Stablecoin Development Corp 10-K

ITEM 8. 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. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 25 Consolidated Balance Sheets as of December 31, 2023 and 2022 28 Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022 29 Consolidated Statements of Stockholders ’ Equity for the Years Ended December 31, 2023 and 2022 30 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 31 Notes to Consolidated Financial Statements 32 26 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of NovaBay Pharmaceuticals, Inc. Opinion on 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 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 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 these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our 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 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. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters 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. 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. 27 Table of Contents 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 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. 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 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 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. 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. 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, 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. 28 Table of Contents 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 We have served as the Company’s auditor since 2010. San Francisco, California March 26, 2024 PCAOB ID Number 100 29 Table of Contents NOVABAY PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value amounts) December 31, December 31, 2023 2022 ASSETS Current assets: Cash and cash equivalents $ 3,130 $ 5,362 Accounts receivable, net of allowance for credit losses ($ 3 and $ 19 at December 31, 2023 and 2022, respectively) 759 1,973 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) 2,877 3,437 Prepaid expenses and other current assets 388 560 Total current assets 7,154 11,332 Operating lease right-of-use assets 1,296 1,831 Property and equipment, net 87 119 Goodwill — 348 Other intangible assets, net — 2,280 Other assets 497 489 TOTAL ASSETS $ 9,034 $ 16,399 LIABILITIES AND STOCKHOLDERS ’ EQUITY Liabilities: Current liabilities: Accounts payable $ 1,130 $ 1,080 Accrued liabilities 1,516 2,724 Secured Convertible Notes, net of discounts 1,137 — Operating lease liabilities 495 453 Total current liabilities 4,278 4,257 Warrant liability 334 — Operating lease liabilities-non-current 1,108 1,588 Total liabilities 5,720 5,845 Commitments and contingencies (Note 10) Stockholders’ equity: Preferred stock, $ 0.01 par value; 5,000 shares authorized; Series B Preferred Stock; 6 and 12 shares issued and outstanding at December 31, 2023 and 2022, respectively 275 570 Series C Preferred Stock; 1 and 2 shares issued and outstanding at December 31, 2023 and 2022, respectively 1,675 2,403 Common stock, $ 0.01 par value; 150,000 shares authorized, 11,230 and 2,035 shares issued and outstanding at December 31, 2023 and 2022, respectively* 112 20 Additional paid-in capital* 176,101 165,713 Accumulated deficit ( 174,849 ) ( 158,152 ) Total stockholders’ equity 3,314 10,554 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 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. 30 Table of Contents NOVABAY PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) For the Years Ended December 31, 2023 2022 Sales: Product revenue, net $ 14,687 $ 14,374 Other revenue, net 39 30 Total sales, net 14,726 14,404 Cost of goods sold 6,831 6,623 Gross profit 7,895 7,781 Operating expenses Research and development 68 174 Sales and marketing 6,500 7,798 General and administrative 6,330 7,489 Goodwill, intangible and other asset impairment 2,593 6,737 Total operating expenses 15,491 22,198 Operating loss ( 7,596 ) ( 14,417 ) Non-cash gain on changes in fair value of warrant liability 272 5,446 Non-cash gain on changes in fair value of embedded derivative liability 40 — Non-cash gain on changes in fair value of contingent liability — 561 Non-cash loss on modification of common stock warrants ( 292 ) ( 1,922 ) Other expense, net ( 2,064 ) ( 276 ) Net loss $ ( 9,640 ) $ ( 10,608 ) Less: Increase to accumulated deficit due to adjustment to Preferred Stock conversion prices 7,057 5,657 Net loss attributable to common stockholders $ ( 16,697 ) $ ( 16,265 ) Net loss per share attributable to common stockholders (basic and diluted)* $ ( 3.96 ) $ ( 10.10 ) Weighted-average shares of common stock outstanding used in computing net loss per share of common stock (basic and diluted)* 4,215 1,610 * 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. 