What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2024-03-26 compared with 2023-03-31 · 153 added, 184 removed, 72 unchanged (82% of the section changed)

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Market Information

Our common stock is listed on the NYSE American, under the symbol “NBY.”

As of March 21, 2024, there were approximately 114 holders of record of our common stock.

This figure does not reflect persons or entities that hold their stock in nominee or “street”

name through various brokerage firms.

This figure does not reflect persons or entities that hold their stock in nominee or “street” name through various brokerage firms.

Dividend Policy

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

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part II, Item 8  

of this report.

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part II, Item 8 of this annual report.

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

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

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

As a result of many factors, including those set forth under the section entitled "Risk Factors" in Item  

and elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements.

Words such as “ expects, ” “ anticipated, ” “ will, ” “ may ,” “ goals, ” “ plans, ” “ believes, ” “ estimates, ” “ concludes, ” determines, ” variations of these words, and similar expressions are intended to identify these forward-looking statements.

As a result of many factors, including those set forth under the section entitled “ Risk Factors ” in Item 1A.

and elsewhere in this annual report, our actual results may differ materially from those anticipated in these forward-looking statements.

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

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

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

Overview  

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

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

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

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

NovaBay Pharmaceuticals, Inc.

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

Our leading product, Avenova® 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 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.

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

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

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

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

We have not been able to achieve these objectives in fiscal 2022, 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.

Because dry eye is a complex condition, we offer a complementary portfolio of scientifically-developed products for each step of the standard at-home treatment regimen, including the Avenova Eye Health Support antioxidant-rich oral supplement, Avenova Lubricating Eye Drops for instant relief, NovaWipes by Avenova, Avenova Warm Eye Compress to soothe the eyes, and the i-Chek by Avenova to monitor physical eyelid health.

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

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

We currently sell these products through distributors.

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

The Company currently sells these products through distributors.

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

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

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

We were not able to achieve these objectives in fiscal 2023, although our overall operating loss attributable to the skin care segment declined significantly in 2023 compared to fiscal 2022.

We continue to evaluate strategies for our entire Company, to maximize revenue growth and profitability and minimize operating losses while addressing our capital and liquidity needs.

To that end, we determined to divest DERMAdoctor and entered into a Membership Unit Purchase Agreement with New Age Investments, LLC (“ New Age ”) dated March 12, 2024 to buy DERMAdoctor from us which closed on March 25, 2024.

Recent Developments

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

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

2022 Warrant Reprice Transaction

On September 9, 2022, we entered into certain letter agreements and completed the 2022 Warrant Reprice Transaction with each of the holders of the November 2021 Warrants and certain holders of the July 2020 Warrants.

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

Pursuant to the letter agreements, the November 2021 Warrants and the July 2020 Warrants were amended to:

(1) reduce the exercise price;

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

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

Additionally, in connection with the 2022 Warrant Reprice Transaction, we issued to certain participants in the 2022 Warrant Reprice Transaction that exercised their November 2021 Warrants, as amended, or their Amended July 2020 Warrants, as applicable, the September 2022 Warrants to purchase up to a number of shares of common stock, equal to 100% of the number of shares of Common Stock that a participant exercised.

The September 2022 Warrants are exercisable for an aggregate of 327,860 shares of Common Stock.

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

and Note 14, “Stockholders’

Equity”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report.

2022 Private Placement

Concurrent with the 2022 Warrant Reprice Transaction on September 9, 2022, we entered into the 2022 Private Placement, a private placement transaction with certain accredited investors to sell, pursuant to the 2022 Securities Purchase Agreement, units consisting of:

(1) 3,250 shares of Series C Preferred Stock convertible into an aggregate of 516,750 shares of common stock , (2) the Short-Term Warrants exercisable for 515,876 shares of common stock, and (3) the Long-Term Warrants exercisable for 515,876 shares of common stock.

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

For additional information regarding the 2022 Private Placements, see Note 14, “Stockholders’

Equity”

in Part II, Item 8 of this report.

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

We regained compliance with the NYSE American listing requirements by effecting our Reverse Stock Split effective November 15, 2022.

DERMAdoctor Divestiture

On March 12, 2024, we entered into a Membership Unit Purchase Agreement (the “ Purchase Agreement ”) by and among:

(ii) DERMAdoctor;

and (iii) the Company.

