NovaBay(NBY) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Unaudited condensed consolidated financial statements and management's discussion, detailing financial condition, operations, and going concern doubt ITEM 1. FINANCIAL STATEMENTS Presents unaudited condensed consolidated financial statements, including balance sheets, operations, equity, cash flows, and detailed accounting notes Condensed Consolidated Balance Sheets Details the company's financial position, including assets, liabilities, and stockholders' equity, as of September 30, 2022, and December 31, 2021 | ASSETS (in thousands) | Sep 30, 2022 (Unaudited) (in thousands) | Dec 31, 2021 (in thousands) | | :---------------------- | :-------------------------------------- | :-------------------------- | | Cash and cash equivalents | $3,868 | $7,504 | | Accounts receivable, net | $2,133 | $1,668 | | Inventory, net | $4,068 | $3,220 | | Total current assets | $10,613 | $13,170 | | TOTAL ASSETS | $22,376 | $23,978 | | LIABILITIES (in thousands) | Sep 30, 2022 (Unaudited) (in thousands) | Dec 31, 2021 (in thousands) | | :----------------------- | :-------------------------------------- | :-------------------------- | | Accounts payable | $1,097 | $1,045 | | Accrued liabilities | $2,168 | $2,092 | | Warrant liability | $2,827 | $9,558 | | Total liabilities | $8,592 | $13,807 | | Total stockholders' equity | $13,784 | $10,171 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $22,376 | $23,978 | - Cash and cash equivalents decreased by $3,636 thousand from December 31, 2021, to September 30, 2022. Total assets decreased by $1,602 thousand, while total liabilities decreased by $5,215 thousand, primarily due to a significant reduction in warrant liability. Total stockholders' equity increased by $3,613 thousand[13] Condensed Consolidated Statements of Operations and Comprehensive Loss Outlines the company's financial performance, including revenue, gross profit, operating loss, and net loss for the periods ended September 30, 2022 and 2021 | (in thousands, except per share data) | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Product revenue, net | $3,816 | $2,259 | $10,743 | $7,012 | | Total sales, net | $3,826 | $2,265 | $10,761 | $7,031 | | Gross profit | $2,375 | $1,553 | $6,026 | $4,837 | | Operating loss | $(457) | $(2,289) | $(4,991) | $(5,668) | | Net loss and comprehensive loss | $(136) | $(2,289) | $(2,402) | $(5,666) | | Net loss attributable to common stockholders | $(5,793) | $(2,289) | $(8,059) | $(5,666) | | Net loss per share (basic and diluted) | $(0.10) | $(0.05) | $(0.15) | $(0.13) | - For the three months ended September 30, 2022, product revenue increased by 69% YoY to $3.816 million, and gross profit increased by 53% YoY to $2.375 million. Operating loss significantly improved from $(2.289) million to $(0.457) million. Net loss attributable to common stockholders increased due to a $5.657 million adjustment to accumulated deficit from Series B Preferred Stock conversion price[15] - For the nine months ended September 30, 2022, product revenue increased by 53% YoY to $10.743 million, and gross profit increased by 25% YoY to $6.026 million. Operating loss improved from $(5.668) million to $(4.991) million. Net loss attributable to common stockholders increased due to the same Series B Preferred Stock adjustment[15] Condensed Consolidated Statements of Stockholders' Equity Details changes in stockholders' equity, including preferred stock, common stock, additional paid-in capital, and accumulated deficit, for the periods presented | (in thousands) | Preferred Stock Amount (in thousands) | Common Stock Amount (in thousands) | Additional Paid-In Capital (in thousands) | Accumulated Deficit (in thousands) | Total Stockholders' Equity (in thousands) | | :------------- | :------------------------------------ | :--------------------------------- | :---------------------------------------- | :--------------------------------- | :---------------------------------------- | | Balance at Dec 31, 2021 | $680 | $478 | $150,900 | $(141,887) | $10,171 | | Net loss | - | - | - | $(111) | $(111) | | Reclassification of Private Placement Warrants | - | - | $7,502 | - | $7,502 | | Balance at Mar 31, 2022 | $609 | $514 | $158,621 | $(141,998) | $17,746 | | Net loss | - | - | - | $(2,155) | $(2,155) | | Balance at Jun 30, 2022 | $570 | $535 | $158,793 | $(144,153) | $15,745 | | Net loss | - | - | - | $(136) | $(136) | | Modification of common stock warrants | - | - | $1,922 | - | $1,922 | | Exercise of warrants, net of offering costs | - | $115 | $171 | - | $286 | | Reclassification of common stock warrants to liability | - | - | $(3,825) | - | $(3,825) | | Adjustment of Series B Preferred Stock conversion price | - | - | $5,657 | $(5,657) | - | | Balance at Sep 30, 2022 | $570 | $650 | $162,510 | $(149,946) | $13,784 | - Total stockholders' equity