31 Table of Contents NOVABAY PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY (in thousands) Additional Total Preferred Stock Common Stock Paid-in Accumulated Stockholders’ Shares Amount Shares* Amount* Capital* Deficit Equity Balance at December 31, 2021 14 $ 680 1,365 $ 13 $ 151,365 $ ( 141,887 ) $ 10,171 Net loss — — — — — ( 10,608 ) ( 10,608 ) Stock-based compensation expense related to employee and director stock awards — — — — 220 — 220 Vesting of director restricted stock awards — — 3 — — — — Reclassification of November 2021 Warrants from liability — — — — 7,502 — 7,502 Conversion of Series B Preferred Stock to common stock ( 2 ) ( 110 ) 161 2 108 — — Down round feature adjustment related to Series B Preferred Stock — — — — 5,657 ( 5,657 ) — Modification of common stock warrants in connection with 2022 Warrant Reprice Transaction — — — — 1,922 — 1,922 Issuance of common stock in connection with 2022 Warrant Reprice Transaction, net of offering costs — — 328 3 283 — 286 Reclassification of July 2020 Warrants and November 2021 Warrants to liability in connection with 2022 Warrant Reprice Transaction — — — — ( 3,825 ) — ( 3,825 ) Reclassification of July 2020 Warrants, November 2021 Warrants and September 2022 Warrants from liability — — — — 1,851 — 1,851 Issuance of Series C Preferred Stock and 2022 Warrants, net of offering costs 3 3,035 — — — — 3,035 Conversion of Series C Preferred Stock to common stock ( 1 ) ( 632 ) 159 2 630 — — Shares issued due to Reverse Stock Split rounding feature — — 19 — — — — Balance at December 31, 2022 14 $ 2,973 2,035 $ 20 $ 165,713 $ ( 158,152 ) $ 10,554 Net loss — — — — — ( 9,640 ) ( 9,640 ) Stock-based compensation expense related to employee and director stock awards — — — — 291 — 291 Vesting of director restricted stock awards — — 5 — — — — Conversion of Series B Preferred Stock to common stock ( 6 ) ( 295 ) 6,384 64 231 — — Down round feature adjustment related to Series B Preferred Stock — — — — 6,385 ( 6,385 ) — Conversion of Series C Preferred Stock to common stock ( 1 ) ( 728 ) 277 3 725 — — Down round feature adjustment related to Series C Preferred Stock — — — — 672 ( 672 ) — Modification of common stock warrants in connection with 2023 Private Placement — — — — 286 — 286 Reclassification of May 2023 Warrants from liability — — — — 1,360 — 1,360 Reclassification of 2023 Private Placement embedded derivative liability — — — — 169 — 169 Modification of common stock warrants in connection with 2023 Warrant Reprice Transaction — — — — 193 — 193 Issuance of common stock in connection with 2023 Warrant Reprice Transaction, net of offering costs — — 2,529 25 76 — 101 Balance at December 31, 2023 7 $ 1,950 11,230 $ 112 $ 176,101 $ ( 174,849 ) $ 3,314 * 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. 32 Table of Contents NOVABAY PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2023 2022 Operating activities: Net loss $ ( 9,640 ) $ ( 10,608 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property and equipment 51 120 Amortization of intangible assets 152 363 Impairment of goodwill, intangible and other assets 2,593 6,737 Impairment of property and equipment 2 66 Stock-based compensation expense related to employee and director stock awards 291 220 Non-cash gain on changes in fair value of warrant liability ( 272 ) ( 5,446 ) Non-cash gain on changes in fair value of embedded derivative liability ( 40 ) — Non-cash gain on changes in fair value of contingent liability — ( 561 ) Non-cash loss on modification of common stock warrants 292 1,922 Accretion of interest and amortization of debt discounts on convertible notes 1,690 — Changes in operating assets and liabilities: Accounts receivable 1,214 ( 305 ) Inventory 560 ( 217 ) Prepaid expenses and other current assets 172 218 Operating lease right-of-use assets 417 ( 1,420 ) Other assets ( 17 ) ( 5 ) Accounts payable and accrued liabilities ( 1,158 ) 667 Operating lease liabilities ( 438 ) 1,595 Net cash used in operating activities ( 4,131 ) ( 6,654 ) Investing activities: Purchases of property and equipment ( 19 ) ( 112 ) Net cash used in investing activities ( 19 ) ( 112 ) Financing activities: Proceeds from issuance of Secured Convertible Notes and May 2023 Warrants, net of discounts 3,000 — Payments on Secured Convertible Notes ( 1,474 ) — Cash debt issuance cost ( 181 ) — Proceeds from issuance of Series C Preferred Stock and November 2022 Warrants, net — 3,035 Proceeds from warrant exercises and issuance of December 2023 Warrants, net 565 1,703 Payment on line of credit — ( 105 ) Net cash provided by financing activities 1,910 4,633 Net decrease in cash, cash equivalents, and restricted cash ( 2,240 ) ( 2,133 ) Cash, cash equivalents and restricted cash, beginning of year 5,846 7,979 Cash, cash equivalents and restricted cash, end of year $ 3,606 $ 5,846 For the Years Ended December 31, 2023 2022 Supplemental disclosure of cash flow information: Interest paid $ 326 $ 17 Income taxes paid 359 24 For the Years Ended December 31, 2023 2022 Supplemental disclosure of non-cash information: Conversions of preferred stock to common stock $ 1,023 $ 742 Down round feature adjustments related to preferred stock 7,057 5,657 Equity transferred to warrant liabilities — 3,825 Common stock warrant modification recorded as debt discount 113 — Warrant liabilities transferred to equity 1,360 9,353 Embedded derivative liability transferred to equity 169 — Addition of operating lease, right-of-use asset — 2,039 The accompanying notes are an integral part of these consolidated financial statements. 