Pursuant to the Purchase Agreement, the Company sold 100% of the membership units (the “ Membership Units ”) of DERMAdoctor (the “ DERMAdoctor Divestiture ”), which was the Company’s wholly-owned subsidiary that developed, manufactured, marketed, branded, distributed, and sold a variety of skincare products.

Upon the closing of the DERMAdoctor Divestiture on March 25, 2024 as contemplated by the Purchase Agreement, the Company sold the Membership Units to New Age for a purchase price of $1,070,000, streamlining our business and allowing us to focus on pursuing better growth opportunities.

Amendment to the Security Agreement and Consent to Terminate the Subsidiary Guarantee

The closing of the DERMAdoctor Divestiture was subject to certain conditions, which included the Company obtaining the consent of the holders (the “ Secured Parties ”) of the Company’s Original Discount Senior Secured Convertible Debentures due November 1, 2024 (the “ Secured Convertible Notes ”), to (i) amend the Security Agreement, dated April 27, 2023 (the “ Security Agreement ”), to remove the Membership Units and any assets of DERMAdoctor as collateral for the Company’s obligations pursuant to the Secured Convertible Notes and for DERMAdoctor to be removed as a party to the Security Agreement (the “ Security Agreement Amendment ”) and (ii) terminate the Subsidiary Guarantee, dated April 27, 2023 (the “ Subsidiary Guarantee ”), which DERMAdoctor entered into in connection with the issuance of the Secured Convertible Notes (the “ Subsidiary Guarantee Termination ”).

On March 24, 2024, the Company and the Secured Parties entered into a First Amendment to the Security Agreement to effect the Security Agreement Amendment (the “ First Amendment ”), and a Consent and Release to effect the Subsidiary Guarantee Termination (the “ Subsidiary Guarantee Consent ”).

As consideration for the Secured Parties executing and delivering the First Amendment and the Subsidiary Guarantee Consent, which reduced the collateral available to secure the obligations under the Secured Convertible Notes, the Company provided each Secured Party the option, at the Secured Party’s election, to receive upon the closing of the DERMAdoctor Divestiture either:

(i) a new Series D warrant (the “ Series D Warrants ”) to purchase shares of the Company’s common stock, or (ii) a new unsecured convertible note convertible into shares of common stock (the “ Unsecured Convertible Notes ”).

Based on the Secured Parties’ elections and as a result of the closing of the DERMAdoctor Divestiture, the Company issued:

(A) a Series D Warrant to a Secured Party that is exercisable for an aggregate of 1,000,000 shares of common stock and (B) New Notes to four (4) Secured Parties that have an aggregate principal amount of $525,000 or will be convertible into an aggregate of 3,750,000 shares of common stock.

2023 Financing Transactions

On April 27, 2023, the Company entered into the 2023 Private Placement that provided for the issuance and sale of $3.3 million aggregate principal amount of Secured Convertible Notes and the May 2023 Warrants exercisable for 5,076,928 shares of common stock.

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.

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

On December 21, 2023, the Company entered into the 2023 Warrant Reprice Transaction with certain existing holders of the May 2023 Warrants that were issued in the 2023 Private Placement.

Participants agreed to exercise May 2023 Warrants exercisable for 2,528,848 shares of common stock at a reduced exercise price of $0.25 and were issued the December 2023 Warrants exercisable for 2,528,848 shares of common stock.

The Company received gross proceeds of $0.6 million, before deducting placement agent fees and other offering expenses.

See also Notes 11, “Financing Activities”;

12, “Secured Convertible Notes”;

13, “Common Stock Warrants”;

and 14, “Stockholders’ Equity” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this annual report.

Financial Overview and Outlook

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

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 products.

Our net losses were $9.6 million and $10.6 million for the years ended December 31, 2023 and 2022, respectively.

As of December 31, 2023, we had an accumulated deficit of $174.8 million, total current assets of $7.2 million and total assets of $9.0 million.

Included in our net losses for the year ended December 31, 2022, was an impairment of our DERMAdoctor business of approximately $6.8 million.

