Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 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 001-33678 NOVABAY PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) (State or other jurisdic ...

Financial Data and Key Metrics Changes - The net product revenue for the fourth quarter of 2022 increased 15% year-over-year to $3.6 million, including $2.1 million from Avenova, $1 million from DERMAdoctor, and $0.4 million from wound care products [47] - For the full year 2022, product revenue was $14.4 million, a 41% increase over 2021, reflecting a full year of DERMAdoctor product sales [21] - The net loss attributable to common stockholders for Q4 2022 was $8.2 million or $0.433 per share, which included a large non-cash impairment charge of $6.7 million [48] Business Line Data and Key Metrics Changes - Avenova continues to be the highest revenue driver and highest gross margin product, with sales of companion products growing steadily [17] - The introduction of Eyeganics Organic Tears, a USDA certified organic eye drop, adds to the eye care portfolio [3] - DERMAdoctor's new KP Duty peel pads were introduced, focusing on customer loyalty and attracting new users [4] Market Data and Key Metrics Changes - The global market for dry eye is expected to reach nearly $9 billion by 2030, with 49 million Americans suffering from dry eyes [2] - The company is focusing on international growth opportunities, particularly in China and the EU for DERMAdoctor products [29] Company Strategy and Development Direction - The company aims to leverage relationships with eye care professionals to enhance the Avenova brand and expand its customer base [27] - A shift in strategy for 2023 focuses on selling existing products more effectively rather than launching new ones [38] - The company plans to expand its eye care portfolio with additional innovative products for dry eye and other ophthalmic conditions [45] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the impact of external factors like the COVID-19 pandemic and geopolitical tensions on operations and financial results [1] - The company expects continued growth in the wound care sector and aims to optimize digital marketing efforts [25][31] Other Important Information - The company completed the acquisition of DERMAdoctor in November 2021, and the financial results reflect operations post-acquisition [5] - R&D expenses for 2022 were $174,000, significantly higher than $44,000 in the prior year, indicating increased investment in product development [6] Q&A Session Summary Question: Can you discuss Q4 margins and expectations for 2023? - Management noted that lower margins in Q4 were due to higher sales of lower-margin products, but Avenova's margins remain strong. Future margins will depend on product mix [25] Question: What is the company's approach to M&A? - The company is committed to pursuing M&A opportunities, particularly in the eye care vertical, and aims to leverage existing relationships with eye care professionals [54] Question: What are the expectations for international growth? - The company sees significant growth opportunities in China and the EU for DERMAdoctor products and plans to align distributors to support this growth [29]

Financial Data and Key Metrics Changes - Product revenue for Q3 2022 was $3.8 million, a 69% increase from the prior year period, driven by the acquisition of DERMAdoctor and diversified revenue streams [5][26] - Gross margin for Q3 2022 was 62%, down from 69% in Q3 2021, primarily due to the addition of DERMAdoctor and wound care product sales [27] - Net loss attributable to common stockholders for Q3 2022 was $5.8 million or $0.10 per share, compared to a net loss of $2.3 million or $0.05 per share in Q3 2021 [31] Business Line Data and Key Metrics Changes - Avenova spray sales for Q3 2022 were $1.9 million, down from $2.1 million a year ago, attributed to a shift to a more efficient online sales channel [26] - DERMAdoctor product sales reached $1.3 million in Q3 2022, marking the highest sales quarter since the acquisition [26] - Sales and marketing expenses decreased by 11% to $1.8 million, despite the addition of DERMAdoctor sales and marketing costs [28] Market Data and Key Metrics Changes - The company reported that more than two-thirds of Avenova unit sales were generated online, indicating a successful shift to digital marketing [7][8] - The skincare eCommerce market in the US is projected to reach $18 billion in 2022, with significant growth expected in the coming years [11] - The company is expanding its presence in international markets, particularly in China and Europe, with a focus on increasing brand awareness [15][16] Company Strategy and Development Direction - The company aims to capitalize on established brands in eye care, skin care, and wound care, with plans to introduce new products and expand digital marketing efforts [34] - Increasing DERMAdoctor's presence in international markets is a key priority, leveraging strong local partnerships for market penetration [14][15] - The company is focused on optimizing marketing tactics and expanding target demographics to drive sales growth [40][42] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about continued growth, particularly in online sales and international markets [5][34] - The company acknowledged potential risks from external factors such as the COVID-19 pandemic and geopolitical tensions [4] - Management highlighted the importance of adapting marketing strategies to reach new demographics, particularly younger consumers for Avenova [42] Other Important Information - The company held a special meeting of stockholders, approving a one-for-thirty-five reverse stock split to regain compliance with NYSE listing requirements [20][21] - The company reported cash and cash equivalents of $3.9 million as of September 30, 2022, including proceeds from a warrant reprice transaction [33] Q&A Session Summary Question: Inquiry about marketing expense reduction - Management confirmed that the 11% decrease in sales and marketing expenses was due to improved digital marketing tactics, cross-selling, and upselling opportunities [39][40] Question: Expansion of demographic targeting - Management indicated that Avenova is targeting a younger demographic due to the prevalence of dry eye issues among younger consumers, while DERMAdoctor is expanding into new geographic territories [42][43] Question: Commercialization process in Europe - Management stated that they are onboarding a partner to serve as the main distributor for the European Union, with potential revenue expected in early 2023 [45][46] Question: Impact of lower margins - Management explained that lower margins were primarily due to the addition of DERMAdoctor products and increased wound care sales, which generally have lower margins [47][49]

Financial Data and Key Metrics Changes - Net product revenue for Q2 2022 was $3 million, a 43% increase from $2.1 million in the prior year period [23] - Gross margin for Q2 2022 was 51%, down from 71% in Q2 2021, primarily due to the addition of DERMAdoctor product sales [24] - Year-to-date product revenue for the first half of 2022 was $5.7 million, a 44% increase over the prior year period [27] - The net loss for the first half of 2022 was $2.2 million or $0.04 per share, compared to a net loss of $3.4 million or $0.08 per share in the same period of 2021 [29] Business Line Data and Key Metrics Changes - Avenova branded product sales for Q2 2022 were $1.8 million, with significant growth attributed to online sales channels [23] - DERMAdoctor product sales contributed $0.6 million in Q2 2022, reflecting the impact of the acquisition completed in November 2021 [22][23] - Sales of NeutroPhase and Phase 1 branded wound care products were $0.6 million, with expectations for additional fulfillment in the second half of the year [24] Market Data and Key Metrics Changes - Online sales of Avenova Spray increased year-over-year, with a notable 27% increase during Amazon's Prime Day compared to 2021 [7] - The majority of Avenova unit sales were generated through Amazon, highlighting the effectiveness of this sales channel [8][41] Company Strategy and Development Direction - The company is focused on diversifying and expanding its product portfolio, with a strategy to enhance digital marketing and broaden demographic targets [9] - Expansion into the beauty market with Avenova is a key initiative, targeting women using eyelash extensions [10] - International expansion, particularly in China and the EU, is a priority, with partnerships established to enhance market presence [15][49] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about growth in the second half of 2022, anticipating that the majority of growth will come from ongoing initiatives [18][32] - There is caution regarding potential macroeconomic slowdowns, but current consumer sentiment is not expected to materially impact the business [47] - The company is confident in its ability to capture growth opportunities in both domestic and international markets [48][49] Other Important Information - The company launched seven new products since the beginning of 2022, maintaining relevance in a rapidly changing industry [15] - The new VP of Commercial, Kim Shartsis, brings over 20 years of experience in consumer brand management to support growth initiatives [19] Q&A Session Summary Question: What is the expected operating expense for the back half of the year? - Management indicated that operating expenses might be closer to $4 million rather than $5 million, with a slight uptick in sales and marketing expenses expected [36] Question: Can you provide details on the retailer order for DERMAdoctor? - The retailer has committed to orders for the Kakadu C serum, expected to be fulfilled in Q3 and Q4 [38][39] Question: What trends are observed in online versus brick-and-mortar sales? - The company noted that online sales, particularly through Amazon, are more efficient for customer acquisition compared to traditional retail [40][41] Question: What are the expectations for gross margins in the second half of the year? - Management anticipates gross margins to improve in the second half, with Avenova products traditionally having higher margins than DERMAdoctor products [42][43] Question: Are there any expected macroeconomic slowdowns? - While skin care and beauty products are often considered recession-proof, management acknowledged the potential for future impacts from macroeconomic conditions [46][47] Question: How is the international expansion progressing? - The company is actively pursuing growth opportunities in China and the EU, with strong connections and plans for market development [48][49]

```markdown PART I. FINANCIAL INFORMATION [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents NovaBay Pharmaceuticals, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations and comprehensive loss, stockholders' equity, and cash flows, along with detailed notes for the periods ended June 30, 2022, and December 31, 2021 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows a decrease in total assets from **$23.98 million** at December 31, 2021, to **$21.54 million** at June 30, 2022, primarily due to reduced cash and reclassified warrant liability, while total liabilities significantly decreased and stockholders' equity increased | Metric | Dec 31, 2021 (in thousands) | Jun 30, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Cash and cash equivalents | $7,504 | $3,931 | $(3,573) | -47.6% | | Total current assets | $13,170 | $9,459 | $(3,711) | -28.2% | | Total assets | $23,978 | $21,544 | $(2,434) | -10.1% | | Total current liabilities | $3,442 | $3,657 | $215 | 6.2% | | Warrant liability | $9,558 | $0 | $(9,558) | -100.0% | | Total liabilities | $13,807 | $5,799 | $(8,008) | -58.0% | | Total stockholders' equity | $10,171 | $15,745 | $5,574 | 54.8% | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) For the three months ended June 30, 2022, total sales increased by **43%** to **$3.05 million** due to the DERMAdoctor acquisition, but a **143%** rise in product cost of goods sold led to only a **2%** gross profit increase and a **16%** higher net loss of **$2.16 million**; for the six months, net loss decreased by **33%** to **$2.27 million** due to non-cash gains | Metric (3 Months Ended Jun 30) | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Product revenue, net | $3,043 | $2,126 | $917 | 43% | | Total sales, net | $3,045 | $2,133 | $912 | 43% | | Product cost of goods sold | $1,495 | $614 | $881 | 143% | | Gross profit | $1,550 | $1,519 | $31 | 2% | | Total operating expenses | $3,702 | $3,378 | $324 | 10% | | Operating loss | $(2,152) | $(1,859) | $(293) | 16% | | Net loss | $(2,155) | $(1,859) | $(296) | 16% | | Net loss per share (basic & diluted) | $(0.04) | $(0.04) | $0.00 | 0% | | Metric (6 Months Ended Jun 30) | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Product revenue, net | $5,666 | $3,927 | $1,739 | 44% | | Total sales, net | $5,674 | $3,940 | $1,734 | 44% | | Product cost of goods sold | $2,608 | $1,069 | $1,539 | 144% | | Gross profit | $3,066 | $2,871 | $195 | 7% | | Total operating expenses | $7,600 | $6,250 | $1,350 | 22% | | Operating loss | $(4,534) | $(3,379) | $(1,155) | 34% | | Non-cash gain on changes in fair value of warrant liability | $2,056 | $0 | $2,056 | 100% | | Non-cash gain on changes in fair value of contingent liability | $219 | $0 | $219 | 100% |\ | Net loss | $(2,266) | $(3,377) | $1,111 | -33% | | Net loss per share (basic & diluted) | $(0.04) | $(0.08) | $0.04 | -50% | [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity increased from **$10.17 million** at December 31, 2021, to **$15.75 million** at June 30, 2022, driven by a **$7.50 million** reclassification of Private Placement Warrants to Additional Paid-In Capital and Series B Preferred Stock conversion, partially offset by a **$2.27 million** net loss | Metric (in thousands) | Dec 31, 2021 | Jun 30, 2022 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total Stockholders' Equity | $10,171 | $15,745 | $5,574 | | Net loss (6 months) | $(111) (Q1) | $(2,155) (Q2) | $(2,266) | | Reclassification of Private Placement Warrants | $0 | $7,502 | $7,502 | | Conversion of Series B Preferred Stock | $0 | $110 | $110 | | Stock-based compensation expense | $184 (Q1) | $154 (Q2) | $338 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2022, net cash used in operating activities increased to **$3.76 million** from **$3.41 million** in the prior year, while financing activities shifted from providing **$1.78 million** to using **$105 thousand**, mainly for line of credit repayment | Metric (Six Months Ended Jun 30, in thousands) | 2022 | 2021 | Change | | :--------------------------------------------- | :------ | :------ | :------ | | Net cash used in operating activities | $(3,756) | $(3,406) | $(350) | | Net cash used in investing activities | $(32) | $(27) | $(5) | | Net cash (used in) provided by financing activities | $(105) | $1,775 | $(1,880) |\ | Net decrease in cash, cash equivalents, and restricted cash | $(3,893) | $(1,658) | $(2,235) |\ | Cash, cash equivalents and restricted cash, end of period | $4,086 | $10,769 | $(6,683) | [NOTE 1. ORGANIZATION](index=8&type=section&id=NOTE%201.%20ORGANIZATION) NovaBay Pharmaceuticals, Inc. develops and sells eyecare and skincare products, including Avenova® and DERMAdoctor products acquired in November 2021, but has sustained operating losses and faces substantial doubt about its ability to continue as a going concern beyond Q1 2023 without additional funding - NovaBay Pharmaceuticals, Inc. develops and sells scientifically-created and clinically-proven eyecare and skincare products, with Avenova® Antimicrobial Lid and Lash Solution as its leading product[18](index=18&type=chunk) - On November 5, 2021, the company acquired DERMAdoctor, LLC, significantly expanding its business with over **30** dermatologist-developed products[19](index=19&type=chunk) - The company is managed as two reportable segments: (1) Optical & Wound Care and (2) Skin Care[20](index=20&type=chunk) - NovaBay has sustained operating losses and expects **2022** expenses to exceed revenues, raising substantial doubt about its ability to continue as a going concern into at least the first quarter of **2023** without additional capital or significant revenue growth[21](index=21&type=chunk)[22](index=22&type=chunk) [NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=8&type=section&id=NOTE%202.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note details NovaBay's significant accounting policies, including basis of presentation, use of estimates, revenue recognition, inventory, goodwill, intangible assets, stock-based compensation, and warrant liabilities, emphasizing the critical role of estimates and potential for actual results to differ - The financial statements are prepared in accordance with U.S. GAAP and require management to make significant estimates and assumptions, which may differ from actual results[23](index=23&type=chunk)[25](index=25&type=chunk)[26](index=26&type=chunk) | Cash, Cash Equivalents, and Restricted Cash (in thousands) | Jun 30, 2022 | Dec 31, 2021 | | :------------------------------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $3,931 | $7,504 | | Restricted cash included in other assets | $155 | $475 | | Total cash, cash equivalents, and restricted cash | $4,086 | $7,979 | | Product Revenue, Net (in thousands) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Avenova | $1,626 | $1,883 | $3,052 | $3,458 | | DERMAdoctor | $592 | $0 | $1,483 | $0 | | NeutroPhase | $509 | $175 | $657 | $175 | | Other products | $316 | $68 | $474 | $294 | | Total product revenue, net | $3,043 | $2,126 | $5,666 | $3,927 | - Sales of Avenova Spray via Amazon comprised **62%** and **69%** of total Avenova Spray net revenue for the three and six months ended June 30, 2022, respectively[36](index=36&type=chunk) - The Company relies on seven contract manufacturers and does not own any manufacturing facilities, exposing it to potential supply chain issues[37](index=37&type=chunk) [NOTE 3. BUSINESS COMBINATION](index=18&type=section&id=NOTE%203.