UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | 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
NOVABAY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange On Which Registered |
| | | |
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.
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).
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 | |
| | ☒ | Smaller reporting company | |
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
As of May 7, 2023, there were
TABLE OF CONTENTS
| PART I |
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| FINANCIAL INFORMATION |
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| Item 1. |
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| Condensed Consolidated Balance Sheets: March 31, 2023 (unaudited) and December 31, 2022 |
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| Notes to Condensed Consolidated Financial Statements (unaudited) |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. |
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| Item 4. |
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| PART II |
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| OTHER INFORMATION |
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| Item 1. |
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| Item 1A. |
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| Item 2. |
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| Item 3. |
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| Item 4. |
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| Item 5. |
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| Item 6. |
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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.
PART I
FINANCIAL INFORMATION
| FINANCIAL STATEMENTS |
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for credit losses ($ and $ at March 31, 2023 and December 31, 2022, respectively) | ||||||||
| Inventory, net of allowance for excess and obsolete inventory and lower of cost or estimated net realizable value adjustments ($ and $ at March 31, 2023 and December 31, 2022, respectively) | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Liabilities: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities-non-current | ||||||||
| Total liabilities | ||||||||
| Commitments & contingencies (Note 10) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value; shares authorized; | ||||||||
| Series B Preferred Stock; shares issued and outstanding at March 31, 2023 and December 31, 2022 | ||||||||
| Series C Preferred Stock; shares issued and outstanding at March 31, 2023 and December 31, 2022 | ||||||||
| Common stock, $ par value; shares authorized, shares issued and outstanding at March 31, 2023 and December 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
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 March 31, |
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| 2023 |
2022 |
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| Sales: |
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| Product revenue, net |
$ | $ | ||||||
| Other revenue, net |
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| Total sales, net |
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| Product cost of goods sold |
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| Gross profit |
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| Operating expenses: |
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| Research and development |
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| Sales and marketing |
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| General and administrative |
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| Total operating expenses |
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| Operating loss |
( |
) |
( |
) |
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| Non-cash gain on changes in fair value of warrant liability |
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| Non-cash gain on changes in fair value of contingent liability |
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| Other expense, net |
( |
) |
( |
) |
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| Net loss |
$ | ( |
) |
$ | ( |
) |
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| Net loss per share attributable to common stockholders (basic and diluted) |
$ | ( |
) |
$ | ( |
) |
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| Weighted-average shares of common stock outstanding used in computing net loss per share of common stock (basic and diluted) |
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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 |
$ | $ | $ | $ | ( |
) |
$ | |||||||||||||||||||||
| Net Loss |
- | - | ( |
) |
( |
) |
||||||||||||||||||||||
| Stock-based compensation expense related to employee and director stock awards |
- | - | ||||||||||||||||||||||||||
| Balance at March 31, 2023 |
$ | $ | $ | $ | ( |
) |
$ | |||||||||||||||||||||
| Preferred Stock |
Common Stock |
Additional Paid- |
Accumulated |
Total Stockholders’ |
||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
in Capital |
Deficit |
Equity | ||||||||||||||||||||||
| Balance at December 31, 2021 |
$ | $ | $ | $ | ( |
) |
$ | |||||||||||||||||||||
| Net Loss |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||
| Reclassification of Series B Private Placement Warrants |
- | - | ||||||||||||||||||||||||||
| Conversion of Series B Preferred Stock to common stock |
( |
) |
( |
) |
||||||||||||||||||||||||
| Stock-based compensation expense related to employee and director stock awards |
- | - | ||||||||||||||||||||||||||
| Balance at March 31, 2022 |
$ | $ | $ | $ | ( |
) |
$ | |||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation of property and equipment | ||||||||
| Amortization of intangible assets | ||||||||
| Stock-based compensation expense related to employee and director stock awards | ||||||||
| Non-cash gain on changes in fair value of warrant liability | ( | ) | ||||||
| Non-cash gain on changes in fair value of contingent liability | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Operating lease right-of-use assets | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Operating lease liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Payment on the line of credit | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ||||||
| Net change in cash, cash equivalents, and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents and restricted cash, beginning of year | ||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
| Three Months Ended March 31, |
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| 2023 |
2022 |
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| Supplemental disclosure of cash flow information: |
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| Interest paid |
$ | $ | ||||||
| Three Months Ended March 31, |
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| 2023 |
2022 |
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| Supplemental disclosure of non-cash information: |
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| Warrant liability transferred to equity |
$ | $ | ||||||
| Addition of operating lease, right-of-use asset |
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| Conversion of Series B Preferred Stock to common stock |
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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 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, it 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
Effective November 15, 2022, the Company effected a 1-for-
Liquidity and Going Concern
Based primarily on the funds available on March 31, 2023 and the 2023 Private Placement (as defined elsewhere in this Quarterly Report) completed subsequent to March 31, 2023 as further described in Note 18, “Subsequent Events”, 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 and meet its planned operating expenses 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. Additionally, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may need to spend more cash than currently expected because of circumstances beyond its control that impact the broader economy such as periods of inflation, supply chain issues, the continuation of the COVID-19 pandemic and international conflicts (e.g., the conflict between Russia and Ukraine).