Approximately $6.7 million of the total impairment was reflected in the goodwill, intangible and other asset impairment caption in our consolidated statements of operations, and approximately $0.1 million was reflected in the general and administrative caption in our consolidated statements of operations.

The impact of the DERMAdoctor impairment on our consolidated balance sheet as of December 31, 2022 was as follows;

goodwill was reduced by $4.2 million, other intangible assets, net was reduced by $2.6 million, and property and equipment, net was reduced by $0.1 million.

Refer to Note 2, “Summary of Significant Accounting Policies”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for further information on the impairment of our DERMAdoctor business.

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.

Included in our net losses for the years ended December 31, 2023 and 2022, was an impairment of our DERMAdoctor business of approximately $2.6 million and $6.8 million, respectively.

Approximately $2.6 million and $6.7 million of the total impairment was reflected in the goodwill, intangible and other asset impairment caption in our consolidated statements of operations for each of those years, respectively, and approximately $0.1 million was reflected in the general and administrative caption in our consolidated statements of operations for the year ended December 31, 2022.

The impact of the DERMAdoctor impairment on our consolidated balance sheet as of December 31, 2023 was reflected by a right-of-use asset reduction to $1.3 million by $0.1 million, a goodwill reduction to zero by $0.3 million and other intangible assets, net was fully reduced to zero by $2.1 million.

Refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this annual report for further information on the impairment of our DERMAdoctor business.

Subsequent to December 31, 2023, on March 25, 2024, we closed the DERMAdoctor Divestiture.

See additional information above under the subheading “Overview”.

We expect to grow commercial sales of Avenova branded products primarily through an expansion of domestic market penetration of our online channels as well expanded product offerings through partnerships with other eyecare product providers.

Critical Accounting Estimates

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

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

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

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

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

Actual results may differ from these estimates. 

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

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report, we believe that the following accounting estimates are most critical to fully understanding and evaluating our reported financial results.

Actual results may differ from these estimates.

While our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report, we believe that the following accounting estimates are most critical to fully understanding and evaluating our reported financial results.

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

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

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

in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

Valuation of Contingent Consideration Resulting from a Business Combination

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

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

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

Updates to assumptions could have a significant impact on our results of operations in any given period, including adjustments recorded during the year ended December 31, 2022 as further described in Note 2, “Summary of Significant Accounting Policies”

in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

Changes in judgments with respect to these assumptions and estimates could impact any such impairments recorded such as those recorded in the fourth quarters of 2023 and 2022 to fully impair these assets related to our DERMAdoctor business as further described in Note 2, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

Estimates of Future Product Returns

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

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.

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

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

Common Stock Warrant Liabilities

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

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

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

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

The fair values of these warrants are determined using the Black-Scholes option pricing model.

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

Results of Operations

Comparison of Years Ended December 31, 2022 and 2021

Comparison of Years Ended December 31, 2023 and 2022 (in thousands)

For the Years Ended

(in thousands)

Statement of Operations

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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 embedded derivative liability

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

Non-cash loss on modification of common stock warrants

Other expense, net

Impact of DERMAdoctor Acquisition

The 2021 results above include the financial results of DERMAdoctor beginning at the time of the closing of the DERMAdoctor Acquisition on November 5, 2021 (see Note 3, “Business Combination”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report) which includes product revenue, net, of $0.6 million, goods sold of $0.3 million, $0.2 million in sales and marketing costs and $0.3 million in general and administrative costs.

Accordingly, the 2021 results do not represent a full year of DERMAdoctor financial results while the 2022 results do reflect a full year of DERMAdoctor financial results.

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

As discussed in “Revenue Adjustment and Revenue Recognition”

above and in more detail in Note 2, “Summary of Significant Accounting Policies”

in the Notes to the Consolidated Financial Statement in Part II, Item 8 of this report, during the year ended December 31, 2022, we made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon.

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

Beginning in the third quarter of 2022 and for the year ended December 31, 2022, we began expensing them as incurred as sales and marketing expenses within our consolidated statements of operations.

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

For year ended December 31, 2021, the result of these changes and revisions was an increase of $1.8 million in product revenue, net, which was offset by an increase of $0.9 million in product cost of goods sold and $0.9 million in sales and marketing expenses.