increased from $10,171 thousand at December 31, 2021, to $13,784 thousand at September 30, 2022. Key changes include a $7,502 thousand reclassification of private placement warrants to equity, a $1,922 thousand gain from modification of common stock warrants, and a $5,657 thousand adjustment to Series B Preferred Stock conversion price which impacted additional paid-in capital and accumulated deficit[17] Condensed Consolidated Statements of Cash Flows Summarizes cash flows from operating, investing, and financing activities, showing the net change in cash and cash equivalents for the periods presented | (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :------------- | :-------------------------------------------- | :-------------------------------------------- | | Net loss | $(2,402) | $(5,666) | | Net cash used in operating activities | $(5,445) | $(4,874) | | Net cash used in investing activities | $(112) | $(44) | | Net cash provided by financing activities | $1,598 | $1,994 | | Net decrease in cash, cash equivalents, and restricted cash | $(3,959) | $(2,924) | | Cash, cash equivalents and restricted cash, end of period | $4,020 | $9,503 | - Net cash used in operating activities increased to $5,445 thousand for the nine months ended September 30, 2022, from $4,874 thousand in the prior year, despite a lower net loss. This was influenced by non-cash adjustments like a $4,470 thousand unrealized gain on warrant liabilities and a $1,922 thousand non-cash loss on warrant modification[21] - Cash, cash equivalents, and restricted cash decreased by $3,959 thousand, ending at $4,020 thousand as of September 30, 2022, compared to $9,503 thousand in the prior year[21] Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures for the condensed consolidated financial statements, covering organization, accounting policies, and financial instrument details NOTE 1. ORGANIZATION Describes NovaBay's business, product lines (eyecare, skincare, wound care), DERMAdoctor acquisition, segment reporting, and going concern doubt - 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[25] - The company significantly expanded its business by acquiring DERMAdoctor, LLC on November 5, 2021, adding over 30 dermatologist-developed skincare products[27] - The company is managed as two reportable segments: (1) Optical & Wound Care and (2) Skin Care[28] - 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 second quarter of 2023[29] NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines significant accounting policies, including changes for fulfillment fees and selling commissions, now expensed as incurred, with no impact on net loss or cash - The company changed its accounting policy for fulfillment fees paid to third-party online retailers (e.g., Amazon), now expensing them as product cost of goods sold, effective Q3 2022. Previously, these fees were netted against revenue[37][68] - An immaterial error was identified and corrected regarding selling commissions paid to third-party online retailers, which are now expensed as sales and marketing expenses, effective Q3 2022. Previously, these were also netted against revenue[38][69] - These accounting changes and revisions to prior period amounts had no impact on operating loss, net loss, comprehensive loss, net loss per share, cash, or ending cash balances for any periods presented[37][39][68][69] Impact of Accounting Changes on Financial Statement Line Items (Three Months Ended Sep 30, 2022, in thousands) | Line Item | As Previously Reported (in thousands) | Selling Commissions (in thousands) | Fulfillment Fees (in thousands) | As Revised (in thousands) | | :-------------------- | :------------------------------------ | :--------------------------------- | :------------------------------ | :------------------------ | | Product revenue, net | $3,268 | $265 | $283 | $3,816 | | Product cost of goods sold | $1,168 | - | $283 | $1,451 | | Sales and marketing | $1,570 | $265 | - | $1,835 | NOTE 3. BUSINESS COMBINATION Details the November 2021 DERMAdoctor acquisition for $12.0 million, resulting in $4.5 million goodwill from assembled workforce and synergies - NovaBay completed the DERMAdoctor Acquisition on November 5, 2021, acquiring 100% of DERMAdoctor for a closing purchase price of $12.0 million and potential future earnout payments up to $3.0 million[92] Final Allocation of Purchase Price for DERMAdoctor Acquisition (in thousands) | Asset/Liability Category | Fair Value (in thousands) | | :----------------------- | :------------------------ | | Tangible net assets and liabilities | $2,779 | | Intangible Assets: | | | Customer relationships | $290 | | Trade secrets / product formulations | $2,890 | | Trade names | $2,080 | | Total intangible assets | $5,260 | | Net assets acquired | $8,039 | | Purchased consideration | $12,561 | | Goodwill | $4,528 | - Goodwill of $4.528 