The Company’s long-term liquidity needs will be largely determined by the success of commercialization efforts. To address the Company’s current liquidity and capital needs, the Company has and continues to evaluate different plans and strategic transactions to fund operations, including: (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”). 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
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.
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. These estimates include contract liabilities related to product sales such as product returns, assumptions for valuing warrants, the fair value of contingent consideration, intangible assets, goodwill, stock-based compensation, income taxes and other contingencies.
These estimates are based on management’s best estimates and judgment. Actual results may differ 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.
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.
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 our direct to consumer on-line channels. Changes to prior period amounts presented in this report have been made to conform to the current period presentation. See additional information under “Revenue Recognition” 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.
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 March 31, 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):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash included in other assets | ||||||||
| Total cash, cash equivalents, and restricted cash in the condensed consolidated statements of cash flows | $ | $ | ||||||
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.
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 months ended March 31, 2023 and 2022, revenues were derived primarily from sales of Avenova and DERMAdoctor branded products, directly to consumers through Amazon.com, Avenova.com and DERMAdoctor.com.
During the three months ended March 31, 2023 and 2022, revenues from significant product categories were as follows (in thousands):
| For the three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Avenova Spray | $ | $ | ||||||
| DERMAdoctor | ||||||||
| NeutroPhase | ||||||||
| Other products | ||||||||
| Total product revenue, net | ||||||||
| Other revenue, net | ||||||||
| Total sales, net | $ | $ | ||||||
During the three months ended March 31, 2023 and 2022, sales of Avenova Spray via Amazon comprised
As of March 31, 2023 and December 31, 2022, accounts receivable from our major distribution partners and major retailers greater than 10% were as follows:
| March 31, | December 31, | |||||||
| Major distribution partner | 2023 | 2022 | ||||||
| Avenova Spray Pharmacy Distributor A | % | % | ||||||
| Major U.S. Retailer A | % | * | % | |||||
| Major U.S. Retailer B | 12 | % | * | % | ||||
| Major U.S. Retailer C | * | % | % | |||||
| Avenova Spray Pharmacy Distributor B | * | % | 11 | % | ||||
* 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.
Fair Value of Financial Assets and Liabilities
The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, warrant liabilities, and contingent consideration. The Company’s cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.
The Company follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. 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.
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 $
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 March 31, 2023 and December 31, 2022, management had recorded an allowance for excess and obsolete inventory at the lower of cost or estimated net realizable value of $
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 to years for office and laboratory equipment, to years for computer equipment and software, and to 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.
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 record any goodwill or indefinite-lived asset impairment charges during the three months ended March 31, 2023 or 2022.
Valuation of Contingent Consideration Resulting from a Business Combination
In connection with certain acquisitions, including the DERMAdoctor Acquisition, the Company may be required to pay future consideration that is contingent upon the achievement of specified milestone events. The Company records contingent consideration resulting from a business combination at its fair value on the acquisition date. Each quarter thereafter, the Company revalues these obligations and records increases or decreases in the fair value within the consolidated statement of operations until such time as the specified milestone achievement period is complete.
Increases or decreases in fair value of the contingent consideration liabilities can result from updates to assumptions such as the expected timing or probability of achieving the specified milestones. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Updates to assumptions could have a significant impact on the Company’s results of operations in any given period. Actual results may differ from estimates.
DERMAdoctor Acquisition milestone events consist of financial targets for calendar years 2022 and 2023. The financial target was not met for the calendar year 2022. Additionally, we do not expect the financial target to be met for the calendar year 2023. As a result, the liability recorded for potential earn out payments in the Company’s condensed consolidated balance sheets was zero as of March 31, 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.
Long-Lived Assets
The Company’s intangible assets that do 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 record any long-lived asset impairments during the three months ended March 31, 2023 or 2022.
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 consolidated balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current.
Revenue Recognition
Revenue is recognized from the sale of goods in accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue when or as the Company’s performance obligations are satisfied by transferring control of the promised goods to customers in an amount that reflects the consideration to which the Company expects to receive. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps as prescribed by ASC 606:
| 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 months ended March 31, 2022 were adjusted for the above changes as follows (in thousands, except per share amounts):
| For the Three Months Ended March 31, 2022 | ||||||||||||||||
| As Previously Reported | Selling Commissions | Fulfillment Fees | As Revised | |||||||||||||
| Sales | ||||||||||||||||
| Product revenue, net | $ | $ | $ | $ | ||||||||||||
| Product cost of goods sold | ||||||||||||||||
| Product cost of goods sold | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||
| Net loss per share attributable to common stockholders (basic and diluted) | ( | ) | ( | ) | ||||||||||||
The Company also generates Avenova Spray revenue through major pharmacy distribution partners. Product supply of Avenova Spray is the only performance obligation contained in these arrangements, and the Company recognizes product revenue upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to, generally upon delivery to the distributor on a “sell-in” 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
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
Revenue generated through the Company’s partner pharmacies is recognized when control of the product transfers to the end customer.
