NovaBay(NBY) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents NovaBay's unaudited condensed consolidated financial statements and management's discussion 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 for the periods ended September 30, 2020, and December 31, 2019 Condensed Consolidated Balance Sheets: September 30, 2020 (unaudited) and December 31, 2019 This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Cash and cash equivalents | $13,413 | $6,937 | $6,476 | 93.36% | | Total current assets | $16,012 | $9,381 | $6,631 | 70.69% | | TOTAL ASSETS | $17,082 | $11,220 | $5,862 | 52.25% | | Total current liabilities | $3,003 | $5,687 | $(2,684) | -47.19% | | Total liabilities | $3,200 | $10,247 | $(7,047) | -68.77% | | Total stockholders' equity | $13,882 | $973 | $12,909 | 1326.72% | Condensed Consolidated Statements of Operations and Comprehensive Loss: Three and nine months ended September 30, 2020 and 2019 (unaudited) This section details the company's financial performance, including revenues, expenses, and net loss Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Change (YoY) | % Change (YoY) | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :----------- | :------------- | | Product revenue, net | $2,167 | $1,615 | $552 | 34% | | Total sales, net | $2,170 | $1,615 | $555 | 34% | | Gross profit | $1,634 | $1,214 | $420 | 35% | | Total operating expenses | $3,696 | $2,926 | $770 | 26% | | Operating loss | $(2,062) | $(1,712) | $(350) | 20% | | Non-cash (loss) gain on changes in fair value of warrant liability | $(1,589) | $1,480 | $(3,069) | -207% | | Other income (expense), net | $429 | $(719) | $1,148 | -160% | | Net loss and comprehensive loss | $(3,221) | $(282) | $(2,939) | 1042% | | Net loss per share (basic) | $(0.08) | $(0.01) | $(0.07) | 700% | | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change (YoY) | % Change (YoY) | | :------------------------------------------------ | :----------------------------- | :----------------------------- | :----------- | :------------- | | Product revenue, net | $8,038 | $4,854 | $3,184 | 66% | | Total sales, net | $8,046 | $4,895 | $3,151 | 64% | | Gross profit | $4,889 | $3,750 | $1,139 | 30% | | Total operating expenses | $9,557 | $10,912 | $(1,355) | -12% | | Operating loss | $(4,668) | $(7,162) | $2,494 | -35% | | Non-cash (loss) gain on changes in fair value of warrant liability | $(5,224) | $936 | $(6,160) | -658% | | Other income (expense), net | $605 | $(1,166) | $1,771 | -152% | | Net loss and comprehensive loss | $(9,285) | $(6,972) | $(2,313) | 33% | | Net loss per share (basic) | $(0.28) | $(0.36) | $0.08 | -22.22% | Condensed Consolidated Statements of Cash Flows: Nine months ended September 30, 2020 and 2019 (unaudited) This section outlines cash flows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change (YoY) | % Change (YoY) | | :------------------------------------------ | :----------------------------- | :----------------------------- | :----------- | :------------- | | Net cash used in operating activities | $(3,276) | $(6,500) | $3,224 | -49.60% | | Net cash used in investing activities | $(5) | $(19) | $14 | -73.68% | | Net cash provided by financing activities | $9,757 | $12,356 | $(2,599) | -21.03% | | Net increase in cash, cash equivalents, and restricted cash | $6,476 | $5,837 | $639 | 10.95% | | Cash, cash equivalents and restricted cash, end of period | $13,888 | $9,495 | $4,393 | 46.27% | Condensed Consolidated Statements of Stockholders' Equity (Deficit): Three and nine months ended September 30, 2020 and 2019 (unaudited) This section details changes in stockholders' equity, including net loss, warrant reclassification, and stock issuances Stockholders' Equity (Deficit) Highlights (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | Change | | :------------------------------------------------ | :----------- | :----------- | :------- | | Balance at period end | $13,882 | $973 | $12,909 | | Reclassification of warrant liability to equity | $9,293 | — | $9,293 | | Issuance of common stock, net of offering costs | $5,220 | — | $5,220 | | Issuance of common stock in connection with exercise of warrants, net | $6,425 | — | $6,425 | Notes to Condensed Consolidated Financial Statements (unaudited) This section provides detailed explanations of significant accounting policies, fair value measurements, and specific financial accounts NOTE 1. ORGANIZATION This note describes NovaBay Pharmaceuticals, Inc.'s business, primary products, and financial outlook - NovaBay Pharmaceuticals, Inc. is a medical device company primarily focused on eye care, with Avenova® as its main FDA-cleared product[21] - During Q2 2020, the company's primary revenue source was from third-party manufactured disposable KN95 facial coverings due to COVID-19 demand, but these are not anticipated to be a significant future revenue source[21] - Management believes existing cash and cash equivalents, along with cash flows from