million is primarily attributable to assembled workforce, expected synergies, and other factors[94] NOTE 4. FAIR VALUE MEASUREMENTS Details fair value measurements of financial assets and liabilities, classifying warrant and contingent earnout liabilities as Level 3 due to unobservable inputs Fair Value Measurements as of September 30, 2022 (in thousands) | Category | Balance at Sep 30, 2022 (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | | :------------------------ | :------------------------------------- | :--------------------- | :--------------------- | :--------------------- | | Assets: | | | | | | Deposit held as a certificate of deposit | $152 | $152 | $— | $— | | Liabilities: | | | | | | Warrant liability | $2,827 | $— | $— | $2,827 | | Contingent earnout liability | $342 | $— | $— | $342 | | Total liabilities | $3,169 | $— | $— | $3,169 | Reconciliation of Level 3 Liabilities (in thousands) | Item | Amount (in thousands) | | :---------------------------------------- | :-------------------- | | Fair value of warrant liability at Dec 31, 2021 | $9,558 | | Decrease in fair value of November 2021 Warrants | $(2,056) | | Reclassification of November 2021 Warrants liability to equity | $(7,502) | | Fair value of warrants issued in connection with 2022 Warrant Reprice Transaction | $5,241 | | Decrease in fair value of warrants issued in connection with 2022 Warrant Reprice Transaction | $(2,414) | | Fair value of warrant liability at Sep 30, 2022 | $2,827 | | Fair value of contingent liability at Dec 31, 2021 | $561 | | Decrease in fair value of contingent liability | $(219) | | Fair value of contingent liability at Sep 30, 2022 | $342 | NOTE 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets decreased to $544 thousand by September 30, 2022, mainly due to reduced prepaid inventory and consultants | (in thousands) | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :------------------------ | :-------------------------- | :-------------------------- | | Prepaid insurance | $149 | $138 | | Tenant allowance | $119 | - | | Prepaid inventory | $91 | $368 | | Prepaid dues and subscriptions | $39 | $18 | | Prepaid patents | $12 | $9 | | Prepaid sales rebates | $11 | $19 | | Prepaid rent | - | $14 | | Prepaid consultants | - | $68 | | Prepaid marketing costs | $14 | - | | Other | $109 | $144 | | Total prepaid expenses and other current assets | $544 | $778 | NOTE 6. INVENTORY Total inventory, net, increased to $4,068 thousand by September 30, 2022, driven by finished goods, despite a decreased reserve for obsolete inventory | (in thousands) | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Raw materials and supplies | $1,195 | $1,179 | | Finished goods | $3,328 | $2,682 | | Less: Reserve for excess and obsolete inventory | $(455) | $(641) | | Total inventory, net | $4,068 | $3,220 | NOTE 7. PROPERTY AND EQUIPMENT Net property and equipment increased to $217 thousand by September 30, 2022, due to additions in computer equipment, production equipment, and leasehold improvements | (in thousands) | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Office and laboratory equipment | $20 | $20 | | Furniture and fixtures | $157 | $157 | | Computer equipment and software | $479 | $464 | | Production equipment | $138 | $114 | | Leasehold improvements | $152 | $79 | | Total property and equipment, at cost | $946 | $834 | | Less: accumulated depreciation and amortization | $(729) | $(641) | | Total property and equipment, net | $217 | $193 | - Depreciation and amortization expense was $29 thousand for the three months ended September 30, 2022 (vs. $13 thousand in 2021) and $88 thousand for the nine months ended September 30, 2022 (vs. $32 thousand in 2021)[103] NOTE 8. GOODWILL Goodwill remained constant at $4.5 million with no impairment recognized, primarily from the DERMAdoctor Acquisition - Goodwill was $4.5 million as of both September 30, 2022, and December 31, 2021[104] - No goodwill impairment was recognized as of September 30, 2022, and there were no material measurement period adjustments recorded for the DERMAdoctor Acquisition[104] NOTE 9. OTHER INTANGIBLE ASSETS Other intangible assets, net, decreased to $4,928 thousand due to amortization of customer relationships and trade secrets, while trade names remain indefinite-lived Other Intangible Assets (in thousands) | Asset Category | Gross (in thousands) | Accumulated Amortization (in thousands) | Net (Sep 30, 2022) (in thousands) | Net (Dec 31, 2021) (in thousands) | | :----------------------------- | :------------------- | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Indefinite-lived: | | | | | | Trade names | $2,080 | $— | $2,080 | $2,080 | | Amortizable: | | | | | | Customer relationships | $290 | $(38) | $252 | $283 | | Trade secrets / product formulations | $2,890 | $(294) | $2,596 | $2,837 | | Total other intangible assets | $5,260 | $(332) | $4,928 | $5,200 | - Amortization expense was $90 thousand for the three months ended September 30, 2022, and $272 thousand for the nine months ended September 30, 2022. No comparable expense in 2021[106] NOTE 10. ACCRUED LIABILITIES Accrued liabilities increased to $2,168 thousand by September 30, 2022, primarily due to higher contract liabilities, partially offset by lower payroll and benefits | (in thousands) | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :------------------------------ | :-------------------------- | :-------------------------- | | Contract liabilities | $1,703 | $1,289 | | Employee payroll and benefits | $292 | $443 | | Inventory purchases | $10 | $— | | Other | $163 | $360 | | Total accrued liabilities | $2,168 | $2,092 | NOTE 11. LINE OF CREDIT The $500 thousand DERMAdoctor line of credit was terminated and repaid in full on January 6, 2022, with no outstanding balance - The $500 thousand line of credit associated with DERMAdoctor was terminated and repaid in full on January 6, 2022[108] - As of September 30, 2022, there was no outstanding balance on the line of credit[108] NOTE 12. COMMITMENTS AND CONTINGENCIES Details indemnification agreements, immaterial legal matters, and lease commitments totaling $2,391 thousand as of September 30, 2022 - The company indemnifies its officers and directors, and provides indemnification in agreements with clinical research organizations, investigators, clinical sites, suppliers, and others. Historically, costs related to these indemnification provisions have been immaterial[109][110] - As of September 30, 2022, there were no legal matters expected to have a material adverse effect on the company's financial position, results of operations, or cash flows[111] - The company leases office space in Emeryville, California (extended through July 31, 2027) and a 19,136 sq ft facility in Riverside, Missouri (expires December 31, 2024)[112][113] Future Lease Payments (in thousands) | Period | Amount (in thousands) | | :---------------------- | :-------------------- | | 2022 (remaining 3 months) | $141 | | 2023 | $535 | | 2024 | $549 | | 2025 | $431 | | 2026 | $445 | | Thereafter | $290 | | Total future minimum lease payments | $2,391 | | Less imputed interest | $(233) | | Total | $2,158 | NOTE 13. WARRANT LIABILITY Details accounting and fair value measurements of common stock warrants, including reclassifications and adjustments due to amendments and exercise restrictions - The 2019 Domestic and Foreign Warrants were exercised in Q3 2020, and their fair values were transferred to equity. The 2019 Ladenburg Warrants were amended in Q3 2020, reclassified from liability to equity, and are no longer adjusted to fair value[118][119] - The Amended July 2020 Warrants and November 2021 Warrants were reclassified as liabilities due to exercise restrictions until March 9, 2023, or the effectiveness of a Reverse Stock Split[120][121] - The September 2022 Warrants, issued in connection with the 2022 Warrant Reprice Transaction, were classified as liabilities due to similar exercise restrictions[124] Fair Value and Key Assumptions for Warrants (as of Sep 30, 2022) | Warrant Type | Fair Value (in thousands) | Expected Price Volatility | Expected Term (years) | Risk-Free Interest Rate | Dividend Yield | | :----------------------- | :------------------------ | :------------------------ | :-------------------- | :---------------------- | :------------- | | Amended July 2020 Warrants | $100 | 79.6% | 3.3 | 3.58% | 0.00% | | November 2021 Warrants (amended) | $1,900 | 79.6% | 6.0 | 3.43% | 0.00% | | September 2022 Warrants | $800 | 79.6% | 6.0 | 3.43% | 0.00% | NOTE 14. STOCKHOLDERS' EQUITY Details changes in stockholders' equity, including common and preferred stock, and the impact of the 2022 Warrant Reprice Transaction, which triggered a $5.7 million deemed dividend - On September 9, 2022, the 2022 Warrant Reprice Transaction amended November 2021 Warrants and certain July 2020 Warrants, reducing their exercise price to $0.18 per share and extending expiration dates[126][140] - The 2022 Warrant Reprice Transaction resulted in a $1.9 million non-cash loss on modification of common stock warrants[127] - New September 2022 Warrants were issued to participants, exercisable for 11,475,000 shares of common stock at $0.18 per share, expiring September 11, 2028[127] - The 2022 Warrant Reprice Transaction triggered the anti-dilution feature of Series B Preferred Stock, adjusting its conversion price to $0.18 and resulting in a $5.7 million deemed dividend[139] Outstanding Warrants as of September 30, 2022 (in thousands) | Item | Warrants (in thousands) | Weighted Average Exercise Price | | :------------------------ | :---------------------- | :------------------------------ | | Outstanding at Dec 31, 2021 | 7,082 | $1.63 | | Warrants granted | 37,500 | $0.53 | | Warrants exercised | (11,475) | $0.18 | | Warrants modified and not exercised | (30,825) | $0.18 | | Outstanding at Sep 30, 2022 | 2,282 | $1.59 | NOTE 15. EQUITY-BASED COMPENSATION Details equity compensation plans, stock option and RSU activity, with total stock-based compensation expense of $130 thousand for the nine months ended September 30, 2022 - The company operates under the 2007 and 2017 Omnibus Incentive Plans, granting stock options and restricted stock units to employees, directors, and consultants[156][157] - As of September 30, 2022, 3,049,127 shares were available for future awards under the 2017 Plan[157] Stock Option Activity (in thousands, except per share data) | Item | Awards (in thousands) | Weighted Average Exercise Price | | :------------------------ | :-------------------- | :------------------------------ | | Outstanding at Dec 31, 2021 | 4,449 | $1.39 | | Options granted | 626 | $0.28 | | Restricted stock units granted | 180 | $— | | Options forfeited/cancelled | (362) | $3.50 | | Outstanding at Sep 30, 2022 | 4,743 | $1.07 | Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :------------------------ | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Research and development | $5 | $2 | $14 | $8 | | Sales and marketing | $12 | $53 | $37 | $118 | | General and administrative | $(225) | $169 | $79 | $576 | | Total stock-based compensation expense | $(208) | $224 | $130 | $702 | NOTE 16. DISTRIBUTION AGREEMENTS Outlines revenue recognition from Avenova Spray and DERMAdoctor distribution agreements, with contract liabilities increasing to $1,703 thousand by September 30, 2022 - Contract liabilities for product sales discounts and allowances increased from $1,289 thousand at December 31, 2021, to $1,703 thousand at September 30, 2022[176] - Avenova Spray is distributed through major pharmacy partners (McKesson, Cardinal Health, AmerisourceBergen) and direct-to-consumer online channels (Amazon.com, Avenova.com, Walmart.com, CVS.com)[179][181] - Over-the-counter Avenova Spray revenue was $1.6 million for the three months ended September 30, 2022 (stable YoY) and $5.1 million for the nine months ended September 30, 2022 (slight increase YoY)[181] - DERMAdoctor products are sold through wholesale distribution relationships (Costco, Amazon), with a reserve balance of $0.3 million as of September 30, 2022[182] NOTE 17. EMPLOYEE BENEFIT PLAN NovaBay began 401(k) matching contributions in 2022, totaling $15 thousand for three months and $101 thousand for nine months ended September 30, 2022 - Beginning January 1, 2022, NovaBay initiated matching contributions to its 401(k) plan, matching 100% of the first 3% of compensation deferred, plus 50% of the next 2%[183] - Company matching contributions were $15 thousand for the three months and $101 thousand for the nine months ended September 30, 2022, with no comparable expenditures in 2021[183] NOTE 18. RELATED PARTY TRANSACTIONS Related party revenue from NeutroPhase products was $657 thousand for the nine months ended September 30, 2022, with $648 thousand cost of goods sold Related Party Revenue and Cost of Goods Sold (in thousands) | Item | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :-------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Related party revenue: | | | | | | NeutroPhase | $— | $— | $657 | $175 | | Cost of goods sold: | | | | | | NeutroPhase | $— | $— | $648 | $131 | NOTE 19. SEGMENT REPORTING NovaBay operates in two segments: Optical & Wound Care and Skin Care, with Skin Care contributing $1.3 million net sales and $0.2 million operating loss for Q3 2022 - NovaBay operates in two reportable segments: (1) Optical & Wound Care and (2) Skin Care, established after the DERMAdoctor Acquisition in November 2021[187] Segment Financial Information (in thousands) | Segment | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :-------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net sales: | | | | | | Optical & Wound Care | $2,507 | $2,265 | $7,646 | $7,031 | | Skin Care | $1,319 | $— | $3,115 | $— | | Consolidated | $3,826 | $2,265 | $10,761 | $7,031 | | Operating loss: | | | | | | Optical & Wound Care | $(257) | $(2,289) | $(3,605) | $(5,668) | | Skin Care | $(200) | $— | $(1,386) | $— | | Consolidated | $(457) | $(2,289) | $(4,991) | $(5,668) | NOTE 20. SUBSEQUENT EVENTS Subsequent events include a NYSE American low stock price notification, leading to stockholder approval for a 1-for-35 reverse stock split effective November 15, 2022 - On October 3, 2022, NovaBay received a notification from NYSE American regarding non-compliance with Section 1003(f)(v) due to a low stock price, requiring a reverse stock split or sustained price improvement by April 3, 2023[190] - On November 10, 2022, stockholders approved a 1-for-10 to 1-for-35 reverse stock split, with the Board approving a 1-for-35 split effective November 