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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/10/23 NovaBay Pharmaceuticals, Inc. 10-Q 6/30/23 96:10M RDG Filings/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.84M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 30K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 30K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 27K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 27K
11: R1 Document And Entity Information HTML 79K
12: R2 Condensed Consolidated Balance Sheets (Current HTML 128K
Period Unaudited)
13: R3 Condensed Consolidated Balance Sheets (Current HTML 54K
Period Unaudited) (Parentheticals)
14: R4 Condensed Consolidated Statements of Operations HTML 91K
(Unaudited)
15: R5 Condensed Consolidated Statements of Stockholders' HTML 105K
Equity (Unaudited)
16: R6 Condensed Consolidated Statements of Cash Flows HTML 119K
(Unaudited)
17: R7 Note 1 - Organization HTML 39K
18: R8 Note 2 - Summary of Significant Accounting HTML 187K
Policies
19: R9 Note 3 - Fair Value Measurements HTML 81K
20: R10 Note 4 - Prepaid Expenses and Other Current Assets HTML 40K
21: R11 Note 5 - Inventory HTML 36K
22: R12 Note 6 - Property and Equipment HTML 39K
23: R13 Note 7 - Other Intangible Assets HTML 68K
24: R14 Note 8 - Accrued Liabilities HTML 39K
25: R15 Note 9 - Debentures HTML 57K
26: R16 Note 10 - Commitments and Contingencies HTML 60K
27: R17 Note 11 - Warrant Liability HTML 84K
28: R18 Note 12 - Stockholders' Equity HTML 150K
29: R19 Note 13 - Equity-based Compensation HTML 82K
30: R20 Note 14 - Distribution Agreements HTML 46K
31: R21 Note 15 - Employee Benefit Plan HTML 33K
32: R22 Note 16 - Related Party Transactions HTML 48K
33: R23 Note 17 - Segment Reporting HTML 89K
34: R24 Note 18 - Subsequent Events HTML 30K
35: R25 Significant Accounting Policies (Policies) HTML 242K
36: R26 Note 2 - Summary of Significant Accounting HTML 136K
Policies (Tables)
37: R27 Note 3 - Fair Value Measurements (Tables) HTML 76K
38: R28 Note 4 - Prepaid Expenses and Other Current Assets HTML 39K
(Tables)
39: R29 Note 5 - Inventory (Tables) HTML 36K
40: R30 Note 6 - Property and Equipment (Tables) HTML 38K
41: R31 Note 7 - Other Intangible Assets (Tables) HTML 68K
42: R32 Note 8 - Accrued Liabilities (Tables) HTML 38K
43: R33 Note 9 - Debentures (Tables) HTML 48K
44: R34 Note 10 - Commitments and Contingencies (Tables) HTML 52K
45: R35 Note 11 - Warrant Liability (Tables) HTML 74K
46: R36 Note 12 - Stockholders' Equity (Tables) HTML 111K
47: R37 Note 13 - Equity-based Compensation (Tables) HTML 75K
48: R38 Note 14 - Distribution Agreements (Tables) HTML 40K
49: R39 Note 16 - Related Party Transactions (Tables) HTML 43K
50: R40 Note 17 - Segment Reporting (Tables) HTML 84K
51: R41 Note 1 - Organization (Details Textual) HTML 31K
52: R42 Note 2 - Summary of Significant Accounting HTML 67K
Policies (Details Textual)
53: R43 Note 2 - Summary of Significant Accounting HTML 35K
Policies - Components of Cash, Cash Equivalents,
and Restricted Cash (Details)
54: R44 Note 2 - Summary of Significant Accounting HTML 42K
Policies - Disaggregation of Revenue (Details)
55: R45 Note 2 - Summary of Significant Accounting HTML 36K
Policies - Revenues and Accounts Receivable from
Major Distribution Partners and Customers
(Details)
56: R46 Note 2 - Summary of Significant Accounting HTML 71K
Policies - Revision of Prior Period (Details)
57: R47 Note 2 - Summary of Significant Accounting HTML 54K
Policies - Calculation of Basic and Diluted EPS
(Details)
58: R48 Note 2 - Summary of Significant Accounting HTML 36K
Policies - Outstanding Stock Options and Stock
Warrants Excluded from the Diluted Net Loss Per
Share Computation (Details)
59: R49 Note 3 - Fair Value Measurements - Assets and HTML 46K
Liabilities Measured at Fair Value on a Recurring
Basis (Details)
60: R50 Note 4 - Prepaid Expenses and Other Current Assets HTML 41K
- Summary of Prepaid Expenses and Other Current
Assets (Details)
61: R51 Note 5 - Inventory - Summary of Inventory HTML 34K
(Details)
62: R52 Note 6 - Property and Equipment (Details Textual) HTML 28K
63: R53 Note 6 - Property and Equipment - Summary of HTML 41K
Property and Equipment (Details)
64: R54 Note 7 - Other Intangible Assets (Details Textual) HTML 34K
65: R55 Note 7 - Other Intangible Assets - Schedule of HTML 50K
Finite-lived Intangible Assets (Details)
66: R56 Note 7 - Other Intangible Assets - Schedule of HTML 38K
Finite-Lived Intangible Assets, Future
Amortization Expense (Details)
67: R57 Note 8 - Accrued Liabilities - Summary of Accrued HTML 40K
Liabilities (Details)
68: R58 Note 9 - Debentures (Details Textual) HTML 90K
69: R59 Note 9 - Debentures - Key Assumptions of Combined HTML 36K
Embedded Derivative (Details)
70: R60 Note 9 - Debentures - Debenture (Details) HTML 37K
71: R61 Note 9 - Debentures - Contractual Maturity HTML 35K
(Details)
72: R62 Note 10 - Commitments and Contingencies (Details HTML 28K
Textual)
73: R63 Note 10 - Commitments and Contingencies - Lease HTML 35K
Expense (Details)
74: R64 Note 10 - Commitments and Contingencies - Schedule HTML 47K
of Future Lease Payments (Details)
75: R65 Note 11 - Warrant Liability (Details Textual) HTML 50K
76: R66 Note 11 - Warrant Liability - The Key Assumptions HTML 90K
Used to Value the Warrants (Details)
77: R67 Note 12 - Stockholders' Equity (Details Textual) HTML 250K
78: R68 Note 12 - Stockholders' Equity - The Key HTML 70K
Assumptions Used to Value the Warrants (Details)
79: R69 Note 12 - Stockholders' Equity - Preferred Stock HTML 47K
Assumptions (Details)
80: R70 Note 12 - Stockholders' Equity - Outstanding HTML 37K
Warrants (Details)
81: R71 Note 13 - Equity-based Compensation (Details HTML 82K
Textual)
82: R72 Note 13 - Equity-based Compensation - Stock HTML 77K
Options Outstanding (Details)
83: R73 Note 13 - Equity-based Compensation - HTML 39K
Weighted-average Assumptions Used in Determining
the Value of Options Granted to Employees and
Directors (Details)
84: R74 Note 13 - Equity-based Compensation - Summary of HTML 34K
Stock-based Compensation Expense Included in
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85: R75 Note 14 - Distribution Agreements (Details HTML 52K
Textual)
86: R76 Note 14 - Distribution Agreements - Changes in HTML 41K
Assets and Liabilities (Details)
87: R77 Note 15 - Employee Benefit Plan (Details Textual) HTML 37K
88: R78 Note 16 - Related Party Transactions (Details HTML 29K
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89: R79 Note 16 - Related Party Transactions - Related HTML 37K
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90: R80 Note 17 - Segment Reporting (Details Textual) HTML 27K
91: R81 Note 17 - Segment Reporting - Financial HTML 46K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
(Mark One)
| i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i June 30, 2023
OR
| i ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number i 001-33678
NOVABAY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
| i Delaware | i 68-0454536 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
i 2000 Powell Street, Suite 1150, i Emeryville, i California i 94608
(Address of principal executive offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: ( i 510) i 899-8800
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange On Which Registered |
| i Common Stock, par value $0.01 per share | i NBY | i NYSE American |
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | Emerging growth company | i ☐ |
| i Non-accelerated filer | ☒ | Smaller reporting company | i ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i ☐ No ☒
As of August 7, 2023, there were i 4,214,682 shares of the registrant’s common stock outstanding.
| PART I |
||
| FINANCIAL INFORMATION |
||
| Item 1. |
||
| Condensed Consolidated Balance Sheets: June 30, 2023 (unaudited) and December 31, 2022 |
||
| Condensed Consolidated Statements of Cash Flows: Six months ended June 30, 2023 and 2022 (unaudited) |
||
| Notes to Condensed Consolidated Financial Statements (unaudited) |
||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
| Item 3. |
||
| Item 4. |
||
| PART II |
||
| OTHER INFORMATION |
||
| Item 1. |
||
| Item 1A. |
||
| Item 2. |
||
| Item 3. |
||
| Item 4. |
||
| Item 5. |
||
| Item 6. |
||
Unless the context requires otherwise, all references in this report to “we,” “our,” “us,” the “Company” and “NovaBay” refer to NovaBay Pharmaceuticals, Inc., a Delaware corporation, and its wholly-owned subsidiary, DERMAdoctor, LLC, a Missouri limited liability company.
The Company owns over 40 live trademark registrations in the U.S., as well as trademark registrations and pending applications in many other countries internationally, with our primary trademarks including “Avenova®”, “CelleRx®”, “PhaseOne®”, “NeutroPhase®”, “DERMAdoctor®”, “Kakadu C®”, “AIN’T Misbehavin’®”, “KP Duty®”, and the Company licenses depictions of Dr. Audrey Kunin, some of which are held directly by NovaBay and others by our wholly-owned subsidiary DERMAdoctor.
On November 15, 2022, the Company effected a 1-for-35 reverse stock split of its common stock (the “Reverse Stock Split”). The accompanying financial statements and related notes give retroactive effect to this reverse stock split.