33 Table of Contents NOVABAY PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 NOTE 1. ORGANIZATION NovaBay Pharmaceuticals, Inc. (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. 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. The Company was incorporated under the laws of the State of California on January 19, 2000, as NovaCal Pharmaceuticals, Inc. It had no operations until July 1, 2002, on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company. In February 2007, 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. The Company is managed as two reportable segments: ( 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 2024 expenses will exceed its 2024 revenues, as the Company continues to invest in its commercialization efforts. Additionally, the Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Accordingly, the Company has determined that its planned operations raise substantial doubt about its ability to continue as a going concern. Additionally, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control that impact the broader economy such as periods of inflation, supply chain issues, global pandemics and international conflicts (e.g., the conflicts between Israel and Hamas, Russia and Ukraine, and China and Taiwan). The Company’s long-term liquidity needs will be largely determined by the success of our commercialization efforts. To address the Company’s current liquidity and capital needs, the Company has and continues to evaluate different plans and strategic transactions to fund operations, including: ( 1 ) raising additional capital through debt and equity financings or from other sources; ( 2 ) reducing spending on operations, including reducing spending on one or more of its sales and marketing programs or restructuring operations to change its overhead structure; ( 3 ) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee; ( 4 ) entering into license agreements to sell new products; and/or ( 5 ) the divestiture of certain business or product lines and related assets. The Company may issue securities, including common stock, preferred stock, convertible debt securities and warrants through additional private placement transactions or registered public offerings, which may require the filing of a Form S- 1 or Form S- 3 registration statement with the Securities and Exchange Commission (“SEC”). While the Company believes that the proceeds from the 2023 Private Placement 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 the Company’s ability to continue as a going concern. 34 Table of Contents NOTE 2. 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 of America (“ U.S. GAAP ”) and are expressed in U.S. dollars. 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 The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. 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. 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, 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): December 31, December 31, 2023 2022 Cash and cash equivalents $ 3,130 $ 5,362 Restricted cash included in other assets 476 484 Total cash, cash equivalents, and restricted cash in the consolidated statements of cash flows $ 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. 35 Table of Contents Concentrations of Credit Risk and Major Partners Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains deposits of cash, cash equivalents and restricted cash with a 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, 2023 and 2022, revenues from significant product categories were as follows (in thousands): For the Years Ended December 31, 2023 2022 Avenova Spray $ 7,805 $ 7,651 DERMAdoctor 3,552 4,155 NeutroPhase 1,377 976 Other products 1,953 1,592 Total product revenue, net 14,687 14,374 Other revenue, net 39 30 Total sales, net $ 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: December 31, December 31, Major distribution partner 2023 2022 Chongqing Pioneer Pharma Holdings Limited 32 % 11 % Major U.S. Retailer A 21 % * % Avenova Spray Pharmacy Distributor A 12 % 30 % Major U.S. Retailer B * % 15 % * Less than 10% The Company relies on seven contract manufacturers to produce its products. 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, 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. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. 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; and Level 3 – inputs that are unobservable (for example, cash flow modeling inputs based on assumptions). 36 Table of Contents Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. 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 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; and ( 3 ) finished goods. The Company utilizes contract manufacturers to produce our products and the price paid to these manufacturers is included in inventory. Inventory is stated at the lower of cost or estimated net realizable value determined by the first -in, first -out method. At December 31, 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 Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets of five to seven years for office and laboratory equipment, three to five years for computer equipment and software, and five to seven years for furniture and fixtures. Leasehold improvements are amortized over the 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. 