These changes and revisions that were applied for the year ended December 31, 2021 and did not impact operating loss, net loss or loss per share in our consolidated statement of operations.

The changes and revisions also did not impact cash or ending cash balances in our consolidated balance sheets as of December 31, 2021, or in previously issued annual Company financial statements.

Total Net Sales, Cost of Goods Sold and Gross Profit

DERMAdoctor Divestiture

The results above include the financial results of DERMAdoctor for all periods presented.

Subsequent to December 31, 2023, on March 25, 2024, we announced the closing of the DERMAdoctor Divestiture.

Accordingly, DERMAdoctor results will be excluded from future periods presented after closing.

See additional information about the DERMAdoctor Divestiture above under the subheading “Recent Developments”.

Total Net Sales and Cost of Goods Sold

Product revenue, net, increased by $0.3 million, or 2%, to $14.7 million for the year ended December 31, 2023, from $14.4 million for the year ended December 31, 2022.

The increase in product revenue, net, was primarily the result of $4.2 million from the sale of DERMAdoctor products recognized during the year ended December 31, 2022, compared to revenue recognized from DERMAdoctor products of $0.6 million for the year ended December 31, 2021.

The 2022 results include sales from DERMAdoctor products for the entire fiscal year while the 2021 results include sales recognized only after the DERMAdoctor Acquisition on November 5, 2021 through December 31, 2021.

Revenue from Avenova Spray decreased by $0.8 million in 2022 from $8.4 million for the year ended December 31, 2021 to $7.6 million for the year ended December 31, 2022.

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

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

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

Additionally, the Company recorded an increase of $0.6 million in revenue from other Avenova branded optical products, including the Company’s NovaWipes by Avenova and Avenova Moist Heating Eye Compress Mask.

Additionally, product revenue, net, from the Company’s NeutroPhase and PhaseOne branded wound care products was $0.9 million higher during the year ended December 31, 2022, compared to the year ended December 31, 2021.

Cost of goods sold increased by $2.9 million, or 80%, to $6.6 million for the year ended December 31, 2022, from $3.7 million for year ended December 31, 2021.

This increase was primarily due to $2.7 million in cost of goods sold recognized from the sales of DERMAdoctor products for the year ended December 31, 2022, compared to the cost of goods sold from sales of DERMAdoctor products of $0.3 million for the year ended December 31, 2021.

In addition, cost of goods sold increased in relation to the increase in Avenova branded optical products other than Avenova Spray and wound care products sold in the year ended December 31, 2022 compared to the year ended December 31, 2021.

Gross profit increased by $1.3 million, to $7.8 million for the year ended December 31, 2022, from $6.5 million for the comparable period in 2021, which is a result of the increase in total sales, net, offset by the increase in the cost of goods sold for the same period.

Research and development  

Research and development expenses increased by $130 thousand to $174 thousand for the year ended December 31, 2022, from $44 thousand for the year ended December 31, 2021.

The 2022 results include costs incurred for DERMAdoctor research and development activities incurred for the entire fiscal year while the 2021 results include costs recognized only after the DERMAdoctor Acquisition was completed on November 5, 2021 through December 31, 2021.

Revenue from Avenova Spray increased by $0.2 million to $7.8 million for the year ended December 31, 2023 from $7.6 million for the year ended December 31, 2022.

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.

Additionally, the Company recorded a year-over-year increase of $0.2 million in 2023 in revenue from other Avenova branded optical products, including the Company’s NovaWipes by Avenova and Avenova Moist Heating Eye Compress Mask.

Additionally, product revenue, net, from the Company’s NeutroPhase and PhaseOne branded wound care products was $0.5 million higher during the year ended December 31, 2023, compared to the year ended December 31, 2022.

These increases were partially offset by a $0.6 million decrease in product revenue from DERMAdoctor branded skincare products due to our focus on commercializing only the most profitable skincare products and sales channels.

Subsequent to December 31, 2023, on March 25, 2024, we closed the DERMAdoctor Divestiture.

See additional information above about the DERMAdoctor Divestiture under the subheading “Recent Developments”.

Cost of goods sold increased by $0.2 million, or 3%, to $6.8 million for the year ended December 31, 2023, from $6.6 million for the year ended December 31, 2022.