%20BUSINESS%20COMBINATION) On November 5, 2021, NovaBay acquired DERMAdoctor, LLC for **$12.0 million** upfront and up to **$3.0 million** in future earn-out payments, recognizing **$4.53 million** in goodwill primarily for assembled workforce and synergies, along with identifiable intangible assets like customer relationships, trade secrets, and trade names - NovaBay acquired DERMAdoctor, LLC on November 5, 2021, for **$12.0 million** upfront and up to **$3.0 million** in future earn-out payments[78](index=78&type=chunk) | Acquired Assets/Liabilities (in thousands) | Fair Value | | :--------------------------------------- | :--------- | | Total net tangible assets | $2,779 | | Total intangible assets | $5,260 | | Goodwill | $4,528 | | Purchased consideration | $12,561 | - Goodwill of **$4.53 million** is primarily attributable to assembled workforce, expected synergies, and other factors[80](index=80&type=chunk) | Intangible Asset (in thousands) | Fair Value | Useful Life | Amortization Method | | :------------------------------ | :--------- | :---------- | :------------------ | | Customer relationships | $290 | 7 years | Straight line | | Trade secrets / product formulations | $2,890 | 9 years | Straight line | | Trade names | $2,080 | Indefinite | N/A | [NOTE 4. FAIR VALUE MEASUREMENTS](index=19&type=section&id=NOTE%204.%20FAIR%20VALUE%20MEASUREMENTS) This note details the fair value measurements of the company's financial assets and liabilities, showing the warrant liability reclassified to equity with a zero balance as of June 30, 2022, and the contingent earnout liability valued at **$342 thousand** using Level 3 inputs, reflecting a decrease in fair value | Fair Value Measurements (in thousands) | Jun 30, 2022 (Level 1) | Jun 30, 2022 (Level 3) | Dec 31, 2021 (Level 1) | Dec 31, 2021 (Level 3) | | :----------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Deposit held as a certificate of deposit | $152 | $0 | $151 | $0 | | Restricted cash held as a certificate of deposit | $0 | $0 | $324 | $0 | | Warrant liability | $0 | $0 | $0 | $9,558 | | Contingent earnout liability | $0 | $342 | $0 | $561 | - The warrant liability, previously classified as Level 3, was reclassified to equity as of June 30, 2022, resulting in a zero fair value[86](index=86&type=chunk) - The fair value of contingent earnout liability decreased by **$219 thousand** to **$342 thousand** at June 30, 2022, from **$561 thousand** at December 31, 2021[86](index=86&type=chunk) [NOTE 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS](index=20&type=section&id=NOTE%205.%20PREPAID%20EXPENSES%20AND%20OTHER%20CURRENT%20ASSETS) Prepaid expenses and other current assets decreased from **$778 thousand** at December 31, 2021, to **$629 thousand** at June 30, 2022, primarily due to reductions in prepaid inventory, consultants, and sales rebates, partially offset by increases in prepaid dues, subscriptions, and marketing costs | Prepaid Expenses (in thousands) | Jun 30, 2022 | Dec 31, 2021 | Change | | :------------------------------ | :----------- | :----------- | :----- | | Prepaid inventory | $218 | $367 | $(149) | | Prepaid consultants | $8 | $68 | $(60) | | Prepaid sales rebates | $6 | $19 | $(13) | | Total prepaid expenses and other current assets | $629 | $778 | $(149) | [NOTE 6. INVENTORY](index=21&type=section&id=NOTE%206.%20INVENTORY) Total inventory, net, increased from **$3.22 million** at December 31, 2021, to **$3.80 million** at June 30, 2022, primarily due to increases in finished goods and raw materials, while the reserve for excess and obsolete inventory decreased | Inventory (in thousands) | Jun 30, 2022 | Dec 31, 2021 | Change | | :----------------------- | :----------- | :----------- | :----- | | Raw materials and supplies | $1,339 | $1,179 | $160 | | Finished goods | $2,984 | $2,682 | $302 | | Less: Reserve for excess and obsolete inventory | $(522) | $(641) | $119 | | Total inventory, net | $3,801 | $3,220 | $581 | [NOTE 7. PROPERTY AND EQUIPMENT](index=21&type=section&id=NOTE%207.%20PROPERTY%20AND%20EQUIPMENT) Total property and equipment, net, decreased from **$193 thousand** at December 31, 2021, to **$166 thousand** at June 30, 2022, due to increased accumulated depreciation and amortization totaling **$59 thousand** for the six months ended June 30, 2022 | Property and Equipment (in thousands) | Jun 30, 2022 | Dec 31, 2021 | Change | | :------------------------------------ | :----------- | :----------- | :----- | | Total property and equipment, at cost | $866 | $834 | $32 | | Less: accumulated depreciation and amortization | $(700) | $(641) | $(59) | | Total property and equipment, net | $166 | $193 | $(27) | - Depreciation and amortization expense was **$59 thousand** for the six months ended June 30, 2022, compared to **$20 thousand** for the same period in **2021**[90](index=90&type=chunk) [NOTE 8. GOODWILL](index=21&type=section&id=NOTE%208.%20GOODWILL) Goodwill remained constant at **$4.5 million** as of June 30, 2022, and December 31, 2021, with no impairment recognized during the reported periods following annual or more frequent impairment tests - Goodwill was **$4.5 million** as of both June 30, 2022, and December 31, 2021, with no impairment recognized[91](index=91&type=chunk) [NOTE 9. OTHER INTANGIBLE ASSETS](index=22&type=section&id=NOTE%209.%20OTHER%20INTANGIBLE%20ASSETS) Total other intangible assets, net, decreased from **$5.20 million** at December 31, 2021, to **$5.02 million** at June 30, 2022, primarily due to **$182 thousand** in amortization expense for customer relationships and trade secrets/product formulations, while indefinite-lived trade names remained constant | Other Intangible Assets (in thousands) | Jun 30, 2022 (Net) | Dec 31, 2021 (Net) | Change | | :------------------------------------- | :----------------- | :----------------- | :----- | | Trade names (indefinite-lived) | $2,080 | $2,080 | $0 | | Customer relationships (amortizable) | $262 | $283 | $(21) | | Trade secrets / product formulations (amortizable) | $2,676 | $2,837 | $(161) |\ | Total other intangible assets, net | $5,018 | $5,200 | $(182) | - Amortization expense was **$182 thousand** for the six months ended June 30, 2022, with no comparable expense in the prior year[93](index=93&type=chunk) | Future Amortization Expenses (in thousands) | Amount | | :------------------------------------------ | :----- | | 2022 (remaining) | $181 | | 2023 | $363 | | 2024 | $363 | | 2025 | $363 | | 2026 | $363 | | Thereafter | $1,305 |\ | Total | $2,938 | [NOTE 10. ACCRUED LIABILITIES](index=23&type=section&id=NOTE%2010.%20ACCRUED%20LIABILITIES) Total accrued liabilities increased from **$2.09 million** at December 31, 2021, to **$2.26 million** at June 30, 2022, driven by higher contract liabilities and employee payroll/benefits, partially offset by a decrease in other accrued liabilities | Accrued Liabilities (in thousands) | Jun 30, 2022 | Dec 31, 2021 | Change | | :--------------------------------- | :----------- | :----------- | :----- | | Contract liabilities | $1,466 | $1,289 | $177 | | Employee payroll and benefits | $546 | $443 | $103 | | Other | $235 | $360 | $(125) |\ | Total accrued liabilities | $2,257 | $2,092 | $165 | [NOTE 11. LINE OF CREDIT](index=23&type=section&id=NOTE%2011.%20LINE%20OF%20CREDIT) The DERMAdoctor line of credit with Bank Midwest, which had a **$500 thousand** limit, was terminated and repaid in full on January 6, 2022, resulting in no outstanding balance as of June 30, 2022 - The DERMAdoctor line of credit for **$500 thousand** was terminated and fully repaid on January 6, 2022[96](index=96&type=chunk) - As of June 30, 2022, there was no outstanding balance on the line of credit[96](index=96&type=chunk) [NOTE 12. COMMITMENTS AND CONTINGENCIES](index=23&type=section&id=NOTE%2012.