What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2024-05-09 compared with 2023-11-09 · 825 added, 1287 removed, 284 unchanged (88% of the section changed)

3 unchanged sentences

(in thousands, except par value amounts)

September 30,

Current assets:

Cash and cash equivalents

$ 3,472  

$ 5,362  

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

Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($ 556 and $ 499 at September 30, 2023 and December 31, 2022, respectively)

$ 1,823 $ 2,924

Accounts receivable, net of allowance for credit losses ($ 3 at March 31, 2024 and December 31, 2023)

Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($ 229 and $ 264 at March 31, 2024 and December 31, 2023, respectively)

Prepaid expenses and other current assets

Current assets, discontinued operations

Total current assets

11,332  

Operating lease right-of-use assets

Property and equipment, net

Other intangible assets, net

$ 12,852  

$ 16,399  

LIABILITIES AND STOCKHOLDERS ’

Other assets, discontinued operations

$ 5,357 $ 9,034

LIABILITIES AND STOCKHOLDERS ’ EQUITY

Current liabilities:

Accounts payable

$ 1,080  

$ 1,117 $ 906

Accrued liabilities

Convertible Notes, net

Secured Convertible Notes, net of discounts

Unsecured Convertible Notes, net of discounts

Embedded derivative liability

Operating lease liabilities

Current liabilities, discontinued operations

Total current liabilities

Warrant liabilities

Operating lease liabilities-non-current

Total liabilities

Commitments & contingencies (Note 10)

Stockholders’

Commitments and contingencies (Note 8)

Stockholders’ equity:

Preferred stock, $ 0.01 par value;

1 unchanged sentence

Series B Preferred Stock;

6 and 12 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively

1 and 6 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

Series C Preferred Stock;

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

1 shares issued and outstanding at March 31, 2024 and December 31, 2023

Common stock, $ 0.01 par value;

150,000 shares authorized, 6,529 and 2,035 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively*

150,000 shares authorized, 32,025 and 11,230 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

Additional paid-in capital

170,675  

165,713  

176,798 176,101

Accumulated deficit

Total stockholders’

10,554  

TOTAL LIABILITIES AND STOCKHOLDERS’

$ 12,852  

$ 16,399  

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

( 178,443 ) ( 174,849 )

Total stockholders’ equity

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$ 5,357 $ 9,034

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

3 unchanged sentences

Three Months Ended

September 30,

Nine Months Ended

September 30,

Product revenue, net

$ 2,624 $ 2,332

Other revenue, net

Total sales, net

Product cost of goods sold

Cost of goods sold

Operating expenses

2 unchanged sentences

General and administrative

Loss on divestiture of subsidiary

Total operating expenses

Operating loss

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

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

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

Non-cash loss on modification of common stock warrants

( 2,436 ) ( 1,345 )

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

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

Accretion of interest and amortization of discounts on convertible notes

Other expense, net

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

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

Net loss from continuing operations

( 3,090 ) ( 1,345 )

Net loss from discontinued operations (Note 17)

( 124 ) ( 394 )

( 3,214 ) ( 1,739 )

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

Net loss attributable to common stockholders

$ ( 3,594 ) $ ( 1,739 )

Basic and diluted net loss per share

Net loss per share from continuing operations

$ ( 0.14 ) $ ( 0.66 )

Net loss per share from discontinued operations

( 0.01 ) ( 0.19 )

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

$ ( 0.15 ) $ ( 0.85 )

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

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

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

NOVABAY PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY

(in thousands)

Preferred Stock

Stockholders ’

Stockholders’

Balance at December 31, 2023

$ 2,973  

$ 165,713  

$ ( 158,152 )

$ 10,554  

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

Balance at March 31, 2023

$ 2,973  

$ 165,788  

$ ( 159,891 )

$ 8,890  

Conversion of Series B Preferred Stock to common stock

Conversion of Series C Preferred Stock to common stock

Modification of common stock warrants

Adjustment of Series B Preferred Stock conversion price  

Adjustment of Series C Preferred Stock conversion price  

( 194 )  

Reclassification of May 2023 Warrants

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

Vesting of director restricted stock awards

Balance at June 30, 2023

$ 2,124  

$ 170,321  

$ ( 163,923 )

$ 8,563  

Conversion of Series B Preferred Stock to common stock

Reclassification of derivative liability

Adjustment of Series C Preferred Stock conversion price

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

Balance at September 30, 2023

$ 1,977  

$ 170,675  

$ ( 165,680 )

$ 7,037  

Balance at March 31, 2024

Preferred Stock

Stockholders ’

Stockholders’

Balance at December 31, 2022

$ 151,365  

$ ( 141,887 )

$ 10,171  

Reclassification of November 2021 Warrants

Conversion of Series B Preferred Stock to common stock

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

Balance at March 31, 2023

$ 159,121  

$ ( 141,998 )

$ 17,746  

Conversion of Series B Preferred Stock to common stock

Vesting of director restricted stock awards

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

Balance at June 30, 2022

$ 159,313  

$ ( 144,153 )

$ 15,745  

Modification of common stock warrants

Exercise of warrants, net of offering costs

Reclassification of common stock warrants to liability

Adjustment of Series B Preferred Stock conversion price

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

Balance at September 30, 2022

$ 163,142  

$ ( 149,946 )

$ 13,784  

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 unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)  

(In thousands)

Nine Months Ended September 30

Three Months Ended March 31,

Operating activities:

$ ( 3,214 ) $ ( 1,739 )

Net loss from discontinued operations 124 394

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

Depreciation of property and equipment

Amortization of intangible assets

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

Non-cash loss on modification of common stock warrants

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

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

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

Non-cash loss on divestiture of subsidiary

Non-cash expense incurred to obtain consent of Secured Convertible Note holders

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

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

Accretion of interest and amortization of debt discounts on convertible notes

1 unchanged sentence

Accounts receivable

( 107 ) ( 80 )

Prepaid expenses and other current assets

( 115 ) ( 45 )

Operating lease right-of-use assets

1 unchanged sentence

Operating lease liabilities ( 60 ) ( 34 )

Net cash used in operating activities

Net cash used in operating activities, continuing operations

( 1,572 ) ( 1,187 )

Investing activities:

Proceeds from divestiture of subsidiary

Purchases of property and equipment

Net cash used in investing activities

Net cash provided by (used in) investing activities, continuing operations

Financing activities:

Proceeds from convertible notes and warrant issuances, net of discount

Payment on the convertible notes

Payments on Secured Convertible Notes

Debt issuance cost

Proceeds from the exercise of warrants

Payment on the line of credit

Net cash provided by financing activities

Net change in cash, cash equivalents, and restricted cash

Cash, cash equivalents and restricted cash, beginning of year

Cash, cash equivalents and restricted cash, end of period

$ 3,948  

$ 4,020  

Nine Months Ended September 30,

Net cash used in financing activities, continuing operations

Net decrease in cash, cash equivalents, and restricted cash, continuing operations

( 1,101 ) ( 1,200 )

Net decrease in cash and cash equivalents, discontinued operations ( 206 ) (424)

Net decrease in cash, cash equivalents, and restricted cash, consolidated ( 1,307 ) ( 1,624 )

Cash, cash equivalents and restricted cash, beginning of year, consolidated

Cash and cash equivalents of discontinued operations, end of period — ( 52 )

Cash, cash equivalents and restricted cash of continuing operations, end of period

$ 2,299 $ 4,170

Three Months Ended March 31,

Supplemental disclosure of cash flow information:

Interest paid

Nine Months Ended September 30,

Interest paid in continuing operations

Interest paid in discontinued operations

Three Months Ended March 31,

Supplemental disclosure of non-cash information:

Warrant liability transferred to equity

Conversion of Series B Preferred Stock to common stock

Conversion of Series C Preferred Stock to common stock

Derivative liability transferred to equity

Adjustment of Series B Preferred Stock conversion price

Adjustment of Series C Preferred Stock conversion price

Equity transferred to warrant liability

Addition of operating lease, right-of-use asset

Reassessment of operating lease, right-of-use asset

Conversions of preferred to common stock

Down round feature adjustments related to Preferred Stock

Issuance of embedded derivative liability in conjunction with Unsecured Convertible Notes

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

NovaBay Pharmaceuticals, Inc.

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

Our leading product, Avenova®

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

Avenova Spray is formulated with our proprietary, stable and pure form of hypochlorous acid and is cleared by the Food and Drug Administration (the “FDA”) for sale in the United States.

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

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

Avenova Spray is formulated with our proprietary, stable and pure form of hypochlorous acid and is cleared by the Food and Drug Administration (the “FDA”) for sale in the United States.

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

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

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

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

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 certain wounds, burns, ulcers and other injuries.

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

The Company currently sells these products through distributors.

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

On March 25, 2024, we announced that we had sold DERMAdoctor (the “ DERMAdoctor Divestiture ”).

The Company operated in principally 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.

The Company was incorporated under the laws of the State of California on January 19, 2000, as NovaCal Pharmaceuticals, Inc.

2 unchanged sentences

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.

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

Equity”

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

Liquidity and Going Concern

Based primarily on the funds available on September 30, 2023 and the 2023 Private Placement, the Company believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund its existing operations, meet its planned operating expenses and to meet the Monthly Redemptions of the Convertible Notes (both as defined below) into at least the second quarter of 2024.

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

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.

Discontinued Operations

On March 25, 2024, the Company completed the DERMAdoctor Divestiture for an aggregate sale price of $ 1.1 million.

The Company recognized a loss on the DERMAdoctor Divestiture amounting to $ 0.9 million in the period ended March 31, 2024, which is recorded in loss on divestiture of subsidiary in the unaudited condensed consolidated statements of operations.

In connection with the DERMAdoctor Divestiture, the Company has entered into Transition Services Agreement with New Age Investments, LLC to provide for a customary and orderly transition of the business, including warehousing services provided by New Age Investments, LLC and fulfillment services provided by the Company, which shall be included in continuing operations in subsequent periods.

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 for at least one year from the date this Quarterly Report on Form 10 -Q is filed with the Securities and Exchange Commission (“SEC”).

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 and supply chain issues.

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

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

Accordingly, the Company has determined that its planned operations raise substantial doubt about its ability to continue as a going concern for a period of at least twelve months from the date of issuance of these unaudited condensed consolidated financial statements.

