NovaBay(NBY) - 2023 Q4 - Annual Report

PART I Business NovaBay Pharmaceuticals develops and sells eyecare and wound care products, with Avenova® Antimicrobial Lid and Lash Solution as its leading product - The company's core business focuses on scientifically-created eyecare and wound care products, led by Avenova® Spray, formulated with a proprietary, stable form of hypochlorous acid[16] - On March 25, 2024, the company sold its DERMAdoctor skincare subsidiary to streamline the business, reduce cash burn, and focus on its core eyecare business[17][28] - Avenova Spray is marketed directly to consumers through online channels like Amazon.com and Avenova.com, which was the leading sales channel in 2023, and as a prescription product through eyecare professionals and retail pharmacies[22][23] - The company outsources all manufacturing for its Avenova and former DERMAdoctor products to third-party contract manufacturers in the United States[33] Research and Development Expenses | Year | R&D Expense (in thousands) | | :--- | :--- | | 2023 | $68 | | 2022 | $174 | - The company has raised substantial doubt about its ability to continue as a going concern due to recurring expenses exceeding revenues and the need for additional capital to fund operations[41] Risk Factors The company faces significant risks, including substantial doubt about its ability to continue as a going concern, dependence on Avenova Spray, intense competition, reliance on third-party manufacturers, and potential adverse regulatory actions - There is substantial doubt about the company's ability to continue as a going concern, as current cash resources are not sufficient to fund operations beyond the third quarter of 2024[72] - The company requires additional capital to finance its operations, which may not be available on acceptable terms and could result in significant dilution to existing stockholders[73] Goodwill and Intangible Asset Impairment Charges (DERMAdoctor) | Year Ended Dec 31 | Impairment Charge (in millions) | | :--- | :--- | | 2023 | $2.6 | | 2022 | $6.7 | - The company faces intense competition in the eyecare market from large, well-resourced companies and other over-the-counter products containing hypochlorous acid[77] - Avenova Spray is classified as a cleared medical device, not an approved drug, by the FDA, and its marketability could be halted if the FDA changes this classification, materially harming the business[85][91] - Stockholders face significant dilution risk from the conversion of outstanding Series B and Series C Preferred Stock, convertible notes, and the exercise of warrants, which in aggregate represent a substantial increase over the current outstanding common shares[108][110] - The company is at risk of being delisted from the NYSE American if it fails to comply with continued listing requirements, which would impair its ability to raise capital and reduce stock liquidity[103] Unresolved Staff Comments The company reports that it has no unresolved staff comments - Not Applicable[123] Cybersecurity NovaBay relies on established third-party software providers for its cybersecurity needs, with management and the Board overseeing risk, and no material incidents reported to date - The company relies on third-party software providers like Microsoft 365, Salesforce, and ADP for its cybersecurity, as it lacks in-house information technology personnel[124] - The Board of Directors oversees cybersecurity risk as part of its general risk management function, and management regularly evaluates these risks[125][126] - As of the report date, the company is not aware of any cybersecurity threats that have materially affected or are reasonably likely to materially affect its business, operations, or financial condition[128] Properties The company's principal executive offices are located in Emeryville, California, under a lease expiring July 31, 2027 - The company leases approximately 7,675 square feet of office space for its principal executive offices in Emeryville, California, with the lease expiring on July 31, 2027[129] Legal Proceedings As of December 31, 2023, NovaBay reports no legal proceedings expected to have a material adverse effect on its financial position - As of December 31, 2023, the company had no legal matters that management believed would result in a material adverse effect on its financial condition or operations[131] Mine Safety Disclosures This item is not applicable to the company's operations - Not Applicable[133] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities NovaBay's common stock is listed on the NYSE American under "NBY," and the company has never paid cash dividends, retaining earnings for business operations - The company's common stock is listed on the NYSE American under the trading symbol "NBY"[136] - NovaBay has never paid cash dividends and does not plan to in the foreseeable future, instead retaining earnings for business