NovaBay(NBY) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents NovaBay Pharmaceuticals, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents NovaBay Pharmaceuticals, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations and comprehensive loss, cash flows, and stockholders' equity, along with detailed notes explaining significant accounting policies, fair value measurements, and specific financial accounts Condensed Consolidated Balance Sheets This table presents the company's financial position, detailing total assets, liabilities, and stockholders' equity at June 30, 2020, and December 31, 2019 | Metric | June 30, 2020 (Unaudited) (in thousands) | December 31, 2019 (in thousands) | | :-------------------------- | :--------------------------------------- | :------------------------------- | | Total Assets | $13,272 | $11,220 | | Total Liabilities | $12,289 | $10,247 | | Total Stockholders' Equity | $983 | $973 | Condensed Consolidated Statements of Operations and Comprehensive Loss This statement outlines the company's financial performance, including product revenue, gross profit, operating loss, and net loss for the three and six months ended June 30, 2020 and 2019 | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Product revenue, net | $3,979 | $1,789 | $5,871 | $3,239 | | Total sales, net | $3,984 | $1,789 | $5,876 | $3,280 | | Gross profit | $1,944 | $1,386 | $3,255 | $2,536 | | Operating loss | $(1,071) | $(1,379) | $(2,606) | $(5,450) | | Non-cash loss on changes in fair value of warrant liability | $(3,772) | $(487) | $(3,635) | $(544) | | Net loss and comprehensive loss | $(4,482) | $(2,501) | $(6,064) | $(6,690) | | Net loss per share (basic and diluted) | $(0.15) | $(0.14) | $(0.21) | $(0.38) | Condensed Consolidated Statements of Cash Flows This statement details the cash flows from operating, investing, and financing activities, showing the net change in cash and cash equivalents for the six months ended June 30, 2020 and 2019 | Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(6,064) | $(6,690) | | Net cash used in operating activities | $(1,906) | $(5,000) | | Net cash used in investing activities | $0 | $(19) | | Net cash provided by financing activities | $3,744 | $5,504 | | Net increase in cash, cash equivalents, and restricted cash | $1,838 | $485 | | Cash, cash equivalents and restricted cash, end of period | $9,250 | $4,143 | Condensed Consolidated Statements of Stockholders' Equity (Deficit) This statement presents changes in common stock, additional paid-in capital, and accumulated deficit, reflecting the evolution of stockholders' equity from December 31, 2019, to June 30, 2020 | Metric (in thousands) | Balance at December 31, 2019 | Balance at June 30, 2020 | | :------------------------------------------------ | :--------------------------- | :----------------------- | | Common Stock (Shares) | 27,938 | 34,648 | | Common Stock (Amount) | $279 | $346 | | Additional Paid-In Capital | $125,718 | $131,725 | | Accumulated Deficit | $(125,024) | $(131,088) | | Total Stockholders' Equity (Deficit) | $973 | $983 | - Issuance of common stock, net of offering costs, contributed $5.22 million to additional paid-in capital during the three months ended June 30, 2020[20] Notes to Condensed Consolidated Financial Statements (Unaudited) These notes provide detailed explanations of the company's significant accounting policies, financial statement line items, and other relevant disclosures for a comprehensive understanding of its financial position and performance NOTE 1. ORGANIZATION NovaBay Pharmaceuticals, Inc. focuses on eye care with Avenova®, temporarily expanded into KN95 masks in Q2 2020, and expects sufficient cash for operations through June 2021 - NovaBay's main product is Avenova®, an FDA-cleared product for eye care, specifically for blepharitis and dry-eye disease[22] - In Q2 2020, the company started selling disposable KN95 facial coverings as a temporary response to COVID-19 demand[22][23] - Management expects existing cash and cash flows from product sales to cover operating expenses through at least June 30, 2021[24] NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details significant accounting policies, including revenue recognition for Avenova and temporary KN95 mask sales, inventory, and warrant liabilities, along with the impact of recent accounting pronouncements Product Revenue by Type (in thousands) | Product (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | KN95 Masks | $2,839 | $0 | $3,012 | $0 | | Avenova | $1,140 | $1,580 | $2,686 | $3,030 | | Other products | $0 | $209 | $173 | $209 | | Total product revenue, net | $3,979 | $1,789 | $5,871 | $3,239 | | Other revenue, net | $5 | $0 | $5 | $41 | | Total sales, net | $3,984 | $1,789 | $5,876 | $3,280 | - The Company does not expect KN95 Masks to provide a long-term source of revenue[34] Revenue Concentration by Partner | Major distribution or collaboration partner | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Avenova Direct via Amazon | 12% | *% | 21% | *% | | Avenova distributor A | *% | 13% | *% | 18% | | Avenova distributor B | *% | 12% | *% | 15% | | Avenova distributor C | *% | 23% | *% | 19% | - Net loss per share (basic and diluted) was $(0.15) for the three months ended June 30, 2020, and $(0.21) for the six months ended June 30, 2020[15][69] - The Company adopted ASU 2018-13 (Fair Value Measurement) effective January 1, 2020, with no material impact on financial statements[70] NOTE 3. FAIR VALUE MEASUREMENTS This note details fair value measurements for financial assets and liabilities, classifying warrant and embedded derivative liabilities as Level 3 due to unobservable inputs, with a significant increase in warrant liability fair value Fair Value of Liabilities (in thousands) | Liability (in thousands) | June 30, 2020 (Level 3) | December 31, 2019 (Level 3) | | :----------------------- | :---------------------- | :-------------------------- | | Warrant liability | $7,724 | $4,089 | | Embedded derivative liability | $1 | $3 | | Total liabilities | $7,725 | $4,092 | - The fair value of warrant liability and embedded derivative liability increased from $4.09 million at December 31, 2019, to $7.73 million at June 30, 2020, primarily due to a $3.77 million increase in warrant liability[78] NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS This note provides a breakdown of prepaid expenses and other current assets, which increased from $886 thousand at December 31, 2019, to $1,116 thousand at June 30, 2020, mainly driven by higher prepaid insurance and receivables from an at-the-market offering Prepaid Expenses and Other Current Assets (in thousands) | Item (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------ | :------------ | :---------------- | | Prepaid insurance | $455 | $94 | | Prepaid sales rebates | $142 | $401 | | Receivables from at-the-marketing offering | $96 | $0 | | Related party receivables | $79 | $0 | | Total prepaid expenses and other current assets | $1,116 | $886 | NOTE 5. INVENTORY This note details the composition of inventory, which includes raw materials, goods in progress, and finished goods. Net inventory increased from $492 thousand at December 31, 2019, to $626 thousand at June 30, 2020, despite a decrease in the reserve for excess and obsolete inventory Inventory Composition (in thousands) | Item (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------ | :------------ | :---------------- | | Raw materials and supplies | $180 | $185 | | Finished goods | $652 | $554 | | Less: Reserve for excess and obsolete inventory | $(206) | $(247) | | Total inventory, net | $626 | $492 | NOTE 6. PROPERTY AND EQUIPMENT This note provides a breakdown of property and equipment, net of accumulated depreciation. Total net property and equipment decreased from $110 thousand at December 31, 2019, to $84 thousand at June 30, 2020 Property and Equipment (in thousands) | Item (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------ | :------------ | :---------------- | | Total property and equipment, at cost | $664 | $670 | | Less: accumulated depreciation and amortization | $(580) | $(560) | | Total property and equipment, net | $84 | $110 | - Depreciation and amortization expense was $14 thousand for Q2 2020 (down from $16 thousand in Q2 2019) and $28 thousand for YTD 2020 (down from $33 thousand in YTD 2019)[81] NOTE 7. ACCRUED LIABILITIES This note details the components of accrued liabilities, which decreased from $1,778 thousand at December 31, 2019, to $1,282 thousand at June 30, 2020, primarily due to a reduction in Avenova contract liabilities and employee payroll and benefits Accrued Liabilities (in thousands) | Item (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------ | :------------ | :---------------- | | Avenova contract liabilities | $478 | $822 | | Employee payroll and benefits | $237 | $463 | | Consulting service | $210 | $109 | | Total accrued liabilities | $1,282 | $1,778 | NOTE 8. COMMITMENTS AND CONTINGENCIES This note details indemnification agreements, a pending arbitration