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;

1 unchanged sentence

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

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

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

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

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

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

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

While the Company believes that the proceeds from the 2023 Private Placement and the 2023 Warrant Reprice Transaction (both as defined in Note 9, “Financing Activities”) 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.

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

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

Basis of Presentation

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

GAAP”) and are expressed in U.S.

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

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

GAAP”) and are expressed in U.S.

Principles of Consolidation

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

and its wholly-owned subsidiary, DERMAdoctor, LLC.

All intercompany balances and transactions have been eliminated in consolidation.

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

and its former wholly-owned subsidiary, DERMAdoctor, LLC, as of and for the three months ended March 31, 2024.

All significant intercompany balances and transactions have been eliminated in consolidation.

As of March 25, 2024, the Company divested its wholly-owned subsidiary pursuant to the DERMAdoctor Divestiture.

The financial results for DERMAdoctor have been presented as discontinued operations in the accompanying condensed consolidated financial statements.

For the three months ended March 31, 2024, all gains and losses on disposition, along with the sales, costs and expenses attributable to discontinued operations, have been aggregated in the captions entitled “Loss on divestiture of subsidiary” and “Net loss from discontinued operations” in our unaudited condensed consolidated statements of operations.

Financial Statement Reclassification

Certain account balances from prior periods have been reclassified in these condensed consolidated financial statements to conform to current period classifications.

The prior year amounts have been modified in these financial statements to properly report amounts under current operations and discontinued operations (see Note 17, “Divestiture and Discontinued Operations”).

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 unaudited condensed consolidated financial statements and accompanying notes.

GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed 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.

3 unchanged sentences

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

The condensed consolidated financial statements and notes included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2022, which was filed with the SEC on March 31, 2023, as amended by Amendment No.

1 to the Annual Report on Form 10 -K, which was filed with the SEC on April 28, 2023 ( collectively, the “Annual Report”).

Change in Accounting and Revision of Prior Period Financial Statements

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

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

The Company previously recorded revenue net of these fees.

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

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

See additional information under “Revenue Recognition”

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

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

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

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

The identified error impacted the Company’s previously issued 2022 first and second quarter condensed consolidated financial statements.

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

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

See additional information under “Revenue Recognition”

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

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

The condensed consolidated financial statements and notes included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2023, which was filed with the SEC on March 26, 2024 and amended on March 29, 2024 ( collectively, the “2023 Annual Report”).

Cash, Cash Equivalents, and Restricted Cash

1 unchanged sentence

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

As of September 30, 2023 and December 31, 2022, the Company’s cash and cash equivalents were held in a major financial institution in the United States.

As of March 31, 2024 and December 31, 2023, the Company’s cash and cash equivalents were held in a major financial institution in the United States.

The following table provides a reconciliation of the cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheets (in thousands):

September 30,

Cash and cash equivalents

$ 3,472  

$ 5,362  

$ 1,823 $ 3,130

Cash and cash equivalents, discontinued operations

Restricted cash included in other assets

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

$ 3,948  

$ 5,846  

$ 2,299 $ 3,400

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

1 unchanged sentence

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 three and nine months ended September 30, 2023 and 2022, revenues were derived primarily from sales of Avenova and DERMAdoctor branded products, directly to consumers through Amazon.com, Avenova.com and DERMAdoctor.com.

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

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

During the three months ended March 31, 2024 and 2023, revenues from significant product categories were as follows (in thousands):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Avenova Spray

$ 2,064  

$ 1,939  

$ 5,759  

$ 5,778  

$ 2,096 $ 1,937

Other products

Total product revenue, net

10,971  

10,743  

Other revenue, net

Total sales, net

$ 3,265  

$ 3,826  

$ 10,999  

$ 10,761  

During the three months ended September 30, 2023 and 2022, sales of Avenova Spray via Amazon comprised 66 % and 70 % of total Avenova Spray net revenue, respectively.

During the nine months ended September 30, 2023 and 2022, sales of Avenova Spray via Amazon comprised 68 % and 73 % of total Avenova Spray net revenue, respectively.

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

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

September 30,

$ 2,631 $ 2,339

During the three months ended March 31, 2024 and 2023, revenues were derived primarily from sales of Avenova branded products, directly to consumers through Amazon.com and Avenova.com.

Sales of Avenova Spray via Amazon comprised 74 % and 75 % of total Avenova Spray net revenue during the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024 and December 31, 2023, accounts receivable from continuing operations from our major distribution partners and major retailers greater than 10% were as follows:

Major distribution partner

Avenova Spray Pharmacy Distributor A

Major International Retailer A

Avenova Spray Pharmacy Distributor B

Phase One Health

Chongqing Pioneer Pharma Holdings Limited

* Less than 10%

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

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

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

The Company relies on one contract manufacturer 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.

Our contract manufacturer 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, convertible notes, derivative liabilities, warrant liabilities, and contingent consideration.

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

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

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

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

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.

1 unchanged sentence

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

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

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

Level 1 –

quoted prices in active markets for identical assets or liabilities;

Level 2 –

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

Level 3 –

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

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

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

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

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

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

Allowance for Credit Losses

1 unchanged sentence

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

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

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

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

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 as of March 31, 2024 and December 31, 2023.

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.

The Company utilizes a contract manufacturer to produce our products and the price paid to these manufacturers is included in inventory.

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

At September 30, 2023 and December 31, 2022, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $ 556 thousand and $ 499 thousand, respectively.

At March 31, 2024 and December 31, 2023, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $ 229 thousand and $ 264 thousand, respectively.

Property and Equipment, net

1 unchanged sentence

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

Leasehold improvements are amortized over the lease term.

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.

Goodwill and Indefinite-Lived Intangible Assets

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.

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

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

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

three and nine months ended September 30, 2023 or 2022.

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 did not record any goodwill or indefinite-lived asset impairment charges during the three months ended March 31, 2024 or 2023.

Valuation of Contingent Consideration Resulting from a Business Combination

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

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

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

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

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

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

Actual results may differ from estimates.

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

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

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

As a result, the liability recorded for potential earn out payments in the Company’s condensed consolidated balance sheets was zero as of September 30, 2023 and December 31, 2022.

This amount is subject to change in the event that there are changes to our expectations and related valuation assumptions, which are valued using Level 3 fair value inputs.

Long-Lived Assets  

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.

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 condensed 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 condensed consolidated balance sheets was zero as of March 31, 2024 and December 31, 2023.

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.

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.

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

three and nine months ended September 30, 2023 or 2022.

The Company did not record any long-lived asset impairments during the three months ended March 31, 2024 or 2023.

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.

3 unchanged sentences

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

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

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

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

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

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

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

Operating leases are recognized in the condensed 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 the issuance of common stock purchase warrants issued 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 during the period 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 condensed 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 11, “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 historically included a Ratchet whereby the applicable conversion price could be adjusted (as defined and described in Note 12, “Stockholders’ Equity”).

The applicable Ratchet provisions of the Company’s outstanding Preferred Stock terminated during the quarter ended March 31, 2024.

When a conversion price was adjusted under the Ratchet, the Company recorded a deemed dividend as a reduction to income available to common stockholders.

In accordance with ASC 820, the deemed dividend was 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 were determined using the Black-Scholes option pricing model.

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

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

Revenue Recognition

Revenue is recognized from the sale of goods in accordance with ASC 606, Revenue from Contracts with Customers .

Under ASC 606, the Company recognizes revenue when or as the Company’s performance obligations are satisfied by transferring control of the promised goods to customers in an amount that reflects the consideration which the Company expects to receive.

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

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

identify the contract(s) with a customer;

3 unchanged sentences

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

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

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

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

The Company presents revenue net of sales taxes and refunds. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company may be required to defer recognition of revenue for upfront payments until it performs its obligations under these arrangements, and such amounts are recorded as deferred revenue upon receipt. Deferred revenue was $ 103 thousand and $ 4 thousand as of September 30, 2023 and December 31, 2022, respectively, which is recorded within Accrued liabilities on the Company’s unaudited condensed consolidated balance sheets.

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 store (Avenova.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 condensed consolidated statements of operations.

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

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

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

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

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

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

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

Revenue generated from 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 allowance for excess and obsolete inventory along with lower of cost and estimated net realizable value.

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

Research and Development Costs

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

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

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

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

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

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

2 unchanged sentences

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

Advertising expenses were $ 0.3 million and $ 0.5 million for the three months ended September 30, 2023 and 2022, respectively.

Advertising expenses were $ 0.9 million and $ 1.6 million for the nine months ended September 30, 2023 and 2022, respectively.

Advertising expenses were $ 0.2 million and $ 0.3 million, respectively, for the three months ended March 31, 2024 and 2023, respectively.

Stock-Based Compensation

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

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

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

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

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

See Note 13, “Equity-Based Compensation”

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

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

See Note 13, “Equity-Based Compensation” for further information regarding stock-based compensation expense and the assumptions used in estimating the expense.

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

3 unchanged sentences

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

Common Stock Warrants

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

Derivatives and Hedging .

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

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

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

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.

Net Loss per Share

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

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

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

2 unchanged sentences

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

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

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

( 5,657 )  

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

( 194 )  

Net loss attributable to common stockholders (basic and diluted)

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

Net loss per share (basic and diluted)

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

For the three and nine months ended September 30, 2023 and 2022, Series B Non-Voting Convertible Preferred Stock (the “Series B Preferred Stock”) and the Series C Non-Voting Convertible Preferred Stock (the “Series C Preferred Stock”) were excluded from the computation of diluted net loss per share as their inclusion on an “if converted”

basis would have been anti-dilutive.

For the three months ended March 31, 2024 and 2023, 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 (in thousands):

As of September 30,

Series B Preferred Stock

Series C Preferred Stock

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:

Balance at March 31,

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

3,616,000 1,847,580

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

5,192,961 357,750

Stock options

116,700 121,203

Stock warrants

13,111  

8,382,447 2,305,519

17,308,108 4,632,052

Recent Accounting Pronouncements

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

included in the Annual Report.

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

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

Credit Losses (Topic 326 ):

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

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

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

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

FAIR VALUE MEASUREMENTS  

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

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

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

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

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

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

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

See Notes 9, “Convertible Note”;

11, “Warrant Liability”;

and Note 12, “Stockholder’s Equity”

for further discussion of related fair value calculations.