operations[137] Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights a 2% increase in net sales for 2023, driven by Avenova and wound care products, partially offset by a decline in DERMAdoctor sales, with a significant reduction in operating loss but continued substantial doubt about going concern - In March 2024, the company divested its DERMAdoctor subsidiary for $1.07 million to streamline its business and focus on growth opportunities aligned with its core eyecare business[142][143][144] - The company raised approximately $3.6 million in gross proceeds during 2023 through a private placement of secured convertible notes and a warrant reprice transaction to address its liquidity needs[42][147][148] Goodwill and Asset Impairment of DERMAdoctor Business | Year Ended Dec 31 | Impairment Charge (in millions) | | :--- | :--- | | 2023 | $2.6 | | 2022 | $6.8 | - The company has sustained operating losses and expects expenses to exceed revenues in 2024, raising substantial doubt about its ability to continue as a going concern[179] Results of Operations For 2023, net product revenue increased by 2% to $14.7 million, driven by Avenova and wound care products, while total operating expenses decreased by 30% to $15.5 million, leading to a narrowed operating loss of $7.6 million Comparison of Operations (in thousands) | Statement of Operations | 2023 | 2022 | Dollar Change | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Total sales, net | $14,726 | $14,404 | $322 | 2% | | Gross profit | $7,895 | $7,781 | $114 | 1% | | Total operating expenses | $15,491 | $22,198 | ($6,707) | (30%) | | Operating loss | ($7,596) | ($14,417) | $6,821 | (47%) | | Net loss | ($9,640) | ($10,608) | $968 | (9%) | - Product revenue increased by $0.3 million (2%) year-over-year, primarily due to a $0.2 million increase in Avenova Spray revenue and a $0.5 million increase in wound care products, partially offset by a $0.6 million decrease in DERMAdoctor skincare product revenue[162][163][164][165] - Sales and marketing expenses decreased by $1.3 million (17%) due to lower digital advertising and consulting costs[168] - General and administrative expenses decreased by $1.2 million (15%) reflecting lower average headcount, reduced corporate fees, and lower depreciation and amortization costs following asset impairments in 2022[169] - The company recorded a goodwill and intangible asset impairment charge of $2.6 million in 2023, compared to $6.7 million in 2022, related to the DERMAdoctor business, which was fully impaired as of December 31, 2023[171] Financial Condition, Liquidity and Capital Resources As of December 31, 2023, cash and cash equivalents decreased to $3.1 million, leading to substantial doubt about the company's ability to continue as a going concern, with net cash used in operating activities at $4.1 million Cash and Cash Equivalents | Date | Amount (in millions) | | :--- | :--- | | Dec 31, 2023 | $3.1 | | Dec 31, 2022 | $5.4 | - Management has determined that existing cash and projected cash flows will only be sufficient to fund operations into the third quarter of 2024, raising substantial doubt about the company's ability to continue as a going concern[178][179] Cash Flow Summary (Year Ended Dec 31, 2023) | Cash Flow Activity | Amount (in millions) | | :--- | :--- | | Net cash used in operating activities | ($4.1) | | Net cash used in investing activities | ($0.019) | | Net cash provided by financing activities | $1.9 | - The company is evaluating various strategies to fund operations, including raising additional capital, reducing spending, out-licensing products, or divesting assets, as exemplified by the recent DERMAdoctor sale[180] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity on its cash and cash equivalents, which is considered minimal due to the short-term nature of its investments - The company's principal market risk is interest rate risk on its cash and cash equivalents, but due to the short-term nature of its investments, this risk is considered minimal[195][196] - The company has not had any material exposure to foreign currency rate fluctuations due to its focus on the domestic U.S. market[197] Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements for 2023 and 2022, with the auditor's report expressing substantial doubt about the company's ability to continue as a going concern - The report from the independent registered public accounting firm includes an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern[206] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $7,154 | $11,332 | | Total Assets | $9,034 | $16,399 | | Total Liabilities | $5,720 | $5,845 | | Total Stockholders' Equity | $3,314 | $10,554 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Total sales, net | $14,726 | $14,404 | | Operating loss | ($7,596) | ($14,417) | | Net loss | ($9,640) | ($10,608) | | Net loss per share | ($3.96) | ($10.10) | Consolidated Cash Flow