PART I
FINANCIAL INFORMATION
| FINANCIAL STATEMENTS |
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
| June 30, | December 31, | |||||||
| 2022 | ||||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | i 4,414 | $ | i 5,362 | ||||
| Accounts receivable, net of allowance for credit losses ($3 and $19 at June 30, 2023 and December 31, 2022, respectively) | i 2,623 | i 1,973 | ||||||
| Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($446 and $499 at June 30, 2023 and December 31, 2022, respectively) | i 3,660 | i 3,437 | ||||||
| Prepaid expenses and other current assets | i 519 | i 560 | ||||||
| Total current assets | i 11,216 | i 11,332 | ||||||
| Operating lease right-of-use assets | i 1,636 | i 1,831 | ||||||
| Property and equipment, net | i 108 | i 119 | ||||||
| Goodwill | i 348 | i 348 | ||||||
| Other intangible assets, net | i 2,204 | i 2,280 | ||||||
| Other assets | i 496 | i 489 | ||||||
| TOTAL ASSETS | $ | i 16,008 | $ | i 16,399 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Liabilities: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | i 1,481 | $ | i 1,080 | ||||
| Accrued liabilities | i 2,755 | i 2,724 | ||||||
| Convertible Notes, net | i 1,185 | i — | ||||||
| Embedded derivative liabilities | i 169 | i — | ||||||
| Operating lease liabilities | i 476 | i 453 | ||||||
| Total current liabilities | i 6,066 | i 4,257 | ||||||
| Operating lease liabilities-non-current | i 1,379 | i 1,588 | ||||||
| Total liabilities | i 7,445 | i 5,845 | ||||||
| Commitments & contingencies (Note 10) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.01 par value; 5,000 shares authorized; | ||||||||
| Series B Preferred Stock; 9 and 12 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | i 449 | i 570 | ||||||
| Series C Preferred Stock; 1 and 2 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | i 1,675 | i 2,403 | ||||||
| Common stock, $0.01 par value; 150,000 shares authorized, 4,214 and 2,035 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | i 673 | i 652 | ||||||
| Additional paid-in capital | i 169,689 | i 165,081 | ||||||
| Accumulated deficit | ( i 163,923 | ) | ( i 158,152 |
) | ||||
| Total stockholders’ equity | i 8,563 | i 10,554 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | i 16,008 | $ | i 16,399 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2022 |
2023 |
2022 |
||||||||||||||
| Sales: |
||||||||||||||||
| Product revenue, net |
$ | i 4,599 | $ | i 3,660 | $ | i 7,716 | $ | i 6,927 | ||||||||
| Other revenue, net |
i 11 | i 2 | i 18 | i 8 | ||||||||||||
| Total sales, net |
i 4,610 | i 3,662 | i 7,734 | i 6,935 | ||||||||||||
| Product cost of goods sold |
i 2,304 | i 1,824 | i 3,492 | i 3,283 | ||||||||||||
| Gross profit |
i 2,306 | i 1,838 | i 4,242 | i 3,652 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Research and development |
i 27 | i 40 | i 53 | i 68 | ||||||||||||
| Sales and marketing |
i 1,718 | i 2,040 | i 3,371 | i 4,025 | ||||||||||||
| General and administrative |
i 1,916 | i 1,910 | i 3,907 | i 4,093 | ||||||||||||
| Total operating expenses |
i 3,661 | i 3,990 | i 7,331 | i 8,186 | ||||||||||||
| Operating loss |
( i 1,355 | ) |
( i 2,152 | ) |
( i 3,089 | ) |
( i 4,534 | ) |
||||||||
| Non-cash gain on changes in fair value of warrant liability |
i 216 | i — | i 216 | i 2,056 | ||||||||||||
| Non-cash gain on changes in fair value of combined derivative liability |
i 40 | i — | i 40 | i — | ||||||||||||
| Non-cash gain on changes in fair value of contingent liability |
i — | i — | i — | i 219 | ||||||||||||
| Other expense, net |
( i 937 | ) |
( i 3 | ) |
( i 942 | ) |
( i 7 | ) |
||||||||
| Net loss |
( i 2,036 | ) |
( i 2,155 | ) |
( i 3,775 | ) |
( i 2,266 | ) |
||||||||
| Less: Retained earnings reduction related to preferred stock down round feature triggered |
( i 1,996 | ) |
i — | ( i 1,996 | ) | i — | ||||||||||
| Net loss attributable to common stockholders |
$ | ( i 4,032 | ) | $ | ( i 2,155 | ) |
$ | ( i 5,771 | ) | $ | ( i 2,266 | ) |
||||
| Net loss per share attributable to common stockholders (basic and diluted) |
$ | ( i 1.27 | ) |
$ | ( i 1.43 | ) |
$ | ( i 2.21 | ) |
$ | ( i 1.54 | ) |
||||
| Weighted-average shares of common stock outstanding used in computing net loss per share of common stock (basic and diluted) |
i 3,176 | i 1,507 | i 2,609 | i 1,469 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands)
| Preferred Stock |
Common Stock |
Additional Paid- |
Accumulated |
Total Stockholders’ |
||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
in Capital |
Deficit |
Equity |
||||||||||||||||||||||
| Balance at December 31, 2022 |
i 14 | $ | i 2,973 | i 2,035 | $ | i 652 | $ | i 165,081 | $ | ( i 158,152 | ) |
$ | i 10,554 | |||||||||||||||
| Net Loss |
- | i - | - | i - | i - | ( i 1,739 | ) |
( i 1,739 | ) |
|||||||||||||||||||
| Stock-based compensation expense related to employee and director stock awards |
- | i - | - | i - | i 75 | i - | i 75 | |||||||||||||||||||||
| Balance at March 31, 2023 |
i 14 | $ | i 2,973 | i 2,035 | $ | i 652 | $ | i 165,156 | $ | ( i 159,891 | ) |
$ | i 8,890 | |||||||||||||||
| Net Loss |
- | i - | - | i - | i - | ( i 2,036 | ) |
( i 2,036 | ) |
|||||||||||||||||||
| Conversion of Series B Preferred Stock to common stock |
( i 3 | ) |
( i 121 | ) |
i 1,897 | i 19 | i 102 | i - | i - | |||||||||||||||||||
| Conversion of Series C Preferred Stock to common stock |
( i 1 | ) |
( i 728 | ) |
i 277 | i 2 | i 726 | i - | i - | |||||||||||||||||||
| Modification of common stock warrants | - | i - | - | i - | i 285 | i - | i 285 | |||||||||||||||||||||
| Down round feature adjustment related to Series B & C Preferred Stock |
- | i - | - | i - | i 1,996 | ( i 1,996 | ) | i - | ||||||||||||||||||||
| Reclassification of May 2023 Warrants | - | i - | - | i - | i 1,360 | i - | i 1,360 | |||||||||||||||||||||
| Stock-based compensation expense related to employee and director stock awards | - | i - | - | i - | i 64 | i - | i 64 | |||||||||||||||||||||
| Vesting of director restricted stock awards | i - | - | i 5 | - | - | - | - | |||||||||||||||||||||
| Balance at June 30, 2023 | i 10 | $ | i 2,124 | i 4,214 | $ | i 673 | $ | i 169,689 | $ | ( i 163,923 | ) | $ | i 8,563 | |||||||||||||||
| Preferred Stock |
Common Stock |
Additional Paid- |
Accumulated |
Total Stockholders’ |
||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
in Capital |
Deficit |
Equity |
||||||||||||||||||||||
| Balance at December 31, 2021 |
i 14 | $ | i 680 | i 1,365 | $ | i 478 | $ | i 150,900 | $ | ( i 141,887 | ) |
$ | i 10,171 | |||||||||||||||
| Net Loss |
- | - | - | - | - | ( i 111 | ) |
( i 111 | ) |
|||||||||||||||||||
| Reclassification of November 2021 Warrants |
- | i - | - | i - | i 7,502 | i - | i 7,502 | |||||||||||||||||||||
| Conversion of Series B Preferred Stock to common stock |
( i 1 | ) |
( i 71 | ) |
i 104 | i 36 | i 35 | i - | i - | |||||||||||||||||||
| Stock-based compensation expense related to employee and director stock awards |
- | i - | - | i - | i 184 | i - | i 184 | |||||||||||||||||||||
| Balance at March 31, 2022 |
i 13 | $ | i 609 | i 1,469 | $ | i 514 | $ | i 158,621 | $ | ( i 141,998 | ) |
$ | i 17,746 | |||||||||||||||
| Net Loss |
- | i - | - | i - | i - | ( i 2,155 | ) |
( i 2,155 | ) |
|||||||||||||||||||
| Conversion of Series B Preferred Stock to common stock |
( i 1 | ) |
( i 39 | ) |
i 57 | i 20 | i 19 | i - | i - | |||||||||||||||||||
| Vesting of director restricted stock awards |
i - | i - | i 3 | i 1 | ( i 1 | ) |
i - | i - | ||||||||||||||||||||
| Stock-based compensation expense related to employee and director stock awards |
- | i - | - | i - | i 154 | i - | i 154 | |||||||||||||||||||||
| Balance at June 30, 2022 |
i 12 | $ | i 570 | i 1,529 | $ | i 535 | $ | i 158,793 | $ | ( i 144,153 | ) |
$ | i 15,745 | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Six Months Ended June 30 | ||||||||
| 2023 |
2022 |
|||||||
| Operating activities: |
||||||||
| Net loss |
$ | ( i 3,775 | ) |
$ | ( i 2,266 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation of property and equipment |
i 26 | i 59 | ||||||
| Amortization of intangible assets |
i 76 | i 182 | ||||||
| Stock-based compensation expense related to employee and director stock awards |
i 139 | i 338 | ||||||
| Modification of common stock warrants, included in Other expense |
i 285 | i — | ||||||
| Non-cash gain on changes in fair value of warrant liability |
( i 216 | ) | ( i 2,056 | ) | ||||
| Non-cash gain on changes in fair value of combined derivative liability |
( i 40 | ) | i — | |||||
| Non-cash gain on changes in fair value of contingent liability |
i — | ( i 219 | ) | |||||
| Accretion of interest and amortization of debt discounts on convertible notes |
i 457 | i — | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
( i 650 | ) |
i 570 | |||||
| Inventory |
( i 223 | ) |
( i 581 | ) | ||||
| Prepaid expenses and other current assets |
i 41 | i 149 | ||||||
| Operating lease right-of-use assets |
i 195 | ( i 1,806 | ) | |||||
| Other assets |
( i 15 | ) |
i — | |||||
| Accounts payable and accrued liabilities |
i 432 | i 50 | ||||||
| Operating lease liabilities |
( i 186 | ) |
i 1,824 | |||||
| Net cash used in operating activities |
( i 3,454 | ) |
( i 3,756 | ) | ||||
| Investing activities: |
||||||||
| Purchases of property and equipment |
( i 15 | ) |
( i 32 | ) | ||||
| Net cash used in investing activities |
( i 15 | ) |
( i 32 | ) | ||||
| Financing activities: |
||||||||
| Proceeds from convertible notes and warrant issuances, net of discount |
i 3,000 | i — | ||||||
| Payment on the convertible notes |
( i 193 | ) |
i — | |||||
| Debt issuance cost |
( i 294 | ) |
i — | |||||
| Payment on the line of credit |
i — | ( i 105 | ) | |||||
| Net cash provided by (used in) financing activities |
i 2,513 | ( i 105 | ) | |||||
| Net change in cash, cash equivalents, and restricted cash |
( i 956 | ) |
( i 3,893 | ) | ||||
| Cash, cash equivalents and restricted cash, beginning of year |
i 5,846 | i 7,979 | ||||||
| Cash, cash equivalents and restricted cash, end of period |
$ | i 4,890 | $ | i 4,086 | ||||
| Six Months Ended June 30, |
||||||||
| 2022 |
||||||||
| Supplemental disclosure of cash flow information: |
||||||||
| Interest paid |
$ | i 9 | $ | i 7 | ||||
| Six Months Ended June 30, |
||||||||
| 2022 |
||||||||
| Supplemental disclosure of non-cash information: |
||||||||
| Warrant liability transferred to equity |
$ | i 1,360 | $ | i 7,502 | ||||
| Addition of operating lease, right-of-use asset |
i — | i 2,039 | ||||||
| Conversion of Series B Preferred Stock to common stock |
i 121 | i 110 | ||||||
| Conversion of Series C Preferred Stock to common stock |
i 728 | i — | ||||||
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. Avenova Spray is available direct to consumers primarily through online distribution channels and is also available by prescription and dispensed by eyecare professionals for blepharitis and dry-eye disease. Other eyecare products offered under the Avenova eyecare brand include Novawipes by Avenova, Avenova Lubricant Eye Drops, Avenova Moist Heating Eye Compress, and the i-Chek eyelid and eyelash mirror by Avenova.
Through our subsidiary DERMAdoctor, LLC (“DERMAdoctor”), 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.
The Company also manufactures and sells its proprietary form of hypochlorous acid for the wound care market through our NeutroPhase and PhaseOne branded products. NeutroPhase and PhaseOne are used for the cleansing and irrigation as part of surgical procedures, as well as treating certain wounds, burns, ulcers and other injuries. The Company currently sells these products through distributors.
The Company was incorporated under the laws of the State of California on January 19, 2000, as NovaCal Pharmaceuticals, Inc. It had no operations until July 1, 2002, on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company. In February 2007, the Company changed its name from NovaCal Pharmaceuticals, Inc. to NovaBay Pharmaceuticals, Inc. In June 2010, the Company changed the state in which it was incorporated (the “Reincorporation”) and is now incorporated under the laws of the State of Delaware. All references to “the Company” herein refer to the California corporation prior to the date of the Reincorporation and to the Delaware corporation on and after the date of the Reincorporation. The Company is managed as i two reportable segments: (1) Eyecare and Wound Care and (2) Skincare.
Effective November 15, 2022, the Company effected a 1-for- i 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 June 30, 2023 and the 2023 Private Placement, the Company believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund its existing operations, meet its planned operating expenses and to meet the Monthly Redemptions of the Convertible Notes (both as defined below) into at least the second quarter of 2024. The Company has sustained operating losses for the majority of its corporate history and expects that its 2023 expenses will exceed its 2023 revenues, as the Company continues to invest in both its Avenova and DERMAdoctor commercialization efforts. Additionally, the Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Accordingly, the Company has determined that its planned operations raise substantial doubt about its ability to continue as a going concern 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: (1) raising additional capital through debt and equity financings or from other sources; (2) reducing spending on operations, including reducing spending on one or more of its sales and marketing programs or restructuring operations to change its overhead structure; (3) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee; 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. 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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. dollars. 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.
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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.
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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. 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.
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Unaudited Condensed Consolidated Interim Financial Information
The accompanying unaudited condensed consolidated financial statements and related disclosures have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only recurring adjustments, necessary for a fair presentation.
The year-end condensed consolidated balance sheet data was derived from the audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. 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.
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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” below. 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, as well as the 2021 annual 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” below. 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.
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Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly-liquid instruments with a stated maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. As of June 30, 2023 and December 31, 2022, the Company’s cash and cash equivalents were held in a major financial institution in the United States.
The following table provides a reconciliation of the cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheets (in thousands):
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| June 30, | ||||||||
| 2022 | ||||||||
| Cash and cash equivalents | $ | i 4,414 | $ | i 5,362 | ||||
| Restricted cash included in other assets | i 476 | i 484 | ||||||
| Total cash, cash equivalents, and restricted cash in the condensed consolidated statements of cash flows | $ | i 4,890 | $ | i 5,846 | ||||
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.
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Concentrations of Credit Risk and Major Partners
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains deposits of cash, cash equivalents and restricted cash with a major financial institution in the United States.
The Company has a significant amount of its cash balances at financial institutions which throughout the year regularly exceed the federally insured limit of $250,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows.
During the three and six months ended June 30, 2023 and 2022, revenues were derived primarily from sales of Avenova and DERMAdoctor branded products, directly to consumers through Amazon.com, Avenova.com and DERMAdoctor.com.
