a result, the Company recorded a non-cash gain on changes in fair value of warrant liability of $ 216 thousand.

September 2022 Warrants

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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.

Under ASC 480, Distinguishing Liabilities from Equity , the September 2022 Warrants were classified as liabilities from the date of issuance until Company stockholders approval on November 10, 2022, 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:

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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.

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 of the increase in authorized shares at which time they were reclassified to equity.

As of December 31, 2021 

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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.

The 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.

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.

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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;

2023 Private Placement

On May 1, 2023, the Company closed the 2023 Private Placement, which consisted of issuing the Convertible Notes and the May 2023 Warrants.

For additional information regarding the Convertible Notes, please see Note 9 , “Convertible Note”.

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

In connection with the 2023 Private Placement, certain Amended November 2021 Warrants, Amended July 2020 Warrants, September 2022 Warrants and 2022 Warrants previously issued to participants in the 2023 Private Placement exercisable for 1,724,455 shares of common stock were amended to lower the exercise price from $ 6.30 to $ 1.50 per share, as further described below.

2022 and 2023 Warrant Reprice Transactions, Amended November 2021 Warrants, Amended July 2020 Warrants and September 2022 Warrants

On September 9, 2022, the Company entered into a 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 (as defined below) (the “2022 Warrant Reprice Transaction”). 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 to $6.30;

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

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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 Amended November 2021 Warrants expire on September 11, 2028, and the Amended July 2020 Warrants expire on January 22, 2026.

As a result of the 2023 Private Placement, ( 1 ) a portion of the Amended November 2021 Warrants exercisable for 535,716 shares of common stock have an exercise price of $ 1.50 and the remaining portion of the Amended November 2021 Warrants exercisable for 267,858 shares of common stock have an exercise price of $ 6.30 and ( 2 ) all of the Amended July 2020 Warrants exercisable for 77,145 shares of common stock have an exercise price of $ 1.50 .

As a result of the 2022 Warrant Reprice Transaction 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 2022 Warrant Reprice Transaction 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.

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$ 3.50  

As a result of the 2023 Private Placement transaction amendments to the September 2022 Warrants, the Company allocated $ 46 thousand between other expenses and Convertible Notes debt issuance cost.

The $ 46 thousand represents the difference in value immediately before and after modification using the Black-Scholes option pricing model.

The fair value of the September 2022 Warrants was determined to be $ 48 thousand immediately prior to the modification in accordance with the following key assumptions:

Stock price  

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.20  

The fair value of the September 2022 Warrants was determined to be $ 94 thousand immediately after the modification in accordance with the following key assumptions:

Stock price  

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.39  

As of June 30, 2023, the September 2022 Warrants were exercisable for an aggregate of 327,860 shares of common stock.

As a result of the 2023 Private Placement transaction, amendments to the Amended November 2021 Warrants and the Amended July 2020 Warrants, the Company allocated $ 117 thousand between other expenses and Convertible Notes debt issuance cost.

The $ 117 thousand represents the difference in value immediately before and after modification using the Black-Scholes option pricing model.

The fair value of the Amended November 2021 Warrants and the Amended July 2020 Warrants was determined to be $ 112 thousand immediately prior to the modification in accordance with the following key assumptions:

November 2021

Stock price  

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.20  

$ 0.06  

The fair value of the Amended November 2021 Warrants and the Amended July 2020 Warrants was determined to be $ 230 thousand immediately after the modification in accordance with the following key assumptions:

November 2021

Stock price  

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.39  

$ 0.24  

As of June 30, 2023, the Amended November 2021 Warrants were exercisable for an aggregate of 803,574 shares of common stock and the Amended July 2020 Warrants were exercisable for an aggregate of 77,145 shares of common stock.

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.

As a result of the 2023 Private Placement, a portion of the September 2022 Warrants exercisable for 238,574 shares of common stock have an exercise price of $ 1.50 and the remaining portion of the September 2022 Warrants exercisable for 89,286 shares of common stock have an exercise price of $ 6.30 .

The September 2022 Warrants expire on September 11, 2028.

As of June 30, 2023, the September 2022 Warrants were exercisable for an aggregate of 327,860 shares of common stock.

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

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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.

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

Series C Preferred Stock, Series A- 1 Warrants and Series A- 2 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”).