Highlights (in thousands) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($4,131) | ($6,654) | | Net cash provided by financing activities | $1,910 | $4,633 | | Net decrease in cash | ($2,240) | ($2,133) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[431] Controls and Procedures As of December 31, 2023, the company's CEO and Interim CFO concluded that its disclosure controls and procedures and internal control over financial reporting were effective - Management, including the CEO and Interim CFO, concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective at a reasonable assurance level[433] - Management concluded that as of December 31, 2023, the company's internal control over financial reporting was effective[434] Other Information During the fourth quarter of 2023, no directors or Section 16 officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No directors or Section 16 officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the fourth quarter of 2023[436] PART III Directors, Executive Officers and Corporate Governance This section provides biographical information for the company's seven directors and two executive officers, confirms the adoption of a Code of Ethics, and discloses late Section 16(a) filings for several directors - The Board is comprised of seven directors, and the executive officers are Justin M. Hall (CEO, General Counsel) and Tommy Law (Interim CFO)[439][449] - The company has adopted a Code of Ethics and Business Conduct applicable to all directors, officers, and employees[451] - Several directors filed late Form 4s related to the vesting and granting of restricted stock units during the fiscal year ended December 31, 2023[453] Executive Compensation This section details executive compensation for 2023, with CEO Justin M. Hall's total compensation at $364,146, and notes no bonuses or equity awards were granted to most NEOs 2023 Summary Executive Compensation | Name | Position | Salary ($) | Total Compensation ($) | | :--- | :--- | :--- | :--- | | Justin M. Hall, Esq. | CEO, GC and Chief Compliance Officer | 350,000 | 364,146 | | Tommy Law | Interim Chief Financial Officer | 148,750 | 155,484 | | Andrew Jones (Former) | Former Chief Financial Officer | 77,883 | 216,961 | | Audrey Kunin, M.D. (Former) | Chief Product Officer | 170,513 | 175,513 | - No bonuses were awarded to NEOs for fiscal year 2023 performance, except for a $42,500 bonus paid to Interim CFO Tommy Law[461] - No equity awards were granted to any of the NEOs during the 2023 fiscal year[462] - Non-employee director compensation for 2023 consisted of annual cash retainers and an annual grant of 858 restricted stock units[493] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details beneficial ownership, noting that all directors and executive officers as a group own less than one percent of outstanding common stock, and no person beneficially owns more than five percent - As of December 31, 2023, 124,897 securities were to be issued upon exercise of outstanding options and rights under equity compensation plans, with 171,424 securities remaining available for future issuance[498] - As of March 21, 2024, all directors and executive officers as a group beneficially owned 35,145 shares, representing less than 1% of the class[501] - The company is not aware of any beneficial owner of more than 5% of its securities as of March 21, 2024[499] Certain Relationships and Related Transactions, and Director Independence The company discloses related party transactions, including the DERMAdoctor acquisition, and confirms that four of its seven directors are independent according to NYSE American standards - The 2021 acquisition of DERMAdoctor involved potential earn-out payments conditioned on the continued employment of its founders, Dr. Audrey Kunin and Dr. Jeff Kunin, though these targets were not met for 2022 or 2023[503][505] - The Board has determined that four of its directors (Dr. Freiman, Ms. Garlikov, Ms. Sit, and Dr. Jeff Zheng) are independent under NYSE American listing standards[507] Principal Accountant Fees and Services This section details fees paid to WithumSmith+Brown, PC, totaling $384,800 in 2023, primarily for audit services, a decrease from $451,588 in 2022 Fees Paid to Independent Registered Public Accounting Firm (Withum) | Fee Type | 2023 | 2022 | | :--- | :--- | :--- | | Audit Fees | $370,000 | $443,875 | | Audit-Related Fees | $14,800 | $7,713 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | | Total Fees | $384,800 | $451,588 | - All services provided by the independent auditor for fiscal years 2023 and 2022 were pre-approved by the Audit Committee[511] PART IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including financial statements and various exhibits - This section contains a list of all financial statements and exhibits filed with the annual report, including material agreements, bylaws, and certifications[513]