What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-26 compared with 2023-03-31 · 868 added, 976 removed, 442 unchanged (81% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this Item 8 are set forth below.

Our quarterly financial information is set forth in Item 7 of this report and is hereby incorporated into this Item 8 by reference.

The financial statements required by this Item 8 are set forth below.

Our quarterly financial information is set forth in Item 7 of this report and is hereby incorporated into this Item 8 by reference.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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Consolidated Balance Sheets as of December 31, 2023 and 2022

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

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

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

Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022

Consolidated Statements of Stockholders ’ Equity for the Years Ended December 31, 2023 and 2022

Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of

To the Board of Directors and Stockholders of

NovaBay Pharmaceuticals, Inc.

Opinion on the Consolidated Financial Statements

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

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

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

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

and subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt Regarding Going Concern

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

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

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

As discussed in Note 1 to the consolidated financial statements, 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.

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

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

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

Our opinion is not modified with respect to this matter.

Basis for Opinion  

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

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

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

Basis for Opinion

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

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

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

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

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

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

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

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

Accordingly, we express no such opinion.

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The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

(1) relate to accounts or disclosures that are material to the consolidated financial statements;

and (2) involved our especially challenging, subjective, or complex judgments.

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

Product Revenue Allowances for Product Returns

Description of the Matter  

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

Allowances for Product Returns

Description of the Matter

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

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

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

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

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

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

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

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

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

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

Therefore, we identified the Company’s allowance for product returns as a critical audit matter.

How We Addressed the Matter in Our Audit

We obtained an understanding of and evaluated the design of controls relating to the Company’s processes for estimating product returns.

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

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

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

Impairment of Goodwill and Intangible Assets

We obtained an understanding of and evaluated the design of controls relating to the Company’s processes for estimating the allowance for product returns.

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

We obtained the Company’s allowance for product returns analysis and performed testing procedures on the underlying data that was used in management’s development of the product returns estimate.

We compared the significant assumptions used by management to customer contract information, tested the historical returns data used in the analysis, and reviewed subsequent product return activity.

In addition, we performed sensitivity analyses of significant assumptions used in the analysis to determine what changes in assumptions are particularly sensitive when calculating the amount of the allowance for product returns.

Additionally, we tested the mathematical accuracy of management’s calculation of revenue, net of product sales allowances, and the associated timing of revenue recognition, in the consolidated financial statements.

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

Description of the Matter

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

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

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

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

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

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

As described in Notes 2, 7 and 8 of the consolidated financial statements, the Company’s 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 also reviews its long-lived assets for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.

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

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

During the year ended December 31, 2023, the Company recognized an impairment charge related to its DERMAdoctor goodwill, indefinite-lived intangible assets and long-lived assets of $2.6 million.

The Company’s impairment analysis related to its goodwill, indefinite-lived intangible assets and long-lived assets requires a high degree of judgment and is subject to change based on various quantitative and qualitative factors.

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

Therefore, we identified the Company’s impairment analysis related to its goodwill, indefinite-lived intangible assets and long-lived assets as a critical audit matter.

How We Addressed the Matter in Our Audit

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

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

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

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

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

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

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

We obtained the Company’s impairment analyses and performed testing procedures on the underlying data and assumptions that were used in management’s analyses.

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

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

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

We also considered events that occurred subsequent to year end and the impact they had on the Company’s impairment analyses.

Valuation of the Secured Convertible Notes, Warrants and Derivatives Related to the 2023 Private Placement

Description of the Matter

As described in Notes 11 and 12 of the consolidated financial statements, in May 2023, the Company closed a private placement (the “2023 Private Placement”) that provided for the issuance and sale of $3.3 million aggregate principal amount of convertible notes and warrants exercisable for up to 5.1 million shares of the Company’s common stock.

The Company allocated the proceeds from the 2023 Private Placement between the warrants, an embedded derivative liability, and the convertible notes by applying the residual fair value methodology.

The valuation of the convertible notes, warrants and derivatives related to the 2023 Private Placement and the related allocation of the proceeds requires a high degree of judgment and is subject to change based on various quantitative and qualitative factors.

A high degree of auditor judgment and an increased extent of effort were required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the valuation of the transaction due to the use of complex valuation models to estimate the value of the convertible notes, warrants and embedded conversion and redeemable features, which included the need to involve our valuation specialists.

Therefore, we identified the Company’s valuation of the convertible notes, warrants and derivatives related to the 2023 Private Placement as a critical audit matter.

How We Addressed the Matter in Our Audit

We obtained an understanding of and evaluated the design of controls relating to the Company’s valuation of the convertible notes, warrants and derivatives related to the 2023 Private Placement.

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

To test the accounting for the convertible notes, warrants and embedded derivative liability in the 2023 Private Placement, we performed audit procedures that included, among other things, obtaining an understanding of the Company’s process to account for the issuance of the convertible notes, warrants and derivatives, reviewing the convertible notes and warrant agreements, and testing the accuracy of the underlying data used in the valuation models by tracing the key inputs to relevant terms contained in the convertible notes and warrant agreements.

We also involved a valuation specialist to assist in evaluating the valuation methodologies and significant assumptions used in the valuation model, as well as testing the mathematical accuracy of the calculations.

/s/ WithumSmith+Brown, PC

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Cash and cash equivalents

$ 5,362  

$ 7,504  

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

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

$ 3,130 $ 5,362

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

Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($ 627 and $ 499 at December 31, 2023 and 2022, respectively)

Prepaid expenses and other current assets

Total current assets

11,332  

13,170  

Operating lease right-of-use assets

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Other intangible assets, net

$ 16,399  

$ 23,978  

$ 9,034 $ 16,399

LIABILITIES AND STOCKHOLDERS ’ EQUITY

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Accounts payable

$ 1,080  

$ 1,045  

$ 1,130 $ 1,080

Accrued liabilities

Line of credit

Secured Convertible Notes, net of discounts

Operating lease liabilities

Total current liabilities

Operating lease liabilities-non-current

Warrant liability

Contingent earnout liability

Operating lease liabilities-non-current

Total liabilities

13,807  

Commitments & contingencies (Note 12)

Commitments and contingencies (Note 10)

Stockholders’ equity:

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Series B Preferred Stock;

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

6 and 12 shares issued and outstanding at December 31, 2023 and 2022, respectively

Series C Preferred Stock;

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

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

Common stock, $ 0.01 par value;

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

150,000 shares authorized, 11,230 and 2,035 shares issued and outstanding at December 31, 2023 and 2022, respectively*

Additional paid-in capital*

165,081  

150,900  

176,101 165,713

Accumulated deficit

( 174,849 ) ( 158,152 )

Total stockholders’ equity

10,554  

10,171  

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$ 16,399  

$ 23,978  

$ 9,034 $ 16,399

After giving retroactive effect to a 1-for-35 reverse stock split that became effective November 15, 2022.

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

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Product revenue, net

$ 14,374  

$ 10,180  

Other revenue, net

Total sales, net

14,404  

10,204  

Cost of goods sold

Operating expenses

Research and development

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Total operating expenses

22,198  

15,377  

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

Preferred deemed dividend

Retained earnings reduction related to preferred stock down round feature triggered

Increase to accumulated deficit due to adjustment to Preferred Stock conversion prices

Net loss attributable to common stockholders

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

After giving retroactive effect to a 1-for-35 reverse stock split that became effective November 15, 2022.

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

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY

(in thousands)  

Preferred Stock

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Balance at December 31, 2021

Issuance of warrants in connection with the TLF Warrants

Issuance of common stock, net of offering costs

Vesting of employee restricted stock awards

Issuance of RSUs to non-employees for services

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

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

Vesting of director restricted stock awards

Reclassification of November 2021 Warrants from liability

Conversion of Series B Preferred Stock to common stock

Beneficial conversion feature upon Issuance of Series B Preferred Stock

Deemed dividend from beneficial Conversion feature of Series B Preferred Stock

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

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

Down round feature adjustment related to Series B Preferred Stock

Modification of common stock warrants in connection with 2022 Warrant Reprice Transaction

Issuance of common stock in connection with 2022 Warrant Reprice Transaction, net of offering costs

Reclassification of July 2020 Warrants and November 2021 Warrants to liability in connection with 2022 Warrant Reprice Transaction

Reclassification of July 2020 Warrants, November 2021 Warrants and September 2022 Warrants from liability

Issuance of Series C Preferred Stock and 2022 Warrants, net of offering costs

Conversion of Series C Preferred Stock to common stock

Shares issued due to Reverse Stock Split rounding feature

Balance at December 31, 2022

Reclassification of Series B Private Placement Warrants

Conversion of Series B Preferred Stock to common stock

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

Vesting of director restricted stock awards

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

Shares issued for reverse stock split due to rounding feature

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

Modification of common stock warrants

Conversion of Series B Preferred Stock to common stock

Down round feature adjustment related to Series B Preferred Stock

Reclassification of Private Placement Warrants

Issuance of Series C Preferred Stock, net of offering costs

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

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

Conversion of Series C Preferred Stock to common stock

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

Down round feature adjustment related to Series C Preferred Stock

Modification of common stock warrants in connection with 2023 Private Placement

Reclassification of May 2023 Warrants from liability

Reclassification of 2023 Private Placement embedded derivative liability

Modification of common stock warrants in connection with 2023 Warrant Reprice Transaction

Issuance of common stock in connection with 2023 Warrant Reprice Transaction, net of offering costs

Balance at December 31, 2023

After giving retroactive effect to a 1-for-35 reverse stock split that became effective November 15, 2022.

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

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(in thousands)

Year ended December 31,

For the Years Ended December 31,

Operating activities:

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Impairment of goodwill, intangible and other assets

Impairment of property, plant and equipment

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

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

Issuance of RSUs to non-employees for services

Issuance of warrants in connection with the TLF Warrants

Impairment of property and equipment

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

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

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

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

Non-cash loss on modification of common stock warrants

Accretion of interest and amortization of debt discounts on convertible notes

Changes in operating assets and liabilities:

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Investing activities:

Acquisition, net of cash

Purchases of property and equipment

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Financing activities:

Proceeds from Series B Preferred Stock issuances, net

Proceeds from Series C Preferred Stock and warrant issuances, net

Proceeds from common stock issuances, net

Proceeds from exercise of warrants

Draws (payments) on the line of credit

Proceeds from issuance of Secured Convertible Notes and May 2023 Warrants, net of discounts

Payments on Secured Convertible Notes

Cash debt issuance cost

Proceeds from issuance of Series C Preferred Stock and November 2022 Warrants, net

Proceeds from warrant exercises and issuance of December 2023 Warrants, net

Payment on line of credit

Net cash provided by financing activities

Net (decrease) increase in cash, cash equivalents, and restricted cash

Net decrease in cash, cash equivalents, and restricted cash

Cash, cash equivalents and restricted cash, beginning of year

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Supplemental disclosure of non-cash information:

Warrant liability transferred to equity related to warrant modification

Equity transferred to warrant liability related to warrant modification

Conversions of preferred stock to common stock

Down round feature adjustments related to preferred stock

Equity transferred to warrant liabilities

Common stock warrant modification recorded as debt discount

Warrant liabilities transferred to equity

Embedded derivative liability transferred to equity

Addition of operating lease, right-of-use asset

Fair value of warrants issued in connection with financings

Conversion of Series B Preferred Stock to common stock

Conversion of Series C Preferred Stock to common stock

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2023

NovaBay Pharmaceuticals, Inc.

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

Our leading product, Avenova®

Antimicrobial Lid and Lash Solution, 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.

(the “ Company ” or “ our ,” “ we ,” or “ us ”) 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, the Company offers over 30 dermatologist-developed products targeting common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris.