During the three and six months ended June 30, 2023 and 2022, revenues from significant product categories were as follows (in thousands):
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| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2023 | 2022 | ||||||||||||||
| Avenova Spray | $ | i 1,758 | $ | i 2,001 | $ | i 3,695 | $ | i 3,840 | ||||||||
| DERMAdoctor | i 1,076 | i 752 | i 1,861 | i 1,795 | ||||||||||||
| NeutroPhase | i 1,043 | i 509 | i 1,043 | i 657 | ||||||||||||
| Other products | i 722 | i 398 | i 1,117 | i 635 | ||||||||||||
| Total product revenue, net | i 4,599 | i 3,660 | i 7,716 | i 6,927 | ||||||||||||
| Other revenue, net | i 11 | i 2 | i 18 | i 8 | ||||||||||||
| Total sales, net | $ | i 4,610 | $ | i 3,662 | $ | i 7,734 | $ | i 6,935 | ||||||||
During the three months ended June 30, 2023 and 2022, sales of Avenova Spray via Amazon comprised i 61% and i 69% of total Avenova Spray net revenue, respectively. During the six months ended June 30, 2023 and 2022, sales of Avenova Spray via Amazon comprised i 68% and i 75% of total Avenova Spray net revenue, respectively. No other individual distributor comprised greater than 10% of total Avenova Spray net revenue during the three and six months ended June 30, 2023 or 2022.
As of June 30, 2023 and December 31, 2022, accounts receivable from our major distribution partners and major retailers greater than 10% were as follows:
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| June 30, | December 31, | |||||||
| Major distribution partner | 2023 | 2022 | ||||||
| Avenova Spray Pharmacy Distributor A | i 28 | % | i 11 |
% | ||||
| Avenova Spray Pharmacy Distributor B | i 27 | % | i 30 |
% | ||||
| Major U.S. Retailer A | * | % | i 15 | % | ||||
* 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. In particular, it is possible that the Company may suffer from unexpected delays in light of the global supply chain issues.
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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 cost, which management believes approximates fair value. Additionally, the derivative liability related to certain embedded features contained within the Convertible Notes, restricted cash, warrant liabilities, and contingent consideration are carried at fair value.
The Company follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under this standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. There are three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities;
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable; and
Level 3 – inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
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Allowance for Credit Losses
The Company maintains an allowance for estimated losses resulting from the inability of its customers to meet their financial obligations to the Company. The Company recognizes an allowance for credit losses based on factors such as historical experience, contract terms and general and market business conditions. The Company’s future collection experience can differ significantly from historical collection trends due to such factors as changing customer circumstances and uncertain economic and industry trends. Management recorded a reserve for allowance for credit losses of $ i 3 thousand and $ i 19 thousand as of June 30, 2023 and December 31, 2022, respectively.
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Inventory
Inventory is comprised of (1) raw materials and supplies, such as bottles, packaging materials, labels, boxes and pumps; (2) goods in progress, which are normally filled but unlabeled bottles; and (3) finished goods. The Company utilizes contract manufacturers to produce our products and the price paid to these manufacturers is included in inventory. Inventory is stated at the lower of cost or estimated net realizable value determined by the first-in, first-out method. At June 30, 2023 and December 31, 2022, management had recorded an allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments of $ i 446 thousand and $ i 499 thousand, respectively.
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Property and Equipment, net
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets of five to seven years for office and laboratory equipment, three to five years for computer equipment and software, and five to seven years for furniture and fixtures. Leasehold improvements are amortized over the lease term.
The costs of normal maintenance, repairs, and minor replacements are expensed as incurred.
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Goodwill and Indefinite-Lived Intangible Assets
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 six months ended June 30, 2023 or 2022.
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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 i zero as of June 30, 2023 and December 31, 2022. This amount is subject to change in the event that there are changes to our expectations and related valuation assumptions, which are valued using Level 3 fair value inputs.
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Long-Lived Assets
The Company’s intangible assets that do not have indefinite lives (primarily trade secrets / product formulations) are amortized over their estimated useful lives. All of the Company’s intangible assets subject to amortization and other long-lived assets, are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment, which requires that companies consider whether events or changes in facts and circumstances, both internally and externally, may indicate that an impairment of long-lived assets held for use are present. The Company reviews long-lived assets for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values and the loss is recognized in the consolidated statements of operations.
The Company did not record any long-lived asset impairments during the three and six months ended June 30, 2023 or 2022.
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Leases
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use assets may be required for items such as initial direct costs paid or incentives received.
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 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.
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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:
| i. | identify the contract(s) with a customer; |
| ii. | identify the performance obligations in the contract; |
| iii. | determine the transaction price; |
| iv. | allocate the transaction price to the performance obligations in the contract; and |
| v. | recognize revenue when (or as) the entity satisfies performance obligations. |
Revenue is 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. 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.
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. However, revisions to prior period amounts presented in this report have been made to conform to the current period presentation as outlined below. The revisions had no impact on operating loss, net loss or net 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. The changes also did not impact cash or ending cash balances in the Company’s condensed consolidated balance sheets in the periods presented in this report or in previously issued annual consolidated financial statements.
Financial statement line items included in the condensed consolidated statements of operations for the three and six months ended June 30, 2022 were adjusted for the above changes as follows (in thousands, except per share amounts):
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| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||
| As Previously Reported | Selling Commissions | Fulfillment Fees | As Revised | As Previously Reported | Selling Commissions | Fulfillment Fees | As Revised | |||||||||||||||||||||||||
| Sales | ||||||||||||||||||||||||||||||||
| Product revenue, net | $ | i 3,043 | $ | i 288 | $ | i 329 | $ | i 3,660 | $ | i 5,666 | $ | i 586 | $ | i 675 | $ | i 6,927 | ||||||||||||||||
| Product cost of goods sold | ||||||||||||||||||||||||||||||||
| Product cost of goods sold | i 1,495 | i - | i 329 | i 1,824 | i 2,608 | i - | i 675 | i 3,283 | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| Sales and marketing | i 1,752 | i 288 | i - | i 2,040 | i 3,439 | i 586 | i - | i 4,025 | ||||||||||||||||||||||||
| Net loss | ( i 2,155 | ) | i - | i - | ( i 2,155 |
) | ( i 2,266 | ) | i - | i - | ( i 2,266 |
) | ||||||||||||||||||||
| Net loss per share attributable to common stockholders (basic and diluted) | ( i 1.43 | ) | i - | i - | ( i 1.43 |
) | ( i 1.54 | ) | i - | i - | ( i 1.54 |
) | ||||||||||||||||||||
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” basis. 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 i 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 i 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 $ i 4 thousand as of June 30, 2023 and December 31, 2022, which is recorded within Accrued liabilities on the Company’s unaudited condensed consolidated balance sheets.
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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.
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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.
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Patent Costs
Patent costs, including legal expenses, 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.
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Advertising Costs
Advertising costs are expensed in the period in which the costs are incurred. Advertising costs are included in sales and marketing expenses in the condensed consolidated statements of operations. Advertising expenses were $ i 0.3 million and $ i 0.4 million for the three months ended June 30, 2023 and 2022, respectively. Advertising expenses were $ i 0.6 million and $ i 1.0 million for the six months ended June 30, 2023 and 2022, respectively.
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Stock-Based Compensation
The Company’s stock-based compensation includes grants of stock options and RSUs to employees, consultants and non-employee directors. The expense associated with these grants is recognized in the Company’s unaudited 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.
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Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.
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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, the Binomial Lattice (“Lattice”) valuation model, or the Monte Carlo simulation model where deemed appropriate. These values are subject to a significant degree of management’s judgment.
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Net Loss per Share
The Company computes net loss per share by presenting both basic and diluted earnings (loss) per share (“EPS”).
Basic EPS is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods if their effect would be anti-dilutive.
The following table sets forth the calculation of basic EPS and diluted EPS (in thousands, except per share amounts):
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| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Numerator | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net loss | $ | 2,036 | $ | ( i 2,155 | ) | $ | ( i 3,775 | ) | $ | ( i 2,266 | ) | |||||
| Less: Retained earnings reduction due to preferred stock down round feature triggered | ( i 1,996 | ) | i - | ( i 1,996 | ) | i - | ||||||||||
| Net loss attributable to common stockholders (basic and diluted) | $ | ( i 4,032 | ) | $ | ( i 2,155 |
) | $ | ( i 5,771 | ) | $ | ( i 2,266 |
) | ||||
| Denominator | ||||||||||||||||
| Weighted average shares of common stock outstanding (basic and diluted) | i 3,176 | i 1,507 | i 2,609 | i 1,469 | ||||||||||||
| Net loss per share (basic and diluted) | $ | ( i 1.27 | ) | $ | ( i 1.43 |
) | $ | ( i 2.21 | ) | $ | ( i 1.54 |
) | ||||
For the three and six months ended June 30, 2023 and 2022, Series B Convertible Preferred Stock (the “Series B Preferred Stock”) and the Series C Convertible Preferred Stock (the “Series C Preferred Stock”) were excluded from the computation of diluted net loss per share as their inclusion on an “if converted” basis would have been anti-dilutive. The Series B Preferred Stock and Series C Preferred Stock were considered anti-dilutive because such securities did not have a contractual obligation to participate in losses of the Company.
The following outstanding preferred stock, stock options and stock warrants were excluded from the diluted EPS computation as their effect would have been anti-dilutive (in thousands):
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| As of June 30, | ||||||||
| 2022 | ||||||||
| Series B Preferred Stock | i 7,050 | i 830 | ||||||
| Series C Preferred Stock | i 845 | i — | ||||||
| Stock options | 115 | i 127 | ||||||
| Stock warrants | 7,382 | i 1,274 | ||||||
| 15,392 | i 2,231 | |||||||
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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 our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 31, 2023. 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.
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NOTE 3. 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 is classified within Level 2 of the fair value hierarchy because the stock price used in the related Black Sholes valuation model is adjusted for the dilutive effect of the 2023 Private Placement. This price was also used in the fair value models used by the Company to value the 2023 Warrants issued in conjunction with the 2023 Private Placement as well as in accounting for the warrant amendment and preferred stock conversion price adjustments that resulted from the 2023 Private Placement. This price is based on observable inputs but is not a quoted price in an active market and involves uncertainties. If factors or assumptions utilized in determining this price change, the estimated fair values for which it was used could be materially different. See Notes 9, “Convertible Note”; 11, “Warrant Liability”; and Note 12, “Stockholder’s Equity” for further discussion of related fair value calculations.
The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of June 30, 2023 (in thousands):
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| Fair Value Measurements Using | ||||||||||||||||
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets | Other | Significant | ||||||||||||||
| Balance at | for Identical | Observable | Unobservable | |||||||||||||
| June 30, | Items | Inputs | Inputs | |||||||||||||
| 2023 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets | ||||||||||||||||
| Restricted cash held as a certificate of deposit | $ | i 324 | $ | i 324 | $ | i — | $ | i — | ||||||||
| Deposit held as a certificate of deposit | i 152 | i 152 | i — | i — | ||||||||||||
| Total assets | $ | i 476 | $ | i 476 | $ | i — | $ | i — | ||||||||
| Liabilities | ||||||||||||||||
| Combined embedded derivative liability | i 169 | i — | i 169 | i — | ||||||||||||
| Total liabilities | $ | i 169 | $ | i — | $ | i 169 | $ | i — | ||||||||
The following table presents the Company’s cash equivalent assets measured at fair value on a recurring basis as of December 31, 2022 (in thousands):
| Fair Value Measurements Using | ||||||||||||||||
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets | Other | Significant | ||||||||||||||
| Balance at | for Identical | Observable | Unobservable | |||||||||||||
| December 31, | Items | Inputs | Inputs | |||||||||||||
| 2022 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets | ||||||||||||||||
| Restricted cash held as a certificate of deposit | $ | i 332 | $ | i 332 | $ | i — | $ | i — | ||||||||
| Deposit held as a certificate of deposit | i 152 | i 152 | i — | i — | ||||||||||||
| Total assets | $ | i 484 | $ | i 484 | $ | i — | $ | i — | ||||||||
NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following (in thousands):
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| June 30, | ||||||||
| 2022 | ||||||||
| Prepaid inventory | $ | i 107 | $ | i 211 | ||||
| Prepaid insurance | i 102 | i 146 | ||||||
| Prepaid dues and subscriptions | i 65 | i 43 | ||||||
| Prepaid marketing costs | i 47 | i 24 | ||||||
| Prepaid patents | i 1 | i 12 | ||||||
| Tenant allowance | i — | i 11 | ||||||
| Other | i 197 | i 113 | ||||||
| Total prepaid expenses and other current assets | $ | i 519 | $ | i 560 | ||||
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NOTE 5. INVENTORY
Inventory consisted of the following (in thousands):
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| June 30, | ||||||||
| 2022 | ||||||||
| Raw materials and supplies | $ | i 1,046 | $ | i 1,273 | ||||
| Finished goods | i 3,060 | i 2,663 | ||||||
| Less: Reserve for excess and obsolete inventory | ( i 446 | ) | ( i 499 |
) | ||||
| Total inventory, net | $ | i 3,660 | $ | i 3,437 | ||||
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NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
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| June 30, | ||||||||
| 2022 | ||||||||
| Office and laboratory equipment | $ | i 20 | $ | i 20 | ||||
| Furniture and fixtures | i 157 | i 157 | ||||||
| Computer equipment and software | i 427 | i 412 | ||||||
| Leasehold improvements | i 152 | i 152 | ||||||
| Total property and equipment, at cost | i 756 | i 741 | ||||||
| Less: accumulated depreciation | ( i 648 | ) | ( i 622 |
) | ||||
| Total property and equipment, net | $ | i 108 | $ | i 119 | ||||
Depreciation expenses were $ i 13 thousand and $ i 29 thousand for the three months ended June 30, 2023 and 2022, respectively, and $ i 26 thousand and $ i 59 thousand for the six months ended June 30, 2023 and 2022, respectively.