Revenue for product sales to other retailers, such as CVS, is generally recognized upon transfer of control to the retailer, which generally occurs upon delivery of the products to a third-party carrier, net of estimated future product returns.
The Company 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 $
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.
Research and Development Costs
The Company charges research and development costs to expense as incurred. These costs include all costs associated with research, development and regulatory activities, including submissions to the Food and Drug Administration (the “FDA”).
Patent Costs
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.
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 $
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.
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.
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 settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement) or (iii) do not become exercisable until the occurrence of a contingent event.
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.
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):
| Three Months Ended March 31, | ||||||||
| Numerator | 2023 | 2022 | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Denominator | ||||||||
| Weighted average shares of common stock outstanding (basic and diluted) | ||||||||
| Net loss per share attributable to common stockholders (basic and diluted) | $ | ( | ) | $ | ( | ) | ||
For the three months ended March 31, 2023 and 2022, Series B Non-Voting Convertible Preferred Stock (the “Series B Preferred Stock”) and the Series C Non-Voting Convertible Preferred Stock (the “Series C Preferred Stock”) were excluded from the computation of diluted net loss per share as their inclusion on an “if converted” basis would have been anti-dilutive. 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 stock options and stock warrants were excluded from the diluted EPS computation as their effect would have been anti-dilutive (in thousands):
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Stock options | ||||||||
| Stock warrants | ||||||||
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.
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.
The following table presents the Company’s cash equivalent assets measured at fair value on a recurring basis as of March 31, 2023 (in thousands):
| Fair Value Measurements Using | ||||||||||||||||
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets | Other | Significant | ||||||||||||||
| Balance at | for Identical | Observable | Unobservable | |||||||||||||
| March 31, | Items | Inputs | Inputs | |||||||||||||
| 2023 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets | ||||||||||||||||
| Restricted cash held as a certificate of deposit | $ | $ | $ | $ | ||||||||||||
| Deposit held as a certificate of deposit | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
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 | $ | $ | $ | — | $ | — | ||||||||||
| Deposit held as a certificate of deposit | — | — | ||||||||||||||
| Total assets | $ | $ | $ | — | $ | — | ||||||||||
NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Prepaid inventory | $ | $ | ||||||
| Prepaid insurance | ||||||||
| Prepaid dues and subscriptions | ||||||||
| Prepaid marketing costs | ||||||||
| Prepaid patents | ||||||||
| Tenant allowance | ||||||||
| Other | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
NOTE 5. INVENTORY
Inventory consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Raw materials and supplies | $ | $ | ||||||
| Finished goods | ||||||||
| Less: Reserve for excess and obsolete inventory | ( | ) | ( | ) | ||||
| Total inventory, net | $ | $ | ||||||
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Office and laboratory equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Computer equipment and software | ||||||||
| Leasehold improvements | ||||||||
| Total property and equipment, at cost | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation expense was $
NOTE 7. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following (in thousands):
| Balance at March 31, 2023 | ||||||||||||||||
| Accumulated | ||||||||||||||||
| Gross | Amortization | Impairment | Net | |||||||||||||
| Indefinite-lived intangible assets | ||||||||||||||||
| Trade names | $ | $ | — | $ | ( | ) | $ | |||||||||
| Amortizable intangible assets | ||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Trade secrets / product formulations | ( | ) | ( | ) | ||||||||||||
| Total other intangible assets | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Balance at December 31, 2022 | ||||||||||||||||
| Accumulated | ||||||||||||||||
| Gross | Amortization | Impairment | Net | |||||||||||||
| Indefinite-lived intangible assets | ||||||||||||||||
| Trade names | $ | $ | — | $ | ( | ) | $ | |||||||||
| Amortizable intangible assets | ||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Trade secrets / product formulations | ( | ) | ( | ) | ||||||||||||
| Total other intangible assets | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
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 $
Amortization expense was $
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ |
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Contract liabilities (see Note 14) | $ | $ | ||||||
| Employee payroll and benefits | ||||||||
| Marketing costs | ||||||||
| Inventory purchases | ||||||||
| Other | ||||||||
| Total accrued liabilities | $ | $ | ||||||
NOTE 9. LINE OF CREDIT
At the time of the DERMAdoctor Acquisition, DERMAdoctor had a line of credit agreement with Bank Midwest for $
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 March 31, 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 March 31, 2023 or December 31, 2022.
Legal Matters
As of March 31, 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.