%20COMMITMENTS%20AND%20CONTINGENCIES) This note details NovaBay's indemnification agreements for officers and directors, which are deemed to have minimal fair value, and outlines lease commitments for its corporate headquarters and a Missouri facility, totaling **$2.54 million** in future minimum lease payments as of June 30, 2022 - The company indemnifies its officers, directors, and other entities, but believes the fair value of these agreements is minimal and has recorded no liabilities[97](index=97&type=chunk)[98](index=98&type=chunk) - No legal matters are expected to have a material adverse effect on the company's financial position as of June 30, 2022[99](index=99&type=chunk) - The company extended its corporate headquarters lease through July 31, 2027, and also leases a facility in Riverside, Missouri, expiring December 31, 2024[100](index=100&type=chunk)[101](index=101&type=chunk) | Future Lease Payments (in thousands) | Amount | | :----------------------------------- | :----- | | 2022 (remaining) | $286 | | 2023 | $535 | | 2024 | $549 | | Thereafter | $1,166 |\ | Total future minimum lease payments | $2,536 | [NOTE 13. WARRANT LIABILITY](index=25&type=section&id=NOTE%2013.%20WARRANT%20LIABILITY) The November 2021 Warrants were reclassified from liabilities to equity on January 31, 2022, following stockholder approval, resulting in a non-cash gain on changes in fair value, while prior 2019 warrants were either exercised or amended and reclassified to equity in 2020 - The November 2021 Warrants were reclassified from a liability to equity on January 31, 2022, following stockholder approval of an increase in authorized share capital, as they became exercisable and require physical or net share settlement[109](index=109&type=chunk) - Upon issuance on November 2, 2021, the fair value of the November 2021 Warrants was **$14.2 million**, decreasing to **$9.6 million** by December 31, 2021[110](index=110&type=chunk) - The 2019 Domestic and Foreign Warrants were exercised in Q3 2020 at a reduced price of **$0.99**, generating **$6.8 million** in gross proceeds, and the associated liabilities were transferred to equity[107](index=107&type=chunk)[126](index=126&type=chunk) - The 2019 Ladenburg Warrants were amended in Q3 2020, changing their cash-settlement obligation to be within the Company's control, leading to their reclassification from liabilities to equity[108](index=108&type=chunk)[129](index=129&type=chunk) [NOTE 14. STOCKHOLDERS' EQUITY](index=28&type=section&id=NOTE%2014.%20STOCKHOLDERS'%20EQUITY) This note details changes in common and preferred stock and warrants, including an increase in authorized common stock to **150 million** shares, a November 2021 private placement generating **$14.9 million** net proceeds from Series B Preferred Stock and warrants, and the conversion of **3,380** Preferred Stock shares into **8.45 million** common shares by June 30, 2022, with **44.58 million** warrants outstanding - The company is authorized to issue up to **150,000,000** shares of common stock and **5,000,000** shares of preferred stock[112](index=112&type=chunk)[114](index=114&type=chunk) - In November 2021, a private placement raised **$14.9 million** net proceeds from the sale of **15,000** shares of Series B Non-Voting Preferred Stock (convertible into **37.5 million** common shares) and warrants for **37.5 million** common shares[115](index=115&type=chunk) - As of June 30, 2022, **3,380** shares of Preferred Stock had converted into **8,450,000** shares of common stock, and **12 thousand** shares of Preferred Stock remained outstanding[121](index=121&type=chunk) | Warrants Outstanding (in thousands) | Jun 30, 2022 | Dec 31, 2021 | | :---------------------------------- | :----------- | :----------- | | Outstanding warrants | 44,582 | 7,082 | | Weighted Average Exercise Price | $0.71 | $1.63 | [NOTE 15. EQUITY-BASED COMPENSATION](index=31&type=section&id=NOTE%2015.%20EQUITY-BASED%20COMPENSATION) NovaBay grants stock options and restricted stock units under its incentive plans, with **4.78 million** stock options outstanding at a weighted-average exercise price of **$1.25** as of June 30, 2022, and total unrecognized compensation cost of **$1.0 million** expected to be recognized over **2.05 years**, with **$338 thousand** in expense for the six months ended June 30, 2022 - The **2017** Omnibus Incentive Plan had **3,295,752** shares available for future awards as of June 30, 2022[135](index=135&type=chunk) | Stock Options (in thousands, except per share data) | Jun 30, 2022 | Dec 31, 2021 | | :-------------------------------------------------- | :----------- | :----------- | | Outstanding Awards | 4,778 | 4,449 | | Weighted Average Exercise Price | $1.25 | $1.39 | | Vested and expected to vest | 4,446 | N/A | | Vested | 2,280 | N/A | | Exercisable | 2,280 | N/A | - Total unrecognized compensation cost for unvested awards was approximately **$1.0 million**, with a weighted average vesting period of **2.05 years**[139](index=139&type=chunk) | Stock-Based Compensation Expense (in thousands) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :---------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total stock-based compensation expense | $154 | $296 | $338 | $479 | [NOTE 16. LICENSE, COLLABORATION AND DISTRIBUTION AGREEMENTS](index=34&type=section&id=NOTE%2016.%20LICENSE,%20COLLABORATION%20AND%20DISTRIBUTION%20AGREEMENTS) NovaBay recognizes revenue from distribution agreements upon transfer of control, with contract liabilities increasing from **$1.27 million** to **$1.53 million** by June 30, 2022; Avenova Spray pharmacy distribution agreements resulted in a net sales loss of **$57 thousand** due to returns, while over-the-counter sales remained stable and DERMAdoctor products are sold through wholesale | Contract Liabilities (in thousands) | Dec 31, 2021 | Jun 30, 2022 | Additions (6 months) | Deductions (6 months) | | :---------------------------------- | :----------- | :----------- | :------------------- | :-------------------- | | Deferred revenue | $2 | $69 | $69 | $(2) | | Accrued liabilities | $1,270 | $1,460 | $1,357 | $(1,167) |\ | Total contract liabilities | $1,272 | $1,529 | $1,426 | $(1,169) | - Avenova Spray pharmacy distribution agreements resulted in a net sales loss of **$57 thousand** for the six months ended June 30, 2022, due to increased returns of expired product[156](index=156&type=chunk) - Over-the-counter Avenova Spray revenue was **$2.7 million** for the six months ended June 30, 2022, consistent with **$2.6 million** in the prior year[158](index=158&type=chunk) [NOTE 17. EMPLOYEE BENEFIT PLAN](index=35&type=section&id=NOTE%2017.%20EMPLOYEE%20BENEFIT%20PLAN) Effective January 1, 2022, NovaBay Pharmaceuticals, Inc. began making 401(k) matching contributions, matching **100%** of the first **3%** of compensation deferred, plus **50%** of the next **2%** of compensation deferred - Beginning January 1, 2022, the company started making 401(k) matching contributions: **100%** of the first **3%** deferred, plus **50%** of the next **2%** deferred[160](index=160&type=chunk) [NOTE 18. RELATED PARTY TRANSACTIONS](index=36&type=section&id=NOTE%2018.%20RELATED%20PARTY%20TRANSACTIONS) Related party revenue from NeutroPhase products significantly increased to **$509 thousand** for the three months ended June 30, 2022, from **$175 thousand** in the prior year, with a corresponding increase in cost of goods sold, and no related party accounts receivable as of June 30, 2022 | Related Party Transactions (in thousands) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :---------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | NeutroPhase Revenue | $509 | $175 | $657 | $175 | | NeutroPhase Cost of Goods Sold | $514 | $131 | $648 | $131 | - There was no related party accounts receivable as of June 30, 2022, compared to **$0.1 million** as of December 31, 2021[161](index=161&type=chunk) [NOTE 19. SEGMENT REPORTING](index=37&type=section&id=NOTE%2019.