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 through May 20, 2024 ( the “Series A- 2 Warrants”), and ( 3 ) series A- 1 warrants to purchase common stock, which are exercisable for 515,876 shares of common stock through November 20, 2028 ( the “Series A- 1 Warrants”

and, together with the Series A- 2 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.

As a result of the 2023 Private Placement, a portion of the 2022 Warrants exercisable for 873,020 shares of common stock have an exercise price of $ 1.50 and the remaining portion of the September 2022 Warrants exercisable for 158,732 shares of common stock have an exercise price of $ 6.30 .

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.

Each share of the Series C Preferred Stock that the Company issued in the 2022 Private Placement had a purchase price of $ 1,000 per share and was initially convertible at a conversion price of $ 6.30 into 159 shares of common stock.

On April 27, 2023, the Company entered into the 2023 Private Placement where the May 2023 Warrants were issued with an exercise price of $ 1.30 per share, which exercise price was lower than the then effective $ 6.30 conversion price of the Series C Preferred Stock.

This triggered the Series C Preferred Stock anti-dilution feature, resulting in the automatic adjustment to the conversion price for each outstanding share of the Series C Preferred Stock to $ 1.30 , and each outstanding share of Series C Preferred Stock became convertible into 770 shares of common stock.

As a result of the change, the Company recorded a $ 194 thousand deemed Series C Preferred Stock dividend.

The deemed dividend was recorded as a reduction to income available to common stockholders in the basic earnings per share (EPS) calculation in the second quarter of 2023.

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

The fair value of the Series C Preferred Stock was determined to be $ 0.9 million immediately prior to the conversion price adjustment in accordance with the following key assumptions:

Stock price  

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 5.35  

The fair value of the Series C Preferred Stock was determined to be $ 1.1 million immediately after the conversion price protection adjustment in accordance with the following key assumptions:

Stock price  

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.61  

As of June 30, 2023, the Series A- 1 Warrants were exercisable into 515,876 shares of common stock and the Series A- 2 Warrants were exercisable into 515,876 shares of common stock.

As of June 30, 2023, 2,153 shares of the Series C Preferred Stock had been converted into common stock.

Each of the remaining 1,097 shares of the Series C Preferred Stock, as of June 30, 2023, were convertible into 770 shares of common stock at a conversion price of $ 1.30 .

As a result of the 2023 Private Placement transaction, amendments to the Series A- 1 Warrants and the Series A- 2 Warrants, the company allocated $ 122 thousand between other expenses and Convertible Notes debt issuance cost.

The $ 122 thousand represents the difference in value immediately before and after modification using the Black-Scholes option pricing model.

The fair value of the Series A- 1 Warrants and the Series A- 2 Warrants was determined to be $ 93 thousand immediately prior to the adjustment to the exercise price with the following key assumptions:

Stock price  

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.21  

$ 0.00  

The fair value of the Series A- 1 Warrants and the Series A- 2 Warrants was determined to be $ 216 thousand immediately after the adjustment to the exercise price with the following key assumptions:

Stock price  

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.40  

$ 0.09  

Series B Preferred Stock and November 2021 Warrants

On October 29, 2021, the Company entered into the 2021 Private Placement, including a securities purchase agreement with various institutional investors to sell in a private placement offering (i) an aggregate of 15,000 shares of our newly-created Series B 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.

On October 29, 2021, the Company entered into a private placement (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.

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 November 2021 Warrants became exercisable as of January 31, 2022, and are exercisable through September 11, 2028.

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

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

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.

The deemed dividend was recorded as a reduction to income available to common stockholders 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).

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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.

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 $ 1.30 , and each outstanding share of Series B Preferred Stock became convertible into 770 shares of common stock.

As a result of the change, the Company recorded a $ 1.8 million deemed Series B Preferred Stock dividend.

The deemed dividend was recorded as a reduction to income available to common stockholders in the basic earnings per share (EPS) calculation in the second quarter of 2023.

The fair value of the Series B Preferred Stock was determined to be $ 8.7 million immediately prior the conversion price adjustment in accordance with the following key assumptions:

Stock price  

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 5.35  

The fair value of the Series B Preferred Stock was determined to be $ 10.5 million immediately after the conversion price protection adjustment in accordance with the following key assumptions:

Stock price  

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

As of June 30, 2023, 5,844 shares of the Series B Preferred Stock had been converted into common stock.