product sales, will be sufficient to meet operating expenses through at least November 12, 2021[23] NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting principles and methods used in preparing the financial statements - Revenue recognition varies by channel: webstore/Amazon sales are recognized upon customer receipt/delivery, while sales to major distribution partners are recognized upon transfer of control (sell-in basis) with contract liabilities for estimated reversals[48][49][50] - Warrants classified as liabilities are recorded at fair value at each balance sheet date, with changes recognized as non-cash gain or loss in the income statement, using Black-Scholes, Binomial Lattice, or Monte Carlo models[60] - The company adopted ASU 2018-13 (Fair Value Measurement) effective January 1, 2020, with no material impact, and is evaluating ASU 2016-13 (Credit Losses) for January 1, 2023, and ASU 2019-12 (Income Taxes) for Q1 2021[67][68][69] NOTE 3. FAIR VALUE MEASUREMENTS This note details the valuation methodologies and classifications for assets and liabilities measured at fair value - Restricted cash and deposits are classified as Level 1 fair value measurements, while warrant liabilities and the TLF Bio Innovation consulting service liability are classified as Level 3, requiring significant management judgment[71][72][73] - The warrant liability significantly decreased by $9.1 million due to the amendment and exercise of 2019 Domestic and Foreign Warrants, and by $197 thousand from the modification of 2019 Ladenburg Warrants in July 2020[72] - The embedded derivative liability related to the Convertible Note was fully settled in September 2020[74] NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS This note provides a breakdown of prepaid expenses and other current assets, including insurance and sales rebates Prepaid Expenses and Other Current Assets (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------------- | :----------- | :----------- | | Prepaid insurance | $314 | $94 | | Prepaid inventory | $84 | — | | Prepaid sales rebates | $63 | $401 | | Total prepaid expenses and other current assets | $695 | $886 | NOTE 5. INVENTORY This note details the composition of inventory, including raw materials, finished goods, and reserves for obsolescence Inventory Composition (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------------- | :----------- | :----------- | | Raw materials and supplies | $172 | $185 | | Finished goods | $807 | $554 | | Less: Reserve for excess and obsolete inventory | $(194) | $(247) | | Total inventory, net | $785 | $492 | NOTE 6. PROPERTY AND EQUIPMENT This note presents the net value of property and equipment, along with associated depreciation and amortization expenses Property and Equipment, Net (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------------- | :----------- | :----------- | | Total property and equipment, at cost | $668 | $670 | | Less: accumulated depreciation and amortization | $(592) | $(560) | | Total property and equipment, net | $76 | $110 | - Depreciation and amortization expense for the nine months ended September 30, 2020, was $40 thousand, down from $50 thousand in the prior year[80] NOTE 7. ACCRUED LIABILITIES This note details various accrued liabilities, including settlement obligations and contract liabilities Accrued Liabilities (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | | :------------------------------------------------ | :----------- | :----------- | | Settlement liability related to John McGovern case | $502 | — | | Avenova contract liabilities | $380 | $822 | | Employee payroll and benefits | $246 | $463 | | TLF Bio Innovation consulting service liability | $109 | — | | Total accrued liabilities | $1,655 | $1,778 | NOTE 8. COMMITMENTS AND CONTINGENCIES This note outlines the company's legal, contractual, and other contingent obligations and potential liabilities - The company accrued a $502 thousand liability for an interim arbitration award to its former Interim President & CEO, John McGovern, with the arbitration ongoing for additional damages[86] - The EmeryStation lease and sublease were terminated as of August 31, 2020, resulting in a $54 thousand gain recorded in Q3 2020[90] - Under an agreement with TLF Bio Innovation, the company recorded a $109 thousand consulting expense and related liability for potential warrant issuance upon the probable achievement of the first milestone for the CelleRx relaunch[95] - An international distribution agreement with Microprofit for SARS-CoV-2 Test Kits includes potential warrant issuance to Microprofit officers upon FDA approval, but this issuance was not deemed probable as of September 30, 2020[97] NOTE 9. RELATED PARTY NOTE PAYABLE This note details the repayment of a promissory note to a related party and associated interest expenses - The $1.0 million promissory note payable to Pioneer Pharma (Hong Kong) Company Ltd., a related party, was fully repaid