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

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

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

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.

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.

Subsequent to December 31, 2023, on March 25, 2024, we announced that we had sold DERMAdoctor (the “ DERMAdoctor Divestiture ”).

We acquired DERMAdoctor in November 2021 ( the “ DERMAdoctor Acquisition ”) in order to achieve overall revenue growth, cost reductions and profitability.

We were unable to achieve those objectives with DERMAdoctor.

The DERMAdoctor Divestiture immediately streamlined our business by reducing our cash burn and allowing us to begin focusing on pursuing newer and stronger growth opportunities that are better aligned with our core eyecare business.

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 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.

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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.

In June 2010, the Company changed the state in which it was incorporated (the “Reincorporation”) and is now incorporated under the laws of the State of Delaware.

All references to “the Company”

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

In June 2010, the Company changed the state in which it was incorporated (the “ Reincorporation ”) and is now incorporated under the laws of the State of Delaware.

All references to “the Company” herein refer to the California corporation prior to the date of the Reincorporation and to the Delaware corporation on and after the date of the Reincorporation.

The Company is managed as two reportable segments:

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

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

Equity”

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

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

As noted above, on March 25, 2024, we closed the DERMAdoctor Divestiture resulting in the sale of our skincare segment.

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

Except as otherwise specifically noted, all share numbers, share prices, exercise/conversion prices and per share amounts have been adjusted, on a retroactive basis, to reflect the Reverse Stock Split.

Going Concern

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

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, the continuation of the COVID- 19 pandemic and international conflicts (e.g., the conflict between Russia and Ukraine).

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

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

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;

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

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

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

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

and/or ( 5 ) the divestiture of certain business or product lines and related assets.

While the Company believes that the proceeds from the 2023 Private Placement and 2023 Warrant Reprice Transaction (as defined below) and the DERMAdoctor Divestiture 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 consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

Basis of Presentation

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

GAAP”) and are expressed in U.S.

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

GAAP ”) and are expressed in U.S.

Principles of Consolidation

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

and its former wholly-owned subsidiary, DERMAdoctor, LLC.

All intercompany balances and transactions have been eliminated in consolidation.

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

See additional information in Note 21, “Subsequent Events”.

Use of Estimates

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

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

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

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.

Actual results may differ from these estimates.

Estimates, judgments, and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

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

Change in Accounting and Revision of Prior Period Financial Statements

During the third quarter of 2022, the Company made an accounting policy change election related to fulfillment fees paid to third -party online retailers such as Amazon.

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

The Company previously recorded revenue net of these fees.

The Company believes that making this change is appropriate and preferable as it is more consistent with the practices of comparable companies as the Company increasingly focus on commercial growth in our direct to consumer on-line channels.

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

See additional information under “Revenue Recognition”

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

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

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

For the year ended December 31, 2022, the Company concluded that these commissions relate to a sales activity and began expensing them as incurred as sales and marketing expenses within the Company’s consolidated statements of operations.

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

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

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

See additional information under “Revenue Recognition”

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

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

Cash, Cash Equivalents, and Restricted Cash

Cash, Cash Equivalents, and Highly Liquid Restricted Cash

The Company considers all highly-liquid instruments with a stated maturity of three months or less at the date of purchase to be cash equivalents.

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

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

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

Cash and cash equivalents

$ 5,362  

$ 7,504  

$ 3,130 $ 5,362

Restricted cash included in other assets

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

$ 5,846  

$ 7,979  

$ 3,606 $ 5,846

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

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

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

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

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

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

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

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

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

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

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Avenova Spray

$ 7,651  

$ 8,565  

$ 7,805 $ 7,651

Other products

Total product revenue, net

14,374  

10,180  

14,687 14,374

Other revenue, net

Total sales, net

$ 14,404  

$ 10,204  

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

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

$ 14,726 $ 14,404

During the years ended December 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.

Sales of Avenova Spray via Amazon comprised 67 % and 73 % of total Avenova Spray net revenue during the years ended December 31, 2023 and 2022, respectively.

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

See additional information in Note 21, “Subsequent Events”.

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

Major distribution partner

Chongqing Pioneer Pharma Holdings Limited

Avenova Spray Pharmacy Distributor A

Avenova Spray Pharmacy Distributor B

Avenova Spray Pharmacy Distributor C

* Less than 10%

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

The Company does not own any manufacturing facilities and intends to continue to rely on third parties for the supply of finished goods.

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

The Company does not have any manufacturing facilities and intends to continue to rely on third parties for the supply of finished goods.

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

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

Fair Value of Financial Assets and Liabilities

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

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

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

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

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

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

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Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company.

Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances.

There are three levels of inputs that may be used to measure fair value:

Level 1 –

quoted prices in active markets for identical assets or liabilities;

Level 2 –

quoted prices for similar assets and liabilities in active markets or inputs that are observable;

Level 3 –

inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).

Level 1 – quoted prices in active markets for identical assets or liabilities;

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable;

Level 3 – inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).

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

Allowance for Doubtful Accounts

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

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

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

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

See additional information in Note 3, “Fair Value Measurements”.

Allowance for Credit Losses

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

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

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

The allowance is re-evaluated on a regular basis and adjusted as needed.

Once a receivable is deemed to be uncollectible, such balance is charged against the allowance.

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

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

( 2 ) goods in progress, which are normally filled but unlabeled bottles;

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

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

At December 31, 2023 and 2022, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $ 627 thousand and $ 499 thousand, respectively.

Property and Equipment, Net

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

Leasehold improvements are amortized over the lease term.

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

Business Combinations  

Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term.

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

Business Combinations, Goodwill and Indefinite-Lived Intangible Assets

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

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

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

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

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

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

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

Goodwill and Indefinite-Lived Intangible Assets

Intangible assets are measured at their respective fair values as of the acquisition date.

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

Intangible assets are measured at their respective fair values as of the acquisition date and may be subject to adjustment within the measurement period, which may be up to one year from the acquisition date.

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.

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

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

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

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

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

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

The Company was not able to achieve these objectives.

As a result, management continued to revise its forecast for the future performance of DERMAdoctor branded products.

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

See additional information in Note 21, “Subsequent Events”.

During the fourth quarters of 2022 and 2023, the Company performed its annual goodwill impairment analysis following the steps laid out in ASC 350 - 20 - 35 - 3C.

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

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

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

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

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

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

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

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

After performing the quantitative impairment test in accordance with ASC 350 - 20 - 35 - 3C, the Company determined that goodwill related to its DERMAdoctor reporting unit was fully impaired as of December 31, 2023 which resulted in goodwill impairment charges of $ 0.3 million and $4.2 million during the years ended December 31, 2023 and 2022, respectively, which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations.

The impact of the impairments on the consolidated balance sheets as of December 31, 2023 and 2022 was a $ 0.3 million and $ 4.2 million reduction to the goodwill caption, respectively.

During the fourth quarters of 2023 and 2022, the Company also performed its indefinite-lived intangible asset impairment assessment.

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

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

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

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

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

Based on the quantitative impairment test, the Company determined that its indefinite-lived trade name intangible asset should be fully impaired as of December 31, 2023, which resulted in a $ 1.1 million and $ 1.0 million impairment charge being recorded during the years ended December 31, 2023 and 2022, respectively, which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations.

Valuation of Contingent Consideration Resulting from a Business Combination

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

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

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

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

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

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

Actual results may differ from estimates.

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

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

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

Long-Lived Assets  

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

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

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

In connection with the DERMAdoctor Acquisition, the Company was subject to paying consideration that was contingent upon the achievement of specified milestone events.

The Company recorded this contingent consideration at its fair value on the acquisition date.

Each quarter thereafter, the Company revalued the contingent consideration and recorded changes in fair value within the consolidated statements of operations.

The DERMAdoctor Acquisition milestone events consisted of financial targets for calendar years 2022 and 2023 which were not met.

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

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

Long-Lived Assets

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

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

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

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

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

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

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

There were no impairment charges during the year ended December 31, 2021.

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

As such, the Company recorded an impairment charge in the years ended December 31, 2023 and 2022 of $ 1.0 million and $ 1.6 million, respectively, for the impairment of long-lived intangible assets which is reflected in the caption goodwill, intangible and other asset impairment in the Company’s consolidated statements of operations;

$ 0.1 million for the impairment of a right-of-use asset which is reflected in the caption goodwill, intangible and other asset impairment in the Company’s consolidated statements of operations in the year ended December 31, 2023;

and of $ 2 thousand and $ 66 thousand, net in the years ended December 31, 2023 and 2022, respectively, for property and equipment which is reflected in the general and administrative expenses caption in the Company’s consolidated statements of operations.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present.

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Certain adjustments to the right-of-use assets may be required for items such as initial direct costs paid or incentives received.

The Company has elected to combine lease and non-lease components as a single component for all leases in which it is a lessee or a lessor.

Additionally, the Company determined that a right-of-use asset related to the DERMAdoctor business had been fully impaired as of December 31, 2023.

Accordingly, the Company recorded an impairment charge of $ 0.1 million which is reflected in the caption goodwill, intangible and other asset impairment in the Company’s consolidated statements of operations in the year ended December 31, 2023.

The Company has elected to combine lease and non-lease components as a single component.

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

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 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 in the consolidated balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current.

Common Stock Warrants

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

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

In accordance with ASC 815, the Company also classifies as liabilities any warrants for which the shares underlying the contract are subject to stockholder approval before the warrant can be exercised.

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.

See Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Model Assumptions” and Note 13, “Common Stock Warrants”, subheading “Summary of Common Stock Warrant Liabilities”.

Amendments to warrant terms are recorded as a non-cash gain or loss on modification of common stock warrants.

The gain or loss represents the decrease or increase in the fair value of the amended warrants when comparing the value immediately before and after amendment using the Black-Scholes option pricing model.

See Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Model Assumptions”.

Preferred Stock

Terms of the Company’s outstanding Preferred Stock include a Ratchet whereby the applicable conversion price may be adjusted (see Note 14, “Stockholders’ Equity”).

When this occurs, the Company records a deemed dividend as a reduction to income available to common stockholders.

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

These fair values are determined using the Black-Scholes option pricing model.

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

See also Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Model Assumptions”.

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:

The Company’s product revenue recognition policies are established in accordance with ASC 606, Revenue from Contracts with Customers , in accordance with the following five steps:

identify the contract(s) with a customer;

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

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

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

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

The Company presents revenue net of sales taxes and refunds. 

Revenue generated through third -party online retailers, including Amazon, is recognized when control of the goods is transferred to the customer, which generally occurs upon delivery of the products to a third -party carrier.

The Company pays third -party online retailers advertising & promotion fees, selling commissions and fulfillment fees.

Advertising & promotion fees are expensed as incurred as sales and marketing expenses within operating expenses in the consolidated statements of operations.

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

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

Prior to the third quarter of 2022, to determine its accounting for fulfillment fees, the Company evaluated principal versus agent considerations with respect to the obligation to ship its product to the customer.

The Company assessed whether the nature of the Company’s obligation is as a principal in providing the fulfillment service or as an agent in promising to arrange for a third party to provide the fulfillment service.

The Company concluded that it is an agent with respect to the shipping service as the Company does not control the service itself and, therefore, its obligation is that of a promise to arrange for the service. This determination involved significant judgement.

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

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

Management believes the resulting accounting changes are preferable as they conform the Company’s practice to a majority of comparable filers and other similar sales channels.

Changes to amounts presented for prior periods have been made to conform to these changes.

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

Prior to the third quarter of 2022, the Company also recorded revenue net of selling commissions.

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

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

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

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

However, revisions to prior period amounts presented in this report have been made to conform to the current period presentation as outlined below.

