NovaBay(NBY) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents NovaBay Pharmaceuticals' unaudited consolidated financial statements as of June 30, 2019, including Balance Sheets, Statements of Operations, Cash Flows, and Stockholders' Equity, with notes on new accounting standard adoptions Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $3,668 | $3,183 | | Total current assets | $7,496 | $8,608 | | Total assets | $9,870 | $9,361 | | Total current liabilities | $3,352 | $3,847 | | Total liabilities | $8,201 | $4,407 | | Total stockholders' equity | $1,669 | $4,954 | Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Product revenue, net | $1,789 | $2,794 | $3,239 | $5,728 | | Gross profit | $1,386 | $2,315 | $2,536 | $5,011 | | Operating loss | $(1,379) | $(2,083) | $(5,450) | $(4,451) | | Net loss | $(2,501) | $(1,589) | $(6,690) | $(3,739) | | Net loss per share (basic) | $(0.14) | $(0.09) | $(0.38) | $(0.22) | Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash (used) in operating activities | $(5,000) | $(1,957) | | Net cash (used) by investing activities | $(19) | $(5) | | Net cash provided by financing activities | $5,504 | $5,597 | Notes to Consolidated Financial Statements These notes detail accounting policies, financial components, and significant events, highlighting liquidity concerns, new accounting standard adoptions, debt financing, warrant liability, equity transactions, related party dealings, and a subsequent arbitration demand - The company's available funds as of June 30, 2019, are projected to be sufficient to fund operations only through the third quarter of 2019. This situation raises substantial doubt about the company's ability to continue as a going concern without securing additional financing[27] - On January 1, 2019, the company adopted the new lease accounting standard (ASU 2016-02), resulting in the recognition of operating lease right-of-use assets of $2.24 million and corresponding lease liabilities on the balance sheet[77][78] - In February 2019, the company issued a $1.0 million promissory note to Pioneer Pharma (Hong Kong) Company Ltd., a related party. The note's maturity was later extended to July 2020 and the interest payment was increased[105][106] - In March 2019, the company issued a $2.215 million Secured Convertible Promissory Note to Iliad Research and Trading, L.P. The note contains embedded derivative features (call and put options) that are bifurcated and accounted for as a liability at fair value, which was $673 thousand as of June 30, 2019[109][115] - Subsequent to the quarter end, on July 29, 2019, former CFO and Interim CEO John McGovern made a demand for arbitration against the company for approximately $370,000, alleging constructive termination[192] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results and condition, detailing a Q2 2019 strategic shift to reduce sales force and focus on a multi-channel sales strategy for Avenova, while reiterating going concern doubts due to limited funds - In Q2 2019, the company made a strategic shift by reducing its field sales representatives by about 75% to significantly reduce operating expenses. This was a response to many national insurance payors stopping reimbursement for Avenova[199] - The company's new core business strategy focuses on increasing Avenova sales through four main channels: Avenova Direct (direct-to-consumer on Amazon.com), retail pharmacies, a Partner Pharmacy Program, and a buy-and-sell channel through eye care specialists[199] - Management states that cash and cash equivalents of $3.7 million as of June 30, 2019, are only sufficient to fund operations through the third quarter of 2019, raising substantial doubt about the company's ability to continue as a going concern[249] Results of Operations This sub-section compares financial results for Q2 2019 and H1 2019 versus prior periods, showing a 36% YoY drop in Q2 net product revenue due to lower Avenova sales and insurance coverage, alongside reduced sales and marketing expenses Comparison of Results for the Three Months Ended June 30 (in thousands) | Metric | 2019 | 2018 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Product revenue, net | $1,789 | $2,794 | $(1,005) | (36%) | | Gross profit | $1,386 | $2,315 | $(929) | (40%) | | Sales and marketing | $1,535 | $2,977 | $(1,442) | (48%) | | Operating loss | $(1,379) | $(2,083) | $704 | (34%) | | Net loss | $(2,501) | $(1,589) | $(912) | 57% | Comparison of Results for the Six Months Ended June 30 (in thousands) | Metric | 2019 | 2018 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Product revenue, net | $3,239 | $5,728 | $(2,489) | (43%) | | Gross profit | $2,536 | $5,011 | $(2,475) | (49%) | | Sales and marketing | $5,066 | $6,373 | $(1,307) | (21%) | | Operating loss | $(5,450) | $(4,451) | $(999) | 22% | | Net loss | $(6,690) | $(3,739) | $(2,951) | 79% | Financial Condition, Liquidity and Capital Resources As of June 30, 2019, the company had $3.7 million in cash, sufficient only through Q3 2019, raising going concern doubts, with increased cash used in operations offset by $5.5 million from financing activities - Cash and cash equivalents were $3.7 million as of June 30, 2019, compared to $3.2 million as of December 31, 2018[249] - Net cash used in operating activities for the first six months of 2019 was $5.0 million, compared to $2.0 million for the same period in 2018. The increase was primarily due to a higher net loss and unfavorable changes in working capital[250] - Net cash provided by financing activities was $5.5 million for the first six months of 2019, mainly from proceeds from private placements, a related party promissory note, and a convertible note[252] Quantitative and Qualitative Disclosures About Market Risk The company identifies interest rate risk on cash and cash equivalents as its principal market risk, with no material exposure to foreign currency fluctuations due to its domestic U.S. market focus - The company's main market risk consists of interest rate risk on its cash and cash equivalents[269] - Due to a focus on the domestic U.S. market, the company does not have any material exposure to foreign currency rate fluctuations[269] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of June 30, 2019. The report also states there were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls - The Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period, the company's disclosure controls and procedures were effective at the reasonable assurance level[272] - There were no changes in internal control over financial reporting during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal controls[273] PART II - OTHER INFORMATION Risk Factors Significant risks include substantial doubt about the company's ability to continue as a going concern, potential NYSE American delisting, heavy dependence on Avenova, intense competition, reliance on third-party manufacturers, and potential litigation - There is substantial doubt about the company's ability to continue as a going concern, as it has sustained operating losses and expects 2019 expenses to exceed revenues. Current funding may only be sufficient through Q3 2019[277] - The company is not in compliance with NYSE American's minimum stockholders' equity requirements and is subject to delisting procedures if its plan to regain compliance, which was accepted by the exchange, is not successful[279] - The company's future success is largely dependent on the successful commercialization of Avenova, which constituted approximately 98% of its revenue for 2018[294] - The company relies on a limited number of pharmaceutical wholesalers (McKesson, Cardinal Health, AmerisourceBergen) for distribution and solely on Amazon.com for its Avenova Direct sales, making it vulnerable to disruptions in these relationships[312] - China Pioneer and Mr. Jian Ping Fu beneficially own approximately 25% and 26% of the company's common stock, respectively, giving them significant influence over corporate matters[283][290] Exhibits This section lists all the exhibits filed with or incorporated by reference into the 10-Q report. These include corporate governance documents, forms of warrants, various agreements (employment, lease, purchase, and financing), and officer certifications required by the SEC - The report includes exhibits such as the Amended and Restated Certificate of Incorporation, various warrant agreements, a Secured Convertible Promissory Note, a Common Stock Purchase Agreement, and officer certifications (31.1, 31.2, 32.1, 32.2)[353][354][355]