in May 2020 using proceeds from the ATM program[100] - The remaining interest payable of $104 thousand as of September 30, 2020, was settled through the delivery of NeutroPhase units in October 2020[100] Interest Expense Related to Promissory Note (in thousands) | Period | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Three Months Ended Sep 30 | $0 | $45 | | Nine Months Ended Sep 30 | $75 | $175 | NOTE 10. CONVERTIBLE NOTE This note describes the full repayment of the secured convertible promissory note and related interest expenses - The Secured Convertible Promissory Note with Iliad Research and Trading, L.P., with an original principal of $2.2 million, was fully repaid prior to September 30, 2020[103] - The embedded derivative liability related to the Convertible Note was fully settled in September 2020[74][103] Interest Expense Related to Convertible Note (in thousands) | Period | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Three Months Ended Sep 30 | $16 | $293 | | Nine Months Ended Sep 30 | $215 | $615 | NOTE 11. WARRANT LIABILITY This note details the classification, fair value changes, and exercise of various warrant liabilities - As of September 30, 2020, the total warrant liability was $20 thousand, consisting of 38,000 October 2015 Warrants, which are classified as liabilities due to potential cash settlement provisions[125] - In July 2020, the 2019 Domestic Warrants and 2019 Foreign Warrants were exercised at a reduced price of $0.99 per share, generating approximately $6.8 million in gross proceeds, and were reclassified to equity[139] - The 2019 Ladenburg Warrants were also amended in July 2020, reducing their exercise price to $0.99 per share and reclassifying them to equity, meaning they will no longer be adjusted to fair value[123][124][139] Outstanding Warrants Summary (in thousands, except price) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------------- | :----------- | :----------- | | Warrants Outstanding | 7,105 | 8,588 | | Weighted Average Exercise Price | $1.63 | $1.09 | NOTE 12. STOCKHOLDERS' EQUITY (DEFICIT) This note outlines changes in stockholders' equity, including authorized shares, stock issuances, and warrant exercises - The number of authorized shares of common stock was increased from 50,000,000 to 75,000,000 in May 2020 after stockholder approval[133] - During Q2 2020, 5,836,792 shares of common stock were issued under the At-the-Market (ATM) Program, generating $5.6 million in net proceeds[142] - In July 2020, the exercise of 2019 Domestic and Foreign Warrants at a reduced price of $0.99 per share resulted in aggregate gross proceeds of approximately $6.8 million[139] NOTE 13. EQUITY-BASED COMPENSATION This note details the unrecognized compensation cost, stock-based expense, and option grants for employees and directors - As of September 30, 2020, total unrecognized compensation cost related to unvested stock options and restricted stock units was approximately $1,167 thousand, expected to be recognized over a weighted average vesting period of 2.81 years[164] Stock-Based Compensation Expense (in thousands) | Period | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Three Months Ended Sep 30 | $176 | $106 | | Nine Months Ended Sep 30 | $359 | $343 | - The company granted 1,156,000 options to employees and directors and 100,000 options to non-employees during the nine months ended September 30, 2020[166][177] NOTE 14. REVENUE This note provides a breakdown of revenue by product, highlighting contributions from Avenova, KN95 Masks, and other products Revenue Recognized (in thousands) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Total Revenue | $8,046 | $4,895 | | Avenova | $4,509 | $4,645 | | KN95 Masks | $3,081 | — | | Other products | $448 | $209 | - Avenova Direct, launched in June 2019, generated $2.4 million in revenue for the nine months ended September 30, 2020, a significant increase from $0.4 million in the prior year[197] - Prescription Avenova revenue decreased from $3.6 million in the nine months ended September 30, 2019, to $1.6 million in the same period of 2020[194] NOTE 15. EMPLOYEE BENEFIT PLAN This note describes the company's 401(k) plan and the absence of employer contributions during the reported periods - The company has a 401(k) plan for eligible employees but made no contributions during the three and nine months ended September 30, 2020, or 2019[199] NOTE 16. RELATED PARTY TRANSACTIONS This note details revenue and expenses arising from transactions with related parties, including NeutroPhase and China Kington Related Party Revenue (in thousands) | Category | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | | NeutroPhase | $173 | $209 | | Licensing | — | $41 | | Total related party revenue | $173 | $250 | Related Party Expenses (in thousands) | Category | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Commissions to China Kington | $201 | $326 | | Board Director Bob Wu consulting fee | $50 | $50 | | Total related party expenses | $251 | $376 | - The company paid TLF Bio Innovation $188 thousand in cash fees and recorded $109 thousand in consulting service expense related to potential warrant issuance during the nine months ended September 30, 2020[204][205] NOTE 17. PAYCHECK PROTECTION PROGRAM This note describes the receipt and expected forgiveness of the PPP Loan and its recognition as other income - The company received a $901 thousand PPP Loan in May 2020 and used the entire amount for qualifying expenses, expecting full forgiveness[208] - For the nine months ended September 30, 2020, $901 thousand was recognized as other income in the condensed consolidated statements of operations and comprehensive loss[209] NOTE 18. SUBSEQUENT EVENTS This note reports the company's recent regaining of compliance with NYSE American minimum stockholders' equity requirements - On October 13, 2020, the company was notified by NYSE American that it had regained compliance with the minimum stockholders' equity requirements[210] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on NovaBay's financial performance and condition, highlighting the strategic focus on Avenova and the upcoming CelleRx relaunch, the temporary impact of KN95 Mask sales, and detailed comparisons of financial results for the three and nine months ended September 30, 2020 and 2019. It also discusses liquidity, capital resources, and key accounting policies Overview This section provides a strategic overview of NovaBay's core products, distribution channels, and future product launches - NovaBay is primarily focused on commercializing Avenova, an FDA-cleared eye care product, through four main distribution channels: Avenova Direct, retail pharmacies, Partner Pharmacy Program, and Buy-and-Sell[213][214] - Avenova Direct has become the leading product by unit sales and net revenue, despite a lower average net selling price, and experienced its highest unit sales and net revenue since launch in Q3 2020[215][216] - The company plans to launch a rebranded CelleRx as 'CelleRx Clinical Reset' into the beauty industry in Q4 2020, leveraging its pharmaceutical pedigree with consumer-focused marketing[217] - Sales of KN95 Masks, significant in Q2 2020 due to the COVID-19 pandemic, decreased in Q3 2020 and are not expected to be a significant future revenue source as the company refocuses on its core eyecare business[219] Critical Accounting Policies and Estimates This section discusses key accounting policies and estimates, including revenue recognition, inventory valuation, and warrant classification - The company recorded no reserves for accounts receivable at September 30, 2020, compared to $51 thousand at December 31, 2019[222] - Inventory is valued at the lower of cost or estimated net realizable value, with an allowance for excess and obsolete inventory of $194 thousand at September 30, 2020, down from $247 thousand at December 31, 2019[223] - Revenue recognition policies vary by product and distribution channel, including recognition upon customer receipt for webstore/Amazon sales, transfer of control for major distribution partners, and delivery to end customers for partner pharmacies and bulk KN95 Mask orders[227][228][230][231] - Common stock purchase warrants are classified as liabilities if they require net-cash settlement or give the counterparty a choice of settlement, with fair value changes recorded as non-cash gains or losses[241][242] Results of Operations This section analyzes the company's financial performance, comparing revenues, expenses, and net loss for the reported periods Comparison of the Three Months Ended September 30, 2020 and 2019 This section compares the company's financial results for the three months ended September 30, 2020, and 2019 - Product revenue, net, increased by $0.6 million (34%) to $2.2 million, driven by a $0.2 million increase in Avenova revenue and $0.2 million from PhaseOne sales[245] - Gross profit increased by $0.4 million (35%) to $1.6 million, primarily due to increased sales of Avenova and PhaseOne[249] - Research and development expenses increased by $76 thousand (155%) to $125 thousand, mainly due to regulatory expenses for the Microprofit Agreement[250] - A non-cash loss of $1.6 million on changes in fair value of warrant liability was recorded in Q3 2020, compared to a $1.5 million gain in Q3 2019, significantly impacting net loss[253] - Other income, net, was $429 thousand, primarily from $432 thousand recognized under the PPP Loan program[255] Comparison of the Nine Months Ended September 30, 2020 and 2019 This section compares the company's financial results for the nine months ended September 30, 2020, and 2019 - Product revenue, net, increased by $3.2 million (66%) to $8.0 million, primarily due to $3.1 million from KN95 Mask sales, with no comparable revenue in 2019[258] - Avenova revenue decreased by $0.1 million to $4.5 million, as a lower average net selling price partially