Financial statement line items included in the consolidated statements of operations for the year ended December 31, 2021 were adjusted for the above changes as follows (in thousands):

For the Year Ended December 31, 2021

As Previously

Product revenue, net

$ 8,397  

$ 10,180  

Cost of goods sold

Revenue is recognized in accordance with the amount of consideration which the Company expects to receive.

Revenue generated from end consumers through third -party online retailers, such as Amazon, as well as the Company’s web stores (Avenova.com and DERMAdoctor.com) is recognized on a “sell-through” basis when control of the goods is transferred to the consumer, which generally occurs upon delivery of the products to the party fulfilling the consumer’s order.

Revenue is recorded net of any discounts and estimates for refunds and product returns.

Fees paid to third -party online retailers and fulfillment parties are recorded as incurred in the Company’s consolidated statements of operations.

Fulfillment and shipping and handling fees are recorded as product cost of goods sold.

Selling commissions and advertising and promotion fees are recorded as sales and marketing expenses.

Revenue generated through major pharmacy distributors is recognized on a “sell-in” basis when control of the goods is transferred to the distributor, which generally occurs upon delivery of the products to the distributor.

Revenue is recorded net of consideration for contract liabilities for distributor services, discounts, rebates, and product returns.

The Company estimates returns and other contract liabilities based on historical data which is updated quarterly.

Payment for product supply is typically due 30 days after delivery to the distributor.

Revenue generated from end consumers through the Company’s partner pharmacies is recognized on a “sell-through” basis when control of the goods is transferred to the consumer.

Revenue generated from Costco is recognized on a “sell-in” basis when control of the goods is transferred to Costco, which generally occurs upon delivery of the products to Costco.

Revenue is recorded net of consideration for discounts and product returns.

The Company estimates returns based on historical data which is updated quarterly.

Revenue generated from other retailers is recognized on a “sell-through” basis, net of estimated future product returns, when control of the goods is transferred to the retailer, which generally occurs upon delivery of the products to a third -party carrier who is delivering the products to the retailer.

The Company defers recognition for pre-payments until the Company’s performance obligations are satisfied.

Cost of Goods Sold

Operating expenses

Sales and marketing

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

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

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

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

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

Payment for product supply is typically due 30 days after control transfers to the distributor.

Revenue for products sales to Costco is recognized upon transfer of control at the amount of consideration that the Company expects to be entitled to, generally upon delivery to Costco.

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

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

Payment for product supply is typically due 30 days after control transfers to Costco.

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

Revenue for product sales to other retailers, such as CVS, is generally recognized upon transfer of control to the retailer, which generally occurs upon delivery of the products to a third -party carrier, net of estimated future product returns.

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

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

Cost of goods sold also includes any necessary allowance for excess and obsolete inventory along with lower of cost and estimated net realizable value.

Cost of goods sold also includes any necessary allowances for excess and obsolete inventory as well as lower of cost and estimated net realizable value.

Research and Development Costs

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”).

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

These costs include all costs associated with research, development and regulatory activities.

Patent costs are expensed in the period in which they are incurred.

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

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Stock-Based Compensation

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

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

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

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

The expense associated with these grants is recognized in the Company’s consolidated statements of operations based on their fair values as they are earned under the applicable vesting terms.

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

See Note 15, “Equity-Based Compensation”

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

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

See Note 15, “Equity-Based Compensation” for further information regarding stock-based compensation expense and the assumptions used in estimating the expense.

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

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

Common Stock Warrants

Derivatives and Hedging .

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

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

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

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

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

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.

Net Loss per Share

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

The Company computes net loss per share by presenting both basic and diluted earnings (loss) per share (“ EPS ”) as shown in the Company’s consolidated statements of operations.

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

2 unchanged sentences

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

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

basis would have been anti-dilutive. 

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

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

For the Years Ended December 31,

Preferred deemed dividend

Retained earnings reduction related to preferred stock down round feature triggered

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

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):

For the Years Ended December 31,

For the years ended December 31, 2023 and 2022, the Series B Preferred Stock and 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 preferred stock, stock options and stock warrants were excluded from the diluted EPS computation as their effect would have been anti-dilutive:

As of December 31,

Common stock equivalent of Series B Non-Voting Convertible Preferred Stock (the “ Series B Preferred Stock ”)

22,428,000 1,847,580

Common stock equivalent of Series C Non-Voting Convertible Preferred Stock (the “ Series C Preferred Stock ”)

4,388,000 357,750

Stock options

124,897 131,954

Stock warrants

7,382,447 2,305,519

34,323,344 4,642,803

Recent Accounting Pronouncements

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

Debt —

Debt with Conversion and Other Options (Subtopic 470 - 20 ) and Derivatives and Hedging —

Contracts in Entity ’

s Own Equity (Subtopic 815 - 40 ):

Accounting for Convertible Instruments and Contracts in an Entity ’

s Own Equity (“ASU 2020 - 06”

ASU 2020 - 06 simplifies the accounting for convertible instruments by removing the separation models for ( 1 ) convertible debt with a cash conversion feature and ( 2 ) convertible instruments with a beneficial conversion feature.

As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost.

ASU 2020 - 06 also requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available.

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

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

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

Credit Losses (Topic 326 ):

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

Changes to U.S.

GAAP are established by the Financial Accounting Standards Board (“ FASB ”) in the form of Accounting Standard Updates (“ ASUs ”) to the FASB ASC.

We consider the applicability and impact of all ASUs and any not listed below were assessed and determined to be not applicable or are expected to have a minimal impact on our consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update (“ ASU ”) 2016 - 13, Financial Instruments — Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments .

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

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

January 1, 2023.

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

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

BUSINESS COMBINATION

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

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

Equity”).

The DERMAdoctor Acquisition is accounted for as a business combination in accordance with ASC 805, Business Combinations , which requires that the assets acquired and liabilities assumed be recognized at their estimated fair values as of the Acquisition Closing.

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

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

Tangible net assets and liabilities:

Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts

Inventory, net of allowance

Prepaid expenses and other current assets

Property and equipment, net

Other intangible assets

Accounts payable

Accrued liabilities

Total net assets

Intangible Assets:

Customer relationships

Trade secrets / product formulations

Total intangible assets

Net assets acquired

Purchased consideration

12,561  

$ 4,528  

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

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

Intangible Asset

Customer relationships

Straight line

Trade secrets / product formulations

Straight line

$ 9,788  

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

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

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

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

Therefore, financial results are reported in two operating segments:

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

FAIR VALUE MEASUREMENTS  

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

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

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

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

and Note 14, “Stockholders’

Equity”).

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

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

Fair Value Measurements Using  

Quoted  

Prices in  

Active  

Significant  

Markets  

Significant  

Balance at  

for Identical

Unobservable  

 December 31,  

 2022  

Restricted cash held as a certificate of deposit

Deposit held as a certificate of deposit

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

Fair value of warrant liability at December 31, 2021

$ 9,558  

Decrease in fair value of November 2021 Warrants

Reclassification of November 2021 Warrants liability to equity

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

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

Reclassification of September 2022 Warrants liability to equity

Fair value of warrant liability at December 31, 2022

Fair value of contingent liability at December 31, 2021

Decrease in fair value of contingent liability

Fair value of contingent liability at December 31, 2022

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

Fair Value Measurements Using  

Balance at  

Quoted  

Significant  

December 31,  

Prices in  

Unobservable  

Active  

Observable  

Inputs  

Markets  

Inputs  

(Level 3)  

for Identical  

(Level 2)  

ASU 2016 - 13 is effective for the Company for annual and interim reporting periods beginning January 1, 2023.

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

In December 2023, the FASB issued ASU 2023 - 09 (“ ASU 2023 - 09 ”) Income Taxes (Topic 740 ):

Improvements to Income Tax Disclosures.

ASU 2023 - 09 requires public companies to annually disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate).

ASU 2023 - 09 will be effective for the annual reporting periods in fiscal years beginning after December 15, 2024.

The Company is currently evaluating ASU 2023 - 09 and does not expect it to have a material effect on the Company’s consolidated financial statements.

In November 2023, the FASB issued ASU 2023 - 07, “Improvements to Reportable Segment Disclosures” (“ ASU 2023 - 07 ”).

ASU 2023 - 07 requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“ CODM ”) and included within the segment measure of profit or loss, an amount and description of its composition for other segment items to reconcile to segment profit or loss, and the title and position of the entity’s CODM.

ASU 2023 - 07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted.

We do not expect that the updated standard will have a significant impact on our financial statement disclosures.

FAIR VALUE MEASUREMENTS

The following tables presents the Company’s financial instruments measured at fair value on a recurring basis as of December 31, 2023 and 2022 (in thousands):

Fair Value Measurements Using

Restricted cash held as a certificate of deposit

Deposit held as a certificate of deposit

$ 476 $ 476 $ — $ —

Warrant liability

$ 9,558  

Contingent earnout liability

Total liabilities

$ 10,119  

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

Fair value of warrant liability at December 31, 2020

Fair value of November 2021 Warrants issued

14,172  

Decrease in fair value of November 2021 Warrants

Fair value of warrant liability at December 31, 2021

$ 9,558  

$ 334 $ — $ — $ 334

Fair Value Measurements Using

Restricted cash held as a certificate of deposit

$ 484 $ 484 $ — $ —

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

The Secured Convertible Notes (see Note 12, “Secured Convertible Notes”) are carried at proceeds, net of discounts, which management believes approximates fair value.

As a result of certain call and put options within the Secured Convertible Notes, 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 Secured Convertible Notes.

The fair value of the embedded derivative liability was classified within Level 2 of the fair value hierarchy because the stock price used in the related Black Scholes valuation model (see subheading “Black Scholes Valuation Models and Assumptions” below) was adjusted for the dilutive effect of the 2023 Private Placement.

The fair value of the May 2023 Warrants issued in conjunction with the 2023 Private Placement as well as the accounting for the warrant amendment and preferred stock conversion price adjustments that resulted from the 2023 Private Placement used the same stock price and were classified within Level 3.

The fair value of the December 2023 Warrants issued in conjunction with the 2023 Warrant Reprice Transaction as well as the accounting for the warrant amendment and preferred stock conversion price adjustments that resulted from the 2023 Warrant Reprice Transaction were classified within Level 3.

See Note 13, “Common Stock Warrants”, subheading “Summary of Common Stock Warrant Liabilities”, for a reconciliation of the beginning and ending balances for the warrant liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) during the years ended December 31, 2023 and 2022.

Black Scholes Valuation Models and Assumptions

The Company utilizes a Black Scholes model for various valuations as outlined throughout this report.

The following tables summarize the assumptions utilized for valuations impacting results for the years ended December 31, 2023 and 2022.

See also Note 15, “Equity-Based Compensation” for related Black Scholes valuation assumptions.

Warrant Liabilities

Various of the Company’s warrants are subject to stockholder approval upon issuance or amendment and prior to exercise.

The warrants are recorded as a liability at fair value upon issuance or amendment and continue to be recorded as a liability at fair value at each reporting date until stockholder approval occurs at which time they are transferred to stockholders’ equity at their fair value on the date of approval.

Fair value was determined using a Black Scholes model as outlined below.