The increase was slightly higher than the percentage increase in overall product revenue due to the relative increase in sales of lower-margin wound care products.

Research and development

Research and development expenses decreased by $106 thousand to $68 thousand for the year ended December 31, 2023, from $174 thousand for the year ended December 31, 2022, as the Company continues to focus on the commercialization of established products rather than the development and launch of new products.

Sales and marketing

Sales and marketing expenses decreased by $1.3 million, or 17%, to $6.5 million for the year ended December 31, 2023, from $7.8 million for the year ended December 31, 2022.

The decrease was due primarily to lower digital advertising and related consulting costs incurred for the Company’s Avenova Spray and other eye care products in the year ended December 31, 2022 compared to the year ended December 31, 2021.

Additionally, results for the year ended December 31, 2021, include marketing costs incurred in conjunction with the Company’s CelleRx Clinical Reset product with no comparable expenditures during the same period in 2022.

These decreases in sales and marketing expenses for the year ended December 31, 2022 were partially offset by an increase of $2.2 million in sales and marketing costs incurred for DERMAdoctor products compared to $0.2 million recognized in the same period of 2021.

The 2022 results include costs of the DERMAdoctor business that we incurred for the entire fiscal year while the 2021 results include costs recognized only after the DERMAdoctor Acquisition was completed on November 5, 2021 through December 31, 2021.

General and administrative  

General and administrative expenses increased $0.3 million to $7.5 million for the year ended December 31, 2022, from $7.2 million for the comparable period in 2021.

Results for the year ended December 31, 2022 include ongoing DERMAdoctor general and administrative operating costs and amortization of intangibles related to the DERMAdoctor Acquisition, and the DERMAdoctor impairment of property plant and equipment recorded for the year ended December 31, 2022.

The 2022 results include these expenses for the entire fiscal year while the 2021 results include costs recognized only after the DERMAdoctor Acquisition was completed on November 5, 2021 through December 31, 2021.

Additionally, during year ended December 31, 2021, the Company received an insurance reimbursement for costs incurred in conjunction with a dispute with the Company’s former Interim President and Chief Executive Officer and Chief Financial Officer which reduced general and administrative costs in the 2021 period.

Offsetting these increases were lower legal and professional fees and variable compensation and non-cash stock-based compensation expenses recorded in the 2022 period.

During the year ended December 31, 2021, we incurred legal and other professional fees related to the DERMAdoctor Acquisition with no comparable DERMAdoctor Acquisition legal and professional fees incurred in the 2022 period.

The decrease was due primarily to continued lower digital and other advertising costs and related consulting costs incurred in 2023 compared to 2022.

General and administrative

General and administrative expenses decreased $1.2 million to $6.3 million for the year ended December 31, 2023, from $7.5 million for the comparable period in 2022.

The 2023 results reflect lower overall average general and administrative headcount as compared to the 2022 period.

The Company also experienced a reduction in corporate registration fees and insurance premiums in the 2023 period due to a reduction of related market rates.

The Company also recorded lower depreciation and amortization costs in the 2023 period after intangible and other asset impairments were reflected in those asset balances in 2022 as discussed below.

Goodwill, intangible and other asset impairment

In connection with the impairment of our DERMAdoctor business, we recorded a goodwill, intangible and other asset impairment charge of $6.7 million in the year ended December 31, 2022.

Goodwill related to our DERMAdoctor business was impaired by $4.2 million as of December 31, 2022, and our indefinite-lived intangible assets and long-lived assets related to our DERMAdoctor business was reduced by $2.6 million.

We did not record any goodwill impairment charges for the year ended December 31, 2021, for further details refer to Note 2, “Summary of Significant Accounting Policies”

in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

Non-cash loss on modification of common stock warrants  

During the year ended December 31, 2022, the Company recorded a $1.9 million non-cash loss on the modification of common stock warrants, which occurred due to amendments to the Amended July 2020 Warrants and the November 2021 Warrants, as amended, in connection with the 2022 Warrant Reprice Transaction with no comparable result in the prior year period.

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

and Note 14, “Stockholder’s Equity”, in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report. 

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

In connection with the impairment of our DERMAdoctor business, we recorded a goodwill, intangible and other asset impairment charge of $2.6 million and $6.7 million in the years ended December 31, 2023 and 2022, respectively.