offset an increase in Avenova Direct unit sales[259] - Sales and marketing expenses decreased by $1.9 million (29%) to $4.7 million, mainly due to reduced sales representative headcount and lower travel expenses, partially offset by increased digital advertising for Avenova Direct and CelleRx relaunch costs[263] - A non-cash loss of $5.2 million on changes in fair value of warrant liability was recorded, compared to a $0.9 million gain in the prior year, contributing to a higher net loss[265] - Other income, net, was $605 thousand, including $901 thousand recognized from the PPP Loan, partially offset by interest expenses from related party notes[267] Financial Condition, Liquidity and Capital Resources This section assesses the company's cash position, liquidity, and sources and uses of capital - Cash and cash equivalents increased to $13.4 million as of September 30, 2020, from $6.9 million at December 31, 2019[269] - Management believes existing cash and cash flows from product sales will be sufficient to meet operating expenses through at least November 12, 2021[269] - Net cash used in operating activities decreased by 49.6% to $3.3 million for the nine months ended September 30, 2020, compared to $6.5 million in the prior year[270][271] - Net cash provided by financing activities was $9.8 million, including $5.2 million from the ATM Program and $7.1 million from warrant exercises, offset by debt repayments[274] Net Operating Losses and Tax Credit Carryforwards This section details the company's federal and state net operating loss and tax credit carryforwards - As of December 31, 2019, the company had federal net operating loss (NOL) carryforwards of $111.0 million and state NOL carryforwards of $90.5 million[276] - Federal tax credit carryforwards were $1.3 million and state tax credits were $0.3 million as of December 31, 2019[276] - The ability to utilize these NOL and tax credit carryforwards may be limited due to potential ownership changes under Section 382 of the Internal Revenue Code[277][308] Inflation This section addresses the impact of inflation on the company's business and operating results - Management does not believe inflation has had a material impact on the business and operating results during the periods presented, nor is it expected to in the near future[278] Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements as of the reporting date - The company had no off-balance sheet arrangements as of September 30, 2020[279] Seasonality This section describes the seasonal patterns affecting the company's business, particularly in the first quarter - The company's business experiences seasonality, with the first quarter typically being the lowest revenue quarter due to consumers satisfying health insurance deductibles and changes to copays[280] Contractual Obligations This section outlines the company's future cash commitments from facility and equipment leases Contractual Cash Commitments (in thousands) as of September 30, 2020 | Contractual Obligations | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | | :---------------------- | :--------------- | :-------- | :-------- | :---------------- | :---- | | Facility leases | $435 | $185 | $0 | $0 | $620 | | Equipment leases | $16 | $17 | $0 | $0 | $33 | | Total | $451 | $202 | $0 | $0 | $653 | Recent Events This section reports the company's recent regaining of compliance with NYSE American listing requirements - On October 13, 2020, the company was notified by NYSE American that it had regained compliance with the minimum stockholders' equity requirements[284] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NovaBay's primary market risk is interest rate risk associated with its cash and cash equivalents. The company has no material exposure to foreign currency rate fluctuations due to its predominant focus on the domestic U.S. market - The company's market risk consists principally of interest rate risk on its cash and cash equivalents[285] - There is no material exposure to foreign currency rate fluctuations due to the company's focus on the domestic U.S. market[285] 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 September 30, 2020, concluding they were effective at a reasonable assurance level. No material changes in internal control over financial reporting occurred during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2020[288] - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2020[289] PART II. OTHER INFORMATION This section provides additional information, including risk factors, exhibits, and official signatures ITEM 1A. RISK FACTORS This section details various risks that could materially and adversely affect NovaBay's business, financial condition, or results of operations. These risks span liquidity concerns, factors related to common stock ownership, and operational challenges including the impact of COVID-19, regulatory compliance, competition, and intellectual property protection Risks Relating