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 is also party to a lease for
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 months ended March 31, 2023 and 2022 were as follows (in thousands):
| Lease Costs | Three Months Ended March 31, | |||||||
| 2023 | 2022 | |||||||
| Operating lease cost | $ | $ | ||||||
| Net lease cost | $ | $ | ||||||
| Other information | ||||||||
| Operational cash flow used for operating leases | $ | $ | ||||||
The Company has measured its operating lease liabilities at its incremental borrowing rate over the remaining term for each operating lease. The weighted average remaining lease term and the weighted average discount rate are summarized as follows:
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Weighted-average remaining lease term (in years) | ||||||||
| Weighted-average discount rate | % | % | ||||||
Future lease payments under non-cancelable leases as of March 31, 2023 were as follows (in thousands):
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total future minimum lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total | $ | |||
| Reported as: | ||||
| Operating lease liabilities | $ | |||
| Operating lease liabilities- non-current | ||||
| Total | $ |
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”.
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 through the date of approval of the Reverse Stock Split at which time they were reclassified to equity.
The fair value of the September 2022 Warrants was determined to be $
| Expected price volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value of warrants | $ |
The fair value of the September 2022 Warrants was determined to be $
| Expected price volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value of warrants | $ |
November 2021 Warrants
The November 2021 Warrants were issued by the Company on November 2, 2021, in connection with the 2021 Private Placement. The November 2021 Warrants were subsequently amended in September 2022 pursuant to the 2022 Warrant Reprice Transaction.
The November 2021 Warrants were not initially exercisable prior to 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 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 $
| Expected price volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value of warrants | $ |
As of January 31, 2022, the fair value of the November 2021 Warrants was determined to be $
| Expected price volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value of warrants | $ |
Unexercised November 2021 Warrants exercisable for
The fair value of these November 2021 Warrants was determined to be $
| Expected price volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value of warrants | $ |
As of November 10, 2022, the fair value of these November 2021 Warrants, as amended, was determined to be $
| Expected price volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value of warrants | $ |
Amended July 2020 Warrants
On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, the Company amended certain July 2020 Warrants. Amended July 2020 Warrants exercisable for
The fair value of these Amended July 2020 Warrants was determined to be $
| Expected price volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value of warrants | $ |
As of November 10, 2022, the fair value of these Amended July 2020 Warrants was determined to be $
| Expected price volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value of warrants | $ |
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
Reverse Stock Split
Effective November 15, 2022, the Company amended its Certificate of Incorporation to effect a 1-for-
2022 Warrant Reprice Transaction, Amended November 2021 Warrants, Amended July 2020 Warrants and September 2022 Warrants
On September 9, 2022, the Company entered into the 2022 Warrant Reprice Transaction, which included warrant reprice letter agreements with each of the holders of the November 2021 Warrants and certain holders of the July 2020 Warrants. Pursuant to the terms of the letter agreements, the November 2021 Warrants and certain July 2020 Warrants were amended to: (i) reduce the exercise price; (ii) provide that such warrants would not be exercisable until a later date, which was March 9, 2023; and (iii) in the case of the November 2021 Warrants, extend the termination date to September 11, 2028 (as amended, the “Amended November 2021 Warrants” and the “Amended July 2020 Warrants”, respectively). The Amended November 2021 Warrants are exercisable for an aggregate of
As a result of these amendments to the Amended November 2021 Warrants and the Amended July 2020 Warrants, the Company recorded a non-cash loss on modification of common stock warrants in the amount of $1.9 million. The loss represents the increase in fair value of the Amended November 2021 Warrants and the Amended July 2020 Warrants as a result of the modification. The increase in fair value was calculated as the difference in value immediately before and after modification using the Black-Scholes option pricing model. The fair value of the Amended November 2021 Warrants and the Amended July 2020 Warrants was determined to be $
| November 2021 Warrants | July 2020 Warrants | |||||||
| Expected price volatility | % | % | ||||||
| Expected term (in years) | ||||||||
| Risk-free interest rate | % | % | ||||||
| Dividend yield | % | % | ||||||
| Weighted-average fair value of warrants | $ | $ | ||||||
The fair value of the Amended November 2021 Warrants and the Amended July 2020 Warrants was determined to be $
| November 2021 Warrants | July 2020 Warrants | |||||||
| Expected price volatility | % | % | ||||||
| Expected term (in years) | ||||||||
| Risk-free interest rate | % | % | ||||||
| Dividend yield | % | % | ||||||
| Weighted-average fair value of warrants | $ | $ | ||||||
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. The September 2022 Warrants are exercisable for an aggregate of
The 2022 Warrant Reprice Transaction resulted in gross proceeds of approximately $
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
Series C Preferred Stock, Short-Term Warrants and Long-Term 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)
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.
Series B Preferred Stock and November 2021 Warrants
On October 29, 2021, the Company entered into the 2021 Private Placement, including a securities purchase agreement with various institutional investors to sell in a private placement offering (i) an aggregate of
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 $
| Expected price volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value of warrants | $ |
The fair value of the Series B Preferred Stock was determined to be million immediately after the conversion price protection adjustment in accordance with the following key assumptions:
| Expected price volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| Weighted-average fair value of warrants | $ |
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 and each outstanding share of Series B Preferred Stock became convertible into shares of common stock.