%20SEGMENT%20REPORTING) Following the DERMAdoctor acquisition in November 2021, NovaBay now reports in two segments: Optical & Wound Care and Skin Care; for the three months ended June 30, 2022, Skin Care generated **$592 thousand** in net sales, contributing to a consolidated net sales increase, with both segments reporting operating losses - The company is managed and reports in two operating segments: (1) Optical & Wound Care and (2) Skin Care, following the DERMAdoctor acquisition[163](index=163&type=chunk) | Segment Net Sales (in thousands) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Optical & Wound Care | $2,453 | $2,133 | $4,191 | $3,940 | | Skin Care | $592 | $0 | $1,483 | $0 | | Consolidated | $3,045 | $2,133 | $5,674 | $3,940 | | Segment Operating Loss (in thousands) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Optical & Wound Care | $(1,308) | $(1,859) | $(3,347) | $(3,379) |\ | Skin Care | $(844) | $0 | $(1,187) | $0 | | Consolidated | $(2,152) | $(1,859) | $(4,534) | $(3,379) | [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=38&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on NovaBay's financial condition and results of operations, highlighting the company's focus on commercializing Avenova and DERMAdoctor products, revenue growth from DERMAdoctor, and ongoing operating losses that raise substantial doubt about its ability to continue as a going concern [Overview](index=38&type=section&id=Overview) NovaBay Pharmaceuticals, Inc. develops science-based eyecare (Avenova) and skincare (DERMAdoctor) solutions, with the DERMAdoctor acquisition in November 2021 expanding its business, funded partly by a **$15.0 million** private placement, and the company aims to grow sales through domestic and international market expansion, online channels, and new product development - NovaBay creates science-based eyecare (Avenova) and skincare (DERMAdoctor) products, with DERMAdoctor acquired in November 2021[167](index=167&type=chunk) - The DERMAdoctor acquisition was partly funded by a **$15.0 million** private placement of Preferred Stock and warrants[168](index=168&type=chunk) - The company plans to grow commercial sales of Avenova and DERMAdoctor products through domestic and international market expansion, online channels, and new product development[169](index=169&type=chunk) - NovaBay also manufactures and sells hypochlorous acid products (NeutroPhase and PhaseOne) for the wound care market, distributed in the U.S. and China[170](index=170&type=chunk)[171](index=171&type=chunk) [Financial Overview and Outlook](index=38&type=section&id=Financial%20Overview%20and%20Outlook) NovaBay has consistently incurred net losses and negative operating cash flows since inception, with a net loss of **$2.2 million** for Q2 2022, and expects **2022** expenses to exceed revenues, raising substantial doubt about its ability to continue as a going concern, with future growth anticipated through expanded market penetration and new product offerings - NovaBay has incurred net losses and negative cash flows from operations since inception, with a net loss of **$2.2 million** for the three months ended June 30, 2022[172](index=172&type=chunk) - As of June 30, 2022, the company had an accumulated deficit of **$144 million** and current assets of **$9.5 million**[172](index=172&type=chunk) - The company expects to continue incurring operating losses and negative cash flows, raising substantial doubt about its ability to continue as a going concern[172](index=172&type=chunk) - Future growth is expected from expanding domestic and international market penetration, especially online, and developing new Avenova and DERMAdoctor product offerings[173](index=173&type=chunk) [Critical Accounting Policies and Estimates](index=39&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The preparation of NovaBay's financial statements requires significant estimates and judgments, particularly concerning revenue recognition, research and development costs, patent costs, stock-based compensation, income taxes, earnout contingency, and warrant liability, which are based on management's best judgment but may differ from actual results - The financial statements rely on significant estimates and judgments for revenue recognition, R&D costs, patent costs, stock-based compensation, income taxes, earnout contingency, and warrant liability[174](index=174&type=chunk) - Management continuously evaluates these estimates, but actual results may differ from expectations[174](index=174&type=chunk) [Comparison of the Three Months Ended June 30, 2022 and 2021](index=40&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20June%2030,%202022%20and%202021) For Q2 2022, total net sales increased by **43%** to **$3.05 million**, primarily due to **$0.6 million** from DERMAdoctor sales, but cost of goods sold surged by **143%** to **$1.5 million**, resulting in only a **2%** increase in gross profit and a **16%** wider operating loss of **$2.15 million** due to higher general and administrative expenses | Metric (3 Months Ended Jun 30) | 2022 (in thousands) | 2021 (in thousands) | Dollar Change | Percent Change | | :----------------------------- | :------------------ | :------------------ | :------------ | :------------- | | Product revenue, net | $3,043 | $2,126 | $917 | 43% | | Total sales, net | $3,045 | $2,133 | $912 | 43% | | Product cost of goods sold | $1,495 | $614 | $881 | 143% | | Gross profit | $1,550 | $1,519 | $31 | 2% | | Research and development | $40 | $21 | $19 | 90% | | Sales and marketing | $1,752 | $1,788 | $(36) | (2%) | | General and administrative | $1,910 | $1,569 | $341 | 22% | | Operating loss | $(2,152) | $(1,859) | $(293) | 16% | | Net loss | $(2,155) | $(1,859) | $(296) | 16% | - The increase in product revenue was primarily due to **$0.6 million** from DERMAdoctor products, offsetting a **$0.3 million** decrease in Avenova Spray revenue due to lower physician-dispensed and pharmacy channel sales[178](index=178&type=chunk)[179](index=179&type=chunk) - Cost of goods sold increased by **$0.5 million** due to DERMAdoctor sales and higher wound care product sales[181](index=181&type=chunk) - Sales and marketing expenses decreased due to lower digital advertising and a shift in focus from CelleRx Clinical Reset to DERMAdoctor, despite **$0.7 million** in DERMAdoctor marketing costs[185](index=185&type=chunk) - General and administrative expenses increased by **$0.3 million**, including **$0.5 million** from DERMAdoctor G&A and **$0.1 million** from amortization of intangibles[186](index=186&type=chunk)[187](index=187&type=chunk) [Comparison of the Six Months Ended June 30, 2022 and 2021](index=42&type=section&id=Comparison%20of%20the%20Six%20Months%20Ended%20June%2030,%202022%20and%202021) For the first half of 2022, total net sales increased by **44%** to **$5.67 million**, largely driven by **$1.5 million** from DERMAdoctor products, but cost of goods sold rose by **144%** to **$2.61 million**, leading to a **7%** increase in gross profit and a **34%** increase in operating loss to **$4.53 million**; however, non-cash gains from warrant and contingent liability fair value changes resulted in a **33%** reduction in net loss to **$2.27 million** | Metric (6 Months Ended Jun 30) | 2022 (in thousands) | 2021 (in thousands) | Dollar Change | Percent Change | | :----------------------------- | :------------------ | :------------------ | :------------ | :------------- | | Product revenue, net | $5,666 | $3,927 | $1,739 | 44% | | Total sales, net | $5,674 | $3,940 | $1,734 | 44% | | Product cost of goods sold | $2,608 | $1,069 | $1,539 | 144% | | Gross profit | $3,066 | $2,871 | $195 | 7% | | Research and development | $68 | $26 | $42 | 162% | | Sales and marketing | $3,439 | $3,468 | $(29) | (1%) | | General and administrative | $4,093 | $2,756 | $1,337 | 49% | | Operating loss | $(4,534) | $(3,379) | $(1,155) | 34% | | Non-cash gain on changes in fair value of warrant liability | $2,056 | $0 | $2,056 | 100% | | Non-cash gain on changes in fair value of contingent liability | $219 | $0 | $219 | 100% | | Net loss | $(2,266) | $(3,377) | $1,111 | (33%) | - Product revenue increase was primarily from **$1.5 million** in DERMAdoctor sales, while Avenova Spray revenue decreased by **$0.4 million** due to increased returns of expired product and lower physician-dispensed sales[190](index=190&type=chunk)[191](index=191&type=chunk) - Cost of goods sold increased by **$1.0 million** due to DERMAdoctor sales and higher wound care product sales[192](index=192&type=chunk) - General and administrative expenses increased by **$1.3 million**, including **$0.7 million** from DERMAdoctor G&A and **$0.2 million** from amortization of intangibles, partially offset by a prior-year insurance reimbursement[196](index=196&type=chunk)[197](index=197&type=chunk) - A **$2.1 million** non-cash gain from warrant liability fair value changes and a **$0.2 million** gain from contingent liability fair value changes significantly reduced the net loss[198](index=198&type=chunk)[199](index=199&type=chunk) [Financial Condition, Liquidity and Capital Resources](index=44&type=section&id=Financial%20Condition,%20Liquidity%20and%20Capital%20Resources) NovaBay's cash and cash equivalents decreased to **$3.9 million** at June 30, 2022, from **$7.5 million** at December 31, 2021, with existing funds anticipated to cover operations only into Q1 2023, raising substantial doubt about its ability to continue as a going concern, necessitating additional funding or significant revenue growth - Cash and cash equivalents decreased to **$3.9 million** at June 30, 2022, from **$7.5 million** at December 31, 2021[201](index=201&type=chunk) - Existing funds are expected to be sufficient only into the first quarter of **2023**, and continued operating losses raise substantial doubt about the company's ability to continue as a going concern[201](index=201&type=chunk)[202](index=202&type=chunk) - The company is considering raising additional capital