SEC Info - NovaBay Pharmaceuticals, Inc.

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		Alternative Formats (Word, et al.) Condensed Consolidated Balance Sheets: September 30, 2023 (unaudited) and December 31, 2022 Condensed Consolidated Statements of Cash Flows: Nine months ended September 30, 2023 and 2022 (unaudited) Condensed Consolidated Statements of Operations: Three and nine months ended September 30, 2023 and 2022 (unaudited) Condensed Consolidated Statements of Stockholders ' Equity: Three and nine months ended September 30, 2023 and 2022 (unaudited) Controls and Procedures Defaults Upon Senior Securities Exhibits Financial Statements Legal Proceedings Management ' s Discussion and Analysis of Financial Condition and Results of Operations Mine Safety Disclosures Notes to Condensed Consolidated Financial Statements (unaudited) Other Information Quantitative and Qualitative Disclosures About Market Risk Risk Factors Signatures Table of Contents Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
1	1st Page – Filing Submission
"	Table of Contents
"	Financial Statements
"	Condensed Consolidated Balance Sheets: September 30, 2023 (unaudited) and December 31, 2022
"	Condensed Consolidated Statements of Operations: Three and nine months ended September 30, 2023 and 2022 (unaudited)
"	Condensed Consolidated Statements of Stockholders ' Equity: Three and nine months ended September 30, 2023 and 2022 (unaudited)
"	Condensed Consolidated Statements of Cash Flows: Nine months ended September 30, 2023 and 2022 (unaudited)
"	Notes to Condensed Consolidated Financial Statements (unaudited)
"	Management ' s Discussion and Analysis of Financial Condition and Results of Operations
"	Quantitative and Qualitative Disclosures About Market Risk
"	Controls and Procedures
"	Legal Proceedings
"	Risk Factors
"	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
"	Defaults Upon Senior Securities
"	Mine Safety Disclosures
"	Other Information
"	Exhibits
"	Signatures

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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.

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

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, as amended by Amendment No. 1 to the Annual Report on Form 10-K, which was filed with the SEC on April 28, 2023. Words such as “expects,” “anticipated,” “will,” “may,” “goals,” “plans,” “believes,” “estimates,” “concludes,” determines,” variations of these words, and similar expressions are intended to identify these forward-looking statements. As a result of many factors, including those set forth under the section entitled “Risk Factors” and other sections in our SEC filings, our actual results may differ materially from those anticipated in these forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions based upon assumptions made that we believed to be reasonable at the time and are subject to risks and uncertainties. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements after the date of this report, even if new information becomes available in the future.

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

Our leading product, Avenova Spray, is proven in laboratory testing to have broad antimicrobial properties as it removes foreign material including microorganisms and debris from the skin around the eye, including the eyelid. Avenova Spray is formulated with our proprietary, stable and pure form of hypochlorous acid and is cleared by the FDA for sale in the United States. Avenova Spray is available direct to consumers primarily through online distribution channels and is also available by prescription and dispensed by eyecare professionals for blepharitis and dry-eye disease. Because dry eye is a complex condition, we offer a complementary portfolio of scientifically developed products for each step of the standard at home treatment regimen, including the Avenova Eye Health Support antioxidant-rich oral supplement, Avenova Lubricating Eye Drops for instant relief, NovaWipes by Avenova, Avenova Warm Eye Compress to soothe the eyes, and the i-Chek by Avenova to monitor physical eyelid health. In September 2023, we launched the Avenova Allograft, a dehydrated single-layer amnion membrane used by eyecare professionals as protective covering for the repair of ocular surfaces.