NOTE 7. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following (in thousands):
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| Balance at June 30, 2023 | ||||||||||||||||
| Accumulated | ||||||||||||||||
| Gross | Amortization | Impairment | Net | |||||||||||||
| Indefinite-lived intangible assets | ||||||||||||||||
| Trade names | $ | i 2,080 | $ | — | $ | ( i 970 |
) | $ | i 1,110 | |||||||
| Amortizable intangible assets | ||||||||||||||||
| Customer relationships | $ | i 290 | $ | ( i 54 |
) | $ | ( i 172 | ) | $ | i 64 | ||||||
| Trade secrets / product formulations | i 2,890 | ( i 445 |
) | ( i 1,415 | ) | i 1,030 | ||||||||||
| Total other intangible assets | $ | i 5,260 | $ | ( i 499 |
) | $ | ( i 2,557 | ) | $ | i 2,204 | ||||||
| Balance at December 31, 2022 | ||||||||||||||||
| Accumulated | ||||||||||||||||
| Gross | Amortization | Impairment | Net | |||||||||||||
| Indefinite-lived intangible assets | ||||||||||||||||
| Trade names | $ | i 2,080 | $ | — | $ | ( i 970 |
) | $ | i 1,110 | |||||||
| Amortizable intangible assets | ||||||||||||||||
| Customer relationships | $ | i 290 | $ | ( i 48 |
) | $ | ( i 172 | ) | $ | i 70 | ||||||
| Trade secrets / product formulations | i 2,890 | ( i 375 |
) | ( i 1,415 | ) | i 1,100 | ||||||||||
| Total other intangible assets | $ | i 5,260 | $ | ( i 423 |
) | $ | ( i 2,557 | ) | $ | i 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 $ i 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 six months ended June 30, 2023 or 2022.
Amortization expenses were $ i 38 thousand and $ i 91 thousand for the three months ended June 30, 2023 and 2022, respectively, and $ i 76 thousand and $ i 182 thousand for the six months ended June 30, 2023 and 2022, respectively. Based on the amortizable intangible assets as of June 30, 2023, future amortization expenses are expected to be as follows (in thousands):
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| 2023 | $ | i 76 | ||
| 2024 | i 153 | |||
| 2025 | i 152 | |||
| 2026 | i 153 | |||
| Thereafter | i 560 | |||
| Total | $ | i 1,094 |
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NOTE 8. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
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| June 30, | ||||||||
| 2022 | ||||||||
| Contract liabilities (see Note 14) | $ | i 1,817 | $ | i 1,807 | ||||
| Employee payroll and benefits | i 562 | i 261 | ||||||
| Marketing costs | i 66 | i 104 | ||||||
| Accrued interest on Convertible Notes | i 45 | i — | ||||||
| Inventory purchases | i 4 | i 101 | ||||||
| Other | i 261 | i 451 | ||||||
| Total accrued liabilities | $ | i 2,755 | $ | i 2,724 | ||||
NOTE 9. 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) $ 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 i 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 i 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 i 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 $ i 1.30 per share. The 2023 Private Placement closed on May 1, 2023 and the Company received gross proceeds of $ i 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 i 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 $ i 1.30 per share (“Conversion Price”) at any time, subject to certain limitations upon conversion. The Convertible Notes are subject to a limitation upon conversion into shares of Common Stock to the extent that, after giving effect to such conversion, the holder of a Convertible Note (together with the holder’s affiliates, and any other persons acting as a group together with the holder or any of the holder’s affiliates), would beneficially own in excess of 4.99% or 9.99% of the outstanding Common Stock. The Company is required to make a monthly redemption of the Convertible Notes (“Monthly Redemption”) beginning on June 1, 2023 equal to 1/18th of the Aggregate Principal Amount multiplied by i 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) i 90% of the Company’s average volume-weighted average price over i 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 i 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 i 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 $ i 1.6 million to the May 2023 Warrants and $ i 0.2 million to the derivative liabilities with the residual $ i 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:
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| Stock price | $ | i 0.72 | |||||
| Equity volatility | i 80.1 | % | |||||
| Risk-free interest rate | i 4.88 | % | |||||
| Dividend yield |
| i 0.0 | % | ||||
| Remaining term | i 0.8 | ||||||
The fair value of the combined embedded derivative was $ i 209 thousand as of April 27, 2023.
The key assumptions used to value the combined embedded derivative as of June 30, 2023 were as follows:
| Assumption | As of | |||
| Stock price | $ | i 0.75 | ||
| Equity volatility | i 76.9 | % | ||
| Risk-free interest rate | i 5.41 | % | ||
| Remaining term | i 0.7 | |||
The fair value of the combined embedded derivative was $ i 169 thousand as of June 30, 2023. The change of $ i 40 thousand in fair value between the date of issuance and June 30, 2023 was recorded as a non-cash gain in the consolidated statements of operations and comprehensive loss.
The aggregate $ i 300 thousand original issue discount, and the $ i 294 thousand of debt issuance costs that were allocated to the Convertible Notes based on the relative fair value method, were recorded at issuance as an offset to the Convertible Notes on the Company’s unaudited condensed consolidated balance sheet. The Convertible Notes are presented as follows as of June 30, 2023:
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| (in thousands) | ||||
| Principal amount | $ | i 3,117 | ||
| Unamortized discount | ( i 1,696 | ) | ||
| Unamortized debt issuance costs | ( i 236 | ) | ||
| Total Convertible Note, net | i 1,185 |
The Convertible Notes, net is classified as short term in the Company’s unaudited condensed consolidated balance sheet.
The discount and debt issuance costs are being amortized to interest expense using the effective interest rate method over the term of the Convertible Notes, assuming that the Convertible Notes will be redeemed for cash of $ i 193 thousand per month beginning in June 2023. During both the three and six months ended June 30, 2023, the effective interest rate on the Convertible Notes was i 173%. Interest expense recognized, including amortization of the issuance costs and debt discount, was $ i 501 thousand during the three and six months ended June 30, 2023.
As of June 30, 2023, the Company's contractual maturity of the principal balance of the Convertible Notes was as follows:
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| (in thousands) | ||||
| Remainder of 2023 | $ | i 1,100 | ||
| 2024 | i 2,017 | |||
| Total | $ | i 3,117 |
NOTE 10. COMMITMENTS AND CONTINGENCIES
Indemnification Agreements
As permitted under Delaware law and in accordance with its bylaws, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and may enable it to recover a portion of any future payments. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, it has not recorded any liabilities for these agreements as of June 30, 2023 or December 31, 2022.
In the normal course of business, the Company provides indemnification of varying scope under its agreements with other entities, typically its clinical research organizations, investigators, clinical sites, suppliers, and others. Pursuant to these agreements, it generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with the use or testing of its products or product candidates or with any U.S. patent or any copyright or other intellectual property infringement claims by any third party with respect to its products. The term of these indemnification agreements is generally perpetual. The potential future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, costs related to these indemnification provisions have been immaterial. The Company also maintains various liability insurance policies that limit its exposure. As a result, it believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of June 30, 2023 or December 31, 2022.
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. The ultimate outcome of any litigation or other legal dispute is uncertain. When a loss related to a legal proceeding or claim is probable and reasonably estimable, the Company accrues its best estimate for the ultimate resolution of the matter. If one or more legal matters are resolved against the Company in a reporting period for an amount above expectations, the Company’s financial condition and operating results for that period may be adversely affected. As of June 30, 2023 and December 31, 2022, there were no legal matters that, in the opinion of management, would ultimately result in liability that would have a material adverse effect on the Company’s financial position, results of operations or cash flows. Any outcome, whether favorable or unfavorable, may materially and adversely affect the Company due to legal costs and expenses, diversion of management attention and other factors. The Company expenses legal costs in the period incurred. The Company cannot provide assurance that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against it in the future, and these matters could relate to prior, current, or future transactions or events.
Leases
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 i 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. 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. 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 six months ended June 30, 2023 and 2022 were as follows (in thousands):
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| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Lease Costs | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Operating lease cost | $ | i 131 | $ | i 141 | $ | i 261 | $ | i 275 | ||||||||
| Other information | ||||||||||||||||
| Operational cash flow used for operating leases | $ | i 146 | $ | i 144 | $ | i 252 | $ | i 255 | ||||||||
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:
| Weighted-average remaining lease term (in years) | i 3.8 | i 5.0 | ||||||
| Weighted-average discount rate | i 5 | % | i 5 |
% | ||||
Future lease payments under non-cancelable leases as of June 30, 2023 were as follows (in thousands):
i
| 2023 | $ | i 291 | ||
| 2024 | i 557 | |||
| 2025 | i 439 | |||
| 2026 | i 444 | |||
| 2027 | i 290 | |||
| Total future minimum lease payments | i 2,021 | |||
| Less imputed interest | ( i 166 | ) | ||
| Total | $ | i 1,855 | ||
| Reported as: | ||||
| Operating lease liabilities | $ | i 476 | ||
| Operating lease liabilities- non-current | i 1,379 | |||
| Total | $ | i 1,855 |
/
NOTE 11. 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”.
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 $ i 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:
i
| Series B-1 Warrants | Series B-2 Warrants | |||||||
| Stock price | $ | i 0.72 | $ | i 0.72 | ||||
| Expected price volatility | i 80.1 | % | i 80.1 |
% | ||||
| Expected term (in years) | i 5.1 | i 2.1 | ||||||
| Risk-free interest rate | i 3.60 | % | i 4.04 |
% | ||||
| Dividend yield | i 0.00 | % | i 0.00 |
% | ||||
| Weighted-average fair value of warrants | $ | i 0.40 | $ | i 0.22 | ||||
As of June 9, 2022, the date of shareholder approval, the fair value of these May 2023 Warrants, was determined to be $ i 1.4 million in accordance with the following key assumptions, at which time they were reclassified to equity:
| Series B-1 Warrants | Series B-2 Warrants | |||||||
| Stock price | $ | i 0.68 | $ | i 0.68 | ||||
| Expected price volatility | i 77.6 | % | i 77.6 |
% | ||||
| Expected term (in years) | i 5.0 | i 2.0 | ||||||
| Risk-free interest rate | i 3.92 | % | i 4.59 |
% | ||||
| Dividend yield | i 0.00 | % | i 0.00 |
% | ||||
| Weighted-average fair value of warrants | $ | i 0.36 | $ | i 0.18 | ||||
As a result, the Company recorded a non-cash gain on changes in fair value of warrant liability of $ i 216 thousand.
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 the effective date of the Reverse Stock Split, which was approved by Company stockholders on November 10, 2022. Under ASC 480, Distinguishing Liabilities from Equity, the September 2022 Warrants were classified as liabilities from the date of issuance 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 $ i 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 | i 79.6 | % | ||
| Expected term (in years) | i 6.0 | |||
| Risk-free interest rate | i 3.43 | % | ||
| Dividend yield | i 0.0 | % | ||
| Weighted-average fair value of warrants | $ | i 4.55 |
The fair value of the September 2022 Warrants was determined to be $ i 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 | i 79.5 | % | ||
| Expected term (in years) | i 5.8 | |||
| Risk-free interest rate | i 3.93 | % | ||
| Dividend yield | i 0.0 | % | ||
| Weighted-average fair value of warrants | $ | i 1.40 |
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 shareholder approval for an increase in authorized share capital which the Company received on January 31, 2022. Under ASC 480, Distinguishing Liabilities from Equity, the November 2021 Warrants were classified as liabilities from the date of issuance through the date of approval 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 $ i 9.6 million in accordance with the following key assumptions, which was recorded as a liability:
| Expected price volatility | i 87 | % | ||
| Expected term (in years) | i 6.0 | |||
| Risk-free interest rate | i 1.31 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 8.75 |
As of January 31, 2022, the fair value of the November 2021 Warrants was determined to be $ i 7.5 million in accordance with the following key assumptions, at which time the liability was adjusted and reclassified to equity:
| Expected price volatility | i 91 | % | ||
| Expected term (in years) | i 6.0 | |||
| Risk-free interest rate | i 1.65 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 7.00 |
Unexercised November 2021 Warrants exercisable for i 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 the effective date of the Reverse Stock Split, which was approved by Company stockholders on November 10, 2022. Under ASC 480, Distinguishing Liabilities from Equity, the 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 $ i 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 | i 79.6 | % | ||
| Expected term (in years) | i 6.0 | |||
| Risk-free interest rate | i 3.43 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 4.55 |
As of November 10, 2022, the fair value of these November 2021 Warrants, as amended, was determined to be $ i 1.3 million in accordance with the following key assumptions, at which time they were reclassified to equity:
| Expected price volatility | i 79.5 | % | ||
| Expected term (in years) | i 5.8 | |||
| Risk-free interest rate | i 3.93 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 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 i 77,145 shares of common stock were no longer exercisable prior to the effective date of the Reverse Stock Split. Under ASC 480, Distinguishing Liabilities from Equity, these Amended July 2020 Warrants were reclassified as liabilities on the date of amendment and remained recorded as liabilities through the date of approval of the Reverse Stock Split at which time they were reclassified to equity.