through debt/equity financings, reducing spending, out-licensing products, or entering new license agreements[202](index=202&type=chunk) | Cash Flow Activities (Six Months Ended Jun 30, in thousands) | 2022 | 2021 | | :----------------------------------------------------------- | :------ | :------ | | Net cash used in operating activities | $(3,756) | $(3,406) | | Net cash used in investing activities | $(32) | $(27) | | Net cash (used in) provided by financing activities | $(105) | $1,775 | - As of December 31, 2021, the company had federal NOL carryforwards of **$125.9 million** and state NOLs of **$106.8 million**, subject to ownership change limitations[207](index=207&type=chunk)[209](index=209&type=chunk) [Inflation](index=46&type=section&id=Inflation) NovaBay's costs are subject to fluctuations in raw materials, packaging, labor, and transportation, making the company's financial results dependent on its ability to manage these fluctuations through pricing actions, cost savings, and sourcing decisions to maintain and improve margins and market share - Costs are subject to fluctuations in raw materials, packaging, labor, and transportation[210](index=210&type=chunk) - The company's ability to manage these fluctuations through pricing, cost savings, and sourcing is critical for maintaining margins and market share[210](index=210&type=chunk) [Off-Balance Sheet Arrangements](index=46&type=section&id=Off-Balance%20Sheet%20Arrangements) NovaBay Pharmaceuticals, Inc. reported no off-balance sheet arrangements as of June 30, 2022 - The company had no off-balance sheet arrangements as of June 30, 2022[211](index=211&type=chunk) [Seasonality](index=46&type=section&id=Seasonality) Avenova branded products, particularly prescription Avenova Spray, experience Q1 seasonality due to health insurance deductibles, while over-the-counter sales are less seasonal; DERMAdoctor products see periodic large orders and seasonal demand, with higher sales of sunscreen/antiperspirants in summer and moisturizers in fall/winter, and an uptick during Q4 holidays - Avenova Spray prescriptions show Q1 seasonality due to insurance deductibles, while over-the-counter sales are less seasonal[212](index=212&type=chunk) - DERMAdoctor products experience periodic large orders and seasonal demand: sunscreens/antiperspirants higher in summer, moisturizers in fall/winter, and an uptick during Q4 holidays[213](index=213&type=chunk) [Contractual Obligations](index=46&type=section&id=Contractual%20Obligations) As of June 30, 2022, NovaBay's contractual cash commitments totaled **$2.54 million**, primarily consisting of facility operating leases (**$2.53 million**) and equipment leases (**$5 thousand**), with the total commitment for facility leases significantly increasing from **$0.5 million** at December 31, 2021 | Contractual Obligations (in thousands) | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | | :------------------------------------- | :--------------- | :-------- | :-------- | :---------------- | :---- | | Facility leases | $529 | $1,468 | $534 | $0 | $2,531 | | Equipment leases | $5 | $0 | $0 | $0 | $5 | | Total | $534 | $1,468 | $534 | $0 | $2,536 | - Total commitment for facility leases increased to **$2.5 million** as of June 30, 2022, from **$0.5 million** at December 31, 2021[215](index=215&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=46&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) NovaBay's primary market risk is interest rate risk on its cash and cash equivalents, managed by an investment policy prioritizing capital preservation and liquidity through short-term marketable securities, with a **10%** change in interest rates having an immaterial effect as of June 30, 2022, and minimal exposure to foreign currency risk due to its domestic U.S. market focus - The primary market risk is interest rate risk on cash and cash equivalents[217](index=217&type=chunk) - Investment policy prioritizes capital preservation and liquidity, investing in short-term marketable securities to minimize interest rate risk[218](index=218&type=chunk) - A **10%** change in interest rates would have an immaterial effect on the investment portfolio as of June 30, 2022[218](index=218&type=chunk) - The company has minimal exposure to foreign currency rate fluctuations due to its focus on the domestic U.S. market[219](index=219&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=47&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management, including the CEO and CFO, evaluated the effectiveness of NovaBay's disclosure controls and procedures as of June 30, 2022, concluding they were effective at a reasonable assurance level, with no material changes in internal controls over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022[222](index=222&type=chunk) - There were no material changes in internal controls over financial reporting during the quarter ended June 30, 2022[223](index=223&type=chunk) PART II. OTHER INFORMATION [ITEM 1. LEGAL PROCEEDINGS](index=48&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) NovaBay Pharmaceuticals, Inc. has no legal matters that, in management's opinion, would ultimately result in liability having a material adverse effect on the company's financial position, results of operations, or cash flows as of June 30, 2022 - No legal matters are expected to have a material adverse effect on the company's financial position, results of operations, or cash flows[226](index=226&type=chunk) [ITEM 1A. RISK FACTORS](index=48&type=section&id=ITEM%201A.%20RISK%20FACTORS) NovaBay faces significant uncertainty regarding its ability to continue as a going concern due to sustained operating losses and negative cash flows, with existing working capital projected to be sufficient only into Q1 2023, necessitating additional funding or substantial revenue growth - There is substantial doubt about the company's ability to continue as a going concern due to sustained operating losses and negative cash flows[227](index=227&type=chunk) - Existing working capital is expected to fund operations only into the first quarter of **2023**, requiring additional financing or significant revenue growth[227](index=227&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=48&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) NovaBay Pharmaceuticals, Inc. reported no unregistered sales of equity securities or use of proceeds during the period - No unregistered sales of equity securities or use of proceeds were reported[230](index=230&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=48&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) NovaBay Pharmaceuticals, Inc. reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[231](index=231&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=48&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) NovaBay Pharmaceuticals, Inc. reported no mine safety disclosures, as this item is not applicable to the company's operations - Mine safety disclosures are not applicable to the company[232](index=232&type=chunk) [ITEM 5. OTHER INFORMATION](index=48&type=section&id=ITEM%205.%20OTHER%20INFORMATION) NovaBay Pharmaceuticals, Inc. reported no other information for this item - No other information was reported for this item[233](index=233&type=chunk) [ITEM 6. EXHIBITS](index=49&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed with or incorporated by reference into the report, including various agreements, certificates of incorporation, bylaws, and certifications required by SEC rules - Exhibits include the Membership Unit Purchase Agreement for DERMAdoctor, various amendments to the Certificate of Incorporation, and forms of warrants[237](index=237&type=chunk) - Certifications by the Principal Executive Officer and Principal Financial Officer (Exhibits **31.1**, **31.2**, **32.1**, **32.2**) are included as required by SEC rules[238](index=238&type=chunk) [SIGNATURES](index=51&type=section&id=SIGNATURES) The report is duly signed on behalf of NovaBay Pharmaceuticals, Inc. by Justin Hall, Chief Executive Officer, General Counsel and Director, and Andrew Jones, Chief Financial Officer, on August 11, 2022 - The report was signed by Justin Hall (CEO, General Counsel, and Director) and Andrew Jones (CFO) on August 11, 2022[242](index=242&type=chunk) ```

NovaBay Pharmaceuticals, Inc. (NYSE:NBY) Q1 2022 Earnings Conference Call May 12, 2022 4:30 PM ET Company Participants Jody Cain - LHA Investor Relations Justin Hall - Chief Executive Officer and General Counsel Andy Jones - Chief Financial Officer Conference Call Participants Destiny Hance - Ladenburg Thalmann Edward Woo - Ascendiant Capital Markets Operator Good afternoon and welcome to NovaBay Pharmaceuticals First Quarter 2022 Financial Results Conference Call. All participants will be in listen-only m ...