Goodwill, indefinite-lived intangible assets and long-lived assets related to our DERMAdoctor business were fully impaired as of December 31, 2023.

For further details refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this annual report.

Subsequent to December 31, 2023, on March 25, 2024, we closed the DERMAdoctor Divestiture.

See additional information about the DERMAdoctor Divestiture above under the subheading “Recent Developments”.

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

Adjustments to the fair value of warrant liabilities resulted in a gain of $0.3 million for the year ended December 31, 2023 as compared to a gain of $5.4 million for the year ended December 31, 2022.

For additional information regarding the warrant liabilities and their valuation, please see Note 13, “Warrant Liability”, in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

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

Adjustments to the fair value of contingent liability resulted in a gain of $0.6 million for the year ended December 31, 2022 with no comparable adjustment for the prior 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 December 31, 2022, we determined that the above-mentioned milestones were not met for the first calendar year of the post-closing earn out and are not expected to be met in the second calendar year of the post-closing earn out, based on projections;

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

expense , net

Other expense, net, was $276 thousand and $1.6 million for the years ended December 31, 2022 and 2021, respectively. The other expense, net in 2022 was primarily due to an expense of $166 thousand related to the issuance of the September 2022 Warrants.

The other expense, net for the year ended December 31, 2021, represented issuance costs related to the November 2021 Warrants.

For additional information on our September 2022 Warrants and November 2021 Warrants, please see Note 14, “Stockholder’s Equity”, in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

Financial Condition, Liquidity and Capital Resources  

For additional information regarding the warrant liabilities and related valuations, see Note 13, “Common Stock Warrants and Warrant Liabilities”, in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

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

The adjustments to the fair value of the embedded derivative liability resulted in a gain of $40 thousand for the year ended December 31, 2023.

The gain results from the decrease in the Company’s common stock price during the period that the embedded derivative liability was classified as a liability.

The Company did not record a comparable result for the year ended December 31, 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 $0.6 million for the year ended December 31, 2022 with no comparable adjustment for the 2023 period.

The contingent liability related to potential earn out payments that could have become payable if specified DERMAdoctor business milestones were achieved during the first two calendar years after the DERMAdoctor Acquisition.

We have determined that the above-mentioned milestones were not met and therefore no earn out payments are due.

Non-cash loss on modification of common stock warrants

During the year ended December 31, 2023, the Company recorded a $0.3 million non-cash loss on the modification of common stock warrants, which resulted from the 2023 Private Placement and 2023 Warrant Reprice Transaction.

During the year ended December 31, 2022, the Company recorded a $1.9 million non-cash loss on the modification of common stock warrants, which resulted from the 2022 Warrant Reprice Transaction.

For additional information, see Notes 11, “Financing Activities” and 13, “Common Stock Warrants and Warrant Liabilities”, in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

Other expense, net

Other expense, net increased $1.8 million to $2.1 million for the year ended December 31, 2023, from $0.3 million for the year ended December 31, 2022.

The increase was primarily due to the amortization of discounts and issuance costs related to the Secured Convertible Notes issued in May 2023 with no comparable expense for the year ended December 31, 2022.

For additional information, see Note 12, “Secured Convertible Notes” in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

Financial Condition, Liquidity and Capital Resources

As of December 31, 2023, our cash and cash equivalents were $3.1 million, compared to $5.4 million as of December 31, 2022.

Our cash and cash equivalents include approximately $2.1 million in aggregate gross proceeds received from the 2022 Warrant Reprice Transaction, and $3.2 million in aggregate gross proceeds from the 2022 Private Placement.

Based primarily on the funds available on December 31, 2022, we believe that our existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund our existing operations and meet our planned operating expenses into at least the third quarter of 2023.

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

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

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

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

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

To address our current liquidity and capital needs, we have and continue to evaluate different plans and strategic transactions to fund operations, including:

Our cash and cash equivalents as of December 31, 2023 includes $0.6 million of net proceeds from the 2023 Warrant Reprice Transaction and $2.8 million of net proceeds from the 2023 Private Placement.

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

We have paid the Monthly Redemption in cash to date.