Each of the remaining 9,156 shares of the Series B Preferred Stock as of June 30, 2023, was currently convertible into 770 shares of common stock at a conversion price of $ 1.30 .

Further, 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.

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:

In addition to the Amended July 2020 Warrants, the Amended November 2021 Warrants, the September 2022 Warrants, the 2022 Warrants and the May 2023 Warrants, the Company also has the following outstanding warrants:

2019 Ladenburg Warrants

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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.

As of June 30, 2023, outstanding July 2020 Warrants which were not amended were exercisable for 59,960 shares of common stock.

The July 2020 Warrants expire on January 22, 2026.

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Summary of Warrants Outstanding

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

The details of all outstanding warrants as of June 30, 2023 and December 31, 2022 are as follows:

(in thousands)

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Warrants expired

Outstanding at March 31, 2023

$ 7.70  

Outstanding at June 30, 2023

EQUITY-BASED COMPENSATION

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

March 31, 2023, 

June 30, 2023, 

there were 

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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: 

The following table summarizes information about the Company’s equity awards outstanding at June 30, 2023 and activity during the period ended June 30, 2023: 

(in thousands, except years

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$ 1.67  

Restricted stock units granted

Restricted stock units vested

Options forfeited/cancelled

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Restricted stock units cancelled

Outstanding at March 31, 2023

Outstanding at June 30, 2023

$ 26.92  

Vested and expected to vest at March 31, 2023

Vested and expected to vest at June 30, 2023

$ 33.13  

Vested at March 31, 2023

Vested at June 30, 2023

$ 63.79  

Exercisable at March 31, 2023

Exercisable at June 30, 2023

$ 63.79  

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.

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 June 30, 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 and six months ended June 30, 2023 and 2022.

The Company received no cash payments for the exercise of stock options during the three and six months ended June 30, 2023 and 2022.

As of June 30, 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 2.2 years.

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

During the three months ended March 31, 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.

During the six months ended June 30, 2023 and 2022, the Company granted options to employees and directors to purchase an aggregate of 42,150 and 9,605 shares of common stock, respectively.

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

Three Months Ended March 31,

Six Months Ended June 30,

Expected price volatility

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

During the three months ended March 31, 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.

During the six months ended June 30, 2023, the Company granted 5,148 shares of restricted stock to employees and directors.

During the six months ended June 30, 2022, the Company granted 5,148 shares of restricted stock to employees and directors.

For the three months ended June 30, 2023 and 2022, the Company recognized stock-based compensation expense of $ 64 thousand and $ 154 thousand, respectively, for stock-based awards to employees and directors.  For the six months ended June 30, 2023 and 2022, the Company recognized stock-based compensation expense of $ 139 thousand and $ 338 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,

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

Three Months Ended June 30,

Six Months Ended June 30,

Research and development

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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 three months ended March 31, 2023 ( in thousands): 

Product Returns,

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Payments and customer credits issued

Balance at March 31, 2023

Balance at June 30, 2023

$ 1,722  

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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.

During the three months ended June 30, 2023 and 2022, the Company earned $ 195 thousand and $ 142 thousand, respectively, in net sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements.

The Company earned net sales revenue of $ 287 thousand during the six months ended June 30, 2023, and a net sales loss of $ 57 thousand during the six months ended June 30, 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 $ 1.6 million as of June 30, 2023 and December 31, 2022, respectively.

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”).

The Company also recorded a prepayment of $ 35 thousand for rebates related to these distribution agreements as of June 30, 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 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. 

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

During the three and six months ended June 30, 2023, the revenue generated from over-the-counter Avenova Spray was $ 1.3 million and $ 2.9 million, respectively.

During the three and six months ended June 30, 2022, the revenue generated from over-the-counter Avenova Spray was $ 1.7 million and $ 3.5 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.

During the three and six months ended June 30, 2023, the Company earned $ 0.1 million and $ 0.2 million, respectively, in sales revenue for its DERMAdoctor products from these distribution agreements.

During the three and six months ended June 30, 2022, the Company lost $ 0.2 million and earned $ 0.1 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 $ 0.2 million as of June 30, 2023 and December 31, 2022.

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

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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.