November 2021 &

September 2022

November 2021 &

September 2022

Measurement event

Reporting date

Stockholder approval

Amendment and Issuance

Stockholder Approval Issuance

December 31, 2021

September 9, 2022

November 10, 2022 May 1, 2023

9.6 million 7.5 million 5.2 million 1.9 million 1.6 million

not applicable

2.1 million not applicable

3.4 million not applicable

Exercise price

$ 18.55 $ 18.55 $ 6.30 $ 6.30 1.30

$ 13.18 $ 10.50 $ 6.29 $ 2.80 $ 0.72 (a)

87 % 91 % 79.6 % 79.5 % 80.1 %

Risk-free rate

1.31 % 1.65 % 3.58 - 3.43 % 3.93 - 4.15 % 3.60 - 4.04 %

Dividend yield

0.0 % 0.0 % 0.0 % 0.0 % 0.0 %

6.0 6.0 3.4 - 6.0 3.2 – 5.8 2.1 - 5.1 %

Measurement event

Stockholder Approval

Reporting Date

December 21, 2023

December 31, 2023

not applicable

Exercise price

$ 1.30 $ 0.25 $ 0.25

$ 0.68 $ 0.23 $ 0.20

77.6 % 79.3 % 79.3 %

Risk-free rate

3.92 – 4.59 % 3.88 % 3.85 %

Dividend yield

0.0 % 0.0 % 0.0 %

2.0 - 5.0 5.5 5.5

Adjusted for the dilutive effect of the 2023 Private Placement.

See additional discussion above.

Warrant Modifications

Amendments to warrant terms are recorded as a non-cash gain (or loss) on modification of common stock warrants.

Fair value was determined using a Black Scholes model as outlined below.

July 2020 & November 2021

Measurement event

Prior to amendment

After amendment

September 9, 2022

not applicable

Exercise price

$ 18.55 - 57.75 $ 6.30

$ 6.29 $ 6.29

79.6 % 79.6 %

Risk-free rate

3.43 - 3.58 % 3.43 - 3.58 %

Dividend yield

0.7 – 5.4 3.4 – 6.0

July 2020, November 2021,

September 2022 & November 2022

Measurement event

Prior to amendment

After amendment

April 27, 2023

not applicable

Exercise price

$ 6.30 $ 1.50

80.1 % 80.1 %

Risk-free rate

3.59 - 4.73 % 3.59 – 4.73 %

Dividend yield

1.1 – 5.6 1.1 – 5.6

May 2023 Warrants

Measurement event

Prior to amendment

After amendment

December 21, 2023

not applicable

Exercise price

$ 1.30 $ 0.25

$ 0.23 $ 0.23

79.3 % 79.3 %

Risk-free rate

3.92 – 4.62 % 3.92 – 4.62

Dividend yield

1.5 – 4.5 1.5 – 4.5

Adjusted for the dilutive effect of the 2023 Private Placement.

See additional discussion above.

Preferred Stock Conversion Price Adjustments

Terms of the Company’s outstanding Preferred Stock include a Ratchet whereby the applicable conversion price may be adjusted (See Note 14, “Stockholders’ Equity”).

When this occurs, the Company records a deemed dividend as a reduction to income available to common stockholders.

Fair value was determined using a Black Scholes model as outlined below.

Measurement event

Prior to amendment

After amendment

Prior to amendment

After amendment

September 9, 2022

April 27, 2023

Total value (b)

$12.5 million

$11.6 million

Deemed dividend

not applicable

Exercise price

$ 14.00 $ 6.30 $ 6.30 $ 1.30

$ 6.29 $ 6.29 $0.72

79.6 % 79.6 % 80.1 % 80.1 %

Risk-free rate

3.64 % 3.64 % 4.91 % 4.91 %

Dividend yield

0.0 % 0.0 % 0.0 % 0.0 %

Term (in years)

1.3 1.3 0.8 0.8

Measurement event

Prior to amendment

After amendment

December 21, 2023

Total value (b)

Deemed dividend not applicable

Exercise price

$ 1.30 $ 0.25

$ 0.23 $ 0.23

79.3 % 79.3 %

Risk-free rate

5.43 % 5.43 %

Dividend yield

Adjusted for the dilutive effect of the 2023 Private Placement.

See additional discussion above.

Includes value of incremental shares underlying preferred stock and adjusted for probability of occurrence.

Bifurcatable Derivatives

Upon issuance in May 2023, the Secured Convertible Notes contained a lender’s conversion option which represented an embedded call option requiring bifurcation as an embedded derivative liability at fair value (see Note 12, “Secured Convertible Notes” for additional discussion).

Fair value was determined using a Black Scholes model as outlined below.

Notes derivative

Measurement event

Shareholder approval

April 27, 2023

Total value (b)

not applicable

Exercise price

$ 1.30 $ 1.30

$ 0.72 (a) $ 0.75

80.1 % 76.9 %

Risk-free rate

4.88 % 5.41 %

Dividend yield

Adjusted for the dilutive effect of the 2023 Private Placement.

See additional discussion above.

Adjusted for probability of occurrence.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

(in thousands)  

Prepaid dues and subscriptions

Prepaid taxes

Prepaid inventory

Prepaid insurance

Prepaid dues and subscriptions

Prepaid marketing costs

Prepaid patents

Tenant Allowance

Prepaid consultants

Prepaid sales rebates

Total prepaid expenses and other current assets

1 unchanged sentence

Raw materials and supplies

$ 1,273  

$ 1,179  

Finished goods

1 unchanged sentence

Total inventory, net

$ 3,437  

$ 3,220  

PROPERTY AND EQUIPMENT  

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

2 unchanged sentences

Computer equipment and software

Production equipment

Leasehold improvements

1 unchanged sentence

Accumulated depreciation

( 673 ) ( 622 )

Total property and equipment, net

Depreciation expense was $ 51 thousand and $ 120 thousand for the years ended December 31, 2023 and 2022, respectively.

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

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

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

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

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

During the year ended December 31, 2022, the Company disposed of damaged, unusable and fully depreciated property and equipment with a cost of approximately $ 68 thousand and recognized an immaterial loss on the disposal of these assets in the consolidated statements of operation.

During the years ended December 31, 2023 and 2022, the Company recorded an impairment charge of $ 2 thousand and $ 66 thousand, net, respectively, for DERMAdoctor property and equipment which is reflected in the general and administrative caption in the Company’s consolidated statements of operations.

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

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

See additional information in Note 21, “Subsequent Events”.

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

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

There were indications of impairment during the year ended December 31, 2022. 

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

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

The Company does not amortize goodwill, but rather tests for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired.

During the fourth quarters of 2023 and 2022, the Company performed its annual goodwill impairment analysis following the steps laid out in ASC 350 - 20 - 35 - 3C.

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

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

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

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

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

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

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

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

After performing the quantitative impairment test in accordance with ASC 350 - 20 - 35 - 3C, the Company determined that goodwill related to its DERMAdoctor reporting unit was impaired by $ 0.3 million and $4.2 million, respectively, during the years ended December 31, 2023 and 2022, including a full impairment as of December 31, 2023.

As such, the Company has recorded a goodwill impairment charge in each of the years ended December 31, 2023 and 2022, which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations.

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

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

See additional information in Note 21, “Subsequent Events”.

The following table presents details of our goodwill during the years ended December 31, 2023 and 2022 (in thousands):

Balance as of December 31, 2021

$ 4,528  

Goodwill impairment  

Balance as of December 31, 2022  

Goodwill impairment

Balance as of December 31, 2022

Goodwill impairment

Balance as of December 31, 2023

OTHER INTANGIBLE ASSETS

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

As of December 31, 2023 and 2022, other intangible assets consisted of the following (in thousands):

Balance at December 31, 2023

Impairment  

Indefinite-lived intangible assets

$ 2,080  

$ ( 970 )  

$ 1,110  

$ 2,080 $ — $ ( 2,080 ) $ —

Amortizable intangible assets

Customer relationships

$ ( 48 )  

$ ( 172 )  

290 ( 60 ) ( 230 ) —

Trade secrets / product formulations

( 375 )  

$ ( 1,415 )  

2,890 ( 515 ) ( 2,375 ) —

Total other intangible assets

$ 5,260  

$ ( 423 )  

$ ( 2,557 )  

$ 2,280  

$ 5,260 $ ( 575 ) $ ( 4,685 ) $ —

Balance at December 31, 2022

Impairment  

Indefinite-lived intangible assets

$ 2,080  

$ 2,080 $ — $ ( 970 ) $ 1,110

Amortizable intangible assets

Customer relationships

$ ( 7 )  

290 ( 48 ) ( 172 ) 70

Trade secrets / product formulations

( 53 )  

2,890 ( 375 ) ( 1,415 ) 1,100

Total other intangible assets

$ 5,260  

$ ( 60 )  

$ 5,200  

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

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

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

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

$ 5,260 $ ( 423 ) $ ( 2,557 ) $ 2,280

In each of the fourth quarters of 2023 and 2022, the Company determined that certain of its indefinite-lived and long-lived amortizable intangible assets related to its DERMAdoctor business were impaired, including fully impaired as of December 31, 2023.

As such, the Company recorded an intangible asset impairment charge of $ 2.1 million and $ 2.6 million in the years ended December 31, 2023 and 2022, respectively, which is reflected in the goodwill, intangible and other asset impairment caption in the Company’s consolidated statements of operations.

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

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

See additional information in Note 21, “Subsequent Events”.

Amortization expense was $ 152 thousand and $ 363 thousand for the years ended December 31, 2023 and 2022, respectively.

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

$ 1,170  

ACCRUED LIABILITIES  

Accrued liabilities consisted of the following (in thousands):

(in thousands)  

Contract liabilities (see Note 16)

$ 1,807  

$ 1,289  

Employee payroll and benefits

2 unchanged sentences

Total accrued liabilities

$ 2,724  

$ 2,092  

LINE OF CREDIT

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

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

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

All borrowings were collateralized by substantially all assets of DERMAdoctor.

As of December 31, 2022, there was no outstanding balance on the line of credit as such line of credit was terminated in the first quarter of 2022.

COMMITMENTS AND CONTINGENCIES  

Indemnification  

As permitted under Delaware law and in accordance with its bylaws, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity.

The term of the indemnification period is for the officer’s or director’s lifetime.

COMMITMENTS AND CONTINGENCIES

Indemnification Agreements

The term of the indemnification period is for the officer’s or director’s lifetime.

The maximum amount of potential future indemnification is unlimited;

1 unchanged sentence

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

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

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

6 unchanged sentences

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 December 31, 2022. 

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

Legal Matters

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

From time to time, the Company is subject to various legal proceedings, as well as demands, claims and threatened litigation, which 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 December 31, 2023 and 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 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 lease commenced on October 1, 2019 and expires on December 31, 2024.

In calculating the present value of the minimum lease payments, the Company utilized its incremental borrowing rate.

The Company has elected to account for each lease component and its associated non-lease components as a single lease component and has allocated all of the contract consideration across lease components only.

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 years ended December 31, 2022 and 2021 were as follows (in thousands):

For the Years 

Operating lease cost

Net lease cost

Other information

Operational cash flow used for operating leases

The Company has measured its operating lease liabilities at its incremental borrowing rate over the remaining term for each operating lease.

The current lease term expires on July 31, 2027.

As of December 31, 2023, the Company also leased 19,136 square feet of space located in Riverside, Missouri, which it utilized for light manufacturing, storage, distribution of products and administrative functions related to its DERMAdoctor operations.

The lease commenced on October 1, 2019 and expires on December 31, 2024, although it was assigned and divested from the Company as a part of the DERMAdoctor Divestiture.

See additional information in Note 21, “Subsequent Events”.

Lease costs for the years ended December 31, 2023 and 2022 were as follows (in thousands):

For the Years Ended

Operating lease – expense

Operating lease – included in operating cash flow

The Company has measured its operating lease liabilities as the present value of minimum least payments using its incremental borrowing rate over the remaining term for each operating lease.