The fair value of these Amended July 2020 Warrants was determined to be $ i 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 | i 79.6 | % | ||
| Expected term (in years) | i 3.4 | |||
| Risk-free interest rate | i 3.58 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 3.50 |
As of November 10, 2022, the fair value of these Amended July 2020 Warrants was determined to be $ i 0.1 million in accordance with the following key assumptions, at which time they were reclassified to equity:
| Expected price volatility | i 79.5 | % | ||
| Expected term (in years) | i 3.2 | |||
| Risk-free interest rate | i 4.15 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 1.05 |
NOTE 12. 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 i 150,000,000 shares of common stock and up to i 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- i 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- i 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 warrant liability and valuation, please see Note 11, “Warrant Liability”.
In connection with the 2023 Private Placement, certain Amended November 2021 Warrants, Amended July 2020 Warrants, September 2022 Warrants and 2022 Warrants previously issued to participants in the 2023 Private Placement exercisable for i 1,724,455 shares of common stock were amended to lower the exercise price from $ i 6.30 to $ i 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 i 535,716 shares of common stock have an exercise price of $ i 1.50 and the remaining portion of the Amended November 2021 Warrants exercisable for i 267,858 shares of common stock have an exercise price of $ i 6.30 and (2) all of the Amended July 2020 Warrants exercisable for i 77,145 shares of common stock have an exercise price of $ i 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 $ i 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 $ i 3.3 million immediately prior to the modification in accordance with the following key assumptions:
i
| November 2021 Warrants | July 2020 Warrants | |||||||
| Expected price volatility | i 79.6 | % | i 79.6 |
% | ||||
| Expected term (in years) | i 5.4 | i 3.4 | ||||||
| Risk-free interest rate | i 3.43 | % | i 3.58 |
% | ||||
| Dividend yield | i 0.00 | % | i 0.00 |
% | ||||
| Weighted-average fair value of warrants | $ | i 3.15 | $ | i 0.70 | ||||
The fair value of the Amended November 2021 Warrants and the Amended July 2020 Warrants was determined to be $ i 5.2 million immediately after the modification in accordance with the following key assumptions:
| November 2021 Warrants | July 2020 Warrants | |||||||
| Expected price volatility | i 79.6 | % | i 79.6 |
% | ||||
| Expected term (in years) | i 6.0 | i 3.4 | ||||||
| Risk-free interest rate | i 3.43 | % | i 3.58 |
% | ||||
| Dividend yield | i 0.00 | % | i 0.00 |
% | ||||
| Weighted-average fair value of warrants | $ | i 4.55 | $ | i 3.50 | ||||
As a result of the 2023 Private Placement transaction amendments to the September 2022 Warrants, the Company allocated $ i 46 thousand between other expenses and Convertible Notes debt issuance cost. The $ i 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 $ i 48 thousand immediately prior to the modification in accordance with the following key assumptions:
| Stock price | $ | i 0.72 | ||
| Expected price volatility | i 80.1 | % | ||
| Expected term (in years) | i 5.4 | |||
| Risk-free interest rate | i 3.59 | % | ||
| Dividend yield | i 0.0 | % | ||
| Weighted-average fair value of warrants | $ | i 0.20 |
The fair value of the September 2022 Warrants was determined to be $ i 94 thousand immediately after the modification in accordance with the following key assumptions:
| Stock price | $ | i 0.72 | ||
| Expected price volatility | i 80.1 | % | ||
| Expected term (in years) | i 5.4 | |||
| Risk-free interest rate | i 3.59 | % | ||
| Dividend yield | i 0.0 | % | ||
| Weighted-average fair value of warrants | $ | i 0.39 |
As of June 30, 2023, the September 2022 Warrants were exercisable for an aggregate of i 327,860 shares of common stock.
As a result of the 2023 Private Placement transaction, amendments to the Amended November 2021 Warrants and the Amended July 2020 Warrants, the Company allocated $ i 117 thousand between other expenses and Convertible Notes debt issuance cost. The $ i 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 $ i 112 thousand immediately prior to the modification in accordance with the following key assumptions:
| November 2021 Warrants | July 2020 Warrants | |||||||
| Stock price | $ | i 0.72 | $ | i 0.72 | ||||
| Expected price volatility | i 80.1 | % | i 80.1 |
% | ||||
| Expected term (in years) | i 5.4 | i 2.7 | ||||||
| Risk-free interest rate | i 3.59 | % | i 3.88 |
% | ||||
| Dividend yield | i 0.00 | % | i 0.00 |
% | ||||
| Weighted-average fair value of warrants | $ | i 0.20 | $ | i 0.06 | ||||
The fair value of the Amended November 2021 Warrants and the Amended July 2020 Warrants was determined to be $ i 230 thousand immediately after the modification in accordance with the following key assumptions:
| November 2021 Warrants | July 2020 Warrants | |||||||
| Stock price | $ | i 0.72 | $ | i 0.72 | ||||
| Expected price volatility | i 80.1 | % | i 80.1 |
% | ||||
| Expected term (in years) | i 5.4 | i 2.7 | ||||||
| Risk-free interest rate | i 3.59 | % | i 3.88 |
% | ||||
| Dividend yield | i 0.00 | % | i 0.00 |
% | ||||
| Weighted-average fair value of warrants | $ | i 0.39 | $ | i 0.24 | ||||
As of June 30, 2023, the Amended November 2021 Warrants were exercisable for an aggregate of i 803,574 shares of common stock and the Amended July 2020 Warrants were exercisable for an aggregate of i 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 i 238,574 shares of common stock have an exercise price of $ i 1.50 and the remaining portion of the September 2022 Warrants exercisable for i 89,286 shares of common stock have an exercise price of $ i 6.30. The September 2022 Warrants expire on September 11, 2028. As of June 30, 2023, the September 2022 Warrants were exercisable for an aggregate of i 327,860 shares of common stock.
The 2022 Warrant Reprice Transaction resulted in gross proceeds of approximately $ i 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 $ i 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 $ i 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. Inc. (“Ladenburg”) served as the Company’s warrant solicitation agent for the 2022 Warrant Reprice Transaction in exchange for a fee equal to i 8% of the total gross proceeds. The Company incurred total issuance costs of $ i 529 thousand in conjunction with the 2022 Warrant Reprice Transaction. The Company allocated $ i 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 $ i 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) i 3,250 shares of Series C Preferred Stock convertible into an aggregate of i 516,750 shares of common stock, (2) series A-2 warrants to purchase common stock, which are exercisable for i 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 i 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 $ i 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 i 873,020 shares of common stock have an exercise price of $ i 1.50 and the remaining portion of the September 2022 Warrants exercisable for i 158,732 shares of common stock have an exercise price of $ i 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 $ i 1,000 per share and was initially convertible at a conversion price of $ i 6.30 into i 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 $ i 1.30 per share, which exercise price was lower than the then effective $ i 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 $ i 1.30, and each outstanding share of Series C Preferred Stock became convertible into i 770 shares of common stock. As a result of the change, the Company recorded a $ i 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 $ i 0.9 million immediately prior to the conversion price adjustment in accordance with the following key assumptions:
i
| Stock price | $ | i 0.72 | ||
| Expected price volatility | i 80.1 | % | ||
| Expected term (in years) | i 0.8 | |||
| Risk-free interest rate | i 4.91 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 5.35 |
The fair value of the Series C Preferred Stock was determined to be $ i 1.1 million immediately after the conversion price protection adjustment in accordance with the following key assumptions:
| Stock price | $ | i 0.72 | ||
| Expected price volatility | i 80.1 | % | ||
| Expected term (in years) | i 0.8 | |||
| Risk-free interest rate | i 4.91 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 0.61 |
As of June 30, 2023, the Series A-1 Warrants were exercisable into i 515,876 shares of common stock and the Series A-2 Warrants were exercisable into i 515,876 shares of common stock. As of June 30, 2023, i 2,153 shares of the Series C Preferred Stock had been converted into common stock. Each of the remaining i 1,097 shares of the Series C Preferred Stock, as of June 30, 2023, were convertible into i 770 shares of common stock at a conversion price of $ i 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 $ i 122 thousand between other expenses and Convertible Notes debt issuance cost. The $ i 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 $ i 93 thousand immediately prior to the adjustment to the exercise price with the following key assumptions:
| Series A-1 Warrants | Series A-2 Warrants | |||||||
| Stock price | $ | i 0.72 | $ | i 0.72 | ||||
| Expected price volatility | i 80.1 | % | i 80.1 |
% | ||||
| Expected term (in years) | i 5.6 | i 1.1 | ||||||
| Risk-free interest rate | i 3.59 | % | i 4.73 |
% | ||||
| Dividend yield | i 0.00 | % | i 0.00 |
% | ||||
| Weighted-average fair value of warrants | $ | i 0.21 | $ | i 0.00 | ||||
The fair value of the Series A-1 Warrants and the Series A-2 Warrants was determined to be $ i 216 thousand immediately after the adjustment to the exercise price with the following key assumptions:
| Series A-1 Warrants | Series A-2 Warrants | |||||||
| Stock price | $ | i 0.72 | $ | i 0.72 | ||||
| Expected price volatility | i 80.1 | % | i 80.1 |
% | ||||
| Expected term (in years) | i 5.6 | i 1.1 | ||||||
| Risk-free interest rate | i 3.59 | % | i 4.73 |
% | ||||
| Dividend yield | i 0.00 | % | i 0.00 |
% | ||||
| Weighted-average fair value of warrants | $ | i 0.40 | $ | i 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 i 15,000 shares of our newly-created Series B Preferred Stock convertible into an aggregate of i 1,071,429 shares of common stock, and (ii) the November 2021 Warrants exercisable for i 1,071,429 shares of common stock for net proceeds of $ i 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 $ i 1,000 per share and was initially convertible at a conversion price of $ i 0.40 into i 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 $ i 0.18 per share as well as the issuance of the September 2022 Warrants also with an exercise price of $ i 0.18 per share, which exercise price was lower than the then effective $ i 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 $ i 0.18, and each outstanding share of Series B Preferred Stock became convertible into i 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 $ i 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 $ i 6.8 million immediately prior the conversion price adjustment in accordance with the following key assumptions:
| Expected price volatility | i 79.6 | % | ||
| Expected term (in years) | i 1.3 | |||
| Risk-free interest rate | i 3.64 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 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 | i 79.6 | % | ||
| Expected term (in years) | i 1.3 | |||
| Risk-free interest rate | i 3.64 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 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.
On April 27, 2023, the Company entered into the 2023 Private Placement where the May 2023 Warrants were issued with an exercise price of $ i 1.30 per share, which exercise price was lower than the then effective $ i 6.30 conversion price of the Series B Preferred 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 $ i 1.30, and each outstanding share of Series B Preferred Stock became convertible into i 770 shares of common stock. As a result of the change, the Company recorded a $ i 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. 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 $ i 8.7 million immediately prior the conversion price adjustment in accordance with the following key assumptions:
| Stock price | $ | i 0.72 | ||
| Expected price volatility | i 80.1 | % | ||
| Expected term (in years) | i 0.8 | |||
| Risk-free interest rate | i 4.91 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 5.35 |
The fair value of the Series B Preferred Stock was determined to be $ i 10.5 million immediately after the conversion price protection adjustment in accordance with the following key assumptions:
| Stock price | $ | i 0.72 | ||
| Expected price volatility | i 80.1 | % | ||
| Expected term (in years) | i 0.8 | |||
| Risk-free interest rate | i 4.91 | % | ||
| Dividend yield | i 0.00 | % | ||
| Weighted-average fair value of warrants | $ | i 0.61 |
As of June 30, 2023, i 5,844 shares of the Series B Preferred Stock had been converted into common stock. Each of the remaining i 9,156 shares of the Series B Preferred Stock as of June 30, 2023, was currently convertible into i 770 shares of common stock at a conversion price of $ i 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 $ i 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
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 i 4,799 shares of common stock (the “2019 Ladenburg Warrants”). The 2019 Ladenburg Warrants bear an exercise price of $ i 34.65 and an expiration date of August 8, 2024.