15, 2022[191][192] - The Reverse Stock Split and other stockholder approvals are necessary for the September 2022 Warrants, amended November 2021 Warrants, and amended July 2020 Warrants to become exercisable, and to satisfy a closing condition of the 2022 Private Placement[191] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion of financial condition and operations, covering market focus, DERMAdoctor impact, financing activities, liquidity challenges, and NYSE compliance Overview Provides a high-level summary of NovaBay's business, market focus (eyecare, skincare, wound care), and the strategic impact of the DERMAdoctor acquisition - NovaBay Pharmaceuticals focuses on three major markets: Eyecare (Avenova Antimicrobial Lid and Lash Solution), Skincare (DERMAdoctor products acquired in November 2021), and Wound Care (NeutroPhase and PhaseOne)[195][196][197][200] - The DERMAdoctor acquisition significantly expanded the skincare business, funded partly by the sale of Series B Preferred Stock and November 2021 Warrants for $15.0 million[198][199] Recent Developments Highlights recent corporate actions, including the 2022 Warrant Reprice Transaction, new warrant issuances, the 2022 Private Placement, and NYSE American listing compliance issues - The 2022 Warrant Reprice Transaction on September 9, 2022, reduced the exercise price of November 2021 Warrants and certain July 2020 Warrants to $0.18 per share, extended expiration dates, and resulted in gross proceeds of approximately $2.1 million[203][204] - New September 2022 Warrants were issued, exercisable for 11,475,000 shares at $0.18 per share, becoming exercisable after March 9, 2023, or the Reverse Stock Split[204] - A 2022 Private Placement was entered into to sell Series C Preferred Stock and Series A-1/A-2 Warrants, expecting $3.3 million in gross proceeds, contingent on stockholder approvals and a Reverse Stock Split[206][207] - NovaBay received a NYSE American notification on October 3, 2022, for non-compliance due to low stock price, requiring a reverse stock split or sustained price improvement by April 3, 2023. Stockholders approved a Reverse Stock Split on November 10, 2022[208][209] Financial Overview and Outlook Presents a summary of the company's financial performance, liquidity, and capital resources, highlighting the going concern doubt and strategies to address it - Net loss attributable to common stockholders was $8.1 million ($0.15 per share) for the nine months ended September 30, 2022, compared to $5.7 million ($0.13 per share) in the prior year[210] - The company had an accumulated deficit of $150 million and net cash used in operating activities of $5.4 million for the nine months ended September 30, 2022[210] - NovaBay believes existing cash and cash flows will fund operations into at least Q2 2023, but sustained operating losses raise substantial doubt about its ability to continue as a going concern[212] - To address liquidity, the company is evaluating additional capital raises (debt/equity), spending reductions, out-licensing, and new product license agreements[212] Critical Accounting Policies and Estimates and Change in Accounting and Revision of Prior Period Financial Statements Discusses key accounting policies and estimates, including recent changes to fulfillment fees and selling commissions, with no impact on net loss or cash balances - The company's financial statements require significant estimates and judgments, particularly for revenue recognition, R&D costs, stock-based compensation, income taxes, earnout contingency, and common stock warrant liability[215] - An accounting policy change in Q3 2022 now expenses fulfillment fees as cost of goods sold and selling commissions as sales and marketing expenses, with retrospective revisions to prior periods. These changes had no impact on operating loss, net loss, or cash balances[216] Results of Operations Details revenue growth from DERMAdoctor acquisition, improved operating loss, and the impact of non-cash warrant modifications and fair value changes on net loss Comparison of the Three Months Ended September 30, 2022 and 2021 Compares key financial metrics for the three months ended September 30, 2022 and 2021, highlighting revenue growth, gross profit, and operating loss changes Key Financials (Three Months Ended Sep 30, in thousands) | Item | 2022 (in thousands) | 2021 (in thousands) | Dollar Change (in thousands) | Percent Change | | :---------------------------- | :------------------ | :------------------ | :--------------------------- | :------------- | | Product revenue, net | $3,816 | $2,259 | $1,557 | 69% | | Total sales, net | $3,826 | $2,265 | $1,561 | 69% | | Product cost of goods sold | $1,451 | $712 | $739 | 104% | | Gross profit | $2,375 | $1,553 | $822 | 53% | | Operating loss | $(457) | $(2,289) | $1,832 | (80%) | | Non-cash loss on modification of