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

For the Years 

For the Years Ended

Weighted-average remaining lease term (in years)

2 unchanged sentences

Total future minimum lease payments

Less imputed interest

$ 2,041  

Imputed interest

Operating lease liability

Operating lease liability- non-current

$ 2,041  

WARRANT LIABILITY

September 2022 Warrants

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

The September 2022 Warrants became exercisable on March 9, 2023 after being subject to an exercise restriction until the later of (i) March 9, 2023 or (ii) the date that the Reverse Stock Split, which was approved by Company stockholders on November 10, 2022, becomes effective.

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

See Note 14, “

Stockholders ’

Equity ”.

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 4.55  

As of November 10, 2022, the fair value of the September 2022 Warrants was determined to be $ 0.5 million in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 1.40  

November 2021 Warrants

The Company issued the November 2021 Warrants in the fourth quarter of 2021 which were all subsequently amended pursuant to the 2022 Warrant Reprice Transaction.

The November 2021 Warrants, as amended, became exercisable on March 9, 2023 after being subject to a restriction upon the exercise of the November 2021 Warrants until the later of (i) March 9, 2023 or (ii) the date that the Reverse Stock Split, which was approved by the Company’s stockholders on November 10, 2022, becomes effective.

See Note 14, “Stockholders’

Equity”.

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

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

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 13.30  

As of December 31, 2021 

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 8.75  

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, the Company reduced the exercise price of all of the November 2021 Warrants to $ 0.18 per share and amended certain other of their terms.

In connection with the 2022 Warrant Reprice Transaction, a total of 9,375,000 shares of common stock (or 267,857 shares of common stock if accounting for the subsequent Reverse Stock Split) underlying the November 2021 Warrants were exercised immediately after amendment.

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 4.55  

As of November 10, 2022, the fair value of the November 2021 Warrants, as amended, was determined to be $ 1.3 million in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 1.40  

Amended July 2020 Warrants

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, the Company reduced the exercise price of certain July 2020 Warrants exercisable for 4,800,000 shares of common stock (or 137,145 shares of common stock if accounting for the subsequent Reverse Stock Split) to $ 0.18 per share and amended certain other of their terms.

In connection with the 2022 Warrant Reprice Transaction, a total of 2,100,000 shares of common stock (or 60,000 shares of common stock if accounting for the subsequent Reverse Stock Split) underlying the Amended July 2020 Warrants were exercised immediately after amendment.

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

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

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 3.50  

As of November 10, 2022, the fair value of the Amended July 2020 Warrants was determined to be $ 0.1 million in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 1.05  

2019 Domestic Warrants, 2019 Foreign Warrants and 2019 Ladenburg Warrants

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

Equity”) in the third quarter of 2019.

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

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

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

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

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

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

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

The fair values were then transferred to equity.

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

2019 Domestic

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrant

$ 41.30  

$ 53.90  

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

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

Equity”, the Company amended the 2019 Ladenburg Warrants.

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

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

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

The fair value was then transferred to equity.

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 40.95  

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

STOCKHOLDERS' EQUITY

Common Stock and Preferred Stock

Under the Company’s Amended and Restated Certificate of Incorporation, as amended, the Company is authorized to issue up to 150,000,000 shares of common stock and up to 5,000,000 shares of preferred stock (with rights and preferences as may be approved by the Company’s Board of Directors).

Reverse Stock Split

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

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

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

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

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

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

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

2022 Warrant Reprice Transaction and September 2022 Warrants

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

(i) reduce the exercise price;

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

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

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

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

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

The fair value of the Amended November 2021 Warrants and the Amended July 2020 Warrants was determined to be $ 3.3 million immediately prior to the modification in accordance with the following key assumptions:

November 2021

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 3.15  

$ 0.70  

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

November 2021

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 4.55  

$ 3.50  

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

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

FINANCING ACTIVITIES

See Notes 2, “ Summary of Significant Accounting Policies ” ;

3, “ Fair Value Measurements ” ;

12, “ Secured Convertible Notes ” ;

13, “ Common Stock Warrants ” and 14, “ Stockholders ’ Equity ” for certain defined terms below and additional discussion of financing activities and related accounting policies and fair value estimates.

2023 Warrant Reprice Transaction

In December 2023, the Company entered into a warrant reprice transaction (the “ 2023 Warrant Reprice Transaction ”) whereby the price terms of certain May 2023 Warrants exercisable for 2,528,848 shares of common stock were amended and exercised.

The price of the amended and exercised May 2023 Warrants was reduced from $ 1.30 to $ 0.25 .

The Company also issued to participants in the 2023 Warrant Reprice Transaction, the December 2023 Warrants exercisable for 2,528,848 shares of common stock.

The 2023 Warrant Reprice Transaction resulted in gross proceeds of approximately $ 0.6 million.

The Company allocated the gross proceeds between the common stock issued for the Amended November 2021 Warrants and the Amended July 2020 Warrants exercised, and the September 2022 Warrants issued to participants by applying the relative fair value allocation methodology.

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

For additional information regarding the warrant liability and valuation, please see Note 13, “Warrant Liability”.

Ladenburg Thalmann & Co.

(“Ladenburg”) served as the Company’s warrant solicitation agent for the 2022 Warrant Reprice Transaction in exchange for a fee equal to 8 % of the total gross proceeds.

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

The Company allocated $ 166 thousand of the issuance costs to the warrant liability which was expensed in the Company’s consolidated statements of operations during the year ended December 31, 2022 .

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

Series C Preferred Stock and Warrants

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

( 1 ) 3,250 shares of 

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

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

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

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

Series B Preferred Stock and November 2021 Warrants

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

The 2021 Private Placement closed on November 2, 2021.

The November 2021 Warrants were not immediately exercisable upon issuance.

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

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

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

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

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

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

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

The Series B Preferred Stock does, however, have anti-dilution protection in the event that the Company sells or grants any of its common stock or any other securities, subject to certain limited exceptions, that would entitle the holder thereof to acquire common stock at an effective price per share that is lower than the then applicable conversion price of the Series B Preferred Stock.

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

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

See Note 13, “Warrant Liability”

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

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

The Company fully amortized the discount related to the beneficial conversion feature on the deemed dividend in the consolidated statements of operations upon approval of the Share Issuance Proposal in the fourth quarter of 2022.

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

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

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

Each share of the Series B Preferred Stock that the Company issued in the 2021 Private Placement had a purchase price of $ 1,000 per share and was initially convertible at a conversion price of $ 0.40 into 2,500 shares of common stock, or an aggregate of 37,500,000 shares of common stock (which does not account for the Reverse Stock Split).

On September 9, 2022, the 2022 Warrant Reprice Transaction provided for amendments to certain common stock purchase warrants to lower their exercise price to $ 0.18 per share as well as the issuance of the September 2022 Warrants also with an exercise price of $ 0.18 per share, which exercise price was lower than the then effective $ 0.40 conversion price of the Series B Preferred Stock (which does not account for the Reverse Stock Split).

This triggered the Series B Preferred Stock anti-dilution feature, resulting in the automatic adjustment to the conversion price for each outstanding share of the Series B Preferred Stock to $ 0.18 , and each outstanding share of Series B Preferred Stock became convertible into 5,556 shares of common stock (which does not account for the Reverse Stock Split).

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

The deemed dividend is recorded as a reduction to income available to common shareholders in the basic earnings per shares (EPS) calculation.

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

The fair value of the Series B Preferred Stock was determined to be $ 6.9 million immediately prior the conversion price adjustment in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 8.05  

The fair value of the Series B Preferred Stock was determined to be $12.5 million immediately after the conversion price protection adjustment in accordance with the following key assumptions:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 2.10  

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

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

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

On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, the November 2021 Warrants were amended to reduce the exercise price to $ 0.18 (or $ 6.30 to adjust for the subsequent Reverse Stock Split) and extend the expiration date to September 11, 2028.

Additionally, in conjunction with the 2022 Warrant Reprice Transaction, holders of the November 2021 Warrants, as amended, exercised a portion of their warrants at the reduced exercise price.

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

May 2021 At the Market Offering

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

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

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

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

The Company allocated the gross proceeds between the common stock and December 2023 Warrants issued to participants by applying the relative fair value allocation methodology.

The Company allocated $ 0.2 million in gross proceeds to the common stock and $ 0.4 million to the December 2023 Warrants which were classified as a liability upon issuance and at December 31, 2023.

The Company incurred total issuance costs of $ 0.2 million in conjunction with the 2023 Warrant Reprice Transaction.

The Company allocated $ 0.1 million of the issuance costs to the common stock which was recorded as a reduction of additional paid-in capital in the Company’s consolidated balance sheets.

The remaining $ 0.1 million was allocated to the warrant liability and expensed as “Other expense, net” in the Company’s consolidated statements of operations during the year ended December 31, 2023 .

2023 Private Placement

In May 2023, the Company closed a private placement (the “ 2023 Private Placement ”) with existing accredited institutional investors of the Company that provided for the issuance and sale of $ 3.3 million aggregate principal amount of the Secured Convertible Notes and the May 2023 Warrants exercisable for up to 5,076,928 shares of common stock.

The Company received gross proceeds of $ 3.0 million from the 2023 Private Placement.

The Company allocated the proceeds from the 2023 Private Placement between the May 2023 Warrants, an embedded derivative liability, and the Secured 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 embedded derivative liability with the residual $ 1.2 million allocated to the Secured Convertible Notes.

The embedded derivative liability was subsequently reclassified to equity upon stockholder approval.

The Company incurred total issuance costs of $ 0.7 million in conjunction with the 2023 Private Placement, including a $ 0.4 million non-cash loss on the warrant modification.

The Company allocated $ 0.3 million of the issuance costs to the Secured Convertible Notes which was recorded as a discount in the Company’s consolidated balance sheets.

The remaining $ 0.4 million was allocated to the embedded derivative liability and warrant liability and expensed as “Other expense, net” in the Company’s consolidated statements of operations during the year ended December 31, 2023.

2022 Warrant Reprice Transaction

In September 2022, the Company entered into a warrant reprice transaction (the “ 2022 Warrant Reprice Transaction ”) whereby certain terms of all November 2021 Warrants exercisable for 1,071,434 shares of common stock and certain July 2020 Warrants exercisable for 137,145 shares of common stock were amended.

In connection with the 2022 Warrant Reprice Transaction, amended November 2021 Warrants exercisable for 267,860 shares of common stock and amended July 2020 Warrants exercisable for 60,000 shares of common stock were exercised.

The Company issued to participants in the 2022 Warrant Reprice Transaction, the September 2022 Warrants exercisable for 327,860 shares of common stock.

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

The Company allocated the gross proceeds between the common stock and September 2022 Warrants by applying the relative fair value allocation methodology.

The Company allocated $ 0.7 million in gross proceeds to the common stock and $ 1.4 million to the September 2022 Warrants which were classified as a liability upon issuance and later reclassified to equity upon stockholder approval.

The Company incurred total issuance costs of $ 0.5 million in conjunction with the 2022 Warrant Reprice Transaction.

The Company allocated $ 0.3 million of the issuance costs to the common stock which was recorded as a reduction of additional paid-in capital in the Company’s consolidated balance sheets.

The remaining $ 0.2 million was allocated to the warrant liability and expensed as “Other expense, net” in the Company’s consolidated statements of operations during the year ended December 31, 202 2.

SECURED CONVERTIBLE NOTES

In May 2023, the Company issued $ 3.3 million aggregate principal amount Original Issue Discount Senior Secured Convertible Debentures (the “ Secured Convertible Notes ”) in conjunction with the 2023 Private Placement (see Note 11, “Financing Activities”).

The Secured Convertible Notes were issued with a $ 300 thousand original issue discount.