July 2020 Warrants
In 2020, certain of the Company’s accredited investors were granted warrants with an exercise price of $ i 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 June 30, 2023, outstanding July 2020 Warrants which were not amended were exercisable for i 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 i 429 shares of common stock with an exercise price of $ i 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 June 30, 2023 and December 31, 2022 are as follows:
i
| Warrants | Weighted- Average Exercise Price | |||||||
| Outstanding at December 31, 2022 | i 2,306 | $ | i 7.70 | |||||
| Warrants granted | i 5,076 | i 1.30 | ||||||
| Warrants expired | i — | i — | ||||||
| Outstanding at June 30, 2023 | i 7,382 | i 2.18 | ||||||
/
NOTE 13. EQUITY-BASED COMPENSATION
Equity Compensation Plans
In October 2007, the Company adopted the 2007 Omnibus Incentive Plan (the “2007 Plan”) to provide for the granting of equity awards, such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights, and stock appreciation rights to employees, directors and outside consultants, as determined by the Board. The 2007 Plan expired on March 15, 2017. Upon expiration, new awards cannot be issued pursuant to the 2007 Plan, but outstanding awards continue to be governed by its terms. Stock options granted under the 2007 Plan expire no later than ten years from the date of grant. All stock options outstanding under the 2007 Plan were fully vested as of December 31, 2020.
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 i 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) i 4% of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of common stock than provided for in Section 4(a)(i) of the 2017 Plan as determined by the Board. On March 31, 2023, the number of shares available for future awards under the 2017 Plan was increased by i 81,417 shares. As of June 30, 2023, there were i 145,866 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 i 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 i 10% of the Company’s stock, then not less than i 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 June 30, 2023 and activity during the period ended June 30, 2023:
i
| (in thousands, except years | Awards | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | ||||||||||||
| Outstanding at December 31, 2022 | i 132 | $ | i 37.99 | i 7.5 | $ | i 69 | ||||||||||
| Options granted | i 42 | $ | i 1.67 | |||||||||||||
| Restricted stock units granted | i 5 | — | ||||||||||||||
| Restricted stock units vested | ( i 5 | ) | — | |||||||||||||
| Options forfeited/cancelled | ( i 16 | ) | $ | i 63.10 | ||||||||||||
| Restricted stock units cancelled | ( i 7 | ) | — | |||||||||||||
| Outstanding at June 30, 2023 | i 151 | $ | i 26.92 | i 7.9 | $ | i 21 | ||||||||||
| Vested and expected to vest at June 30, 2023 | i 120 | $ | i 33.13 | i 7.8 | $ | i 4 | ||||||||||
| Vested at June 30, 2023 | i 56 | $ | i 63.79 | i 5.9 | $ | — | ||||||||||
| Exercisable at June 30, 2023 | i 56 | $ | i 63.79 | i 5.9 | $ | — | ||||||||||
The aggregate intrinsic value in the table above is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE American as of June 30, 2023 for options that have a quoted market price in excess of the exercise price. There were i no stock option awards exercised during the three and six months ended June 30, 2023 and 2022. The Company received i no cash payments for the exercise of stock options during the three and six months ended June 30, 2023 and 2022.
As of June 30, 2023, total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately $ i 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 i 2.2 years.
Equity Awards to Employees and Directors
The Company grants options to purchase common stock to its employees and directors at prices equal to or greater than the market value of the stock on the dates the options are granted. The Company has estimated the value of stock option awards as of the date of grant by applying the Black-Scholes option pricing model using the single-option valuation approach. The application of this valuation model involves assumptions that are judgmental and subjective in nature. See Note 2, “Summary of Significant Accounting Policies,” for a description of the accounting policies that the Company applied to value its stock-based awards.
During the six months ended June 30, 2023 and 2022, the Company granted options to employees and directors to purchase an aggregate of i 42,150 and i 9,605 shares of common stock, respectively.
The weighted-average assumptions used in determining the value of options are as follows:
i
| Six Months Ended June 30, | ||||||||
| Assumption | 2023 | 2022 | ||||||
| Expected price volatility | i 152.99 | % | i 160.41 |
% | ||||
| Expected term (in years) | i 6.81 | i 6.45 | ||||||
| Risk-free interest rate | i 3.47 | % | i 1.65 |
% | ||||
| Dividend yield | i 0.00 | % | i 0.00 |
% | ||||
| Weighted-average fair value of options granted during the period | $ | i 1.61 | $ | i 10.17 | ||||
Expected Price Volatility—This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The computation of expected volatility was based on the historical volatility of our own stock.
Expected Term—This is the period of time over which the options granted are expected to remain outstanding. The expected life assumption is based on the Company’s historical data.
Risk-Free Interest Rate—This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option.
Dividend Yield—The Company has not made any dividend payments nor does the Company have plans to pay dividends in the foreseeable future.
Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
During the six months ended June 30, 2023, the Company granted i 5,148 shares of restricted stock to employees and directors. During the six months ended June 30, 2022, the Company granted i 5,148 shares of restricted stock to employees and directors.
For the three months ended June 30, 2023 and 2022, the Company recognized stock-based compensation expense of $ i 64 thousand and $ i 154 thousand, respectively, for stock-based awards to employees and directors. For the six months ended June 30, 2023 and 2022, the Company recognized stock-based compensation expense of $ i 139 thousand and $ i 338 thousand, respectively, for stock-based awards to employees and directors.
Summary of Stock-Based Compensation Expense
A summary of the stock-based compensation expense included in results of operations for the options and restricted stock awards discussed above is as follows (in thousands):
i
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2023 | 2022 | ||||||||||||||
| Research and development | $ | i 5 | $ | i 5 | $ | i 11 | $ | i 9 | ||||||||
| Sales and marketing | i 17 | i 13 | i 32 | i 25 | ||||||||||||
| General and administrative | i 42 | i 136 | i 96 | i 304 | ||||||||||||
| Total stock-based compensation expense | $ | i 64 | $ | i 154 | $ | i 139 | $ | i 338 | ||||||||
/
NOTE 14. 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. 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 six months ended June 30, 2023 (in thousands):
i
| Product Returns, Discounts for Prompt Payment | Other Customer Fees | Rebates | Total | |||||||||||||
| Balance at December 31, 2022 | $ | i 1,673 | $ | i 53 | $ | i 81 | $ | i 1,807 | ||||||||
| Provision related to sales made in current period | i 398 | i 57 | i 33 | i 488 | ||||||||||||
| Payments and customer credits issued | ( i 349 | ) | ( i 35 |
) | ( i 94 | ) | ( i 478 |
) | ||||||||
| Balance at June 30, 2023 | $ | i 1,722 | $ | i 75 | $ | i 20 | $ | i 1,817 | ||||||||
Avenova Spray Pharmacy Distribution Agreements and Specialty Pharmacies
Avenova Spray is made available in local pharmacies and major pharmacy retail chains under nationwide distribution agreements with McKesson Corporation, Cardinal Health and AmerisourceBergen. The Company has also entered into direct agreements with preferred pharmacy networks as part of our Partner Pharmacy Program. During the three months ended June 30, 2023 and 2022, the Company earned $ i 195 thousand and $ i 142 thousand, respectively, in net sales revenue for its Avenova Spray product from these distribution and partner pharmacy agreements. The Company earned net sales revenue of $ i 287 thousand during the six months ended June 30, 2023, and a net sales loss of $ i 57 thousand during the six months ended June 30, 2022 for its Avenova Spray product from these distribution and partner pharmacy agreements.
Under these product distribution arrangements, the Company had a contract liability balance of $ i 1.6 million as of June 30, 2023 and December 31, 2022, respectively. The contract liability is included in accrued liabilities in the condensed consolidated balance sheets. The Company also recorded a prepayment of $ i 35 thousand for rebates related to these distribution agreements as of June 30, 2023, with i 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 six months ended June 30, 2023, the revenue generated from over-the-counter Avenova Spray was $ i 1.3 million and $ i 2.9 million, respectively. During the three and six months ended June 30, 2022, the revenue generated from over-the-counter Avenova Spray was $ i 1.7 million and $ i 3.5 million, respectively.
DERMAdoctor Products Distribution Agreements
DERMAdoctor products are sold through distribution arrangements with third parties such as Costco and others. During the three and six months ended June 30, 2023, the Company earned $ i 0.1 million and $ i 0.2 million, respectively, in sales revenue for its DERMAdoctor products from these distribution agreements. During the three and six months ended June 30, 2022, the Company lost $ i 0.2 million and earned $ i 0.1 million, respectively, in sales revenue for its DERMAdoctor products from these distribution agreements.
Under these distribution arrangements, the Company had a contract liability balance of $ i 0.2 million as of June 30, 2023 and December 31, 2022. The contract liability is included in accrued liabilities in the condensed consolidated balance sheets.
NOTE 15. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan covering all eligible employees. The Company provides matching contributions equal to i 100% of the first i 3% of compensation deferred, plus i 50% of the next i 2% of compensation deferred. During the three and six months ended June 30, 2023, the Company contributed $ i 32 thousand and $ i 63 thousand, respectively. During the three and six months ended June 30, 2022, the Company contributed $ i 30 thousand and $ i 76 thousand, respectively.
/
NOTE 16. 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):
i
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2023 | 2022 | ||||||||||||||
| Related party revenue: | ||||||||||||||||
| NeutroPhase | $ | i 1,043 | $ | i 509 | $ | i 1,043 | $ | i 657 | ||||||||
| Total related party revenue | $ | i 1,043 | $ | i 509 | $ | i 1,043 | $ | i 657 | ||||||||
| Cost of goods sold: | ||||||||||||||||
| NeutroPhase | $ | ( i 895 | ) | $ | ( i 514 | ) | $ | ( i 895 | ) | $ | ( i 648 | ) | ||||
| Total related party expenses | $ | ( i 895 | ) | $ | ( i 514 | ) | $ | ( i 895 | ) | $ | ( i 648 | ) | ||||
Related party accounts receivable was $ i 0.7 million and $ i 0.2 million as of June 30, 2023 and December 31, 2022, respectively.
/
NOTE 17. 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 i 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:
i
| Three Months | Three Months | |||||||||||||||
| Ended | Percentage | Ended | Percentage | |||||||||||||
| June 30, | of Total Sales, | June 30, | of Total Sales, | |||||||||||||
| 2023 | Net | 2022 | Net | |||||||||||||
| Eyecare & Wound Care | $ | i 3,534 | i 77 |
% | $ | i 2,910 | i 79 |
% | ||||||||
| Skincare | i 1,076 | i 23 |
% | i 752 | i 21 |
% | ||||||||||
| Total sales, net | $ | i 4,610 | i 100 |
% | $ | i 3,662 | i 100 |
% | ||||||||
| Three Months | Three Months | |||||||||||||||
| Ended | Percentage | Ended | Percentage | |||||||||||||
| June 30, | of Total | June 30, | of Total | |||||||||||||
| 2023 | Operating Loss | 2022 | Operating Loss | |||||||||||||
| Eyecare & Wound Care | $ | ( i 1,062 | ) | i 78 |
% | $ | ( i 1,308 | ) | i 61 |
% | ||||||
| Skincare | ( i 293 | ) | i 22 |
% | ( i 844 | ) | i 39 |
% | ||||||||
| Total operating loss | $ | ( i 1,355 | ) | i 100 |
% | $ | ( i 2,152 | ) | i 100 | % | ||||||
| Six Months | Six Months | |||||||||||||||
| Ended | Percentage | Ended | Percentage | |||||||||||||
| June 30, | of Total Sales, | June 30, | of Total Sales, | |||||||||||||
| 2023 | Net | 2022 | Net | |||||||||||||
| Eyecare & Wound Care | $ | i 5,873 | i 76 |
% | $ | i 5,140 | i 74 |
% | ||||||||
| Skincare | i 1,861 | i 24 |
% | i 1,795 | i 26 |
% | ||||||||||
| Total sales, net | $ | i 7,734 | i 100 |
% | $ | i 6,935 | i 100 |
% | ||||||||
| Six Months | Six Months | |||||||||||||||
| Ended | Percentage | Ended | Percentage | |||||||||||||
| June 30, | of Total | June 30, | of Total | |||||||||||||
| 2023 | Operating Loss | 2022 | Operating Loss | |||||||||||||
| Eyecare & Wound Care | $ | ( i 2,396 | ) | i 78 |
% | $ | ( i 3,347 | ) | i 74 |
% | ||||||
| Skincare | ( i 693 | ) | i 22 |
% | ( i 1,187 | ) | i 26 |
% | ||||||||
| Total operating loss | $ | ( i 3,089 | ) | i 100 |
% | $ | ( i 4,534 | ) | i 100 | % | ||||||
/
NOTE 18. 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 June 30, 2023, and events which occurred subsequently but were not recognized in the condensed consolidated financial statements. Except as described below there were no other subsequent events which required recognition, adjustment to or disclosure in the unaudited condensed consolidated financial statements.
| 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 “SEC”) on March 31, 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 development and commercialization 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. Avenova Spray is available direct to consumers primarily through online distribution channels and is also available by prescription and dispensed by eyecare professionals for blepharitis and dry-eye disease. Other eyecare products offered under the Avenova eyecare brand include our Novawipes, Lubricant Eye Drops, Moist Heating Eye Compress, i-Chek lash mirror, and the Eye Health Support Oral Supplement with MaquiBright.
