NovaBay(US:NBY)2022-08-11 20:10markdown 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)