As of March 31, 2023,
On September 9, 2022, in connection with the 2022 Warrant Reprice Transaction, the November 2021 Warrants were amended to reduce the exercise price to $
Common Stock
Common Stock Warrants
In addition to the Amended July 2020 Warrants, the Amended November 2021 Warrants, the September 2022 Warrants and the 2022 Warrants, the Company also has the following outstanding warrants:
2019 Ladenburg Warrants
In 2019, Ladenburg was granted warrants exercisable for
July 2020 Warrants
In 2020, certain of the Company’s accredited investors were granted warrants with an exercise price of $
TLF Bio Innovation 2021 Warrants
In 2021, TLF Bio Innovation was granted warrants exercisable for
Summary of Warrants Outstanding
The details of all outstanding warrants as of March 31, 2023 and December 31, 2022 are as follows:
| Warrants | Weighted- Average Exercise Price | |||||||
| Outstanding at December 31, 2022 | $ | |||||||
| Warrants granted | $ | |||||||
| Warrants expired | $ | |||||||
| Outstanding at March 31, 2023 | $ | |||||||
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 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
Under the terms of the 2017 Plan, the exercise price of NQSOs, ISOs and SARs may not be less than
Summary of Outstanding Equity Awards
The following table summarizes information about the Company’s equity awards outstanding at March 31, 2023 and activity during the period ended March 31, 2023:
| (in thousands, except years | Awards | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | ||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Options granted | $ | |||||||||||||||
| Options forfeited/cancelled | ( | ) | $ | |||||||||||||
| Restricted stock units cancelled | ( | ) | — | |||||||||||||
| Outstanding at March 31, 2023 | $ | $ | ||||||||||||||
| Vested and expected to vest at March 31, 2023 | $ | $ | ||||||||||||||
| Vested at March 31, 2023 | $ | $ | — | |||||||||||||
| Exercisable at March 31, 2023 | $ | $ | — | |||||||||||||
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 March 31, 2023 for options that have a quoted market price in excess of the exercise price. There were
As of March 31, 2023, total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately $
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 three months ended March 31, 2023 and 2022, the Company granted options to employees and directors to purchase an aggregate of
The weighted-average assumptions used in determining the value of options are as follows:
| Three Months Ended March 31, | ||||||||
| Assumption | 2023 | 2022 | ||||||
| Expected price volatility | % | % | ||||||
| Expected term (in years) | ||||||||
| Risk-free interest rate | % | % | ||||||
| Dividend yield | % | % | ||||||
| Weighted-average fair value of options granted during the period | $ | $ | ||||||
Expected Price Volatility—This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The computation of expected volatility was based on the historical volatility of our own stock.
Expected Term—This is the period of time over which the options granted are expected to remain outstanding. The expected life assumption is based on the Company’s historical data.
Risk-Free Interest Rate—This is the U.S. 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 three months ended March 31, 2023 and 2022, the Company did grant restricted stock to employees.
For the three months ended March 31, 2023 and 2022, the Company recognized stock-based compensation expense of $
Summary of Stock-Based Compensation Expense
A summary of the stock-based compensation expense included in results of operations for the options and restricted stock awards discussed above is as follows (in thousands):
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Research and development | $ | $ | ||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Total stock-based compensation expense | $ | $ | ||||||
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 three months ended March 31, 2023 (in thousands):
| Product Returns, Discounts for Prompt Payment | Other Customer Fees | Rebates | Total | |||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Provision related to sales made in current period | ||||||||||||||||
| Payments and customer credits issued | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ||||||||||||
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 March 31, 2023, the Company earned $
Under these product distribution arrangements, the Company had a contract liability balance of $
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), Walmart.com, select CVS stores and online on CVS.com. During the three months ended March 31, 2023 and 2022, the revenue generated from over-the-counter Avenova Spray was $
DERMAdoctor Products Distribution Agreements
DERMAdoctor products are sold through distribution arrangements with third parties such as Costco and others. During the three months ended March 31, 2023 and 2022, the Company earned $
Under these distribution arrangements, the Company had a contract liability balance of $
NOTE 15. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan covering all eligible employees. The Company provides matching contributions equal to
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):
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Related party revenue: | ||||||||
| NeutroPhase | $ | $ | ||||||
| Total related party revenue | $ | $ | ||||||
| Cost of goods sold: | ||||||||
| NeutroPhase | $ | $ | ( | ) | ||||
| Total related party expenses | $ | $ | ( | ) | ||||
Related party accounts receivable was
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
Select financial information for each segment is as follows:
| Three Months | Three Months | |||||||||||||||
| Ended | Percentage | Ended | Percentage | |||||||||||||
| March 31, | of Total Sales, | March 31, | of Total Sales, | |||||||||||||
| 2023 | Net | 2022 | Net | |||||||||||||
| Eyecare & Wound Care | $ | % | $ | % | ||||||||||||
| Skincare | % | % | ||||||||||||||
| Total sales, net | $ | % | $ | % | ||||||||||||
| Three Months | Three Months | |||||||||||||||
| Ended | Percentage | Ended | Percentage | |||||||||||||
| March 31, | of Total | March 31, | of Total | |||||||||||||
| 2023 | Operating Loss | 2022 | Operating Loss | |||||||||||||
| Eyecare & Wound Care | $ | ( | ) | % | $ | ( | ) | % | ||||||||
| Skincare | ( | ) | % | ( | ) | % | ||||||||||
| Total operating loss | $ | ( | ) | % | $ | ( | ) | % | ||||||||
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 financial statements as of March 31, 2023, and events which occurred subsequently but were not recognized in the 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.