Financial Performance - The company incurred a net loss of $111 thousand for the three months ended March 31, 2022, compared to a net loss of $1.5 million for the same period in 2021 [171]. - As of March 31, 2022, the company had an accumulated deficit of $142 million and current assets totaling $12.5 million [171]. - Product revenue increased by $0.8 million, or 46%, to $2.6 million for the three months ended March 31, 2022, compared to $1.8 million for the same period in 2021 [207]. - Gross profit increased by 12%, reaching $1.5 million for the three months ended March 31, 2022, compared to $1.4 million for the same period in 2021 [213]. - Non-cash gain on changes in fair value of warrant liability was $2.1 million for the three months ended March 31, 2022, following the reclassification of the warrant liability to equity [218]. - Net cash used in operating activities was $2.1 million for the three months ended March 31, 2022, primarily due to a net loss of $111 thousand [221]. - As of March 31, 2022, cash and cash equivalents were $5.6 million, down from $7.5 million as of December 31, 2021 [220]. Acquisition and Product Development - The company acquired DERMAdoctor, LLC for approximately $12.0 million, with an additional $3.0 million contingent consideration based on achieving specific contribution margin targets [168]. - The acquisition of DERMAdoctor contributed $0.9 million in product revenue for the three months ended March 31, 2022, with no comparable revenue in 2021 [211]. - The company expanded its Avenova product offerings, adding Avenova Moist Heating Eye Compress and i-Chek, and partnered with ImprimisRx to promote Avenova Spray [170]. Sales and Marketing Strategy - The company expects to grow commercial sales of Avenova and DERMAdoctor branded products through domestic and international market expansion, particularly focusing on online channels [172]. - The company anticipates focusing sales and marketing resources on the DERMAdoctor brand moving forward [214]. - Revenue from Avenova Spray decreased by $0.2 million to $1.4 million for the three months ended March 31, 2022, due to increased returns from retail pharmacies [210]. - DERMAdoctor products experience higher sales in summer for sunscreen and antiperspirants, and in fall/winter for moisturizers, with a notable uptick during the fourth quarter holidays, especially in the U.S. and China [232]. Expenses and Inventory Management - General and administrative expenses increased by $1.0 million, or 84%, to $2.2 million for the three months ended March 31, 2022, from $1.2 million for the same period in 2021 [215]. - Cost of goods sold rose by 145%, to $1.1 million for the three months ended March 31, 2022, from $0.5 million for the same period in 2021, primarily due to $0.5 million in costs from DERMAdoctor products [212]. - Advertising expenses were $0.6 million for the three months ended March 31, 2022, down from $0.7 million in the same period in 2021 [197]. - The company recorded an allowance for excess and obsolete inventory adjustments of $522 thousand as of March 31, 2022 [177]. Financial Obligations and Risk Management - As of March 31, 2022, total contractual obligations amounted to $2.68 million, with facility leases accounting for $2.67 million and equipment leases for $9 thousand [233]. - The total commitment for facility leases increased from $0.5 million as of December 31, 2021, to $2.7 million as of March 31, 2022 [234]. - The company has limited exposure to market risk, primarily interest rate risk on cash and cash equivalents, with a 10% change in interest rates having an immaterial effect on the investment portfolio [237]. - The investment policy focuses on high-quality investments, capital preservation, liquidity assurance, and minimizing capital taxation, with no use of derivative financial instruments [237]. - The company maintains cash and cash equivalents in short-term marketable securities to mitigate interest rate risk [237]. - There has been no material exposure to foreign currency rate fluctuations due to the focus on the domestic U.S. market [238].

Financial Data and Key Metrics Changes - Product sales for Q4 2021 increased by 40% compared to the prior year period, with Avenova sales increasing by 15% and unit sales rising by 31% [5][15] - Total net sales for 2021 were reported at $8.4 million, which includes $6.8 million in Avenova spray sales, up 15% from 2020 [21][23] - Gross margin for Q4 2021 was 54%, down from 57% in Q4 2020, primarily due to a reduction in revenue from higher margin pharmacy channels [16] - Net loss attributable to common stockholders for Q4 2021 was approximately $900,000 or $0.02 per share, a significant decrease from a net loss of $1.8 million or $0.04 per share in the prior year [20] Business Line Data and Key Metrics Changes - Avenova spray sales in Q4 2021 were $1.6 million, up 11% from the prior year quarter, with total Avenova unit sales increasing by 13% [15] - DERMAdoctor product sales contributed approximately $600,000 in Q4 2021 [15] - The company launched two new products in 2022, including lubricating eye drops and a hyaluronic acid moisture recovery serum [7][9] Market Data and Key Metrics Changes - The global lash extension market is projected to grow at a rate of 7.6% through 2031, reaching $2.4 billion in sales [27] - The company is expanding its marketing activities outside the United States, particularly in China, by engaging a leading marketing firm to drive consumer sales of DERMAdoctor products [12] Company Strategy and Development Direction - The acquisition of DERMAdoctor in November 2021 marked a significant transition for the company, diversifying its product portfolio and expanding its presence in the eye care and skincare markets [6] - The company plans to introduce innovative over-the-counter products under both Avenova and DERMAdoctor brands, with a focus on expanding the addressable market into the beauty industry [26] - The strategy includes leveraging social media and influencer campaigns to enhance brand engagement and awareness [10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's growth potential in 2022, anticipating that most growth will occur in the second half of the year [30] - The company has no debt instruments, positioning it favorably against rising interest rates and providing a clear path to profitability [30] Other Important Information - As of December 31, 2021, the company had cash and cash equivalents of $7.5 million, which is deemed sufficient to fund operations through the coming year [24] - The company has increased its board size from 6 to 8 directors, adding significant expertise to reflect its transformed business [29] Q&A Session Summary Question: What are some of the other segments you are looking into and which product lines are you looking to extend further in 2022? - Management indicated that while they are developing new products, they prefer not to disclose the entire product pipeline for competitive reasons [37] Question: Are you noticing that a larger portion of repeat customers are buying another product and opting in on their second purchase? - Management noted that repeat purchases often occur after the first purchase, with many customers opting for subscribe and save or multipacks after trying the product [39] Question: Can you discuss some of the buying trends associated with QVC? - Management observed that QVC appearances lead to immediate sales and a subsequent spike in sales across other channels, particularly Amazon [41] Question: What are some of the near-term campaigns or initiatives in China? - Management emphasized the importance of local partnerships and influencer marketing in China, while maintaining consistent branding and messaging [43] Question: Do you have any issues or impacts from supply chains? - Management confirmed that while they have faced challenges, they have successfully managed supply chain issues without significant interruptions [46]