claim, the termination of Emeryville lease agreements by August 31, 2020, and new distribution and related-party services agreements - The company indemnifies its officers and directors, and also provides indemnification to clinical research organizations, investigators, and suppliers, with the fair value of these agreements deemed minimal due to insurance[84][85] - The company is defending an arbitration claim from a former Interim President & CEO seeking $370 thousand in severance and additional damages[86] - The EmeryStation lease and sublease agreement will terminate as of August 31, 2020, following the landlord's exercise of an early termination right[89][208] - Entered into a services agreement with TLF Bio Innovation Lab LLC (related party) to manage the relaunch of CelleRx, with potential warrants for up to 2 million shares upon successful completion of conditions[95] - Signed an international distribution agreement with Shenzhen Microprofit Biotech Co., LTD for SARS-CoV-2 IgG and IgM Antibody Combined Test Kits in the US, with potential warrants for 12% of outstanding common stock upon FDA approval[96] NOTE 9. RELATED PARTY NOTES PAYABLE This note details the $1.0 million promissory note payable to Pioneer Pharma (Hong Kong) Company Ltd., which was fully repaid on May 14, 2020, using proceeds from the ATM program. A remaining interest payable of $104 thousand as of June 30, 2020, will be settled through the delivery of NeutroPhase units - The $1.0 million principal balance of the Promissory Note to Pioneer Pharma (Hong Kong) Company Ltd. was repaid on May 14, 2020, using proceeds from the ATM program[98] - As of June 30, 2020, $104 thousand in remaining interest payable will be settled through the delivery of NeutroPhase units[98] Interest Expense (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest expense | $27 | $98 | $75 | $130 | NOTE 10. CONVERTIBLE NOTE This note details a $2.2 million convertible note with Iliad Research and Trading, L.P., maturing September 26, 2020, including an immaterial Level 3 embedded derivative liability, with $1.2 million repaid year-to-date 2020 - The Convertible Note has an original principal amount of $2.2 million, bears 10% interest, and matures on September 26, 2020[101] - The embedded derivative liability, including call and put options, was deemed immaterial as of June 30, 2020[107] - The Lender has redeemed $200 thousand of the Convertible Note every month since September 27, 2019[110] - During the six months ended June 30, 2020, the Company repaid a total of $1.2 million in cash against the outstanding balance of the convertible note[110] Interest Expense (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest expense | $59 | $302 | $199 | $322 | NOTE 11. WARRANT LIABILITY This note details various warrant issuances, their Level 3 classification, exercise price adjustments, and expirations, with a significant Q2 2020 fair value increase and a July 2020 repricing event generating $6.4 million in net proceeds - All warrants are classified as Level 3 liabilities due to potential cash settlement provisions upon specified fundamental transactions[111][117][121] - Exercise prices for July 2011, March 2015, and October 2015 Warrants were reduced to $0.2061 per share in May 2019 due to price protection provisions[115] - July 2011 and March 2015 Warrants expired in Q1 2020, and June 2019 Warrants expired on June 17, 2020, without being exercised[115][150][152] Outstanding Warrants and Liabilities (in thousands) | Warrant Type (in thousands) | Shares Outstanding (June 30, 2020) | Warrant Liability (June 30, 2020) | | :-------------------------- | :--------------------------------- | :-------------------------------- | | October 2015 Warrants | 38 | $39 | | 2019 Domestic Warrants | 4,199 | $4,567 | | 2019 Foreign Warrants | 2,700 | $2,937 | | 2019 Ladenburg Warrants | 168 | $181 | | Total Outstanding | 7,105 | $7,724 | - Subsequent to June 30, 2020, a Warrant Inducement Transaction reduced the exercise price of 2019 Domestic, Foreign, and Ladenburg Warrants to $0.99, generating approximately $6.4 million in net proceeds from exercises and leading to the issuance of new warrants[206] NOTE 12. STOCKHOLDERS' EQUITY (DEFICIT) This note details changes in stockholders' equity, including the conversion of preferred stock, common stock issuances, and warrant-related adjustments. The company increased its authorized common stock to 75 million shares in May 2020 and raised $5.6 million through an At-the-Market (ATM) offering in Q2 2020 - 2.7 million