The Secured Convertible Notes are due November 1, 2024.

The Secured Convertible Notes may be converted or redeemed for a conversion price equal to $ 1.30 per share (“ Conversion Price ”) at any time at the election of the holder up to the amount of outstanding principal at the time of conversion subject to certain limitations such as beneficial ownership limitations.

Upon issuance, the Secured Convertible Notes were convertible for up to 2,538,464 shares of common stock.

As of December 31, 2023, the Secured Convertible Notes were convertible for up to 1,454,021 shares of common stock.

Beginning June 1, 2023, the Company was required to start making a monthly redemption of 1/18 th of the original principal amount of the Secured Convertible Notes.

Each monthly redemption reduces the outstanding principle of the Secured Convertible Note by $ 183 thousand and may be made in cash or, under limiting conditions, in stock at the election of the Company.

Monthly redemption in cash requires a total payment of $ 193 thousand.

Monthly redemption in stock requires the issuance of shares equal to $ 193 thousand divided by the lower of (i) $ 1.30 or (ii) 90 % of the Company’s common stock’s average volume-weighted average price over 10 trading days prior to the redemption.

The conditions allowing for redemption in stock have not been met through December 31, 2023 and the Company has made all monthly redemption payments in cash.

The Secured Convertible Notes also provide for a redemption equal to up to 20 % of the gross proceeds received by the Company from any financing completed while the Secured Convertible Notes are outstanding.

In connection with the 2023 Warrant Reprice Transaction (see Note 14, “Stockholders’ Equity”), the Company made such a payment totaling $ 126 thousand in cash against the Secured Convertible Notes.

If any event of default occurs, the outstanding principal amount of the Secured Convertible Notes, plus accrued but unpaid interest, liquidated damages and other amounts owing thereof become immediately due and payable in cash at the holder’s election.

After any event of default, the Secured Convertible Notes will also accrue interest at a rate up to 18 % per year.

The Secured Convertible Notes are secured obligations of the Company including a security interest, a lien upon and a right of set-off against all of the Company’s assets as collateral security.

As of December 31, 2023, the Secured Convertible Notes were also secured obligations of DERMAdoctor and DERMAdoctor was a guarantor under the Secured Convertible Notes.

DERMAdoctor was released of such obligations in connection with the DERMAdoctor Divestiture.

Upon issuance in May 2023, the lender’s conversion option under the Secured Convertible Notes represented an embedded call option requiring bifurcation as an embedded derivative liability because the common stock underlying the option required stockholder approval before the option could be exercised.

The fair value of the embedded derivative was determined to be $ 209 thousand as of the date of issuance.

After stockholder approval of the underlying common stock, the embedded call option no longer required liability treatment and was reclassified to equity.

The fair value of the embedded derivative liability was determined to be $ 169 thousand upon stockholder approval.

The change of $ 40 thousand in fair value between the date of issuance and stockholder approval was recorded as a non-cash gain on change in fair value of embedded derivative liability in the consolidated statements of operations.

See also Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Model Assumptions”.

The lender’s subsequent financing redemption option and certain events of default also represent embedded call options and the Company’s monthly share redemption option represents an embedded put option.

The fair value of these options was determined to be immaterial upon issuance and at each subsequent reporting date.

The Company allocated $ 1.2 million of gross proceeds from the 2023 Private Placement to the Secured Convertible Notes.

The difference between the $ 1.2 million allocated to the Secured Convertible Notes and the $ 3.3 million aggregate principal amount represent discounts for the portion of proceeds allocated to the embedded derivative liability and the May 2023 Warrants (See Note 13, “Common Stock Warrants”) as well as the $ 0.3 million original issue discount.

The Company also allocated $ 0.3 million of debt issuance costs to the Secured Convertible Notes.

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

During the year ended December 31, 2023, the effective interest rate on the Secured Convertible Notes was 173%.

During the year ended December 31, 2023, interest expense recognized, including amortization of the issuance costs and debt discount, was $ 1.7 million, which was included in other expense, net in the consolidated statements of operations.

The Secured Convertible Notes are presented as follows as of December 31, 2023 ( in thousands):

Principal amount

Unamortized discount for proceeds allocated to embedded derivative liability and May 2023 Warrants

Unamortized debt issuance costs

Total Secured Convertible Notes, net

The Secured Convertible Notes, net, are classified as short term in the Company’s consolidated balance sheets.

As of December 31, 2023, the Company's contractual maturity of the principal balance of the Secured Convertible Notes was as follows (in thousands):

COMMON STOCK WARRANTS

TLF Bio Innovation 2021 Warrants

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

The TLF Warrants will expire five years after their issuance.

The TLF Warrants are classified as equity.

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

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

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

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

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

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

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

See Note 13, “Warrant Liability”

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

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

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

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

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

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

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

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

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

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

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

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

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

2019 Ladenburg Warrants

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

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

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

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

See Note 13, “Warrant Liability”

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

During the third quarter of 2020, the Company also entered into a reprice agreement with Ladenburg which reduced the exercise price to $ 0.99 per share (or $ 34.65 to adjust for the subsequent Reverse Stock Split) and amended certain terms of the 2019 Ladenburg Warrants.

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

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

June 2019 Private Placement and June 2019 Warrants

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

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

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

Three accredited investors, Messrs.

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

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

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

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

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

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

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

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

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

Also, during the second quarter of 2021, all remaining 571,428 June 2019 Warrants expired unexercised.

October 2015 Warrants

As of December 31, 2022, there were no October 2015 Warrants (as defined below) outstanding.

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

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

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

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

Also during the fourth  quarter of 2021, a total of 22,680 October 2015 Warrants were exercised, resulting in gross proceeds of $ 5 thousand.

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

March 2015 Warrants

As of December 31, 2022, there were no March 2015 Warrants (as defined below) outstanding.

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

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

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

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

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

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

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

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

See Notes 2, “ Summary of Significant Accounting Policies ” ;

3, “ Fair Value Measurements ” ;

11, “ Financing Activities ” ;

and 14, “ Stockholders ’ Equity ” for certain defined terms below and additional discussion of financing activities and related accounting policies and fair value estimates.

December 2023 Warrants

In December 2023, in conjunction with the 2023 Warrant Reprice Transaction, the Company issued the December 2023 Warrants (the “ December 2023 Warrants ”) exercisable for 2,528,848 shares of common stock for $ 0.25 per share through June 21, 2029.

Upon issuance, the December 2023 Warrants were subject to stockholder approval prior to exercise.

Stockholder approval had not occurred as of December 31, 2023.

These warrants were recorded as a liability at fair value upon issuance and will continue to be recorded as a liability at fair value at each reporting date until stockholder approval occurs.

May 2023 Warrants

In May 2023, in conjunction with the 2023 Private Placement, the Company issued following warrants (combined, the “ May 2023 Warrants ”):

May 2023 Series B- 1 Warrants exercisable for 2,538,464 shares of common stock for $ 1.30 per share through June 9, 2028 (“ May 2023 B- 1 Warrants ”);

May 2023 Series B- 2 Warrants exercisable for 2,538,464 shares of common stock for $ 1.30 per share through June 9, 2025 (“ May 2023 B- 2 Warrants ”).

In December 2023, in conjunction with the 2023 Warrant Reprice Transaction, the Company amended all May 2023 Warrants to reduce their exercise prices to $ 0.25 .

Immediately after amendment, the following May 2023 Warrants were exercised:

May 2023 B- 1 Warrants exercisable for 634,616 shares of common stock;

May 2023 B- 2 Warrants exercisable for 1,894,232 shares of common stock.

For the amendment in December 2023, the Company recognized a $ 0.2 million loss on modification of common stock warrants related to the May 2023 Warrants.

November 2022 Warrants

In November 2022, in conjunction with the 2022 Private Placement, the Company issued following warrants (combined, the “ November 2022 Warrants ”):

November 2022 Series A- 1 Warrants exercisable for 515,876 shares of common stock for $ 6.30 per share through November 20, 2024 (“ November 2022 A- 1 Warrants ”);

November 2022 Series A- 2 Warrants exercisable for 515,876 shares of common stock for $ 6.30 per share through May 20, 2024 (“ November 2022 A- 2 Warrants ”).

In May 2023, in conjunction with the 2023 Private Placement, the Company amended certain November 2022 Warrants to reduce their exercise prices from $ 6.30 to $ 1.50 as follows:

November 2022 A- 1 Warrants exercisable for 436,510 shares of common stock

November 2022 A- 2 Warrants exercisable for 436,510 shares of common stock

For the amendment in May 2023, the Company recognized a $ 0.1 million loss on modification of common stock warrants related to the November 2022 Warrants.

September 2022 Warrants

In September 2022, in conjunction with the 2022 Warrant Reprice Transaction, the Company issued the September 2022 Warrants (the “ September 2022 Warrants ”) exercisable for 327,860 shares of common stock for $ 6.30 per share through September 11, 2028.

In May 2023, in conjunction with the 2023 Private Placement, the Company amended September 2022 Warrants exercisable for 238,574 shares of common stock to reduce their exercise prices from $ 6.30 to $ 1.50 .

For the amendment in May 2023, the Company recognized a $ 46 thousand loss on modification of common stock warrants related to the September 2022 Warrants.

November 2021 Warrants

In November 2021, in conjunction with a private placement transaction, the Company issued the November 2021 Warrants (the “ November 2021 Warrants ”) exercisable for 1,071,434 shares of common stock for $ 18.55 per share through March 9, 2023.

In September 2022, in conjunction with the 2022 Warrant Reprice Transaction, the Company amended all November 2021 Warrants to reduce their exercise prices from $ 18.55 to $ 6.30 and extend their termination date to September 11, 2028.

Immediately after amendment, November 2021 Warrants were exercised for 267,860 shares of common stock.

In May 2023, in conjunction with the 2023 Private Placement, the Company amended November 2021 Warrants exercisable for 535,716 shares of common stock to reduce their exercise prices from $ 6.30 to $ 1.50 .

For the amendments in September 2022 and May 2023, the Company recognized a loss on modification of common stock warrants related to the November 2021 Warrants of $ 1.5 million and $ 0.1 million, respectively.

July 2020 Warrants

As of December 31, 2022, there were no July 2011 Warrants (as defined below) outstanding.

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

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

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

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

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

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

The details of all outstanding warrants as of December 31, 2022 were as follows:

(in thousands)

In July 2020, in conjunction with a private placement transaction, the Company issued the July 2020 Warrants (the “ July 2020 Warrants ” ) exercisable for 197,105 shares of common stock for $ 57.75 per share through January 22, 2026.

In September 2022, in conjunction with the 2022 Warrant Reprice Transaction, the Company amended certain July 2020 Warrants exercisable for 137,145 shares of common stock to reduce their exercise prices from $ 57.75 to $ 6.30 .

Immediately after amendment, July 2020 Warrants were exercised for 60,000 shares of common stock.

In May 2023, in conjunction with the 2023 Private Placement, the Company amended July 2020 Warrants exercisable for 77,145 shares of common stock to reduce their exercise prices from $ 6.30 to $ 1.50 .

For the amendments in September 2022 and May 2023, the Company recognized a loss on modification of common stock warrants related to the July 2020 Warrants of $ 0.4 million and $ 14 thousand, respectively.