Through our subsidiary DERMAdoctor, LLC (“DERMAdoctor”), we offer over 30 dermatologist-developed products targeting common skin concerns, ranging from aging and blemishes to dry skin, perspiration and keratosis pilaris. DERMAdoctor branded products are marketed and sold through the DERMAdoctor website, well-known traditional and digital beauty retailers, and a network of international distributors. We acquired DERMAdoctor in November 2021, and since completing the DERMAdoctor Acquisition we have been working to integrate and expand the DERMAdoctor business in order to achieve strategic objectives that we expected by completing this acquisition, including revenue growth, cost reductions and achieving overall profitability. We have not been able to achieve these objectives to date, as DERMAdoctor’s product revenue declined in 2023 compared to 2022, while operating costs relating to these products remained substantially the same. We are working to achieve our overall objectives, as well as continuing to evaluate additional strategies for our Company and our business to address our capital and liquidity needs, including potential other strategic alternatives.

We also manufacture and sell our proprietary form of hypochlorous acid for the wound care market with our NeutroPhase and PhaseOne branded products. NeutroPhase and PhaseOne are used for cleansing and irrigation as part of surgical procedures, as well as treating certain wounds, burns, ulcers and other injuries. We currently sell these products only through distributors.

On April 27, 2023, the Company entered into a Securities Purchase Agreement with existing accredited institutional investors of the Company for the 2023 Private Placement that provided for the issuance and sale of (i) $3.3 million aggregate principal amount of Convertible Notes, (ii) the Series B-1 Warrants, and (iii) the Series B-2 Warrants. The 2023 Private Placement closed on May 1, 2023 and the Company received gross proceeds of $3.0 million, before deducting placement agent fees and other offering expenses. Due to the number of shares of common stock that may be issued upon conversion or redemption of the Convertible Notes and the exercise of the May 2023 Warrants, we were required to obtain the Stockholder Approval for the issuance of these shares of common stock in accordance with Section 713(a) and 713(b) of the NYSE American Company Guide. The Company received the Stockholder Approval at its 2023 Annual Meeting of Stockholders on June 9, 2023, and, as a result the Convertible Notes and the May 2023 Warrants are currently convertible or exercisable, as applicable, in accordance with their respective terms. In connection with the 2023 Private Placement, certain previously issued common stock purchase warrants issued to participants in the 2023 Private Placement exercisable for 1,724,455 shares of common stock were amended to lower the exercise price from $6.30 to $1.50 per share, as further described below.

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

The Certificate of Designation of Preferences, Rights and Limitations for the Company’s outstanding Series B Preferred Stock (the “Series B Certificate of Designation”) and the Certificate of Designation of Preferences, Rights and Limitations for the Company’s outstanding Series C Preferred Stock (the “Series C Certificate of Designation”) both provide for anti-dilution protection in the event that the Company grants any right to reprice any Company security or issues a new Company security that would entitle the holder to acquire common stock at an effective price per share that is lower than the conversion price of the Series B Preferred Stock and the Series C Preferred Stock, which is referred to as “full-ratchet” anti-dilution protection. As a result of the consummation of the 2023 Private Placement, the conversion price of the Convertible Notes and the exercise price of the May 2023 Warrants at $1.30 per share triggered this anti-dilution protection in the Series B Certificate of Designation and the Series C Certificate of Designation. As a result, the conversion price of each share of Series B Preferred Stock and each share of Series C Preferred Stock, which were each convertible at a price of $6.30 into 159 shares of common stock, were both automatically adjusted downward to become convertible at a price of $1.30 into 770 shares of common stock resulting in an additional 7,863,570 shares of common stock issuable upon conversion of the then outstanding shares of Series B Preferred Stock and Series C Preferred Stock.

For additional information regarding the 2023 Private Placement, the Convertible Notes, the May 2023 Warrants, the warrant amendments and the other related agreements and transactions, as well as the antidilution adjustment to the Series B Preferred Stock and Series C Preferred Stock, see Note 9 “Convertible Notes” and Note 12 “Stockholders’ Equity” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report and the Company’s Current Report on Form 8-K filed with the SEC on April 27, 2023.

We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue to commercialize our eyecare, skincare and wound care products. Our net losses were $1.8 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively. In addition, our net losses were $5.5 million and $2.4 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, we had an accumulated deficit of $165.7 million, total current assets of $8.2 million and total assets of $12.9 million.