shares of Series A Preferred Stock automatically converted into common stock in October 2019 after stockholder approval[128][129] - The number of authorized common stock shares was increased from 50 million to 75 million in May 2020[133] - During Q2 2020, 5,836,792 shares of common stock were issued under the At-the-Market (ATM) Program for total net proceeds of $5.6 million[139] - A down round feature was triggered in May 2019, resulting in a $29 thousand dividend treated as a reduction to income available to common shareholders[142] - During Q1 2020, 70,000 March 2015 Warrants were exercised for $14 thousand, and 228,571 June 2019 Warrants were exercised for $199 thousand[149][151] - During Q2 2020, 571,428 June 2019 Warrants were exercised for $497 thousand[152] NOTE 13. EQUITY-BASED COMPENSATION This note describes the company's equity compensation plans (2007 and 2017 Omnibus Incentive Plans) and summarizes stock option and RSU activity. Total unrecognized compensation cost for unvested awards was approximately $743 thousand as of June 30, 2020, expected to be recognized over a weighted average vesting period of 2.32 years - As of June 30, 2020, there were 3,044,090 shares available for future awards under the 2017 Omnibus Incentive Plan[157] - During the six months ended June 30, 2020, the company granted 520,000 stock options and 160,000 RSUs to employees and directors[159][162][164] - Total unrecognized compensation cost related to unvested stock options and RSUs was approximately $743 thousand as of June 30, 2020, with a remaining weighted average vesting period of 2.32 years[160] Stock-Based Compensation Expense (in thousands) | Expense Category (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $7 | $13 | $14 | $24 | | Sales and marketing | $11 | $27 | $20 | $46 | | General and administrative | $108 | $83 | $149 | $167 | | Total stock-based compensation expense | $126 | $123 | $183 | $237 | NOTE 14. REVENUE This note explains the company's revenue recognition policies for various channels, including webstore sales, Amazon.com, and distribution partners. It highlights the significant increase in KN95 Mask revenue in 2020 and the successful launch of Avenova Direct, while also noting a decrease in prescription Avenova revenue - Revenue from KN95 Masks was $2.8 million for the three months ended June 30, 2020, and $3.0 million for the six months ended June 30, 2020, with no comparable revenue in 2019[193] - Avenova Direct, launched on June 1, 2019, generated $0.6 million in revenue for the three months ended June 30, 2020, and $1.4 million for the six months ended June 30, 2020[192] Prescription Avenova Distribution Agreements Revenue (in thousands) | Revenue Source (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Prescription Avenova distribution agreements | $400 | $1,300 | $900 | $2,500 | - The Partner Pharmacy Program increased from 4 to 16 pharmacies, improving gross-to-net and per-script profitability[191] NOTE 15. EMPLOYEE BENEFIT PLAN The company maintains a 401(k) plan for all eligible employees but did not make any contributions to the plan during the three and six months ended June 30, 2020, or 2019 - The Company made no contributions to its 401(k) plan during the three and six months ended June 30, 2020, or 2019[194] NOTE 16. RELATED PARTY TRANSACTIONS This note details various transactions with related parties, including the repayment of a promissory note to Pioneer Pharma, sales of NeutroPhase, purchases of KN95 Masks, and consulting fees. It also highlights a receivable from Chongqing Pioneer for shipping costs - The $1.0 million principal balance of the Promissory Note to Pioneer Pharma was repaid in Q2 2020[195] NeutroPhase Sales (in thousands) | Revenue Source (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | NeutroPhase sales | $0 | $209 | $173 | $209 | - The company purchased KN95 Masks through an affiliate of China Pioneer, resulting in $418 thousand in related party accounts payable as of June 30, 2020[198] - Related party fees paid to China Kington for brokering warrant exercises were $29 thousand in Q2 2020 and $12 thousand in Q1 2020[199] - Paid $75 thousand to TLF Bio Innovation Lab (related party) for services related to the CelleRx relaunch during Q2 2020[200] NOTE 18. PAYCHECK PROTECTION PROGRAM The company received a $901 thousand loan under the Paycheck Protection Program (PPP) in May 2020, which it expects to be fully forgiven. $469 thousand was recognized as other income in Q2 2020 as qualifying expenses were incurred, with a deferred