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

FAIR VALUE MEASUREMENTS

The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 ( in thousands):

Fair Value Measurements Using

for Identical

September 30,

Restricted cash held as a certificate of deposit

Deposit held as a certificate of deposit

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

$ 476 $ 476 $ — $ —

Warrant liabilities

$ 232 $ — $ 232 $ —

Embedded derivative liability

Total liabilities

$ 391 $ — $ 391 $ —

Fair Value Measurements Using

for Identical

Restricted cash held as a certificate of deposit

Deposit held as a certificate of deposit

$ 476 $ 476 $ — $ —

Warrant liabilities

$ 334 $ — $ 334 $ —

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 10, “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 an embedded derivative liability on its condensed 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 Unsecured Convertible Notes (see Note 10, “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 Unsecured Convertible Notes, the Company recorded an embedded derivative liability on its unaudited condensed consolidated balance sheet with a corresponding debt discount which is netted against the face value of the Unsecured Convertible Notes.

The fair value of the embedded derivative liability was classified within Level 2 of the fair value hierarchy.

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 2.

See Note 11, “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 2 ) during the three months ended March 31, 2024 and 2023.

There were no transfers in or out of Level 1, Level 2 or Level 3 assets and liabilities for the three months ended March 31, 2024 and 2023.

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 periods reported.

See also Note 13, “Equity-Based Compensation” for related Black Scholes valuation assumptions.

Warrant Liabilities

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

Currently, the Company’s December 2023 Warrants and March 2024 Warrant are subject to stockholder approval 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.

See Note 11, “Common Stock Warrants” for additional information and the definitions of the Company’s warrants.

Measurement event

Stockholder Approval Issuance Reporting Date

June 9, 2023 December 21, 2023 December 21, 2023

$1.4 million $0.4 million $0.3 million

not applicable

$0.2 million not applicable $56 thousand

Exercise price

1.30 $ 1.30 $ 0.25 $ 0.25

$ 0.72 (a) $ 0.68 $ 0.23 $ 0.20

80.1 % 77.6 % 79.3 % 79.3 %

Risk-free rate

3.60 - 4.04 % 3.92 - 4.59 % 3.88 % 3.85 %

Dividend yield

0.0 % 0 % 0 % 0 %

2.1 - 5.1 % 2.0 - 5.0 5.5 5.5

Measurement event

Reporting Date

March 31, 2024

March 25, 2024

March 31, 2024

$173 thousand

not applicable

Exercise price

$ 0.25 $ 0.14 $ 0.14

$ 0.10 $ 0.13 $ 0.10

92.3 % 86.9 % 86.9 %

Risk-free rate

4.21 % 4.24 % 4.21 %

Dividend yield

Adjusted for the dilutive effect of the 2023 Private Placement.

See additional discussion above.

Warrant Modifications

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

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

July 2020, November 2021,

September 2022 & November 2022

Measurement event

Prior to amendment

After amendment

April 27, 2023

not applicable

Exercise price

$ 6.30 $ 1.50

$ 0.72 (a) $ 0.72 (a)

80.1 % 80.1 %

Risk-free rate

3.59 - 4.73 % 3.59 - 4.73 %

Dividend yield

1.1 - 5.6 1.1 - 5.6

May 2023 Warrants

Measurement event

Prior to amendment

After amendment

December 21, 2023

not applicable

Exercise price

$ 1.30 $ 0.25

$ 0.23 $ 0.23

79.3 % 79.3 %

Risk-free rate

3.92 - 4.62 % 3.92 - 4.62 %

Dividend yield

1.5 - 4.5 1.5 - 4.5

Adjusted for the dilutive effect of the 2023 Private Placement.

See additional discussion above.

Preferred Stock Conversion Price Adjustments

Terms of the Company’s outstanding Preferred Stock historically included a Ratchet whereby the applicable conversion price could be adjusted (see Note 12, “Stockholders’ Equity”).

The applicable Ratchet provisions of the Company’s outstanding Preferred Stock terminated during the quarter ended March 31, 2024.

When a conversion price was adjusted under the Ratchet, the Company recorded 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 & C Preferred Stock

Measurement event

Prior to Ratchet

After Ratchet

April 27, 2023

Total value (b)

$11.6 million

Deemed dividend

not applicable

Exercise price

$ 6.30 $ 1.30

$ 0.72 (a) $ 0.72 (a)

80.1 % 80.1 %

Risk-free rate

4.91 % 4.91 %

Dividend yield

Term (in years)

Series B & C Preferred Stock

Measurement event

Prior to Ratchet

After Ratchet

December 21, 2023

Total value (b)

Deemed dividend

not applicable

Exercise price

$ 1.30 $ 0.25

$ 0.23 $ 0.23

79.3 % 79.3 %

Risk-free rate

5.43 % 5.43 %

Dividend yield

Series C Preferred Stock

Measurement event

Prior to Ratchet After Ratchet

March 24, 2024 March 24, 2024

Total value (b)

$0.5 million $0.9 million

Deemed dividend

not applicable $0.4 million

Exercise price

$ 0.25 $ 0.14

$ 0.13 $ 0.13

79.9 % 79.9 %

Risk-free rate

5.51 % 5.51 %

Dividend yield

Term (in years)

Adjusted for the dilutive effect of the 2023 Private Placement.

See additional discussion above.

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

Bifurcatable Derivatives

Upon issuance in March 2024, the Unsecured 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 10, “Convertible Notes” for additional discussion).

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

Notes derivative

Measurement event

Reporting Date

March 25, 2024

March 31, 2024

not applicable

Exercise price

$ 0.14 $ 0.14

$ 0.13 $ 0.10

86.9 % 86.9 %

Risk-free rate

4.54 % 4.59 %

Dividend yield

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 10, “Convertible Notes” for additional discussion).

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

Notes derivative

Measurement event

Shareholder approval

April 27, 2023

Total value (b)

not applicable

Exercise price

$ 1.30 $ 1.30

$ 0.72 (a) $ 0.75

80.1 % 76.9 %

Risk-free rate

4.88 % 5.41 %

Dividend yield

Adjusted for the dilutive effect of the 2023 Private Placement.

See additional discussion above.

Adjusted for probability of occurrence.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

September 30,

Prepaid dues and subscriptions

Prepaid taxes

Prepaid inventory

Prepaid insurance

Prepaid dues and subscriptions

Prepaid marketing costs

Prepaid patents

Tenant allowance

Prepaid expenses from discontinued operations

Total prepaid expenses and other current assets

Inventory consisted of the following (in thousands):

September 30,

Raw materials and supplies

$ 1,031  

$ 1,273  

$ 160 $ 1,027

Finished goods

Reserve for excess and obsolete inventory

( 229 ) ( 627 )

Inventory, net of reserves, from discontinued operations

Total inventory, net

$ 3,493  

$ 3,437  

PROPERTY AND EQUIPMENT  

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

September 30,

Office and laboratory equipment

4 unchanged sentences

accumulated depreciation

( 685 ) ( 673 )

Total property and equipment, net

Depreciation expenses were $ 13 thousand and $ 29 thousand for the three months ended September 30, 2023 and 2022, respectively, and $ 39 thousand and $ 88 thousand for the nine months ended September 30, 2023 and 2022, respectively.

OTHER INTANGIBLE ASSETS

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

Balance at September 30, 2023

Indefinite-lived intangible assets

$ 2,080  

$ 1,110  

Amortizable intangible assets

Customer relationships

Trade secrets / product formulations

Total other intangible assets

$ 5,260  

$ 2,166  

Balance at December 31, 2022

Indefinite-lived intangible assets

$ 2,080  

$ 1,110  

Amortizable intangible assets

Customer relationships

Trade secrets / product formulations

Total other intangible assets

$ 5,260  

$ 2,280  

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

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

caption in the Company’s consolidated statements of operations.

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

Amortization expenses were $ 38 thousand and $ 90 thousand for the three months ended September 30, 2023 and 2022, respectively, and $ 114 thousand and $ 272 thousand for the nine months ended September 30, 2023 and 2022, respectively.

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

$ 1,056  

ACCRUED LIABILITIES  

Depreciation expense related to continuing operations was $ 12 thousand and $ 13 thousand for the three months ended March 31, 2024 and 2023, respectively.

The Company recorded no depreciation expense during the three months ended March 31, 2024 and 2023, and no property and equipment as of March 31, 2024 and December 31, 2023 related to discontinued operations.

ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

September 30,

Contract liabilities (see Note 14)

$ 1,042  

$ 1,807  

Employee payroll and benefits

Marketing costs

Accrued interest on Convertible Notes

Inventory purchases

Accrued liabilities from discontinued operations

Total accrued liabilities

$ 1,869  

$ 2,724  

CONVERTIBLE NOTE

On April 27, 2023, the Company entered into a Securities Purchase Agreement with existing accredited institutional investors (the “Purchasers”) of the Company that provided for the issuance and sale in a private placement (the “2023 Private Placement”) of (i) $ 3.3 million aggregate principal amount  (the “Aggregate Principal Amount”) of Original Issue Discount Senior Secured Convertible Debentures Due November 1, 2024 ( the “Convertible Notes”) that may be converted or redeemed into up to an aggregate of 2,538,464 shares of common stock (the “Conversion Shares”), (ii) a new long-term Series B- 1 warrant exercisable for up to an aggregate of 2,538,464 shares of common stock through June 9, 2028 ( “Series B- 1 Warrants”), and (iii) a new short-term Series B- 2 warrant exercisable for up to an aggregate of 2,538,464 shares of common stock through June 9, 2025 ( “Series B- 2 Warrants” and, together with the Series B- 1 Warrants, the “May 2023 Warrants”).

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

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

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

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

The Company received Stockholder Approval at its 2023 Annual Meeting of Stockholders on June 9, 2023, and, as a result, the Convertible Notes and the May 2023 Warrants are currently convertible or exercisable, as applicable, in accordance with their respective terms.

The Convertible Notes are convertible by the holder, in whole or in part, into shares of common stock at a conversion price equal to $ 1.30 per share (“Conversion Price”) at any time, subject to certain limitations upon conversion.

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

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

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

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

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

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

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

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

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

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

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

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

Each of the options requires bifurcation.