During the three and six months ended June 30, 2023, the Company contributed $ 32 thousand and $ 63 thousand, respectively.

During the three and six months ended June 30, 2022, the Company contributed $ 30 thousand and $ 76 thousand, respectively.

RELATED PARTY TRANSACTIONS       

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Related party revenue:

$ 1,043  

Total related party revenue

$ 1,043  

Cost of goods sold:

$ ( 895 )  

$ ( 514 )  

$ ( 895 )  

Total related party expenses

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

$ ( 895 )  

$ ( 514 )  

$ ( 895 )  

Related party accounts receivable was $ 0.7 million and $ 0.2 million as of June 30, 2023 and December 31, 2022, respectively.

SEGMENT REPORTING

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Eyecare & Wound Care

Total operating loss

of Total Sales,

Eyecare & Wound Care

$ 5,873  

$ 5,140  

Total sales, net

$ 7,734  

$ 6,935  

Operating Loss

Eyecare & Wound Care

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 

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

not  recognized in the financial statements.

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

June 30, 2023 ,  and events which occurred subsequently but were 

not  recognized in the condensed consolidated 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.

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

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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 are working to achieve our overall objectives, as well as continuing to evaluate additional strategies for our Company and our business to address our capital and liquidity needs, as well as potential other strategic alternatives.

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

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2023 Private Placement

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.

On April 27, 2023, the Company entered into the Purchase Agreement with existing accredited institutional investors of the Company for the 2023 Private Placement that provided for the issuance and sale of (i) $3.3 million aggregate principal amount of Convertible Notes, (ii) the Series B-1 Warrants, and (iii) the Series B-2 Warrants.

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

Due to the number of shares of common stock that may be issued upon conversion or redemption of the Convertible Notes and the exercise of the May 2023 Warrants, we were required to obtain the 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 Company received Stockholder Approval at its 2023 Annual Meeting of Stockholders on June 9, 2023, and, as a result the Convertible Notes and the May 2023 Warrants are currently convertible or exercisable, as applicable, in accordance with their respective terms.

In connection with the 2023 Private Placement, certain previously issued common stock purchase warrants issued to participants in the 2023 Private Placement exercisable for 1,724,455 shares of common stock were amended to lower the exercise price from $6.30 to $1.50 per share, as further described below.

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

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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”

As a result of the consummation of the 2023 Private Placement, the conversion price of the Convertible Notes and the exercise price of the May 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 convertible at a price of $6.30 into 159 shares of Common Stock, were both automatically adjusted downward to become convertible at a price of $1.30 into 770 shares of Common Stock resulting in an additional 7,863,570 shares of common stock issuable upon conversion of the then outstanding shares of Series B Preferred Stock and Series C Preferred Stock.

For additional information regarding the 2023 Private Placement, the Convertible Notes, the May 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 9 “Convertible Notes”

and Note 12 “Stockholders’

Equity”

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.

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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.

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.

Our net losses were $4.0 million and $2.2 million for the three months ended June 30, 2023 and 2022, respectively.

In addition, our net losses were $5.8 million and $2.3 million for the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, we had an accumulated deficit of $163.9 million, total current assets of $11.2 million and total assets of $16.0 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.

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Estimates of Future Product Returns

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

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

Accordingly, revenue is reduced for estimated future product returns.

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Comparison of the Three Months  

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

Ended June 30, 2023 and 2022 (dollars in thousands)

Three Months Ended

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Operating loss

Non-cash loss on modification of common stock warrants

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

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

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

Other expense, net

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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 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.

For the three months ended June 30, 2022, the result of these changes and revisions was an increase of $617 thousand in product revenue, net, which was offset by an increase of $329 thousand in product cost of goods sold and $288 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.

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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.

Product revenue, net, increased by $939 thousand, or 26%, to $4.6 million for the three months ended June 30, 2023, from $3.7 million for the three months ended June 30, 2022, primarily due to increases in revenue recognized from our wound care and DERMAdoctor branded skincare products.

Revenue from eyecare products, including Avenova Spray, decreased $0.1 million to $2.2 million for the three months ended June 30, 2023, from $2.3 million for the three months ended June 30, 2022.

Revenue from the Company’s wound care products increased $0.6 million to $1.2 million for the three months ended June 30, 2023, from $0.6 million for the three months ended June 30, 2022, due to an unusually large order of the NeutroPhase branded wound care product.