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. 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. Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, that the fair value of the reporting unit may more likely than not be less than carrying amount, or if significant adverse changes in the Company’s future financial performance occur that could materially impact fair value, a quantitative goodwill impairment test would be required. Additionally, management can elect to forgo the qualitative assessment and perform the quantitative test. If the qualitative assessment indicates that the quantitative analysis should be performed, or if management elects to bypass a qualitative assessment, the Company then evaluates goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. The quantitative assessment for goodwill requires management to estimate the fair value of the Company’s reporting units using either an income or market approach or a combination thereof. Management makes critical assumptions and estimates in completing impairment assessments of goodwill and indefinite-lived intangible assets. The Company’s cash flow projections look several years into the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions, probability of success, market competition, inflation and discount rates. The Company acquired DERMAdoctor in November 2021, and since completing this transaction it 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”. 37 Table of Contents 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 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 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 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 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. 38 Table of Contents Leases 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. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use assets may be required for items such as initial direct costs paid or incentives received. 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 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 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: i. identify the contract(s) with a customer; ii. identify the performance obligations in the contract; iii. determine the transaction price; iv. allocate the transaction price to the performance obligations in the contract; and v. recognize revenue when (or as) the entity satisfies performance obligations. 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. 39 Table of Contents 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 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 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. Patent Costs 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. Advertising Costs Advertising costs are expensed in the period in which the costs are incurred. Advertising costs are included in sales and marketing expenses in the consolidated statements of operations. Advertising expenses were $ 1.1 million and $ 2.0 million, respectively, for the years ended December 31, 2023 and 2022. Stock-Based Compensation The Company’s stock-based compensation includes grants of stock options and restricted stock units (“ RSUs ”) to employees, consultants and non-employee directors. The expense associated with these grants is recognized in the Company’s consolidated statements of 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. 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 on 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. Income Taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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. 40 Table of Contents Net Loss per Share 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. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods if their effect would be anti-dilutive. 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, 2023 2022 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 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 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. 41 Table of Contents NOTE 3. 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 Quoted Prices in Active Markets Significant for Other Significant Balance at Identical Observable Unobservable December Items Inputs Inputs 31, 2023 (Level 1) (Level 2) (Level 3) Assets Restricted cash held as a certificate of deposit $ 476 $ 476 $ — $ — Liabilities Warrant liability $ 334 $ — $ — $ 334 Fair Value Measurements Using Quoted Prices in Active Markets Significant for Other Significant Balance at Identical Observable Unobservable December Items Inputs Inputs 31, 2022 (Level 1) (Level 2) (Level 3) Assets 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. 