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

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

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

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

$ 0.72  

Equity volatility

Risk-free interest rate

Dividend yield

Remaining term

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

As of June 9, 2023, the date of stockholder approval for the shares underlying potential conversion of the Convertible Notes, the fair value of the combined embedded derivative liability was determined to be $ 169 thousand in accordance with the following key assumptions:

$ 0.75  

Equity volatility

Risk-free interest rate

Remaining term

The change of $ 40 thousand in fair value between the date of issuance and June 9, 2023 was recorded as a non-cash gain in the consolidated statements of operations and comprehensive loss.

The derivative liability was subsequently reclassified to equity.

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

(in thousands)

Principal amount

$ 2,567  

Unamortized discount

Unamortized debt issuance costs

Total Convertible Note, net

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

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

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

During the three and nine months ended September 30, 2023, interest expense recognized, including amortization of the issuance costs and debt discount, was $ 0.7 million and $ 1.2 million, respectively.

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

(in thousands)

Remainder of 2023

$ 2,567  

$ 1,266 $ 1,169

COMMITMENTS AND CONTINGENCIES

Indemnification  

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

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

Indemnification Agreements

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

The maximum amount of potential future indemnification is unlimited;

1 unchanged sentence

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

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

Accordingly, it has not recorded any liabilities for these agreements as of March 31, 2024 or December 31, 2023.

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

6 unchanged sentences

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

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

Accordingly, the Company has not recorded any liabilities for these agreements as of March 31, 2024 or December 31, 2023.

Legal Matters

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

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 September 30, 2023 and December 31, 2022, there were no legal matters that, in the opinion of management, would ultimately result in liability that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.

As of March 31, 2024 and December 31, 2023, there were no legal matters that, in the opinion of management, would ultimately result in liability that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.

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

The Company expenses legal costs in the period incurred.

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

The Company leases office space for its corporate headquarters located in Emeryville, California.

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

The Company also leases 19,136 square feet of space located in Riverside, Missouri, which it utilizes for light manufacturing, storage, distribution of products and administrative functions.

The lease commenced on October 1, 2019 and expires on December 31, 2024.

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

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

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

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Operating lease cost

Other information

Operational cash flow used for operating leases

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

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

September 30,

The current lease term expires on July 31, 2027.

Lease costs for the three months ended March 31, 2024 and 2023 were as follows (in thousands):

For the Three Months Ended

Operating lease – expense

Operating lease from discontinued operations – expense

Operating lease – included in operating cash flow

Operating lease from discontinued operations – included in operating cash flow

The Company has measured its operating lease liabilities as the present value of minimum lease 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 for operating leases from continuing operations are summarized as follows:

For the Three Months Ended

Weighted-average remaining lease term (in years)

Weighted-average discount rate

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

Future lease payments under non-cancelable leases as of March 31, 2024 were as follows (in thousands):

Total future minimum lease payments

Less imputed interest

$ 1,729  

Operating lease liabilities

Operating lease liabilities- non-current

$ 1,729  

WARRANT LIABILITY

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

Equity”.

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

Equity”.

Imputed interest

Operating lease liability

Operating lease liability- non-current

FINANCING ACTIVITIES

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

3, “ Fair Value Measurements ” ;

10, “ Convertible Notes ” ;

11, “ Common Stock Warrants ” and 12, “ Stockholders ’ Equity ” for certain defined terms below and additional discussion of financing activities and related accounting policies and fair value estimates.

2024 Subsidiary Guarantee Termination

On March 24, 2024, in connection with completing certain required conditions to close the DERMAdoctor Divestiture, the Company and the holders of the Secured Convertible Notes entered into a First Amendment (the “ First Amendment ”) to the Company’s 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, and a Consent and Release (the “ Subsidiary Guarantee Consent ”), to terminate the Subsidiary Guarantee, dated April 7, 2023 ( the “ Subsidiary Guarantee ”) (collectively, the “ 2024 Subsidiary Guarantee Termination ”).

To obtain the secured parties’ consent that resulted in the reduction of the collateral available to secure the obligations under the Secured Convertible Notes and as consideration for the secured parties taking the necessary actions to execute and deliver the First Amendment and the Subsidiary Guarantee Consent, the Company provided each secured party the option, at the Secured Party’s election, to receive only upon the closing of the DERMAdoctor Divestiture either a March 2024 Warrant (see Note 11, “Common Stock Warrants”) or an Unsecured Convertible Note (see Note 10 “Convertible Notes”).

The Company issued, based on the secured parties’ elections, (i) a March 2024 Warrant to a secured party that is exercisable for an aggregate of 1,000,000 shares of Common Stock and (ii) Unsecured Convertible Notes to four 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.

The Company incurred total issuance costs of $ 130 thousand in conjunction with the 2024 Subsidiary Guarantee Termination.

The Company allocated $ 19 thousand of the issuance costs to the Unsecured Convertible Notes which was recorded as a discount in the Company’s condensed consolidated balance sheets.

The remaining $ 111 thousand was allocated to the embedded derivative liability and warrant liability and expensed as “Other expense, net” in the Company’s condensed consolidated statements of operations, during the three months ended March 31, 2024.

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 as of March 31, 2024.

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 condensed consolidated balance sheets.

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

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 condensed 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 condensed consolidated statements of operations.

CONVERTIBLE NOTES

Unsecured Convertible Note

In March 2024, the Company issued $ 525 thousand aggregate principal amount unsecured convertible notes (the “ Unsecured Convertible Notes ”) in conjunction with the 2024 Subsidiary Guarantee Termination.

The 2024 Subsidiary Guarantee Termination was executed with certain holders of the Secured Convertible Notes in order to close the DERMAdoctor Divestiture (see additional discussion in Note 9, “Financing Activities” and Note 17, “Divestiture and Discontinued Operations”).

The Unsecured Convertible Notes are due March 25, 2026 and bear no stated interest.

The Unsecured Convertible Notes may be converted or redeemed for a conversion price equal to $ 0.14 per share at any time beginning on the date that the Company’s stockholders approve the conversion of up to the aggregate principal amount of all of the Unsecured Convertible Notes.

Any such conversion is at the election of individual holders up to the amount of outstanding principal at the time of conversion subject to certain limitations such as beneficial ownership limitations.

Upon stockholder approval, the Unsecured Convertible Notes will be convertible for up to 3,750,000 shares of common stock.

If stockholder approval is not obtained by September 25, 2024, the Unsecured Convertible Notes will become immediately due and payable.

Upon issuance in March 2024, the lender’s conversion option under the Unsecured 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 $ 224 thousand as of the date of issuance in accordance with a Black Scholes valuation model.

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

Upon stockholder approval of conversion of the notes, the embedded call option will no longer require liability treatment and will be reclassified to equity.

The fair value of the embedded derivative liability was determined to be $ 159 thousand as of March 31, 2024.

The change of $ 65 thousand in fair value between the date of issuance and as of March 31, 2024 was recorded as a non-cash gain on change in fair value of embedded derivative liability in the condensed consolidated statements of operations.

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

The discount to the note recorded for the embedded derivative liability upon issuance and debt issuance costs are being amortized to interest expense using the effective interest rate method over the term of the Unsecured Convertible Notes, assuming that the Unsecured Convertible Notes will be redeemed for cash of $ 525 thousand at time of maturity as of March 25, 2026.

During the three month period ended March 31, 2024, the effective interest rate on the Unsecured Convertible Notes was 144 %.

During the three month period ended March 31, 2024, interest expense recognized, including amortization of the issuance costs and debt discount, was nominal, which was included in other expense, net in the condensed consolidated statements of operations.

Secured Convertible Note

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 9, “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 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 March 31, 2024, the Secured Convertible Notes were convertible for up to 1,030,944 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 March 31, 2024 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 12, “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.

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 11, “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.

The effective interest rate on the Secured Convertible Notes was 173 %.

During the three months ended March 31, 2024, interest expense recognized, including amortization of the issuance costs and debt discount, was $ 0.4 million, which was included in other expense, net in the condensed consolidated statements of operations.

The Secured Convertible Notes are presented as follows as of March 31, 2024 ( in thousands):

Principal amount

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

Unamortized debt issuance costs

Total Secured Convertible Notes, net

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

As of March 31, 2024, the Company’s contractual maturity of the principal balance of the Secured Convertible Notes was as follows (in thousands):

COMMON STOCK WARRANTS

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

3, “ Fair Value Measurements ” ;

9, “ Financing Activities ” ;

and 12, “ Stockholders ’ Equity ” for certain defined terms below and additional discussion of financing activities and related accounting policies and fair value estimates.

March 2024 Warrant

In March 2024, the Company executed the First Amendment and Subsidiary Guarantee Consent as part of the 2024 Subsidiary Guarantee Termination with holders of the Secured Convertible Notes (see Note 10, “Convertible Notes”) in order to close the DERMAdoctor Divestiture (see additional discussion in Note 9, “Financing Activities” and Note 17, “Divestiture and Discontinued Operations”).

In exchange for the consent of each holder, the option, at the holder’s election, to receive upon the closing of the DERMAdoctor sale either, a new common stock warrant (the “ March 2024 Warrant ”), or a new unsecured convertible note (see additional discussion in Note 17, “Divestiture and Discontinued Operations”).

One holder elected the option to receive a March2024 Warrant exercisable for 1,000,000 shares of common stock for $ 0.14 per share.

Upon issuance, the March 2024 Warrant was subject to stockholder approval prior to exercise.

Stockholder approval had not occurred as of March 31, 2024.

This warrant was 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.

December 2023 Warrants

In December 2023, in conjunction with the 2023 Warrant Reprice Transaction, the Company issued new common stock purchase 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 March 31, 2024.

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

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

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

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

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

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.40  

$ 0.22  

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

$ 0.68  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.36  

$ 0.18  

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

In May 2023, in conjunction with the 2023 Private Placement, the Company issued the following new common stock purchase warrants (collectively, the “ May 2023 Warrants ”):

May 2023 Series B- 1 Warrants exercisable for 2,538,464 shares of common stock for $ 1.30 per share through June 9, 2028 (“ May 2023 B- 1 Warrants ”);

May 2023 Series B- 2 Warrants exercisable for 2,538,464 shares of common stock for $ 1.30 per share through June 9, 2025 (“ May 2023 B- 2 Warrants ”).