Summary of Common Stock Warrant Activity and Outstanding

Activity related to common stock warrants outstanding during the years ended December 31, 2023 and 2022 were as follows:

Outstanding at December 31, 2021

$ 57.13  

202,333 $ 57.13

Warrants granted

$ 23.51  

2,431,046 11.70

Warrants exercised

( 327,860 ) 6.30

Warrants expired

Outstanding at December 31, 2022

$ 57.13  

2,305,519 $ 7.70

Warrants granted

$ 8.18  

7,605,776 0.95

Warrants exercised

$ 6.30  

( 2,528,848 ) 0.25

Warrants expired

Outstanding at December 31, 2023

$ 7.70  

7,382,447 1.82

Common stock warrants outstanding as of December 31, 2023 were as follows:

Expiration Date

2019 Ladenburg Warrants

$ 34.65 August 8, 2024

July 2020 Warrants

$ 57.75 January 22, 2026

July 2020 Warrants

$ 1.50 January 22, 2026

$ 23.51 January 15, 2026

November 2021 Warrants

$ 6.30 September 11, 2028

November 2021 Warrants

$ 1.50 September 11, 2028

September 2022 Warrants

$ 6.30 September 11, 2028

September 2022 Warrants

$ 1.50 September 11, 2028

November 2022 A-1 Warrants

$ 6.30 November 20, 2028

November 2022 A-1 Warrants

$ 1.50 November 20, 2028

November 2022 A-2 Warrants

$ 6.30 May 20, 2024

November 2022 A-2 Warrants

$ 1.50 May 20, 2024

May 2023 B-1 Warrants

$ 0.25 June 9, 2028

May 2023 B-2 Warrants

$ 0.25 June 9, 2025

December 2023 Warrants

$ 0.25 June 21, 2029

Outstanding at December 31, 2023

Summary of Common Stock Warrant Liabilities

The following is a reconciliation of the beginning and ending balances for warrant liabilities measured at fair value on a recurring basis (in thousands).

See additional information per Note 3, “Fair Value Measurements”, subheading “Black Scholes Valuation Model Assumptions.”

Fair value of warrant liability recognized for November 2021 Warrants as of December 31, 2021

Decrease in fair value of November 2021 Warrants liability

Reclassification of November 2021 Warrants liability to equity

Fair value of warrant liabilities recognized in connection with the 2022 Warrant Reprice Transaction

Decrease in fair value of 2022 Warrant Reprice Transaction warrant liabilities

Reclassification of 2022 Warrant Reprice Transaction warrant liabilities to equity

Warrant liabilities as of December 31, 2022

Fair value of warrant liability recognized for May 2023 Warrants

Decrease in fair value of May 2023 Warrants liability

Reclassification of May 2023 Warrants liability to equity

Fair value of warrant liability recognized for December 2023 Warrants

Decrease in fair value of December 2023 Warrants liability

Fair value of December 2023 Warrants liability at December 31, 2023

STOCKHOLDERS' EQUITY

Authorized Share Capital

Under the Company’s Amended and Restated Certificate of Incorporation, as amended, the Company is authorized to issue up to 150,000,000 shares of common stock and up to 5,000,000 shares of preferred stock with rights and preferences as may be approved by the Company’s Board of Directors.

Preferred Stock

There were two series of preferred stock of the Company outstanding during the years ended December 31, 2023 and 2022 – the Series B Non-Voting Convertible Preferred Stock (“ Series B Preferred Stock ”) and the Series C Non-Voting Convertible Preferred Stock (“ Series C Preferred Stock ”) (and combined, the “ Preferred Stock ”).

The rights and preferences of the Series B Preferred Stock and Series C Preferred Stock are identical.

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

Each share of Preferred Stock is convertible into $ 1,000 of common stock at the conversion price per share applicable at the time of conversion.

The Preferred Stock has anti-dilution protection (the “ Ratchet ”) 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 Preferred Stock.

Series B Preferred Stock

The Company issued 15,000 shares of Series B Preferred Stock in November 2021 in connection with a private placement transaction.

As of December 31, 2023 and 2022, 5,607 and 11,620 shares of Series B Preferred Stock remained outstanding, respectively.

As of December 31, 2023 and 2022, outstanding shares of Series B Preferred Stock were convertible into 22,428,000 and 1,847,580 shares of common stock at a conversion price of $ 0.25 and $ 6.30 , respectively.

In accordance with the Ratchet, the Series B conversion price was reduced as follows during the years ended December 31, 2023 and 2022 (see also Notes 2, “Summary of Significant Accounting Policies” and 3, “Fair Value Measurements”):

In September 2022, from $ 14.00 to $ 6.30 , as a result of the 2022 Warrant Reprice Transaction, resulting in a $ 5.7 million deemed dividend.

In April 2023, from $ 6.30 to $ 1.30 , as a result of the 2023 Private Placement, resulting in a $ 1.8 million deemed dividend.

In December 2023, from $ 1.30 to $ 0.25 , as a result of the 2023 Warrant Reprice Transaction, resulting in a $ 4.5 million deemed dividend.

Subsequent to December 31, 2023, on January 29, 2024, the Ratchet of the Series B Preferred Stock expired with no further impact because greater than 75 % of the originally issued 15,000 Series B Preferred Stock had been converted.

The Series B Preferred Stock conversion price will remain at $ 0.25 until all remaining Series B Preferred Stock has been converted.

Series C Preferred Stock

We issued 3,250 shares of Series C Preferred Stock in November 2022 in connection with the 2022 Private Placement (see Note 11, “Financing Activities”).

As of December 31, 2023 and 2022, 1,097 and 2,250 shares of Series C Preferred Stock remained outstanding, respectively.

As of December 31, 2023 and 2022, outstanding shares of Series C Preferred Stock were convertible into 4,388,000 and 357,750 shares of common stock at a conversion price of $ 0.25 and $6.30, respectively.

In accordance with the Ratchet, the Series C conversion price was reduced as follows during the years ended December 31, 2023 and 2022 (see also Notes 2, “Summary of Significant Accounting Policies” and 3, “Fair Value Measurements”):

In April 2023, from $ 6.30 to $ 1.30 , as a result of the 2023 Private Placement, resulting in a $ 194 thousand deemed dividend.

In December 2023, from $ 1.30 to $ 0.25 , as a result of the 2023 Warrant Reprice Transaction, resulting in a $ 0.5 million deemed dividend.

See Notes 11, “Financing Activities” and 13, “Common Stock Warrants” for a description of common stock and common stock warrant-related transactions during the years ended December 31, 2023 and 2022.

Reverse Stock Split

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

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

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

Proportionate voting rights and other rights of common stockholders were not affected by the Reverse Stock Split.

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

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

EQUITY-BASED COMPENSATION

Equity Compensation Plans  

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

Equity Compensation Plans

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

The 2007 Plan expired on March 15, 2017.

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All stock options outstanding under the 2007 Plan were fully vested as of December 31, 2021.

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

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

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

Upon adoption, the 2017 Plan allowed for awards of up to 66,243 shares of the Company’s common stock, plus an automatic annual increase in the number of shares authorized for awards on the first day of each of the Company’s fiscal years beginning January 1, 2018 through January 1, 2027 equal to (i) 4 % of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of common stock than provided for in Section 4 (a)(i) of the 2017 Plan as determined by the Board.

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

As of December 31, 2023, there were 171,424 shares available for future awards under the 2017 Plan.

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

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

The term of awards will not be longer than ten years or, in the case of ISOs, no longer than five years with respect to holders of more than 10% of the Company’s stock.

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

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

Stock Option Summary  

The following table summarizes information about the Company’s stock options and restricted stock outstanding at December 31, 2021, and activity during the year ended December 31, 2022:

The Company issues new shares to satisfy options under the 2007 Plan and the 2017 Plan.

Summary of Outstanding Equity Awards

The following table summarizes information about the Company’s stock options and restricted stock outstanding at December 31, 2022, and activity during the year ended December 31, 2023:

(in thousands, except years

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Restricted stock units granted

Options exercised

Restricted stock units vested

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Vested and expected to vest at December 31, 2023

Vested at December 31, 2022

Exercisable at December 31, 2022

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 December 31, 2022 

for options that have a quoted market price in excess of the exercise price.

There were no stock option awards exercised during the years ended December 31, 2022 and 2021.

Vested and exercisable at December 31, 2023

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE American as of December 31, 2023 for options that have an exercise price that is lower than the market price.

There were no stock option awards exercised during the years ended December 31, 2023 or 2022.

As of December 31, 2023, total unrecognized compensation cost related to unvested stock options and restricted stock was approximately $ 0.2 million.

This amount is expected to be recognized as stock-based compensation expense in the Company’s consolidated statements of operations over the remaining weighted average vesting period of 2.04 years.

Stock Option Awards to Employees and Directors  

This amount is expected to be recognized as stock-based compensation expense in the Company’s consolidated statements of operations over the remaining weighted average vesting period of 1.53 years.

Equity Awards to Employees and Directors

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

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

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

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

See Note 2, “Summary of Significant Accounting Policies,” for a description of the accounting policies that the Company applied to value its stock-based awards.

During the years ended December 31, 2023 and 2022, the Company granted options to employees and directors to purchase an aggregate of 6,150 and 18,607 shares of common stock, respectively.

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

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

For the Years Ended December 31,

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Weighted-average fair value of options granted during the period

Expected Price Volatility —This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate.

The computation of expected volatility was based on the historical volatility of our own stock.

Expected Term —This is the period of time over which the options granted are expected to remain outstanding.

The expected life assumption is based on the Company’s historical data.

Risk-Free Interest Rate —This is the U.S.

Expected Term —This is the period of time over which the options granted are expected to remain outstanding.

The expected life assumption is based on the Company’s historical data.

Risk-Free Interest Rate —This is the U.S.

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

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

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

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

During the years ended December 31, 2022 and 2021, the Company granted 5,148 and 34,291 , shares of restricted stock to employees and directors, respectively.

For the years ended December 31, 2022 and 2021, the Company recognized stock-based compensation expense of $ 0.2  million and $ 0.7 million, respectively, for option awards to employees and directors.

During each of the years ended December 31, 2023 and 2022, the Company granted 5,148 shares of restricted stock to directors.

For the years ended December 31, 2023 and 2022, the Company recognized stock-based compensation expense of $ 0.3 million and $ 0.2 million, respectively, for option awards to employees and directors.

Stock-Based Awards to Non-Employees

During the years ended December 31, 2022 and 2021, the Company did not grant options exercisable for shares of common stock to non-employees in exchange for advisory and consulting services.

The Company did not grant restricted stock to non-employees during the year ended December 31, 2022.

In connection with former director Mr.

Sieczkarek’s resignation, the Company entered into a two -year consulting agreement with Mr.

Sieczkarek under which he is entitled to receive additional shares of fully vested registered stock in exchange for consulting services.

According to the terms of the agreement, the stock units are to be issued in two tranches of $ 0.2 million each for a total aggregate fair market value equal to $ 0.4 million.

The number of shares issued for each tranche is calculated using the closing price on each respective grant date.

In July 2021, the Company issued 9,382 shares to Mr.

Sieczkarek to fulfill the second tranche.

The expense related to the shares issued under the consulting agreement was recorded over the term of the Consulting Agreement.

During the year ended December 31, 2023, the Company granted options to purchase an aggregate of 36,000 , shares of common stock to non-employees in exchange for advisory and consulting services.

During the year ended December 31, 2022, the Company did not grant options to non-employees.

The Company did not grant restricted stock to non-employees during the years ended December 31, 2023 and 2022.

For the year ended December 31, 2023, the Company recognized stock-based compensation expense of $ 40 thousand, as it relates to non-employees.

For the year ended December 31, 2022, the Company recognized a nominal amount of stock-based compensation expense as relates to non-employees.

For the year ended December 31, 2021, the Company recognized stock-based compensation expense of $ 240 thousand, related to non-employee options and restricted stock grants.