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 2022 compared to 2021, while operating costs relating to these products remained substantially the same. We are working to achieve our overall objectives, as well as continuing to evaluate additional strategies for our Company and our business to address our capital and liquidity needs, as well as potential other strategic alternatives.
We also manufacture and sell our proprietary form of hypochlorous acid for the wound care market with our NeutroPhase and PhaseOne branded products. NeutroPhase and PhaseOne are used for cleansing and irrigation as part of surgical procedures, as well as treating certain wounds, burns, ulcers and other injuries. We currently sell these products through distributors.
Recent Developments
2023 Private Placement
On April 27, 2023, the Company entered into the Purchase Agreement with existing accredited institutional investors of the Company for the 2023 Private Placement that provided for the issuance and sale of (i) $3.3 million aggregate principal amount of Convertible Notes, (ii) the Series B-1 Warrants, and (iii) the Series B-2 Warrants. The 2023 Private Placement closed on May 1, 2023 and the Company received gross proceeds of $3.0 million, before deducting placement agent fees and other offering expenses. Due to the number of shares of common stock that may be issued upon conversion or redemption of the Convertible Notes and the exercise of the May 2023 Warrants, we were required to obtain the Stockholder Approval for the issuance of these shares of common stock in accordance with Section 713(a) and 713(b) of the NYSE American Company Guide. The Company received Stockholder Approval at its 2023 Annual Meeting of Stockholders on June 9, 2023, and, as a result the Convertible Notes and the May 2023 Warrants are currently convertible or exercisable, as applicable, in accordance with their respective terms. In connection with the 2023 Private Placement, certain previously issued common stock purchase warrants issued to participants in the 2023 Private Placement exercisable for 1,724,455 shares of common stock were amended to lower the exercise price from $6.30 to $1.50 per share, as further described below.
Anti-Dilution Adjustment to Series B Preferred Stock and the Series C Preferred Stock
The Certificate of Designation of Preferences, Rights and Limitations for the Company’s outstanding Series B Preferred Stock (the “Series B Certificate of Designation”) and the Certificate of Designation of Preferences, Rights and Limitations for the Company’s outstanding Series C Preferred Stock (the “Series C Certificate of Designation”) provides for anti-dilution protections in the event that the Company grants any right to reprice any Company security or issue a new Company security that would entitle the holder to acquire common stock at an effective price per share that is lower than the conversion price of the Series B Preferred Stock and the Series C Preferred Stock, which is referred to as “full-ratchet” anti-dilution protection. As a result of the consummation of the 2023 Private Placement, the conversion price of the 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 and skincare products. Our net losses were $4.0 million and $2.2 million for the three months ended June 30, 2023 and 2022, respectively. In addition, our net losses were $5.8 million and $2.3 million for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, we had an accumulated deficit of $163.9 million, total current assets of $11.2 million and total assets of $16.0 million.
We expect to grow commercial sales of Avenova branded products and expect to grow commercial sales of our DERMAdoctor branded products through an expansion of domestic and international market penetration, with a particular focus on online channels, and the development of new product offerings under both brand names.
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. Increases or decreases in fair value of the contingent consideration liabilities can result from updates to assumptions such as the expected timing or probability of achieving the specified milestones. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Updates to assumptions could have a significant impact on our results of operations in any given period. 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
For warrants that are classified as liabilities, the Company records the fair value of the warrants at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations. The fair values of these warrants are determined using the Black-Scholes option pricing model, the Binomial Lattice (“Lattice”) valuation model, or the Monte Carlo simulation model when deemed appropriate. These values are subject to a significant degree of management’s judgment.
Results of Operations
Comparison of the Three Months Ended June 30, 2023 and 2022 (dollars in thousands)
| Three Months Ended June 30, |
Dollar |
Percent |
||||||||||||||
| 2023 |
2022 |
Change |
Change |
|||||||||||||
| Statement of Operations |
||||||||||||||||
| Sales: |
||||||||||||||||
| Product revenue, net |
$ | 4,599 | $ | 3,660 | $ | 939 | 26 | % |
||||||||
| Other revenue, net |
11 | 2 | 9 | 450 | % |
|||||||||||
| Total sales, net |
4,610 | 3,662 | 948 | 26 | % |
|||||||||||
| Product cost of goods sold |
2,304 | 1,824 | 480 | 26 | % |
|||||||||||
| Gross profit |
2,306 | 1,838 | 468 | 25 | % |
|||||||||||
| Research and development |
27 | 40 | (13 | ) |
(33 | %) |
||||||||||
| Sales and marketing |
1,718 | 2,040 | (322 | ) |
(16 | %) |
||||||||||
| General and administrative |
1,916 | 1,910 | 6 | 0 | % |
|||||||||||
| Total operating expenses |
3,661 | 3,990 | (329 | ) |
(8 | %) |
||||||||||
| Operating loss |
(1,355 | ) |
(2,152 | ) |
797 | (37 | %) |
|||||||||
| Non-cash loss on modification of common stock warrants |
||||||||||||||||
| Non-cash gain on changes in fair value of warrant liability |
216 | — | 216 | 100 | % |
|||||||||||
| Non-cash gain on changes in fair value of combined embedded derivative liability |
40 | — | 40 | 100 | % |
|||||||||||
| Other expense, net |
(937 | ) |
(3 | ) |
(934 | ) |
31133 | % |
||||||||
| Net loss |
$ | (2,036 | ) |
$ | (2,155 | ) |
$ | 119 | (6 | %) |
||||||
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. For the three months ended June 30, 2022, the result of these changes and revisions was an increase of $617 thousand in product revenue, net, which was offset by an increase of $329 thousand in product cost of goods sold and $288 thousand in sales and marketing expenses. These changes and revisions did not impact operating loss, net loss or net loss per share in the Company’s unaudited condensed consolidated statement of operations in the periods presented in this report or in previously issued annual and quarterly Company consolidated financial statements. 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, Cost of Goods Sold and Gross Profit
Product revenue, net, increased by $939 thousand, or 26%, to $4.6 million for the three months ended June 30, 2023, from $3.7 million for the three months ended June 30, 2022, primarily due to increases in revenue recognized from our wound care and DERMAdoctor branded skincare products.
Revenue from eyecare products, including Avenova Spray, decreased $0.1 million to $2.2 million for the three months ended June 30, 2023, from $2.3 million for the three months ended June 30, 2022.
Revenue from the Company’s wound care products increased $0.6 million to $1.2 million for the three months ended June 30, 2023, from $0.6 million for the three months ended June 30, 2022, due to an unusually large order of the NeutroPhase branded wound care product.
Revenue from DERMAdoctor branded skincare products increased $0.3 million to $1.1 million for the three months ended June 30, 2023, from $0.8 million for the three months ended June 30, 2022, due to an increase in sales in our international and domestic wholesale and retail channels.
Product cost of goods sold increased by $0.5 million, or 26%, to $2.3 million for the three months ended June 30, 2023, from $1.8 million for the three months ended June 30, 2022 primarily due to the increase in wound care and DERMAdoctor branded skincare products sold during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.
Sales and marketing
Sales and marketing expenses decreased by $0.3 million, or 16%, to $1.7 million for the three months ended June 30, 2023, from $2.0 million for the three months ended June 30, 2022. The decrease was due primarily to lower digital advertising and related consulting costs incurred in the three months ended June 30, 2023 compared to the three months ended June 30, 2022.
General and administrative
General and administrative expenses were $1.9 million for the three months ended June 30, 2023 and June 30, 2022.
Non-cash gain on changes in fair value of warrant liability
Adjustments to the fair value of warrant liability resulted in a gain of $216 thousand for the three months ended June 30, 2023. The warrant liability was reclassified to equity during the three months ended June 30, 2023 and will no longer require fair value adjustments which will impact our results of operations. For additional information regarding the warrant liability and their valuation, please see Note 11, “Warrant Liability”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report. The Company did not record a comparable loss or gain for the three months ended June 30, 2022.
Non-cash gain on changes in fair value of embedded derivative liability
The adjustments to the fair value of derivative liability resulted in a gain of $40 thousand for the three months ended June 30, 2023. The gain results from the increase in the price of the Company’s common stock price during that period. The Company did not record a comparable loss or gain for the three months ended June 30, 2022.
Other expense, net
Other expense, net increased $934 thousand to $937 thousand for the three months ended June 30, 2023, from $3 thousand for the three months ended June 30, 2022. The increase was primarily due to the amortization of discount and issuance cost related to the Convertible Notes issued in May 2023 and modification of common stock warrants with no comparable item for the three months ended June 30, 2022.
Comparison of the Six Months Ended June 30, 2023 and 2022 (dollars in thousands)
| Six Months Ended June 30, |
Dollar |
Percent |
||||||||||||||
| 2023 |
2022 |
Change |
Change |
|||||||||||||
| Statement of Operations |
||||||||||||||||
| Sales: |
||||||||||||||||
| Product revenue, net |
$ | 7,716 | $ | 6,927 | $ | 789 | 11 | % |
||||||||
| Other revenue, net |
18 | 8 | 10 | 125 | % |
|||||||||||
| Total sales, net |
7,734 | 6,935 | 799 | 12 | % |
|||||||||||
| Product cost of goods sold |
3,492 | 3,283 | 209 | 6 | % |
|||||||||||
| Gross profit |
4,242 | 3,652 | 590 | 16 | % |
|||||||||||
| Research and development |
53 | 68 | (15 | ) |
(22 | %) |
||||||||||
| Sales and marketing |
3,371 | 4,025 | (654 | ) |
(16 | %) |
||||||||||
| General and administrative |
3,907 | 4,093 | (186 | ) |
(5 | %) |
||||||||||
| Total operating expenses |
7,331 | 8,186 | (855 | ) |
(10 | %) |
||||||||||
| Operating loss |
(3,089 | ) |
(4,534 | ) |
1,445 | (32 | %) |
|||||||||
| Non-cash gain on changes in fair value of warrant liability |
216 | 2,056 | (1,840 | ) |
(89 | %) |
||||||||||
| Non-cash gain on changes in fair value of combined embedded derivative liability |
40 | — | 40 | (100 | %) |
|||||||||||
| Non-cash gain on changes in fair value of contingent liability |
— | 219 | (219 | ) |
(100 | %) |
||||||||||
| Other expense, net |
(942 | ) |
(7 | ) |
(935 | ) |
13357 | % |
||||||||
| Net loss |
$ | (3,775 | ) |
$ | (2,266 | ) |
$ | (1,509 | ) |
67 | % |
|||||
Total Net Sales, Cost of Goods Sold and Gross Profit
Product revenue, net, increased by $789 thousand, or 11%, to $7.7 million for the six months ended June 30, 2023, from $6.9 million for the six months ended June 30, 2022, primarily due to increased revenue from our wound care and DERMAdoctor branded skincare products.
Revenue from eyecare products, including Avenova Spray decreased $0.1 million to $3.7 million for the six months ended June 30, 2023, from $3.8 million for the six months ended June 30, 2022.
Revenue from the Company’s wound care products increased $0.6 million to $1.4 million for the six months ended June 30, 2023, from $0.8 million for the six months ended June 30, 2022, due to an unusually large order of the NeutroPhase branded wound care product.
Revenue from DERMAdoctor branded skincare products was $1.8 million for each of the six months ended June 30, 2023 and 2022.
Product cost of goods sold increased by $209 thousand, or 6%, to $3.5 million for the six months ended June 30, 2023, from $3.3 million for the six months ended June 30, 2022 primarily due to the increase in wound care products sold during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.
Sales and marketing
Sales and marketing expenses decreased by $0.7 million, or 16%, to $3.4 million for the six months ended June 30, 2023, from $4.0 million for the six months ended June 30, 2022. The decrease was due primarily to lower digital advertising and related consulting costs incurred in the six months ended June 30, 2023 compared to the six months ended June 30, 2022.
General and administrative
General and administrative expenses decreased $0.2 million to $3.9 million for the six months ended June 30, 2023, from $4.1 million for the six months ended June 30, 2022. The change is primarily the result of a decrease in variable compensation costs, including non-cash stock-based compensation expense, recorded in the comparable periods.