In December 2023, in conjunction with the 2023 Warrant Reprice Transaction, the Company amended certain May 2023 Warrants to reduce their exercise prices to $ 0.25 .

Immediately after amendment, the following May 2023 Warrants were exercised (while any unexercised May 2023 Warrants maintained an exercise price of $ 1.30 ):

May 2023 B- 1 Warrants exercisable for 634,616 shares of common stock;

May 2023 B- 2 Warrants exercisable for 1,894,232 shares of common stock.

For the amendment in December 2023, the Company recognized a $ 0.2 million loss on modification of common stock warrants related to the May 2023 Warrants.

November 2022 Warrants

In November 2022, in conjunction with the 2022 Private Placement, the Company issued the following common stock purchase warrants (collectively, the “ November 2022 Warrants ”):

November 2022 Series A- 1 Warrants exercisable for 515,876 shares of common stock for $ 6.30 per share through November 20, 2024 (“ November 2022 A- 1 Warrants ”);

November 2022 Series A- 2 Warrants exercisable for 515,876 shares of common stock for $ 6.30 per share through May 20, 2024 (“ November 2022 A- 2 Warrants ”).

In May 2023, in conjunction with the 2023 Private Placement, the Company amended certain November 2022 Warrants to reduce their exercise prices from $ 6.30 to $ 1.50 as follows:

November 2022 A- 1 Warrants exercisable for 436,510 shares of common stock;

November 2022 A- 2 Warrants exercisable for 436,510 shares of common stock.

For the amendment in May 2023, the Company recognized a $ 0.1 million loss on modification of common stock warrants related to the November 2022 Warrants.

September 2022 Warrants

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

The September 2022 Warrants were not exercisable prior to stockholder approval being received on November 10, 2022.

Under ASC 480, Distinguishing Liabilities from Equity , the September 2022 Warrants were classified as liabilities from the date of issuance until Company stockholders approval on November 10, 2022, at which time they were reclassified to equity.

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 4.55  

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 1.40  

In September 2022, in conjunction with the warrant reprice transaction (the “ 2022 Warrant Reprice Transaction ”), the Company issued new common stock purchase 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 certain 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

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

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

The November 2021 Warrants were not initially exercisable prior to certain stockholder approval being received on January 31, 2022. 

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

As of December 31, 2021 

the fair value of the November 2021 Warrants was determined to be $ 9.6 million in accordance with the following key assumptions, which was recorded as a liability:

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 8.75  

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 7.00  

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

As a result of the amendment, these November 2021 Warrants were no longer exercisable prior to certain stockholder approval being received on November 10, 2022.

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

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 1.40  

Amended July 2020 Warrants

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

The Amended July 2020 Warrants exercisable for 77,145 shares of common stock were no longer exercisable prior to certain stockholder approval being received on November 10, 2022.

Under ASC 480, Distinguishing Liabilities from Equity , these Amended July 2020 Warrants were reclassified as liabilities on the date of amendment and remained recorded as liabilities through the date of approval of certain stockholder approval on November 10, 2022 at which time they were reclassified to equity.

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 3.50  

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 1.05  

STOCKHOLDERS' EQUITY

Common Stock and Preferred Stock

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

Reverse Stock Split

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

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

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

Proportionate voting rights and other rights of common stockholders were not affected by the Reverse Stock Split.

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

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

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

2023 Private Placement

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

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

For additional information regarding the 2023 Warrants and the related warrant liability and valuation, please see Note 11 , “Warrant Liability”.

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

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

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

(i) reduce the exercise price to $6.30;

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

and (iii) in the case of the November 2021 Warrants, extend the termination date to September 11, 2028 ( as amended, the “Amended November 2021 Warrants”

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

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

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

As a result of the 2022 Warrant Reprice Transaction amendments to the Amended November 2021 Warrants and the Amended July 2020 Warrants, the Company recorded a non-cash loss on modification of common stock warrants in the amount of $ 1.9 million.

The loss represents the increase in fair value of the Amended November 2021 Warrants and the Amended July 2020 Warrants as a result of the 2022 Warrant Reprice Transaction modification.

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

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

November 2021

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 3.15  

$ 0.70  

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

November 2021

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 4.55  

$ 3.50  

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

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

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

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.20  

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

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.39  

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

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

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

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

November 2021

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.20  

$ 0.06  

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

November 2021

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.39  

$ 0.24  

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

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

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

The September 2022 Warrants expire on September 11, 2028.

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

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

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

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

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

Ladenburg Thalmann & Co.

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

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

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

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

Series C Preferred Stock, Series A- 1 Warrants and Series A- 2 Warrants

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

( 1 ) 3,250 shares of 

Series C Preferred Stock convertible into an aggregate of 516,750 shares of common stock, ( 2 ) series A- 2 warrants to purchase common stock, which are exercisable for 515,876 shares of common stock through May 20, 2024 ( the “Series A- 2 Warrants”), and ( 3 ) series A- 1 warrants to purchase common stock, which are exercisable for 515,876 shares of common stock through November 20, 2028 ( the “Series A- 1 Warrants”

and, together with the Series A- 2 Warrants, the “2022 Warrants”).

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

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

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

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

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

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

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

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

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

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

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

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

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 5.35  

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

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.61  

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

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

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

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

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

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

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.21  

$ 0.00  

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

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.40  

$ 0.09  

Series B Preferred Stock and November 2021 Warrants

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

The 2021 Private Placement closed on November 2, 2021.

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

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

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

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

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

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

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

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

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

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 8.05  

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

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 2.10  

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

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

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

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

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

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 5.35  

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

$ 0.72  

Expected price volatility

Expected term (in years)

Risk-free interest rate

Dividend yield

Weighted-average fair value of warrants

$ 0.61  

As of September 30, 2023, 8,850 shares of the Series B Preferred Stock had been converted into common stock.

Each of the remaining 6,150 shares of the Series B Preferred Stock as of September 30, 2023, was currently convertible into 770 shares of common stock at a conversion price of $ 1.30 .

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

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

Common Stock Warrants

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

2019 Ladenburg Warrants

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

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

In November 2021, in conjunction with a private placement transaction, the Company issued the new common stock purchase 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 certain 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 2020, certain of the Company’s accredited investors were granted warrants with an exercise price of $ 57.75 (the “July 2020 Warrants”).

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

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

The July 2020 Warrants expire on January 22, 2026.

TLF Bio Innovation 2021 Warrants

In 2021, TLF Bio Innovation was granted warrants exercisable for 429 shares of common stock with an exercise price of $ 23.51 (the “TLF Warrants”).

The TLF Warrants expire on January 15, 2026.

Summary of Warrants Outstanding

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

(in thousands)

In July 2020, in conjunction with a private placement transaction, the Company issued the new common stock purchase 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 certain 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 three months ended March 31, 2024 and 2023 were as follows:

Outstanding at December 31, 2022

$ 7.70  

2,305,519 $ 7.70

Warrants granted

Warrants exercised

Warrants expired

Outstanding at September 30, 2023

Outstanding at March 31, 2023

2,305,519 7.70

Outstanding at December 31, 2023

7,382,447 $ 1.82

Warrants granted

1,000,000 0.14

Warrants exercised

Warrants expired

Outstanding at March 31, 2024

8,382,447 1.60

Common stock warrants outstanding as of March 31, 2024 were as follows:

Expiration Date

2019 Ladenburg Warrants

$ 34.65 August 8, 2024

July 2020 Warrants

$ 57.75 January 22, 2026

July 2020 Warrants

$ 1.50 January 22, 2026

$ 23.51 January 15, 2026

November 2021 Warrants

$ 6.30 September 11, 2028

November 2021 Warrants

$ 1.50 September 11, 2028

September 2022 Warrants

$ 6.30 September 11, 2028

September 2022 Warrants

$ 1.50 September 11, 2028

November 2022 A-1 Warrants

$ 6.30 November 20, 2028

November 2022 A-1 Warrants

$ 1.50 November 20, 2028

November 2022 A-2 Warrants

$ 6.30 May 20, 2024

November 2022 A-2 Warrants

$ 1.50 May 20, 2024

May 2023 B-1 Warrants

$ 1.30 June 9, 2028

May 2023 B-2 Warrants

$ 1.30 June 9, 2025

December 2023 Warrants

$ 0.25 June 21, 2029

March 2024 Warrant

$ 0.14 To be determined (*) 1,000,000

Outstanding at March 31, 2024

*The March 2024 Warrant will be initially exercisable on the later of (A) the six ( 6 ) month anniversary of the date of issuance or (B) the date immediately following the date on which Company stockholders approve the exercise of the March 2024 Warrant into shares of Common Stock and have a term of exercise of five ( 5 ) years from the date that the March 2024 Warrant becomes exercisable.

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.”

Warrant liabilities as of December 31, 2023

Decrease in fair value of December 2023 Warrants liability during period

Fair value of March 2024 Warrant upon issuance

Decrease in fair value of March 2024 Warrant liability after issuance

Warrant liabilities as of March 31, 2024

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 three months ended March 31, 2024 and 2023 – 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 nearly 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.

Until its expiration (as described in more detail below), the Preferred Stock had anti-dilution protection (the “ Ratchet ”) in the event that the Company sold or granted any of its common stock or any other securities, subject to certain limited exceptions, that would entitle the holder thereof to acquire common stock at an effective price per share that is lower than the then applicable conversion price of the Preferred Stock.

Series B Preferred Stock

The Company issued 15,000 shares of Series B Preferred Stock in November 2021 in connection with a private placement transaction.

As of March 31, 2024 and 2023, 904 and 11,620 shares of Series B Preferred Stock remained outstanding, respectively.

As of March 31, 2024 and 2023, outstanding shares of Series B Preferred Stock were convertible into 3,616,000 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 Preferred Stock conversion price was reduced as follows (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.

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 into common stock.

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 9, “Financing Activities”).

As of March 31, 2024 and 2023, 727 and 2,250 shares of Series C Preferred Stock remained outstanding, respectively.

As of March 31, 2024 and 2023, outstanding shares of Series C Preferred Stock were convertible into 5,192,961 and 357,750 shares of common stock at a conversion price of $ 0.14 and $6.30, respectively.