Revenue from DERMAdoctor branded skincare products increased $0.3 million to $1.1 million for the three months ended June 30, 2023, from $0.8 million for the three months ended June 30, 2022, due to an increase in sales in our international and domestic wholesale and retail channels.

Product cost of goods sold increased by $0.5 million, or 26%, to $2.3 million for the three months ended June 30, 2023, from $1.8 million for the three months ended June 30, 2022 primarily due to the increase in wound care and DERMAdoctor branded skincare products sold during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

Sales and marketing

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.

Sales and marketing expenses decreased by $0.3 million, or 16%, to $1.7 million for the three months ended June 30, 2023, from $2.0 million for the three months ended June 30, 2022.

The decrease was due primarily to lower digital advertising and related consulting costs incurred in the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

General and administrative  

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.

General and administrative expenses were $1.9 million for the three months ended June 30, 2023 and June 30, 2022.

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

Adjustments to the fair value of warrant liability resulted in a gain of $216 thousand for the three months ended June 30, 2023.

The warrant liability was reclassified to equity during the three months ended June 30, 2023 and will no longer require fair value adjustments which will impact our results of operations.

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

The Company did not record a comparable loss or gain for the three months ended June 30, 2022.

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

The adjustments to the fair value of derivative liability resulted in a gain of $40 thousand for the three months ended June 30, 2023.

The gain results from the increase in the price of the Company’s common stock price during that period.

The Company did not record a comparable loss or gain for the three months ended June 30, 2022.

Other expense, net

Other expense, net increased $934 thousand to $937 thousand for the three months ended June 30, 2023, from $3 thousand for the three months ended June 30, 2022.

The increase was primarily due to the amortization of discount and issuance cost related to the Convertible Notes issued in May 2023 and modification of common stock warrants with no comparable item for the three months ended June 30, 2022.

Comparison of the Six Months  

Ended June 30, 2023 and 2022 (dollars in thousands)

Six Months Ended

Statement of Operations

Product revenue, net

Other revenue, net

Total sales, net

Product cost of goods sold

Research and development

Sales and marketing

General and administrative

Total operating expenses

Operating loss

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

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

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

Other expense, net

Total Net Sales, Cost of Goods Sold and Gross Profit

Product revenue, net, increased by $789 thousand, or 11%, to $7.7 million for the six months ended June 30, 2023, from $6.9 million for the six months ended June 30, 2022, primarily due to increased revenue from our wound care and DERMAdoctor branded skincare products.

Revenue from eyecare products, including Avenova Spray decreased $0.1 million to $3.7 million for the six months ended June 30, 2023, from $3.8 million for the six months ended June 30, 2022.

Revenue from the Company’s wound care products increased $0.6 million to $1.4 million for the six months ended June 30, 2023, from $0.8 million for the six months ended June 30, 2022, due to an unusually large order of the NeutroPhase branded wound care product.

Revenue from DERMAdoctor branded skincare products was $1.8 million for each of the six months ended June 30, 2023 and 2022.

Product cost of goods sold increased by $209 thousand, or 6%, to $3.5 million for the six months ended June 30, 2023, from $3.3 million for the six months ended June 30, 2022 primarily due to the increase in wound care products sold during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.

Sales and marketing

Sales and marketing expenses decreased by $0.7 million, or 16%, to $3.4 million for the six months ended June 30, 2023, from $4.0 million for the six months ended June 30, 2022.

The decrease was due primarily to lower digital advertising and related consulting costs incurred in the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

General and administrative  

General and administrative expenses decreased $0.2 million to $3.9 million for the six months ended June 30, 2023, from $4.1 million for the six months ended June 30, 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.

Adjustments to the fair value of warrant liability resulted in a gain of $0.2 million for the six months ended June 30, 2023 compared to a gain of $2.1 million for the six months ended June 30, 2022.

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

The adjustments to the fair value of derivative liability resulted in a gain of $40 thousand for the three months ended June 30, 2023.

The gain results from the increase in the price of the Company’s common stock price during that period.

The Company did not record a comparable loss or gain for the three months ended June 30, 2022.

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 three months ended March 31, 2022 with no comparable adjustment for the current year period.

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

As of June 30, 2023, the Company does not anticipate that any such earn out payments will be made.