Summary of Stock-Based Compensation Expense  

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

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):

For the Years Ended December 31,

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DISTRIBUTION AGREEMENTS

Transactions under the Company’s major distribution agreements are recognized upon transfer of control of product sold to its major distribution partners at the amount of consideration that the Company expects to be entitled to.

Transactions under the Company’s major distribution agreements are recognized upon transfer of control of products sold to its major distribution partners at the amount of consideration that the Company expects to be entitled to.

The Company records contract liabilities for the amounts that are estimated to be subject to significant reversal, including allowances for services, discounts, rebate programs, and product returns.

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 year ended December 31, 2022 ( in thousands): 

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 year ended December 31, 2023 ( in thousands):

Discounts for

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Balance at December 31, 2022

$ 1,150  

$ 1,289  

$ 1,673 $ 53 $ 81 $ 1,807

Provision related to sales made in:

Current period

$ 1,865  

$ 2,378  

716 321 106 1,143

Payments and customer credits issued

( 1,476 ) ( 362 ) ( 166 ) ( 2,004 )

Balance at December 31, 2023

$ 1,673  

$ 1,807  

$ 913 $ 12 $ 21 $ 946

Discounts for

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Balance at December 31, 2021

$ 1,150 $ 83 $ 56 $ 1,289

Provision related to sales made in:

Current period

$ 1,374  

$ 2,232  

1,865 65 448 2,378

Payments and customer credits issued

( 1,342 ) ( 95 ) ( 423 ) ( 1,860 )

Balance at December 31, 2022

$ 1,150  

$ 1,289  

Contract Assets and Liabilities

The Company receives payments from our distribution partners established in each contract.

Amounts are recorded as accounts receivable when the Company’s rights to consideration is unconditional.

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.

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

Contract assets

Contract liabilities

Current portion

Long-term portion

Total contract liabilities

$ 1,673 $ 53 $ 81 $ 1,807

Avenova Spray Pharmacy Distribution Agreements and Specialty Pharmacies

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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 years ended December 31, 2022 and 2021, the Company earned $ 0.1 million and $ 0.6 million, respectively, in sales revenue 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 December 31, 2022 and $ 0.9 million as of December 31, 2021.

During each of the years ended December 31, 2023 and 2022, the Company earned $ 0.1 million in sales revenue 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 $ 0.7 million and $ 1.6 million as of December 31, 2023 and 2022, respectively.

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

The Company also recorded a prepayment of $ 19 thousand for rebates related to these distribution agreements as of December 31, 2021, with no such prepayment recorded in the 2022 period, that is recorded in the prepaid expenses and other current assets in the consolidated balance sheets (see Note 5, “Prepaid Expenses and Other Current Assets”).

Over-the-Counter Sales of Avenova Spray

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

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

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

During the years ended December 31, 2022 and 2021, the revenue generated from Avenova Spray in these channels was $ 6.5  million and $ 6.6 million, respectively. 

DERMAdoctor Products Distribution Agreements

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

During the years ended December 31, 2022 and 2021, the Company earned $ 0.9 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 $ 0.2 million as of December 31, 2022, and $ 0.4 million as of December 31, 2021.

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

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

During the years ended December 31, 2023 and 2022, the revenue generated from Avenova Spray in these channels was $ 6.1 million and $ 6.5 million, respectively.

DERMAdoctor Branded Products Distribution Agreements

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

During the years ended December 31, 2023 and 2022, the Company earned $ 0.7 million and $ 0.9 million, respectively, in sales revenue for its DERMAdoctor branded products from these distribution agreements.

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

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

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

See additional information in Note 21, “Subsequent Events”.

EMPLOYEE BENEFIT PLAN

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

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

The Company contributed $ 125 thousand to the plan in the year ended December 31, 2022.

During the year ended December 31, 2021, the Company had not elected to contribute to the 401 (k) plan and made no contributions.

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 $ 122 thousand and $ 125 thousand to the plan in the years ended December 31, 2023 and 2022, respectively.

For the years ended December 31, 2023 and 2022, loss before provision for income taxes consisted of the following (in thousands):

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United States

$ ( 9,640 ) $ ( 10,608 )

International

$ ( 9,640 ) $ ( 10,608 )

For the years ended December 31, 2023 and 2022, the federal and state income tax provision is summarized as follows (in thousands):

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Net operating losses

 $ 35,234  

$ 33,455  

$ 36,943 $ 35,234

Acquisition assets

Stock options

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Total deferred tax assets

37,905  

35,691  

41,385 37,905

Deferred tax liabilities:

Operating lease right-of-use assets

( 337 ) ( 472 )

Total deferred tax liabilities

( 337 ) ( 472 )

Valuation allowance

( 41,048 ) ( 37,433 )

Net deferred taxes

ASC 740, Income Taxes , requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not”.

Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period.

Because of the Company's recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a valuation allowance.

The valuation allowance increased by $1.8  million and $ 2.8 million during the years ended December 31, 2022 and 2021, respectively.

The valuation allowance increased by $ 3.6 million and $ 1.8 million during the years ended December 31, 2023 and 2022, respectively.

Net operating loss and tax credit carryforwards as of December 31, 2023, are as follows (in thousands):

Net operating losses, federal (Post December 31, 2017)

$ 38,087  

$ 44,443 Does Not Expire

Net operating losses, federal (Pre January 1, 2018)

$ 94,886  

$ 94,886 Beginning in 2024

Net operating losses, state

$ 111,012  

$ 117,375 Beginning in 2028

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Tax credits, state

Effective January 1, 2009, the Company adopted a new accounting standard that provides guidance on accounting for uncertainty in income taxes.

The adoption had no effect on the Company's financial statements.

$ 125 Indefinite

A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the below years are as follows (in thousands):

For the Years Ended December 31,  

Unrecognized benefit - beginning of period

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The entire amount of the unrecognized tax benefits would not impact our effective tax rate if recognized.

The balance of unrecognized tax benefits increased as a result of a comprehensive analysis to substantiate the company's research and orphan drug credits.

Accrued interest and penalties related to unrecognized tax benefits are classified as income tax expense and were immaterial.

Accrued interest and penalties related to unrecognized tax benefits are classified as income tax expense and were immaterial for the years ended December 31, 2023 and 2022.

The Company files income tax returns in the United States and in California.

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Statutory rate

21.0 % 21.0 %

Change in valuation allowance

( 19.5 %) ( 48.0 %)

Warrant/equity expenses

20.2 %  

( 3.7 %) 20.2 %

Stock-based compensation expense

Change in value of earnout 3.2 %  

RELATED PARTY TRANSACTIONS       

Related Party Revenue  

The following table summarizes information about the Company’s related party revenue and cost of goods sold during the years ended December 31, 2022 and 2021, respectively (in thousands): 

( 1.4 %) ( 4.2 %)

Impairment of assets

( 0.1 %) ( 0.1 %)

Change in value of earnout

RELATED PARTY TRANSACTIONS

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

For the Years Ended December 31,

Related party revenue:

Total related party revenue

Chongqing Pioneer Pharma Holdings Limited:

$ 1,377 $ 976

Cost of goods sold

Total related party expenses

Related party accounts receivable was $ 0.2 million and $ 0.1 million as of December 31, 2022 and December 31, 2021, respectively.

On November 17, 2020, the Company entered into a consulting agreement with Eric Wu.

Eric Wu is Partner and Senior Vice President of China Kington and the brother of Bob Wu, who serves on the Company’s Board of Directors. Pursuant to the Agreement, Eric Wu acted as a consultant to the Company in support of product expansion efforts as well as in potential financings and other transaction opportunities.

The term of the Agreement was for twelve months. As consideration for his services, the Company granted Eric Wu options exercisable for 300,000 shares of the Company’s common stock (or 8,572 shares of common stock if accounting for the subsequent Reverse Stock Split) under the Company’s 2017 Omnibus Incentive Plan with an exercise price equal to the Company’s closing stock price on the date of the grant (as subsequently adjusted for the Reverse Stock Split) and vesting on the one year anniversary of the grant date.

Stock-based compensation expense of $ 152 thousand was recorded for the year ended December 31, 2021 related to Eric Wu’s options, with no stock-based compensation expense related to Eric Wu’s options recorded in the year ended December 31, 2022.

Related party accounts receivable were $ 0.2 million as of December 31, 2023 and 2022.

SEGMENT REPORTING

The Company’s chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company.

The Company’s CODM , who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company.

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

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

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

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

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

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

Select financial information for each segment is as follows:

Percentage  

Optical & Wound Care

$ 10,239  

$ 9,555  

The Company is managed in two segments and aggregates its operational and financial information accordingly:

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

The Eyecare & Wound Care segment consists primarily of eyecare products sold under the Avenova brand name as well as wound care products sold under the NeutroPhase and PhaseOne brands.

The Skincare segment consists of products sold under the DERMAdoctor brand.

Subsequent to December 31, 2023, on March 25, 2024, we closed the DERMAdoctor Divestiture, resulting in the sale of all of our Skincare segment.

See additional information in Note 21, “Subsequent Events”.

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

Eyecare & Wound Care

$ 11,174 76 % $ 10,239 71 %

3,552 24 % 4,165 29 %

Total sales, net

$ 14,404  

$ 10,204  

Percentage  

December 31,  

of Total  

December 31,  

of Total  

Operating Loss  

Optical & Wound Care

$ 5,645  

$ 8,682  

$ 14,726 100 % $ 14,404 100 %

Eyecare & Wound Care

$ 3,650 48 % $ 5,645 39 %

3,946 52 % 8,772 61 %

Total operating loss

$ 14,417  

$ 8,862  

$ 7,596 100 % $ 14,417 100 %

SUBSEQUENT EVENTS

On January 29, 2024, the Ratchet of the Series B Preferred Stock (see Note 14, “Stockholders’ Equity”) expired with no further impact because greater than 75% of the originally issued 15,000 Series B Preferred Stock had been converted.

The Series B Preferred Stock conversion price will remain at $ 0.25 until all remaining preferred stock has been converted.

On March 14, 2024, the Company announced that it had entered into a Membership Unit Purchase Agreement with New Age Investments LLC (“ New Age ”) whereby New Age would acquire 100 % of the membership units (the “ Membership Units ”) of the Company’s wholly owned subsidiary, DERMAdoctor, LLC (“ DERMAdoctor ”) for $ 1.1 million in cash, exclusive of any debt (the “ DERMAdoctor Divestiture ").

The DERMAdoctor Divestiture closed on March 25, 2024.

The Company has not yet finalized its accounting but expects to record a net loss on the of sale of DERMAdoctor in the first quarter of 2024 as a result of the transaction.

As discussed further in Notes 7, "Goodwill” and 8, "Other Intangible Assets”, the Company recorded goodwill, intangible and other asset impairment charges of $ 2.6 million and $ 6.7 million, relating to the DERMAdoctor business for the years ended December 31, 2023 and 2022, respectively.

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 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.

Additional information regarding the Series D Warrants and the New Notes is included in the Current Report on Form 8 -K filed by the Company on March 25, 2024.

On March 24, 2024, the Ratchet of the Series C Preferred Stock (see Note 14, “Stockholders’ Equity”) was further triggered as a result of the Company entering into the First Amendment that provides for the issuance of the Series D Warrants and the Unsecured Convertible Notes, which will have an exercise price and conversion price, respectively, of $ 0.14 per share.

the conversion price of each share of Series C Preferred Stock, which were each $ 0.25 per share convertible into 4,000 shares of common stock, has been automatically adjusted downward to now be $ 0.14 per share convertible into 7,143 shares of common stock.

Therefore, based on the Series C Preferred Stock currently outstanding, there will be an additional 2,787,841 shares of common stock issuable upon conversion.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data