income liability of $432 thousand remaining - Received a $901 thousand PPP Loan on May 6, 2020, maturing May 3, 2022, with a 1.00% interest rate[203][204] - The company expects the entire loan amount to be forgiven as it intends to use the funds for Qualifying Expenses[204] - $469 thousand was recognized as other income for the three and six months ended June 30, 2020, related to incurred Qualifying Expenses[205] - A deferred income liability of $432 thousand related to the PPP Loan remained as of June 30, 2020[205] NOTE 19. SUBSEQUENT EVENTS Subsequent to June 30, 2020, the company engaged in a Warrant Inducement Transaction in July 2020, repricing existing warrants to $0.99, generating $6.4 million in net proceeds, and issuing new warrants. Additionally, the EmeryStation lease and sublease were terminated effective August 31, 2020 - In July 2020, the company executed a Warrant Inducement Transaction, reducing the exercise price of 2019 Domestic, Foreign, and Ladenburg Warrants to $0.99 per share[206] - The transaction generated approximately $6.4 million in aggregate net proceeds from the exercise of these warrants[206] - New Warrants were issued to purchase 6,898,566 shares of common stock, exercisable at $1.65 per share and expiring in five and a half years[207] - The EmeryStation lease and sublease agreement were terminated effective August 31, 2020[208] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on NovaBay's financial condition, results of operations, and liquidity. It covers the company's strategic focus on Avenova, the impact of COVID-19, critical accounting policies, and a detailed comparison of financial performance for the three and six months ended June 30, 2020, versus 2019 Overview NovaBay Pharmaceuticals, Inc. focuses on Avenova® sales across multiple channels, experienced Q2 2020 slowdown due to COVID-19 but is recovering, confirmed Avenova kills SARS-CoV-2, and temporarily launched KN95 masks - The company's core business strategy is centered around increasing sales of Avenova® in all distribution channels: Avenova Direct, retail pharmacies, Partner Pharmacy Program, and Buy-and-Sell[214] - Avenova sales experienced a slowdown in Q2 2020 due to decreased patient visits to eyecare specialists caused by the COVID-19 pandemic, but a gradual pickup was observed in June and July[215] - Independent laboratory testing confirmed that Avenova kills SARS-CoV-2, the virus causing COVID-19, which is expected to broaden its appeal[216] - The company launched the sale of KN95 Masks and other personal protection equipment (PPE) in March 2020 as a temporary response to the COVID-19 outbreak[217] Critical Accounting Policies and Estimates This section discusses critical accounting policies and estimates, including allowance for doubtful accounts, inventory, revenue recognition, and common stock warrant liabilities, which involve significant management judgment and may lead to differing actual results - No reserves for accounts receivable were recorded at June 30, 2020, compared to $51 thousand at December 31, 2019[221] - Inventory is stated at the lower of cost or estimated net realizable value (FIFO method), with an allowance for excess and obsolete inventory of $206 thousand at June 30, 2020, and $247 thousand at December 31, 2019[222][223] - Revenue recognition varies by channel: upon shipment for webstore sales, upon fulfillment by Amazon.com, upon transfer of control for distribution partners, and upon delivery for bulk KN95 Mask orders[227][228][229][231] - Common stock warrants classified as liabilities are recorded at fair value at each balance sheet date, with changes recognized as non-cash gains or losses, using Black-Scholes or Binomial Lattice models[236] Results of Operations This section provides a detailed comparison of the company's financial performance for the three and six months ended June 30, 2020, versus the corresponding periods in 2019, highlighting significant changes in sales, gross profit, operating expenses, and net loss, largely influenced by the introduction of KN95 Mask sales and non-cash warrant liability adjustments Comparison of the Three Months Ended June 30, 2020 and 2019 For Q2 2020, total sales increased significantly by 123% to $3.98 million, primarily driven by $2.8 million in KN95 Mask sales. Gross profit rose 40% to $1.94 million. However, net loss increased by 79% to $4.48 million, largely due to a $3.8 million non-cash loss on changes in fair value of warrant liability | Metric (in thousands) | Q2 2020 | Q2 2019 | Dollar Change | Percent Change | | :-------------------- | :------ | :------ | :------------ | :------------- | | Total sales, net | $3,984 | $1,789 | $2,195 | 123% | | Product revenue, net | $3,979 | $1,789 | $2,190 | 122% | | Gross profit | $1,944 | $1,386 | $558 | 40% | | Operating loss | $(1,071)| $(1,379)| $308 | (22%) | | Net loss | $(4,482)| $(2,501)| $(1,981) | 79% | - Product revenue increase was primarily due to $2.8 million in KN95 Mask sales in Q2 2020, with no comparable revenue in 2019[239] - Avenova revenue decreased by $0.5 million to $1.1 million, attributed to a lower average net sales price due to reduced insurance coverage and the launch of Avenova Direct[240] - Non-cash loss on changes in fair value of warrant liability increased significantly to $3.8 million in Q2 2020 from $0.5 million in Q2 2019[246] - Other income (expense), net, shifted from a $387 thousand expense in Q2 2019 to a $362 thousand income in Q2 2020, primarily due to $469 thousand recognized from the PPP loan[248][249] Comparison of the Six Months Ended June 30, 2020 and 2019 For the six months ended June 30, 2020, total sales increased by 79% to $5.88 million, driven by $3.0 million in KN95 Mask sales. Gross profit increased 28% to $3.26 million. Operating loss decreased by 52% to $2.61 million, and net loss decreased by 9% to $6.06 million, despite a significant non-cash loss on warrant liability changes | Metric (in thousands) | YTD 2020 | YTD 2019 | Dollar Change | Percent Change | | :-------------------- | :------- | :------- | :------------ | :------------- | | Total sales, net | $5,876 | $3,280 | $2,596 | 79% | | Product revenue, net | $5,871 | $3,239 | $2,632 | 81% | | Gross profit | $3,255 | $2,536 | $719 | 28% | | Operating loss | $(2,606) | $(5,450) | $2,844 | (52%) | | Net loss | $(6,064) | $(6,690) | $626 | (9%) | - Product revenue increase was primarily due to $3.0 million in KN95 Mask sales in YTD 2020, with no comparable revenue in 2019[251] - Sales and marketing expenses decreased by $2.1 million (41%) to $3.0 million, mainly due to reduced sales representative headcount, partially offset by increased Avenova Direct digital advertising[257] - Non-cash loss on changes in fair value of warrant liability increased to $3.6 million in YTD 2020 from $0.5 million in YTD 2019[259] - Other income (expense), net, was an income of $176 thousand in YTD 2020, compared to an expense of $447 thousand in YTD 2019, primarily due to $469 thousand recognized from the PPP loan[261][262] Financial Condition, Liquidity and Capital Resources The company's cash increased to $8.8 million by June 30, 2020, with management expecting liquidity to cover operations through June 2021, supported by financing activities and reduced operating cash burn, while holding substantial NOL carryforwards - Cash and cash equivalents were $8.8 million as of June 30, 2020, up from $6.9 million at December 31, 2019[263] - Management believes existing cash and cash equivalents, combined with cash flows from product sales, will be sufficient to meet planned operating expenses through at least June 30, 2021[263] - Net cash used in operating activities decreased to $1.9 million for the six months ended June 30, 2020, from $5.0 million in the prior year period[264] - Net cash provided by financing activities was $3.7 million for the six months ended June 30, 2020, primarily from $5.2 million in ATM Program proceeds and $0.7 million from warrant exercises, offset by debt repayments[266] - As of December 31, 2019, the company had federal net operating loss carryforwards of $111.0 million and state net operating loss carryforwards of $90.5 million[268] - The company had no off-balance sheet arrangements as of June 30, 2020[271] Contractual Obligations As of June 30, 2020, the company's total contractual cash commitments were $1.004 million, primarily for facility and equipment leases. Subsequent to the reporting period, the EmeryStation lease and sublease were terminated effective August 31, 2020, which will impact future obligations Contractual Obligations (in thousands) | Contractual Obligations (in thousands) | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | | :----------------------------------- | :--------------- | :-------- | :-------- | :---------------- | :---- | | Facility leases | $672 | $295 | $0 | $0 | $967 | | Equipment leases | $16 | $21 | $0 | $0 | $37 | | Total | $688 | $316 | $0 | $0 | $1,004| - The EmeryStation lease and sublease agreement were terminated effective August 31, 2020, impacting future lease commitments[208][275] - The