2023 Private Placement
On April 27, 2023, the Company entered into a Securities Purchase Agreement (the “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) $
Due to the number of shares of common stock that may be issued upon conversion or redemption of the Debentures and the exercise of the 2023 Warrants, the Company is 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 is required to promptly hold a meeting of stockholders within sixty (60) days following the Private Placement Closing to seek the Stockholder Approval and the Company intends to submit a proposal for consideration of stockholders at the 2023 Annual Meeting of Stockholders. Until the Stockholder Approval is obtained, the conversion of the Debentures by the holders into shares of common stock is currently limited a holder’s pro rata share of
At any time after issuance, the Debentures are convertible by the holder, in whole or in part, into shares of common stock at a conversion price equal to $
If any event of default occurs, the outstanding principal amount of the Debentures, 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 Debentures, the interest rate on the Debentures shall accrue at an interest rate equal to the lesser of
Warrant Amendments
In connection with the closing of the 2023 Private Placement, common stock purchase warrants that the Company previously issued to the Purchasers and to other existing investors in prior private placements and warrant reprice transactions were amended to lower the exercise price of the previously issued warrants exercisable for an aggregate of
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 Debentures and the exercise price of the 2023 Warrants at $
| 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 its business to address our capital and liquidity needs.
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 a Securities Purchase Agreement (the “Purchase Agreement”) with existing accredited institutional investors of the Company that provided for the issuance and sale in a private placement (the “2023 Private Placement”) of (i) $3.3 million aggregate principal amount of Original Issue Discount Senior Secured Convertible Debentures Due November 1, 2024 (the “Debentures”), which may be converted or redeemed into up to an aggregate of 2,538,464 shares of Common Stock (the “Conversion Shares”), (ii) a new long-term Series B-1 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a five year period (“Long-Term Warrants”), and (iii) a new short-term Series B-2 warrant exercisable for up to an aggregate of 2,538,464 shares of Common Stock for a two year period (“Short-Term Warrants” and, together with the Long-Term Warrants, the “2023 Warrants”). The 2023 Private Placement closed on May 1, 2023 (the “Private Placement Closing”) and the Company received gross proceeds of $3.0 million, before deducting placement agent fees and other offering expenses. In connection with the closing of the 2023 Private Placement, common stock purchase warrants that the Company previously issued to the Purchasers and to other existing investors in prior private placements and warrant reprice transactions were amended to lower the exercise price of the previously issued warrants exercisable for an aggregate of 1,724,455 shares of Common Stock from $6.30 to $1.30 per share pursuant to Warrant Amendment Agreements entered into by the Company.
Due to the number of shares of common stock that may be issued upon conversion or redemption of the Debentures and the exercise of the 2023 Warrants, the Company is 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”) and the Company expects to seek the Stockholder Approval at its 2023 Annual Meeting of Stockholders. Until the Stockholder Approval is obtained, the conversion of the Debentures by the holders into shares of common stock is currently limited a holder’s pro rata share of 19.99% of the Company’s outstanding shares of Common Stock, or into an aggregate of 438,669 shares (the “Issuable Maximum”), and none of the 2023 Warrants will be exercisable until the Stockholder Approval is obtained.
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 Debentures and the exercise price of the 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 $6.30 convertible into 159 shares of Common Stock, were both automatically adjusted downward to now be $1.30 convertible into 770 shares of Common Stock resulting in an additional 7,863,570 shares of common stock issuable upon conversion of the outstanding Series B Preferred Stock and Series C Preferred Stock.