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

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.

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.

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.

Comparison of the Three Months Ended September 30, 2023 and 2022 (dollars in thousands)

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

As discussed further in Note 2, “Summary of Significant Accounting Policies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report, during the three months ended September 30, 2022, the Company made an accounting policy change election related to fulfillment fees paid to third-party online retailers such as Amazon. While reviewing its accounting policy for fulfillment fees, the Company identified an immaterial error in its previously issued consolidated financial statements whereby the Company had been incorrectly presenting revenue net of selling commissions paid to third-party online retailers. Changes and revisions to prior period amounts presented in this report have been made to conform to the current period presentations. These changes and revisions did not impact operating loss, net loss or net loss per share in the Company’s unaudited condensed consolidated statement of operations in the periods presented in this report or in previously issued annual and quarterly Company consolidated financial statements. The changes and revisions also did not impact cash or ending cash balances in the Company’s unaudited condensed consolidated balance sheets as of the dates presented in this report or in previously issued annual and quarterly Company consolidated financial statements.

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

Revenue from eyecare products, including Avenova Spray, increased $0.2 million to $2.4 million for the three months ended September 30, 2023, from $2.2 million for the three months ended September 30, 2022. The increase was due to an overall increase in physician dispensed units sold and units sold through online channels. The increase was partially offset by the decrease in the number of other Avenova branded optical products sold, including the Company’s NovaWipes by Avenova and Avenova Warm Eye Compress.

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

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

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

Sales and marketing expenses decreased by $0.1 million, or 7%, to $1.7 million for the three months ended September 30, 2023, from $1.8 million for the three months ended September 30, 2022. The decrease was due primarily to lower digital advertising and related consulting costs incurred in the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

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

Adjustments to the fair value of warrant liability resulted in a gain of $2.4 million for the three months ended September 30, 2022 with no comparable adjustment for the three months ended September 30, 2023. For additional information regarding the warrant liability and their valuation, please see Note 11, “Warrant Liability”, in the Notes to Unaudited Condensed Consolidated Financial Statements, in Part I, Item 1 of this report.

Adjustments to the fair value of common stock warrants resulted in a loss of $1.9 million for the three months ended September 30, 2022 with no comparable adjustment for the three months ended September 30, 2023. This loss related to modification of common stock warrants, which occurred due to amendments to the Amended July 2020 Warrants and the November 2021 Warrants, as amended, in connection with the 2022 Warrant Reprice Transaction.

Other expense, net increased $0.4 million to $0.6 million for the three months ended September 30, 2023, from $0.2 million for the three months ended September 30, 2022. The increase was primarily due to the amortization of discount and issuance cost related to the Convertible Notes issued in May 2023 with no comparable expense for the three months ended September 30, 2022.

Comparison of the Nine Months Ended September 30, 2023 and 2022 (dollars in thousands)

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

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

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

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

Product cost of goods sold increased by $0.2 million, or 4%, to $4.9 million for the nine months ended September 30, 2023, from $4.7 million for the nine months ended September 30, 2022 primarily due to the increase in the margins of our wound care products sold during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Sales and marketing expenses decreased by $0.8 million, or 13%, to $5.1 million for the nine months ended September 30, 2023, from $5.9 million for the nine months ended September 30, 2022. The decrease was due primarily to lower digital advertising and related consulting costs incurred in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

General and administrative expenses increased by $0.1 million, or 2%, to $5.1 million for the nine months ended September 30, 2023, from $5.0 million for the nine months ended September 30, 2022.

Adjustments to the fair value of warrant liability resulted in a gain of $0.2 million for the nine months ended September 30, 2023 compared to a gain of $4.5 million for the nine months ended September 30, 2022. 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 combined embedded derivative liability

The adjustments to the fair value of combined embedded derivative liability resulted in a gain of $40 thousand for the nine months ended September 30, 2023. The gain results from the increase in the price of the Company’s common stock price during the period that the derivative liability was recorded. The Company did not record a comparable loss or gain for the nine months ended September 30, 2022.