Non-cash gain on changes in fair value of warrant liability
Adjustments to the fair value of warrant liability resulted in a gain of $0.2 million for the six months ended June 30, 2023 compared to a gain of $2.1 million for the six months ended June 30, 2022. 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 gain on changes in fair value of embedded derivative liability
The adjustments to the fair value of derivative liability resulted in a gain of $40 thousand for the three months ended June 30, 2023. The gain results from the increase in the price of the Company’s common stock price during that period. The Company did not record a comparable loss or gain for the three months ended June 30, 2022.
Non-cash gain on changes in fair value of contingent liability
Adjustments to the fair value of contingent liability resulted in a gain of $0.2 million for the six months ended June 30, 2022 with no comparable adjustment for the current year period. This contingent liability related to potential future contingent consideration of earn out payments that could have become payable as part of the DERMAdoctor Acquisition if specified milestone events were achieved. As of June 30, 2023, the Company does not anticipate that any such earn out payments will be made.
Other expense, net
Other expense, net increased $935 thousand to $942 thousand for the six months ended June 30, 2023, from $7 thousand for the six months ended June 30, 2022. The increase was primarily due to the amortization of discount and issuance cost related to the Convertible Notes issued in May 2023 and modification of common stock warrants with no comparable item for the three months ended June 30, 2022.
Financial Condition, Liquidity and Capital Resources
As of June 30, 2023, our cash and cash equivalents were $4.4 million, compared to $5.4 million as of December 31, 2022. Our cash and cash equivalents as of June 30, 2023 includes $2.8 million of net proceeds from the issuance of the Convertible Notes and the May 2023 Warrants in the 2023 Private Placement that closed on May 1, 2023. Under the terms of the Convertible Notes, we are required to make a monthly redemption of the principal amount of the Convertible Notes (“Monthly Redemption”) over an 18-month period beginning on June 1, 2023 in an amount equal to $193 thousand per month, unless such Monthly Redemption is eligible under the terms of the Convertible Notes to instead be settled through the issuance of our common stock. We have paid the Monthly Redemption in cash for the first three payments. For additional information regarding the 2023 Private Placement and the Convertible Notes, see Note 9 “Convertible Note,” and Note 12 “Stockholders’ Equity” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report and the Company’s Current Report on Form 8-K filed with the SEC on April 27, 2023.
Based primarily on the funds available on June 30, 2023, the Company believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund its existing operations, meet its planned operating expenses and to meet the Monthly Redemption of the Convertible Notes into at least the second quarter of 2024. We have sustained operating losses for the majority of our corporate history and expect that our 2023 expenses will exceed our 2023 revenues, as we continue to invest in both Avenova and DERMAdoctor commercialization efforts. 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. These unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to our ability to continue as a going concern.
Cash Used in Operating Activities
Net cash used in operating activities was $3.5 million for the six months ended June 30, 2023, which consisted primarily of a net loss of $3.8 million, adjusted by depreciation and amortization expenses of $102 thousand, stock-based compensation expenses of $139 thousand, modification of common stock warrants expense of $285 thousand, gain on changes in fair value of warrant liability of $216 thousand, gain on changes in fair value of combined derivative liability of $40 thousand, accretion of interest and amortization of debt discounts on convertibles notes of $457 thousand, and a net change of $406 thousand in our net operating assets and liabilities.
Net cash used in operating activities was $3.8 million for the six months ended June 30, 2022, which consisted primarily of a net loss of $2.3 million, adjusted primarily by a non-cash gain of $2.1 million on the change in fair value of warrant liability, non-cash gain of $219 thousand on the change in fair value of contingent liability, depreciation and amortization expenses of $241 thousand, stock-based compensation expenses of $338 thousand, and a net increase of $206 thousand in our net operating assets and liabilities.
Cash Used in Investing Activities
Net cash used in investing activities for the purchase of property and equipment was $15 thousand and $32 thousand, for the six months ended June 30, 2023 and 2022, respectively.
Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was $2.5 million for the six months ended June 30, 2023, which included the net proceeds of $2.8 million received in the 2023 Private Placement of the Convertible Notes and the May 2023 Warrants. Pursuant to the terms of the Convertible Notes, we paid $193 thousand for the first Monthly Redemption of the Convertible Notes, which will be payable in cash each month, unless such payment is made by us in common stock, subject to the terms of the Convertible Notes.
For the six months ended June 30, 2022, net cash used in financing activities of $105 thousand consisted of a repayment of the DERMAdoctor line of credit, which was subsequently terminated.
Net Operating Losses and Tax Credit Carryforwards
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.
Inflation
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 June 30, 2023 and December 31, 2022 as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Seasonality
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 June 30, 2023 were as follows (in thousands):
| Contractual Obligations |
Less than 1 year |
1-3 years |
3-5 years |
More than 5 years |
Total |
|||||||||||||||
| Facility leases |
$ | 542 | $ | 926 | $ | 534 | $ | — | $ | 2,002 | ||||||||||
| Equipment lease |
8 | 11 | — | — | 19 | |||||||||||||||
| Total |
$ | 550 | $ | 937 | $ | 534 | $ | — | $ | 2,021 | ||||||||||
Our commitments as of June 30, 2023 consisted primarily of facility operating leases and an operating lease for one copier.
The total commitment for the facility leases were $2.0 million due over the leases’ terms as of June 30, 2023.
The total commitment for the copier lease was $19 thousand due over the leases’ terms as of June 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.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our market risk consists principally of interest rate risk on our cash and cash equivalents. Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in interest rates, particularly because our current liquid assets at June 30, 2023 were held in cash and cash equivalents.
Our investment policy restricts our investments to high-quality investments and limits the amounts invested with any one issuer, industry, or geographic area. The goals of our investment policy are as follows: preservation of capital, assurance of liquidity needs, best available return on invested capital, and minimization of capital taxation. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with an interest rate fixed at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, in accordance with our investment policy, we maintain our cash and cash equivalents in short-term marketable securities, including money market mutual funds, Treasury bills, Treasury notes, certificates of deposit, commercial paper, and corporate and municipal bonds. The risk associated with fluctuating interest rates is limited to our investment portfolio. Due to the short-term nature of our investment portfolio, we believe we have minimal interest rate risk arising from our investments. As of June 30, 2023 and December 31, 2022, a 10% change in interest rates would have had an immaterial effect on the value of our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We do not hold any instruments for trading purposes.
With most of our focus on the domestic U.S. market, we have not had any material exposure to foreign currency rate fluctuations.
| CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Assessing the costs and benefits of such controls and procedures necessarily involves the exercise of judgment by management. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Based upon that evaluation at June 30, 2023, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure, at the reasonable assurance level, that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2023, which has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
| LEGAL PROCEEDINGS |
The “Legal Matters” section of Note 10, “Commitments and Contingencies” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report is incorporated herein by reference.
| RISK FACTORS |
For information regarding factors that could affect our business, results of operations, financial condition and liquidity, see the risk factors discussed under Part I, Item 1A included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 31, 2023 and under Part II, Item 1A included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, which was filed with the SEC on May 11, 2023. We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide updated quarterly information under this Item.
| UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
| DEFAULTS UPON SENIOR SECURITIES |
None.
| MINE SAFETY DISCLOSURES |
Not Applicable.
| OTHER INFORMATION |
None.
| EXHIBITS |
The following exhibits are filed with or incorporated by reference into this report.
| Incorporation by Reference |
Filed Herewith |
|||||
| Exhibit Number |
Exhibit Description |
Form |
File Number |
Exhibit/ Form 8-K Item Reference |
Filing Date |
|
| 2.1 |
8-K |
001-3678 |
2.1 |
9/28/2021 |
||
| 3.1 |
Amended and Restated Certificate of Incorporation of NovaBay Pharmaceuticals, Inc. |
10-K |
3.1 |
3/21/2018 |
||
| 3.2 |
Amendment to the Amended and Restated Certificate of Incorporation |
8-K |
3.1 |
6/04/2018 |
||
| 3.3 |
Amendment to the Amended and Restated Certificate of Incorporation, as amended |
8-K |
3.1 |
5/28/2020 |
||
| 3.4 |
Amendment to the Amended and Restated Certificate of Incorporation, as amended, dated May 24, 2021 |
8-K |
3.1 |
5/24/2021 |
||
| 3.5 |
8-K |
3.1 |
2/1/2022 |
|||
| 3.6 |
8-K |
3.1 |
11/1/2021 |
|||
| 3.7 |
Amendment to Amended and Restated Certificate of Incorporation, as amended, dated November 14, 2022 |
8-K |
3.1 |
11/18/2022 |
||
| 3.8 |
8-K |
3.2 |
11/18/2022 |
|||
| 3.9 |
8-K |
3.1 |
6/14/2023 |
|||
| 4.1 |
8-K |
4.1 |
5/18/2020 |
|||
| 4.2 |
8-K |
4.1 |
7/21/2020 |
|||
| 4.3 |
8-K |
4.1 |
9/13/2022 |
|||
| 4.4 |
8-K |
4.2 |
9/13/2022 |
|||
| 4.5 |
8-K |
4.3 |
9/13/2022 |
|||
| 4.6 |
8-K |
4.4 |
9/13/2022 |
|||
| 4.7 |
8-K |
4.5 |
9/13/2022 |
|||
| 4.8 |
8-K |
4.6 |
9/13/2022 |
|||
| 4.9 |
Form of Original Issue Discount Secured Senior Convertible Debentures |
8-K |
4.1 |
4/27/2023 |
||
| 4.10 |
8-K |
4.2 |
4/27/2023 |
|||
| 4.11 |
8-K |
4.3 |
4/27/2023 |
|||
| 4.12 |
8-K |
4.4 |
4/27/2023 |
|||
| 10.1 |
8-K |
10.1 |
4/27/2023 |
|||
| 10.2 |
8-K |
10.2 |
4/27/2023 |
|||
| 10.3 |
8-K |
10.3 |
4/27/2023 |
|||
| 10.4 |
8-K |
10.4 |
4/27/2023 |
|||
| 10.5 |
8-K |
10.5 |
4/27/2023 |
|||
| 31.1 |
X |
|||||
| 31.2 |
X |
|||||
| 32.1 |
X |
|||||
| 32.2 |
X |
|||||
| 101.INS |
Inline XBRL Instance Document |
X |
||||
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
X |
||||
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
X |
||||
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
X |
||||
| 101.LAB |
Inline XBRL Taxonomy Extension Labels Linkbase Document |
X |
||||
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
X |
||||
| 104 |
The Cover Page Interactive Data File, formatted in Inline XBRL (included within the Exhibit 101 attachments) |
X |
||||
* Certain schedules and exhibits were omitted as well as certain confidential portions of the agreements by means of marking such portions with brackets (due to such confidential portions are not material and would be competitively harmful if publicly disclosed) pursuant to Item 601 of Regulation S-K promulgated by the Commission. The Company agrees to supplementally furnish a copy of any omitted schedule, exhibit or confidential portions to the Commission upon request.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: August 10, 2023 |
||
| By: |
/s/ Justin Hall |
|
| Chief Executive Officer, General Counsel and Director (principal executive officer) |
||
| Date: August 10, 2023 |
||
| By: |
/s/ Tommy Law |
|
| Interim Chief Financial Officer (principal financial officer) |
||
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 11/20/28 | ||||
| 9/11/28 | ||||
| 6/9/28 | ||||
| 7/31/27 | ||||
| 1/1/27 | ||||
| 1/22/26 | ||||
| 1/15/26 | ||||
| 6/9/25 | ||||
| 12/31/24 | ||||
| 11/1/24 | ||||
| 8/8/24 | ||||
| 5/20/24 | ||||
| 12/31/23 | ||||
| Filed on: | 8/10/23 | |||
| 8/7/23 | ||||
| For Period end: | 6/30/23 | |||
| 6/9/23 | 4, 8-K, EFFECT | |||
| 6/1/23 | ||||
| 5/11/23 | 10-Q, 4 | |||
| 5/1/23 | 8-K | |||
| 4/27/23 | 8-K | |||
| 3/31/23 | 10-K, 10-Q, S-1/A, S-8 | |||
| 3/9/23 | ||||
| 1/1/23 | ||||
| 12/31/22 | 10-K, 10-K/A, ARS | |||
| 11/18/22 | 8-K | |||
| 11/15/22 | ||||
| 11/10/22 | 8-K, DEF 14A, PRE 14A | |||
| 9/30/22 | 10-Q, DEF 14A, DEFA14A | |||
| 9/9/22 | 8-K | |||
| 6/30/22 | 10-Q | |||
| 6/9/22 | ||||
| 3/31/22 | 10-Q | |||
| 2/28/22 | ||||
| 1/31/22 | 8-K | |||
| 1/19/22 | ||||
| 12/31/21 | 10-K | |||
| 11/2/21 | 8-K, DEFA14A, PRE 14A | |||
| 10/29/21 | 8-K | |||
| 12/31/20 | 10-K | |||
| 10/1/19 | ||||
| 1/1/18 | ||||
| 6/2/17 | 4, 8-K, DEF 14A, S-8 | |||
| 3/15/17 | ||||
| 7/1/02 | ||||
| 1/19/00 | ||||
| List all Filings | ||||