42 Table of Contents 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 Warrants November 2021 Warrants July 2020, November 2021 & September 2022 Warrants July 2020, November 2021 & September 2022 Warrants May 2023 Warrants Measurement event Reporting date Stockholder approval Amendment and Issuance Stockholder Approval Issuance Date December 31, 2021 January 31. 2022 September 9, 2022 November 10, 2022 May 1, 2023 Total Value 9.6 million 7.5 million 5.2 million 1.9 million 1.6 million Gain not applicable 2.1 million not applicable 3.4 million not applicable Assumptions: Exercise price $ 18.55 $ 18.55 $ 6.30 $ 6.30 1.30 Market price $ 13.18 $ 10.50 $ 6.29 $ 2.80 $ 0.72 (a) Volatility 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 % Term (years) 6.0 6.0 3.4 - 6.0 3.2 – 5.8 2.1 - 5.1 % May 2023 Warrants December 2023 Warrants December 2023 Warrants Measurement event Stockholder Approval Issuance Reporting Date Date June 9, 2023 December 21, 2023 December 31, 2023 Total Value $1.4 million $0.4 million $0.3 million Gain $0.2 million not applicable $56 thousand Assumptions: Exercise price $ 1.30 $ 0.25 $ 0.25 Market price $ 0.68 $ 0.23 $ 0.20 Volatility 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 % Term (years) 2.0 - 5.0 5.5 5.5 (a) Adjusted for the dilutive effect of the 2023 Private Placement. See additional discussion above. 43 Table of Contents Warrant Modifications 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. Fair value was determined using a Black Scholes model as outlined below. July 2020 & November 2021 Warrants Measurement event Prior to amendment After amendment Date September 9, 2022 September 9, 2022 Total Value $3.3 million $5.2 million Loss not applicable $1.9 million Assumptions: Exercise price $ 18.55 - 57.75 $ 6.30 Market price $ 6.29 $ 6.29 Volatility 79.6 % 79.6 % Risk-free rate 3.43 - 3.58 % 3.43 - 3.58 % Dividend yield 0.0 % 0.0 % Term (years) 0.7 – 5.4 3.4 – 6.0 July 2020, November 2021, September 2022 & November 2022 Warrants Measurement event Prior to amendment After amendment Date April 27, 2023 April 27, 2023 Total Value $0.3 million $0.5 million Loss not applicable $0.2 million Assumptions: Exercise price $ 6.30 $ 1.50 Market price $0.72 (a) $0.72 (a) Volatility 80.1 % 80.1 % Risk-free rate 3.59 - 4.73 % 3.59 – 4.73 % Dividend yield 0.0 % 0.0 % Term (years) 1.1 – 5.6 1.1 – 5.6 44 Table of Contents May 2023 Warrants Measurement event Prior to amendment After amendment Date December 21, 2023 December 21, 2023 Total Value $56 thousand $0.2 million Loss not applicable $0.1 million Assumptions: Exercise price $ 1.30 $ 0.25 Market price $ 0.23 $ 0.23 Volatility 79.3 % 79.3 % Risk-free rate 3.92 – 4.62 % 3.92 – 4.62 Dividend yield 0.0 % 0.0 % Term (years) 1.5 – 4.5 1.5 – 4.5 (a) 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. 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). Fair value was determined using a Black Scholes model as outlined below. Series B Series B & C Measurement event Prior to amendment After amendment Prior to amendment After amendment Date September 9, 2022 September 9, 2022 April 27, 2023 April 27, 2023 Total value (b) $6.9 million $12.5 million $9.6 million $11.6 million Deemed dividend not applicable $5.7 million not applicable $2.0 million Assumptions: Exercise price $ 14.00 $ 6.30 $ 6.30 $ 1.30 Market price $ 6.29 $ 6.29 $0.72 (a) $0.72 (a) Volatility 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 45 Table of Contents Series B & C Measurement event Prior to amendment After amendment Date December 21, 2023 December 21, 2023 Total value (b) $1.7 million $6.8 million Deemed dividend not applicable $5.1 million Assumptions: Exercise price $ 1.30 $ 0.25 Market price $ 0.23 $ 0.23 Volatility 79.3 % 79.3 % Risk-free rate 5.43 % 5.43 % Dividend yield 0.0 % 0.0 % Term (years) 0.3 0.3 (a) Adjusted for the dilutive effect of the 2023 Private Placement. See additional discussion above. (b) 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. Secured Convertible Notes derivative Secured Convertible Notes derivative Measurement event Issuance Shareholder approval Date April 27, 2023 June 9, 2023 Total value (b) $0.2 million $0.2 million Gain not applicable $40 thousand Assumptions: Exercise price $ 1.30 $ 1.30 Market price $ 0.72 (a) $ 0.75 Volatility 80.1 % 76.9 % Risk-free rate 4.88 % 5.41 % Dividend yield 0.0 % 0.0 % Term (years) 0.8 0.7 (a) Adjusted for the dilutive effect of the 2023 Private Placement. See additional discussion above. (b) Adjusted for probability of occurrence. NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consisted of the following (in thousands): December 31, 2023 2022 Prepaid dues and subscriptions $ 85 $ 43 Prepaid taxes 83 1 Prepaid inventory 73 211 Prepaid insurance 66 146 Other 81 159 Total prepaid expenses and other current assets $ 388 $ 560 46 Table of Contents NOTE 5. INVENTORY Inventory consisted of the following (in thousands): December 31, December 31, 2023 2022 Raw materials and supplies $ 1,027 $ 1,273 Finished goods 2,477 2,663 Less: Reserve for excess and obsolete inventory ( 627 ) ( 499 ) Total inventory, net $ 2,877 $ 3,437 NOTE 6. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): December 31, December 31, 2023 2022 Office and laboratory equipment $ 20 $ 20 Furniture and fixtures 157 157 Computer equipment and software 431 412 Leasehold improvements 152 152 Total property and equipment, at cost 760 741 Less: Accumulated depreciation ( 673 ) ( 622 ) Total property and equipment, net $ 87 $ 119 Depreciation expense was $ 51 thousand and $ 120 thousand for the years ended December 31, 2023 and 2022, respectively. 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”. NOTE 7. GOODWILL Goodwill is accounted for in accordance with ASC 350, Intangibles-Goodwill and Other. 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 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): Amount Balance as of December 31, 2021 $ 4,528 Goodwill impairment 4,180 Balance as of December 31, 2022 $ 348 Goodwill impairment 348 Balance as of December 31, 2023 $ — 47 Table of Contents NOTE 8. OTHER INTANGIBLE ASSETS As of December 31, 2023 and 2022, other intangible assets consisted of the following (in thousands): Balance at December 31, 2023 Accumulated Impairments Gross Amortization to Date Net Indefinite-lived intangible assets Trade names $ 2,080 $ — $ ( 2,080 ) $ — Amortizable intangible assets Customer relationships 290 ( 60 ) ( 230 ) — Trade secrets / product formulations 2,890 ( 515 ) ( 2,375 ) — Total other intangible assets $ 5,260 $ ( 575 ) $ ( 4,685 ) $ — Balance at December 31, 2022 Accumulated Impairments Gross Amortization to Date Net Indefinite-lived intangible assets Trade names $ 2,080 $ — $ ( 970 ) $ 1,110 Amortizable intangible assets Customer relationships 290 ( 48 ) ( 172 ) 70 Trade secrets / product formulations 2,890 ( 375 ) ( 1,415 ) 1,100 Total other intangible assets $ 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. NOTE 9. ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands): December 31, December 31, 2023 2022 Contract liabilities (see Note 16) $ 946 $ 1,807 Employee payroll and benefits 341 261 Marketing costs 14 104 Inventory purchases 17 101 Other 198 451 Total accrued liabilities $ 1,516 $ 2,724 48 Table of Contents NOTE 10. COMMITMENTS AND CONTINGENCIES Indemnification Agreements 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. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and may enable it to recover a portion of any future payments. 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, 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. Pursuant to these agreements, it generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with the use or testing of its products or product candidates or with any U.S. patent or any copyright or other intellectual property infringement claims by any third party with respect to its products. The term of these indemnification agreements is generally perpetual. The potential future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, costs related to these indemnification provisions have been immaterial. The Company also maintains various liability insurance policies that limit its exposure. 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, 2023 or 2022. Legal Matters 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. Leases The Company leases office space for its corporate headquarters located in Emeryville, California. 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 December 31, 2023 2022 Operating lease – expense $ 525 $ 525 Operating lease – included in operating cash flow 543 540 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 Ended December 31, 2023 2022 Weighted-average remaining lease term (in years) 3.4 4.3 Weighted-average discount rate 5 % 5 % Future lease payments under non-cancelable leases as of December 31, 2023 were as follows (in thousands): 2024 $ 557 2025 439 2026 444 2027 290 Total future minimum lease payments 1,730 Less: Imputed interest ( 127 ) Total $ 1,603 Reported as: Operating lease liability $ 495 Operating lease liability- non-current 1,108 Total $ 1,603 49 Table of Contents NOTE 11. 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 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. 50 Table of Contents 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. NOTE 12. 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. 51 Table of Contents The Secured Convertible Notes are presented as follows as of December 31, 2023 ( in thousands): Principal amount $ 1,831 Unamortized discount for proceeds allocated to embedded derivative liability and May 2023 Warrants ( 596 ) Unamortized debt issuance costs ( 98 ) Total Secured Convertible Notes, net $ 1,137 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): 2024 $ 1,831 NOTE 13. COMMON STOCK WARRANTS 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 ”); and ● 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; and ● 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 ”); and ● 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 ”). 