Financial Performance - The company incurred net losses of $5.8 million and $11.0 million for the years ended December 31, 2021, and 2020, respectively, with an accumulated deficit of $141.9 million as of December 31, 2021[145]. - Product revenue decreased by $1.5 million, or 15%, to $8.4 million for the year ended December 31, 2021, compared to $9.9 million for the year ended December 31, 2020[177]. - Gross profit decreased by $0.3 million, or 5%, to $5.6 million for the year ended December 31, 2021, from $6.0 million for the year ended December 31, 2020[183]. - The net loss for 2021 was $5,824,000, an improvement from a net loss of $11,039,000 in 2020[246]. - Net loss attributable to common stockholders for 2021 was $6,559,000, compared to $11,039,000 in 2020[246]. - The basic and diluted net loss per share for 2021 was $(0.15), an improvement from $(0.31) in 2020[312]. Revenue and Sales - The company expects to grow commercial sales of Avenova and DERMAdoctor branded products through domestic and international market expansion, particularly focusing on online channels[146]. - Total net sales for 2021 were $8,421,000, a decrease of 15.2% from $9,934,000 in 2020[246]. - Avenova Spray revenue from major distribution partners increased to 59% in 2021 from 50% in 2020, indicating a significant growth in direct sales through Amazon[271]. - Total sales for the quarter were $2,641,000, up from $1,840,000 in the prior quarter, reflecting a growth of 43%[201]. Expenses - Total operating expenses increased to $14,507,000 in 2021, up 17.1% from $12,390,000 in 2020[246]. - Sales and marketing expenses increased by $1.0 million, or 17%, to $7.2 million for the year ended December 31, 2021, from $6.2 million for the year ended December 31, 2020[185]. - General and administrative expenses increased by $1.3 million, or 22%, to $7.2 million for the year ended December 31, 2021, from $5.9 million for the year ended December 31, 2020[186]. - Research and development expenses decreased by $241 thousand, or 85%, to $44 thousand for the year ended December 31, 2021, from $285 thousand for the year ended December 31, 2020[184]. Cash Flow and Liquidity - Net cash used in operating activities was $9.2 million for the year ended December 31, 2021, compared to $4.7 million for the year ended December 31, 2020[194]. - Cash used in investing activities was $12.0 million for the year ended December 31, 2021, primarily due to the DERMAdoctor Acquisition[196]. - Net cash provided by financing activities was $17.0 million for the year ended December 31, 2021, including net proceeds of $14.9 million from the 2021 Private Placement[197]. - Cash and cash equivalents decreased to $7.504 million in 2021 from $11.952 million in 2020, a decline of approximately 37.5%[244]. Acquisition and Integration - The company acquired DERMAdoctor, LLC for approximately $12.0 million, with an additional $3.0 million in contingent consideration based on achieving specific contribution margin targets[141]. - The company recorded a goodwill of $4.528 million and other intangible assets of $5.200 million following the acquisition of DERMAdoctor, LLC on November 5, 2021[224]. - The total net assets acquired from DERMAdoctor amounted to $8.039 million, with goodwill of $4.528 million attributed to assembled workforce and expected synergies[320]. - The Company recognized approximately $1.2 million in transaction costs related to the DERMAdoctor Acquisition, recorded in general and administrative expenses[323]. Inventory and Assets - As of December 31, 2021, total assets increased to $23.978 million from $15.238 million in 2020, representing a growth of approximately 57.5%[244]. - Inventory levels rose to $3.220 million in 2021 from $0.608 million in 2020, an increase of approximately 429.5%[244]. - The company recorded an allowance for excess and obsolete inventory adjustments of $641 thousand and $236 thousand as of December 31, 2021, and 2020, respectively[150]. - Accounts receivable increased to $1.668 million in 2021 from $1.106 million in 2020, reflecting a growth of approximately 51%[244]. Liabilities - Total liabilities rose significantly to $13.807 million in 2021 from $2.920 million in 2020, marking an increase of approximately 373.5%[244]. - The contingent earnout liability associated with the DERMAdoctor acquisition was recorded at $0.561 million as of December 31, 2021[228]. Market and Economic Conditions - The company does not expect inflation to materially impact its business in the near future[203]. - The company relies on seven contract manufacturers for product production, which may lead to supply chain risks, particularly in light of the COVID-19 pandemic[273].

Financial Data and Key Metrics Changes - Avenova product revenue for Q3 2021 was $1.8 million, unchanged from the prior year quarter, while total Avenova unit sales increased by 11% and OTC unit sales increased by 26% compared to the prior year period [11][12] - Gross margin for Q3 2021 was 73%, down from 75% in Q3 2020, influenced by sales channel mix [12] - Net loss for Q3 2021 was $2.1 million or $0.05 per share, an improvement from a net loss of $3.2 million or $0.08 per share in the previous year [13] - Year-to-date financial results showed total net sales of $5.8 million, with Avenova unit sales increasing by 39% and OTC unit sales by 67% compared to the prior year [14][15] - As of September 30, 2021, cash and cash equivalents were $9 million, with an anticipated year-end cash balance of approximately $7 million to $7.5 million [16][59] Business Line Data and Key Metrics Changes - Avenova continues to perform strongly, with year-to-date revenues increasing by 16% compared to the same period last year [10] - The acquisition of DERMAdoctor is expected to double NovaBay's revenues and is immediately accretive to the bottom line [18] Market Data and Key Metrics Changes - The global market for cosmetic skincare products exceeded $145 billion in 2020 and is projected to reach $185 billion by 2027, indicating a lucrative growth opportunity for the company [25] Company Strategy and Development Direction - The acquisition of DERMAdoctor is seen as a strategic move to diversify the product portfolio and enhance marketing capabilities [22][23] - The company aims to leverage DERMAdoctor's established international distribution networks to expand sales of both Avenova and DERMAdoctor products [28] - Plans include launching new products targeting common skin concerns and expanding into the eyecare market [36][38] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, highlighting the potential for growth through the DERMAdoctor acquisition and the anticipated profitability by the end of 2022 [19][44] - The company expects to reach profitability with revenues exceeding $20 million for the fiscal year 2022 [18][60] Other Important Information - The company completed a $15 million financing to support the DERMAdoctor acquisition, which is expected to incur approximately $1.5 million in administrative costs for integration [17] - A special meeting of stockholders is scheduled for December 17, 2021, to vote on proposals related to the recent financing and acquisition [41] Q&A Session Summary Question: What is the expected share count for the fourth quarter? - The expected share count is approximately 45 million shares outstanding, with potential conversion of preferred shares contingent on shareholder approval [52][56] Question: What is the anticipated cash balance at year-end? - The anticipated cash balance at year-end is approximately $7 million to $7.5 million [59] Question: Is the $20 million revenue guidance for 2022 a target? - Yes, the $20 million revenue guidance for 2022 is a target [60] Question: What are the expected ramifications on margins from the DERMAdoctor acquisition? - Margins are expected to improve, with combined margins anticipated to be close to 70% [64] Question: Are the four new SKUs for the first half of next year all skincare products? - Yes, the four new SKUs are skincare products within the DERMAdoctor brand [70] Question: Is product development capital intensive? - The commercialization of new products is less capital intensive compared to pharmaceutical products, with costs measured in the thousands of dollars [71]