In accordance with the Ratchet, the Series C Preferred Stock conversion price was reduced as follows during the three months ended March 31, 2024 and 2023 (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.

● In March 2024, from $ 0.25 to $ 0.14 , as a result of the 2024 First Amendment and the Subsidiary Guarantee Consent, resulting in a $ 0.4 million deemed dividend.

On March 27, 2024, the Ratchet of the Series C Preferred Stock expired with no further impact because greater than 75 % of the originally issued 3,250 Series C Preferred Stock had been converted into common stock.

The Series C Preferred Stock conversion price will remain at $ 0.14 until all remaining Series C Preferred Stock has been converted.

See Note 9, “Financing Activities” and Note 11, “Common Stock Warrants” for a description of common stock and common stock warrant-related transactions during the three months ended March 31, 2024 and 2023.

EQUITY-BASED COMPENSATION

Equity Compensation Plans  

October 2007, 

the Company adopted the 

2007  Omnibus Incentive Plan (the 

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

2007  Plan expired on 

March 15, 2017. 

Upon expiration, new awards cannot be issued pursuant to the 

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

Stock options granted under the 

2007  Plan expire 

no  later than 

ten  years from the date of grant.

All stock options outstanding under the 

2007  Plan were fully vested as of 

December 31, 2020.

March 2017, 

the Company adopted the 

2017  Omnibus Incentive Plan (the 

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

June 2, 2017, 

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

2017  Plan does 

not  affect awards previously granted under the 

2007  Plan.

Upon adoption, the 

2017  Plan allowed for awards of up to 

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

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

January 1, 2018 

through 

January 1, 2027 

equal to (i) 

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

4 (a)(i) of the 

2017  Plan as determined by the Board.

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.

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.

September 30, 2023, 

there were 

147,905  shares available for future awards under the 

2017  Plan.

Under the terms of the 

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

not  be less than 

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

10 % of the Company’s stock, then 

not  less than 

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

The term of awards will 

not  be longer than 

ten  years, or in the case of ISOs, 

not  longer than 

five  years with respect to holders of more than 

10%  of the Company’s stock.

Stock options granted to employees generally vest over 

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

The Company issues new shares to satisfy option exercises under the 

2007  Plan and the 

2017  Plan.

Summary  

of Outstanding Equity Awards

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

As of March 31, 2024, there were 179,585 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, 2023, and activity during the three month period ended March 31, 2024:

(in thousands, except years

1 unchanged sentence

Outstanding at December 31, 2023

$ 37.99  

Options granted

$ 1.67  

Restricted stock units granted

Restricted stock units vested

125 $ 31.15 7.3 $ 1

Options forfeited/cancelled

$ 64.23  

Restricted stock units cancelled

Outstanding at September 30, 2023

$ 26.26  

Vested and expected to vest at September 30, 2023

$ 32.34  

Vested at September 30, 2023

$ 59.30  

Exercisable at September 30, 2023

$ 59.30  

The aggregate intrinsic value in the table above is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE American as of September 30, 2023 for options that have a quoted market price in excess of the exercise price.

There were no stock option awards exercised during the three and nine months ended September 30, 2023 and 2022.

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

As of September 30, 2023, total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately $ 0.3 million.

This amount is expected to be recognized as stock-based compensation expense in the Company’s unaudited condensed consolidated statements of operations over the remaining weighted average vesting period of 2.1 years.

( 8 ) $ 20.36

Outstanding at March 31, 2024

117 $ 31.91 6.8 $ 1

Vested and expected to vest at March 31, 2024

111 $ 33.17 6.7 $ 1

Vested and exercisable at March 31, 2024

62 $ 56.86 5.0 $ —

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 March 31, 2024 for options that have an exercise price that is lower than the market price.

There were no stock option awards exercised during the three months ended March 31, 2024 or 2023.

The Company received no cash payments for the exercise of stock options during the three months ended March 31, 2024 and 2023.

As of March 31, 2024, total unrecognized compensation cost related to unvested stock options and restricted stock was approximately $ 0.1 million.

This amount is expected to be recognized as stock-based compensation expense in the Company’s condensed consolidated statements of operations over the remaining weighted average vesting period of 1.41 years.

Equity Awards to Employees and Directors

2 unchanged sentences

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. 

During the nine months ended September 30, 2023 and 2022, the Company granted options to employees and directors to purchase an aggregate of 6,150 and 17,892 shares of common stock, respectively.

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

Nine Months Ended September 30,

See Note 2, “Summary of Significant Accounting Policies,” for a description of the accounting policies that the Company applied to value its stock-based awards.

During the three months ended March 31, 2024, the Company did not grant any options to employees or directors.

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

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

For the Three

March 31, 2023

Expected price volatility

3 unchanged sentences

Weighted-average fair value of options granted during the period

$ 1.61  

$ 9.46  

Expected Price Volatility —This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate.

The computation of expected volatility was based on the historical volatility of our own stock.

Expected Term —This is the period of time over which the options granted are expected to remain outstanding.

The expected life assumption is based on the Company’s historical data.

Risk-Free Interest Rate —This is the U.S.

Expected Term —This is the period of time over which the options granted are expected to remain outstanding.

The expected life assumption is based on the Company’s historical data.

Risk-Free Interest Rate —This is the U.S.

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

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

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

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

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

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

For the three months ended September 30, 2023 and 2022, the Company recognized stock-based compensation expense of $ 62 thousand and $ 208 thousand, respectively, for stock-based awards to employees and directors.  For the nine months ended September 30, 2023 and 2022, the Company recognized stock-based compensation expense of $ 201 thousand and $ 130 thousand, respectively, for stock-based awards to employees and directors.

During the three months ended March 31, 2024 and 2023, the Company did not grant restricted stock to employees or directors.

For the three months ended March 31, 2024 and 2023, the Company recognized stock-based compensation expense of $ 47 thousand and $ 75 thousand, respectively, for option awards to employees and directors.

Stock-Based Awards to Non-Employees

During the nine months ended September 30, 2023, the Company granted options to non-employees to purchase an aggregate of 36,000 shares of common stock in exchange for advisory and consulting services.

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

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

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

For the 

three  months ended 

September 30, 

2023,  the Company recognized compensation expense of $ 3 thousand as compared to no  stock-based compensation expense for the 

three  months ended 

September 30, 

2022,  related to non-employee stock option grants.

For the 

nine  months ended 

September 30, 

2023,  the Company recognized stock-based compensation expense of $ 7 thousand as compared to a nominal stock-based compensation expense for the 

nine  months ended 

September 30, 

2022,  related to non-employee stock option grants.

During the nine months ended September 30, 2023, the Company did not grant restricted stock to non-employees.

During the three months ended March 31, 2024 and 2023, the Company did not grant options to non-employees in exchange for advisory and consulting services.

The Company did not grant restricted stock to non-employees during the three months ended March 31, 2024.

For the three months ended March 31, 2024 and 2023, the Company recognized stock-based compensation expense of $ 13 thousand and $ 0 , respectively, as it 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):

Three Months Ended

September 30,

Nine Months Ended

September 30,

For the Three Months Ended

Research and development

3 unchanged sentences

DISTRIBUTION AGREEMENTS

Transactions under the Company’s major distribution agreements are recognized upon transfer of control of product sold to its major distribution partners at the amount of consideration that the Company expects to be entitled to.

Transactions under the Company’s major distribution agreements are recognized upon transfer of control of products sold to its major distribution partners at the amount of consideration that the Company expects to be entitled to.

The Company records contract liabilities for the amounts that are estimated to be subject to significant reversal, including allowances for services, discounts, rebate programs, and product returns.

Product Sales Discounts and Allowances  

The following table presents activities and ending reserve balances for each significant category of discounts and allowance, which constitute variable consideration for the nine months ended September 30, 2023 ( in thousands): 

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 three months ended March 31, 2024 ( in thousands):

Discounts for

Prompt Payment

Balance at December 31, 2023

$ 1,673  

$ 1,807  

Provision related to sales made in current period

$ 913 $ 12 $ 21 $ 946

Less discontinued operations

( 218 ) — — ( 218 )

Continuing operations balance at December 31, 2023

695 12 21 728

Provision related to sales made in:

Current period

Payments and customer credits issued

Balance at September 30, 2023

$ 1,000  

$ 1,042  

( 2 ) ( 7 ) ( 26 ) ( 35 )

Balance at March 31, 2024

$ 719 $ 13 $ 13 $ 745

Avenova Spray Pharmacy Distribution Agreements and Specialty Pharmacies

1 unchanged sentence

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

During the three months ended September 30, 2023 and 2022, the Company earned $ 232 thousand and $ 170 thousand, respectively, in net sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements.

During the nine months ended September 30, 2023 and 2022, the Company earned $ 519 thousand and $ 113 thousand, respectively, in net 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 September 30, 2023 and December 31, 2022, respectively.

During the three months ended March 31, 2024 and 2023, the Company earned $ 55 thousand and $ 92 thousand, respectively, in sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements.

Under these product distribution arrangements, the Company had a contract liability balance of $ 0.7 million as of March 31, 2024 and December 31, 2023.

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

The Company also recorded a prepayment of $ 141 thousand for rebates related to these distribution agreements as of September 30, 2023, with no such prepayment recorded as of December 31, 2022, that is recorded in the prepaid expenses and other current assets in the condensed consolidated balance sheets (see Note 4, “Prepaid Expenses and Other Current Assets”).

Over-the-Counter Sales of Avenova Spray

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

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

During the three and nine months ended September 30, 2023, the revenue generated from over-the-counter Avenova Spray was $ 1.6 million and $ 4.5 million, respectively.

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

DERMAdoctor Products Distribution Agreements

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

During the three and nine months ended September 30, 2023, the Company earned $ 0.1 million and $ 0.5 million, respectively, in sales revenue for its DERMAdoctor products from these distribution agreements.

During both the three and nine months ended September 30, 2022, the Company earned $ 0.4 million in sales revenue for its DERMAdoctor products from these distribution agreements.

Under these distribution arrangements, the Company had a contract liability balance of $ 0.3 million and $ 0.2 million as of September 30, 2023 and December 31, 2022, respectively.

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

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

During the three months ended March 31, 2024 and 2023, the revenue generated from Avenova Spray in these channels was $ 1.7 million and $ 1.6 million, respectively.