52 Table of Contents 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 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: Warrants Weighted- Average Exercise Price Outstanding at December 31, 2021 202,333 $ 57.13 Warrants granted 2,431,046 11.70 Warrants exercised ( 327,860 ) 6.30 Warrants expired — — Outstanding at December 31, 2022 2,305,519 $ 7.70 Warrants granted 7,605,776 0.95 Warrants exercised ( 2,528,848 ) 0.25 Warrants expired — — Outstanding at December 31, 2023 7,382,447 1.82 53 Table of Contents Common stock warrants outstanding as of December 31, 2023 were as follows: Series Exercise Price Expiration Date Warrants 2019 Ladenburg Warrants $ 34.65 August 8, 2024 4,799 July 2020 Warrants $ 57.75 January 22, 2026 59,960 July 2020 Warrants $ 1.50 January 22, 2026 77,145 TLF Warrants $ 23.51 January 15, 2026 429 November 2021 Warrants $ 6.30 September 11, 2028 267,858 November 2021 Warrants $ 1.50 September 11, 2028 535,716 September 2022 Warrants $ 6.30 September 11, 2028 89,286 September 2022 Warrants $ 1.50 September 11, 2028 238,574 November 2022 A-1 Warrants $ 6.30 November 20, 2028 79,366 November 2022 A-1 Warrants $ 1.50 November 20, 2028 436,510 November 2022 A-2 Warrants $ 6.30 May 20, 2024 79,366 November 2022 A-2 Warrants $ 1.50 May 20, 2024 436,510 May 2023 B-1 Warrants $ 0.25 June 9, 2028 1,903,848 May 2023 B-2 Warrants $ 0.25 June 9, 2025 644,232 December 2023 Warrants $ 0.25 June 21, 2029 2,528,848 Outstanding at December 31, 2023 7,382,447 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 $ 9,558 Decrease in fair value of November 2021 Warrants liability ( 2,056 ) Reclassification of November 2021 Warrants liability to equity ( 7,502 ) Fair value of warrant liabilities recognized in connection with the 2022 Warrant Reprice Transaction 5,241 Decrease in fair value of 2022 Warrant Reprice Transaction warrant liabilities ( 3,390 ) Reclassification of 2022 Warrant Reprice Transaction warrant liabilities to equity ( 1,851 ) Warrant liabilities as of December 31, 2022 $ — Fair value of warrant liability recognized for May 2023 Warrants 1,576 Decrease in fair value of May 2023 Warrants liability ( 216 ) Reclassification of May 2023 Warrants liability to equity ( 1,360 ) Fair value of warrant liability recognized for December 2023 Warrants 390 Decrease in fair value of December 2023 Warrants liability ( 56 ) Fair value of December 2023 Warrants liability at December 31, 2023 $ 334 NOTE 14. 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. 54 Table of Contents 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. Common Stock 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. 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. NOTE 15. EQUITY-BASED COMPENSATION Equity Compensation Plans In October 2007, the Company adopted the 2007 Omnibus Incentive Plan (the “ 2007 Plan ”) to provide for the granting of equity awards, such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights, and stock appreciation rights to employees, directors and outside consultants, as determined by the Board. The 2007 Plan expired on March 15, 2017. Upon expiration, new awards cannot be issued pursuant to the 2007 Plan, but outstanding awards continue to be governed by its terms. Stock options granted under the 2007 Plan expire no later than ten years from the date of grant. All stock options outstanding under the 2007 Plan were fully vested as of December 31, 2021. 55 Table of Contents 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 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, 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 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 and per share data) Awards Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life (years) Aggregate Intrinsic Value Outstanding at December 31, 2022 132 $ 37.99 7.5 $ 69 Options granted 42 1.67 Restricted stock units granted 5 — Options exercised — — Restricted stock units vested ( 5 ) — Options forfeited/cancelled ( 19 ) 62.39 Restricted stock units cancelled ( 30 ) — Outstanding at December 31, 2023 125 31.15 7.3 1 Vested and expected to vest at December 31, 2023 119 32.40 7.3 1 Vested and exercisable at December 31, 2023 63 56.85 5.7 — 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 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. The Company has estimated the value of stock option awards as of the date of grant by applying the Black-Scholes option pricing model using the single-option valuation approach. The application of this valuation model involves assumptions that are judgmental and subjective in nature. 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. 56 Table of Contents 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 were as follows: For the Years Ended December 31, Assumptions 2023 2022 Expected price volatility 154 % 158 % Expected term (in years) 6.66 6.45 Risk-free interest rate 3.57 % 2.36 % Dividend yield 0.00 % 0.00 % Weighted-average fair value of options granted during the period $ 1.29 $ 9.22 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. 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 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 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. 