For additional information regarding the 2023 Warrant Reprice Transaction and 2023 Private Placement and the Secured Convertible Notes, see Notes 11, “Financing Activities” and 12, “Secured Convertible Notes” in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

Based primarily on the funds available on December 31, 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 Secured Convertible Notes into at least the third quarter of 2024.

The Company has sustained operating losses for the majority of its corporate history and expects that its 2024 expenses will exceed its 2024 revenues, as the Company continues to invest in its 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, global pandemics and international conflicts (e.g., the conflicts between Israel and Hamas, Russia and Ukraine, and China and Taiwan).

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

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

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

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

(3) out-licensing rights to certain of our products or product candidates, pursuant to which we would receive cash milestones or an upfront fee;

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

We may issue securities, including common stock, preferred stock, convertible debt securities and warrants through additional private placement transactions or registered public offerings, which may require the filing of a Form S-1 or Form S-3 registration statement with the SEC.

In the absence of one or more additional transactions and/or substantial revenue growth from our commercialization efforts, there will be substantial doubt about our ability to continue as a going concern within one year after the date these audited 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 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.

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

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

(3) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee;

(4) entering into license agreements to sell new products;

and/or (5) the divestiture of certain business or product lines and related assets, which resulted in the DERMAdoctor Divestiture on March 25, 2024.

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”).

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

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

Cash Used in Operating Activities

Net cash used in operating activities was $6.7 million for the year ended December 31, 2022, which consisted primarily of a net loss of $10.6 million, a non-cash loss of $1.9 million on the modification of common stock warrants, a non-cash gain of $5.4 million on the change in fair value of our warrant liability, a non-cash gain of $0.6 million on the change in fair value of our contingent liability, impairment of our DERMAdoctor business including goodwill, intangible assets and property and equipment totaling $6.8 million, the amortization of intangible assets and depreciation of property and equipment of $0.5 million, stock-based compensation expenses of $0.2 million, and a net increase of $0.5 million in our net operating assets and liabilities.

Net cash used in operating activities was $9.2 million for the year ended December 31, 2021, which consisted primarily of a net loss of $5.8 million, adjusted primarily by non-cash gain of $4.6 million on the change in fair value of warrant liability, stock-based compensation expenses of $0.9 million, and a net decrease of $38 thousand in our net operating assets and liabilities.

Net cash used in operating activities was $4.1 million for the year ended December 31, 2023, which consisted primarily of a net loss of $9.6 million, a non-cash loss of $0.3 million on the modification of common stock warrants, a non-cash gain of $0.3 million on the change in fair value of our warrant liability, impairment of our DERMAdoctor business including goodwill, intangible assets and property and equipment totaling $2.6 million, the amortization of intangible assets and depreciation of property and equipment of $0.2 million, stock-based compensation expenses of $0.3 million, and a net decrease of $0.7 million in our net operating assets and liabilities.

Net cash used in operating activities was $6.7 million for the year ended December 31, 2022, which consisted primarily of a net loss of $10.6 million, a non-cash loss of $1.9 million on the modification of common stock warrants, a non-cash gain of $5.4 million on the change in fair value of our warrant liability, a non-cash gain of $0.6 million on the change in fair value of our contingent liability, impairment of our DERMAdoctor business including goodwill, intangible assets and property and equipment totaling $6.8 million, the amortization of intangible assets and depreciation of property and equipment of $0.5 million, stock-based compensation expenses of $0.2 million, and a net decrease of $0.5 million in our net operating assets and liabilities.

Cash Used in Investing Activities

For the year ended December 31, 2022, cash used in investing activities was $0.1 million, which was primarily the result of capital expenditures for the purchase of property and equipment. 

For the year ended December 31, 2021, cash used in investing activities was $12.0 million which was primarily the result of $12.0 million, net of cash, paid at closing of the DERMAdoctor Acquisition (see Note 3, “Business Combination”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report).

Capital expenditures were $52 thousand for the year ended December 31, 2021, for the purchase of property and equipment. 

Net cash used in investing activities for the purchase of property and equipment was $19 thousand and $112 thousand for the years ended December 31, 2023 and 2022, respectively.

Cash Provided by Financing Activities

Net cash provided by financing activities was $1.9 million for the year ended December 31, 2023, including $0.6 million of net proceeds from the 2023 Warrant Reprice Transaction and $2.8 million of net proceeds from the 2023 Private Placement.