Adjustments to the fair value of contingent liability resulted in a gain of $0.2 million for the nine months ended September 30, 2022 with no comparable adjustment for the nine months ended September 30, 2023. This contingent liability related to potential future contingent consideration of earn out payments that could have become payable as part of the DERMAdoctor Acquisition if specified milestone events were achieved. As of September 30, 2023, the Company does not anticipate that any such earn out payments will be made.

Adjustments to the fair value of common stock warrants resulted in a loss of $0.3 million for the nine months ended September 30, 2023. The loss related to modification of common stock warrants, which occurred due to amendments to the Amended July 2020 Warrants, Amended November 2021 Warrants, and the September 2022 Warrants, as amended, in connection with the 2023 Private Placement. Adjustments to the fair value of common stock warrants resulted in a loss of $1.9 million for the nine months ended September 30, 2022. This loss related to modification of common stock warrants, which occurred due to amendments to the Amended July 2020 Warrants and the November 2021 Warrants, as amended, in connection with the 2022 Warrant Reprice Transaction.

Other expense, net increased $1.1 million to $1.3 million for the nine months ended September 30, 2023, from $0.2 million for the nine months ended September 30, 2022. The increase was primarily due to the amortization of discount and issuance cost related to the Convertible Notes issued in May 2023 with no comparable expense for the nine months ended September 30, 2022.

As of September 30, 2023, our cash and cash equivalents were $3.5 million, compared to $5.4 million as of December 31, 2022. Our cash and cash equivalents as of September 30, 2023 includes $2.8 million of net proceeds from the issuance of the Convertible Notes and the May 2023 Warrants in the 2023 Private Placement that closed on May 1, 2023. Under the terms of the Convertible Notes, we are required to make a monthly redemption of the principal amount of the Convertible Notes (“Monthly Redemption”) over an 18-month period beginning on June 1, 2023 in an amount equal to $193 thousand per month, unless such Monthly Redemption is eligible under the terms of the Convertible Notes to instead be settled through the issuance of our common stock. We have paid the Monthly Redemption in cash for the first six payments. For additional information regarding the 2023 Private Placement and the Convertible Notes, see Note 9 “Convertible Note,” and Note 12 “Stockholders’ Equity” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report and the Company’s Current Report on Form 8-K filed with the SEC on April 27, 2023.

Based primarily on the funds available on September 30, 2023, the Company believes that the Company’s existing cash and cash equivalents and cash flows generated from product sales will be sufficient to fund its existing operations, meet its planned operating expenses and to meet the Monthly Redemption of the Convertible Notes into at least the second quarter of 2024. We have sustained operating losses for the majority of our corporate history and expect that our 2023 expenses will exceed our 2023 revenues, as we continue to invest in both Avenova and DERMAdoctor commercialization efforts. Additionally, we expect to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Accordingly, we have determined that our planned operations raise substantial doubt about our ability to continue as a going concern. Additionally, changing circumstances may cause us to expend cash significantly faster than currently anticipated, and we may need to spend more cash than currently expected because of circumstances beyond our control that impact the broader economy such as periods of inflation and supply chain issues.

Our long-term liquidity needs will be largely determined by the success of commercialization efforts. To address our current liquidity and capital needs, we have and continue to evaluate different plans and strategic transactions to fund operations, including: (1) raising additional capital through debt and equity financings or from other sources; (2) reducing spending on operations, including reducing spending on one or more of our sales and marketing programs or restructuring operations to change our overhead structure; (3) out-licensing rights to certain of our products or product candidates, pursuant to which we would receive cash milestones or an upfront fee; and/or (4) entering into license agreements to sell new products. We may issue securities, including common stock, preferred stock, convertible debt securities and warrants through additional private placement transactions or registered public offerings, which may require the filing of a Form S-1 or Form S-3 registration statement with the SEC. While the Company believes that the proceeds from the 2023 Private Placement improved our liquidity in the near term, there is no assurance that we will be successful in executing additional capital raising strategies at levels necessary to address the Company’s ongoing and future cash flow and liquidity needs. Accordingly, we continue to evaluate different plans and strategies to address our capital and liquidity needs, as well as evaluating potential other strategic alternatives and transactions. In the absence of one or more additional transactions and/or substantial revenue growth from our commercialization efforts, there will be substantial doubt about our ability to continue as a going concern within one year after the date these unaudited condensed consolidated financial statements are issued, and we will be required to scale back or terminate operations and/or seek protection under applicable bankruptcy laws. The accompanying unaudited condensed consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. 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.