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, 2023 2022 Research and development $ 21 $ 20 Sales and marketing 96 52 General and administrative 174 148 Total stock-based compensation expense $ 291 $ 220 57 Table of Contents NOTE 16. DISTRIBUTION AGREEMENTS 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, 2023 ( in thousands): Chargebacks, Discounts for Prompt Payment Other Customer Fees Rebates Total Balance at December 31, 2022 $ 1,673 $ 53 $ 81 $ 1,807 Provision related to sales made in: Current period 716 321 106 1,143 Payments and customer credits issued ( 1,476 ) ( 362 ) ( 166 ) ( 2,004 ) Balance at December 31, 2023 $ 913 $ 12 $ 21 $ 946 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): Chargebacks, Discounts for Prompt Payment Other Customer Fees Rebates Total Balance at December 31, 2021 $ 1,150 $ 83 $ 56 $ 1,289 Provision related to sales made in: Current period 1,865 65 448 2,378 Payments and customer credits issued ( 1,342 ) ( 95 ) ( 423 ) ( 1,860 ) Balance at December 31, 2022 $ 1,673 $ 53 $ 81 $ 1,807 Avenova Spray Pharmacy Distribution Agreements and Specialty Pharmacies Avenova Spray is made available in local pharmacies and major pharmacy retail chains under nationwide distribution agreements with McKesson Corporation, Cardinal Health and AmerisourceBergen. The Company has also entered into direct agreements with preferred pharmacy networks as part of our Partner Pharmacy Program. 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. Over-the-Counter Sales of Avenova Spray Avenova Spray is offered for sale direct to U.S. customers primarily on Amazon.com, the Company’s website (Avenova.com) 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”. 58 Table of Contents NOTE 17. EMPLOYEE BENEFIT PLAN The Company has a 401 (k) plan covering all eligible employees. 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. NOTE 18. INCOME TAXES For the years ended December 31, 2023 and 2022, loss before provision for income taxes consisted of the following (in thousands): For the Years Ended December 31, 2023 2022 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): For the Years Ended December 31, 2023 2022 Current Federal $ — $ — State — — Other — — Total current tax expense $ — $ — Deferred Federal — — State — — Other — — Total deferred tax expense $ — $ — Income tax provision $ — $ — Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards. The tax effects of significant items comprising the Company's deferred taxes as of December 31, 2023 and 2022 are as follows (in thousands): For the Years Ended December 31, 2023 2022 Deferred tax assets: Net operating losses $ 36,943 $ 35,234 Acquisition assets 2,257 — Stock options 665 750 Research and development credits 641 641 Accruals 477 464 Operating lease liabilities 368 472 Property and equipment 28 13 Other deferred tax assets 6 331 Total deferred tax assets 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 $ — $ — 59 Table of Contents 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 $ 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): Expiration Amount Years Net operating losses, federal (Post December 31, 2017) $ 44,443 Does Not Expire Net operating losses, federal (Pre January 1, 2018) $ 94,886 Beginning in 2024 Net operating losses, state $ 117,375 Beginning in 2028 Tax credits, federal $ 542 Beginning in 2031 Tax credits, state $ 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, 2023 2022 Unrecognized benefit - beginning of period $ 974 $ 974 Change during the period — — Unrecognized benefit - end of period $ 974 $ 974 The entire amount of the unrecognized tax benefits would not impact our effective tax rate if recognized. 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. Other jurisdictions are not significant. The tax years 2019 - 2022 remain open in the federal jurisdiction and 2018 - 2022 for California. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. The effective tax rate of the Company's provision (benefit) for income taxes differs from the federal statutory rate as follows: For the Years Ended December 31, 2023 2022 Statutory rate 21.0 % 21.0 % State tax 4.5 % 7.9 % Change in valuation allowance ( 19.5 %) ( 48.0 %) Warrant/equity expenses ( 3.7 %) 20.2 % Stock-based compensation expense ( 1.4 %) ( 4.2 %) Impairment of assets ( 0.9 %) — % Other ( 0.1 %) ( 0.1 %) Change in value of earnout — % 3.2 % Total 0.0 % 0.0 % NOTE 19. 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, 2023 2022 Chongqing Pioneer Pharma Holdings Limited: Revenue $ 1,377 $ 976 Cost of goods sold 1,225 954 Related party accounts receivable were $ 0.2 million as of December 31, 2023 and 2022. 60 Table of Contents NOTE 20. SEGMENT REPORTING 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. 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): Year Year Ended Ended December 31, Percentage December 31, Percentage 2023 of Total 2022 of Total Eyecare & Wound Care $ 11,174 76 % $ 10,239 71 % Skincare 3,552 24 % 4,165 29 % Total sales, net $ 14,726 100 % $ 14,404 100 % Eyecare & Wound Care $ 3,650 48 % $ 5,645 39 % Skincare 3,946 52 % 8,772 61 % Total operating loss $ 7,596 100 % $ 14,417 100 % NOTE 21. 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. Accordingly. 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. 61 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None