EMPLOYEE BENEFIT PLAN

1 unchanged sentence

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

During the three and nine months ended September 30, 2023, the Company contributed $ 32 thousand and $ 95 thousand, respectively.

During the three and nine months ended September 30, 2022, the Company contributed $ 25 thousand and $ 101 thousand, respectively.

RELATED PARTY TRANSACTIONS       

Related Party Revenue  

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Related party revenue:

$ 1,043  

Total related party revenue

$ 1,043  

Cost of goods sold:

Total related party expenses

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

The Company contributed $ 24 thousand and $ 23 thousand to the plan from continuing operations in the three months ended March 31, 2024 and 2023, respectively.

The Company contributed $ 9 thousand to the plan from discontinued operations in the three months ended March 31, 2023.

SEGMENT REPORTING

The Company’s chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, allocates resources and assesses performance based on financial information of the Company.

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

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

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

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

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

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

Select financial information for each segment is as follows:

Percentage  

of Total  

Sales,  

Eyecare & Wound Care

$ 2,481  

$ 2,507  

Total sales, net

$ 3,265  

$ 3,826  

September  

of Total  

September  

of Total  

Operating  

Eyecare & Wound Care

Total operating loss

September  

of Total  

September  

of Total  

Eyecare & Wound Care

$ 8,354  

$ 7,646  

Total sales, net

$ 10,999  

$ 10,761  

Percentage  

of Total  

Operating Loss

Eyecare & Wound Care

Total operating loss

SUBSEQUENT EVENTS

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

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

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

not  recognized in the condensed consolidated financial statements.

Except as described below there were 

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

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

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

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

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

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

) on March 31, 2023, as amended by Amendment No.

1 to the Annual Report on Form 10-K, which was filed with the SEC on April 28, 2023.

Words such as “

expects, ”

anticipated, ”

will, ”

may ,”

goals, ”

plans, ”

believes, ”

estimates, ”

concludes, ”

determines, ”

variations of these  

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

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

Risk Factors ”

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

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

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

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

Overview  

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

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

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

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.

In September 2023, we launched the Avenova Allograft, a dehydrated single-layer amnion membrane used by eyecare professionals as protective covering for the repair of ocular surfaces.

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

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

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

We have not been able to achieve these objectives to date, as DERMAdoctor’s product revenue declined in 2023 compared to 2022, while operating costs relating to these products remained substantially the same.

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

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

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

We currently sell these products only through distributors.

Recent Developments

2023 Private Placement

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

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

Due to the number of shares of common stock that may be issued upon conversion or redemption of the Convertible Notes and the exercise of the May 2023 Warrants, we were required to obtain the Stockholder Approval for the issuance of these shares of common stock in accordance with Section 713(a) and 713(b) of the NYSE American Company Guide.

The Company received the Stockholder Approval at its 2023 Annual Meeting of Stockholders on June 9, 2023, and, as a result the Convertible Notes and the May 2023 Warrants are currently convertible or exercisable, as applicable, in accordance with their respective terms.

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

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

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

anti-dilution protection.

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

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

For additional information regarding the 2023 Private Placement, the Convertible Notes, the May 2023 Warrants, the warrant amendments and the other related agreements and transactions, as well as the antidilution adjustment to the Series B Preferred Stock and Series C Preferred Stock, see Note 9 “Convertible Notes”

and Note 12 “Stockholders’

Equity”

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

Financial Overview and Outlook

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

Our net losses were $1.8 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively.

In addition, our net losses were $5.5 million and $2.4 million for the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, we had an accumulated deficit of $165.7 million, total current assets of $8.2 million and total assets of $12.9 million.

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

Critical Accounting Estimates

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

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

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

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

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

Actual results may differ from these estimates.

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

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

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

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

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

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

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

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

Valuation of Contingent Consideration Resulting from a Business Combination

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

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

Updates to assumptions could have a significant impact on our results of operations in any given period.

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

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

Estimates of Future Product Returns

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

Accordingly, revenue is reduced for estimated future product returns.

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

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

Common Stock Warrant Liabilities

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

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

Results of Operations

Comparison of the Three Months  

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

The Company operates as one reportable segment, Eyecare and Wound Care, which is described in further detail below.

This is based on the objectives of the business and how our chief operating decision maker (CODM), the President and Chief Executive Officer, monitors operating performance and allocates resources.

Change in Reportable Segments

The Company previously operated in principally two reportable segments, ( 1 ) Eyecare and Wound Care and ( 2 ) Skincare.

During the three month period ended March 31, 2024, in connection with the previously announced strategic shift and upon the DERMAdoctor Divestiture, the Company has ceased to operate the Skincare segment.

As a result, the Company changed the level of detail at which our CODM regularly reviews and manages the businesses, resulting in a change to our reportable segments.

We now manage and report our operating results through one reportable segment:

Eyecare and Wound Care.

This change allows us to better align our business models, resources, and cost structure to the specific current and future growth of our business, while maintaining the necessary information and transparency to our stockholders.

Our historical segment information has been recast to conform to the current segment structure.

DIVESTITURE AND DISCONTINUED OPERATIONS

On March 12, 2024, the Company entered into an agreement to sell 100 % of the membership units of DERMAdoctor for a closing purchase price of $ 1.1 million.

The sale of the membership units closed, and the DERMAdoctor Divestiture occurred, on March 25, 2024.

In order to close the sale, the Company was required to obtain the consent of the holders of the Secured Convertibles Notes (see Note 10, “Convertible Notes”) issued in May 2023 to (i) amend 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 and (ii) terminate the Subsidiary Guarantee, which DERMAdoctor entered into in connection with the issuance of the Secured Convertible Notes.

On March 24, 2024, the Company and the secured parties entered into a First Amendment to the Security Agreement, to effect an amendment to the Security Agreement and a Consent and Release to terminate the Subsidiary Guarantee.

To obtain the secured parties’ consent and as consideration for the secured parties taking the necessary actions to execute and deliver the First Amendment and the Subsidiary Guarantee Consent, the Company provided each secured party the option, at the secured party’s election, to receive only upon the closing of the DERMAdoctor Sale Transaction either:

a March 2024 Warrant or the Unsecured Convertible Notes (see Note 10 “Convertible Notes”).

The accounting requirements for reporting the DERMAdoctor business as discontinued operations were met during the first quarter of 2024.

Accordingly, the condensed consolidated financial statements and notes to the condensed consolidated financial statements reflect the results of the DERMAdoctor business as a discontinued operation for the periods presented.

In accordance with the provisions of ASC 205 - 20, the Company has separately reported the assets and liabilities of the discontinued operations in the condensed consolidated balance sheets.

The assets and liabilities have been reflected as discontinued operations in the condensed consolidated balance sheets as of December 31, 2023, and consist of the following (in thousands):

Current assets:

Cash and cash equivalents

Accounts receivable, net of allowance for credit losses ($ 0 at December 31, 2023)

Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($ 363 at December 31, 2023)

Prepaid expenses and other current assets

Total current assets, discontinued operations

Total assets, discontinued operations

Current liabilities:

Accounts payable

Accrued liabilities

Operating lease liabilities

Total current liabilities, discontinued operations

Total liabilities, discontinued operations

In accordance with the provisions of ASC 205 - 20, the Company has not included in the results of continuing operations the results of operations of the discontinued operations in the condensed consolidated statements of operations.

The results of DERMAdoctor’s operations for the three months ended March 31, 2024 and 2023 have been reflected as discontinued operations in the condensed consolidated statements of operations and consist of the following (in thousands):

Three Months Ended

September 30,

Statement of Operations

Product revenue, net

Other revenue, net

Total sales, net

Product cost of goods sold

Research and development

Sales and marketing

General and administrative

Total operating expenses

Operating loss

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

Non-cash loss on modification of common stock warrants

Other expense, net

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

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

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

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

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

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

Total Net Sales and Product Cost of Goods Sold

Product revenue, net, decreased $0.5 million, or 15%, to $3.3 million for the three months ended September 30, 2023, from $3.8 million for the three months ended September 30, 2022, primarily due to a decrease in revenue recognized from our DERMAdoctor branded skincare products.

Revenue from eyecare products, including Avenova Spray, increased $0.2 million to $2.4 million for the three months ended September 30, 2023, from $2.2 million for the three months ended September 30, 2022.

The increase was due to an overall increase in physician dispensed units sold and units sold through online channels.

The increase was partially offset by the decrease in the number of other Avenova branded optical products sold, including the Company’s NovaWipes by Avenova and Avenova Warm Eye Compress.

Revenue from the Company’s wound care products decreased $0.2 million to $0.1 million for the three months ended September 30, 2023, from $0.3 million for the three months ended September 30, 2022.

Revenue from DERMAdoctor branded skincare products decreased $0.5 million to $0.8 million for the three months ended September 30, 2023, from $1.3 million for the three months ended September 30, 2022, due to a decrease in sales in our international and domestic wholesale and retail channels.

Product cost of goods sold decreased by $0.1 million, or 2%, to $1.4 million for the three months ended September 30, 2023, from $1.5 million for the three months ended September 30, 2022 primarily due to the decrease in wound care and DERMAdoctor branded skincare products sold during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Sales and marketing

Sales and marketing expenses decreased by $0.1 million, or 7%, to $1.7 million for the three months ended September 30, 2023, from $1.8 million for the three months ended September 30, 2022.

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

General and administrative  

General and administrative expenses increased by $0.2 million, or 28%, to $1.2 million for the three months ended September 30, 2023, from $1.0 million for the three months ended September 30, 2022, primarily due to lower non-cash stock-based compensation expenses recorded in the 2022 period.

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

Adjustments to the fair value of warrant liability resulted in a gain of $2.4 million for the three months ended September 30, 2022 with no comparable adjustment for the three months ended September 30, 2023.

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

Non-cash loss on modification of common stock warrants

Adjustments to the fair value of common stock warrants resulted in a loss of $1.9 million for the three months ended September 30, 2022 with no comparable adjustment for the three months ended September 30, 2023.

This loss related to modification of common stock warrants, which occurred due to amendments to the Amended July 2020 Warrants and the November 2021 Warrants, as amended, in connection with the 2022 Warrant Reprice Transaction.