Net cash used in operating activities was $3.8 million for the nine months ended September 30, 2023, which consisted primarily of a net loss of $5.5 million, adjusted by depreciation and amortization expenses of $0.2 million, stock-based compensation expenses related to employee and director stock awards of $0.2 million, non-cash loss on modification of common stock warrants expense of $0.3 million, non-cash gain on changes in fair value of warrant liability of $0.2 million, non-cash gain on changes in fair value of combined derivative liability of $0.1 million, accretion of interest and amortization of debt discounts on convertibles notes of $1.1 million, and a net increase of $0.2 million in our net operating assets and liabilities.

Net cash used in operating activities was $5.4 million for the nine months ended September 30, 2022, which consisted primarily of a net loss of $2.4 million, non-cash loss on modification of common stock warrants of $1.9 million, non-cash gain on the change in fair value of warrant liability of $4.5 million, non-cash gain on the change in fair value of contingent liability of $0.2 million, depreciation and amortization expenses of $0.4 million, stock-based compensation expenses related to employee and director stock awards of $0.1 million, and a net decrease in our net operating assets and liabilities of $0.8 million.

Net cash used in investing activities for the purchase of property and equipment was $17 thousand and $112 thousand, for the nine months ended September 30, 2023 and 2022, respectively.

Net cash provided by financing activities was $1.9 million for the nine months ended September 30, 2023, which included the net proceeds of $2.8 million received in the 2023 Private Placement of the Convertible Notes and the May 2023 Warrants. The aggregate proceeds were offset by repayment of $0.8 million for the Monthly Redemption through September 30, 2023 on the Convertible Notes issued and debt issuance cost of $0.3 million.

Net cash provided by financing activities was $1.6 million for the nine months ended September 30, 2022 and was primarily related to the proceeds received in the 2022 Warrant Reprice Transaction partially offset by the repayment of the DERMAdoctor line of credit, which was terminated in the first quarter of 2022.

As of December 31, 2022, we had net operating loss carryforwards for federal and state income tax purposes of $133.0 million and $111.0 million, respectively. The federal net operating loss carryforwards consist of $94.9 million generated before January 1, 2018, which will begin to expire in 2024 and $38.1 million that will carry forward indefinitely but are subject to an 80% limitation for years following December 31, 2021. The state net operating loss carryforwards will begin to expire in 2028. As of December 31, 2022, we also had tax credit carryforwards for federal income tax purposes of $0.5 million and $0.1 million for state tax purposes. If not utilized, the federal tax credits will begin expiring in 2031. The state tax credits have an indefinite carryover period.

Current federal and California tax laws include substantial restrictions on the utilization of net operating loss carryforwards in the event of an ownership change of a corporation. Accordingly, our ability to utilize net operating loss carryforwards may be limited as a result of such ownership changes. Such a limitation could result in the expiration of carryforwards before they are utilized.

Our costs are subject to fluctuations, particularly due to changes in the price of raw and packing materials and the cost of labor, transportation and operating supplies. Therefore, our business results depend, in part, on our continued ability to manage these fluctuations through pricing actions, costs savings projects and sourcing decisions, while maintaining and improving margins and market share. Failure to manage these fluctuations could adversely impact our results of operations or cash flows.

We did not have any off-balance sheet arrangements at September 30, 2023 and December 31, 2022 as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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.

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.