common stock warrants | $(1,922) | $— | $(1,922) | (100%) | | Non-cash gain on changes in fair value of warrant liabilities | $2,414 | $— | $2,414 | 100% | | Net loss and comprehensive loss | $(136) | $(2,289) | $2,153 | (94%) | - Product revenue, net, increased by $1.6 million (69%) primarily due to $1.3 million from DERMAdoctor product sales, which had no comparable revenue in 2021[222][223] - Avenova Spray revenue decreased by $0.2 million due to lower physician-dispensed and pharmacy channel sales, partially offset by increased over-the-counter online sales[224] - Operating loss significantly improved by $1.8 million (80%) due to higher gross profit and decreased sales & marketing and general & administrative expenses, despite non-cash warrant modification losses[219][228][230][231] Comparison of the Nine Months Ended September 30, 2022 and 2021 Compares key financial metrics for the nine months ended September 30, 2022 and 2021, detailing revenue growth, gross profit, and operating loss changes Key Financials (Nine Months Ended Sep 30, in thousands) | Item | 2022 (in thousands) | 2021 (in thousands) | Dollar Change (in thousands) | Percent Change | | :---------------------------- | :------------------ | :------------------ | :--------------------------- | :------------- | | Product revenue, net | $10,743 | $7,012 | $3,731 | 53% | | Total sales, net | $10,761 | $7,031 | $3,730 | 53% | | Product cost of goods sold | $4,735 | $2,194 | $2,541 | 116% | | Gross profit | $6,026 | $4,837 | $1,189 | 25% | | Operating loss | $(4,991) | $(5,668) | $677 | (12%) | | Non-cash loss on modification of common stock warrants | $(1,922) | $— | $(1,922) | (100%) | | Non-cash gain on changes in fair value of warrant liabilities | $4,470 | $— | $4,470 | 100% | | Non-cash gain on changes in fair value of contingent liability | $219 | $— | $219 | 100% | | Net loss and comprehensive loss | $(2,402) | $(5,666) | $3,264 | (58%) | - Product revenue, net, increased by $3.7 million (53%) primarily due to $3.1 million from DERMAdoctor product sales[239][240] - Avenova Spray revenue decreased by $0.6 million due to increased returns of expired products and lower physician-dispensed/pharmacy sales, partially offset by online over-the-counter growth[241] - Operating loss improved by $0.7 million (12%) due to higher gross profit and a slight decrease in sales & marketing expenses, despite increased general & administrative costs and non-cash warrant modification losses[236][245][247][248] Financial Condition, Liquidity and Capital Resources Assesses the company's financial health, liquidity position, and capital resources, emphasizing the going concern doubt and strategies for future funding - Cash and cash equivalents were $3.9 million as of September 30, 2022, down from $7.5 million at December 31, 2021, including $2.1 million from the 2022 Warrant Reprice Transaction[255] - The company's planned operations raise substantial doubt about its ability to continue as a going concern beyond Q2 2023 due to sustained operating losses and negative cash flows[255] - Net cash used in operating activities was $5.4 million for the nine months ended September 30, 2022, compared to $4.9 million in 2021[257][258] - Net cash provided by financing activities was $1.6 million for the nine months ended September 30, 2022, primarily from warrant exercises, offset by line of credit repayment[260] - As of December 31, 2021, the company had federal NOL carryforwards of $125.9 million and state NOLs of $106.8 million, subject to utilization restrictions[263] Inflation Discusses the impact of inflation on the company's costs and strategies to manage fluctuations in raw materials, labor, and transportation expenses - The company's costs are subject to fluctuations from raw materials, packaging, labor, transportation, and operating supplies. Managing these fluctuations through pricing, cost savings, and sourcing is crucial for maintaining margins and market share[266] Off-Balance Sheet Arrangements Confirms that NovaBay Pharmaceuticals had no off-balance sheet arrangements as of September 30, 2022 - NovaBay Pharmaceuticals did not have any off-balance sheet arrangements as of September 30, 2022[267] Seasonality Describes the seasonal sales patterns for Avenova branded products and DERMAdoctor products, influenced by health insurance deductibles and holidays - Avenova branded products experience seasonality, with Q1 typically being the lowest revenue quarter due to health insurance deductibles. Non-prescription Avenova sales and other Avenova products show less seasonality[268] - DERMAdoctor products have seasonal sales patterns: sunscreen/antiperspirants are higher in summer, moisturizers in fall/winter, and an uptick in Q4 around holidays, especially in the US and China[269] Contractual Obligations Outlines the company's contractual cash commitments, primarily