Other expense, net

Other expense, net increased $0.4 million to $0.6 million for the three months ended September 30, 2023, from $0.2 million for the three months ended September 30, 2022.

The increase was primarily due to the amortization of discount and issuance cost related to the Convertible Notes issued in May 2023 with no comparable expense for the three months ended September 30, 2022.

Comparison of the Nine Months  

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

Nine Months Ended

September 30,

Statement of Operations

Product revenue, net

Other revenue, net

Total sales, net

Product cost of goods sold

Cost of goods sold

Operating expenses

Research and development

3 unchanged sentences

Operating loss

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

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

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

Non-cash loss on modification of common stock warrants

Other expense, net

Total Net Sales and Product Cost of Goods Sold

Product revenue, net, increased $0.3 million, or 2%, to $11.0 million for the nine months ended September 30, 2023, from $10.7 million for the nine months ended September 30, 2022, primarily due to increased revenue from our wound care products.

Revenue from eyecare products, including Avenova Spray increased $0.3 million to $6.8 million for the nine months ended September 30, 2023, from $6.5 million for the nine months ended September 30, 2022, primarily due to an increase in the number of Avenova Spray and NovaWipes by Avenova bundles sold through online channels.

Revenue from the Company’s wound care products increased $0.5 million to $1.6 million for the nine months ended September 30, 2023, from $1.1 million for the nine months ended September 30, 2022, due to a large order of the NeutroPhase branded wound care product in the current year.

Revenue from DERMAdoctor branded skincare products decreased $0.5 million to $2.6 million for the nine months ended September 30, 2023, from $3.1 million for the nine months ended September 30, 2022, primarily due to an overall decrease in units sold through online channels and through domestic and international wholesalers.

Product cost of goods sold increased by $0.2 million, or 4%, to $4.9 million for the nine months ended September 30, 2023, from $4.7 million for the nine months ended September 30, 2022 primarily due to the increase in the margins of our wound care products sold during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Sales and marketing

Sales and marketing expenses decreased by $0.8 million, or 13%, to $5.1 million for the nine months ended September 30, 2023, from $5.9 million for the nine months ended September 30, 2022.

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

General and administrative  

General and administrative expenses increased by $0.1 million, or 2%, to $5.1 million for the nine months ended September 30, 2023, from $5.0 million for the nine months ended September 30, 2022.

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

Adjustments to the fair value of warrant liability resulted in a gain of $0.2 million for the nine months ended September 30, 2023 compared to a gain of $4.5 million for the nine months ended September 30, 2022.

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

The adjustments to the fair value of combined embedded derivative liability resulted in a gain of $40 thousand for the nine months ended September 30, 2023.

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

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

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

Adjustments to the fair value of contingent liability resulted in a gain of $0.2 million for the nine months ended September 30, 2022 with no comparable adjustment for the nine months ended September 30, 2023.

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

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

Non-cash loss on modification of common stock warrants

Adjustments to the fair value of common stock warrants resulted in a loss of $0.3 million for the nine months ended September 30, 2023.

The loss related to modification of common stock warrants, which occurred due to amendments to the Amended July 2020 Warrants, Amended November 2021 Warrants, and the September 2022 Warrants, as amended, in connection with the 2023 Private Placement.

Adjustments to the fair value of common stock warrants resulted in a loss of $1.9 million for the nine months ended September 30, 2022.

( 118 ) ( 389 )

Other expense, net

Other expense, net increased $1.1 million to $1.3 million for the nine months ended September 30, 2023, from $0.2 million for the nine months ended September 30, 2022.

The increase was primarily due to the amortization of discount and issuance cost related to the Convertible Notes issued in May 2023 with no comparable expense for the nine months ended September 30, 2022.

Financial Condition, Liquidity and Capital Resources  

As of September 30, 2023, our cash and cash equivalents were $3.5 million, compared to $5.4 million as of December 31, 2022.

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

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

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

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

and Note 12 “Stockholders’

Equity”

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

Based primarily on the funds available on September 30, 2023, the Company believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund its existing operations, meet its planned operating expenses and to meet the Monthly Redemption of the Convertible Notes into at least the second quarter of 2024.

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

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

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

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

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

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

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

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

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

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

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

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

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

In the absence of one or more additional transactions and/or substantial revenue growth from our commercialization efforts, there will be substantial doubt about our ability to continue as a going concern within one year after the date these unaudited condensed consolidated financial statements are issued, and we will be required to scale back or terminate operations and/or seek protection under applicable bankruptcy laws.

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

Cash Used in Operating Activities

Net cash used in operating activities was $3.8 million for the nine months ended September 30, 2023, which consisted primarily of a net loss of $5.5 million, adjusted by depreciation and amortization expenses of $0.2 million, stock-based compensation expenses related to employee and director stock awards of $0.2 million, non-cash loss on modification of common stock warrants expense of $0.3 million, non-cash gain on changes in fair value of warrant liability of $0.2 million, non-cash gain on changes in fair value of combined derivative liability of $0.1 million, accretion of interest and amortization of debt discounts on convertibles notes of $1.1 million, and a net increase of $0.2 million in our net operating assets and liabilities.

Net cash used in operating activities was $5.4 million for the nine months ended September 30, 2022, which consisted primarily of a net loss of $2.4 million, non-cash loss on modification of common stock warrants of $1.9 million, non-cash gain on the change in fair value of warrant liability of $4.5 million, non-cash gain on the change in fair value of contingent liability of $0.2 million, depreciation and amortization expenses of $0.4 million, stock-based compensation expenses related to employee and director stock awards of $0.1 million, and a net decrease in our net operating assets and liabilities of $0.8 million.

Cash Used in Investing Activities

Net cash used in investing activities for the purchase of property and equipment was $17 thousand and $112 thousand, for the nine months ended September 30, 2023 and 2022, respectively.

Cash Provided by Financing Activities

Net cash provided by financing activities was $1.9 million for the nine months ended September 30, 2023, which included the net proceeds of $2.8 million received in the 2023 Private Placement of the Convertible Notes and the May 2023 Warrants.

The aggregate proceeds were offset by repayment of $0.8 million for the Monthly Redemption through September 30, 2023 on the Convertible Notes issued and debt issuance cost of $0.3 million.

Net cash provided by financing activities was $1.6 million for the nine months ended September 30, 2022 and was primarily related to the proceeds received in the 2022 Warrant Reprice Transaction partially offset by the repayment of the DERMAdoctor line of credit, which was terminated in the first quarter of 2022.

Net Operating Losses and Tax Credit Carryforwards

As of December 31, 2022, we had net operating loss carryforwards for federal and state income tax purposes of $133.0 million and $111.0 million, respectively.

The federal net operating loss carryforwards consist of $94.9 million generated before January 1, 2018, which will begin to expire in 2024 and $38.1 million that will carry forward indefinitely but are subject to an 80% limitation for years following December 31, 2021.

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

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

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

The state tax credits have an indefinite carryover period.

Current federal and California tax laws include substantial restrictions on the utilization of net operating loss carryforwards in the event of an ownership change of a corporation.

Accordingly, our ability to utilize net operating loss carryforwards may be limited as a result of such ownership changes.

Such a limitation could result in the expiration of carryforwards before they are utilized.

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

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

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

Off-Balance Sheet Arrangements

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

Avenova Branded Products

In recent years, as our focus and revenue mix have shifted in favor of Avenova products sold directly to the consumer without insurance reimbursement, we have not noted any material seasonal impacts on our overall eyecare business, with demands consistent throughout the year.

Prior to this shift, while focused on prescription Avenova Spray, prescriptions for Avenova Spray experienced seasonality with the first quarter of each year typically being the lowest revenue quarter.

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

Dermatology/Skincare Products

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

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

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

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

Contractual Obligations

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

Contractual Obligations

Facility leases

Equipment lease

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

The total commitment for the facility leases were $1.9 million due over the leases’

terms as of September 30, 2023.

The total commitment for the copier lease was $18 thousand due over the leases’

terms as of September 30, 2023.

See Note 10, “Commitments and Contingencies”

in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further information regarding these leases.

Net loss from discontinued operations

$ ( 124 ) $ ( 394 )

The results of DERMAdoctor for the three months ended March 31, 2024 and 2023 have been reflected as discontinued operations in the condensed consolidated statements of cash flows and consist of the following (in thousands):

Three Months Ended March 31,

Operating activities:

Net loss from discontinued operations

$ ( 124 ) $ ( 394 )

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

Amortization of intangible assets

Changes in operating assets and liabilities:

Accounts receivable

( 262 ) ( 112 )

Prepaid expenses and other current assets

Operating lease right-of-use assets

Accounts payable and accrued liabilities

Operating lease liabilities

( 31 ) ( 29 )

Net cash used in operating activities, discontinued operations

( 160 ) ( 424 )

Investing activities:

Cash transferred to New Age Investments, LLC

Net cash used in investing activities, discontinued operations

Net decrease in cash and cash equivalents, discontinued operations

$ ( 206 ) $ ( 424 )

SUBSEQUENT EVENTS

The Company has evaluated all subsequent events through the filing date of this Form 10 -Q with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the condensed consolidated financial statements as of March 31, 2024 , and events which occurred subsequently but were not recognized in the condensed consolidated financial statements.

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

On April 18, 2024, the Company received a notification from the NYSE American LLC Exchange (“ NYSE American ”) stating that the Company is not in compliance with Section 1003 (a)(ii) and 1003 (a)(iii) of the NYSE American Company Guide (requiring stockholders’ equity of $4.0 million or more if the Company has reported losses from continuing operations and/or net losses in three of the four most recent fiscal years and $6.0 million or more if the Company has reported losses from continuing operations and/or net losses in its five most recent fiscal years, respectively).

Therefore, the Company has become subject to the procedures and requirements of Section 1009 of the NYSE American Company Guide and must submit a plan of compliance by May 18, 2024 addressing how it intends to regain compliance with Section 1003 (a)(ii) and 1003 (a)(iii) of the NYSE American Company Guide by October 18, 2025.

The Company has submitted its plan of compliance to the NYSE for its review.

Subsequent to the three month period ended March 31, 2024, 273 shares of Series B Preferred Stock and 660 shares of Series C Preferred Stock were converted into 1,092,000 and 4,714,380 shares of common stock, respectively.

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

What changed 10-Q

Item 1. Financial Statements