Our contractual cash commitments as of September 30, 2023 were as follows (in thousands):

Our commitments as of September 30, 2023 consisted primarily of facility operating leases and an operating lease for one copier.

The total commitment for the facility leases were $1.9 million due over the leases’ terms as of September 30, 2023.

The total commitment for the copier lease was $18 thousand due over the leases’ terms as of September 30, 2023.

See Note 10, “Commitments and Contingencies” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further information regarding these leases.

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 September 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 September 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.

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 September 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.

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023, which has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting

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.

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.

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.

i Delaware	i 68-0454536
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

Large accelerated filer	☐	Accelerated filer	☐	Emerging growth company	i ☐
i Non-accelerated filer	☒	Smaller reporting company	i ☒

	September 30, 2023			December 31, 2022
	(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	i 3,472		$	i 5,362
Accounts receivable, net of allowance for credit losses ($3 and $19 at September 30, 2023 and December 31, 2022, respectively)		i 916			i 1,973
Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($556 and $499 at September 30, 2023 and December 31, 2022, respectively)		i 3,493			i 3,437
Prepaid expenses and other current assets		i 333			i 560
Total current assets		i 8,214			i 11,332
Operating lease right-of-use assets		i 1,526			i 1,831
Property and equipment, net		i 97			i 119
Goodwill		i 348			i 348
Other intangible assets, net		i 2,166			i 2,280
Other assets		i 501			i 489
TOTAL ASSETS	$	i 12,852		$	i 16,399

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Current liabilities:
Accounts payable	$	i 947		$	i 1,080
Accrued liabilities		i 1,869			i 2,724
Convertible Notes, net		i 1,270			i —
Operating lease liabilities		i 485			i 453
Total current liabilities		i 4,571			i 4,257
Operating lease liabilities-non-current		i 1,244			i 1,588
Total liabilities		i 5,815			i 5,845
Commitments & contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized;
Series B Preferred Stock; 6 and 12 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively		i 302			i 570
Series C Preferred Stock; 1 and 2 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively		i 1,675			i 2,403
Common stock, $0.01 par value; 150,000 shares authorized, 6,529 and 2,035 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively*		i 65			i 20
Additional paid-in capital*		i 170,675			i 165,713
Accumulated deficit		( i 165,680	)		( i 158,152	)
Total stockholders’ equity		i 7,037			i 10,554
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	i 12,852		$	i 16,399

	Nine Months Ended September 30
	2023			2022

Operating activities:
Net loss	$	( i 5,532	)	$	( i 2,402	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment		i 39			i 88
Amortization of intangible assets		i 114			i 272
Stock-based compensation expense related to employee and director stock awards		i 201			i 130
Non-cash loss on modification of common stock warrants		i 285			i 1,922
Non-cash gain on changes in fair value of warrant liability		( i 216	)		( i 4,470	)
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 1,119			i —
Changes in operating assets and liabilities:
Accounts receivable		i 1,057			( i 465	)
Inventory		( i 56	)		( i 848	)
Prepaid expenses and other current assets		i 227			i 234
Operating lease right-of-use assets		i 305			( i 1,526	)
Other assets		( i 20	)		( i 1	)
Accounts payable and accrued liabilities		( i 988	)		i 128
Operating lease liabilities		( i 312	)		i 1,712
Net cash used in operating activities		( i 3,817	)		( i 5,445	)

Investing activities:
Purchases of property and equipment		( i 17	)		( i 112	)
Net cash used in investing activities		( i 17	)		( i 112	)

Financing activities:
Proceeds from convertible notes and warrant issuances, net of discount		i 3,000			i —
Payment on the convertible notes		( i 770	)		i —
Debt issuance cost		( i 294	)		i —
Proceeds from the exercise of warrants		i —			i 1,703
Payment on the line of credit		i —			( i 105	)
Net cash provided by financing activities		i 1,936			i 1,598
Net change in cash, cash equivalents, and restricted cash		( i 1,898	)		( i 3,959	)
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 3,948		$	i 4,020