related to facility and equipment leases, as of September 30, 2022 Contractual Cash Commitments as of September 30, 2022 (in thousands) | Contractual Obligations | Less than 1 year (in thousands) | 1-3 years (in thousands) | 3-5 years (in thousands) | More than 5 years (in thousands) | Total (in thousands) | | :---------------------- | :------------------------------ | :----------------------- | :----------------------- | :------------------------------- | :------------------- | | Facility leases | $532 | $1,446 | $412 | $— | $2,390 | | Equipment leases | $1 | $— | $— | $— | $1 | | Total | $533 | $1,446 | $412 | $— | $2,391 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Details market risk, primarily interest rate risk on cash and equivalents, minimized by short-term investments, with minimal foreign currency exposure - The company's market risk is primarily interest rate risk on cash and cash equivalents, managed by investing in short-term marketable securities (money market funds, Treasury bills/notes, CDs, commercial paper, corporate/municipal bonds)[273][274] - A 10% change in interest rates would have had an immaterial effect on the investment portfolio as of September 30, 2022, and December 31, 2021[274] - The company has not had any material exposure to foreign currency rate fluctuations due to its focus on the domestic U.S. market[275] ITEM 4. CONTROLS AND PROCEDURES Management concluded disclosure controls and procedures were effective as of September 30, 2022, with no material changes in internal controls - As of September 30, 2022, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[278] - No material changes in internal controls over financial reporting occurred during the quarter ended September 30, 2022[279] PART II. OTHER INFORMATION Provides additional information on legal proceedings, risk factors, and equity securities, highlighting going concern, potential delisting, and dilution risks ITEM 1. LEGAL PROCEEDINGS Incorporates legal matters from Note 12, confirming no material adverse legal proceedings as of September 30, 2022 - The company's legal matters are incorporated by reference from Note 12, which states there were no legal matters that would result in material adverse liability as of September 30, 2022[282] ITEM 1A. RISK FACTORS Outlines key risks, including going concern doubt, potential NYSE delisting due to low stock price, and significant dilution from warrant and preferred stock issuances - There is substantial doubt about NovaBay's ability to continue as a going concern, as operating losses are expected to continue, and current funding may only last into Q2 2023 (or Q4 2023 with the 2022 Private Placement)[285] - The company received a NYSE American notification for non-compliance due to low stock price, and failure to effect a reverse stock split or demonstrate sustained price improvement by April 3, 2023, could lead to delisting[287] - The 2022 Warrant Reprice Transaction and the proposed 2022 Private Placement could result in significant dilution for existing stockholders, with an aggregate of 96,468,114 shares of common stock potentially issuable upon conversion/exercise[294] - Anti-dilution provisions in Series B and expected in Series C Preferred Stock mean future equity offerings at lower prices will trigger conversion price reductions, leading to more shares issued and further dilution[296] - A proposed Reverse Stock Split may not increase the stock price proportionately, could decrease liquidity, and may result in stockholders owning 'odd lots' with higher transaction costs[299][301][302] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Reports no unregistered sales of equity securities or use of proceeds for the period - There were no unregistered sales of equity securities and use of proceeds to report[305] ITEM 3. DEFAULTS UPON SENIOR SECURITIES Indicates that there were no defaults upon senior securities - There were no defaults upon senior securities[306] ITEM 4. MINE SAFETY DISCLOSURE States that mine safety disclosure is not applicable to the company - Mine safety disclosure is not applicable[307] ITEM 5. OTHER INFORMATION Indicates that there is no other information to report - There is no other information to report[308] ITEM 6. EXHIBITS Lists all exhibits filed or incorporated by reference, including agreements, certificates, and certifications - The exhibit index lists various documents filed or incorporated by reference, including the Membership Unit Purchase Agreement for DERMAdoctor, amendments to the Certificate of Incorporation, forms of warrants (July 2020, November 2021, September 2022, Series A-1, Series A-2), and related agreements for the 2022 Warrant Reprice Transaction and 2022 Private Placement[312] - Certifications by the Principal Executive Officer and Principal Financial Officer (Rule 13a-14(a) and 18 U.S.C. 1350) are included[313]