company anticipates collecting $0.2 million in sublease rental reimbursement in 2020[275] Recent Events Subsequent to the reporting period, the company completed a Warrant Inducement Transaction in July 2020, repricing certain warrants to $0.99, generating $6.4 million in net proceeds, and issuing new warrants. Additionally, the EmeryStation lease and sublease were terminated effective August 31, 2020 - In July 2020, the company executed a Warrant Inducement Transaction, reducing the exercise price of 2019 Domestic, Foreign, and Ladenburg Warrants to $0.99 per share[278] - The transaction generated approximately $6.4 million in aggregate net proceeds from the exercise of these warrants[278] - New Warrants were issued to purchase 6,898,566 shares of common stock, exercisable at $1.65 per share and expiring in five and a half years[279] - The EmeryStation lease and sublease agreement were terminated effective August 31, 2020[208] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risk consists of interest rate risk on its cash and cash equivalents. Due to its focus on the domestic U.S. market for Avenova, it does not have any material exposure to foreign currency rate fluctuations - The company's principal market risk is interest rate risk on its cash and cash equivalents[280] - There is no material exposure to foreign currency rate fluctuations due to the company's focus on the domestic U.S. market[280] ITEM 4. CONTROLS AND PROCEDURES Management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the company's disclosure controls and procedures as of June 30, 2020, and concluded they were effective at a reasonable assurance level. There were no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective at the reasonable assurance level as of June 30, 2020[283] - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2020[285] PART II OTHER INFORMATION This section outlines significant risk factors, including liquidity, stock ownership, tax attributes, and business operations, along with other information such as recent events and exhibits ITEM 1A. RISK FACTORS This section details significant risks including liquidity concerns, potential delisting, stock price volatility, large stockholder influence, and dilution. Business risks encompass COVID-19 impacts, temporary KN95/Test Kit revenues, Avenova commercialization challenges, third-party manufacturing reliance, intense competition, regulatory hurdles, intellectual property, and product liability Risks Relating to Our Liquidity The company has a history of net losses and may never achieve or maintain sustained profitability, requiring significant revenue generation from Avenova and a successful CelleRx relaunch to avoid adverse impacts on its stock price - The company has historically incurred net losses and may never achieve or maintain sustained profitability[288] - Achieving and maintaining profitability requires generating significant revenues, particularly from Avenova sales and a successful relaunch of CelleRx[288] Risks Relating to Owning Our Common Stock Risks include potential delisting from NYSE American if minimum stockholders' equity standards are not met, substantial stock price fluctuations, and the significant influence of large stockholders (Mr. Jian Ping Fu and Pioneer Hong Kong) who collectively own over 30% of common stock. Future warrant issuances could also dilute existing stockholders - The company's stockholders' equity is below NYSE American minimum requirements, and failure to regain compliance could lead to delisting[289] - The market price of the common stock is likely to be volatile due to industry, company-specific, and general economic factors[291][294] - Large stockholders, Mr. Jian Ping Fu (15.3%) and Pioneer Hong Kong (15.0%), could exercise significant influence over corporate matters, potentially not in the best interest of other stockholders[293][298][299][300] - Anti-takeover provisions in the company's charter documents and Delaware law could deter or delay attempts by stockholders to effect changes in control[295][296] - The company does not anticipate paying cash dividends or repurchasing stock, meaning return on investment is limited to stock price appreciation[297] - Potential issuance and exercise of Microprofit Warrants (12% of outstanding common stock) and TLF Bio Warrants (up to 2 million shares) could dilute existing stockholders[301][303] Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. The company's ability to utilize its substantial net operating loss (NOL) carryforwards and tax