For additional information regarding the 2023 Private Placement, the Debentures, the 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 18, “Subsequent Events” 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 $1.7 million and $111 thousand for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, we had an accumulated deficit of $159.9 million, total current assets of $9.9 million and total assets of $14.8 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 reflets 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 March 31, 2023 and 2022 (dollars in thousands)
| Three Months Ended March 31, |
Dollar |
Percent |
||||||||||||||
| 2023 |
2022 |
Change |
Change |
|||||||||||||
| Statement of Operations |
||||||||||||||||
| Sales: |
||||||||||||||||
| Product revenue, net |
$ | 3,117 | $ | 3,267 | $ | (150 | ) |
(5 | %) |
|||||||
| Other revenue, net |
7 | 6 | 1 | 17 | % |
|||||||||||
| Total sales, net |
3,124 | 3,273 | (149 | ) |
(5 | %) |
||||||||||
| Product cost of goods sold |
1,188 | 1,459 | (271 | ) |
(19 | %) |
||||||||||
| Gross profit |
1,936 | 1,814 | 122 | 7 | % |
|||||||||||
| Research and development |
26 | 28 | (2 | ) |
(7 | %) |
||||||||||
| Sales and marketing |
1,653 | 1,985 | (332 | ) |
(17 | %) |
||||||||||
| General and administrative |
1,991 | 2,183 | (192 | ) |
(9 | %) |
||||||||||
| Total operating expenses |
3,670 | 4,196 | (526 | ) |
(13 | %) |
||||||||||
| Operating loss |
(1,734 | ) |
(2,382 | ) |
648 | (27 | %) |
|||||||||
| Non-cash gain on changes in fair value of warrant liability |
— | 2,056 | (2,056 | ) |
(100 | %) |
||||||||||
| Non-cash gain on changes in fair value of contingent liability |
— | 219 | (219 | ) |
(100 | %) |
||||||||||
| Other expense, net |
(5 | ) |
(4 | ) |
(1 | ) |
25 | % |
||||||||
| Net loss |
$ | (1,739 | ) |
$ | (111 | ) |
$ | (1,628 | ) |
1467 | % |
|||||
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 March 31, 2022, the result of these changes and revisions was an increase of $644 thousand in product revenue, net, which was offset by an increase of $346 thousand in product cost of goods sold and $298 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, decreased by $150 thousand, or 5%, to $3.1 million for the three months ended March 31, 2023, from $3.3 million for the three months ended March 31, 2022.
Revenue from Avenova Spray increased $0.1 million from $1.8 million for the three months ended March 31, 2022 to $1.9 million for the three months ended March 31, 2023. The 2022 result reflects an unanticipated increase in expired Avenova Spray units returned from retail pharmacies for product purchased prior to the launch of our over-the-counter Avenova Spray product in 2019 and the beginning of the COVID-19 pandemic in 2020.
Revenue from DERMAdoctor branded skincare products decreased $0.2 million from $1.0 million for the three months ended March 31, 2022 to $0.8 million for the three months ended March 31, 2023, primarily from wholesale customers.
Revenue from the Company’s wound care products was $0.1 million during both quarters.
Cost of goods sold decreased by $271 thousand, or 19%, to $1.2 million for the three months ended March 31, 2023 from $1.5 million for the three months ended March 31, 2022 primarily due to the overall decrease in product revenue.
Gross profit increased by $122 thousand in spite of the decrease in product revenue. This is primarily the impact of the increase in expired Avenova Spray units returned from retail pharmacies in the 2022 period as well as product and channel mix.
Sales and marketing
Sales and marketing expenses decreased by $0.3 million, or 17%, to $1.7 million for the three months ended March 31, 2023, from $2.0 million for the three months ended March 31, 2022. The decrease was due primarily to continued lower digital advertising costs incurred for the Company’s Avenova Spray and other Avenova branded optical products in the three months ended March 31, 2023 compared to the three months ended March 31, 2022.
General and administrative
General and administrative expenses decreased $0.2 million to $2.0 million for the three months ended March 31, 2023, from $2.2 million for the comparable period in 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 $2.1 million for the three months ended March 31, 2022 with no comparable adjustment for the current year period. 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 contingent liability
Adjustments to the fair value of contingent liability resulted in a gain of $0.2 million for the three months ended March 31, 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 March 31, 2023, the Company does not anticipate that any such earn out payments will be made.
Financial Condition, Liquidity and Capital Resources
As of March 31, 2023, our cash and cash equivalents were $3.7 million, compared to $5.4 million as of December 31, 2022. Based primarily on the funds available on March 31, 2023 and the 2023 Private Placement completed subsequent to March 31, 2023 as further described in Note 18, “Subsequent Events”, 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 and meet its planned operating expenses 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, supply chain issues, the continuation of the COVID-19 pandemic and international conflicts.
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. 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 $1.6 million for the three months ended March 31, 2023, which consisted primarily of a net loss of $1.7 million, adjusted by depreciation and amortization expenses of $51 thousand, stock-based compensation expenses of $75 thousand, and a net change of $2 thousand in our net operating assets and liabilities.
Net cash used in operating activities was $2.1 million for the three months ended March 31, 2022, which consisted primarily of a net loss of $111 thousand, adjusted primarily by 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, stock-based compensation expenses of $184 thousand, and a net increase of $24 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 $13 thousand and $24 thousand, for the three months ended March 31, 2023 and 2022, respectively.
Cash Used in Financing Activities
There was no cash used in, or provided by, financing activities during the three months ended March 31, 2023.
For the three months ended March 31, 2022, net cash used in financing activities 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 March 31, 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 March 31, 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 |
$ | 538 | $ | 952 | $ | 656 | $ | — | $ | 2,146 | ||||||||||
| Equipment lease |
8 | 13 | — | — | 21 | |||||||||||||||
| Total |
$ | 546 | $ | 965 | $ | 656 | $ | — | $ | 2,167 | ||||||||||
Our commitments as of March 31, 2023 consisted primarily of facility operating leases and an operating lease for one copier.