to Our Liquidity This section addresses risks associated with the company's ability to achieve and maintain sustained profitability - The company has a history of net losses and may never achieve or maintain sustained profitability, requiring significant revenue generation from products like Avenova and the relaunched CelleRx[293] Risks Relating to Owning Our Common Stock This section outlines risks related to common stock ownership, including delisting, price fluctuations, and dilution - The company faces a risk of delisting from NYSE American if it fails to maintain minimum stockholders' equity standards, despite regaining compliance on October 13, 2020[294][295] - The price of common stock may fluctuate substantially due to various factors, including new product announcements, competitor actions, and general economic conditions[296][298] - Large stockholders, such as China Pioneer (12.7% ownership) and China Kington, may exert significant influence over corporate matters, potentially not aligning with the interests of other stockholders[299][303][304] - Potential future warrant issuances (Microprofit Warrants for 12% of outstanding common stock and TLF Bio Warrants for up to 2 million shares) could dilute the ownership percentages of existing stockholders[305][307] Risks Relating to Our Business This section covers operational risks, including the impact of COVID-19, regulatory compliance, competition, and intellectual property - The COVID-19 pandemic has adversely affected the business, causing a slowdown in Avenova sales in Q2 2020 and potentially in the future, and increasing reliance on work-from-home policies[309] - There is no assurance that the PPP Loan will be fully forgiven, and a default could trigger immediate repayment of all outstanding amounts[311][312] - The Test Kits may not gain market acceptance or receive necessary FDA Regulatory Approvals, potentially preventing the realization of anticipated revenue[313][314] - The company relies on third-party manufacturers for its products, including Avenova and Test Kits, which poses risks related to timing, quantity, quality, and supply chain delays, especially due to COVID-19[35][327] - Revenue generated from KN95 Masks and Test Kits is likely temporary and not expected to be a long-term source of revenue beyond the current COVID-19 pandemic[317] - Future success is largely dependent on the successful commercialization of Avenova and its continued FDA clearance as a medical device, with risks of FDA requiring drug approval or additional clinical trials[318][319][321] - The company operates in an intensely competitive medical device market, facing larger competitors with greater resources, which could render its products obsolete or uncompetitive[346][347] - None of the company's products are reimbursed by federal healthcare programs, and reliance on non-governmental payors may lead to reduced or limited reimbursement[349] - The current patent portfolio, particularly the lack of a composition of matter patent for Neutrox, leaves the company vulnerable to competitors developing similar products[361] - The company is subject to ongoing FDA obligations, potential product recalls, and strict limitations on marketing claims, with risks of enforcement actions for off-label promotion or non-compliance[322][324][338][339][340] - Compliance with complex U.S. healthcare fraud and abuse and health information privacy and security laws (e.g., Anti-Kickback Statute, False Claims Act, HIPAA) is critical, as violations could result in severe penalties[368][369][370] - Significant disruptions of information technology systems or breaches of information security could adversely affect business operations, leading to loss of confidential information, financial harm, and reputational damage[373] ITEM 6. EXHIBITS This section provides a comprehensive list of all exhibits filed with or incorporated by reference into the 10-Q report. These exhibits include various corporate documents, financial agreements, compensation plans, and regulatory filings, offering detailed supporting information for the report's content - Exhibits include organizational documents (Amended and Restated Certificate of Incorporation, Bylaws), various warrant forms (October 2015, 2019 Domestic, 2019 Foreign, Microprofit, TLF Bio, New Warrant), and indemnity agreements[377] - Key agreements listed are the ATM Offering Agreement, PPP Loan Promissory Note, Services Agreement with TLF Bio Innovation, International Distribution Agreement with Shenzhen Microprofit Biotech, and Intermediary Distribution Agreement with Chongqing Pioneer Pharma Holdings Limited[378][380] - The section also includes certifications from the Principal Executive Officer and Principal Financial Officer, as well as XBRL instance and taxonomy documents[380] 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 November 12, 2020, affirming 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, on November 12, 2020[383]