credits may be limited by Section 382 of the Internal Revenue Code due to past or future ownership changes, potentially resulting in increased future tax liability - The company's ability to use its pre-change net operating loss (NOL) carryforwards and other tax attributes may be limited by Section 382 of the Internal Revenue Code due to past or future ownership changes[304] - Such limitations could result in the expiration of carryforwards before utilization and potentially increase future tax liability[304] Risks Relating to Our Business This section details business risks including COVID-19 impacts, PPP loan forgiveness uncertainty, temporary KN95/Test Kit revenues, Avenova commercialization challenges, reliance on third-party manufacturers, intense competition, regulatory limitations, intellectual property protection, product liability, and healthcare law compliance - The COVID-19 pandemic has adversely affected Avenova sales and operations, with future impacts remaining highly uncertain[305][306] - There is no assurance that the company will obtain full forgiveness for its PPP Loan, potentially leading to repayment liability[307] - Revenue generated from KN95 Masks and potential Test Kits is likely temporary and not expected to be a long-term source of income[313] - Future success is largely dependent on the successful commercialization of Avenova, which faces regulatory, market, and competitive uncertainties[314][316] - Avenova and CelleRx are FDA 510(k) cleared medical devices, not approved drugs, which limits promotional claims and affects insurance reimbursement, posing a risk of FDA enforcement for off-label promotion[318][319][320][328] - The company relies on third-party manufacturers for its products, posing risks related to production yields, quality control, and compliance with cGMP and QSR regulations[323][324][327] - The medical device market is intensely competitive, with larger competitors potentially developing more effective or affordable products, risking obsolescence or uncompetitiveness for NovaBay's products[342][343] - The company faces challenges in protecting its intellectual property, including the risk of patents being challenged, invalidated, or circumvented, and the potential for costly infringement claims[352][353][357] - Product liability lawsuits, even without merit, could result in costly litigation, reduced sales, significant liabilities, and harm to the company's reputation[349][351] - The company is subject to complex U.S. healthcare fraud and abuse and health information privacy and security laws, with potential for severe penalties for non-compliance[364][366] ITEM 5. OTHER INFORMATION This section provides an update on the termination of the EmeryStation office lease and sublease. On August 4, 2020, the landlord exercised its right to terminate the Master Lease, and consequently, the Sublease Agreement also terminated, both effective August 31, 2020 - On August 4, 2020, the EmeryStation landlord exercised its early termination right for the Master Lease[371][373] - Both the Master Lease and the Sublease Agreement for the EmeryStation premises will terminate as of August 31, 2020[372][373] ITEM 6. EXHIBITS This section lists all exhibits filed with or incorporated by reference into the report, including organizational documents, various warrant forms, incentive plans, employment agreements, lease agreements, and other significant contracts such as recent distribution and financing agreements - The exhibit index includes organizational documents (Amended and Restated Certificate of Incorporation, Bylaws)[378] - Various warrant forms (e.g., October 2015, 2019 Domestic, 2019 Foreign, New Warrants) and equity incentive plans (2007 and 2017 Omnibus Incentive Plans) are listed[378][379] - Key agreements such as the International Distribution Agreement with Shenzhen Microprofit Biotech Co., Ltd., the Intermediary Distribution Agreement with Chongqing Pioneer Pharma Holdings Limited, the At the Market Offering Agreement, and the Paycheck Protection Program Promissory Note are included[382] SIGNATURES The report is officially signed on behalf of NovaBay Pharmaceuticals, Inc. by Justin Hall, President and Chief Executive Officer, and Andrew Jones, Chief Financial Officer, on August 6, 2020, confirming its submission in accordance with the Securities Exchange Act of 1934 - The report was signed by Justin Hall, President and Chief Executive Officer, and Andrew Jones, Chief Financial Officer[386] - The signing date for the report was August 6, 2020[385][386]