Other expense, net

Other expense, net increased $935 thousand to $942 thousand for the six months ended June 30, 2023, from $7 thousand for the six months ended June 30, 2022.

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.

As of June 30, 2023, our cash and cash equivalents were $4.4 million, compared to $5.4 million as of December 31, 2022.

Our cash and cash equivalents as of June 30, 2023 includes $2.8 million of net proceeds from the issuance of the Convertible Notes and the May 2023 Warrants in the 2023 Private Placement that closed on May 1, 2023.

Under the terms of the Convertible Notes, we are required to make a monthly redemption of the principal amount of the Convertible Notes (“Monthly Redemption”) over an 18-month period beginning on June 1, 2023 in an amount equal to $193 thousand per month, unless such Monthly Redemption is eligible under the terms of the Convertible Notes to instead be settled through the issuance of our common stock.

We have paid the Monthly Redemption in cash for the first three payments.

For additional information regarding the 2023 Private Placement and the Convertible Notes, see Note 9 “Convertible Note,”

and Note 12 “Stockholders’

Equity”

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.

Based primarily on the funds available on June 30, 2023, 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, meet its planned operating expenses and to meet the Monthly Redemption of the Convertible Notes 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.

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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.

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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.

While the Company believes that the proceeds from the 2023 Private Placement improved our liquidity in the near term, there is no assurance that we will be successful in executing additional capital raising strategies at levels necessary to address the Company’s ongoing and future cash flow and liquidity needs.

Accordingly, we continue to evaluate different plans and strategies to address our capital and liquidity needs, as well as evaluating potential other strategic alternatives and transactions.

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.

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 our ability to continue as a going concern.

Cash Used in Operating Activities

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.

Net cash used in operating activities was $3.5 million for the six months ended June 30, 2023, which consisted primarily of a net loss of $3.8 million, adjusted by depreciation and amortization expenses of $102 thousand, stock-based compensation expenses of $139 thousand, modification of common stock warrants expense of $285 thousand, gain on changes in fair value of warrant liability of $216 thousand, gain on changes in fair value of combined derivative liability of $40 thousand, accretion of interest and amortization of debt discounts on convertibles notes of $457 thousand, and a net change of $406 thousand in our net operating assets and liabilities.

Net cash used in operating activities was $3.8 million for the six months ended June 30, 2022, which consisted primarily of a net loss of $2.3 million, adjusted primarily by a 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, depreciation and amortization expenses of $241 thousand, stock-based compensation expenses of $338 thousand, and a net increase of $206 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 $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 cash used in investing activities for the purchase of property and equipment was $15 thousand and $32 thousand, for the six months ended June 30, 2023 and 2022, respectively.

Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $2.5 million for the six months ended June 30, 2023, which included the net proceeds of $2.8 million received in the 2023 Private Placement of the Convertible Notes and the May 2023 Warrants.

Pursuant to the terms of the Convertible Notes, we paid $193 thousand for the first Monthly Redemption of the Convertible Notes, which will be payable in cash each month, unless such payment is made by us in common stock, subject to the terms of the Convertible Notes.

For the six months ended June 30, 2022, net cash used in financing activities of $105 thousand consisted of a repayment of the DERMAdoctor line of credit, which was subsequently terminated. 

Net Operating Losses and Tax Credit Carryforwards

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Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements at March 31, 2023 and December 31, 2022 as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We did not have any off-balance sheet arrangements at June 30, 2023 and December 31, 2022 as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Avenova Branded Products

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Contractual Obligations

Our contractual cash commitments as of March 31, 2023 were as follows (in thousands):

Our contractual cash commitments as of June 30, 2023 were as follows (in thousands):

Contractual Obligations

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Equipment lease

Our commitments as of March 31, 2023 consisted primarily of facility operating leases and an operating lease for one copier.

Our commitments as of June 30, 2023 consisted primarily of facility operating leases and an operating lease for one copier.

The total commitment for the facility leases were $2.0 million due over the leases’

terms as of March 31, 2023.

terms as of June 30, 2023.

The total commitment for the copier lease was $19 thousand due over the leases’

terms as of March 31, 2023.

terms as of June 30, 2023.

See Note 10, “Commitments and Contingencies”

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

What changed 10-Q

Item 1. Financial Statements