The total commitment for the facility leases were $2.1 million due over the leases’ terms as of March 31, 2023.
The total commitment for the copier lease was $22 thousand due over the leases’ terms as of March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 |
While, as a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, we are not required to provide updated quarterly information under this Item, we are providing the below disclosure as additional material risks we face.
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.
Risk Relating to the Debentures
We have debt, which is secured by all of our assets, and defaulting on such debt may have a material adverse effect on the Company.
The Debentures represent outstanding secured convertible notes of the Company. Pursuant to the Security Agreement and Subsidiary Guarantee, all of our assets, including our accounts receivable and general intangibles, including all inventory, machinery, equipment, furniture and fixtures and the products and proceeds of all the foregoing, have been pledged as collateral to secure the repayment of the Debentures. If we are unable to repay these Debentures or if another type of event of default occurs, a decision by the holders of the Debentures to foreclose on their security interest would materially and adversely affect our future.
The issuance of our Common Stock in connection with the conversion of the Debentures would cause substantial dilution, and could materially affect the trading price of our common shares.
There is an aggregate principal amount of $3.3 million outstanding under the Debentures. To the extent we or the holders of the Debentures converts the Debentures into our Common Stock, including for more shares of Common Stock than we currently anticipate due to the monthly redemption provision in the Debentures and the trading price of our Common Stock potentially declining, substantial amounts of our Common Stock will be issued. Such issuances could result in substantial decreases to our stock price and dilution to our existing shareholders.
| 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 |
001-33678 |
3.1 |
3/21/2018 |
|
| 3.2 |
Amendment to the Amended and Restated Certificate of Incorporation |
8-K |
001-33678 |
3.1 |
6/04/2018 |
|
| 3.3 |
Amendment to the Amended and Restated Certificate of Incorporation, as amended |
8-K |
001-33678 |
3.1 |
5/28/2020 |
|
| 3.4 |
Amendment to the Amended and Restated Certificate of Incorporation, as amended, dated May 24, 2021 |
8-K |
001-33678 |
3.1 |
5/24/2021 |
|
| 3.5 |
8-K |
001-33678 |
3.1 |
2/1/2022 |
||
| 3.6 |
8-K |
001-33678 |
3.1 |
11/1/2021 |
||
| 3.7 |
Amendment to Amended and Restated Certificate of Incorporation, as amended, dated November 14, 2022 |
8-K |
001-33678 |
3.1 |
11/18/2022 |
|
| 3.8 |
8-K |
001-33678 |
3.2 |
11/18/2022 |
||
| 3.9 |
10-K |
001-33678 |
3.7 |
3/29/2022 |
||
| 4.1 |
10-K |
001-33678 |
3.1 |
3/31/2023 |
||
| 4.2 |
8-K |
001-33678 |
4.1 |
5/18/2020 |
||
| 4.3 |
8-K |
001-33678 |
4.1 |
7/21/2020 |
||
| 4.4 |
8-K |
001-33678 |
4.1 |
9/13/2022 |
||
| 4.5 |
8-K |
001-33678 |
4.2 |
9/13/2022 |
||
| 4.6 |
8-K |
001-33678 |
4.3 |
9/13/2022 |
||
| 4.7 |
8-K |
001-33678 |
4.4 |
9/13/2022 |
||
| 4.8 |
8-K |
001-33678 |
4.5 |
9/13/2022 |
||
| 4.9 |
8-K |
001-33678 |
4.6 |
9/13/2022 |
||
| 4.10 | Form of Original Issue Discount Secured Senior Convertible Debenture | 8-K | 001-33678 | 4.1 | 4/27/2023 | |
| 4.11 | Form of Series B-1 Long-Term Common Stock Warrant | 8-K | 001-33678 | 4.2 | 4/27/2023 | |
| 4.12 | Form of Series B-2 Short-Term Common Stock Warrant | 8-K | 001-33678 | 4.3 | 4/27/2023 | |
| 4.13 | Form of Warrant Amendment Agreement | 8-K | 001-33678 | 4.4 | 4/27/2023 | |
| 10.1 | Form of Securities Purchase Agreement* | 8-K | 001-33678 | 10.1 | 4/27/2023 | |
| 10.2 | Form of Security Agreement* | 8-K | 001-33678 | 10.2 | 4/27/2023 | |
| 10.3 | Form of Subsidiary Guarantee | 8-K | 001-33678 | 10.3 | 4/27/2023 | |
| 10.4 | Form of Voting Commitment | 8-K | 001-33678 | 10.4 | 4/27/2023 | |
| 10.5 | Form of Registration Rights Agreement | 8-K | 001-33678 | 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 |
||||
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: May 11, 2023 |
||
| By: |
/s/ Justin Hall |
|
| Justin Hall Chief Executive Officer, General Counsel and Director (principal executive officer) |
||
| Date: May 11, 2023 |
||
| By: |
/s/ Tommy Law |
|
| Tommy Law Interim Chief Financial Officer (principal financial officer) |
||