NovaBay Pharmaceuticals, Inc. – ‘10-Q’ for 9/30/23

On: Thursday, 11/9/23, at 4:10pm ET · For: 9/30/23 · Accession #: 1437749-23-31256 · File #: 1-33678

Previous ‘10-Q’: ‘10-Q’ on 8/10/23 for 6/30/23 · Latest ‘10-Q’: This Filing · 13 References:

Quarterly Report — Form 10-Q

Filing Table of Contents

‘10-Q’ — Quarterly Report

Document Table of Contents

This is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference

13 Previous Filings that this Filing References

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets: September 30, 2023 (unaudited) and December 31, 2022	3

	Condensed Consolidated Statements of Operations: Three and nine months ended September 30, 2023 and 2022 (unaudited)	4

	Condensed Consolidated Statements of Stockholders’ Equity: Three and nine months ended September 30, 2023 and 2022 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows: Nine months ended September 30, 2023 and 2022 (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	44

PART II
OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	Mine Safety Disclosures	45

Item 5.	Other Information	45

Item 6.	Exhibits	46

SIGNATURES		47

	Nine Months Ended September 30,
	2023		2022
Supplemental disclosure of cash flow information:
Interest paid	$	i 189	$	i 12

	September 30,		December 31,
	2023		2022
Cash and cash equivalents	$	i 3,472	$	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 3,948	$	i 5,846

	September 30,			December 31,
Major distribution partner	2023			2022
Major U.S. Retailer A		i 26	%		*	%
Avenova Spray Pharmacy Distributor A		i 20	%		i 11	%
Major International Retailer A		i 10	%		*	%
Avenova Spray Pharmacy Distributor B		*	%		i 30	%
Major U.S. Retailer B		*	%		i 15	%

	Three Months Ended September 30,						Nine Months Ended September 30,
Numerator	2023			2022*			2023			2022*
Net loss	$	(1,757	)	$	( i 136	)	$	( i 5,532	)	$	( i 2,402	)
Less: Increase in accumulated deficit due to Series B Preferred Stock conversion price		i —			( i 5,657	)		( i 1,802	)		( i 5,657	)
Less: Increase in accumulated deficit due to Series C Preferred Stock conversion price		i —			i —			( i 194	)		i —
Net loss attributable to common stockholders (basic and diluted)	$	( i 1,757	)	$	( i 5,793	)	$	( i 7,528	)	$	( i 8,059	)

Denominator
Weighted average shares of common stock outstanding (basic and diluted)		i 4,692			i 1,604			i 3,311			i 1,514
Net loss per share (basic and diluted)	$	( i 0.37	)	$	( i 3.61	)	$	( i 2.27	)	$	( i 5.32	)

	As of September 30,
	2023		2022
Series B Preferred Stock		i 4,736		i 1,845
Series C Preferred Stock		i 845		i —
Stock options		148		i 136
Stock warrants		7,382		i 65
		13,111		i 2,046

2023	$	i 38
2024		i 153
2025		i 152
2026		i 153
Thereafter		i 560
Total	$	i 1,056

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

Assumption	As of June 9, 2023
Stock price	$	i 0.75
Equity volatility		i 76.9	%
Risk-free interest rate		i 5.41	%
Remaining term		i 0.7

(in thousands)
Principal amount	$	i 2,567
Unamortized discount		( i 1,136	)
Unamortized debt issuance costs		( i 161	)
Total Convertible Note, net		i 1,270

(in thousands)
Remainder of 2023	$	i 550
2024		i 2,017
Total	$	i 2,567

2023	$	i 146
2024		i 557
2025		i 439
2026		i 444
2027		i 290
Total future minimum lease payments		i 1,876
Less imputed interest		( i 147	)
Total	$	i 1,729

Reported as:
Operating lease liabilities	$	i 485
Operating lease liabilities- non-current		i 1,244
Total	$	i 1,729

	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

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

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

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

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

	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

	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

	Warrants (in thousands)		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 September 30, 2023		i 7,382		i 2.18