The proceeds were partially offset by repayments of $1.5 million on the Secured Convertible Notes issued in the 2023 Private Placement.

Net cash provided by financing activities for the year ended December 31, 2022 of $4.6 million was primarily related to the net proceeds received in the 2022 Warrant Reprice Transaction of $1.7 million, and the net proceeds received in the 2022 Private Placement of $3.0 million (including the issuance of Series C Preferred Stock and the issuance of the 2022 Warrants), partially offset by $0.1 million for the repayment of our DERMAdoctor line of credit, which was terminated in the first quarter of 2022.

See Note 13, “Warrant Liability”

and Note 14, “Stockholders’

Equity”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for further information regarding the 2022 Warrant Reprice Transaction and the 2022 Private Placement.

Net cash provided by financing activities was $16.8 million for the year ended December 31, 2021.

The Company received net proceeds of $14.9 million from the 2021 Private Placement.

Additionally, the Company received net proceeds of $1.8 million from an at-the-market offering and equity program (“ATM Program”) with Ladenburg Thalmann & Co.

(“Ladenburg”).

See Note 14, “Stockholders’

Equity”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for further information regarding the 2021 Private Placement and the ATM Program.

Additional information on Financing Activities can be found in Notes 11 to 14 in the Notes to Consolidated Financial Statements, in Part II, Item 8 of this report.

Net Operating Losses and Tax Credit Carryforwards

2 unchanged sentences

The state net operating loss carryforwards will begin to expire in 2028.

As of December 31, 2022, we also had tax credit carryforwards for federal income tax purposes of $0.5 million and $0.1 million for state tax purposes.

As of December 31, 2023, we also had tax credit carryforwards of $0.5 million for federal income tax purposes and $0.1 million for state tax purposes.

If not utilized, the federal tax credits will begin expiring in 2031.

4 unchanged sentences

Our costs are subject to fluctuations, particularly due to changes in the price of raw and packing materials and the cost of labor, transportation and operating supplies.

Therefore, our business results depend, in part, on our continued ability to manage these fluctuations through pricing actions, costs savings projects and sourcing decisions, while maintaining and improving margins and market share.

Therefore, our business results depend, in part, on our continued ability to manage these fluctuations through pricing actions, cost savings projects and sourcing decisions, while maintaining and improving margins and market share.

Failure to manage these fluctuations could adversely impact our results of operations or cash flows.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements at December 31, 2022 and December 31, 2021 as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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

Avenova Branded Products

Consistent with our peers in the United States pharmaceutical industry, prescriptions for Avenova Spray experience seasonality with the first quarter of each year typically being the lowest revenue quarter.

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

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

Dermatology/Skincare Products

Our DERMAdoctor products are sold through wholesale distribution relationships with third parties such as Costco and others;

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

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

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

Contractual Obligations

Our contractual cash commitments as of December 31, 2022 were as follows (in thousands):

Our DERMAdoctor branded products were sold through wholesale distribution relationships with third parties such as Costco and others;

therefore, we received periodic large orders that resulted in large chunks of revenue that were received in irregular intervals during the year.

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

This seasonality will no longer impact our business due to the DERMAdoctor Divestiture closing on March 25, 2024.

NeutroPhase and PhaseOne Branded Wound Care Products

Our NeutroPhase and PhaseOne branded products were sold through wholesale distribution relationships with third parties such as Chongqing Pioneer Pharma Holdings Limited and Phase One Health;

therefore, we received periodic large orders that resulted in large chunks of revenue that were received in irregular intervals during the year.

Contractual Obligations

Facility leases

Our commitments as of December 31, 2022 consisted primarily of facility operating leases.

The total commitment for the facility leases were $2.2 million due over the leases’

terms as of December 31, 2022.

Our corporate headquarters lease was amended in 2022, which included extending the lease term until 2027.

See Note 12, “Commitments and Contingencies”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this report for further information regarding these leases.

In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future.

Information regarding our obligations under lease and convertible note arrangements are provided in Notes 10 and 12, respectively.

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

What changed 10-K

Item 5. Market for Registrant’s Common Equity